HomeMy Public PortalAbout2006 Report from Klausner and Kaufman re Police and Fire Pension SystemKlausner el Kaufman
rRoFCss IONAL ASSOCIATION
1TTORNEYS 1TLiW
To Honorable Mayor and Village Council
Village of Key Biscayne
From Klausner & Kaufman P
Re Police and Fire Pension System
Our File No 050035
The following is an interim report on the questions raised by management concerning the status of
the funding of the Police and Fire Pension System (the Plan)
The Plan is a defined benefit retirement program ` This means that the benefit is a guaranteed
percentage of the employee s salary payable for life The member cannot outlive the benefit This
is overwhelmingly the standard in the public sector A defined benefit program uses actuarial
assumptions which are predictions of future events such as payroll growth mortality and
investment return in order to determine the lifetime cost of a member s benefit That cost is
translated to an annual cost for each year s accrual (known as the normal cost ) expressed as a
percentage of payroll The assumptions are tested for accuracy through an expenence study (a
backwards look in time comparing the assumed costs with the actual costs observed over time) If
the experience is better than predicted the cost of the plan in the future goes down If the experience
is worse than predicted cost will be higher
'This compared with a defined contnbution plan in which the participants and the
employer contribute a certain sum of money with no guarantee of benefits The amount in an
individual account at the time of retirement constitutes the sole benefit
10059 NORTHWEST 1ST COURT PLANTATION FLORIDA 33324
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February 21 2005
Page 2
Between 1999 and 2001 the U S capital markets experienced their worst decline since the beginning
of the Great Depression 1929 193 I This had a material effect on the Plan The Plan assumes that
it will earn a positive 9% per year in investments The 1999 2001 period was substantially below
the assumption thereby raising the cost of the Plan Investment performance is perhaps the most
critical element in any defined benefit retirement plan Investment return accounts for between 60
70% of Plan funding It is expected that better performance since 2001 should lower the cost of the
Key Biscayne Plan in the 2007 fiscal year
The Plan was destgned from the begmmng to shift an unanticipated cost to the participants The
Plan provides that contributions from members may be increased to cover plan funding shortfalls
The Plan currently has a set rate of contnbution for members but enables the city through a Plan
amendment to increase that amount
Part of the funding for the Plan is derived from a rebate from the State of Florida of a tax it levies
against premiums collected by fire and casualty insurers In order to qualify for this premium tax
rebate a mumeipality must maintain a defined benefit retirement plan which meets certain minimum
benefit levels last year the Key Biscayne Plan was amended to meet those minimum standards
That required an additional contribution of approximately $120 000 Under the terms of the state
law the sponsor of a retirement plan in this case the Village must contribute to the Plan an amount
which together with other sources of income is sufficient to meet the annual normal cost of the Plan
along with a percentage of any unfunded accrued actuarial liability The Village made the required
payment
The question which arose following this payment is whether the Village must bear the uncertainty
associated with a defined benefit plan In order to continue receiving the insurance premium rebates
which form a substantial contribution to the Plan the Village must guarantee any annual shortfall
in Plan contributions It may however amend the member contribution rate to pass that cost on to
the participants 2
State law does not contain a maximum employee contribution rate The competing employment
market however generally places the variable cost on the employer Exceptions to that are found
in Sunrise and Aventura In Sunrise the City had a provision in its plan that if the employer cost
exceeded 10% of covered payroll (the payroll of those participating in the plan) the excess was split
equally between the city and the participants The increase was effected through an ordinance setting
a higher employee contribution rate As a result of collective bargaining last year the City cost
before the split was raised to nineteen percent (19%) of payroll for firefighters and eighteen percent
(18%) for police Any cost above that number is shared equally Employee contributions were also
raised to approximately ten percent (10%) of pay In Aventura, if the insurance premium rebate falls
'Unilateral changes where the affected workforce is unuonized may create additional legal
issues The Village should consult its labor counsel on this issue
February 21 2005
Page 3
below five percent (5%) of covered payroll the employees make up the difference Any additional
cost is borne by the City
In some plans in other states the employer makes a specific minimum contribution whether or not
the actuarial needs of the plan require it If it is insufficient, the additional cost is passed on to the
employees or benefits are lowered prospectively If the contribution is more than the plan needs the
additional contribution serves as a cushion against future plan cost increases
The Village of Key Biscayne needs to address its future course m the maintenance of the defined
benefit retirement plan The question of how the cost sharing of contributions will affect employee
recruiting and retention is a matter for management to consider From a purely legal standpoint the
Village is not precluded from prospective alteration of the Plan with certain exceptions Once an
employee is eligible to retire Ronda law precludes any change in the Plan which diminishes
benefits For other employees changes may be made prospectively Any benefits earned prior to the
change may not be retroactively reduced No change however may reduce benefits below the
minimum benefits required to retain the insurance premium tax rebates To retain the insurance
premium tax rebate the Plan must be uniform in its benefits that is the law does not permit
different tiers of benefits among active employees
An additional element of our review concerned the accuracy of the current actuarial assumptions
The accuracy and reasonableness of those assumptions is cntical to the ultimate cost of the Plan
As discussed with management we have engaged the internationally known actuarial firm the Segal
Company to review and comment on the assumptions and cost methods employed That analysis
will be contained in our final report