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Home My WebLink AboutS23 - Early Retirement Incentive ProgramCITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Agenda Item No. S23 October 13, 2009 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Dave Kiff, City Manager 949 -644 -3000 or dkiff @newportbeachca.gov SUBJECT: Resolution 2009 -_ Relating to an Early Retirement Incentive Program RECOMMENDATION: Adopt Resolution 2009 -_ authorizing an early retirement incentive program to eligible City staff members under the condition that the program meets the fiscal, managerial, and operational goals of the City. DISCUSSION: As the Council is aware, the City has a deficit to address. The deficit (roughly $5.8 to $6 million) exists despite fairly conservative revenue projections and spending reduction of 2% built into the preparation of the FY 2009 -10 General Fund budget. A mix of budget actions will allow us to address the deficit — the mix includes reductions, restructuring, and realistic revenue recapture. The specific item discussed in this staff report, a supplemental retirement program or "SRP" can be categorized as both restructuring and reduction. A SRP "works" if it: • Accomplishes restructuring goals by allowing the City Manager and department heads the ability to re -think and change programs and services (and the staffing therein). • Accomplishes fiscal goals — in effect, saving money from year one. This is done by not filling, or filling in a different manner, the positions vacated by the retiring employee. • Treats retiring employees fairly and respectfully. There are two major avenues for an early retirement incentive program. One is through CalPERS and one is through Public Agency Retirement Systems or "PARS." There is a difference between the two as follows: Early Retirement Incentive Program October 13, 2009 Page 2 • The CalPERS retirement incentive program adds two years of service credit to each eligible employee and requires the public agency to hold the position vacant for at least two years. It causes a direct hike in the City's employer - paid CalPERS rate. • The PARS program is more flexible — it allows us to set the payment, eligibility, and refilling practice based on our own managerial and fiscal needs. With PARS, the City still has an expense, but it is tied to the purchase of what is in effect a 15 -year annuity for each retiring employee — so our expense is known and quantifiable rather than subject to CaIPERS' rate calculations. PARS has been providing supplemental retirement programs since 1983 and their program is used by more than 228 agencies with over 15,000 participants in California. How it Works — For the Employee An eligible employee (assume "Employee A" is 55 years of age with 25 years of CalPERS enrollment/service and a final year salary of $75,000 /year, vested in the "2.5% at 55" plan). Employee A is estimated to get the following from PERS and PARS: Employee A's Benefit 25 12.5% @ 551 55 1 $ 3,906.25 25 1 7%SRP 1 55 1 $ 679.75 Total $ 4,586.00 * PARS plan assumes Benefit Option #10 (10 Years Fixed Payment). The $679.75 ends after Year 10. In the above scenario, Employee A is estimated to receive an amount from PERS and PARS equal to having about 29 years of service instead of 25. HOWEVER, Employee A's PARS check would end after 10 years, because in the above scenario, Employee A took the "10 -year fixed payment" option. Other options include a lifetime benefit (in this case, $437.50 /month), a lifetime Joint & Survivor Benefit (in Employee A's case, $382.40 /month), or a five- to 15 -year fixed payment (in Employee A's case, $1,266.11 to 485.71 /month). As shown above, the PARS SRP program complements and is in addition to an employee's CalPERS retirement benefit. Checks would come in the mail (or direct deposit) from both PERS and PARS. Early Retirement Incentive Program October 13, 2009 Page 3 How it Works — for the Employer If the City were to offer this benefit and grant it, cost reductions for the City come ONLY if the positions vacated are not filled at all, or not filled at the same salary level, or that a position elsewhere in the department, division, or organization is not filled — in other words, employee counts must drop for the savings to exist. The City's calculation looks like this: 1 — The Total Compensation Difference between Retiring Employee and Replacement Employee less: - Retirement Health Care Cost for that employee; and - Retirement Incentive Cost for that employee (cost to the City includes the purchase of the annuities for each retiring employee, paid over five years, as well as a 5% administrative cost to PARS); and - Current Natural Attrition; and - Future Loss in Natural Attrition 2 — You take the above number and add back any savings due to non - replacements, and then that equals: 3 — The Net Savings (or Cost) In the below example, if 35 people in a generic Non - Management category at a city retired, and not more than 50% of the positions vacated were effectively replaced (either directly or by lower positions or contract services), then the city's net savings would be $1,241,730.00 in Year 1, but only at that replacement level. If all employees were replaced, or a significant amount were, then the program runs into the red. For the projected fiscal impact as calculated by PARS, please see attachment A. A. Savings due to A,reage sages (5,609) Retirements: Re*". 35 Total (196,322) B. Savings due to Average Savir,a. 82,174 Non - Replacements: x a or Po''Vvm 1750 Total 1,438,052 C. Net Annual Savings or (Cost) Aggregate (A +6): 1,241,730 Early Retirement Incentive Program October 13, 2009 Page 4 About the Specific Proposal for Newport Beach Working with PARS, Human Resources, and Administrative Services, I have proposed an SRP that works as follows: Eligibility — an eligible employee must: • Be 50 years of age or older. • Be eligible to retire from PERS with at least five years of service • Have at least three years of service with the City. • Actually retire from the PERS system. • Not be the City Manager, City Clerk, or City Attorney. Benefit — an eligible employee's benefit would be as follows: • 7% of Final Pay provided via a 15 -year annuity BUT if the employee's Final Pay was over $75,000 annually, then the amount of the benefit would be 6% of Final Pay for the increment he or she receives over $75,000 annually (i.e. Employee B makes $100,000 a year. She would receive a PARS benefit of 7% of $75,000 plus 6% of $25,000). The employee may take the benefit over a lifetime, via a Joint & Survivor plan over a lifetime, or over five to 15 years. If Employee B chooses the lifetime benefit (no survivor benefit), her PARS benefit is estimated to be as follows: $ 75,000 7% $ 437.50 $ 25,000 6% $ 125.00 $ 100,000 $ 562.50 Estimated Savings to the City PARS estimates the following savings (or costs) to the City in the event that this plan goes forward. In the chart that follows, PARS uses a complex formula to calculate that, if the above plan is offered to the City's workforce: • Of 166 eligible employees, 41 may express interest in taking the benefit; • If all 41 were authorized to take the benefit, and 50% were effectively replaced, savings would be $729,463 in Year 1 for non - management and $154,931 for management (total Year 1 savings = $884,394.00). For more information about this plan, including eligibility, savings, the "Hybrid 6- 7% Plan, and the PARS formula, please see Attachment C. Early Retirement Incentive Program October 13, 2009 Page 5 Action Requested In light of the City's budget situation, I respectfully request that the Council adopt the resolution attached to this staff report that outlines and authorizes the Supplemental Retirement Plan through PARS. I again note that this plan may not, in the end, be offered to anyone if it does not meet the financial and managerial goals of the City. It will be (and has been) explained to the City employees in that context — an unfortunate part of proposing the Plan is that it requires a thoughtful and deliberative "testing of the waters" to see who is interested and to evaluate whether or not we can lose that position and not refill it, or refill it in another manner. I do not see this plan as "the" solution to the City's budget challenges. But I do see it as an important tool to get us to a sound long -term financial position without more dramatic moves that are far more disruptive to our employee family. Public Notice: The agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers the item). Prepared by: I::-- _ +a Dave-Kiff City Manager Attachments: Attachment A (1 & 2) PARS Information Attachment B Resolution 2009- Attachment A -1 Non - Management Public Agency Retirement Services (PARS) City of Newport Beach Supplementary Retirement Plan (SRP) Miscellaneous Non - Management October 9, 2009 7% Benefit on Salary <$75,000 PLUS 6% on Salary >$75,000 50 %s Replacement of Positions 5 Year Funding Replacement @ 82.28%. 16,000,000 76,000,000 y 14,000.030 E d 12,000,000 A d K 10,000,000 O a e,000,aoo 0 n 6,000.000 m 4.000,000 W N 2,000,000 d � 0 5 E e PARS SRP in 2009.2010, Natural Attrition Thereafter ❑ Natural Attrition in 2009 -2010 and Thereafter 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Fiscal Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 10 -YR TOTAL 0:1031. Y%Cene,Na fgem.'iaclNexgpt 9ea[M1 Cfry943,NetiVSRP(a0yylmn RVitvMM 2 %6 %AbnMmaaenenl.M[IPEpet Pagel PARS SRP Annual Savings(Cosis) Cumulative Savings (Costs) 1,241,730 1,241,730 1,251,746 2,493,478 1,297,951 3,791,429 1,316,851 6,110,280 1,314,203 6,424,494 1,909,232 8,333,715 1,949,284 10,282,999 1,994,124 12,277,123 2,040,160 14,317,283 2,076,740 16,394,023 /8,J94,OSJ NATURAL ATTRITION Annual Savings(Cosis) CumulatVe Savings (DOatf) $12,268 612,268 607,467 1,119,764 689,298 1,008,063 730,239 2,538,292 737,149 3,276,441 722,083 3,997.524 704,770 4.702,294 692,422 6,304,716 681,631 6,076,347 662,962 6,739,310 8,739,310 CUMULATIVE DIFFERENCE 729,463 1,373,724 1,983,376 2,671,989 3,149,043 4,336,192 6,580,706 6,862,407 8,240,936 9,664,714 9,864,714 Are. ae. 5fi B0 AW s.m 18.17 SRP aea[i.. 11 PAas sRP% 24.65% ,aw.a Ama00 10 Nm AS 01% I.. aerw0l T.wai > %68 %abM E,rgcreo 142 PTE 14200 0:1031. Y%Cene,Na fgem.'iaclNexgpt 9ea[M1 Cfry943,NetiVSRP(a0yylmn RVitvMM 2 %6 %AbnMmaaenenl.M[IPEpet Pagel Attachment A -2 Management Public Agency Retirement Services (PARS) City of Newport Beach Supplementary Retirement Plan (SRP) Miscellaneous Management October 9, 2009 7% Benefit on Salary <$75,000 PLUS 6% on Salary >$75,000 50% Replacement of Positions 5 Year Funding Replacement @ 95.23% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 10 -YR TOTAL Projected Fiscal Impact 4,000,000 3.500,000 nPARS SRP in 2009 -2010, Natural Attrition Thereafter PARS SRP Annual Savings (Costs) Cumulative Savings (Costs( 3,000.000 ❑ Natural Attrition in 2009 -2010 and Thereafter 300,207 901,041 ]08,292 1,209,335 316,376 1,62!,711 476,022 1,910,733 480,696 2,480,429 436,237 2,963,067 2,50,000 498,739 3,969,228 - K 2,000,000 _ ar -1 3 1.500,000 151,566 306,317 148,131 464,448 N 140,202 730,015 133,721 972,007 127,464 1,000,261 121,377 1,121,635 1.000,000 110.720 1,34-1661 1,349,951 N N 500,000 m > 0 2011 2012 2013 2014 2015 2016 2017 2019 2019 2020 E 706,626 Fiscal Year 1,400,1" 0 U 2,221,356 $609,377 2,309,377 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 10 -YR TOTAL 0=1A4ercy1CNlo,n3lper,cksWCxpaR aeach C ,tVW8M,(*SRP(SUPPW lary Reli,eneM Wn)W91009j,1 516 6% Manaomnl xKJPa9e1 c °L °s PARS SRP Annual Savings (Costs) Cumulative Savings (Costs( 309.693 309,893 291,144 600,837 300,207 901,041 ]08,292 1,209,335 316,376 1,62!,711 476,022 1,910,733 480,696 2,480,429 436,237 2,963,067 493,823 3,460,489 498,739 3,969,228 ],969,228 NATURAL ATTRITION Annual Savings lCosts) Cumulative Savings (Costs) 154,762 164,762 151,566 306,317 148,131 464,448 144,436 598,884 140,202 730,015 133,721 972,007 127,464 1,000,261 121,377 1,121,635 117,493 1,239,131 110.720 1,34-1661 1,349,951 CUMULA71VE DIFFERENCE 154,931 294,520 446,693 610,452 706,626 1,125,927 1,400,1" 1,"6,029 2,221,356 $609,377 2,309,377 Ap Ape .41 Ay.6eMCa 15J1 SRP AeOrcme,R 6 PARS SRP% 2500% W. A. 2 NeaeJ POlfe,% a33% ..1.. ]%68 %&e. Er,pletves 2e FTE 2J,W 0=1A4ercy1CNlo,n3lper,cksWCxpaR aeach C ,tVW8M,(*SRP(SUPPW lary Reli,eneM Wn)W91009j,1 516 6% Manaomnl xKJPa9e1 c °L °s Early Retirement Incentive Program October 13, 2009 Page 6 Attachment B RESOLUTION 2009- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH AUTHORIZING ADOPTION OF A SUPPLEMENTAL RETIREMENT PLAN (SRP) WHEREAS, the City of Newport Beach's multi -year Financial Plan currently identifies a structural budget deficit; and WHEREAS, the City Council finds it to be in the fiscal interest of the City of Newport Beach (the "City ") and its employees to consider the provision of a Supplemental Retirement Plan to eligible employees who wish to voluntarily exercise their option to separate from City service; and WHEREAS, the City of Newport Beach is a member of the Public Agency Retirement System (PARS) Trust for the purpose of providing tax qualified retirement benefits; and WHEREAS, the PARS Trust has made available a Supplementary Retirement Plan (SRP), supplementing CalPERS and qualifying under the relevant sections of the Internal Revenue Code and the California Government Code. NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH DOES RESOLVE AS FOLLOWS: Section 1. The City Council does hereby adopt the PARS Supplemental Retirement Plan (SRP), as described in Exhibit A to this Resolution, effective October 14, 2009; and Section 2. The Supplementary Retirement Plan must have sufficient plan participation to meet the City's fiscal, managerial and operational objectives. If the objectives are not reached, the City may withdraw the retirement incentive. If the City withdraws the incentive as to some or all eligible employees, all resignations of employees from whom the offer was rescinded will be automatically revoked; and Section 3. The City Council hereby appoints the Human Resources Director or her designee as the City's Plan Administrator for the PARS Supplementary Retirement Plan; and Early Retirement Incentive Program October 13, 2009 Page 7 implement a PARS Supplemental Retirement Program. In addition, if the City's PARS Administrator finds that the PARS SRP benefit must be limited under Section 415 of Internal Revenue Code, then the Plan Administrator will implement replacement benefit programs at no additional cost to the City. ADOPTED this 13`h day of October, 2009. EDWARD D. SELICH Mayor of Newport Beach ATTEST: Leilani Brown City Clerk Early Retirement Incentive Program October 13, 2009 Page 8 Exhibit A to the Resolution Newport Beach PARS Supplemental Retirement Program Description 1.0 Eligibility 1.1 Those Miscellaneous and non - Safety employees (excluding the City Attorney, City Manager, and City Clerk) who: a) Are employed by the City as of October 13, 2009; b) Are fifty (50) years of age as of January 31, 2010; c) Have at least three (3) years of City service as of January 31, 2010; d) Resign from City employment effective no later than January 30, 2010; and e) Retire under PERS effective no later than January 31, 2010, 2.0 Participation Requirements 2.1 Participating employees shall submit all required PARS enrollment materials and City Letter of Resignation to PARS on or before the deadline date of November 20, 2009. Resignations of participants are irrevocable as of the enrollment deadline and may not be rescinded unless the City withdraws the incentive pursuant to Paragraph 2.2 below. 2.2 An employee's participation in the plan must meet the City's financial and managerial objectives in order for the employee's participation to be approved by the City. If after the close of the enrollment window the City determines that the employee's participation in the plan does not meet the City's financial and managerial objectives, the City may withdraw the incentive for that employee, provided it notifies that employee of the withdrawal of the employee's participation on or before December 14, 2009. If the City withdraws the incentive for an employee, that employee's resignation will be automatically rescinded. After the November 20, 2009 deadline, if the incentive is approved for an employee, that employee's participation in the incentive and resignation from City employment is locked in and may not be rescinded. 2.3 Participation in the retirement incentive requires: a. Submission of required PARS enrollment materials and City Letter of Resignation to PARS by November 20, 2009; b. Resignation from City employment effective no later than January 30, 2010; and c. Retirement from PERS and the PARS Supplemental Retirement Plan on or before January 31, 2010. Early Retirement Incentive Program October 13, 2009 Page 9 3.0 Incentive Payments 3.1 Regarding the basic incentive under this plan: a) The basic, unmodified benefit shall be a monthly cash payment for the lifetime of the participant. b) The monthly cash payment amount shall equal one - twelfth of seven percent (7.0 %) of Final Pay, up to Final Pay of $75,000. For employees whose Final Pay is over $75,000, the monthly cash payment shall equal one - twelfth of seven percent (7.0 %) for $75,000, then one - twelfth of six percent (6.00 %) of the remainder of Final Pay over $75,000. c) For purposes of this plan, Final Pay shall be defined as the employee's current base annual salary as of October 13, 2009. 3.2 Alternative monthly forms of payment of equivalent present value to the basic benefit shall be offered. They shall include: a) Joint- and - survivor payments; b) Payments made for the life of the participant, subject to a ten year minimum; and c) Fixed term payments of from five (5) to fifteen (15) years. These payments are guaranteed to the participant forthe full term selected. 3.3 The amount of monthly payment shall be fixed as of November 20, 2009 and shall not be subject to increase thereafter. 3.4 The choice of form of payment (and the choice of payment beneficiary if choosing a joint and survivor form of payment) shall become final as of November 20, 2009 and shall not be subject to change thereafter. 3.5 PARS benefits are to commence February 1, 2010. 4.0 Contract Administrator 4.1 The Contract Administrator for the Retirement Incentive shall be PARS. 4.2 In the event the plan is cancelled due to insufficient participation, the Employer shall pay Phase II Systems /PARS a one -time fee of $2,500.00. 4.3 The fee for Phase II Systems /PARS shall be 5.0% of plan contributions to the PARS Trust for services related to the Supplemental Retirement Plan. Early Retirement Incentive Program October 13, 2009 Page 10 Projected Timeline (Estimated): 1. City Council approval of PARS Incentive 2. Enrollment Packets Mailed to Employees' Home 3. Employee Orientation Meeting & Workshop 4. Enrollment Window Closes 5. City receives Post - Analysis 6. City Announces whether Plan goes forward 7. Employees Resign from City employment 8. Employees Retire under PERS, PARS REP & PARS SRP 9. Benefits Commence # # # October 13, 2009 On or about October 16, 2009 Week of October 26, 2009 no later than 5:00 p.m., November 20, 2009 no later than November 29th no later than December 14, 2009 on or before January 30, 2010 on or before January 31, 2010 February 1, 2010