SHELBY COUNTY GOVERNMENT RETIREMENT TASK FORCE REPORT

SHELBY COUNTY GOVERNMENT RETIREMENT TASK FORCE REPORT

SHELBY COUNTY GOVERNMENT RETIREMENT TASK FORCE MEMBERS & STAFF Task Force Members Mike Ritz, Chairman Jim Martin, Co-Chairman Edith Moore, County Commissioner Bob Fockler, Citizen Rev. Jimmy Latimer, Citizen Rod Deberry, Citizen Joe Saino, Citizen Dorothy Crook, Citizen James Gainer, Citizen Staff Brian Kuhn, County Attorney Waverly Seward, Retirement Manager David Pontius, Retirement Investment Manager Patti Coker, Retirement Staff 2

INTRODUCTION The Retirement Task Force was created by Mayor Joe Ford to examine the long term unfunded liability of the Shelby County Pension Fund and to recommend ways to reduce it. The Task Force was made up of two Commissioners, one County Administrator and seven citizen members chosen by the Mayor. Three other key staff members supported the work of the Task Force: the County Attorney, Manager of the Retirement System, and the Investment Manager for the Retirement System. The Pension Actuary was consulted as needed by the Task Force in the development of their final recommendations. A SHORT HISTORY OF THE SHELBY COUNTY PENSION SYSTEM The Shelby County Pension System was created in 1949 to provide a reasonable retirement benefit for employees. At that time, state and local government workers were not permitted to participate in Social Security. During the 50 s, 60 s, and 70 s, the plan benefits were enhanced by successive county legislative bodies until the plan benefits were considered extremely good. The plan benefit included: 1. A 25 year full retirement, regardless of age. 2. A 15 year retirement for elected officials and appointees, regardless of age. 3. A 2.7 percent credit per year of service. 4. Full spousal benefits at the death of the retiree. In many cases when these enhanced benefits were approved, additional money was not appropriated to pay for them. In September 1978, when William N. Morris was elected Mayor, upon taking office, he was informed that the pension plan was severely under funded (approximately a 60% funding ratio). In order to address this crisis, he immediately closed the plan in December 1978 to all new employees and began development of a new pension plan. When the new plan was approved in 1980, it had significantly lesser benefits, but was a noncontributory plan. The original plan had required an 8% contribution from employees. All new employees automatically went into the new plan (now called Plan A), and current employees in the original plan were given the option to move to the new plan. Many current employees at the time, with less than 10 years pension credit, did move into the plan giving up all pension service credit for the return of their retirement contributions and the opportunity to participate in a non-contributory plan. The new plan with its much lesser benefits and the influx of a very sizeable number of current employees allowed the system to financially stabilize going forward. In 2000, the Retirement Board, at the request of Public Safety employees, recommended and the Board of Commissioners approved a 25 and out (retirement eligible after 25 years of service, regardless of age) provision within the current Plan A for public safety employees. 3

By 2005, at the request of non public safety employees, the Retirement Board had developed a new pension plan for all employees with a 25 and out provision. It was approved by the Board of Commissioners and Plan A was closed. All new employees were automatically put into the new plan (Plan C) and current employees in Plan A were offered a one time option to move from Plan A to the new plan. In addition to the 25 and out provision, Plan C eliminated the back loading feature (which give more pension credit per year, based on years of service) of Plan A, providing participants with a level benefit accrual rate of 2.3 % for every year of service. To pay for these enhanced benefits, participants were required to make a 6% contribution of salary. This plan took effect September 1, 2005, and was designed to be actuarially cost neutral to Plan A. THE LOOMING CRISIS The economic crisis that has devastated the American economy over the past two years has increased funding deficits for all pension plans throughout the United States. Shelby County s plan was in a much better funded position when this crisis hit than most states and local governments, but the County was not immune to a weak economy and declining financial markets. Although the County s retirement fund was fully funded (assets v. liabilities) prior to the economic decline, the loss of millions of dollars in investments reduced the funding ratio to approximately 80%. The decline in asset values, in addition to future funding requirements, will require much larger increases in Annual Required Contributions (ARC) from the County to pay for current and future accrued pension benefits. (See Appendix A., pg. 7) Even if future investment earnings exceed the (8 1/4%) actuarial investment assumption, the County will still face millions of dollars in additional required contributions. The County currently contributes a little over 7% of payroll for pension benefits and this number will rise over the next few years to double digit percentages representing many additional millions of dollars in contributions even while the funding ratio will hover in the low 80% funding range. (See Appendix A., pg. 8) Today, the County faces the same budgetary concerns that all governments are facing. Along with the need to fund a large number of vital services, governments are faced with huge retirement benefit obligations. What makes these pension obligations different from other competing service needs is that under law pension benefits are guaranteed and can not be reduced or taken away from current employees. This leaves County Government in the position that for every dollar spent to reduce the unfunded pension liability, is a dollar that can not be used for education, healthcare, public safety, and other vital services. Ultimately, taxpayers will likely face higher taxes and or cuts in essential services. 4

WHAT CAN BE DONE The Task Force looked at numerous changes to benefits to help reduce future increases in the County s required pension contributions. Due to the legal constraints of reducing current vested employee s retirement benefits, most of the changes were concentrated on reducing retirement benefits for new employees. By reducing retirement benefits for new employees, the short term obligations for current employees are not affected, but it does reduce the long term financial obligations of the county. Social Security Hybrid Plan One of the first proposals considered was putting new employees into Social Security and providing a 401k type plan with a modest County match. This is similar to what most private employers provide for their employees. This was determined to be financially unrealistic because it would cost millions of dollars in the short term, beyond what was already required, to make the switch from a defined benefit plan to a defined contribution plan. Social Security Defined Benefit Plan The next proposal that was considered was the creation of a new pension plan for new employees. This new plan would have many of the same characteristics of Social Security. The plan would be offered in a DB (Defined Benefit) format in addition to a 401k type plan with a small County match. (See Appendix A., pg 9 for specific of this plan) New Defined Benefit Plans The third proposal considered was new defined benefit pension plans for new employees, with greatly reduced benefits. These plans would be called Plan D & E. (See Appendix A., pg. 9 for specific benefits paid by Plan D & E) Some of the plan provisions that were looked at to contain cost were: 1. Retirement age 2. Cost of living (COLA) 3. Annual benefit credit 4. Final average earnings 5. Employee contribution 6. Early retirement benefits In considering a new plan that would increase retirement age to the mid sixties, a separate plan for public safety employees was also considered. The reasons for treating this group of employees differently were two fold: 1. It has been recognized by many public pension plans through out the country that our sheriff s deputies, firefighters, and other public safety employees, who risk their lives protecting us, deserve special consideration. 2. The physical and mental stress of these jobs is best performed by younger experienced employees. Beyond the age of fifty, a public safety employee is more likely to have more on-the-job-injuries, time off the job for sickness, and a declining physical ability to perform many of the functions of these jobs. 5

RECOMMENDATIONS OF THE TASK FORCES After determining a number of options that would reduce the liability of the system, the Task Force asked the Pension Actuary (Cavanaugh MacDonald Consulting) to analyze the options and report the financial effect they would have if adopted. Their full analysis is attached to this report as Appendix A. The basic recommendations that the Task Force approved are as follows: 1. Close the current Plan C by September 1, 2010. On September 1, 2010, many of the elected offices in County Government will have new elected officials. This change over and the maturation of Plan C for employees who transferred into the plan from Plan A will result in one of the biggest turnovers of positions in County Government in the last 30 years. If the County wants to begin to stem the cost of its pension plans in the future, it should start by capturing this large group of new employees about to be hired on September 1, 2010. All new and non-vested employees would go into these plans as soon as they are created, but would continue to contribute the standard Plan C contribution while the plans were being developed. It is anticipated plan development would take from 6 to 12 months. 2. Create two new pension plans (Plan D & E). One would be for regular employees and the second would address the unique situation of Public Safety employees. These new plans would provide a lesser benefit and be more in line with private sector plans. The outline of the recommended plans is spelled out in the actuary report in Appendix A. These plans address the critical areas of retirement age eligibility, annual accrued pension credit, and maximum amount of cost of living increases. (See Appendix A., pg.12 for impact on ARC) 3. Put all non-vested employees in the new plans. Non vested employees do not have the same legal guarantee to their pensions that vested employees have under the law. This group of employees, if put under the new plan, would have a significant effect on future liabilities and the County s future cost. (See Appendix A., pg. 12 for impact on ARC) 4. Increase the current employee contribution over time by 2%. As discussed earlier in this report, the current pension plans are very rich compared to the plans now offered by private employers. An increase of 2% in employee contributions for Plan C in increments of ½% per year and a 2% employee contribution for Plan A, in increments of ½% per year, would be the quickest way of impacting current costs for the County. (See Appendix A., pg. 12 for impact on ARC) 5. Decrease the interest assumption from 8 ¼% to 8 %. This would increase the liabilities to the plan, but in the long run would bring greater transparency and accuracy to the stated future liabilities, while lessening the pressure to invest in higher risk investments. The additional higher cost to do this would be offset by the reductions achieved by the changes outlined above. (See Appendix A., pg. 15, showing projection of contribution rates) 6

The Task Force believes that it is time to more closely align the retirement benefits of County Government employees with those of the private sector. This is not only fair, but faces the reality that Shelby County can no longer afford to provide such a rich benefit. It is the Task Force s opinion that only with immediate action to close Plan C and the implementation of the recommendations in this report that the County will begin to reduce the long term liabilities of the retirement system, and ultimately reduce the required contributions the County would be obligated to pay in the future. To wait or do nothing will only increase future costs and require much more drastic action that could include tax increases and/or major cuts in services to the citizens of Shelby County. 7