1999-02-08 Regular Meeting, Public Hearing and Special Called Workshop Minutes of City Council

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IQUEST FOR CITY COUNCIL AGEND_TEM AGENDA DATE Februarv 8.1999 REQUESTED BY Louis Riabv. Director of Adm. Services Jeff Litchfield. Assistant City Manaaer _ REPORT; _ RESOLUTION; ~ ORDINANCE; ~ Public Hearing In 1995, the State Legislature changed provisions to the Texas Municipal Retirement System which allows member cities to adopt a 20 year retirement provision. Prior to that time, an employee under the age of 60 had to have 25 years of participating service to retire with full benefits (there is a retirement option for 10 years of service and age 60). Since 1995, 156 cities have adopted the 20 year retirement provision. This means that 41.8% of all TMRS contributing members have the 20 year option. An employee retiring under the 20 year provision receives a much smaller annuity than they would if they waited until they had 25 years of service. This is caused by less funds being set aside for their retirement and less funds being matched by the City. It has been estimated that an employee retiring at 20 years of service would have an annuity that is 40% less than if they had waited until they had reached 25 years to retire. Even though retirement at 20 years is less financially attractive than at 25 years, we feel it important to consider the option so employees can have the right to choose. To further complicate our understanding of this option, while the adoption of the 20 year option does not substantially [ncrease the cost of the plan, it does increase the contribution rate required to fund the benefits. The actuary currently calculates a city's cost to fund its plan assuming an employee retires at either 25 years of service or age 60 with at least 10 years of service, whichever is earlier. Adopting this provisions means the plan must now be funded when an employee has only 20 years of service. As a result, the City has to "catch up" its funding. This has a financial impact on our funding into the system. For example, an employee has 9 years of service with the City. Under the current provision, the City has 16 years remaining before retirement in which to fund the current service portion (city matching) of this employee's benefit. The System's actuary calculates the rate required of the City to achieve this end. But the City now adopts the 20-year provision. The City now only has 11 years in which to meet this end; therefore, the City must speed up (increase) its contributions to reach the end result. Although the City is stH! only matching the deposits made by the employee, the actuary can now count on 5 fewer years of actuarial circumstances (turnover, payroll growth, etc.) off-setting some of the required matchir.g funds. A good comparison of this phenomenon is to compare it to refinancing a house note. You originally had 25 years to pay for the house. By refinancing, you increase the amount you pay each year but lowered ~he number of years you pay. You actually save money when you compare the two options. That is how it is with the comparison between the 25 year and 20 year options. You will pay more in the first couple of years but costs will decline after that. If the City adopts the 20 year option, it will not have any financial impact on any employees who do not exercise the option prior to 25 years of service. If an employee exercises the option before they have 25 years of service, they have a lower annuity and it theoretically saves the City money. This is true because you normally replace the retiring employee with someone who has a lower salary than the retiring employee. Providing a 20 year retirement option has additional benefits. For example, if an employee currently has 21 years of services and dies, their spouse would not be eligible for retirement benefits until the time when the employee would have reached age 60. Under the 20 year option, the spouse would be able to receive monthly annuities immediately. This would probably