Agenda Item 5
May 1,2012
Introduction
MEMORANDUM
April 27, 2012
TO:
FROM:
SUBJECT:
County Council
Robert
H.
Drummer, Senior Legislative Attorney
>I\
l1iIJ
Introduction:
Expedited Bill 18-12, Personnel -- Disability Retirement­
Eligibility and Benefits - Amendments
Expedited Bill 18-12, Personnel - Disability Retirement
Eligibility and Benefits ­
Amendments, sponsored by the Council President at the request of the County Executive, is
scheduled to be introduced on May 1, 2012. A public hearing is tentatively scheduled for May 8
at
1:30
p.m.
Bill 18-12 would:
• Create a catastrophic incapacity service-connected disability retirement benefit
for members of Retirement Group F (Police) and employees represented by
MCGEO;
• Modify the amount of the benefit for a partial and total incapacity service­
connected disability retirement for members of Retirement Group F (Police) and
employees represented by MCGEO; and
• Reduce the restrictions on receiving a service-connected disability retirement
benefit for members of Retirement Group F (Police) and employees represented
by MCGEO who are convicted of a crime.
Background
Bill 45-10, Personnel - Disability Retirement- Eligibility - Total and Partial Incapacity,
enacted on June 28, 2011, amended the disability retirement laws to create the same two-tier
system for police and general government employees that already existed for fire and rescue
employees. Under Bill 45-10, a service-connected partial incapacity disability retirement is at
least
52~%
of final pay and a service-connected total incapacity disability retirement is at least
70% of final pay for all employees. Bill 45-10 takes effect for a disability that occurs on or after
July 1,2012.
However, Bill 45-10 also contained an uncodified section that permitted either the FOP
or MCGEO to bargain with the Executive over disability retirement as a separate issue this year.
The parties were permitted to submit an impasse in bargaining to arbitration as a separate issue
on a final offer basis this year only.l The FOP and the Executive negotiated this issue, but were
I
Disability retirement remains a subject for bargaining in future years as part of a collective bargaining agreement.
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unable to reach an agreement and they submitted the impasse to an arbitrator for resolution. A
copy of the arbitrator's decision is at ©14-27.
The arbitrator resolved the following issues by selecting the FOP's final offer.
1.
The FOP and the Executive
agreed
on a 3-tier system before arbitration: 60% of
final pay for partial, 66%% for total incapacity, and 90% for catastrophic
incapacity. The parties did not agree on the definition of catastrophic incapacity
or if the pension would be integrated with social security.
The Executive's final offer would reduce the amount of the pension when the
retiree reaches normal social security retirement age (integrate with social
security). Current disability retirement pensions do not integrate, but normal
County retirement pensions do integrate. The FOP final offer did not integrate
with social security benefits.
The Executive's final offer would prohibit a service-connected disability
retirement award to an employee who is convicted of a significant criminal act.
The FOP final offer would stop a disability retirement pension benefit only while
the employee is incarcerated. Bill 45-10 prohibits a disability retirement award to
a person who commits an offense that would justifY termination for misconduct.
2.
3.
Although MCGEO did not participate as a party in the arbitration, the County Executive
and MCGEO agreed in advance that the arbitrator's decision would include employees
represented by MCGEO. See ©28. Therefore, Bill 18-12 includes employees represented by the
FOP and employees represented by MCGEO.
As required by the uncodified section ofBi1145-10, the Executive transmitted Bi1l18-12
to the Council on April 23 to implement the arbitrator's decision. Since this arbitration was
outside of the normal collective bargaining process required by the County collective bargaining
laws, the Council does not need to indicate its intent to reject or approve this legislation by May
15. Bill 18-12 can be handled by the Council as any other legislation. The Council can enact
it,
reject it, amend it, or not vote on it Bill 18-12, if enacted, would amend the provisions of Bill
45-10 enacted last July. If Bill 18-12 is not enacted, the provisions of Bill 45-10 would take
effect on July 1,2012.
Fiscal Impact
The County's actuary estimated that Bill 18-12, if enacted, would raise the County's
required annual pension contribution by at least $832,000 in FY13 and each year after. See the
OMB fiscal impact statement at ©29-51. The Executive did not include funding for this
additional cost in his FY13 Recommended Budget or in his April 26 FY13 Budget Amendments.
2
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This packet contains:
Expedited Bil118-12
Legislative Request Report
Transmittal Memo from County Executive
Arbitration Decision
Memo from Executive concerning MCGEO
Fiscal Impact Statement
F:ILA WIBILLSI1218 Disability Retirement-Eligibility And Benetitsllntro Memo.Doc
Circle #
1
12
13
14
28
29
3
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Expedited Bill No.
18-12,--~
_ _ __
Concerning: Personnel
Disability
Retirement - Eligibility and Benefits­
Amendments
Revised: April
27, 2012
Draft No.
Introduced:
May 1,
2012
Expires:
November 1....."2=0::...;1c;:;3_
_
~
Enacted: _ _ _ _ _ _ _ _.___
~
Executive: _ _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ _ __
Sunset Date: _ _ _ _ _ _ _ _ __
Ch. _ _, Laws of Mont. Co. _ _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President at the request of the County Executive
AN EXPEDITED ACT
to:
(l)
create a catastrophic incapacity service-connected disability retirement benefit for
certain employees;
modifY the amount of the benefit for a partial and total incapacity service-connected
(2)
disability retirement for certain employees;
(3)
reduce the restrictions on receiving a service-connected disability retirement benefit
for certain employees who are convicted of a crime; and
(4)
generally amend County law regarding disability retirement.
By amending
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-43
Boldface
Underlining
[Single boldface brackets]
Dou~
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, Mwyland approves the following Act:
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EXPEDITED BILL
No. 18-12
Sec
1.
Section 33-43 is amended as follows:
2
,.,
.)
33-43.
Disability retirement.
*
(b)
following meanings:
*
*
4
Definitions.
In this Section, the following words and phrases have the
5
6
7
8
9
10
*
*
*
Catastrophic Incapacity
means
£!
member's inability to engage in any
substantial gainful activity because of
£!
permanent loss or loss of use of:
ill
both arms;
both eyes;
both feet;
both hands;
both legs;
functional deafness; or
£!
combination of any two ofthe following body parts:
o
ill
ill
ill
@
]1
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
ill
®
arm;
ill}
eye;
(g
foot;
021
hand; or
®
k&
*
*
*
iI1
charge of the
penal
Correctional facility
means
£!
jail, pnson, or other penal institution
under the control anci jurisdiction of the agency
system or in
~hich
convicted criminals can be incarcerated.
*
*
*
Felony
means an offense that is classified as
£!
felony under applicable
law
~
in
£!
jurisdiction which does not classify any crime as
£!
felony, is
r;'\
kAW\BILLS\1218 Disability Retirement-Eligibility And Bcncfits\BiIl3.Doc
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EXPEDITED BILL
No. 18-12
28
29
an offense punishable.by death or.by imprisonment for
~
term exceeding
30
31
32
33
34
*
that
~
*
*
~
Vocational rehabilitation program
means
court-approved program
prisoner is actively and satisfactorily participating in and is
expected to result in the prisoner being able to do substantial gainful
activity upon release and within
~
reasonable time.
35
36
*
(f)
*
*
Service-connected disability retirement.
37
38
39
40
41
(1)
A member may be retired on· a service-connected disability
retirement if:
(A)
the member
IS
catastrophically, totally, or partially
incapacitated as the natural and proximate result of an
accident occurring, or an occupational disease incurred or
condition aggravated, while in the actual performance of
duty;
42
43
44
45
*
(E)
*
*
the member}. except
~
member of Group
E
E or.tL has not
committed an offense that would justify termination for
misconduct. A member of Group
E
.!1
or H must not be
paid
~
46
47
48
49
50
51
monthly benefit for any month on or after July
L
2012 if the member is confined in
~
correctional facility for
conviction of
~
felony during any part of that month unless
th~
member is participating in
~
~
vocational rehabilitation
52
program. Confinement in
correctional facility continues
~
53
54
as long as the individual is under
sentence of
confinement and has not been released due to parole or
(~
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Disability Retirement-Eligibility And Benefits\BiII
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EXPEDITED
BILL
No. 18-12
55
56
57
58
59
60
61
62
63
64
pardon. An individual is considered confined even if he or
she is temporarily or intermittently outside of the facility
on work release, attending school, hospitalized, or similar
program.
*
(i)
*
*
~!1
Amount ofpension at service-connected disability retirement.
(1)
Catastrophic Incapacity.
The County must.ImY
fl:
Group
or
H member who retires on
fl:
service-connected disability
retirement with catastrophic incapacity an annual penSlOn
calculated under Section 33-42Cb)(1), except that:
CA)
the County must substitute final earnings for average final
earnings; and
(ill
65
66
67
68
69
70
71
72
73
the pension must be at least 90% of the member's final
earnmgs.
[(1)]
ill
Total incapacity.
The County must pay a member who retires
on service-connected disability retirement with total incapacity an
annual pension calculated under Section 33-42(b)(1), except that:
(A)
the County must substitute final earnings for average final
earnings; and
(B)
the pension must be at least 70% of the member's final
earnings.1 except for
fl:
Group
~
74
75
76
77
!1
or H member. The
pension must be at least
66%
%
of the member's final
earnings for
fl:
Group
~!1
or H member.
[(2)]
78
79
80
81
ill
If the
benefit calculation under Section 33-42(b)(1) is greater
than any other benefit under this subsection, the County must pay
a Group G member who retires on a service-connected disability
0w\BILLSil218 Disability Retirement-Eligibility And Beneftts\BiII3.Doc
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EXPEDITED BILL
No.
18-12
82
83
between June 26, 2002, and June 30, 2007, a pension based on
the member's average final earnings if that member's average
final earnings result in a greater benefit than final earnings.
[(3)]
.c±)
The Disability Review Panel must recommend a finding of
catastrophic incapacity or total incapacity for
f!
Group
~
84
85
86
87
11
or H
member or total incapacity for
!!
member of any other Group if
the member's service-connected disability is severe enough to
meet the Social Security Administration's requirements for
disability, meaning that the member is unable to engage in any
substantial gainful activity because of a medically determinable
physical or mental impairment that can be expected to end in
death or has lasted, or can be expected to last, for a continuous
period of at least 12 months. The member does not have to
qualifY for Social Security disability benefits to be eligible for
benefits under this subsection.
88
89
90
91
92
93
94
95
96
97
*
(D)
*
*
98
99
100
101
102
103
If a member has already been granted disability benefits by
the Social Security Administration when the member
applies for a service-connected disability pension, the
County must pay the member a pension of at least 667'3
%
for
f!
Group
~
E or H member or 70% for
!!
member of
any other Group if the Disability Review Panel finds that
the award of disability benefits from the Social Security
Administration was based primarily on the same medically
determinable physical or mental impairment on which the
Disability Review Panel awards the member a service­
connected disability benefit.
104
105
106
107
108
( 5\
[~
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Disability Retirement-Eligihility And Benefits\BiIl3.Doc
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EXPEDITED
Bill No. 18-12
109
[(4)]
ill
The County must pay a member who retires with partial
110
III
incapacity on a service-connected disability retirement an annual
pension calculated under Section 33-42(b)(1), but the benefit
must be at least 60 % of final earnings for
~
112
113
114
115
Group
~
L
~
or H
member or at least 52'i2 % of final earnings for
member of any
other Group, if the Chief Administrative Officer finds, based on a
recommendation from the Disability Review Panel, that:
(A)
the member meets the standards to receive a servlce­
connected disability benefit under subsection (f); and
(B)
the member is not eligible to receive a benefit for
catastrophic or total incapacity under subsection (0)(3)]
116
117
118
119
120
121
122
123
124
illQJ
or subsection
i.ili.22.
[(5)]
@
(A) The County must increase the partial incapacity service
connected disability pension benefit of a member calculated
under Section 33-42(b)(l), from a benefit of at least [52Y2] 6Q %
to a benefit of at least 66% % for
~
Group
L
~
~
or H member or
125
126
127
128
129
from at least 52'i2 to at least 70% for
Group, if:
member of any other
*
[(6)J
ill
*
*
*
*
*
[(7)]
130
131
132
.un
The County must pay a Group F member who retires on a
service-connected disability retirement on or after June 26, 2002,
an annual pension calculated under subsection (i)(1), [or1
.subsection (i)(2), or subsection [(i)(4))
(i)12).
However, if a
133
134
greater benefit results from the calculation under Section 33
42(b)(1), the County must pay a Group F member a pension
G\\,\BILLS\1218
Disability Retirement-Eligibility And Benefits\Bill3Doc
135
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EXPEDITED BILL
No. 18-12
136
based on the member's average final emnings if that member's
average final earnings result in a greater benefit than final
earnmgs.
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
*
33-128. Definitions.
*
*
In
this Division, the following words and phrases have the following
meanmgs:
*
*
*
Catastrophic Incapacity
!lleans
£!
member's inability to engage in any
substantial gainful activity because of
£!
pefQ1anent loss or loss of use of:
ill
ill
ill
(4}
both arms;
both eyes;
both feet;
both hands;
both legs;
functional
deafness~
W
@
or
ill
£!
combination of any two of the following body parts:
(ill
arm;
.au
©
(ill
eye;
foot~
ill}
hand; or
k&
*
*
*
Correctional facility
means
£!
jail, prison..1 or pther penal institution
under the control and .illri§diction of the agency in charge of the penal
system or in which convicted criminals can be incarcerated.
*
G
*
\ 7 ')
*
Ww\B1LLS\J2IS Disability Retirement-Eligibility And Benefits\BiI! 3.Doc
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EXPEDITED BILL
No. 18-12
163
164
165
166
167
168
169
170 .
171
172
Felony
means an offense that is classified as
~
felony under applicable
law
~
in
~
jurisdiction which does not classify any crime as
~
felony, is
an offense punishable
Qy
death or
Qy
imprisonment for
~
term exceeding
one year.
*
*
*
Represented employee
means an employee who occupies
~
position in
~
bargaining unit represented
Qy
an employee organizatioQ certified ynder
Section 33-106.
*
that
~
*
*
~
Vocational rehabilitation program
means
court-approved program
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
prisoner is actively and satisfactorily participating in and is
expected to result in the prisoner being able to do substantial gainful
activity upon release and within
~
reasonable time.
33-129. Disability benefits.
*
(d)
*
*
Initial service-connected disability benefits. An employee may receive
disability benefits for a period of 36 consecutive months, subject to this
plan, if the administrator finds that:
*
(E)
*
~
*
represented employee, who has
An employee,. except
committed an offense that would justity termination for
misconduct must not receive service-connected disability
benefits.
A represented employee must not be paid
~
monthly benefit for any month on or after July
L
2012 if
the represented employee is confined in
~
correctional
facility for conviction of
~
felon"y during any part of that
month unless the represented employee is participating in
~
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EXPEDITED
BILL
No. 18-12
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
vocational rehabilitation program.
Confinement in
!!
correctional facility continues as long as the individual is
under
~
sentence of confinement and has not been released
due to parole or pardon.
An
individual is considered
confined even if he or she is temporarily or intermittently
outside of the facility on work release,
hospitalized, or similar program.
?-ttendin~ school~
*
(f)
*
*
The Disability Review Panel must recommend a finding of
catastrophic incapacity or total incapacity for
!!
represented employee,
or total incapacity for any other employee, if the member's service­
connected disability is severe enough to meet the Social Security
Administration's requirements for disability, meaning that the member
is unable to engage in any substantial gainful activity because of a
medically determinable physical or mental impairment that can be
expected to end in death or has lasted, or can be expected to last, for a
continuous period of at least 12 months. The member does not have
to qualifY for Social Security disability benefits to be eligible for
benefits under this subsection.
(l)
The Panel must base its determination of whether an individual
is able to engage in any substantial gainful activity on an
assessment from an independent vocational
expert that
211
212
213
considers the member's age, education, work experIence,
transferable skills, and residual functional capacity.
(2)
The Panel must determine the member's residual functional
capacity and provide this information to the independent
vocational expert.
214
215
216
'-'
G
( 9
:
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EXPEDITED
BILL No. 18-12
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
(3)
A Panel determination that the member's service-connected
disability is severe enough to be considered a disability by the
Social Security Administration is not a recommendation that
the member is entitled to, or should be granted, a disability
benefit by the Social Security Administration.
(4)
If a member has already been granted disability benefits by the
Social Security Administration when the member applies for a
service-connected disability pension, the County must give the
member a total incapacity benefit if the Disability Review Panel
finds that the award of disability benefits from the Social
Security Administration was based primarily on the same
medically determinable physical or mental impairment on
which the Disability Review Panel awards the member a
service-connected disability benefit.
(g)
The Disability Review Panel must recommend a finding of partial
incapacity if:
(1)
the member meets the standards to receive a service-connected
disability benefit; and
(2)
the member is not eligible to receive a benefit for catastrophic
or total incapacity under subsection
(f).
*
33-131. Amount of benefits.
*
*
(a)
Service-connected disability.
ill
Catastrophic Incapacity.
Th~
County must
rID::
.1!
represented
employee who retires
011.1!
service-connected disability retirement
with catastrophic incapacity an annual pension equal to 90% of
the represented employee's final earnings, less any reductions
10
B
~\
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EXPEDITED BILL
No. 18-12
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268
provided in Section 33-134.
ill
Total incapacity.
The annual amount of service-connected
disability payments payable to an employee, except
~ repres~nted
employee, for total incapacity equals 70% of the employee's final
earnings, less any reductions provided in section 33-134. The
County must
lli!Y
~
represented employee who retires on
~
service-connected disability retirement with total incapacity an
annual pension equal to 6673% of the represented employee's
final earnings, less any reductions provided in Sectiol} 33-134.
ru
Partial Incapacity.
The annual amount of service-connected
disability payments payable to an employee, except
~
represented
employee, for partial incapacity equals
52Yz
%
of the employee's
final earnings. The County must
lli!Y
who retires on
~
~ ~resented
employee
service-connected disability retirement with
partial incapacity an annual pension equal to 60% of the
represented employee's final earnings.
*
Sec. 2. Expedited Effective Date.
*
*
The Council declares that this Act is necessary for the immediate protection of
the public interest. The amendments to Chapter 33 made by Section 1 of this Act
amend the provisions of Chapter 33 as amended by 2011 Laws of Montgomery
County, Ch. 13, and take effect on July 1, 2012. The amendments to County Code
Chapter 33 made by Section 1 of this Act apply to a service-connected disability
retirement that arises out of a disabling accident, injury, or occupational disease
which occurs on or after July 1, 2012.
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LEGISLA TIVE REQUEST REPORT
Expedited Bill 18-12
Personnel
DESCRIPTION:
Disability Retirement Eligibility and Benefits
-
Amendments
This Bill amends Chapter 33 to implement the March 29,2012, Service­
Connected Disability Retirement Interest Arbitration award, as provided
for in Bill4S-1O.
Amend Chapter 33 to implement the March 29,2012, Service-Connected
Disability Retirement Interest Arbitration award.
PROBLEM:
GOALS AND
OBJECTIVES:
Amend Chapter 33 to implement the March 29,2012, Service-Connected
Disability Retirement Interest Arbitration award.
COORDINATION:
Office of the County Attorney and Police Department.
FISCAL IMPACT:
Office of Management and Budget.
ECONOMIC
IMP ACT:
EVALUATION:
Office of Management and Budget.
Subject to the general oversight of the County Executive and the County
Council. The Office of the County Attorney will evaluate for form and
legality.
EXPERIENCE
ELSEWHERE:
Unknown
SOURCES OF
INFORMATION:
Silvia C. Kinch
Associate County Attorney
Office of the County Attorney
Joseph Adler
Director
Office of Human Resources
APPLICATION
WITHIN
MUNICIPALITIES:
None.
PENALTIES:
Not applicable.
F:ILAWIB1LLSI 1218 Disability Retirement-Eligibility And BenefitslLRR.Doc
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OFFICE OF THE COUNTY EXECUTIVE
ROCl(VILl"E, MARYLAND 20850
Isiah Leggett
County Executive
MEMORANDUM
April 18, 2012
TO:
Roger Berliner, President
Montgomery County Council
Isiah
Leggett, County Executive
FROM:
SUBJECT:
-.0~
J
~
Legislation to Implement the March 29, 2012, Service-Connected
Disability Retirement Interest Arbitration Award as Provided in Bill 45-10
As provided in Bill 45-10, attached please find legislation that would
implement the March 29, 2012, Service-Connected Disability Retirement Interest
Arbitration Award. Council staff was provided with a copy of the Arbitrator's decision
on March 29, 2012. As you know, the Arbitrator selected the Fraternal Order of Police,
Lodge 35's Last Best Final Offer. By transmitting this legislation I am not foregoing any
legislative authority I may have under the County Charter.
As part ofBil145-1O, enacted June 28,2011, and effective July 1, 2012,
the County Council amended Chapter 33 of the County Code
as
it relates to service­
connected disability retirement, but authorized separate negotiations with the certified
employee representative for the police bargaining unit and the certified representative for
the OPT and SLT bargaining units. The Fraternal Order of Police, Lodge 35, engaged in
bargaining, negotiations and arbitration. The Municipal and County Government
Employee's Association, UFCW Loca11994 also participated in bargaining, but chose
not to actively participate in arbitration and instead to simply adopt the Arbitrator's
award. The parties were unable to reach agreement and the matter proceeded to
arbitration on March 22, 2012. The Arbitrator selected the Fraternal Order of Police,
Lodge 35's Last Best Final Offer. In accordance with Section 4(d) ofBil1 45-10, the
Arbitrator's award was submitted to Council on March 29, 2012. The proposed
expedited legislation incorporates the Arbitrator's awal"d.
Attachments:
A
Expedited Legislation
B.
Legislative Request Report
C.
Fiscal Impact Statement
montgomerycountymd.gov/311
@
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In the Matter ofArbitration Between:
FRATERNAL ORDER OF POLICE
LODGE 35
and
Disability Retirement
Interest Arbitration
Walt De Treux, Esq., Arbitrator
MONTGOMERY COUNTY (MD)
GOVERNMENT
Hearing Date: 3/22/12
Decision Date: 3/29/12
Appearances:
For the FOP - Francis
J.
Collins, Esq.,
KAHN SMITH
&
COLLINS, P.A.
For the County - Sylvia Kinch, Esq.,
OFFICE OF COUNTYATTORNEY
Introduction and Statement
of Relevant
Facts
In July 2011, Montgomery County (Maryland) Council enacted Bill 45-10,
which amended the County's disability retirement system for certain employees,
including members of the police bargaining unit. Prior to enactment of the
legislation, police officers who suffered injuries on the job that left them unable to
perform the duties of a police officer were eligible for a disability retirement
pension benefit equal to 66-2/3% of their final earnings. Bill 45-10 created
categories of incapacity (partial or total incapacity) and levels of benefits for each
category. Pursuant to the legislation, an officer incurring partial incapacity
(inability to perform the duties of a police officer, but otherwise able to engage in
other employment) would be entitled to a disability retirement pension equal to 52­
1/2% of final earnings. A bargaining unit member who suffers total incapacity (an
inability to engage in any substantial employment) would be entitled to a disability
retirement pension equal to 70% of final earnings. Council also prohibited an
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employee "who committed an offense that would justify termination for
misconduct" from receiving disability retirement benefits.
While the legislation expressed Council's desire that all Montgomery County
employees have a multi-tier disability retirement system, Council recognized that
disability benefits are a mandatory subject of bargaining. It, therefore, granted time
for the County Executive to negotiate with the police bargaining unit over an
appropriate multi-tier disability retirement system. If the parties failed to reach
agreement, the parties were directed by the legislation to submit the issue for
resolution through the applicable impasse procedures defined in the police labor
relations law.
The parties attempted to negotiate, together and with a mediator, an
appropriate multi-tier system. To that end, they agreed to a three-tier system and
benefit levels for each tier, as follows:
Partial incapacity 60% of final earnings
Total incapacity - 66-2/3% of final earnings
Catastrophic incapacity - 90% of final earningsl
However, the parties were unable to agree to the County Executive's
proposed reduction in disability retirement benefits when an officer reaches Social
Security Normal Retirement Age (SSNRA). While both parties found overly broad
the Council's intent to strip an officer of disability retirement benefits for
Catastrophic incapacity has been defined as the loss of both arms, both eyes, both
feet, both hands, both legs, or a combination of any two of the following: arm, eye,
feet, hand, leg. The FOP proposal also induded functional deafness, the definition of
which had not been fully resolved by the parties at the time of hearing.
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dischargeable misconduct, they could not agree on the appropriate standard that
would disqualify a bargaining unit member from receiving benefits.
Pursuant to the impasse procedures provided in the police labor relations
law, an arbitrator was appointed to hear the dispute. The parties submitted last
best final offers to each other and the Arbitrator. On March 23, 2012, a hearing was
held in Gaithersburg, Maryland, during which time both parties had a full and fair
opportunity to present documentary and other evidence, examine and cross­
examine witnesses, and offer argument in support of their respective positions. The
parties rested their cases on the record, and the matter was submitted to the
Arbitrator for a decision.
Issue
Which of the parties' last best final offers is to be adopted?
Last Best Final Offers
As noted, the parties agreed on the appropriate tiers and benefit levels.
Accordingly, both parties' last best final offers include the folIowing tiers and benefit
levels: Partial incapacity - 60% of final earnings; Total incapacity - 66-2/3% of final
earnings; Catastrophic incapacity - 90% of final earnings.
The County included three other items in its last best final offer, summarized
as follows:
1) at normal social security retirement age, a reduction in the disability
retirement benefit to 1.65% of final earnings, multiplied by the greater of
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25 and the number of years of service at disability, limited to 36, and
increased for the same COLAs that were applied to the pre-normal social
security retirement age disability benefit.;
2) the denial of disability retirement benefits to an employee who commits a
"significant criminal act" which leads to a conviction, provided the act
occurs after date of hire and before separation from service with the
County; and
3) for catastrophic incapacity, the calculation of final earnings as the
member's final earnings or the final earnings for a Police Officer III with
20 years of service, whichever is greater.
The FOP rejected the County proposal for a reduction in benefits at SSNRA.
While not expressly rejecting the final earnings calculation for a catastrophically
incapacitated employee, the FOP noted that it did not receive the County proposal
on this issue until the day of hearing and was not given sufficient time to review it
and/or incorporate it into its own proposal.
The FOP's final offer accepted the 60%-66-2/3%-90% tier levels and
benefits, as noted. It also included the following two items summarized below:
1) prohibiting an employee from receiving disability retirement benefits
while incarcerated; and
2) confirming that tentative agreements reached by the parties during
negotiations are part of the final award.
2
At hearing, the County did not contest that the tentative agreements are part of the
final Award, although it did not include such a statement in its final offer. It was
evident at hearing that both parties intended for the tentative agreements to be
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Analysis and Decision
Due to the parties' dedicated and good faith efforts at reaching an agreement,
the dispute presented to this Arbitrator is effectively limited to two issues - the
reduction, if any, in disability retirement benefits when an officer reaches Social
Security Normal Retirement Age; and the standard by which an officer will be
ineligible for benefits because of criminal activity.
Pursuant to the parties' impasse procedure and Bill 45-10, the arbitrator is
required to select either party's last best final offer in its entirety. He is not free to
select specific provisions from each, or to craft compromises between the parties'
proposals. In short, an arbitrator must select either the County's last best final offer
or the FOP's last best final offer. In Bill 45-10, County Council specified the
standards by which the arbitrator must evaluate the parties' last best final offers. In
the legislation, the Council noted,
[the arbitrator] "must choose the final offer of either party after considering equally
the following factors:
(1) service-connected disability retirement systems for similar employees of other
public employers in the Washington Metropolitan Area and in Maryland;
(2) best practices for service-connected disability retirement systems for similar
employees in the United States;
(3) the interest and welfare of the public; and
(4) the long-term ability of the employer to finance a disability retirement system,
and the effect of the cost of the system on the normal standard of public services
provided by the employer.
--------~-------------.~--.----.~----
binding on the parties regardless of which last best final offer is adopted in this
Award.
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Reduction
of benefits
at Social
Securi~rmal
RetirementAge
In Bill 45-10, County Council expressly stated in Section 33-131( 4) (a),
"It is the policy of Montgomery County that all County employees should have a
multi-tier service-connected disability retirement system which includes a:
(1) partial incapacity service-connected disability retirement benefit for any injury
or illness that prevents an employee from continuing in the employee's current
position but does not prevent the employee from engaging in other substantial
gainful employment; and
(2) total incapacity service-connected disability retirement benefit for any injury or
illness that prevents an employee from engaging in any other substantial gainful
employment.
The Council did not specify why it determined such a policy was appropriate;
but in legislating a multi-tier system that provided a lesser benefit for partial
incapacity, the Council acknowledged its concern with a partially incapacitated
officer, able to engage in other employment, receiving the same benefit as a totally
incapacitated officer, who is precluded from earning additional income.
It
can be reasoned that the primary goal of Council in passing Bill 45-10 was
accomplished when the parties agreed to the partial (60%)-total (66-2/3%)­
catastrophic (90%) tier and benefit levels.
It
must be noted, however, that Bill 45­
10 also resulted in projected savings to the County (in the form of reduced
contributions) of approximately $1.3 million for FY2013. According to plan actuary
Douglas Rowe of Mercer, the parties' three-tier system provides for a savings of
$631,000.
34
Rowe also provided savings projections for non-union employees. Those figures
are not considered in this Award.
4
Joseph Duda, of Duda Actuarial Consulting, retained by the FOP, projected savings
of $771,000, an amount that he considered actuarially consistent with Rowe's
projections. Because Rowe also provided cost estimates for the County's last best
final offer and the competing actuaries have no substantial disagreement, this
Award adopts Rowe's projections throughout.
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The County Executive deemed it necessary to present a proposal that roughly
matched the savings anticipated by Bill 45-10. Accordingly, it introduced the
concept of a reduction in disability benefits when an officer reached Social Security
Normal Retirement Age. It adopted a reduction to 1.65% of final earnings from a
provision in the normal service retirement system, which reduces the benefit of an
officer on service retirement to that amount when he/she reaches SSNRA. The
projected savings achieved by the multi-tier system with the SSNRA-triggered
reduction total $1.235 million in FY2013
5•
While the County's effort to maintain a certain level of savings is
understandable, Council did not specify in Bill 45-10 that the parties had to achieve
the level of savings generated by County Council's 52.5%-70% disability retirement
system. Rather, it instructed the parties to negotiate "an appropriate multi-tier
system" and mandated that the arbitrator apply four specific factors to his
evaluation of the parties' last best final offer. The County's proposal for a reduction
in disability retirement benefits at SSNRA does not withstand scrutiny under the
four factors provided by Bill 45-10.
The County could not identify any service-connected disability retirement
systems for similar employees of other public employers in the Washington
Metropolitan Area and in Maryland that provide for a reduction in disability benefits
at SSNRA. Both Director of Human Resources Joseph Adler and Plan Actuary Rowe
testified that they were not aware of any jurisdiction in Maryland that provided for
such a reduction in benefits. Rowe, who also found no such system in the Metro DC
-.--.----~-~
This figure includes the final earnings formula in the County's last best final offer
for an officer who has a catastrophic incapacity.
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area, cited Frederick County, Maryland as a jurisdiction that converts a disability
retirement benefit to a normal service retirement benefit at SSNRA. But the County
is not seeking a conversion as exists in Frederick County; but rather, it is seeking a
reduction in disability retirement benefits at SSNRA. The systems do not compare.
Rowe noted that Montgomery County reduces a normal service retirement
benefit to 1.65% of final earnings at SSNRA. Bill 45-10 does not require this
Arbitrator to look within the County itself, but rather, at the surrounding
jurisdictions. Even if the County's own practice was taken into consideration, it
stands alone among surrounding jurisdictions in mandating such a reduction.
The second factor to be evaluated under Bill 45-10 is "best practices for
service-connected disability retirement systems for similar employees in the United
States." "Best practices" presumes that other jurisdictions in the United States have
adopted the provision in dispute and that it has gained some widespread
recognition or acceptance as an appropriate method to manage disability retirement
benefits. The County could not cite any jurisdiction in the United States that
includes such a SSNRA-triggered reduction provision in its disability retirement
system. FOP Actuary Duda had also never come across such a provision.
liThe
interest and welfare of the public" is the third factor to be examined.
The County did not offer testimony as to how the public interest and welfare is
improved or protected by reducing a disabled officer's retirement benefits at
SSNRA. FOP President Marc Zifcak offered that the public is better protected by an
officer who knows he/she will not suffer financially if he/she is injured on the job.
Zifcak theorized that the public couldn't afford to have an officer hesitate to act out
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of concern for injury and any negative financial consequences that could result.
Neither parties' presentation persuasively established that the inclusion or absence
of a reduction provision would have any significant impact on the interest and
welfare of the pUblic.
Finally, Bill 45-10 requires this Arbitrator to consider the long-term ability of
the County to finance a disability retirement system and the effect of the cost of the
system on public services. The parties' agreement on a multi-tier system of
incapacity and benefit levels results in considerable savings to the County, thereby
strengthening its ability to finance the disability system and freeing money to be
used for other public services. Certainly, the County Executive's proposal for a
reduction in benefits at SSNRA increases those savings. But it is an unconventional
and untried approach that does not share acceptance or recognition in the
Washington Metropolitan Area, in Maryland, or anywhere in the United States. And
it has not been demonstrated that it has any beneficial effect on the interest and
welfare of the public.
If
the only focus of Bill 45-10 was to generate savings, Council could have
crafted a system that provided for even more drastic reductions in benefits either at
the time of disability or at SSNRA.
It
did not do so; rather it encouraged the parties
to negotiate an appropriate disability retirement system that mirrored the systems
in other jurisdictions, served the interest and welfare of the public, and provided
long-term financial stability to the system with a positive effect on other pUblic
services.
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The parties' agreement on a multi-tier system of incapacity and benefit levels
achieves these goals. The County's proposal to reduce benefits at SSNRA was solely
motivated by a desire to reach approximately the same level of savings as would be
realized under Bill 45-10. Council did not require such a level of savings; and the
parties' agreement already produces substantial savings in FY2013 and for many
years to come.
The County's proposal for a reduction in benefits at SSNRA does not comport
with the factors to be considered under Bill 45-10. The parties' agreement on a
multi-tier system that provides for a 60% benefit for partial incapacity, 66-2/3% for
total incapacity, and 90% for catastrophic incapacity creates an appropriate
disability retirement system consistent with the policy goals of Bill 45-1 O.
Denial
of benefits
felf
criminal conduct
Bill 45-10 contains a provision denying disability retirement benefits to an
officer who commits an offense "that would justify termination for misconduct."
Both parties recognize that prohibition as overly broad, and neither could
adequately explain the Council's motivation for including such a provision in the
legislation.
The County asserted that officers charged with misconduct often file
disability claims, suggesting that those claims were suspect; but it acknowledged
that such claims had to be evaluated and found to have merit by a disability review
board. There was no evidence or allegation that the review board granted disability
retirement benefits to officers with meritless claims.
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Nonetheless, Bill4S-10's broad misconduct language compelled the parties
to craft alternatives. The County proposed in its last best final offer that officers
committing a "significant criminal act"6 resulting in a conviction be denied eligibility
for disability retirement benefits. The FOP's proposal requires the suspension of
benefits during any period of incarceration. Those proposals have to be evaluated
under the four factors enunciated in Bill 45-10.
There is no question that the County worked diligently and in good faith to
craft a proposal that addressed what it perceived as Council's concern. But
Lieutenant David Anderson admitted that the "significant criminal act" standard was
not adopted from other public employers in the Metro Washington Area or in
Maryland. Rather, the standard was the result of internal deliberations among
County and Police Department representatives.
The FOP proposal for suspension of benefits during incarceration did not
.specifically arise from surrounding jurisdictions, but it was adopted from Social
Security regulations. Code of Federal Regulations §404.468(a) provides,
"No monthly benefits shall be paid to any individual for any month any part of which
the individual is confined in a jail, prison, or other penal institution or correctional
facility for conviction of a felony. This rule applies to disability benefits ..."
In the absence of any evidence that other jurisdictions around Montgomery
County or elsewhere have adopted criminal act provisions in their disability
retirement systems, the Social Security standard, applicable throughout the United
6 The proposal defines "significant criminal act" as one resulting "in confinement of
at least 30 days and/or any type of probation of at least 60 days", excluding traffic
code violations.
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States, stands as a "best practice" for handling the effects ofa criminal conviction on
disability retirement benefits.
The County generally offered that the interest and welfare of the public is not
served by officers filing for disability retirement benefits prior to or after being
charged with a criminal act. The unstated implication was that the officers are
attempting to secure these benefits to ensure income in the face of likely
termination of employment. Yet the County admitted that it had no evidence as to
whether the alleged problem is widespread.
It
conceded that all disability claims
have to be vetted by the disability review board, and it acknowledged that an
investigation by the Inspector General did not uncover any systemic fraud.
The FOP asserted its position that the interest and welfare of the public is
best served by officers who, when incurring injuries in the line of duty, are
financially protected from the effects of those injuries. It labeled the County
proposal as "draconian", and it cited a hypothetical situation of a 25-year old officer,
injured in the line of duty, who loses a lifetime of benefits because he engaged in
some minor criminal conduct that resulted in 60 days probation. The FOP argues
that the officer pays his debt to society by serving the 60 days probation, but pays a
much greater penalty imposed by the County when he loses benefits, to which he is
otherwise entitled, for the remainder of his life. Such a disproportionate penalty
serves no public interest.
The FOP argument against the County proposal is persuasive, and the FOP
proposal, borrowed from federal regulations, better serves the public interest and
welfare.
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The parties agree that incidents of officers engaging in criminal conduct that
result in incarceration or probation are rare. Inclusion of either party's proposal
will have no significant effect on the long-term ability of the County to finance the
disability retirement system.
Considering that no surrounding jurisdiction includes a criminal conviction
provision in its disability retirement system, that the FOP proposal adopts the "best
practices" on criminal conviction from Social Security regulations, that the FOP
proposal better serves the public interest and welfare, and that the parties'
proposals do not impact the financial stability of the County's disability retirement
system, I find that only the FOP proposal comports with the factors enunciated in
Bill 45-10.
In conclusion, applying the factors in Bill 45-10 as explained above, I find that
the FOP last best final offer creates an appropriate multi-tier disability retirement
system that achieves the goals set forth by County Council.
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Award
The FOP last best final offer is adopted. The County Executive is directed to
submit this Award to Council pursuant to
than April
1,
2011.
Bill45~10,
Section
33~131(4)(d)
no later
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OFFICE OF THE COUNTY EXECUTIVE
ROCKVILLE, MARYLAND 20850
Isiah Leggett
County Executive
MEMORANDUM
April 26, 2012
TO:
Roger Berliner, President
Montgomery County Council
Isiah Leggett
County Executive
FROM:
~
SUBJECT:
MCGEO's Inclusion in Service-Connected Disability Retirement Arbitration
Award
As I mentioned in my prior memorandum to you dated April 18, 2012, the
Municipal County Government Employee's Organization, UFCW Locall994 ("MCGEO"), and
the Fraternal Order of Police, Lodge
35
("FOP") participated in bargaining with my
representative over service-collilected disability retirement
as
required by Section 4 of Bill
45-10, which was enacted by Council on July 11, 2011, MCGEO and the County agreed that,
although MCGEO would not actively participate in the subsequent arbitration, it would be a
party to that arbitration and any award would apply to MCGEO just as it applied to the FOP.
Arbitration occurred on March 22, 2012, between the FOP and the County, with a representative
from MCGEO present during the hearing.
As
you are aware, the Arbitrator selected FOP's Last
Best Final Offer. That award also applies to MCGEO. In accordance with Section 4(d) of Bill
45-10, the Arbitrator's award was submitted to Council on March 29, 2012, and the County
Executive transmitted proposed legislation to incorporate the Arbitrator's award on April
18,
2012.
IL:kb
montgomerycountymd.gov/311
240-773-3556 TTY
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ROCKVILLE, MARYIAND
MEMORANDUM
April 16, 2012
TO:
FROM:
SUBJECT:
Roger Berliner, President, County Council
Jennif-er A. Hughes, Director, Office of Management and
Joseph F. Beach, Director, Department of Finance
Bi11 xx-J2 - Service Connected Disability Retirement
Attached please find the fiscal and economic impact statements for legislation
that will implement the March 29, 2012 arbitration award regarding service-connected disability
retirement for members ofthe police bargaining unit.
c: Kathleen Boucher, Assistant Chief Administrative Officer
Lisa Austin, Offices ofthe County Executive
Joy Nurmi, Special Assistant to the County Executive
Patrick Lacefield, Director, Public Information Office
Joseph Adler, Director, Office of Human Resources
Alex Espinosa, Office ofManagement and Budget
Naeem Mia, Office of Management and Budget
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Fiscal Impact Statement
Bill, Service Connected Disability Retirement
1.
Legislative Summary
As provided in Bill 45-10, the subject legislation implements the Arbitrator's decision in
the March
29,2012
service-connected disability retirement arbitration award to the
Fraternal Order of Police (FOP), Lodge 35. County Council staffwas provided with a
copy of the arbitration award on March
29.
The bill establishes a multi-tiered disability
retirement system under certain criteria of either the greater of the accrued benefit or
60
percent,
66
2/3
percent, or
90
percent of final earnings, depending on the level of the
disability. Functional hearing loss is included as one of the conditions enabling a member
to be eligible for a disability retirement benefit of
90
percent of final earnings. The
legislation covers employees in Groups A, E, F, and H of the Employees Retirement
System.
2.
An
estimate of changes in County revenues and expenditures regardless of whether the
revenues or expenditures are assumed in the recommended or approved budget. Includes
source of infonnation, assumptions, and methodologies used.
Mercer, the County's retirement plan actuary, estimates a minimum annual cost of
$852,000
relative to the proposed FY13 budget to implement the arbitration award.
Mercer is unable to make an appropriate assumption regarding the increased incidence of
functional hearing loss that would entitle a member to a disability benefit of
90
percent of
final earnings, but did estimate that annual costs could increase by an additional
$73,000
to
$91,000
for each
1
percent of disablements who receive the
90
percent benefit.
According to Mercer, this 1 percent assumption does not represent a best estimate of the
impact; the actual impact could be much higher, lower) or even negligible. The
attachments inc1ude more detailed cost estimates by plan and actuarial assumptions.
3. Revenue and expenditure estimates covering at least the next 6 fiscal years.
The minimum cost over six years is
$5.112
million. There could be an additional six-year
cost between
$438,000
and
$546,000
for each additional
1
percent of disablements who
receive the
90
percent benefit level.
4. An actuarial analysis through the entire amortization period for each bill that would affect
retiree pension or group insurance costs.
See attached actuarial analysis.
5. Later actions that may affect future revenue and expenditures
if
the bill authorizes future
spending.
Not applicable.
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6.
An
estimate ofthe staff time needed to implement the bill.
The bill does not affect the amount of staff time engaged in the disability retirement
administration system.
7. An explanation of how the addition of new
staff
responsibilities would affect other duties.
Not applicable.
8.
An
estimate of costs when an additional appropriation is needed.
An
additional appropriation of at least $852,000 relative to the FY13 proposed budget is
needed to implement the bill.
9. A description of any variable that could affect revenue and cost estimates.
See attached actuarial analysis.
10. Ranges of revenue or expenditures that are uncertain or difficult to project.
See #2 and #3 above.
11. If a bill is likely to have no fiscal impact, why that is the case.
Not applicable.
12. Other fiscal impacts or comments.
None.
13. The following contributed to and concurred with this analysis:
Joseph Adler, Director, Office of Human Resources
Alex
Espinosa, PSP Manager, Office of Management and Budget
O,.ennifi
1\.
Hughes, Dit tor
Office of Management and Budget
~,a~
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Economic Impact Statement
Council Bill XX-12 (amendment to Bill 45-10)
-Service Connected Disability Retirement
Background:
As provided in Bill 45-10, the subject legislation implements the Arbitrator's decision in
the March 29, 2012 service-connected disability retirement arbitration award to the
Fraternal Order of Police (FOP), Lodge 35. County Council staff was provided with a
copy of the arbitration award on March 29. The bill establishes a multi-tiered disability
retirement system under certain criteria of either the greater of the accrued benefit or 60
percent, 66
2/3
percent, or 90 percent of final earnings, depending
011
the level of the
disability. Functional hearing loss is included as one of the conditions enabling a member
to
be
eligible for a disability retirement benefit of 90 percent of final earnings. The
legislation covers employees in Groups A, E, F, and H of the Employees Retirement
System.
1. The sources of information, assumptions, and methodologies used.
The Department of Finance relied on the analysis performed by Mercer, the retirement
plan's actuary. Mercer indicated the minimum annual cost of this legislation (to
implement the arbitration award at $852,000 and a minimum cost over six years of
$5.112 million. There could be an additional six-year cost between $438,000 and
$546,000 for each additional 1 percent of disablements who receive the 90 percent
benefit level.
2. A description of any variable that could affect the economic impact estimates.
Not applicable. See #3 below.
3. The Bill's positive or negative effect, if any on employment, spending, saving,
investment, incomes, and property values in the County.
The annual expenditure impact of the proposed legislation is not significant enough to
cause a quantifiable impact on the County's employment, spending, saving, or other
relevant economic indicators.
4.
If
a Bil1 is likely to have no economic impact, why is that the case?
See
#3
above.
5. The following contributed to and concurred with this analysis: David Platt and Mike
Coveyou, Finance.
~~~ht.Beach,
Director
Department of Finance
~l
-vL
~f-il-/2-
Date
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Douglas Rowe, FSA, EA, MAAA
Principal
M
MERCER
One South St., Suite 1001
Baltimore. MD 21202
4103472806 Fax 410 727 3347
douglas.rowe@mercer.com
www.mercer.com
Via
Electronic
Mail
Mr. Joseph Adler
Director of Office of Human Resources
Montgomery County Government
101 Monroe Street. Seventh Floor
Rockville, MD 20850-2589
April 4,2012
Subject: Proposal on Disability Provisions for FOP -
Updated From Our March
21.
2012 Letter
to
Reflect rfFunctional Hearing
Loss"
Provision
Dear Joe:
The purpose of this letter is to address the inclusion of "functional hearing loss" among the
«certain
criteria"
described later in this letter for which members would be eligible for a benefit equal to
90% of pay at disability. This letter only addresses the impact of this provision on the Montgomery
County Employees' Retirement System (ERS) and only for Group
F.
As we discussed, we have no way of determining what would be an appropriate assumption for
the increased incidence of 90% of pay benefits with this new provision in the absence of further
information about how the provision would be administered. One explanation says "Functional
hearing loss involves a psychological or emotional problem, rather than physical damage to the
hearing pathway. Individuals with this type of hearing loss do not seem to hear or respond; yet, in
reality, they have normal hearing." We are not experts in hearing or disability administration or
determination, but this explanation seems to us to allow a broad range of possible outcomes for
employees to receive the proposed 90% benefit level.
As
we agreed, to illustrate the cost impact of a 1% increase in the incidence of the 90% of pay
benefits and to provide a range of results, we have modified the results from our letter dated
March 21,2012 to reflect two additional scenarios, which increase the assumed rate of service­
connected disabilities that meet
"certain criteria"
by 1
%
and decrease the assumed rate of the
other service-related disabilities per the following scenarios:
• Scenario 1 - decreases the assumed rate of disabilities qualifying for the 66
2/3%
benefit by
1%. No changes to the assumed rate of disabilities qualifying for the 60% benefit
• Scenario 2 - decreases the assumed rate of disabilities qualifying for
the
60% benefit by 1%.
No changes to the assumed rate
of
disabilities qualifying for the 66
2/3%
benefit
The changes reflected in this letter are based on our understanding of the set
of
proposed plan
changes you provided.
. . MARSH
&
McLENNAN
CONSULTING. OUTSOURCING. INVESTMENTS.
~
COMPANIES
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M
MERCER
Page 2
April 4. 2012
Mr. Joseph Adler
Montgomery County Government
The estimates are based on the July 1, 2011 actuarial valuation data. The data, actuarial
assumptions and methods, and plan provisions are the same as those used in our July 1
r
2011
actuarial valuation report unless otherwise noted. Actual costs will depend on the actual
experience of the plan. By cost, we mean the change in Normal Cost and amortization payment
according to the County's policy. The benefit changes are assumed to apply only to active
ERS
members, not to retirees or terminated vested members, with the exception of the retroactivity of
the 90% benefit level to July 1
r
2004.
As requested, we have estimated the impact of the plan changes on the FY2013 County
contributions. We have compared the impact against the budgeted FY2013 contributions provided
in the July 1, 2011 actuarial valuation report, which reflect the disability plan provisions effective
July 1,2012. Reflecting the impact of these proposals in the FY2013 contribution would be a year
earlier than the most common recognition of past plan improvements by the County, which often
would have been reflected in the valuation following the change and funded in the fiscal year
beginning a year after the valuation date. However, reflecting this improvement at the same time,
i.e. in the FY2013 contribution, as the other disability changes seems appropriate.
Description of Proposed Plan Provision Changes
Following is the description of the proposed plan changes you provided.
The benefit amount for a group F member who applies for service-connected disability on or
after July 1, 2012 and doesn't satisfy the
"certain criteria"
outlined below is:
For a disabled employee "determined not able to perform any substantial gainful
employment, as defined in Social Security's standards," but who would not satisfy the
"certain criteria"
outlined below: the greater of the accrued benefit or 66 2/3% of final
earnings
For other disabilities that do not satisfy the
"certain criteria"
outlined below: the greater of
the accrued benefit or 60% of final earnings
The benefit amount for a group F member who applies for service-connected disability on or
after July 1, 2004 and retires on a service-connected disability retirement is:
For disability meeting
certain criteria
(para or quadriplegia, loss of limb, functional hearing
loss, etc. as specified in the Final Offer of Fraternal Order of Police, Montgomery County
Lodge 35, dated March 21, 2012): the greater of the accrued benefit or 90% of final
earnings
~
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~
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Page 3
April 4, 2012
Mr. Joseph Adler
Montgomery County Government
The non-service-connected disability retirement benefit amount and other plan provisions
would remain the same as described in the July
1, 2011
actuarial valuation report.
Actuarial Assumptions
Except as noted below, all the assumptions used in this analysis are the same as those used in
the July 1,
2011
valuation.
Assumptions for Service-connected disability
March 21. 2012 estimates
Scenario 1
Scenario 2
Receiving 60% benefit
Receiving 66
2/3%
benefit
Receiving 90% benefit
Receiving 90% benefit
Total
65.0%
26.2%
1.8%
1.8%
93.0%
65.0%
25.2%
2.8%
2.8%
93.0%
64.0%
26.2%
2.8%
2.8%
93.0%
We understand that there is one current disabled retiree who would qualify for the 90%
minimum benefit. As discussed over the phone with the County, the retiree was receiving
$3,877.16
per month at retirement in
2007
and is currently age 46. Based on the
2007
valuation data, that member has been included in the contribution impact for union members
shown below. Please note that we did not receive information for any current retirees that
would be eligible for the "functional hearing loss" benefit as a result of the plan change. If there
are any, it could increase the cost impact substantially and a revision to this letter may be
required. Please let uS know if you're aware of any.
We assumed that the Social Security standard for suspending benefits during incarceration
would not result in any reduction in contributions until after such suspensions occurred. We did
not attempt to quantify the impact on any future contributions due to this provision.
All other assumptions are the same as those under the Union's LBFO as described in our
March
21 ,
2012 letter.
Contribution Impact
The estimated contribution impact of this proposal based on the results from the
2011
valuation
and budgeted
FY2013
contribution is shown below.
~
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Page 4
April 4, 2012
Mr. Joseph Adler
Montgomery County Government
The amounts shown below are rounded to the nearest thousand.
Scenario 1:
Increase/(Decrease) in
Union
Non-union
Total
Accrued
Liability
$5,566,000
$277,000
..
­
..
~-
..
$87,000
$3,000
$5,653,000
$281,000
Normal Cost
FY2013 Contribution
"Numbers may not add due to rounding.
$9,000
-
$652,000
- - - - - - - - - - - - - - -
$661,000
- - ­
.-.-
---
Since the FY2013 contribution was estimated to increase $614,000 in the March 21, 2012 letter,
each 1% of disablements who receive the 90% benefit instead of the 66
2/3%
benefit increases
the County's contribution by $47,000
($661,000
-
$614,000).
Scenario 2:
Increase/(Decrease) in
Union
Non-union
Total
Accrued
Liability
$5,657,000
$282,000
$663,000
$90,000
$3,000
$9,000
$5,747,000
$672,000
Normal Cost
FY2013
Contribution
"Numbers may not add due to rounding.
$286,000·
---
--
Since the FY2013 contribution was estimated to increase $614,000 in the March 21,2012 letter,
each 1% of disablements who receive the 90% benefit instead of the 60% benefit increases the
County's contribution by $58,000
($672,000
-
$614,000).
Note that the portion of the contribution due to the change in Actuarial Accrued Liability is
amortized as a level percentage
of
assumed payroll over 20 years.
Please also note that the results shown above reflect the impact on the FY2013 contribution. If
these changes were adopted, they may first be reflected in the 2012 actuarial valuation report and
FY2014 budgeted contribution, or even later (depending on when the changes are adopted and
when the County decides to reflect them).
Additional Considerations
With the changes to disability benefits for certain service-connected disablements, it is possible
that the frequency of disability claims could change. This could change the impact on County
contribution amounts shown in this letter.
~
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MclENNAN
~COMPANIES
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MERCER
Page 5
April 4. 2012
Mr. Joseph Adler
Montgomery County Government
Additionally, in the short term, the more generous COLAs available for service retirement benefits
for service prior to June
3D, 2011,
as opposed to disability retirements after June
30, 2011,
could
result in a decrease to the number of disability claims in the near future.
We did not attempt to quantify the impact of either of the above.
Impacts on any amounts reflecting the most recent GASB 27 exposure draft have not been
incorporated into the results in this letter. This would require additional calculations beyond the
scope of this letter.
Important Notices
Mercer has prepared this letter exclusively for Montgomery County; Mercer is not responsible for
reliance upon this letter by any other party. Subject to this limitation, Montgomery County may
direct that this letter be provided to its auditors.
The only purpose of this letter is to provide analyses of the specified changes on annual
contribution amounts in order to help the County with collective bargaining. This letter may not be
used for any other purpose; Mercer is not responsible for the consequences of any unauthorized
use.
Decisions about benefit changes, granting new benefits, investment policy, funding policy, benefit
security and/or benefit-related issues should not be made on the basis of this letter, but only after
careful consideration of alternative economic, financial, demographic and societal factors.
including financial scenarios that assume future sustained investment losses.
This letter only represents a snapshot of a Plan's estimated financial condition at a particular point
in time; it does not predict the Plan's future financial condition or its ability
to
pay benefits in the
future and does not provide any guarantee of future financial soundness of the Plan. Over time, a
plan's total cost will depend on a number of factors, including the amount of benefits the plan
pays, the number of people paid benefits, the period of time over which benefits are paid, plan
expenses and the amount earned on any assets invested to pay benefits. These amounts and
other variables are uncertain and unknowable at the date of the analysis.
Because modeling all aspects of a situation is not possible or practical, we may use summary
information, estimates, or Simplifications of calculations to facilitate the modeling of future events
in an efficient and cost-effective manner. We may also exclude factors or data that are immaterial
. . MARSH
&
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Page 6
April 4, 2012
Mr. Joseph Adler
Montgomery County Government
in our judgment. Use of such simplifying techniques does not, in our judgment, affect the
reasonableness of analysis results for the plan.
To prepare this letter, actuarial assumptions, as described herein and in the July 1, 2011 actuarial
valuation report, are used in a forward looking financial and demographic model to select a single
scenario from a wide range of possibilities; the results based on that single scenario are included
in this letter. The future is uncertain and the plan's actual experience will differ from those
assumptions; these differences may be significant or material because these results are very
sensitive to the assumptions made and, in some cases, to the interaction between the
assumptions.
Different assumptions or scenarios within the range of possibilities may also be reasonable and
results based on those assumptions would be different. As a result of the uncertainty inherent in a
forward looking projection over a very long period of time, no one projection is uniquely "correct"
and many alternative projections of the future could also be regarded as reasonable. Two different
actuaries could, quite reasonably. arrive at different results based on the same data and different
views of the future. Due to the limited scope of Mercer's assignment, Mercer will not perform or
present an analysis of the potential range of future possibilities and scenarios when requested. At
the County's request, Mercer is available to determine the cost of a range of scenarios.
Actuarial assumptions may also be changed from one valuation to the next because of changes in
mandated requirements, plan experience, changes in expectations about the future and other
factors. A change in assumptions is not an indication that prior assumptions were unreasonable
when made.
The calculation of actuarial liabilities for valuation purposes is based on a current estimate of
future benefit payments. The calculation includes a computation of the "present value" of those
estimated future benefit payments using an assumed discount rate; the higher the discount rate
assumption, the lower the estimated liability will be. For purposes of estimating the liabilities
(future and accrued) in this letter, the County selected an assumption based on the expected long
term rate of return on plan investments. Using a lower discount rate assumption, such as a rate
based on long-term bond yields, could substantially increase the estimated present value of future
and accrued liabilities, thus increasing the savings estimated in this letter, but also increasing the
cost of the remaining benefits.
Because analyses are a snapshot in time and are based on estimates and assumptions that are
not precise and will differ from actual experience, contribution calculations are inherently
imprecise. There is no uniquely "correct" level of contributions for a particular plan year .
. . . MARSH & McLENNAN
..,..." COMPANIES
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MMERCER
Page 7
April 4, 2012
Mr. Joseph Adler
Montgomery County Government
Valuations do not affect the ultimate cost of the Plan, only the timing of contributions into the Plan.
Plan funding occurs over time. Contributions not made this year, for whatever reason, including
errors, remain the responsibility of the Plan sponsor and can be made in later years. If the
contribution leveis over a period of years are lower or higher than necessary, it is normal and
expected practice for adjustments to be made to future contribution levels to take account of this
with a view to funding the plan over time.
Data, computer coding, and mathematical errors are possible in the preparation of results
involving complex computer programming and thousands of calculations and data inputs. Errors in
a valuation discovered after its preparation may be corrected by amendment to this analysis letter.
Assumptions used are based on the last experience study, as adopted by the County and the
Board of Investment Trustees. The County is responsible for selecting the plan's funding policy,
actuarial valuation methods, asset valuation methods, and assumptions. The policies, methods
and assumptions used in this letter are those that have been so prescribed and are described
herein. The County is solely responsible for communicating to Mercer any changes required
thereto.
To prepare this letter Mercer has used and relied on financial data and participant data supplied
by the County and summarized herein. The County is responsible for ensuring that such
participant data provides an accurate description of all persons who are participants under the
terms of the plan or otherwise entitled to benefits as of July 1, 2011 that is sufficiently
comprehensive and accurate for the purposes of this report. Although Mercer has reviewed the
data in accordance with Actuarial Standards of Practice No. 23, Mercer has not verified or audited
any of the data or information provided.
Mercer has also used and relied on the plan documents, including amendments, and
interpretations of plan provisions, supplied by the County as summarized herein. We have
assumed for purposes of this letter that copies of any official plan document including all
amendments and collective bargaining agreements as well as any interpretations of any such
document have been provided to Mercer along with a written summary of any other substantive
commitments. The County is solely responsible for the validity, accuracy and comprehensiveness
of this information. If any data or plan provisions supplied are not accurate and complete, the
results may differ Significantly from the results that would be obtained with accurate and complete
information; this may require a later revision of this report. Moreover, plan documents may be
susceptible to different interpretations, each of which could be reasonable, and that the different
interpretations could lead to different results.
~.
MARSH &McLENNAN
~
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MERCER
Page 8
April 4. 2012
Mr. Joseph Adler
Montgomery County Government
The County should notify Mercer promptly after receipt of this letter
if
the County disagrees with
anything contained in this report or is aware of any information that would affect the results of this
report that has not been communicated to Mercer or incorporated therein. This report
will
be
deemed final and acceptable to the County unless the County promptly provides such notice to
Mercer.
All costs, liabilities, and other factors under the plan were determined in accordance with generally
accepted actuarial principles and procedures. Funding calculations reflect the provisions of current
statutes and regulations issued hereunder. In our opinion, the actuarial assumptions are
reasonable and represent our best estimate of the anticipated experience under the plan.
Professiona I Quali'fications
We are available to answer any questions on the material contained in the report, or to provide
explanations of further details as may be appropriate. The undersigned credentialed actuaries
meet the Qualification Standards of the American Academy of Actuaries to render the actuarial
opinion contained in this report. We are 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
~R~'~AAA'
EA
Copy:
Belinda Fulco, Montgomery County Government
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.
\\waswpfs01\data3ldblclnmgawas\2012\special sludieslfOp disabilily
sludylmgeunion
Ibfo
Ulivised
44 2012.doc
. . . MARSH
&
McLENNAN
~COMPAN!ES
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Oouglas Rowe, FSA, EA, MAAA
Principal
M
MERCER
One South St.. Suite 1001
Baltimore, MO 21202
4103472806 Fax 410 727 3347
douglas.rowe@mercer.com
www.mercer.com
Via Electronic Mail
Mr. Joseph Adler
Director of Office of Human Resources
Montgomery County Government
101
Monroe Street, Seventh Floor
Rockville, MD
20850·2589
April 9,
2012
Subject: Proposal on Disability Provisions for Groups A, E, and H
Dear Joe:
The purpose of this letter is to provide the cost estimate you requested for the proposal to revise
the disability provisions for groups
A,
E, and H of the Montgomery County Employees' Retirement
System (ERS) to match the changes in the March
21,2012
Union BAFO letter for group F. This
letter also addresses the potential inclusion of "functional hearing loss" among the
"certain criteria"
described later in this letter for which group
A,
E, and H members would be eligible for a benefit
equal to 90% of pay at disability.
The changes reflected in this letter are based on our understanding of the set of proposed plan
changes you provided. As discussed, we did not reflect any retroactive benefits pertaining to the
90% pay benefit level to July 1,2004.
The estimate is based on the July
1, 2011
actuarial valuation data. The data, actuarial
assumptions and methods, and plan provisions are the same as those used in our July
1, 2011
actuarial valuation report unless othelWise noted. Actual costs
will
depend on the actual
experience of the plan. By cost, we mean the change in Normal Cost and amortization payment
according to the County's policy. The benefit changes are assumed to apply only to active ERS
members, not to retirees or terminated vested members.
As we discussed, we have no way of determining what would be an appropriate assumption for
the increased incidence of
90%
of pay benefits with the functional hearing loss provision in the
absence of further information about how the provision would be administered. One explanation
says "Functional hearing loss involves a psychological or emotional problem, rather than physical
damage to the hearing pathway. Individuals with this type of hearing loss do not seem to hear or
respond; yet, in reality, they have normal hearing." We are not experts in hearing or disability
administration or determination, but this explanation seems to us to allow a broad range of
possible outcomes for employees to receive the proposed 90% benefrt level.
CONSULTING. OUTSOURCING. INVESTMENTS.
, . . MARSH
&
McLENNAN
~
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Page 2
ApriJ9.2012
Mr. Joseph Adler
Montgomery County Government
Due to this uncertainty over the impact of adding functional hearing loss, we have illustrated the
cost impact of a 1% increase in the incidence of the 90% oJ pay benefits for groups A, E, and H by
including two additional scenarios ("Scenario 2 and Scenario 3"), which increase the assumed rate
of service-connected disabilities that meet
"certain criteria"
by 1% and decrease the assumed rate
of the other service-related disabilities. The 1% assumption does not represent a best estimate of
the impad; the actual impact could be much higher, lower, or even negligible. A summary of the
assumed rates for each benefit is shown under the Actuarial Assumptions section below.
As requested. we have estimated the impact of the plan changes on the FY2013 County
contributions. We have compared the impact against the budgeted FY2013 contributions provided
in the July 1, 2011 aduarial valuation report, which reflect the disability plan provisions effective
July 1, 2012. Reflecting the impact of these proposals in the FY2013 contribution would be a year
earlier than the most common recognition of past plan improvements by the County, which often
would have been reflected in the valuation following the change and funded in the fiscal year
beginning a year after the valuation date. However. reflecting this improvement at the same time,
i.e. in the FY2013 contribution, as the other plan changes that are effective July 1, 2012 seems
appropriate.
Description of Proposed Plan Provision Changes
Following is the description of the proposed plan changes you provided.
The benefit amount for group A, E, or H members who apply for service-connected disability
on or after July 1, 2012 and do not satiSfy the
"certain criteria"
outlined below is:
For a disabled employee "determined not able to perform any substantial gainful
employment, as defined in Social Security's standards," but who would not satisfy the
"certain criteria"
outlined below: the greater of the accrued benefit or 66
2/3%
of final
earnings
For other disabilities that do not satisfy the
"certain criteria"
outlined below: the greater of
the accrued benefit or 60% of final earnings
The benefit amount for group At E, or H members who apply for service-conneded disability
on or after July 1, 2004 and retire on a service-connected disability retirement is:
For disability meeting
certain criteria
(para or quadriplegia, loss of limb, functional hearing
loss, etc. as specified in the Final Offer of Fraternal Order of Police, Montgomery County
Lodge 35, dated March 21, 2012): the greater of the accrued benefit or 90% of final
earnings
. . MARSH
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McLENNAN
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Page 3
April 9, 2012
Mr. Joseph Adler
Montgomery County Government
• The non-service-connected disability retirement benefit amount and other plan provisions
would remain the same as described in the July 1, 2011 actuarial valuation report.
Actuarial Assumptions
Except as noted below, aU the assumptions used in
tl);s
analysis are the same as those used in
the July 1, 2011 valuation.
Groups A and H
Assumptions for Service-connected disability
Base Scenario
Scenario 2
Scenario 3
Receiving
60%
benefit
Receiving
66
2/3%
benefit
Receiving
90%
benefit
Total service-connected as
%
of all disabilities
20.0%
18.7%
1.3%
40.0% .
20.0%
17.7%
2.3%
40.0%
19.0%
18.7%
~--
2.3%
40.0%
GroupE
Assumptions for service-connected disability
Base Scenario
Scenario 2
Scenario 3
Receiving
60%
benefit
60.0%~~
___
.---=6~0:..:..:.0::..:°A:.=.o
_ _ _--=5..: :.9:. : .0:. :.o/c.:. o_ _
Receiving 66
2/3%
benefIL ______
._~
.. ___
~.4%
______
2....;.2.;....;4..;..% _ _ _
2_3o...:..4...;,.o_~
_
__
Receiving
90%
benefit
1.6%
2.6%
2.6%
Total service-connected as
%
of all disabilities
85.0%
85.0%
85.0%
-------~~------~~--
• We assumed that the Social Security standard for suspending benefits during incarceration
would not result in any reduction in contributions until after such suspensions occurred. We did
not attempt to quantify the impact on any future contributions due to this provision.
• Please note that we did not receive information for any current retirees in Groups A, E, or H
who would qualify for the 90% minimum benefit. If there are any, it could increase the cost
impact substantially and a revision to this letter may be required. Please let us know
if
you are
aware of any.
Contribution Impact
The estimated contribution impact of this proposal based on the results from the 2011 valuation
and budgeted FY2013 contribution is shown on the following pages. The amounts are rounded to
the nearest thousand. Please note numbers may not add due to rounding .
. . MARSH
&
McLENNAN
~COMPANIES
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Page 4
April 9. 2012
Mr. Joseph Adler
Montgomery County Govemment
Base Scenario
Group A
Increase/(Oecrease) in
Union
Non-union
Total
Accrued Liability
Normal Cost
FY2013 Contribution
$0
$0
$0
$149,000
$6,000
$16,000
$149.000
$6,000
$16,000
Group
E
IncreaseJ(Oecrease) in
Union
Non-union
Total
Accrued Liability
Normal Cost
FY2013 Contribution
$1,481,000
$188,000
$120,000
$5,000
$13,000
..
--.--~-
...
$1,601,000
..
-~~
..
~.~.---.-
-----­
$93,000
$201,000
-----------­
-----------------------------------
Union
Group
H
Increasef(Oecrease) in
Non-union
Total
Accrued Liability
.
-
-~.-.~.-.-.-.~.-.-.-~.-.--.-.--- -------------------'----~-
$200,000
$0
$200,000
Normal Cost
FY2013 Contribution
$8,000
$21,000
..
---­
$0
$0
$8,000
..
---~.--.--.:-.----
..
-~-----------------
---------~
$21,000
All
groups A, E, H
Increasel(Oecrease) in
Union
Non-union
Total
Accrued Liability
Normal Cost
~------~~~------------~.~-----~--~--~----
$1,681,000
$209,000
$269,000
$11,000
$1,950,000
$107,000
$238,000
FY2013 Contribution
$29,000
~
Il!l~
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Page 5
April 9, 2012
Mr. Joseph Adler
Montgomery County Government
Scenario 2
GrouEA
Increase/{Decrease) in
Union
Non-union
Total
Accrued Liability
Normal Cost
FY2013 Contribution
$0
$0
$0
$201,000
$7,000
$21,000
...
-
$201,000
$7,000
---­
$21,000
...
-~--
GrouE
E
Increase/(Decrease) in
Union
Non-union
Total
Accrued Liability
Normal Cost
FY2013 Contribution
$1,577,000
$94,000
$200,000
$135,000
$6,000
$15,000
$1,712,000
$100,000
$215,000
GrouE H
Increase/(Decrease} in
Union
Non-union
Total
Accrued Liability
Normal Cost
FY2013 Contribution
...
...
- - -
$263,000
$10,000
$0
--------_.
$263,000
$10,000
$28,000
$0
_-
..
$28,000
$0
All grouEs A,
E,
H
Increasel(Decrease} in
Union
Non-union
Total
Accrued
Normal Cost
FY2013 Contribution
$1,840,000
$105,000
$228,000
$13,000
$36,000
$2,176,000
$118,000
$264,000
Total Increase from Base Scenario
Increase/(Decrease) in
Union
Non-union
Total
Accrued
Normal Cost
--~-~-------
$159,000
$8,000
$19,000
$67,000
$2,000
$7,000
-
..
- - - -
...
~--
$225,000
$11,000
$26,000
..
- - - -
...
FY2013 ContribUtion
........fIlII
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~
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IVIERCER
Page 6
April 9, 2012
Mr.
Joseph
Adler
Montgomery County Government
Scenario 3
Group A
Increasel(Decrease) in
Union
Non~unjon
Total
Accrued
Normal Cost
$0
$0
.
~
$21
$8,000
..
-
$213,000
$8,000
$22,000
FY2013
Contribution
..
$0
------------~
$22,000
- -
...
.
---
~
..
~
..
Group E
Increase/(Decrease) in
Accrued
Normal Cost
Union
Non~union
Tota'
$1,604,000
$96,000
$204,000
FY2013
Contribution
....
-
-
...
~--
$138,000
$6,000
$15,000
...
- -
....
- -
...
$1,742,000
$102,000
$219,000
Group H
Increase/(Decrease) in
Accrued Liability
Normal Cost
Union
Non-union
Total
FY2013
Contribution
$278,000
$11,000
$30,000
...
- - -
...
--~.-
...
- - - - -
...
---~-
$0
$0
$0
...
- -
...
$278,000
$11
$30,000
All groups A, E, H
Increase/(Decrease) in
Accrued
Normal Cost
...
_ - -
...
Union
Non-union
Totar
FY2013
Contribution
$1,882,000
$107,000
$233,000
$351,000
$14,000
...
_-_
...
$37,000
$2,233,000
$121,000
$271,000
Total Increase from Base Scenario
Increase/(Decrease) in
Accrued Liability
Normal Cost
Union
Non-union
Total
$201,000
$11,000
$24,000
$82,000
$3,000
$9,000
$283,000
$14,000
$33,000
FY2013
Contribution
. . MARSH
&
McLENNAN
. . - , . COMPANIES
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M
IVIERCER
Pagel
Apri19,2012
Mr.
Joseph
Adler
Montgomery County Government
Note that the portion of the contribution due to the change in Actuarial Accrued Liability is
amortized as a level percentage of assumed payroll over 20 years.
Please also note that the results shown above reflect the impact on the FY2013 contribution. If
these changes are adopted, they may first be reflected in the 2012 actuarial valuation report and
FY2014 budgeted contribution, or even later (depending on when the changes are adopted and
when the County decides to reflect them).
Additional Considerations
With the changes to disability benefits for certain service-connected disablements, it is possible
that the frequency of disability claims could change. This could change the impact on County
contribution amounts shown in this letter.
Additionally, in the short term, the more generous COLAs available for service retirement benefits
for service prior to June 30, 2011, as opposed to disability retirements after June 30, 2011, could
result in a decrease to the number of disability claims in the near future.
We did not attempt to quantify the impact of either of the above.
Impacts on any amounts reflecting the most recent GASB 27 exposure draft have not been
incorporated into the results in this letter. This would require additional calculations beyond the
scope of this letter.
Important Notices
Mercer has prepared this letter exclusively for Montgomery County; Mercer is not responsible for
reliance upon this letter by any other party. Subject to this limitation, Montgomery County may
direct that this letter be provided to its auditors.
The only purpose of this letter is to provide analyses of the specified changes on annual
contribution amounts in order to help the County analyze its options. This letter may not be used
for any other purpose; Mercer is not responsible for the consequences of any unauthorized use.
Decisions about benefit changes, granting new benefits, investment policy, funding policy, benefit
security and/or benefit-related issues should not be made on the basis of this letter, but only after
careful consideration of alternative economic, financial, demographic and societal factors,
including financial scenarios that assume future sustained investment losses.
, . . . MARSH
&
McLENNAN
1111....."
COMPANIES
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M
MERCER
Page 8
April 9. 2012
Mr.
Joseph Adler
Montgomery County Government
This letter only represents a snapshot of a Plan's estimated financial condition at a particular point
in time; it does not predict the Plan's future financial condition or its ability to pay benefrts in the
future and does not provide any guarantee of future financial soundness of the Plan. Over time, a
plan's total cost will depend on a number of factors, including the amount of benefits the plan
pays, the number of people paid benefits, the period of time over which benefits are paid, plan
expenses and the amount earned on any assets invested to pay benefits. These amounts and
other variables are uncertain and unknowable at the date of the analysis.
Because modeling all aspects of a situation is not possible or practical, we may use summary
information, estimates, or simplifications of calculations to facilitate the modeling of future events
in an efficient and cost-effective manner. We may also exclude factors or data that are immaterial
in our judgment. Use of such simplifying techniques does not, in our judgment, affect the
reasonableness of analysis results for the plan.
To prepare this letter, actuarial assumptions, as described herein and in the July 1, 2(j11 actuarial
valuation report, are used in a forward looking financial and demographic model to select a single
scenario from a wide range of possibilities; the results based on that single scenario are included
in this letter. The future is uncertain and the plan's actual experience will differ from those
assumptions; these differences may be significant or material because these results are very
sensitive to the assumptions made and, in some cases, to the interaction between the
assumptions.
Different assumptions or scenarios within the range of possibilities may also be reasonable and
results based on those assumptions would be different. As a result of the uncertainty inherent in a
forward looking projection over a very long period of time, no one projection is uniquely "correct"
and many alternative projections of the future could also be regarded as reasonable. Two different
actuaries could, quite reasonably, arrive at different results based on the same data and different
views of the future. Due to the limited scope of Mercer's assignment, Mercer will not perform or
present an analysis of the potential range of future possibilities and scenarios when requested. At
the County's request, Mercer is available to determine the cost of a range of scenarios.
Actuarial assumptions may also be changed from one valuation to the next because of changes in
mandated requirements, plan experience, changes in expectations about the future and other
factors. A change in assumptions is not an indication that prior assumptions were unreasonable
when made.
The calculation of actuarial liabilities for valuation purposes is based on a current estimate of
future benefit payments. The calculation includes a computation of the "present value" of those
~
MARSH
&
MclENNAN
~.."
COMPANIES
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M
IVIERCER
Page 9
April 9, 2012
Mr. Joseph Adler
Montgomery County Govemment
estimated future benefit payments using an assumed discount rate; the higher the discount rate
assumption, the lower the estimated liability will
be.
For purposes of estimating the liabilities
(future and accrued) in this letter, the County selected an assumption based on the expected long
term rate of return on plan investments. Using a lower discount rate assumption, such as a rate
based on long-term bond yields, could substantially increase the estimated present value of future
and accrued liabilities. thus increasing the savings estimated in this letter. but also increasing the
cost of the remaining benefits.
Because analyses are snapshots in time and are based on estimates and assumptions that are
not precise and will differ from actual experience, contribution calculations are inherently
imprecise. There is no uniquely "correct" level of contributions for a particular plan year.
Valuations do not affect the ultimate cost of the Plan, only the timing of contributions into the Plan.
Plan funding occurs over time. Contributions not made this year, for whatever reason, including
errors, remain the responsibility of the Plan sponsor and can
be
made in later years. If the
contribution levels over a period of years are lower or higher than necessary. it is normal and
expected practice for adjustments to be made to future contribution levels to take account of this
with a view to funding the plan over time.
Data, computer coding, and mathematical errors are possible in the preparation of results
involving complex computer programming and thousands of calculations and data inputs. Errors in
a valuation discovered after its preparation may be corrected by amendment to this analysis letter.
Assumptions used are based on the last experience study. as adopted by the County and the
Board of Investment Trustees. The County is responsible for selecting the plan's funding policy,
actuarial valuation methods, asset valuation methods, and assumptions. The policies, methods
and assumptions used in this letter are those that have been so prescribed and are described
herein. The County is solely responsible for communicating to Mercer any changes required
thereto.
To prepare this letter Mercer has used and relied on financial data and participant data supplied
by the County and summarized herein. The County is responsible for ensuring that such
participant data provides an accurate description of all persons who are participants under the
terms of the plan or otherwise entitled to benefits as of July 1, 2011 that is SUfficiently
comprehensive and accurate for the purposes of this report. Although Mercer has reviewed the
data in accordance with Actuarial Standards of Practice No. 23, Mercer has not verified or audited
any
of
the data or information provided.
~
MARSH
&
McLENNAN
~COMPANIES
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IVIERCER
Page 10
April 9. 2012
Mr. Joseph Adler
Montgomery County Government
Mercer has also used and relied on the plan documents, including amendments, and
interpretations of plan provisions, supplied by the County as summarized herein. We have
assumed for purposes of this letter that copies of any official plan document including all
amendments and collective bargaining agreements as well as any interpretations of any such
document have been provided to Mercer along with a written summary of any other substantive
commitments. The County is solely responsible for the validity, accuracy and comprehensiveness
of this information. If any data or plan provisions supplied are not accurate and complete, the
results may differ Significantly from the results that would be obtained with accurate and complete
information; this may require a later revision of this report. Moreover, plan documents may be
susceptible to different interpretations, each of which could be reasonable, and that the different
interpretations could lead to different results.
The County should notify Mercer promptly after receipt of this letter if the County disagrees with
anything contained in this report or is aware of any information that would affect the results of this
report that has not been communicated to Mercer or incorporated therein. This report will be
deemed final and acceptable to the County unless the County promptly provides such notice to
Mercer.
All costs, liabilities, and other factors under the plan were determined in accordance with generally
accepted actuarial principles and procedures. Funding calculations reflect the provisions of current
statutes and regulations issued hereunder. In our opinion, the actuarial assumptions are
reasonable and represent our best estimate of the anticipated experience under the plan.
. . . MARSH
&
McLENNAN
.,--,. COMPANIES
®
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M
MERCER
Page 11
April 9, 2012
Mr. Joseph Adler
Montgomery County Government
Professional Qualifications
We are available to answer any questions on the material contained in the report, or to provide
explanations of further details as may be appropriate. The undersigned credentialed actuaries
meet the Qualification Standards of the American Academy of Actuaries to render the actuarial
opinion contained in this report. We are 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
D~R:a.
!::AAA. EA
Copy:
Belinda Fulco, Montgomery County Government
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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COMPANIES