Meriden Retirement Incentive

1

Making strategic Investments and the Knowledgeable Elimination of liabilities

Michael Lupkas, CPFO September 2018

9/21/2018

2

Goal of Retirement Incentive Program  Reduce payment at separation  Sick time  Earned days  Compensated Absences  Vacation Time Accrued

 Reduce Expenditures and Liabilities  Compensated Absences  Insurance Cost  Other Post Employment Benefits (OPEBs) 9/21/2018

3

Last three years of payouts Audited Audited Unaudited

Gov't Wide Water Sewer Golf 2016 540,592.84 75,673.67 2,897.91 2017 593,153.00 1,675.52 3,004.31 2018 409,767.57 * 116,922.37 ‐

‐ ‐ ‐

Total 619,164.42 597,832.83 526,689.94

*Includes 53,585.12 of severance paid out of WIC grant (Fund 0110)

9/21/2018

4

2019 Possible Retirements  1

15 years

76,100 (retired payment on hold)

 2

16 years

49,250 (retired payment on hold)

 3

29 years

45,700 (retired payment on hold)

 4

10 years

34,000 (retired payment on hold)

 5

29 years

30,600

 6

31 years

18,000

 7

34 years

72,000

 8

30 years

27,900

 9

21 years

62,100

 10

22 years

117,500

 11

15 years

87,800

 Total 252 years 620,950 9/21/2018

5

Mindset  Purchase points (years) of service  Purchase points (years) of age  Other options  Dollar amount exchange for liabilities  How to think outside the box  One time payment(s)  Pay over time 9/21/2018

6

Retirement Incentive Program -

Municipality  Attractive but not too attractive  Budgetary Impact  Financial Statement Impact  Persons at maximum allowed

 Risk/Advantage => 7.75% Return on annuity  Market Return  Mortality Risk  Cost Neutral if risks met

 Must review applicants  Can put a limit on number of people  Can stagger dates  Can agree to future adoption 9/21/2018

7

Retirement Incentive Program -

Participants  Attractive but not too attractive  Persons at maximum allowed  Need funds at separation  Additional Incentives possible

 Advantage => 7.75% Return on annuity  Buyback of service at payroll rate  Leverage funds  No reduction of payout time for excess 9/21/2018

8

Eligibility  Current member City of Meriden Employee Pension Plan(s)  Non Public Safety/Non BOE personnel/Unless agreed  Must qualify for Early Retirement by natural age (55)  Not recommended for Early Retirement participants  If not, meet Rule of 80 with implementation

 No arrears taxes or water/sewer bills  Must be paid to current

9/21/2018

9

General Information  Incentives for time bought and/or separation payout  Insurance and OPEB are separate for purposes of annuity consideration  Purchases over 32 years of service are based on actuary calculations (except as mentioned)  Must separate from employment unless negotiated differently  Must reduce separation payment to <$5,000 (TBD)

9/21/2018

10

Incentives  Purchase of points to meet Rule of 80, Years maximum.  Purchase point/years @11% rate  Source of Funds  Can only use separation funds, or  if exhausted then outside funds can be used for an additional 5 points.  Maximum 32 points of service  Balance of funds (>32 years); actuary formula determines amount  Loan from pension plan (discussed later)

 City to decide on additional years possibility

9/21/2018

11

Incentives  Purchase of layer (annuity), if maximum years met (25% incentive) TBD.  Incentive percentage will be added to funds and actuary formula determines the amount of layer

 Purchase of annuity for Pre-65 Insurance Elimination  Purchase of annuity for OPEBs Benefit

Elimination

9/21/2018

12

Offsetting Costs for the Retirement Incentive Program  Offsetting costs  Workforce reduction/restructure  Hire at a reduction; 5 years to catch-up in salary  No longevity ($250-$2,500/year)  Lower Sick day payout (50% of time)  Lower Separation Payout (Lower number of days)  Lower pension cost; DC plan 5%, DB currently 4.5%, 6.4% amortization cost still must funded in annual payment  Not eligible for unemployment at separation time

9/21/2018

13

Program for persons over the maximum  70% of salary maximum  2% years 1-20  2.5% years 21-32

 Remain at 70% (no change to existing plan)  Layer Payout on top (Payout only; not service)  Except for any “incentive given”, cost neutral

 Survivor Benefits, amounts are separate contributions  ARE subject to 50%/66%/100% survivor benefit  Limited to actual contribution plus interest if not paid

9/21/2018

14

Persons vested going to maximum  Achieving additional points (service and age)  Receive 7 additional points as incentive

(historically)

 Now - Purchase points at the rate of 28.6 days per service and age until Rule of 80 met; then  Equates to 11.00% = 1 Point Service and Age

 At maximum, then layer system used  NEW Actuary calculation = Equates to funds/actuary rate = Additional Points of Service  Normal Survivor Benefits Available 9/21/2018

15

Program Comparison 1999 Incentive Program

 7 Points added to service – no cost 

25 days of payout to purchase one point



Additional years at 25 day rate

2018 Incentive Program  No free points 

Percent of salary to purchase one point service and age; 28.6 days



Actuary based calculations for annuity 



Insurance 1,2 or 3 years paid; based on years of service



No insurance $2,000/yr for 3



Separation date by 7/1/99 latest 12/31/99 or agreed to date.

Cost to city – Annuity  Stock Market Return  Mortality



Separation date 7/1/18 -latest 12/31/18



Cost to city spread over 19 years; offset by multiple factors 9/21/2018

16

Union(s) Request for

Retirement Package Information  Most unions have made requests for buyout of points  Not accepted because of cost and previous methods  Now new alternatives, financial considerations  Benefits to City

Reduced cash payouts at separation  Restructure departments  Eliminate positions or reduce positions  Lower cost of salary for approximately 5 years  No OPEBs for new employees  No Annual sick time payout will be made for 6-7 years  No Longevity for new employees

OPEBs Reduction or Elimination

9/21/2018

Amounts of separation pay by Union

(April 2018)

17

Union ELECTED OFFICIALS F/T Average MANAGEMENT ‐ DEPT HEAD Average MGMT ‐ OTHER NON UNION Average MME Average NURSES Average PUBLIC WORKS LOCAL 740 Average SUPERVISORS Average

Est. Final Average Est. Benefit Est. Accrued Age as of Pool Balance Earnings Service Benefit 7/1/2018 ‐ 53,447 24 29,950 63 75,773 122,014 20 51,611 55 31,269 22,488 27,989 33,490 52,790

61,442 66,253 60,534 75,112 91,573 Average

19 23 16 20 22 21

23,329 30,770 19,612 33,035 40,892

55 57 58 52 53 56

Count 2 7 5 58 8 53 33 166 9/21/2018

18

Employee Plan: Census Making Milestones

Purchasing points to make a milestone Vesting

(7 persons will vest by 12/2018)

20-32 years for 2.5% factor Normal retirement age

(63 persons previously achieved)

Additional contributions to plans Cash payment  Option; Deduct

from pension payment (over 48 months)

9/21/2018

19

Buy additional points  Only available in conjunction with other options  Historically no cost (7 years).  Possible incentive on other items

 Cost of additional points to employee  If 11% (rate of 28.6 days per point year and age)

 Only allowable to maximum of 65 y/o or 32 years service  Layer - Actuary calculation of annuity purchase

9/21/2018

Pension loan to purchase additional points

20

Pension Loan Amortization

Year 1 2 3 4

Loan 7,500 5,760 3,933 2,015

Pension 5% InterestReduction 375 2,115 288 2,115 197 2,115 101 2,115 960 8,460

Balance 5,760 3,933 2,015 0

Salary

68,182

Year 1 2 3 4 5 6

Annual Inc. 1,364 1,364 1,391 1,419 1,447 1,476 8,460

9/21/2018

21

Funds counted as additional contribution for Survivor Benefit calculation  Pension contributions  Additional layers for annuity portion (ARE reduced for survivor benefit)  Separate tracking of contributions/payments on permanent records

 Not all considered Pension Payments; but liability to be transferred based on buyout participation

9/21/2018

22

How reduced expenses can fund/offset city cost  Pension [+] or Pension [$0]  OPEB Annual Expense [-]  OPEB Liability (on balance sheet) [-]  Health Insurance G/F [-] =>Health fund =>OPEB Fund  Longevity [-]…………………………………….No longer paid  Salary [-]…………………………………………Reduced with new hires  Sick time payout current [-]………………….Current year expenditure  Sick time payout future [-]……………………½ paid in future  Vacation payout current [-]………………….Less weeks accruing and used  Vacation payout future [-]……………………Current year expenditure

9/21/2018

23

How OPEB liability is reduced  Pension Liability [+]  Investment Rate at 7.75%

 Health Insurance Fund transfer to OPEB Trust [-]  OPEB Annual Expense [-]  No longer in calculation

 OPEB Long Term Liability [-]  Investment Rate Currently 7.75%  Prior year decision to reduce funding may reduce investment rate to 4.75%-5.0% (increase liability 48%)  Continued reduced funding; rate to 3.0%-4.75% (increase liability another 16%) 9/21/2018

24

Person “A” Option 1 Option 1 Salary Pension Normal Cost Payout Assumption Sick time payout Longevity

Stay 3 Years 2018 2019 82,800 84,870 (9,108) (9,336) 3,000 3,100 4,777 750 82,219

Leave Now 19 Year Amortization Additional

4,896 750 84,281

2020 86,992 (9,569) 3,300 30,600 5,019 750 117,091

Total 254,662 (28,013) 9,400 30,600 14,692 2,250 283,591

224,200

224,200124k*Liability cost

Leave in three years. Current cost $283,591 vs. Pension liability of leaving now $224,200

9/21/2018

25

Person “A” Option 2 Option 2 Salary Pension Normal Cost Payout Assumption Sick time payout Longevity

Leave Now 19 Year Amortization Additional

Rehire at lower salary 3 Years 2018 2019 2020 Total 50,960 54,899 57,954 163,813 2,548 2,745 2,898 8,191 ‐ ‐ 1/2 at separation ‐ Not until yr 7 ‐ None 53,508 57,644 60,852 172,004

‐

None

Separate employment now new salary schedule $172,004 over three years.

9/21/2018

26

Person “A” Option 3 Option 3 Salary Pension Normal Cost Payout Assumption Sick time payout Longevity

Eliminate Position/Do Nothing 2018 2019 2020 82,800 (9,108) ‐ ‐ 3,000 30,600

107,292 ‐ Leave Now 19 Year Amortization Additional ‐

‐

Total 82,800 (9,108) 3,000 30,600 ‐ ‐ 107,292

‐

Separate now and do not refill position. Do not have buyout.

9/21/2018

27

Actual cases with accumulated payout balances

9/21/2018

Example 1 $49,000 b/o 64 y/o 25% Incentive

28

Actuary calculation

Age 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85

Pension Service Buy 35,434 0.05 36,143 0 36,866 0 37,603 0 38,355 0 39,122 0 39,905 0 40,703 0 41,517 0 42,347 0 43,194 0 44,058 0 44,939 0 45,838 0 46,755 0 47,690 0 48,644 0 49,616 0 50,609 0 51,621 0 52,653 0 53,706 0

49,242.50 4,118 4,201 4,285 4,371 4,458 4,547 4,638 4,731 4,825 4,922 5,020 5,121 5,223 5,328 5,434 5,543 5,654 5,767 5,882 6,000 6,120 6,242

25% Incentive Insurance 1,030 1,875 1,050 1,913 1,071 1,951 1,093 1,990 1,114 2,030 1,137 2,070 1,160 2,112 1,183 2,154 1,206 2,197 1,230 2,241 1,255 2,286 1,280 2,331 1,306 2,378 1,332 2,426 1,359 2,474 1,386 2,524 1,413 2,574 1,442 2,625 1,471 2,678 1,500 2,732 1,530 2,786 1,561 2,842

OPEB 5,600 5,712 5,826 5,943 6,062 6,183 6,307 6,433 6,561 6,693 6,826 6,963 7,102 7,244 7,389 7,537 7,688 7,841 7,998 8,158 8,321 8,488

Optional by individual Total 48,057 49,019 49,999 50,999 52,019 53,059 54,120 55,203 56,307 57,433 58,582 59,753 60,948 62,167 63,411 64,679 65,972 67,292 68,638 70,011 71,411 72,839 9/21/2018

Example 1 $49,000 b/o 64 y/o 25% Incentive

29

Example 1 $49,000 b/o 64 y/o

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 ‐

Pension

Service Buy

49,242.50

25% Incentive

Insurance

OPEB 9/21/2018

Example 2 $88,000 b/o 57 y/o 14 years service

30

120,000

Example 2 $88,000 b/o 57 y/o

100,000

Individual Benefit

80,000

60,000

40,000

20,000

‐

Pension

Service Buy Est

87,796.71

25% Incentive

Insurance

OPEB 9/21/2018

Example 3 $63,000 b/o 48 y/o, 24 years service

31

180,000 160,000 140,000 120,000

Individual Benefit

100,000 80,000 60,000 40,000 20,000 0

Pension

Service Buy Est

63,313.77

25% Incentive

Insurance

OPEB 9/21/2018

32

Cost Recovery of Buyout 5‐Jun Based on non payment of separation pool.

ADEC TOTAL 19 Year Effect 62,775

A Savings over 5 years: City not paying separation amount Normal Cost 4.5% of salary; Note amortization amount must still be paid.

Rehire Salary savings for 5 years estimate 20/15/10/5/0 No Longevity payments estimate $1,000 annually No annual sick day payout first 7 years

$ 74,268 Salary Percentage ADEC Percentage 84.52% 180.00%

B

C

(34,875)

‐46.96%

100.00%

(16,710)

‐22.50%

47.91%

(50,000)

‐67.32%

143.37%

(5,000)

‐6.73%

14.34%

(29,993)

‐40.38%

86.00%

9/21/2018

33 Based on non payment of separation pool.

ADEC TOTAL 19 Year Effect 62,775

Separation payout reduction 50 days estimate

Goal for consideration $74,268 average salary With incentive

$ 74,268 Salary Percentage ADEC Percentage 84.52% 180.00%

(37,134) (173,712)

‐50.00% ‐233.90%

106.48% 498.10%

(148,536)

‐200.00%

180.00% 225.00%

9/21/2018

34

Health Insurance Buyout  All eligible, not only ones on insurance now  Insurance coverage maintenance will be costly; buyout saves annual expense  Plan is to eliminate future liability  Eliminate large liability

 Medicare Supplemental Insurance (after age 65)  Include  Do not include

 Calculate by formula for reversals (if necessary)  Council to decide

9/21/2018

35

Pre-65 Health Insurance Buyout

 Years before age 65; more years the better  Lower current year expense  Medical Expense ($15-$35k per year)  Eliminate actual cost

 OPEB Expense  Reduce OPEB Liability  Implicit Rate Subsidy (next slide)

 Lower OPEB Long Term Liability  Eliminate OPEB Liability

 Pension Liability calculated over 19 years

9/21/2018

36

Implicit Health Rate  Definition -An implicit rate is a rate that is not specifically stated in a business transaction.  Example for Health Insurance Cost  A 45 year old person is typically much less to insure than a 64 year old person. ($5,911 vs. $15,935)  However, Equivalent Insured Rate is identical.

Implicit Subsidy Single Participant Implicit Subsidy Single Participant

Implic Implic Expec Expec it it Implicit Expecte Expecte Implicit ted ted Sample Age Premi Subsi d Claim d Claim Premium Subsidy Subsi Subsidy Sample Age Claim Claim um (Male) (Female) (Male) dy(Female) dy (Male (Fema (Male (Fem le) 45 5,911 ) 8,239 9,095 -856 ) -3,184ale) 50 45 8,239 9,095 7,7195,911 9,600 9,095 -3,184 -1,376 -856 505 50 7,719 9,600 9,095 -1,376 55 10,129 11,183 9,095 1,034 505 2,088 55 10,129 11,183 9,095 1,034 2,088 60 13,048 13,043 9,095 3,953 60 13,048 13,043 9,095 3,953 3,948 3,948 64 15,935 9,095 6,840 6,8406,175 6,175 64 15,935 15,270 15,270 9,095

9/21/2018

37

Pre-65 Insurance Buyout Year Under 65

Annual Addition

Cost to amortize

Total cost to Mem+1 +3% 150% amortize premium Implicit Rate 19 yrs.

Equal

10 age 55

7,500

11,511

218,700

304,939

457,409

9 / 56

6,750

10,359

196,830

270,232

405,348

8 / 57

6,000

9,208

174,960

236,536

354,804

7 / 58

5,250

8,057

153,090

203,821

305,732

6 / 59

4,500

6,906

131,220

172,060

258,090

5 / 60

3,750

5,755

109,350

141,223

211,835

4 / 61

3,000

4,604

87,480

111,284

166,927

3 / 62

2,250

3,453

65,610

82,218

123,327

2 / 63

1,500

2,302

43,740

53,998

80,997

1 / 64

750

1,151

21,870

26,600

39,900

9/21/2018

Insurance Buyout

38

$750 per year Insurance Savings Years age <65 years old 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 ‐ 10

9

150% Implicit Rate

8

7

6

Mem+1 +3% premium Equal

5

4

Cost to amortize

3

2

1

Annual Addition 9/21/2018

39

OPEB Benefit Program Est. Accrued Benefit Age as of 7/1/2018 Valuation Liability ER Window Liability Liability Increase Immediate Annuity Factor 5,600 TOTAL

(Post 65)

Resulting Increase to FYE 2020 ADEC (amortized @ 7.75% Information over 19 years) only

57.33 74,590 $7,079.13 177,882 (16,882.22) 103,292 12.38 69,317

5,600.00 $531.48 5,600.00 (16,350.74) 7,079.13

If retired today, the annual rate would jump to this level.

Normal annual cost increase 9/21/2018

40

OPEB Buyout Option (April 2018)  Liability April 2018

$11,407,377*

 If everyone retired today

$19,791,236

 Increase in Liability

$8,383,859

 Using the Immediate Annuity Factor and $5,600/year

$11,378,342*

9/21/2018

41

Decisions to be made. (1 of 3)

 1) Allow separation time for buyout

Y or N

 2) Allow time and layers

Y or N

 3) No free time

Y or N

 4) 11% for purchases, Rule of 80/32 Years, No incentive

Y or N  5) Maximum allowed through purchases

Y or N

*Underline = recommended, or = council choice to be made

9/21/2018

42

Decisions to be made. (2 of 3)

 6) Actuary calculation for other time (>32 years) Y or N  7) Incentive if no time purchased (25% rate) Y or N (20% rate) Y or N  8) Insurance buyout rate  9) OPEB buyout rate

($9,000 x yrs) Y or N ($5,600/yr) Y or N

 10) Separation payout maximum $5,000 Y or N $0 *Underline = recommended, or = council choice to be made

Y or N

9/21/2018

43

Decisions to be made. (3 of 3)

 11) Allow 5% loans to purchase additional time.

Y or N  12) Separation time 100% usable

Y or N

 13) Insurance reversal allowed

Y or N

 14) OPEB reversal allowed

Y or N

*Underline = recommended, or = council choice to be made

9/21/2018