California Association of Public Retirement Systems Training - Basic Class

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City of Fresnos Deferred Retirement
Option Program DROP Police Department
Retirement Planning Seminar 2008
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Speakers

• Stanley L. McDivitt, CPA
• Retirement Administrator
• Yvonne Arellano
• Retirement Benefits Manager

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What is your City Pension

• You are in a Defined Benefit Plan (DB) vs a
  Defined Contribution Plan (DC) which is now
  becoming more common in Corporate Retirement
  Plans.
• You and the City make contributions over your
  career, the money is invested by the System and
  then the System will pay you a pension benefit
  for life with a spousal continuance based on a
  defined formula.

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What is the Employees System Benefit Formula

• 2 of Final Average Salary (defined as highest
  three consecutive year average at current pay
  level), times years of service, not to exceed 25
  years, plus
• 1 of Final Average Salary, times years of
  service in excess of 25 years.
• Plus age table factor after age 55

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What is the Fire Police Benefit Formula

• Tier 1
• 2 ¾ of Final Average Salary, times years of
  service before age 50, not to exceed 20 years,
  plus
• 2 of Final Average Salary, times years of
  service after age 50 not to exceed 10 years.
• Maximum benefit is 75

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What is the Fire Police Benefit Formula

• Tier 2
• Age 50 2.00 X FAS X times years of service
• Age 51 2.14 X FAS X times years of service
• Age 52 2.28 X FAS X times years of service
• Age 53 2.42 X FAS X times years of service
• Age 54 2.56 X FAS X times years of service
• Age 55 2.70 X FAS X times years of service
• Maximum benefit is 75

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DROP HISTORY

• There are many DROP programs across the country
  and every DROP program is different!
• Many DROP programs are NOT cost neutral and have
  created political issues.
• In California DROP programs also exist in San
  Diego, LA Fire Police and now San Francisco has
  recently approved a 3 year DROP and the County of
  San Luis Obispo is implementing DROP.

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MORE DROP HISTORY

• Our DROP Program was developed on the basis that
  if we could design a DROP with a cost neutral
  approach, it would eliminate any political
  questions and concerns.
• The FPOA Association added language in their MOU
  agreeing with the City to study a DROP program.
• With Actuarial Reports and Legal opinions, the
  Boards were able to obtain the necessary support
  of the City Council to implement our DROP
  Programs.
• Our DROP Programs began January 1, 1998
• It is a Forward DROP with a maximum participation
  period up to 10 years

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Deferred Retirement Option Program (DROP)

• What is the Citys DROP Program?
• It is voluntary program and is simply an
  alternative method of receiving a portion of your
  retirement benefits.
• Minimum requirements for eligibility include age
  50 with a minimum of 10 Years of service (Tier 1)
  or 5 years of service (Tier 2). Employees System
  members can enter DROP between ages 50-55 after
  an actuarial cost neutral adjustment with 5
  years of service.

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The Benefits of DROP

• For the employee
• Provides alternative distribution options such as
  lump sum, annuity or roll over to an IRA.
• Ownership of DROP account. The member owns the
  balance of the account and it will go to his/her
  beneficiary or estate upon death.
• The power of compound interest earnings in the
  DROP account.
• Tax deferred benefit of DROP account to
  participant.
• Cease employee contributions to the System.

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Why would you enter the DROP?

• To gain ownership of your DROP account.
• For access to the flexible DROP Distribution
  options.
• To participate in the actual investment returns
  of the System.
• Interest is credited monthly to your DROP account
  using the Systems actual 5 year average
  investment return minus investment expenses
  (currently 11.89, but has been as low as 2.81).
• Your DROP deposit amount is increased annually
  based on the amount of the retiree cost of living
  increase.

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What Happens at Retirement?

• At retirement, the member will receive
• A monthly benefit for life based on service and
  salary up to the start of the DROP participation
  date (adjusted by applicable COLAs)
• Plus your DROP account distribution option
• lump sum
• up to a joint life annuity
• roll-over to IRA account or
• any combination of the three distribution options.

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Sample Employees System DROP Calculation

• Assume an Employees System member has 25 years of
  service and his or her retirement benefit is
  2,600 per month as of the election to enter DROP
  (5,200 monthly salary 50 (25 years
  2.0)2,600).
• Assume that the member stays in DROP for 5 years
  and then decides to retire.
• Assume that interest is credited at 8.5 over the
  60 months in DROP and COLA equals 3 per year.
• Assume that the member elects to payout his or
  her DROP account over 240 months.

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Sample Employees System DROP Calculation

• DROP account balance after 5 years 204,241
• Base retirement begins at 2,926.32 (amount of
  last deposit to DROP account) plus future COLA
  increases.
• Monthly DROP payout would be 1,702.46 for 240
  months (20 years). (1,702.46 240408,590.11)
• Pension DROP starts at 4,628.78 monthly
  (2,926.321,702.46) or 55,545.36 annually.
• If the individual lives to age 85, the pension
  and DROP payments would total 1,803,028.63

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Sample Police DROP Calculation

• Assume a Fire Police System member (Tier 1) has
  20 years of service and his or her retirement
  benefit is 3,437.50 per month as of the election
  to enter DROP (Final Average Salary (75,000/12
  6,250 55 (20 years 2.7555)3,437.50).
• Assume that the member stays in DROP for 5 years
  and then decides to retire.
• Assume that interest is credited at 8.5 over the
  60 months in DROP and COLA equals 3 per year and
  PRBS is 420 per Month.
• Assume that the member elects to payout his or
  her DROP account over 300 months (25 years).

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Sample Police DROP Calculation

• DROP account balance after 5 years 301,283.42
• Base retirement begins at 3,868.94 (amount of
  last deposit to DROP account) plus future COLA
  increases plus PRSB.
• Monthly DROP payout would be 2,316.09 for 300
  months (25 years). (2,316.09 300694,827)
• Pension DROP starts at 6,185.03 monthly
  (3,868.942,316.09) or 74,220.36 annually.
• If the individual lives to age 85, the Pension
  plus COLAs and DROP payments would total
  2,969,887 excluding actual payments of the PRSB.

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Plan ahead for your Retirement!

• If you enter DROP, you are agreeing to retire
  from the City after 10 years in the DROP Program
  and start distribution of your DROP account along
  with your pension.
• For the Employees System Members, there is an Age
  table factor after age 55 which will increase
  your service credits by from 2 to 3 percent per
  year if less than 25 years of service.
• Your retirement plan should consider issues such
  as how will you pay for your health care costs.

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COST OF LIVING ADJUSTMENTS DURING DROP

• Will you receive cost of living increases while
  you are in the DROP program?
• Yes, your monthly deposit into your DROP account
  will be increased annually by the COLA amount
  retirees receive during your DROP participation.

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WHAT ARE THE ADVANTAGES OF A DROP?

• For the employer
• allows employer to retain experienced personnel
• defers the cost of hiring and training
  replacements
• recruitment tool, enhances long term benefit to
  potential candidates without additional expense
  for the employer
• reduced sick time, increased morale of employees,
  re-invigorates senior employees

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WHAT ARE THE ADVANTAGES OF A DROP?

• For the employee
• Provides alternative distribution options such as
  lump sum, annuity or roll over to IRA options.
• Ownership of DROP account. The member owns the
  balance of the account and it will go to his/her
  beneficiary or estate upon death.
• The power of compound interest earnings in the
  DROP account.
• Tax benefit of DROP account to participant.

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DISADVANTAGES OF A DROP?

• For the employee
• The members retirement benefit does not reflect
  service and salary increases while a participant
  in the DROP.
• Delays promotional opportunities for other
  employees.
• The decision to enter DROP is irrevocable.

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DROP NEUTRALITY

• Cost Neutrality of the Fresno DROP Programs?
• Our actuary has determined that the DROP programs
  are cost neutral and have added to the surplus of
  the Systems.

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SUMMARY OF PAST DROP EXPERIENCES

• Past Experiences
• Length of participation in DROP Program?
• Currently 4.5 years, and average could increase
  to approximately 5 years.
• Most employees have selected the annuity
  distribution option with interest credited at the
  Systems assumed investment return (currently at
  8.25).

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CONSIDERATIONS

• Considerations and Concerns
• Working additional years for the City in the DROP
  program may have an impact on the life expectancy
  of retirees.
• With additional years of service at an older age,
  comes the additional risk of disability during
  DROP which could also impact the quality of life
  in retirement.

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For Assistance

• For DROP counseling appointments, call (559)
  621-7080 to schedule an appointment with a
  Retirement Benefit Counselor.
• Our Website CFRS-CA.ORG has DROP Calculators,
  employee handbooks, frequently asked questions
  and much more.
• Questions?