Minutes 06/12/2012 - Laserfiche WebLink

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June 12, 2012 • The language adopted in the 2012 Appropriations Act gave localities the option to pay: 1) The contribution rate certified by the VRS Board of Trustees for the biennium; or 2) For 2012-2014, 70% of the June 30, 2011 Board-certified rate or the 2012 rate, whichever is higher; for 2014-2016, 80% of the June, 2013 Board-certified rate or the 2012 rate, whichever is higher; for 2016-2018, 90% of the June, 2015 Board-certified rate or the 2012 rate, whichever is higher; and for 2018-2020, 100% of the June, 2017 Board-certified rate or the 2012 rate, whichever is higher. • School division and political subdivision employees whose employers currently pay all or part of the 5% contribution on their behalf will begin paying the member contribution effective July 1, 2012 on a pre-tax basis. Employers have the option to elect to phase in the amount the employee pays at a minimum of 1 % in each of the next five years. The bill provides for an offsetting salary increase in the amount the employee begins paying on July 1. All Plan 1 and Plan 2 employees who are hired or re-employed on or after July 1, 2012 must pay the entire 5% member contribution with no phase-in option. • Chapter 822 of the 2012 Acts of the Assembly (SB 497), approved April 18, 2012 requires the election/certification by the local governing body of the member contribution the current employees will be required to pay beginning July 1, 2012 and a corresponding salary increase. • Funding for all Plan 1 employees to contribute the required 5% effective July 1, 2012, was approved on May 15, 2012 with the adoption the city's FY2012-13 Operating Budget. The budget also included a 5.7% pay increase in order to offset the estimated tax impact of the contributions by these employees. Discussion: • The rate certified by the VRS Board of Trustees for the City of Portsmouth for the 2012-2014 biennium is 11.82%. The alternate VRS contribution rate is 8.27%. The FY 2012-13 Adopted Budget includes retirement costs based on the 8.27% rate, which will cost the City 30% less than the higher rate for the biennium. • The Plan 1 employees' 5% contribution to the Virginia Retirement System is currently paid by the City. Effective July 1, 2012, the responsibility of this payment will shift to these employees. As a result of this contribution change, an increase of 5.7% will be applied to Plan 1 employees' salaries which, in whole or in part, will offset the cost of the contribution and related taxes from the State mandated 5% salary increase. • All employees hired on or after July 1, 2012 will be required to contribute 5% of their creditable compensation to the retirement system. Financial impact: • The intent of the language in the 2012 Appropriation Act, Item 468(H), is to offer localities and schools some budget relief for the coming fiscal year with respect to the amount of their retirement contributions. Adopting the lower VRS rate will result in a 30% savings for FY 2013 and 2014, but will also have the following impacts for the City of Portsmouth: • Reduce contributions to Portsmouth's employer account and the investment earnings they would have generated, which means there will be fewer assets available for benefits. • Result in a lower funded ratio when the next Actuarial Valuation is performed and, thus, a higher calculated contribution rate at that time. • Require that the City include the Net Pension Obligation (NPO) under GASB Standards in the notes to the financial statements. • The difference between the prior 5% retirement contribution by the city and the net of 5.7% compensation increase for Plan 1 employees offset by their new 5% retirement contribution is reflected in the FY 2012-13 Adopted Budget. Recommended Action: • Adoption of the resolutions. Vision Principle: Change and New Directions. Next Steps Following Council Action: • Provide the formal signed resolutions to VRS on or before July 10, 2012. • Initiate 5.7% salary adjustment for the PIan1 employees and implement the process to deduct the 5% contribution to the retirement system from Plan 1 employees' salary for remittance to VRS.