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HomeMy WebLinkAbout04 PARS EARLY RETIREMENT INCENTIVE PROGRAMAGENDA REPORT Agenda Item Reviewed: City Manager Finance Director 4 MEETING DATE: TO: FROM: SUBJECT: AUGUST 14, 2012 JEFFREY C. PARKER, CITY MANAGER KRISTI RECCHIA, DIRECTOR OF HUMAN RESOURCES IMPLEMENTATION OF THE PUBLIC AGENCY RETIREMENT SERVICES (PARS) EARLY RETIREMENT INCENTIVE PROGRAM TO ACHIEVE BUDGET SAVINGS AND ALLOW FOR ORGANIZATIONAL RESTRUCTURING SUMMARY On June 5, 2012, the City Council approved the offering of an early retirement incentive program administered by Public Agency Retirement Services (PARS) to help the City directly reduce General Fund expenditures while also making it easier for the City to restructure its staffing levels and operations in a more economical and efficient manner. Since that time, the PARS Supplementary Retirement Plan (SRP) enrollment period has closed, the City has provided PARS with position replacement information, and PARS has provided the City with data identifying the projected cost savings that would result from implementing the SRP. The City Council now must make a final decision to proceed with the early retirement incentive program, withdraw the offer in its entirety, or withdraw the incentive to specific employee job classifications. RECOMMENDATION It is recommended that the City Council: 1. Authorize the implementation of the PARS Supplementary Retirement Plan (SRP) for all eligible employees; and 2. Appropriate funds from Fund 186 — Obligation Reimbursement from the Successor Agency (186 -80 -00 -6012) for the PARS SRP not to exceed $675,214 (1/5 of total cost); and 3. Appropriate funds from Fund 186 — Obligation Reimbursement from the Successor Agency (186 -80 -00 -5011) not to exceed $714,000 to pay separating employees for accrued paid leave balances remaining at the time of separation. FISCAL IMPACT Implementation of the PARS early retirement incentive program will allow the City to achieve significant budget savings in the short -term and over the long -term, while also allowing for organizational restructuring. The program will result in a net cost savings to the City by leaving some vacated positions unfilled indefinitely and replacing employees in other City Council Agenda Report August 14, 2012 Implementation of the PARS Early Retirement Incentive Program to Achieve Budget Savings and Allow for Organizational Restructuring Page 2 positions with new employees who are hired at a lower salary step in the same classification, hired at a lower classification level, and /or placed in a second -tier retirement plan. Of the 86 employees who were eligible to participate, 35 employees (approximately 41 % of those eligible and 13% of all City staff) voluntarily enrolled in the retirement incentive program, pending City Council approval. The City Manager, in consultation with the City's department heads, believes it is in the City's best interest to allow all 35 employees who enrolled in the PARS SRP to participate in the early retirement program. The City will achieve savings primarily in one of two ways. For employees who retire and whose positions remain vacant, the City will benefit from savings due to fully funded positions remaining unfilled. Alternatively, for employees who retire and who are replaced with new employees, the City will still realize savings due to replacements being hired at lower classification levels or lower entry salary steps, in addition to reduced costs resulting from the second tier retirement plans that the City implemented in January 2012 for both Miscellaneous and Safety employees. For any new employees in the Safety plan, the City will realize cost savings immediately since with the second -tier plan the employer rate is 13.697% lower than the first -tier plan and the employee pays the full 9% member contribution instead of half of the member contribution (a total reduction of 18.197 %). For Miscellaneous employees, the second -tier retirement plan has the same employer rate as the first -tier plan (since it is a non - pooled plan), but all new employees will immediately pay the full member contribution (7 %), rather than the City paying 3.5% to 4% of the member contribution. There are a few costs associated with the PARS SRP. First is the direct cost of the incentive plan itself, which is $639,245 per year for five years. Second is the PARS and trustee administrative fee of $35,969 per year for five years. The combined total for the PARS incentive is $675,214 per year for five years. The other primary cost is the cost of paying separating employees for accrued paid leave balances remaining at the time of separation, which is required by law. Payment for remaining accrued paid leave for all 35 employees is projected to be $714,000. These one -time and short -term costs are mitigated by the savings realized due to the retirement of 35 employees (approximately 13% of the City's workforce). Along with the cost implications of the City's replacement plan for the vacated positions, the estimated net annualized savings is approximately $1,017,718 and the net savings over five years is approximately $4,500,658. BACKGROUND AND DISCUSSION The City continues to face significant financial challenges, in large part as a result of the State's dissolution of redevelopment agencies earlier this year. Therefore, despite maintaining a fiscally conservative budget and taking a number of proactive steps to reduce City Council Agenda Report August 14, 2012 Implementation of the PARS Early Retirement Incentive Program to Achieve Budget Savings and Allow for Organizational Restructuring Page 3 personnel costs over the last several years, the City must take additional action to significantly reduce its operating expenditures. In order to reduce the City's personnel costs and facilitate organizational restructuring, at the June 5, 2012 meeting, the City Council authorized staff to offer the PARS early retirement incentive program to eligible employees by 1) adopting Resolution 12 -53 to contract with PARS to provide an early retirement incentive program, 2) appointing the City Manager as Plan Administrator and authorizing the Plan Administrator to execute the Agreement for Administrative Services, and 3) approving the Plan Document for the PARS SRP. A retirement incentive program is designed to encourage employees to retire earlier than otherwise planned, which provides the City with immediate and long -term personnel cost savings and allows the City to realign staff in a more efficient and cost - effective manner. The PARS early retirement incentive program would provide eligible employees who separate employment with the City and retire from CaIPERS with a benefit equivalent to 7% of the employee's base salary (exclusive of any special pays). Employees may choose one of 14 options on how they will receive the benefit, all with actuarially equivalent values. All regular employees (excluding the City Manager, Director of Finance, Director of Community Development, Director of Human Resources, Director of Parks & Recreation, Director of Public Works and Police Chief) are eligible to participate in the early retirement incentive, provided they meet the following criteria: a) Are employed by the City in a full -time or part-time benefitted position as of June 5, 2012; and b) Are fifty (50) years of age with five (5) years of City service and five (5) years of CaIPERS service as of October 31, 2012; and c) Resign from City employment effective no later than October 31, 2012; and d) Retire under CaIPERS effective no later than November 1, 2012. Based on these criteria, 86 employees were eligible to voluntarily enroll in the early retirement incentive. To help ensure that each eligible employee made an educated decision that was in his /her own best interests, the Human Resources Department spent approximately ten weeks educating employees on retirement issues in every imaginable way. Among the actions taken were preparing a weekly "Retirement Incentive Update" with detailed information on key deadlines, frequently asked questions, and various issues of interest to employees considering retirement; providing group training sessions on how to use the CaIPERS website and how benefits transition upon retirement; meeting one -on -one with employees to walk them through requesting CaIPERS estimates, explaining available PARS and CaIPERS options, discussing their benefits, preparing their retirement paperwork, and other related issues; coordinating numerous informational sessions with City Council Agenda Report August 14, 2012 Implementation of the PARS Early Retirement Incentive Program to Achieve Budget Savings and Allow for Organizational Restructuring Page 4 representatives from PARS, CaIPERS, Social Security, and Nationwide Retirement Solutions; coordinating Budget Briefings conducted by the City Manager; and establishing an intranet website with links to various retirement - related documents and resources. By the enrollment deadline of July 27, 2012, a total of 35 employees submitted an enrollment packet. Though the incentive plan can be withdrawn by classification, by bargaining unit, or in its entirety, staff is recommending that all 35 eligible employees who elected to enroll in the PARS SRP be permitted to participate. The breakdown of participating employees by department is as follows: City Manager's Office 2 Community Development 3 Finance 2 Human Resources 1 Parks and Recreation 3 Police 9 Public Works 15 TOTAL 35 Upon City Council approval to move forward with the PARS SRP, the City will need to establish a plan to pay PARS for the administration and implementation of the plan. PARS provides options for funding the plan, including the purchase of an annuity through Pacific Life Insurance Company and self- funding using the PARS Trust. Staff recommends purchasing an annuity through Pacific Life Insurance Company. This approach transfers mortality and investment risk to the insurance company and is consistent with the City Council's philosophy of paying off expenditures in the short term. We have the option to pay the full cost in one lump sum or pay over five years. Staff recommends paying for the incentive over five years. The magnitude of 35 employees retiring within the next three months is significant and it is difficult to accurately project at this time the impact that this action will have. Therefore, staff intends to re- evaluate the impact of the retirement incentive program on organizational operations during the mid -year budget review process. 41/1,0 /q,gAt Kristi Recchia Director of Human Resources