HomeMy WebLinkAboutSubmittal-Larry Spring FR 9-24-09MERCER
I MARSH MERCER KROLL
LTMF GUY CARPENTER OLIVER WYMAN
September 23, 2009
Mr. Pete Chircut
Treasurer
City of Miami
444 SW 2nd Avenue, 6th Floor
Miami, FL 33130
Private & Confidential
Via Electronic Mail
Dear Pete:
Dominic Spampinato
Senior Associate
Six PPG Place, Suite 400
Pittsburgh, PA 15222-5406
412 355 8797 Fax 412 355 8877
dominic.spampinato@mercer.com
www.mercer.com
F9 50
As you requested, we have analyzed the impact that specific plan design changes may have
on the annual plan cost for the City of Miami Elected Officers' Retirement Trust (EORT). The
results of this analysis are summarized below.
Design Alternative I —All Benefits Reduced
The first plan design alternative we evaluated reduces the benefit formula by 25%, applied to
all service (both past service and future service). Under this design, the employee accrues a
benefit of 37.5% of pay' after 7 years of service and an additional 3.75% of pay for each
year of service thereafter, up to a maximum benefit of 75% of pay. Benefits will not be less
than the accrued benefit at the date of the change. Because this alternative reduces benefits
for all service, four of the six officers will not accrue benefits for a period of time until the
new, lower formula catches up to the frozen benefit under the old formula. In fact, if those
same four officers retire at the expected date provided by the City of Miami in the census
data, they will not earn any additional benefits beyond what they've already accrued as of
January 1, 2009.
We measured the impact of this plan change based on the change in 2009 plan cost as if
the plan change had been effective January 1, 2009. A later effective date would reduce the
savings. We estimated that change to be a decrease in annual plan cost of roughly $400k
from $1.8M to about $1.4M. We also looked at the change in the present value of benefits,
which represents the total value of the future benefits expected to be earned in the plan
stated in today's dollars. The present value of benefits as of January 1, 2009 is estimated to
decrease $900k from $7.8M to $6.9M.
' The pay used to determine a participant's plan benefit is the greatest annual W-2 pay in the last
three years of employment.
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MERCER
MARSH MERCER KROLL
"/ C GUY CARPENTER OLIVER WYMAN
Page 2
September 23, 2009
Mr. Pete Chircut
City of Miami
Design Alternative II — Future Benefits Reduced
The next plan design alternative we evaluated reduces the benefit formula by 25%, applied
to future service only. Under this design, each employee's accrual percentage is frozen at
the time of the plan change. Future benefits then begin to accrue at a rate of about 5.35%2
of pay per year for the first 7 years of service and an additional 3.75% of pay for each year
of service thereafter, up to a maximum benefit of 75% of pay for both past and future
service 3. Because benefit accruals under this alternative do not cease for any officers, the
cost savings are not as significant as in Alternative I.
We measured the impact of this plan change based on the change in 2009 plan cost, and
we estimated that change to be a decrease in 2009 plan cost of roughly $200k from $1.8M
to about $1.6M. The present value of benefits as of January 1, 2009 — the total amount of
benefits to be funded in today's dollars — is estimated to decrease $500k from $7.8M to
$7.3M.
Design Alternative III — Closed Plan
The final plan design alternative evaluated doesn't impact any current plan participants.
Under this design, the plan will continue to operate as usual for current participants, but no
new employees will be eligible to participate in the plan. Unlike the previous two alternatives,
this plan change will not produce immediate cost savings. Savings will only be realized as
employees retire with fully funded benefits and are not replaced by other participating
employees.
One way to quantify the financial impact of this plan change would be to run projections of
funding costs, making assumptions about demographic characteristics of new elected
officers and estimating future funding requirements over a period of time. However, that
additional analysis is beyond the scope of this project.
2 This accrual is the annual rate that accumulates to 37.5% of pay after 7 years.
3 There are other options to consider for the new maximum benefit cap before finalizing any changes;
we chose to perform the analysis using a 75% cap for simplicity.
Submitted Into the publl-q
record in onne on w
Item F9 6 on - 2�_
Priscilla A. Thompson
- City Clerk
MERCER
MARSH MERCER KROLL
GUY CARPENTER OLIVER WYMAN
Page 3
September 23, 2009
Mr. Pete Chircut
City of Miami
Data, Assumptions, Methods and Plan Provisions
This analysis was prepared based on the following:
■ All benefits accrued to date will be protected (i.e. no cutback to the benefit already
earned).
■ All plan cost changes were measured as changes in the 2009 plan cost as if the change
is retroactive to January 1, 2009. The impact of any plan changes could be materially
different if measured in future plan years.
■ The maximum benefit under Design Alternative II is 75% of pay. Keeping the current limit
of 100% of pay or interpolating between 75% and 100% are other options to consider;
there are advantages and disadvantages to each option. These should be explored
before this alternative is selected and implemented.
■ Financial and census data provided by the City of Miami as of January 1, 2009, including
expected retirement dates for all current officers. If any officers retire earlier than
expected or any terms are extended, plan costs (including the impact of plan changes)
could be materially different than what is shown herein.
■ Potential cost savings were estimated for the EORT only. Therefore, benefits used in the
analysis were limited by the 2009 IRS Section 415 benefit limit of $195,000, adjusted for
expected retirement age. If benefits in excess of the IRS Section 415 limits are paid
from another source, there may be additional savings for the City.
■ An interest rate of 3.75%.
This report has been prepared exclusively for the City of Miami to evaluate the financial
impact of various plan design alternatives. This report may not be used or relied upon by any
other party or for any other purpose; Mercer is not responsible for the consequences of any
such unauthorized use.
This report material includes or is derived from projections of future funding and/or
accounting costs and/or benefit related results. To prepare these projections or results,
various actuarial assumptions, as described herein were used to project a limited number of
scenarios from a range of possibilities. However, the future is uncertain, and the plan's
actual experience will likely differ from the assumptions utilized and the scenarios presented;
these differences may be significant or material. In addition, different assumptions or
scenarios may also be within the reasonable range and results based on those assumptions
would be different. This report has been created for a limited purpose, is presented at a
particular point in time and should not be viewed as a prediction of the plan's future financial
Submitted into the pUbl.kil
record 'in connection with
item on ,2 -
Priscilla A. Thompson
City .Clerk
MERCER
MARSH MERCER KROLL
- GUY CARPENTER OLIVER WYMAN
Page 4
September 23, 2009
Mr. Pete Chircut
City of Miami
condition. To prepare the results shown in this report, various actuarial methods, as
described herein were used.
Unless otherwise noted herein, this report is based on the January 1, 2009 census data as
well as the plan provisions, assumptions and methods as presented in the December 31,
2007 actuarial valuation. The asset information as of December 31, 2008 was provided by
the City of Miami. The client is solely responsible for the validity, accuracy and
comprehensiveness of this information; the results can be expected to differ and may need
to be revised if the underlying data or the plan provisions supplied are incomplete or
inaccurate.
The undersigned credentialed actuary meets the Qualification Standards of the American
Academy of Actuaries to render the actuarial opinion contained in this letter. I am not aware
of any direct or material indirect financial interest or relationship, including investments or
other services that could create a conflict of interest that would impair the objectivity of our
work.
Please let us know if you have any questions or further requests.
Sincerely,
Dominic Spampinato
Senior Associate
DS/DLR:SJ/elb
Copy:
Diana Gomez, City of Miami
Doug Rowe, Mercer
Scott Jarboe, Mercer
The information contained in this document (including any attachments) is not
intended by Mercer to be used, and it cannot be used, for the purpose of avoiding
penalties under the Internal Revenue Code that may be imposed on the taxpayer.
c:\documents and settings\dominic-spampinato\desktop\work from home\plan design results letter.doc
Submitted Into the publid
recon ' connection with
item
`= °n ? 2
Priscilla A. Thompson
City Clerk