Title
An Ordinance Of The City Of Hollywood, Florida, Amending Section 33.025 Related To Providing New Benefit Options, Revising The Makeup Of The Board Of Trustees, And Revising Language Governing Purchase Of Credited Service.
Strategic Plan Focus
Financial Management and Administration
Body
Staff Recommends: Approval of the attached Ordinance.
Explanation:
Currently, the Code provides only for a defined benefit plan (“DB Plan”) to members of the City of Hollywood Employees’ Retirement Fund (“COHERF”). During collective bargaining between representatives of AFSCME Local 2432 (“AFSCME”) and the City, tentative agreement has been reached upon the desire to add two more options for retirement benefits. These two new options are a defined contribution plan (“DC Plan”) and a hybrid plan (“Hybrid Plan”) that would be comprised of both a DB and a DC component.
The DC Plan would provide for the City to contribute 8% of a new employee’s compensation into a DC Plan, such as a 401(a) account. Vesting would be immediate, giving employees nonforfeitable rights to their benefit, and the benefit would be portable, two features that are attractive to certain employees based upon their own personal family and financial situation.
The second new optional plan is the Hybrid Plan, which would have a DB component of a 1% multiplier toward which the employee would contribute 5% of their compensation, along with a DC component toward which the City would contribute 5% of a new employee’s compensation. New employees would not be required to contribute anything toward the DC component of the Hybrid Plan.
By contrast, new employees joining the current DB Plan vest in the plan after seven years, and contribute 8% of their compensation for a 2.5% multiplier.
Briefly, future benefits under the DB Plan are determined by multiplying the years of service times the average final compensation (a term defined in the ordinance) times the multiplier. Future benefits under the DC Plan are based on the contributions made by the City, contributions made by the employee, and investment earnings over the course of the employee’s investment period. The investment period depends upon the age of the employee and investment earnings are a product of the investment vehicles an employee would select from among available options and the performance of those investments in the market.
Selection of which of the three options (DB, DC, or Hybrid) will be voluntary and at the discretion of the employee.
Current employees will be given a time period during which they can consider the three options and select, through a one-time irrevocable selection, which of the three plan options makes the best sense and is most attractive to them based upon their own family, lifestyle and financial needs.
New employees hired after on or after October 1, 2025, would make the one-time irrevocable decision during the hiring process.
The Board of Trustees of COHERF will select a defined contribution manager through a selection process and be responsible in a fiduciary capacity for the overall management of all three plan options for the exclusive benefit of the members as they are currently responsible for the DB Plan.
For all future employees hired on or after October 1, 2025, the City will make the contribution into the DC Plan if that is what the employee selects. In order to offer current employees and employees hired on or before September 30, 2025, the ability to make an election on which plan to participate in, the structure must comply with an Internal Revenue Code restriction on a governmental plan offering a cash or deferred arrangement, or CODA. Under this restriction, an employee making tax-deferred contributions to a plan (including all current members of COHERF who make either an 8% or 9% tax-deferred contribution into the Plan) cannot subsequently choose another plan that would allow them to contribute a lower tax-deferred percentage toward their retirement benefit. So, the Internal Revenue Code would prohibit an employee currently in the DB Plan and contributing 8% from selecting and moving to a DC Plan that allowed them to make a lower, or no contribution. In order to address this restriction, employees currently in the DB Plan who wish to select either of the new DC or Hybrid Plan options will be required to contribute no less toward the new Plan they select than they are currently contributing to the DB Plan.
Since existing Plan members will, because of the CODA concerns, have to contribute more to either of the new Plans than newly hired employees will contribute, any current employees selecting the DC or Hybrid Plans will have their compensation adjusted so they are made whole. So while those employees hired on or after October 1, 2025, would have the 8% contributed by the City directly into the DC Plan, for current employees hired on or before September 30, 2025, the City would increase their compensation by 8% and then the employee would make that 8% contribution into the DC Plan. Note that there are some current employees who make 9% contributions, and some current employees who may select the Hybrid Plan option, and so their compensation would be adjusted similarly so they would be made whole upon selecting one of the new options, as specified in Section (KK) of the ordinance.
The ordinance also proposes to revise the qualifications for Board membership so that one of the two City Commission citizen member appointees, who are currently required only to be residents of the City, must be a retiree member of COHERF in addition to being a resident. This is being proposed to increase retiree participation on Board, which currently comprises only one of the seven members. Total membership of the Board will remain at seven.
The final significant part of the ordinance revision is to correct for an inadvertent inequity which has come to light as part of the credited service purchase language. Currently, an individual who worked for the City for some period in the past is able to, upon re-employment with the City, “buy back” their time in the pension fund for the period they had worked in the past. The current language provides for too much latitude in repayment terms, such that the employee has no time requirements to buy back that time other than before they separate from City service again. Plus, the employee is placed back into whatever tier they would have been eligible to be part of if they had never separated from the City after first employment period.
So the situation has developed that while current employees must pay for all their benefits as they earn them, and all employees since 2014 (and all general fund employees since 2011) are in what is referred to as “Group Three” with a 2.5% multiplier, and those Group Three employees have been making their contributions to the Fund since their date of hire, employees who are rehired can wait for years before they purchase back their credited service, so when they finally decide to sign the agreement and buy back, the City and the Fund are on the hook for all those years of liabilities without having had the assets from the employee contributions to grow to offset those liabilities. To further exacerbate the inequity, the rehired employee can actually “buy back” into an earlier tier, or group, and end up with a better multiplier than the employee who has been here for years and paying into the Fund for their entire career.
The new proposed language will revise the Code so that “rehire” employees who come back to the City on or after October 1, 2025 will buy back into the current tier or group that anyone hired since 2014 (2011 for general fund employees) is a member of, and they will have a maximum total of three years to make complete payment of their buy back credited service time purchase.
The ordinance also includes some technical “clean-up” language for tax purposes.
The revisions in this proposed ordinance address these issues, providing for all active members of COHERF to be eligible to choose which of the three retirement benefit options works best for them, adjusts the Board membership as described above to give more of a Board presence to retirees, and corrects the inadvertent and unintentional inequity of the current credited service purchase language.
Fiscal Impact:
The Actuary for COHERF, GRS, will not be able to do a meaningful impact statement of the costs or savings associated with the new options until they have data about how many employees select one of the two new options.
They are, however, running estimates based upon multiple reasonable scenarios using assumptions based on experience developed from other similar new plan introductions and reasonable projections on which employees are more or less likely to prefer one of the new plan options. These estimates will be available prior to second reading of the ordinance.
In the meantime, based upon similar but not exact earlier scenarios the Actuary has previously already calculated, the City should experience increased Annual Required Contributions (“ARC”) in the first year, dropping significantly in year two, and then begin realizing savings from the addition of the new plans beginning in year three and growing quickly to significant savings over the next thirty years in the tens of millions of dollars. That is the general flow of how the fiscal impact will go, with more specific data to come once selections are made and data is provided to the Actuary.
There will be a cost of the City’s contribution to the DC plans. Those costs are factored into the discussion above and do not represent additional costs. Similarly, there are savings to the City for elimination of the costs of contributing the normal cost for employees who opt out of the DB plan. Those savings are also factored into the above discussion.
Costs and savings estimates will be more quantifiable and will be presented by the time of second reading of this ordinance, with final calculations to be made once employee selections are known. Adding the new plans is expected to increase costs during the first year or two and then begin providing greater or lesser savings depending upon how many current and future employees select one of the two new options.
Funding for the City’s required contributions for the DB, DC, and Hybrid Plans will be budgeted in subsequent fiscal years, subject to approval and adoption by the City Commission.
Recommended for inclusion on the agenda by:
David E. Keller, Special Projects Administrator, City Manager’s Office
Adam Reichbach, Assistant City Manager