Committee Minutes
FINANCE DEVELOPMENT STANDBY COMMITTEE
March 5, 2008 – Noon
A101
Present:
Christensen, Glassheim, Hutchison.
Review of Financing Options for NDPERS pension plan.
Duquette stated that Doug Anderson, Stanton Group, was present to give a synopsis of the study which they completed evaluating the option of offering the NDPERS pension plan to City employees.
Anderson gave a brief professional history, including his experience in working with the City of Grand Forks on their existing Defined Benefit Plan. He continued by providing a brief overview of the Defined Benefit and Defined Contribution Plan currently offered by the City and the differences in those types of plans. His analysis included a number of comparisons including replacement ratios for assumed and actual employees and the effect that would occur for employees if they transitioned from a DC plan to the NDPERS plan. For nearly all employees, the transition was a positive benefit to the employee.
Anderson stated that typically cost is a concern for employers in a DB Plan, however with the NDPERS plan, the State has fixed the cost at 4.12% for the City. He commented that the State has maintained the 4.12% for about the last 20 years and are able to do that based on the performance of their assets and the large pool of members that participate in the plan. Despite market changes over the last 20 years the contribution percent being able to be kept stable is attributable also to the fact that the State manages the plan well in that they do not over improve benefits when the market is good and therefore, do not need to make negative changes when the asset values fall. He added that the market value of the plan is greater than the accrued liability of the plan which shows this plan has the ability to handle and would not be projected to need a change in the contribution percentage in the near future.
Anderson commented that public plans are not seeing a trend away from traditional defined benefit plans and that is viewed as o.k. if they are not fully funded. He stated that in the public sector Defined Benefit Plans are still the primary plan type used and that they are able to employ smoothing methods in the reflection of their gains and losses unlike private sector Defined Benefit Plans. Anderson continued that in the private sector some companies may be moving away from DB Plans, not because of the attributes of the plan, but due to the way current accounting rules require them to recognize assets in their financial statements and that when the market is volatile, can lead to swings that affect the impression of the company to investors. He stated that the movement to DC Plans was more common 15 years ago, but not as common today.
Hutchinson commented that the State Teachers Plan and NDPERS both started at the same time and use the same investment board, but the Teachers Plan is not as well funded as the NDPERS plan, as they did some things a little differently.
Christensen clarified that if the City joins the plan, the City will be bound to contribute at the rate set by the State. Anderson stated that was correct. Christensen clarified the NDPERS plan requires a 4.12% pension contribution and then an additional 1% health credit and that the City has to also participate in that portion. Schmisek stated that the City will participate in the health credit program, but that is a good benefit for City employees, as it decreases the cost of health insurance premium for retirees.
Hutchison inquired whether if the City adopts the NDPERS plan existing employees participating in the City plan that choose to switch would still get to keep the money they have in their current plan. Schmisek stated that they do, and can either leave it in the DC plan and continue to manage it as they have been or can roll it into the NDPERS plan to purchase past years of service in that plan. Hutchison inquired whether the City will then continue to maintain three plans if not all the employees choose to switch. Schmisek stated that they would. Hutchison inquired what the funding level of the DB Plan was at the time when the City made the change for new employees to the DC Plan. Schmisek stated that is was about 70% funded and then rebounded to be over 100% funded, but due to market changes affecting investment performance is now back down to 71% funded.
Schmisek stated that he had provided a handout that details the participation of the existing City employees as well as the funding needed to manage the additional 1.12% that switching to the NDPERS plan would cost. He continued that the amount for 2008 is the largest amount and was included in the 2008 budget so that funds would be available should the Council approve making this change. He reviewed details of the funding needs with the Council and stated that overall the annual incremental amount needed going forward is very small and should be able to be covered within existing budgets. Schmisek outlined the assumptions used in completion of the projections with the Committee, all of which are in the handout provided, and stated that he believes that the projections shown are all higher than will actually be needed annually. He added that overall this year the amount being paid into the Defined Benefit Plan is about $2.6 million and that by 2035 when that plan no longer has participants the needs for the NDPERS contribution are projected at about $2.4 million, and as look to the future see a gradual shift as employees from the DB Plan retire and new employees that come on enter the NDPERS plan. On an annual basis, incremental amounts range from $6,752 in 2012 to a high in 2009 of $21,487, and that for the General Fund the funding ranges from a low of $4,106 in 2012 to a high of $14,953 in 2009. The reason for the larger projection for 2009 is that one of the assumptions made is that all current employees that are past their elected retirement age and still working in 2008 will all elect to retire in 2009, thereby requiring replacement by new workers all going into the NDPERS plan, and while this probably will not happen, takes into account the largest possible cost for offering the plan.
Glassheim clarified that if the State then chose to increase the contribution amount by a percent then would really only be talking about doubling the numbers shown and maybe a maximum of $15,000 at double and not a material amount.
Duquette concurred that in discussions as staff, seems to be a small amount that can be administratively funded in a budget neutral manner. He added that there have been annual savings from Workers’ Compensation premium discount of 35% that we have obtained due to the diligent work of the city employees and that amounts to over $138,000 for 2008 and would assume that employees will continue their efforts and will lead to future discounts as well. Duquette stated that the amounts per fund are all relatively small in looking at the amount of the budget in total and should not be a problem funding the increase within existing budgets.
Christensen commented that he agrees it seems like a good benefit and that we owe it to the employees to offer it. Hutchinson added that he also believes this is a good benefit and would only have a concern if the employees did not want it. Duquette responded that this actually came about as an initiative of the employees and they are in support of this move.
Schmisek stated that there is an added benefit in that currently those employees in our DB pension plan can continue on in the NDPERS health insurance plan after retirement however, those in our DC Plan do not receive an annuity payment from the plan so are not eligible to continue with their health insurance through NDPERS. Schmisek continued that the DC employees that switch to the NDPERS plan will now be able to keep their health coverage just as other retiring employees do and will also receive the health credit to use towards covering the cost of their insurance premium after retirement.
Motion by Hutchinson, Second by Glassheim, to recommend City Council approve offering the NDPERS pension plan to current employees of the City and that all new hires of the City will be participants in the NDPERS plan and that the offering of this plan can be done in a revenue neutral manner. Aye: All. Motion Carried.
Christensen commented that by making this change the City is on the right track.
Meeting adjourned 1:12 p.m.
Respectfully submitted,
Sherie Lundmark
Admin Spec Sr