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Making strategic Investments and the Knowledgeable Elimination of liabilities
Michael Lupkas, CPFO September 2018
9/21/2018
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Goal of Retirement Incentive Program Reduce payment at separation Sick time Earned days Compensated Absences Vacation Time Accrued
Reduce Expenditures and Liabilities Compensated Absences Insurance Cost Other Post Employment Benefits (OPEBs) 9/21/2018
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Last three years of payouts Audited Audited Unaudited
Gov't Wide Water Sewer Golf 2016 540,592.84 75,673.67 2,897.91 2017 593,153.00 1,675.52 3,004.31 2018 409,767.57 * 116,922.37 ‐
‐ ‐ ‐
Total 619,164.42 597,832.83 526,689.94
*Includes 53,585.12 of severance paid out of WIC grant (Fund 0110)
9/21/2018
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2019 Possible Retirements 1
15 years
76,100 (retired payment on hold)
2
16 years
49,250 (retired payment on hold)
3
29 years
45,700 (retired payment on hold)
4
10 years
34,000 (retired payment on hold)
5
29 years
30,600
6
31 years
18,000
7
34 years
72,000
8
30 years
27,900
9
21 years
62,100
10
22 years
117,500
11
15 years
87,800
Total 252 years 620,950 9/21/2018
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Mindset Purchase points (years) of service Purchase points (years) of age Other options Dollar amount exchange for liabilities How to think outside the box One time payment(s) Pay over time 9/21/2018
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Retirement Incentive Program -
Municipality Attractive but not too attractive Budgetary Impact Financial Statement Impact Persons at maximum allowed
Risk/Advantage => 7.75% Return on annuity Market Return Mortality Risk Cost Neutral if risks met
Must review applicants Can put a limit on number of people Can stagger dates Can agree to future adoption 9/21/2018
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Retirement Incentive Program -
Participants Attractive but not too attractive Persons at maximum allowed Need funds at separation Additional Incentives possible
Advantage => 7.75% Return on annuity Buyback of service at payroll rate Leverage funds No reduction of payout time for excess 9/21/2018
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Eligibility Current member City of Meriden Employee Pension Plan(s) Non Public Safety/Non BOE personnel/Unless agreed Must qualify for Early Retirement by natural age (55) Not recommended for Early Retirement participants If not, meet Rule of 80 with implementation
No arrears taxes or water/sewer bills Must be paid to current
9/21/2018
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General Information Incentives for time bought and/or separation payout Insurance and OPEB are separate for purposes of annuity consideration Purchases over 32 years of service are based on actuary calculations (except as mentioned) Must separate from employment unless negotiated differently Must reduce separation payment to <$5,000 (TBD)
9/21/2018
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Incentives Purchase of points to meet Rule of 80, Years maximum. Purchase point/years @11% rate Source of Funds Can only use separation funds, or if exhausted then outside funds can be used for an additional 5 points. Maximum 32 points of service Balance of funds (>32 years); actuary formula determines amount Loan from pension plan (discussed later)
City to decide on additional years possibility
9/21/2018
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Incentives Purchase of layer (annuity), if maximum years met (25% incentive) TBD. Incentive percentage will be added to funds and actuary formula determines the amount of layer
Purchase of annuity for Pre-65 Insurance Elimination Purchase of annuity for OPEBs Benefit
Elimination
9/21/2018
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Offsetting Costs for the Retirement Incentive Program Offsetting costs Workforce reduction/restructure Hire at a reduction; 5 years to catch-up in salary No longevity ($250-$2,500/year) Lower Sick day payout (50% of time) Lower Separation Payout (Lower number of days) Lower pension cost; DC plan 5%, DB currently 4.5%, 6.4% amortization cost still must funded in annual payment Not eligible for unemployment at separation time
9/21/2018
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Program for persons over the maximum 70% of salary maximum 2% years 1-20 2.5% years 21-32
Remain at 70% (no change to existing plan) Layer Payout on top (Payout only; not service) Except for any “incentive given”, cost neutral
Survivor Benefits, amounts are separate contributions ARE subject to 50%/66%/100% survivor benefit Limited to actual contribution plus interest if not paid
9/21/2018
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Persons vested going to maximum Achieving additional points (service and age) Receive 7 additional points as incentive
(historically)
Now - Purchase points at the rate of 28.6 days per service and age until Rule of 80 met; then Equates to 11.00% = 1 Point Service and Age
At maximum, then layer system used NEW Actuary calculation = Equates to funds/actuary rate = Additional Points of Service Normal Survivor Benefits Available 9/21/2018
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Program Comparison 1999 Incentive Program
7 Points added to service – no cost
25 days of payout to purchase one point
Additional years at 25 day rate
2018 Incentive Program No free points
Percent of salary to purchase one point service and age; 28.6 days
Actuary based calculations for annuity
Insurance 1,2 or 3 years paid; based on years of service
No insurance $2,000/yr for 3
Separation date by 7/1/99 latest 12/31/99 or agreed to date.
Cost to city – Annuity Stock Market Return Mortality
Separation date 7/1/18 -latest 12/31/18
Cost to city spread over 19 years; offset by multiple factors 9/21/2018
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Union(s) Request for
Retirement Package Information Most unions have made requests for buyout of points Not accepted because of cost and previous methods Now new alternatives, financial considerations Benefits to City
Reduced cash payouts at separation Restructure departments Eliminate positions or reduce positions Lower cost of salary for approximately 5 years No OPEBs for new employees No Annual sick time payout will be made for 6-7 years No Longevity for new employees
OPEBs Reduction or Elimination
9/21/2018
Amounts of separation pay by Union
(April 2018)
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Union ELECTED OFFICIALS F/T Average MANAGEMENT ‐ DEPT HEAD Average MGMT ‐ OTHER NON UNION Average MME Average NURSES Average PUBLIC WORKS LOCAL 740 Average SUPERVISORS Average
Est. Final Average Est. Benefit Est. Accrued Age as of Pool Balance Earnings Service Benefit 7/1/2018 ‐ 53,447 24 29,950 63 75,773 122,014 20 51,611 55 31,269 22,488 27,989 33,490 52,790
61,442 66,253 60,534 75,112 91,573 Average
19 23 16 20 22 21
23,329 30,770 19,612 33,035 40,892
55 57 58 52 53 56
Count 2 7 5 58 8 53 33 166 9/21/2018
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Employee Plan: Census Making Milestones
Purchasing points to make a milestone Vesting
(7 persons will vest by 12/2018)
20-32 years for 2.5% factor Normal retirement age
(63 persons previously achieved)
Additional contributions to plans Cash payment Option; Deduct
from pension payment (over 48 months)
9/21/2018
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Buy additional points Only available in conjunction with other options Historically no cost (7 years). Possible incentive on other items
Cost of additional points to employee If 11% (rate of 28.6 days per point year and age)
Only allowable to maximum of 65 y/o or 32 years service Layer - Actuary calculation of annuity purchase
9/21/2018
Pension loan to purchase additional points
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Pension Loan Amortization
Year 1 2 3 4
Loan 7,500 5,760 3,933 2,015
Pension 5% InterestReduction 375 2,115 288 2,115 197 2,115 101 2,115 960 8,460
Balance 5,760 3,933 2,015 0
Salary
68,182
Year 1 2 3 4 5 6
Annual Inc. 1,364 1,364 1,391 1,419 1,447 1,476 8,460
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Funds counted as additional contribution for Survivor Benefit calculation Pension contributions Additional layers for annuity portion (ARE reduced for survivor benefit) Separate tracking of contributions/payments on permanent records
Not all considered Pension Payments; but liability to be transferred based on buyout participation
9/21/2018
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How reduced expenses can fund/offset city cost Pension [+] or Pension [$0] OPEB Annual Expense [-] OPEB Liability (on balance sheet) [-] Health Insurance G/F [-] =>Health fund =>OPEB Fund Longevity [-]…………………………………….No longer paid Salary [-]…………………………………………Reduced with new hires Sick time payout current [-]………………….Current year expenditure Sick time payout future [-]……………………½ paid in future Vacation payout current [-]………………….Less weeks accruing and used Vacation payout future [-]……………………Current year expenditure
9/21/2018
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How OPEB liability is reduced Pension Liability [+] Investment Rate at 7.75%
Health Insurance Fund transfer to OPEB Trust [-] OPEB Annual Expense [-] No longer in calculation
OPEB Long Term Liability [-] Investment Rate Currently 7.75% Prior year decision to reduce funding may reduce investment rate to 4.75%-5.0% (increase liability 48%) Continued reduced funding; rate to 3.0%-4.75% (increase liability another 16%) 9/21/2018
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Person “A” Option 1 Option 1 Salary Pension Normal Cost Payout Assumption Sick time payout Longevity
Stay 3 Years 2018 2019 82,800 84,870 (9,108) (9,336) 3,000 3,100 4,777 750 82,219
Leave Now 19 Year Amortization Additional
4,896 750 84,281
2020 86,992 (9,569) 3,300 30,600 5,019 750 117,091
Total 254,662 (28,013) 9,400 30,600 14,692 2,250 283,591
224,200
224,200124k*Liability cost
Leave in three years. Current cost $283,591 vs. Pension liability of leaving now $224,200
9/21/2018
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Person “A” Option 2 Option 2 Salary Pension Normal Cost Payout Assumption Sick time payout Longevity
Leave Now 19 Year Amortization Additional
Rehire at lower salary 3 Years 2018 2019 2020 Total 50,960 54,899 57,954 163,813 2,548 2,745 2,898 8,191 ‐ ‐ 1/2 at separation ‐ Not until yr 7 ‐ None 53,508 57,644 60,852 172,004
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None
Separate employment now new salary schedule $172,004 over three years. 9/21/2018
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Person “A” Option 3 Option 3 Salary Pension Normal Cost Payout Assumption Sick time payout Longevity
Eliminate Position/Do Nothing 2018 2019 2020 82,800 (9,108) ‐ ‐ 3,000 30,600
107,292 ‐ Leave Now 19 Year Amortization Additional ‐
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Total 82,800 (9,108) 3,000 30,600 ‐ ‐ 107,292
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Separate now and do not refill position. Do not have buyout.
9/21/2018
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Actual cases with accumulated payout balances
9/21/2018
Example 1 $49,000 b/o 64 y/o 25% Incentive
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Actuary calculation
Age 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85
Pension Service Buy 35,434 0.05 36,143 0 36,866 0 37,603 0 38,355 0 39,122 0 39,905 0 40,703 0 41,517 0 42,347 0 43,194 0 44,058 0 44,939 0 45,838 0 46,755 0 47,690 0 48,644 0 49,616 0 50,609 0 51,621 0 52,653 0 53,706 0
49,242.50 4,118 4,201 4,285 4,371 4,458 4,547 4,638 4,731 4,825 4,922 5,020 5,121 5,223 5,328 5,434 5,543 5,654 5,767 5,882 6,000 6,120 6,242
25% Incentive Insurance 1,030 1,875 1,050 1,913 1,071 1,951 1,093 1,990 1,114 2,030 1,137 2,070 1,160 2,112 1,183 2,154 1,206 2,197 1,230 2,241 1,255 2,286 1,280 2,331 1,306 2,378 1,332 2,426 1,359 2,474 1,386 2,524 1,413 2,574 1,442 2,625 1,471 2,678 1,500 2,732 1,530 2,786 1,561 2,842
OPEB 5,600 5,712 5,826 5,943 6,062 6,183 6,307 6,433 6,561 6,693 6,826 6,963 7,102 7,244 7,389 7,537 7,688 7,841 7,998 8,158 8,321 8,488
Optional by individual Total 48,057 49,019 49,999 50,999 52,019 53,059 54,120 55,203 56,307 57,433 58,582 59,753 60,948 62,167 63,411 64,679 65,972 67,292 68,638 70,011 71,411 72,839 9/21/2018
Example 1 $49,000 b/o 64 y/o 25% Incentive
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Example 1 $49,000 b/o 64 y/o
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 ‐
Pension
Service Buy
49,242.50
25% Incentive
Insurance
OPEB 9/21/2018
Example 2 $88,000 b/o 57 y/o 14 years service
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120,000
Example 2 $88,000 b/o 57 y/o
100,000
Individual Benefit
80,000
60,000
40,000
20,000
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Pension
Service Buy Est
87,796.71
25% Incentive
Insurance
OPEB 9/21/2018
Example 3 $63,000 b/o 48 y/o, 24 years service
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180,000 160,000 140,000 120,000
Individual Benefit
100,000 80,000 60,000 40,000 20,000 0
Pension
Service Buy Est
63,313.77
25% Incentive
Insurance
OPEB 9/21/2018
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Cost Recovery of Buyout 5‐Jun Based on non payment of separation pool.
ADEC TOTAL 19 Year Effect 62,775
A Savings over 5 years: City not paying separation amount Normal Cost 4.5% of salary; Note amortization amount must still be paid. Rehire Salary savings for 5 years estimate 20/15/10/5/0 No Longevity payments estimate $1,000 annually No annual sick day payout first 7 years
$ 74,268 Salary Percentage ADEC Percentage 84.52% 180.00%
B
C
(34,875)
‐46.96%
100.00%
(16,710)
‐22.50%
47.91%
(50,000)
‐67.32%
143.37%
(5,000)
‐6.73%
14.34%
(29,993)
‐40.38%
86.00%
9/21/2018
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ADEC TOTAL 19 Year Effect 62,775
Separation payout reduction 50 days estimate
Goal for consideration $74,268 average salary With incentive
$ 74,268 Salary Percentage ADEC Percentage 84.52% 180.00%
(37,134) (173,712)
‐50.00% ‐233.90%
106.48% 498.10%
(148,536)
‐200.00%
180.00% 225.00%
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Health Insurance Buyout All eligible, not only ones on insurance now Insurance coverage maintenance will be costly; buyout saves annual expense Plan is to eliminate future liability Eliminate large liability
Medicare Supplemental Insurance (after age 65) Include Do not include
Calculate by formula for reversals (if necessary) Council to decide
9/21/2018
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Pre-65 Health Insurance Buyout
Years before age 65; more years the better Lower current year expense Medical Expense ($15-$35k per year) Eliminate actual cost
OPEB Expense Reduce OPEB Liability Implicit Rate Subsidy (next slide)
Lower OPEB Long Term Liability Eliminate OPEB Liability
Pension Liability calculated over 19 years
9/21/2018
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Implicit Health Rate Definition -An implicit rate is a rate that is not specifically stated in a business transaction. Example for Health Insurance Cost A 45 year old person is typically much less to insure than a 64 year old person. ($5,911 vs. $15,935) However, Equivalent Insured Rate is identical. Implicit Subsidy Single Participant Implicit Subsidy Single Participant
Implic Implic Expec Expec it it Implicit Expecte Expecte Implicit ted ted Sample Age Premi Subsi d Claim d Claim Premium Subsidy Subsi Subsidy Sample Age Claim Claim um (Male) (Female) (Male) dy(Female) dy (Male (Fema (Male (Fem le) 45 5,911 ) 8,239 9,095 -856 ) -3,184ale) 50 45 8,239 9,095 7,7195,911 9,600 9,095 -3,184 -1,376 -856 505 50 7,719 9,600 9,095 -1,376 55 10,129 11,183 9,095 1,034 505 2,088 55 10,129 11,183 9,095 1,034 2,088 60 13,048 13,043 9,095 3,953 60 13,048 13,043 9,095 3,953 3,948 3,948 64 15,935 9,095 6,840 6,8406,175 6,175 64 15,935 15,270 15,270 9,095
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Pre-65 Insurance Buyout Year Under 65
Annual Addition
Cost to amortize
Total cost to Mem+1 +3% 150% amortize premium Implicit Rate 19 yrs. Equal
10 age 55
7,500
11,511
218,700
304,939
457,409
9 / 56
6,750
10,359
196,830
270,232
405,348
8 / 57
6,000
9,208
174,960
236,536
354,804
7 / 58
5,250
8,057
153,090
203,821
305,732
6 / 59
4,500
6,906
131,220
172,060
258,090
5 / 60
3,750
5,755
109,350
141,223
211,835
4 / 61
3,000
4,604
87,480
111,284
166,927
3 / 62
2,250
3,453
65,610
82,218
123,327
2 / 63
1,500
2,302
43,740
53,998
80,997
1 / 64
750
1,151
21,870
26,600
39,900
9/21/2018
Insurance Buyout
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$750 per year Insurance Savings Years age <65 years old 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 ‐ 10
9
150% Implicit Rate
8
7
6
Mem+1 +3% premium Equal
5
4
Cost to amortize
3
2
1
Annual Addition 9/21/2018
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OPEB Benefit Program Est. Accrued Benefit Age as of 7/1/2018 Valuation Liability ER Window Liability Liability Increase Immediate Annuity Factor 5,600 TOTAL
(Post 65)
Resulting Increase to FYE 2020 ADEC (amortized @ 7.75% Information over 19 years) only
57.33 74,590 $7,079.13 177,882 (16,882.22) 103,292 12.38 69,317
5,600.00 $531.48 5,600.00 (16,350.74) 7,079.13
If retired today, the annual rate would jump to this level.
Normal annual cost increase 9/21/2018
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OPEB Buyout Option (April 2018) Liability April 2018
$11,407,377*
If everyone retired today
$19,791,236
Increase in Liability
$8,383,859
Using the Immediate Annuity Factor and $5,600/year
$11,378,342*
9/21/2018
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Decisions to be made. (1 of 3)
1) Allow separation time for buyout
Y or N
2) Allow time and layers
Y or N
3) No free time
Y or N
4) 11% for purchases, Rule of 80/32 Years, No incentive
Y or N 5) Maximum allowed through purchases
Y or N
*Underline = recommended, or = council choice to be made
9/21/2018
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Decisions to be made. (2 of 3)
6) Actuary calculation for other time (>32 years) Y or N 7) Incentive if no time purchased (25% rate) Y or N (20% rate) Y or N 8) Insurance buyout rate 9) OPEB buyout rate
($9,000 x yrs) Y or N ($5,600/yr) Y or N
10) Separation payout maximum $5,000 Y or N $0 *Underline = recommended, or = council choice to be made
Y or N
9/21/2018
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Decisions to be made. (3 of 3)
11) Allow 5% loans to purchase additional time. Y or N 12) Separation time 100% usable
Y or N
13) Insurance reversal allowed
Y or N
14) OPEB reversal allowed
Y or N
*Underline = recommended, or = council choice to be made
9/21/2018