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10/31/2007 - Joint Meeting Pension Trustees and Advisory Committee TRUSTEES OF THE EMPLOYEES' PENSION FUND/PENSION ADVISORY COMMITTEE SPECIAL MEETING MINUTES CITY OF CLEARWATER October 31, 2007 Present: Frank Hibbard Pension Fund Trustee Chair Carlen Petersen Pension Fund Trustee/PAC Member John Doran Pension Fund Trustee/PAC Member George N. Cretekos Pension Fund Trustee Paul Gibson Pension Fund Trustee/PAC Member J. Nathan Hightower Pension Advisory Committee Member Tom Jensen Pension Advisory Committee Member John Schmalzbauer Pension Advisory Committee Member Stephen Sarnoff Pension Advisory Committee Member Also Present: William B. Horne, II City Manager Joe Roseto Acting Assistant City Manager Pamela K. Akin City Attorney Stuart A. Kaufman Pension Plan Attorney Patricia O. Sullivan Board Reporter The Chair called the meeting to order at 1:00 p.m. at City Hall. To provide continuity for research, items are in agenda order although not necessarily discussed in that order. Acting Assistant City Manager Joe Roseto said this second workshop will cover three areas: 1) Current Pension Plan; 2) Proposed Changes; and 3) DROP (Deferred Retirement Option Plan) provisions. No decisions would be made today as the process requires discussions with employee groups regarding bargaining issues. Principal Provisions of Current Pension Plan Acting Human Resources Director Allen Del Prete provided a PowerPoint presentation on the current Pension Plan. Proposed Changes to the Pension Plan Mr. Roseto said Pension Plan Attorney Stuart Kaufman was tasked with rewriting the Pension Plan for clarification and to eliminate problem language. Mr. Kaufman reviewed a summary of proposed changes outlined in his October 23, 2007, memorandum to Mr. Roseto: 1) Added that Plan cannot preclude participation based on pre-employment physical examination; 2) Added Trustees and PAC (Pension Advisory Committee) fiduciary duties and responsibilities; 3) Added reemployment provisions; 4) Separated benefit types into sections; 5) New provision requires participants to file disability Pension Trustees Pension Advisory Special Meeting 2007-10-31 1 claim while still employed and Plan participant; 6) New provisions add disability benefit setoffs; 7) Clarifies mental health disabilities; 7) References Florida forfeiture Statute rather than duplicates it; and 8) New provision allows participant to select death benefit payment option at anytime while a Plan participant and entitles beneficiary to select payment option after death if selection not made. In response to questions, Mr. Kaufman said plan participants always qualify for a return of their contribution plus 5% simple interest. He recommended that the plan’s pension forfeiture requirements replicate Florida statute. He said the plan could conduct its own pre- employment physical examinations or continue to rely on City examinations. He said some pension plans underwrite comprehensive pre-employment physical examinations that include neck and back x-rays to identify preexisting conditions. It was stated that all employees would benefit if the plan did not pay for preexisting conditions. In response to a suggestion to strike a reference to the previous retirement benefit multiplier, Finance Director Margie Simmons said retaining the reference to the previous multiplier would avoid staff’s need to retain copies of outdated plans. It was noted that the Plan does not reference other changes. In reference to the new provision requiring participants to file a disability claim while still employed, Mr. Kaufman suggested that the deadline could be expanded to a month after termination. It was stated that this change conflicts with members’ fiduciary responsibility as it may be unfair and considered mistreatment should a former employee have a disability manifest itself at a later date. It was stated that non-job-connected disability recipients should retain the ability to convert to a job-connected disability if new information in support of their claim becomes available. It was stated that the plan should have a cut off line for claims. Mr. Kaufman said further discussion of these issues is necessary. Mr. Kaufman said another change allows individuals to select a benefit when they become a member of the plan. Participants can change their beneficiary while working, but once retired, cannot make a change. Language in the rewrite rectifies the situation regarding Dianne Sedrick, widow of William Sedrick, and provides her the benefit she would have received had Sgt. Sedrick not died shortly before his retirement. The rewrite also benefits those in similar circumstances. It was suggested that a change to the plan reduce the time to vest from 10 to seven years. DROP (Deferred Retirement Option Plan) Actuary Steve Metz provided a PowerPoint presentation of his actuarial review of the proposed DROP (Deferred Retirement Option Plan). While DROP programs have been growing in popularity among public sector Pension Plans, they are not common in the private sector due to significant differences in the legal environment for pension plans, and other things. It often is assumed that a DROP is cost-neutral, but this depends on the unique circumstances of each plan and complex analysis assumptions. Pension Trustees Pension Advisory Special Meeting 2007-10-31 2 Mr. Metz reviewed a typical DROP plan. As far as the pension plan is concerned, once employees DROP, in many respects it is same as if they had retired. The proposed DROP is different from most in one respect – normally once employees reach retirement eligibility, the 5-year DROP period begins to run, with the maximum DROP period reduced each month afterwards. In addition to the potential for added cost to the pension plan, other issues must be considered: 1) administrative costs; 2) communication requirements; 3) legal risks; 4) age discrimination concerns; 5) workforce planning; and 6) public perception problems. When employees DROP, they trade increases in their monthly pension benefit for a lump-sum payment. If this trade-off is not precisely even, the DROP adds or reduces plan costs. Variations to the DROP include Back DROPs or PLOPs that are definitely cost-neutral by design, except for the risk of adverse selection. Estimating impact of proposed DROP: 1) 2007 actuarial assumptions reviewed and adjusted for DROP-eligible employees; 2) impact on employees’ liabilities for variety of age and service combinations reviewed; 3) valuation results for Police, Fire, and non-hazardous duty employees separated; and 4) valuation results for each group adjusted. Cost impacts were based on assumptions: 1) 50% of eligible employees would participate; 2) employees would enter DROP three years after eligible; 3) employees would work three years after entering DROP; and 4) employees would receive 4% annual salary increases once DROP eligible. The potential cost varied greatly depending on factors, primarily: 1) employee’s age at DROP; 2) years of service at DROP; 3) rate of salary increases during DROP; and 4) years on DROP. Mr Metz provided his analysis of the DROP impact on the pension plan: 1) participating Police Hazardous Duty employees would increase 2007 costs by $176,078, or 0.22% of total payroll and 1.04% of group payroll; 2) participating Fire Hazardous Duty employees would increase 2007 costs by $108,955, or 0.14% of total payroll and 0.97% of group payroll; 3) participating Non-Hazardous Duty employees would increase 2007 costs by $648,357, or 0.82% of total payroll and 1.27% of group payroll; and 4) all participating employees would increase 2007 costs by $933,389, or 1.18% of total payroll and 1.18% of group payroll. In response to questions, Mr. Metz said the earlier a candidate participates in a DROP, the less expensive it is for the plan. Mr. Kaufman said DROP candidates would be provided an application and informational booklet. Participants would be required to sign a waiver on claims against the administrator and Trustees and a statement that participation in the DROP is irrevocable and that employment must end within five years. Mr. Kaufman said while unknown, administrative expenses are not major and could be covered by a fee. Two speakers representing the FOP (Fraternal Order of Police, Lodge 10) and IAFF (International Association of Fire Fighters) spoke in support of initiating a DROP. It was recommended that staff review all records as a firefighter’s widow has a problem similar to Dianne Sedrick. Pension Trustees Pension Advisory Special Meeting 2007-10-31 3 In response to a question, Mr. Metz estimated the analysis of additional matrices would cost between $5,000 and $10,000. It was stated that additional information on a DROP is needed. Mr. Roseto said this is a starting point for discussion. Adjourn The meeting adjourned at 2:43 p.m. ~ Chair Em~loy~ Pension PI:tn Tru~ l101v1so'Y ~O(A,.t>l 6oafoL ~fh Pension Trustees Pension Advisory Special Meeting 2007-10-31 4 In response to a question, Mr. Metz estimated the analysis of additional matrices would cost between $5,000 and $10,000. It was stated that additional information on a DROP is needed. Mr. Roseto said this is a starting point for discussion. Adjourn The meeting adjourned at 2:43 p.m. ~~ che;( Employee's Pension Plan Trustees ~~ ~ 0.. erk Pension Trustees Pension Advisory Special Meeting 2007-10-31 4