Memo

Memorandum 05-132

Date: August 2, 2005

To: Mayor and City Council

Thru: Walt Wrede, City Manager

From: Dean W. Baugh, Finance Director

RE: PERS Benefits for Councilmembers

Sheri and I spoke to Kathy Lea at PERS and to one of the actuarial companies that work with PERS to get an answer to the following question asked by Council:

How does PERS calculate a retirement for a public official if he has other service? For example an employee that worked for the state for 15 years and leaves then is elected to the council. Once he reaches eligibility for retirement how does the calculation work. His highest three years would be with the state. Would the City assume all the liability cost for his retirement or would it be prorated based on time and salary for each employer?

Kathy Lea sent the following response:

Elected official service works three different ways depending upon when it is served and what retirement system the elected official is participating in as a regular employee.

Active PERS employee is elected to public office; In this instance, the elected official is already earning service with a PERS employer (Primary employer) while they are serving in a public office. The PERS member does not accrue any additional service in the PERS because of the elected service but the elected service salaries are added to the overall compensation. This compensation could be one or more of the three high years used for calculating a benefit. Because no elected official service posts for this individual, the liability for the benefit stays with the primary PERS employer. The difference in the benefit and the subsequent liability to the employer is nominal if used and frequently there are other years of compensation that are higher and the elected official years end up not being used in the calculation at all.

Inactive PERS member elected to public office; In this case, the elected official is not working for a PERS employer at the same time as they are serving in an elected office but they have PERS service either before or after their elected period. In this case, the retirement benefit is calculated on total years of service and the highest 3 (or 5 for Tier III) consecutive years of compensation. The liability is assessed to each employer in proportion to the total years of service accrued. For example, for a member with 20 total years of service at retirement that served 4 years as an elected official for a city and 16 years as a State employee the liability would be apportioned 1/5th to the city and 4/5ths to the State.

Active TRS member elected to public office; The elected official is earning full service credit in the Teachers' Retirement System so cannot earn regular PERS service concurrently. There is a benefit that exists specifically for elected officials in this situation called the "Alternate Benefit for Elected Officials". This is strictly a monetary benefit of 2% times the average elected official compensation times the number of years of service as an elected official. There is no minimum benefit provision, no death, disability or medical benefits available. 100% of the liability for this benefit is apportioned to the city or school district the member is serving as an elected official with.

For council members in the Tier I, II, III, I’ve attached a spreadsheet that explains these tiers.

The following are examples of how the cost to the City is calculated in Tier I, II, and III:

1. A member, who has other PERS service, 5yrs at four other cities with an average high three years of $70,000 and 5yrs as a council member paid at $50 per month equals 25yrs of service.

2. Over the 5yrs of council time the City would contribute approximately $500 to the PERS system.

3. The PERS retirement calculation would be: $70,000 x 25yrs x 2%= $35,000 per yr

4. This would be divided to each PERS employer based on the number of yrs of service, in this example 5yrs to each or $35,000 / 5 = $7,000 per year to each employer.

5. This would result in approximately a $7,000 unfunded amount every year for the life of the retiree. For example 20yrs x $7,000 = $140,000. PERS will combine this amount with any other unfunded amounts that the city has and calculate how much to increase our current rate to pay this over a 25 yr period. This comes out to approximately $2,333 per month for their council service.

1. A member, who has no other PERS service, works 5yrs as a council member paid at $50 per month equals 5yrs of service.

2. Over the 5yrs of council time the City would contribute approximately $500 to the PERS system.

3. The PERS calculation would be: $600 x 5yrs x 2%= $60 per yr retirement. , PERS has a minimum monthly payment of $25 per year of service raising the retirement to $125 per month or $1500 per year..

4. This would result in approximately a $1,500 unfunded amount every year for the life of the retiree. For example 20yrs x $1,500 = $30,000. PERS will combine this amount in with any other unfunded amounts the city has and determine how much to increase our current rate to pay this over a 25 yr period. This comes out to approximately $500 per month for their council service.

Some of the concern with the cost of the PERS system for council members is eliminated with the new Tier IV which goes into effect July 1, 2006, Tier IV changed to a defined contribution (what you put in is what you get out plus interest) and the vesting requirement is set at 10 years for health insurance.

If the Council decides to exclude council members from the PERS system, this will not effect past enrollments. Any time earned by the council members before the exclusion date, would still be credited to their accounts.