Nonuniformed city employees will have more money to retire on after the Little Rock Board of Directors approved an increase in their pension plan Tuesday.
The city will increase its contribution to those employee pensions from 7 percent to 9 percent - an estimated$731,000 increase - starting in January. The employee contribution for about 900 nonuniformed city employees will also increase from 3.5 percent to 4.5 percent of their salaries.
The city pitched the need for increased pension funding in the 2011 citywide sales-tax increase proposal because studies had found Little Rock’s plan was not competitive with surrounding cities, and employees who were being paid on the lower end of the city’s salary schedule were having a hard time affording retirement, city officials said. The board approved an increase from 4 percent to 7 percent after the sales tax went into effect in January 2012, and commissioned a pension study that concluded more changes needed to be made.
With the 2012 and 2014 increases, it will mean the city is paying an additional $1.75 million in pension contributions, more than doubling the total $1.54 million contribution in 2011, before the increases. The total contribution will make up about 2percent of the city’s operating budget, which has hovered around $170 million since the sales tax passed.
The vote Tuesday was unanimous in favor of the change, but several city directors raised questions about whether the plan had fail safe measures to make sure it would not become insolvent or have unfunded liabilities.
“What happens if we do not meet growth expectations?” asked Ward 3 City Director Stacy Hurst.
Actuarial consultant Jody Carreiro, with Osborn, Carreiro & Associates Inc., said the growth rate was projected to be about 6.5 percent, which is less than the 7.75 percent average projection for similar plans. The city’s portfolio, which is managed by Stephens Inc., had an actual growth of 10.83 percent in 2012.
“We have other safeguards, too,” Carreiro said. “Any needed increases would be shared between the city and employees. And the fund has to stay 80 percent funded, or more, to pay the cost-of-living increase each year.”
The cost-of-living increase is also calculated using two thirds of the federal consumer price index, a national measure of inflation.
Carreiro, whose firm conducted the actuarial study of the city’s pension plan, said in previous discussions that the change to the pensions will switch the employees from the current money purchase plan, which places all the liability on employees, to a defined contribution plan, which shares the liability between the employees and city.
Carreiro said employees who still have a 401(a) - the public-sector version of a 401(k) - and who are at least 60 years old will be given the choice of whether they want to keep their 401 (a) or switch to the new pension plan.
City Manager Bruce Moore said the staff will hold mandatory meetings with employees to explain the new pension program.
He said for current years of service, the exchange ratio under the new plan will be about 60 percent, meaning that, for example, when an employee with 10 years of service switches to the new plan, he would carry only six years of service into the new plan.
The move was made partly to prevent the new plan from starting out being underfunded or having unfunded liabilities.
The plan aimed to help employees retire with 80 percent of their salary, including their Social Security payout. The salary amount is based on an average of the highest-paid three years in a 10-year period of employment.
The plan uses a 2 percent multiplier, meaning for every year of service the city would pay an additional 2 percent of the employee’s salary annually upon retirement.
The average employee works for the city for about 25 years. So an employee hired in 2014 who retires after 25 years would receive 50 percent of his salary plus about 30 percent provided through Social Security.
The percentage of salary that employees can receive is not capped in the plan at 50 percent, Carreiro said Tuesday, but it isn’t typical for employees to retire with more service.
Moore said employees will get the opportunity to buy some of the years they lose in the change using their personal assets. He said staff members will help them figure out a plan if they need or want the help.
City staff members said the 2 percent multiplier is used by many other plans across the state, including the Arkansas Public Employees Retirement System. That system contributes about 14.5 percent of employee salaries to its pension plan.
Other city plans also require larger contributions from the city.
The city’s old Police and Fire department pension plans receive $500,000 each from the sales-tax increase, which was part of the city’s pitch for the tax increase. At least one of the plans was projected to be insolvent within a decade.
Both of those plans were closed to new enrollment in the 1980s when the city chose to change plans so that new employees were part of the Arkansas Local Police and Fire Retirement System. Little or no new money is coming into the plans, and many payments are being made from the plans, which caused their financial issues.
At-large City Director Joan Adcock asked several questions Tuesday about whether the same circumstances could happen under the new city plan.
The old fire and police funds are not the same kind of contribution funds as the current nonuniformed employee plan. The nonuniformed plan through January is a money purchase plan, meaning the liability is entirely on the employees, so when the money is gone, it’s gone.
The new pension plans for the police and fire employees both have larger contribution requirements from the employees and from the city.
Under both plans, the employees - firefighters and police officers - pay 8.5 percent of their salaries to the plan.
Neither department is eligible for primary Social Security, but they can take part in the program through a second job. However, the federal government cuts their Social Security payouts because of their primary jobs at the city.
Both departments’ unions negotiate cost-of-living and other increases with the city, but the overall goal of the Arkansas Local Police and Fire Retirement System is to have the city contribute 12.5 percent from its coffers before any other turn back money or other contributions that are processed through the city.
Right now the overall city contribution to the Fire Department’s pension is 18.58 percent of the employees’ salaries on paper, and the contribution to the police pensions is 15.23 percent on paper. In reality, for example, a large part of that contribution to the Fire Department pensions comes from insurance turn-back money, so the actual amount paid from city funds is about 11.35 percent, said Roger Pool, secretary-treasurer of the local firefighters union.
The multiplier for fire and police employees is also higher than nonuniformed employees - 2.93 percent compared with 2 percent. Both retirement plans are based on the highest three years of a 10-year work period.
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Front Section, Pages 1 on 08/28/2013