What We Will Cover. Why Understanding Pensions is Important PENSION REFORM AND MOVING FORWARD

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1 PENSION REFORM AND MOVING FORWARD Richard D. Miller, Esquire Campbell Durrant Beatty Palombo & Miller, P.C. 535 Smithfield Street, Suite 700 Pittsburgh, PA What We Will Cover Discuss applicable legislation and the various types of pension plans Basic requirements of Pennsylvania pension plans Provide some common definitions for often used words Ability to alter or change benefits Common Act 205 Issues Address common questions and issues 2 Why Understanding Pensions is Important 3 1

2 What Laws Apply to Municipal Plans Local government pension plans are exempt from most federal pension laws, including the Employee Retirement Income Security Act (ERISA) However, certain federal laws do apply such as the Internal Revenue Code regarding the taxability and qualification of plans, USERRA and age and other discrimination laws 4 What Laws Apply to Municipal Plans Local Plans in Pennsylvania must comply with one of the applicable state pension laws: Act 600 Pennsylvania Municipal Retirement Law (PMRS) Third Class City Code (or Non-uniformed Employees Optional Retirement System Law for Third Class Cities) Non-Uniformed Retirement System Act 120 Retirement Systems for Boroughs and First and Second Class Townships with less than three officers All Plans are governed by the regulations of Act Note: Defined Benefit vs. Defined Contribution Pennsylvania mandates Defined Benefit plans for many employees, especially public safety employees. Defined Benefit (DB) Plan, is a plan where the amount of the monthly benefit at retirement is defined by a formula and is a guaranteed obligation of the employer. 6 2

3 Note: Defined Benefit vs. Defined Contribution Defined Contribution (DC) plans are plans where the amount of a contribution is defined by a formula. Most pension laws mandate a DB plan, particuilarly for uniformed personnel, but DC plans can be provided to non-uniformed employees. When providing an employer contribution to a DC plan, make sure the applicable municipal code authorizes such a payment. Other types of Plans, Hybrid (DB/DC) and Cash Balance Plans are not currently authorized where there is an applicable pension law. 7 Mandatory vs. Optional Benefits Statutes governing pension plans in Pennsylvania generally contain mandated and optional benefits. Mandated benefits must be provided Optional benefits may be bargained Optional benefits often drive up pension costs because they: Often are provided during or late in an employee s tenure and require higher funding obligations Optional benefits are specifically defined and have maximum caps or formula 8 Mandatory Benefits Provisions Benefits Mandated by Laws (Mandated Benefits): Member contributions (can be bargained away or lowered) Superannuation Retirement: An individual is eligible to retire when he or she reaches a certain age and has a minimum number of years of service. Pension Benefit Calculation: A percentage of a Final Average Salary which is usually a percentage of certain types of remuneration paid to the officer during a designated averaging period, e.g. 50% of base salary and longevity earned during the last months of employment. Disability Pension Benefit: Usually a minimum percentage of salary paid to an officer (e.g. 50%) when he or she becomes disabled and unable to perform a certain type of work, e.g. his or her police duties (Act 600) or gainful employment (PMRS). 9 3

4 Mandatory Benefit Provisions Return of contributions if officer retires without being eligible to vest or to obtain a pension Survivors Benefit of at least 50% of the pension the officer was or could have received. A survivor is specifically defined by the applicable law. Provisions necessary to insure the Plan is a qualified Plan under the IRS Code 10 Optional Benefit Provisions Optional Benefits are benefits that can be given voluntary after bargaining but are not required by law: Elimination or reduction of member contributions Vested Benefit: Allows an officer to vest a reduced pension if he or she leaves the force with between 12 and 25 years of service to receive a reduced pension on what would have been his or her superannuation date. Pension Benefit Calculation: Inclusion of various types of remuneration in the pension calculation in addition to base salary and longevity (this should not be done if it has not been done). Disability Pension Benefit more than 50% if salary: Usually a minimum percentage of salary paid to an officer when he or she becomes disabled. 11 Optional Benefit Provisions Surviving Spouse benefit more than 50% Service Increment: A payment of up to $500 per month after 5 completed years of service after 25 years of service. Cost of Living Adjustments (COLA) Killed In Service Payments: This benefit is now paid by the Commonwealth via Act 51 of It is prohibited under Act 600, but may be paid under the Third Class City Code and coordinated with Act 51 payments. 12 4

5 Important Considerations BEFORE Adding Optional Benefits Benefits in a DB plan are guaranteed by the tax payer and are paid based on a formula, e.g. years of service, salary and a multiplier. Benefit is paid for the life of the retiree and defined survivors Employee contributions do not increase an employee s benefit or provide additional benefits but help fund a portion often a small portion- -of the guaranteed benefits Employer retains the investment risk all risk. 13 Act 205: A Pension Law Worth Special Consideration Act 205, The Municipal Pension Plan Funding Standard and Recovery Act of As of now and in the past, the Public Employee Retirement Commission (PERC) is the regulatory agency charged with enforcing rules and regulations implementing Act 205. Does Not mandate benefits Mandates various reports and actuarial valuation reports (AVR) for each municipality and establishes minimum funding standards. Provides for the distribution of State Pension Aid and establishes a recovery programs for Distressed Pension Plans. Permits DROPs under specific guidelines 14 Act 205: A Pension Law Worth Special Consideration Actuarial Valuation Reports (AVR): Act 205 requires AVRs to be filed every two years, on or before the last business day in March. AVRs are based on the value of the Plan on January 1 of the odd years, e.g. 2007, 2009, Must be filed by March of the following year, March of 2008, 2010,

6 Act 205: A Pension Law Worth Special Consideration Minimum Municipal Obligation (MMO): This is the municipality s minimum required contribution to its pension plans under Act 205. It is the actuarial cost of funding the Plans, less the anticipated member contributions. Note: State Aid is used to satisfy the MMO. The MMO is established using the most recently filed AVR and must be officially certified by the municipality no late than the last business day in September for the next year s MMO. The MMO MUST be paid or a mandamus action can be commenced to force payment. 16 Act 205: A Pension Law Worth Special Consideration The most recently filed AVR is used in the MMO calculation Due to the timing of the biennial filing requirement, flexibility exists regarding the report upon which a municipality s annual MMO will be based. Examples, after the market crash in 2008 which were captured in the 2009 AVR, many municipalities avoided a much higher MMO in 2010 by using the 2007 AVR. 17 Act 205: A Pension Law Worth Special Consideration Act 205 mandates a cost estimate prior to any benefit modifications being made. Must show annual financial requirements before and after proposed modification. Requirement applies notwithstanding any law, municipal ordinance, municipal charter, pension plan agreement, or pension plan contract to the contrary What about benefit reductions? Be safe and have one done. 18 6

7 Deadlines to Remember Calendar of Events lists key dates to remember in the annual pension administration process for all municipalities. Several critical dates applicable to all municipalities include: March 31: Deadline for State Aid Certification Form (AGPF 385) in order to receive state aid; March 31, even years: Submission of AVR to PERC; September 30: Deadline for municipality to receive subsequent year certification and MMO for each municipal plan; October 31, deadline for the deposit of Act 205 State Aid. 19 Common Questions #1 My collective bargaining agreement and pension plan list inconsistent benefits, which controls? Any such inconsistency will result in an audit finding. CBA and bargained benefits control CBA and pension ordinance and plan document must be coordinated as does the AVR. Excessive pension benefits awarded in Act 111 arbitration should be appealed. 20 Common Questions #2 My elected officials have not approved a COLA benefit that was bargained with the Union but a retired officer thinks he is entitled to it. Is he? If the benefit was collectively bargained, yes. CBA and bargained benefits control. However, you must investigate whether the benefit was formally adopted by the elected officials and whether the benefit was properly adopted and funded under Act

8 Common Questions #3 I am willing to provide an optional benefit but only while the pension plan is actuarially sound. Can I do that? Yes, sunset provisions or providing limited benefits within a limited time period is a good idea to consider, but make sure you define precisley what is intended. The pension plan is valued based the amount of assets needed to meet the actuarially accrued liability (AAL) and future costs 22 Common Questions #3 (cont d) There could be confusion over the definition of actuarially sound so provide one so provide one: Assets exceeding actuarially accrued liability and future costs ( over funded ); Assets are not less than actuarially accrued liability (not under funded ); A percentage of assets to liabilities 70%, 80%, 90%; No contributions by the employer; PMRS definition, 53 P.S. Section Common Questions #4 My Board wants to reduce pension benefits to reduce costs. I have argued that such a decision is unfair because our employees have paid for their pensions. Why don t our elected officials see that fact? 24 8

9 Common Questions #4 (cont d) While there are legal issues and possibly practical issues that may prevent the Board from succeeding, that proposition generally is factually (and actuarially) NOT TRUE! The following chart shows the lump sum needed at the time of retirement for an individual to receive the corresponding pension Annual Pension (payable monthly) Lump Sum Needed at Retirement $35,000 $759,766 $50,000 $1,085,380 $65,000 $1,410,994 $80,000 $1,736,607 $95,000 $2,062,221 Assumes 3% growth rate, age 50 retirement continuing for 35 years. No COLA assumed. 25 Common Questions #4 (cont d) Officer Salary $57,524 Pension Calculation $34,514 Annual pension, 2013 dollars $35,032 Average Current Age 33.3 Average Age at Retirement 50.1 Average Years to Retirement 16.8 Life Expectancy on Retirement 28.4 Annual Pension x no. of Years $994,909 Present Value of 5% Officer Contributions Over Career $72,984 Difference That Needs to Be Made Up Through Employer Contributions and $921,925 Investment Returns 26 Common Questions #4 (cont d) Employee Contributions 7% Source of Pension Contributions Township Contributions/ Investment Return 93% 27 9

10 Common Questions #4 (cont d) Other issues with cutting benefits: Statutory mandates currently limit options for uniformed personnel. Constitutional issues Check language of current plan for nonuniformed employees. But Allentown v. IAFF (2015): Court allowed elimination of unlawful benefits and a COLA for current employees. 28 Common Questions #5 Can a pension be over funded and still need an annual contribution? Absolutely. The MMO is based on the normal costs of a plan and administrative costs reduced by employee contributions and 10% of the overfunded amount. If the sum of the normal costs and administrative costs is more than the sum of employee contributions and 10% of the over-funding, a contribution will be necessary. 29 Common Questions #6 Now that DROPs are legal, why not adopt one? There is no cost, is there? Cost of DROPS: Earlier drain of plan assets consisting of benefit payments + pension contributions + loss of state aid for DROP Participant + loss of plan interest + possible underperformance of assets = COST OF DROPS. Employer guarantees market performance through guaranteed interest rate 30 10

11 Common Questions #6 (cont d) You will retain higher paid employees in a physically demanding job and not be able to hire less costly employees A nice benefit for employees, but what is the benefit to the employer? There is only if there is are succession planning concerns or brain drain concerns? 31 Common Questions #7 How can I deal with excessive benefits for which the Auditor General has cited us? You cannot eliminate unlawful benefits unilaterally, but you can only through negotiation. You may have to go to Act 111 interest arbitration and make the elimination of the benefit an issue in dispute Appeal may be necessary 32 Common Questions #8 May a municipality provide a disability benefit under Act 600 in excess of 50%? Yes, but resist doing so. Inevitably, this will result in increased disability pensions The benefit will exceed the superannuation benefit percentage and draw down the Plan assets earlier making disability benefits more costly

12 Common Questions #9 Are there non-pension benefits in a collective bargaining agreement that increase pension costs? Yes, any pay related benefit can increase pension costs, particularly when including overtime and any lump sum payments in the Final Average Salary calculation. Examples base salary and longevity increases, overtime, lump sum and other payments included in FAS Even paying non-pension benefits can encourage individuals to retire earlier and establishing a longer pension pay out period 34 Common Questions #10 I want to get rid of a poor employee by providing him with an optional pension benefit, such as a COLA or purchasing pre-employment military service, in order to allow him to retire. Those benefits are not in the Plan. What do I need to do to allow him to do so? Cost study under Act 205 Amend pension plan ordinance 35 Common Questions #11 Does our Police Chief have to participate in Act 600 Pension Plan? We hired him at the age of 60. Yes. All police officers have to be part of the pension plan. Consider the possibility of employing a Director of Public Safety 36 12

13 Common Questions #12 Our contract allows us to impose pension contributions unilaterally, but our police chief told us that we had to bargain that issue due to Act 30? Is that correct? Not necessarily. You must look at your contract language. Act 30 did not change previously existing pension language that mandated a pension contribution Act 600, as amended by Act 30, still requires pension contributions, but it allows them to be bargained down or eliminated. Don t do it if you have solid language. 37 Common Questions #13 Can we disqualify an employee from receiving a pension benefit if he is terminated for cause? Pension Forfeiture Act Conviction Needed Predicate offenses listed CBA and disqualification for cause? 38 Common Questions #14 We are scheduled for an interest arbitration under Act 111 and the Union asked the Township to provide an actuarial study to be used against us? Why? Do we have to do so? Unclear but err on the side of caution. Study must be completed by the Plan actuary before benefits are altered. Failure to cooperate with union request in good faith could result in unfair labor practice and hurt employer in arbitration and subsequent appeals, if any

14 Common Questions #14 (cont d) Union must work with Plan Administrator to get such information. The extent of the Plan Administrator s required involvement is unclear: The information provided must be complete and accurate under Act 205 and address: Impact on the plan by addressing actuarial soundness of the Plan after the proposed changes Impact on the future financial requirements of the plan Impact on the future minimum financial obligation of the municipality 40 Common Questions #15 Our police are paid a lump sum at retirement and want that pay to be part of the pension calculation. It is part of their W-2 pay. Is that a problem? This is a classic form of spiking a pension benefit. It artificially inflates a pension benefit and drives pension costs because the inflated portion of the pension is typically not funded. The Department of the Auditor General (DAG) has stated that such payments should not be included in the pension calculation. DAG Municipal Pension Bulletin No A subsequent DAG clarification of Bulletin No provides that the DAG will permit the inclusion of any such payment that is for earned but unused time occurring in the pension computation period or time period used to calculate an employee s Final Average Salary (FAS) (e.g., the last 36 months of employment)