Agenda Item 3.1
April 6, 2010
Introduction
MEMORANDUM
TO:
FROM:
SUBJECT:
County Council
Robert
H.
Drummer, Senior Legislative Attorney
F\
rDtr)
Retirement - Imputed
Introduction:
Expedited Bill 16-10, Personnel
Compensation Limit
Expedited Bill 16-10, Personnel - Retirement - Imputed Compensation Limit, sponsored
by Councilmember Andrews, is scheduled to be introduced on April 6, 2010. A public hearing is
tentatively scheduled for April 27 at 1:30 p.m.
Although the general wage adjustments for FYI0 negotiated with each of the 3 County
employee unions representing police, fire, and general government workers were "postponed"
last year, Expedited Bill 18-09 required that the calculation of regular earnings used to determine
a retirement benefit include the FYI0 general wage adjustment as if the employee had received it
on July 1, 2009.
1
This imputed compensation is scheduled to carryover into the calculation of
regular earnings used to calculate a defined benefit pension for the rest of an employee's County
career. Expedited Bill 16-10 would amend the retirement laws to limit the effect of the imputed
compensation to the calculation of regular earnings for FYI 0 only.
The County's actuary, Mercer, estimated that this imputed compensation would require
the County to increase its annual contribution to the Employees Retirement System Trust Fund
by $8.589 million per year for the next 40 years. A copy of Mercer's report is at ©5-7 and a
memorandum reviewing
it
from the Council's actuary, Bolton Partners, Inc., is at 08. The actual
savings from limiting this imputed compensation to FYIO is currently estimated to be $7.2
million for FYll. Annual savings would continue for a total of 40 years.
This packet contains:
Expedited Bill 16-10
Legislative Request Report
Mercer Report
Bolton Partners Memorandum
Circle #
1
4
5
8
Employees of the Montgomery County Public Schools also agreed to "postpone" a negotiated general wage
adjustment for FYlO, but did not receive this imputed compensation.
I
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Expedited Bill No.
-.!...!16,,--,..!..;10~
_ _ __
Concerning: Personnel - Retirement ­
Imputed Compensation Limit
Revised: April 1,2010 Draft No.
2.
Introduced:
April 6, 2010
Expires:
October 6, 2011
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date:
--'N-'-'o~n~e'__
_ _ _ _ __
Ch. _ _, Laws of Mont. Co. _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Councilmember Andrews
AN EXPEDITED ACT
to:
(1)
amend the definition of regular earnings to limit certain imputed compensation
under the employees' retirement system to FYIO only; and
(2)
generally amend the law regarding the employees' retirement system.
By amending
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-35
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
*
* *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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Expedited Bill 16-10
1
Sec.
1.
Section 33-35 is amended as follows:
Sec. 33-35 Definitions
In this Article, the following words and phrases have the following
meanmgs:
2
3
4
5
6
7
8
9
10
11
*
*
*
Regular earnings:
Except as otherwise provided, gross pay for actual hours
worked, not including overtime. To calculate regular [Regular] earnings-,- for FYI 0
only, a Group A, E, or H member who is employed on July 1, 2009 and
participates
in
the integrated or optional plan must include amounts as if the
member had received an increase of 4.5% in the member's gross pay as of July 1,
2009, except for the purpose of calculating a member's contribution under Section
33-39. To calculate regular [Regular] earnings-,- for FYI0 only, for a Group F
member who is employed on July 1, 2009 and participates in the integrated or
optional plan must include amounts as if the member had received an increase of
4.250/0 in the member's gross pay as of July 1, 2009, except for the purpose of
calculating a member's contribution under Section 33-39. To calculate regular
[Regular] earnings-,- for FYI0 only, for a Group G member who is employed on
July 1, 2009 and participates in the integrated or optional plan must include
amounts as if the member had received an increase of 4% in the member's gross
pay as of July 1, 2009, except for the purpose of calculating a member's
contribution under Section 33-39. Regular earnings for an elected official is gross
pay for services rendered to the County. Regular earnings must not exceed the
limit under Internal Revenue Code Section 401(a)(17), as adjusted by the Internal
Revenue Service. Gross pay must be used to determine benefits even if the County
implements a pick-up plan under Section 414 of the Internal Revenue Code. Gross
pay must be used to determine benefits even if a member has agreed to a reduction
in earnings under:
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15
16
17
18
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20
21
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23
24
25
26
27
F:\LAW\BILLS\1016 Imputed Compensation Limit\BiIl 2. Doc
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Expedited Bill 16-10
28
29
30
31
32
33
34
35
(a)
the County's deferred compensation plan under Section 457 of the
Internal Revenue Code; or
(b)
any statutory fringe benefit program sponsored by the County and
permitted by the Internal Revenue Code.
*
*
*
Sec. 2. Expedited Effective Date.
The Council declares that this Act is
necessary for the immediate protection of the public interest. This Act takes effect
on July 1,2010.
Approved:
36
37
38
Nancy Floreen, President, County Council
Date
39
Approved:
40
Isiah Leggett, County Executive
41
Date
This is a correct copy ofCouncil action.
42
Linda M. Lauer, Clerk of the Council
Date
F:\LAW\BILLS\I 0 161mputed Compensation Limit\BiI1 2.Doc
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LEGISLATIVE REQUEST REPORT
Expedited Bill 16-10
Personnel-Retirement-Imputed Compensation Limit
DESCRIPTION:
Bill 18-09 required that the calculation of regular earnings used to
determine a retirement benefit include the general wage adjustment
for FYIO as if the employee had received it on July 1, 2009. This
imputed compensation is scheduled to carry over into the calculation
of regular earnings used to calculate a defined benefit pension for the
rest of an employee's County career. Expedited Bill 16-10 would
amend the Retirement Laws to limit the effect of the imputed
compensation to the calculation of regular earnings for FYIO only.
The County has experienced a severe reduction in revenue and must
reduce its FYIl expenditures in order to balance the budget.
The estimated savings of $7.2 million for FYII would partially offset
the need to use furloughs or a reduction-in-force to reduce
expenditures.
Human Resources, County Attorney
To be requested.
To be requested.
To be requested.
To be researched.
Robert H. Drummer, Senior Legislative Attorney
Not applicable.
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIPALITIES:
PENALTIES:
Not applicable
f:\law\bills\1016 imputed compensation limit\lrr.doc
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Douglas L. F...."· .e, FSA, MAAA, EA
.
Principal
MERCER
0_
MARSH
MERCER
~
GUY CARPENTER
KROll
OLIVER WYMAN
120 East Baltimore Street, 20th Floor
Baltimore, MO 21202-1674
4103472806 Fax 410 727 3347
douglas.rowe@mercer.com
www.mercer.com
April27,2009
Mr. Wes Girling
Montgomery County Government
101 Monroe Street, Seventh Floor
Rockville, MD 208S0-2Seg
Confidential
Via Electronic Mail
Subject:
Imputed Compensation Pension Cost
DearWes:
This letter summarizes the cost calculations you requested for the imputed compensation bill. The
calculations are based on .the July 1, 2008 actuarial valuation data for group A, E, F, G and H
members. The actuarial assumptions and methods and plan provisions are the same as those used in
our July 2008 actuarial valuation report except for the assumptions and incentive provisions noted
below. Please note that actual cost of the imputed compensation will differ based on the number of
individuals that are active as of July 1, 2009.
We have projected all costs from the July 1, 2008 valuation date to the effective date of July 1, 2009
using standard actuarial
approxim~tion
techniques. By cost/savings, we mean the change in Normal
Cost and an amortization of any changes in unfunded liability unless otherwise indicated.
Cost/savings will change over time as experience develops.
Cost Calculated From Two Viewpoints
We have calculated the cost of imputing pay from two Viewpoints just the legislation (which
increases benefits by imputing pay) that we were provided, and as a package which takes away
previously negotiated pay increases, but then calculates pensions as if those pay increases had
occurred. The cost for the second viewpoint is that employee contributions are not made on the
imputed pay.
Other Considerations - Legislation Only Viewpoint
We have recommended that the County consider a shorter amortization period for future plan
improvements in order to restore the funded ratio more quickly following a benefit improvement and in
order to better align the cost of the improvement with the service of participants receiving an increase
for service already performed. Applying that concept to this retirement program might result in a 10 to
20 year amortization period. We show detailed results below for the County's traditional 40 year
amortization period.
The dollar impact of the Normal Cost increase on the County's contribution will tend to increase as
employees near retirement, but decrease as the number of affected employees decreases over time.
Please let me know if you would like a projection to quantify this pattern. Everything else being equal,
the cost impact will increase (decrease) if actual future pay increases exceed (trail) assumed pay
Consulting. Outsourcing. Investments.
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MERCER
r~
~
MARSH MERCER KROLL
GUY CARPENTER OLIVER WYMAN
Page 2
April 27, 2009
Mr. Wes Girling
Montgomery County Government
increases. The amortization payment will remain level for the chosen period
shorter period is chosen.
40 years unless a
Other Considerations - Package Viewpoint
Lower employee contributions also reduce "refund" benefits (e.g., the return of employee contributions
to nonvested terminated employees) but this impact is negligible compared to the contributions
themselves. Employee contributions are subtracted from the total required contribution each year to
determine the County's contribution. The reduced sUbtraction (which results in a higher County
contribution) due to the package will decrease over time as employees on July 1, 2009 leave
employment.
Plan Provisions
• Employees on July 1, 2009 in groups A, E, and H would receive benefits as if their gross pay
increased 4.50% on July 1, 2009 and remained 4.50% higher than actual pay fo!" the remainder of
their careers. This does not include benefits that are based on employee contributions.
• Employees on July 1, 2009 in group F would receive benefits as if their gross pay increased
4.25% .on July 1,2009 and remained 4.25% higher than actual pay for the remainder of their
careers. This does not include benefits that are based on employee contributions.
• Employees on July 1, 2009 in group G would receive benefits as if their gross pay increased
4.00% on July 1, 2009 and remained 4.00% higher than actual pay for the remainder of their
careers. This does not include benefits that are based on employee contributions.
• This legislation does not apply to Retirement Savings Plan or Guaranteed Retirement Income
Plan participants.
Estimated Costs of Proposed Changes
Annual Costs using 40-year amortization for represented and non-represented members.
Legislation Alone
Package
A
E
$1
$ 975,000
$2,233,000
$1,938,000
$1,787,000
$8,589,000*
$155,000
$ 90,000
$185,000
$190,000
$155,000
$775,000
F
G
H
Total
Numbers may not add up due to rounding.
*
The total would increase to $10,673,000 if a 15 year amortization period is used.
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MERCER
0_
~
MARSH MERCER KROLL
GUY CARPENTER OLIVER WYMAN
Page 3
April 27, 2009
Mr. Wes Girting
Montgomery County Government
Presumably, you want to use one column above or the other, depending on the viewpoint. You would
not want to add the columns.
Increase in Actuarial Accrued Liability for represented and non-represented members
Legislation Alone
Package
A
E
F
$14,166,000
$ 7,094,000
$16,968,000
$14,962,000
$15,058,000
In5ignificant
Decrease
G
H
$68,248,000
Total
Numbers may not add up
to rounding.
Please let me know if you have any questions or need any further information. I can be reached at
410 347 2806.
I meet the Qualification Standards of the American Academy of Actuaries to render the
actuarial opinion contained in this letter. I am not aware of any direct or material indirect financial
interest or relationship, including investments or other services that could create a conflict of interest
that would impair the objectivity of our work
Sincerely,
Principal
fZ
~~
MAAA, EA
Copy:
Aquil Ahmed, Mercer
The information contained in this document (including any attachments) is not intended by Mercer to
be used, and it cannot be used, for the purpose of avoiding penalties under the Internal Revenue
Code that may be imposed on the taxpayer.
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MEMORANDUM
DATE:
May 6, 2009
Management and Fiscal Policy Committee
Thomas Lowman, Bolton Partners, Inc.
TO:
FROM:
SUBJECT:
-,-L
Comments on the Pension Amendment/definition of compensation
I have reviewed the May
4th
memo from Joseph Beach to Phil Andrews, and Mercer's April27'h
letter to Wes Girling. These both addressed the pension cost associated with changing the
definition of compensation due to elimination of previously negotiated wage increases. The
higher annual pension cost of $8.589 million looks reasonable, given that the active liability is
about $1. 5 billion.
I was asked to comment on the amortization period. I agree with the fourth paragraph of
Mercer's April 27th letter that a 10-20 year amortization period would be more appropriate.
Basically, there is no good reason to fund this beyond the time when those benefiting from the
change will be working. Thus, Mercer's 15 year amortization cost of $10.673 million is more
appropriate.
My understanding is that this change is permanent for all current employees; this means that
someone retiring 20 years from now, will have their pension based on a higher pay amount then
they actual1y will be receiving in 17-20 years (however, someone hired on 7/1/09 will not have
such an advantage). There are reasons to argue an alternative position: any change of this sort
should apply as an add-on but only to pay earned during the duration of the union contract (when
the additional pay increase was eliminated). This more limited design would have a materially
lower cost and can legitimately be said to addresses the same issue (even if leaving open the
need to have future negotiations over whether the pay levels have "returned" to the appropriate
level).
My understanding is that Montgomery County is not alone in considering this issue. Anne
Arundel County has also prepared proposed legislation. However, Anne Arundel County's
proposal only increases compensation in FYI0. If someone's final average pay does not include
pay in FYIO (most will leave far enough into the future that it will not include FYlO), there
would be no impact on their pension. This makes the cost materially less than what Mercer
determined for the more generous proposal.
My main concern is over the funded status of the plan and the projected contribution increases.
The plan's recent serious investment losses will start showing up in FYll contributions and be
fully reflected by FY15. The current FYI0 contribution of $115 million, will likely climb by
tens of millions. I appreciate the reason for passing a bill of this nature, but it should not be
passed without a full appreciation of the future funding demands that will arrive shortly (and
ideally a belief that these increases can be handled).
(j)
Bolton Partners, Inc.