Retirement Board Meeting - January 18, 2008 The Retirement Board started the New Year with a presentation of the June 30, 2007 Actuarial Report. Gene Kalwarski and Margaret Tempkin of Cheiron, the SDCERS Actuary, gave a presentation and answered questions from the Board. The process of developing the actuarial report begins with the collection of data on the participants (members), plan provisions, and financial aspects. And they do go through as Carl Sagan would say, "billions and billions" of calculations. For example, they need to know the age of each member and his or her beneficiary so they can estimate lifespan. They need to know the number of years worked, number of years left before they will likely retire, and then the estimated number of years the member will live to draw a pension, and how long the beneficiary will live to draw a reduced benefit.
It may be easier on the Plan provision side; no new benefits are in the picture. They also need to make adjustments for the change in benefits, such as eliminating DROP for new city employees, and if the work force expanding or contracting. The reason DROP comes into the picture is that employees will frequently retire earlier if DROP is available, but stay in the work force. They begin to draw their pension sooner, but the city saves money by not having to contribute to the retirement fund for that individual. So to the City, it is like having a 30 year employee, whose pension is fixed, and lowers the City annual contribution to the pension fund. But all of these moving parts must be accounted for and incorporated in the calculations used to generate the Actuarial Report. All benefit payments must be projected, the present value determined, compared to assets then determine what the plan sponsor's contribution should be for that year.
Any change in assumptions has to be evaluated. When the Board voted to adopt a 20 year amortization period for the unfunded liability (down from the 27 year amortization under the Gleason settlement) the change in payments had to be calculated. Suffice it to say that Actuaries are very detail oriented professionals. And with all of these assumptions and calculations, it is a great comfort to me that Trustee Bill Sheffler is an Actuary with years of experience. He speaks the language and goes over the report with a fine tooth comb. Others do to, but for me, Bill was always the go-to guy on the Actuarial report.
Speaking of fine tooth combs -- SDCERS' Tax Attorneys and Staff have completed the Voluntary Compliance Program with the IRS. There were no fines or penalties but a number of changes were required on how payments were made. IRS has limits on the amount of pension payments from a qualified plan. It is not a dollar number, but a calculation for each individual based on salary, years worked, age, etc. This is referred to as the "415 limits" you may have read about. The IRS does not limit the total benefits that may be paid to a retiree, but it does limit the amount that can come from a tax qualified pension plan. This applies to both public and private systems. If the employer had agreed to benefits over the 415 limits, they must be paid from a separate account. This is more common in private enterprise, but does impact some of the top management and professional city employees. The City has rectified this problem by establishing a Preservation of Benefits (POB) fund from. So the agreed to benefits are to be paid from that account and all is well with IRS.
By now I suspect I may have overstayed my welcome in the numbers end of the meeting, so I will leave it with the suggestion that you check the SDCERS Website for an extensive list of Frequently Asked Questions (with answers) on the June 30, 2007 Actuarial Valuation. It will put you in a position to know when someone is misusing the numbers or the concepts.
If your Actuarial appetite is aroused by the Q&A's you will find there, never fear; the Board will discuss the Actuarial Report and take action at the Feb. 15, 2008 meeting. Its festival seating so no need to call ahead for a reservation. Parking is validated.
At the meeting the matter of Presidential Leave and the IRS ruling which disallowed that benefit was discussed. Bill Farrar, current and Gerry Collins, past President of the POA spoke with feeling and clarity on what they felt was the basic unfairness of the ruling. They pointed out that this had been a benefit negotiated between the unions and the city and agreed to by both. Union presidents have incorporated these benefits into their financial and retirement plans. They felt it a breech of contract and good faith to have these negotiated benefits removed.
Another IRS ruling disallowed the use of vacation credits (i.e., sold vacation time) to fund the Purchase of Service Credits by about 43 firefighters.
In addition to SDCERS attorney's explanation of the IRS rulings, David Wescoe, SDCERS Administrator explained the process. He pointed out that the Voluntary Compliance Program was initiated by SDCERS Board of Trustees. This was necessary to gain clarity on a number of questions and to ensure that the tax qualified status of the pension system was secure. SDCERS and their tax attorneys presented the case of Presidential Leave to the IRS along with the rest of the Pension Plan for a ruling. SDCERS could and did make arguments on behalf of the Presidential Leave plan as a negotiated benefit.
Wescoe went on to say that one does not "negotiate" with the IRS. You state your case, make your arguments, and present them to the IRS. When the IRS decides, they will give you the decision; there is no further negotiation. Their decision in this matter applies not only to SDCERS but to public pension plans throughout the US. In this case the IRS arrived at their decision and transmitted that decision to SDCERS on December 19, 2007. Christmas and the holiday season was not a factor in the timing of the decision by the IRS.
While the IRS ruled that the particular implementation of the Presidential Leave benefit did not meet IRS requirements, they did not rule on the benefit itself. The Plan Sponsor, the City, had approved this benefit in negotiations. The City can and should implement this negotiated benefit by another means, much like they resolved the 415 limit and POB plan outlined above. That negotiation would take place between the unions, the individuals and the city; SDCERS does not take part in negotiations to approve benefits; SDCERS administers benefits approved by the plan sponsor. Nothing more.
The Board covered much more, but I will leave that for another time, and to other retirees.
I will forward those comments as I receive them.
Joe Flynn, Retiree |