LR directors to vote on new pension plan

Would add $730,000 to city’s ’14 tab

The Little Rock Board of Directors is set to vote on an increased pension plan for non-uniformed city employees Tuesday that would cost the city an estimated $730,000 more in pension contributions next year.

The new plan - which would switch from one private plan to a different private plan - would require an increase in both the city’s contribution and the employees’ contributions to their pension plans. The city pitched the need for a pension increase in the 2011 citywide sales-tax increase proposal because studies had found Little Rock’s plan was much less than those in surrounding cities, and employees were having a hard time affording retirement, city officials said.

The ordinance before the board would increase employee contributions from 3.5 percent to 4.5 percent of their salaries. The city’s contribution would increase from 7 percent to 9 percent, after the board approved a previous increase from 4 percent to 7 percent in 2012.

About 900 city employees will be enrolled in the new plan if it passes, meaning more than a third of the city’s nearly 2,500 employees.

Little Rock Finance Director Sara Lenehan said using the current pay rates and with the current number of employees, the 2 percent increase in contributions would cost the city an additional $731,214 annually. If the board approves an employee raise for 2014 or hires more employees, that amount would increase.

Lenehan said when the 7 percent increase went into effect in 2012 and the board subsequently approved a 3 percent raise for employees, the jump in contribution was a little less than $1.02 million.

If the measure passes, the increase in pension payments since the sales-tax rise went into effect in January 2012 would be nearly $1.75 million, more than doubling the $1.54 million 2011 city contribution.

The number would still be below the cap created in the sales-tax proposal, Lenehan said.

The proposal called for $1 million to be set aside for the old police and fire pension funds, which closed for new enrollment in 1983 when the city signed onto a newer pension plan for police and fire employees. The sales-tax proposal asked for $500,000 for each of those closed funds and a cap of no more than $2.92 million in additional funding for the non-uniformed employee pension fund.

The proposal for the new plan came from a study by consultant Osborn, Carreiro & Associates Inc., which looked at whether the city should stay with its current plan, join the Arkansas Public Employees Retirement System or find a different plan.

Jody Carreiro, an actuarial consultant with the firm, told the board during a March meeting that the firm had considered a hybrid plan that would have shared more of the liability for the plan between the city and the employees. The current plan, called a money purchase plan, places most of the liability on the employees.

There are some employees who also belonged to a 401(a) program, similar to the private sector 401(k) plan, but the study advised against staying with that plan.

There was no indication in the actuarial study that the plan would become or was close to being insolvent.

Don Flegal, director of human resources for Little Rock, said because of a law passed by legislators, cities of a certain size including Little Rock are allowed to independently monitor their nonuniform pension plans, meaning the nonuniform plan would never be insolvent.

“When the money is gone, then the money is gone under that model. There’s not an insolvency designation,” he said.

“We wanted, however, to get to a point where with Social Security employees would receive 80 percent of their highest average salary when they retired.”

The proposed plan would award 2 percent of that salary per year of service after the plan goes into effect. Flegal said the average Little Rock employee retires after about 25 years of service.

That means an employee hired in January 2014 and who works for the city for 25 years, would receive 50 percent of his salary plus Social Security benefits upon retiring.

Flegal said the state employee plan uses the same 2 percent multiplier. Under the state plan, the state contributes a higher amount to the plan - 14.5 percent of the employees’ salaries.

Under the city’s new plan, it would take five years of service for employees to become fully vested in the plan.

Flegal said employees who have been paying into the pension plan up until this point won’t get a one-to-one exchange rate on their service to date if the proposal passes because the funding amounts are so different. He did not know what the ratio would be for those service years, because there are different situations within the nonuniform plan that would yield different rates.

For example, someone who had worked for the city for 10 years as of January 2014 might only be able to claim six years of service under the new plan when they retire.

That move was made partially to avoid the plan starting out being underfunded.

The board asked Flegal and the consultants to find ways to guarantee the plan and reduce the city’s liability during the pension presentation in March.

The proposal going before the board Tuesday includes many of those safeguards, including a limit on cost of living increases where the plan must be 80 percent funded before an increase could be granted. Those increases would be based on two-thirds of the national Consumer Price Index inflation rate.

Another safeguard allows the board to amend the plan as needed.

Flegal said the plan projects a 6.5 percent return on investment, which is conservative for area plans. He said last year’s actual return on investment was 10.83 percent, but cautioned that to get a true picture of return on investment, the city looks at three to five years of returns.

Flegal said the investment portfolio, which is invested and managed by Stephens Inc., is very diversified including stocks, real estate equity, bonds and other investments.

At least one state legislator has tried to force Little Rock to improve its nonuniform pension plan through legislation that would have mandated the city join the state retirement system. Rep. Jim Nickels, D-Sherwood, agreed in March to postpone a vote on his proposed legislation while the city works on a fix.

Front Section, Pages 1 on 08/26/2013

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