Roanoke City Council listened to/watched a 2-hour 94-slide presentation on sustaining Roanoke City’s employee pension plan Monday. Council will vote to adopt the elements of the plan in January. The earliest it would go into effect for new hires would be July 1, 2013.
Director of finance, Ann Shawver and the city’s financial adviser Jim Link, managing director of PFM Asset Management LLC, explained the reality. Contributions (percent of payroll) are expected to increase from the current rate of 18.04% to 21%. The root of the problem is 30 years of benefit increases and aggressive investment assumptions.
Benefits were enhanced in the late 1990s during a robust stock market; this created additional costs and stress on the pension plan, said Shawver. But the plan has been managed proactively and “we don’t have a crisis,” she stated.
Roanoke’s pension plan is in better shape then the VRS (Virginia Retirement System). It is fully funded at 86% with 1800 employees receiving monthly benefits. “The city has always fully funded the actuarial required contribution,” said Shawver.
The goal is to reduce and stabilize the contribution rate while balancing the interests of all stakeholders – the public (taxpayer), employees and retirees, elected officials and administrators. A team that comprised 8% of the employee workforce attended twelve feedback sessions from September to November. Feedback also came from former finance directors Jim Grisso and Jesse Hall.
The vesting period was reduced from 20 years to 10 years in the 1970s and again from 10 years to 5 years in 1996. In 1998 a supplement was added for retirees with 20 years of service until they reached age 65. The multiplier was increased from 2% to 2.1 percent in 1999.
A sluggish stock market and GDP growth, low interest rates and the aging baby boomer population has created a “new normal” for pension plans. The most commonly used solutions to pension reform include retirement age alignment with social security and the implementation of employee contributions in conjunction with lower benefit tiers.
The recommendation placed before council included two new plans for new hires – a choice of either a Defined Benefit plan or a hybrid Defined Benefit/Defined Contribution Plan.
If adopted by council, employees will be required to contribute 5% of their pay on a pre-tax basis. The multiplier will decrease from 2.1% to 1.8%. The VRS multiplier is 1.7%. Measurement of final compensation will increase from 36 months to 60 months. The taxable pension supplement would be discontinued and a tax-free Retirement Health Savings Account (RHSA) would take its place.
The new hires after July 1, 2013 would have 60-90 days to make their election between the two plans. Education on investment options in the Defined Contribution Plan would be provided.
Councilman Ray Ferris said, “We have to drive home the message to our employees that the government can’t be big brother – we’re not here to take care of you. They’ve got to have some modicum of individual responsibility.”
Current employees hired before July 1, 2013 would have these options offered to them. Council will make a decision at some point whether to offset the 5% pre-tax contribution with a pay raise. A current employee may want to move to the new option for portability purposes.
Vesting will remain unchanged at 5 years. This is comparable to most private plans and the VRS. The city needs to remain competitive with its benefits.
Cost of living adjustments are currently given ad hoc by city council. Shawver recommended a COLA policy instead. COLA would be granted only to normal retirees and would equal 2/3rds of the Urban Consumer Price Index (CPI). It would not exceed 4% or exceed the pay raise of active employees.
Shawver explained that the pension plan changes would result in a reduction of the contribution rate from a high of 21% in 2017 to 15% by the year 2032.
The effective date is dependent upon the purchase or development of new computer software; It will have an upfront cost of about $500,000 and the plan choices will add to administrative costs.