New defined contribution retirement plan will shift investment risk to employees

MARK SCHUMANN

In a move Councilwoman Amelia Graves described as “radical pension reform,” the Vero Beach City Council yesterday voted 3-2 to freeze the City’s defined benefit pension plan and to move current and future employees to a new defined contribution plan.  In rejecting the recommendation of a special magistrate, Mayor Richard Winger and Randy Old joined Pilar Turner in supporting what they described as much needed pension reform. The decision came as the Council met in special session to resolve the impasse in its negotiations with Teamster’s Local No. 769. The union which represents the City’s blue collar, technical and clerical employees.

Graves and Vice Mayor Jay Kramer opposed changing the City’s pension benefit for existing employees.  They did, however, support establishing a defined contribution plan for new hires.  In a defined benefits plan, employers assume the investment risk and are obligated to make up for investment losses, just as the City is currently doing at a rate of $3.5 million a year. In contrast, defined contribution plans limit an employer’s obligations to a specified contribution. Known as 401K plans, defined contribution retirement plans are now almost universal in the private sector and are increasingly common in the public sector.

Under Vero Beach’s new plan, the City will contribute 7 percent of each employee’s salary to their pension plan, and existing employees will contribute 3 percent.  Upon retirement, any current City employee will also receive benefits from the now frozen defined benefit plans. New employees will pay 5 percent of their salary into the soon to be established defined contribution pension plan.  Old explained that in the end the two plans should be comparable, assuming investment returns are stable.

When the stock market crashed in 2008-2009, the City’s pension fund went from being nearly fully funded to less than 60 percent funded.  To make up for investment losses, the City has been contributing an additional $3.5 million a year to the pension fund.  This annual payment is on top of the $1.5 million contribution needed to fund future obligations incurred in the current fiscal year.  Even as it freezes the existing plan, the City will remain obligated to continue making payments of $3.5 million a year until enough money is available to meet future pension obligations.

The City will actually spend an additional $300,000 in the next fiscal year, but according to Old and Winger, it is better to pay more now than to assume the investment risk that comes with insuring future benefits. Kramer disagreed. “You’re spending an extra $300,000 a year to dive off your best employees,” he said.

In proposing to keep the current defined benefits plan for existing employees, the union had offered for each of its members to contribute 4.25 percent, rather than 3.25 percent. Apparently believing an additional employee contribution of 1 percent would not be enough to eliminate risk for the City current and future taxpayers, Winger, Turner and Old insisted the best solution was to switch to a plan in which the City’s annual obligations are clearly defined.

Old said moving all employees to a defined contribution retirement plan was a tough decision, but that he believes he was elected, in part, to shore up the City’s finances. Continuing to expose current and future taxpayers to the investment risk inherent in a defined benefits pension plan was, he said, “unacceptable.”

Given the concessions City’s employees have already made, Graves argued that if the Council was going to move even current employees to a new retirement plan, it contribute 8 or 9 percent, rather than 7 percent, but she was not supported.

If the Council’s move is not approved by union membership, the Teamsters and the City will again be at an impasse. At this point, though, the union has no recourse, except to take the City to court.

Related story: Finance Commission considers pension options…