OCEAN CITY – Last week, the City Council decided on new city employee retiree health benefits and a couple weeks before that new starting pay was approved. This week, the council checked off the list new employee pension plans as well.
Mary Jo Gary of Mercer returned to the Mayor and City Council this week with a continuance of the presentation on alternative pension plans for new city employees.
Gary returned with answers to the council’s previous requests. One request was to provide illustrations of town costs should the current defined benefit plan for current employees be decreased.
Another request was to provide illustrations if the town was to switch to a defined contribution plan for new employees. The option provided was 7 percent payroll contribution by the employee and a 7 percent match from the town. In order to do so, a “soft freeze” would be placed on the town’s defined benefit plan, which would allow those who are already participating to continue to accrue benefits, but new employees would not be allowed to enter the plan.
Gary presented the costs to the town of the current three-year final average pay defined benefit plan to the cost of a similar defined benefit plan with a five- or 10-year final average pay. By 2015, the town’s current defined benefit plan’s estimated cost is $2,090,000. If it were a three-year plan, it would cost around $1,960,000, a 5-year plan would cost around $1,890,000, and a 10-year plan would cost $1,740,000.
“Each of these longer final average pay periods reduces the cost of the current plan,” Gary said. “It still doesn’t entirely eliminate the costs of the change but it chips away at it.”
In 2015, if the town was to continue with the current defined benefit plan for all employees it would cost $2,090,000. If the town were to establish a defined contribution plan with a 7-percent match, in 2015 it would cost the town an estimated $300,000. Add that to the cost of the current defined benefit plan in 2015’s three-year final average pay of $1,960,000, it would cost the town an additional $170,000.
“Should the current plan be soft frozen…new hires are given a 7 percent defined contribution plan it is going to cost the town more,” Gary said.
Councilman Brent Ashley asserted that his motion at the completion of Mercer’s last presentation was to return with options in a defined contribution plan.
“I don’t remember asking for any alternations in the defined benefit plan,” Ashley said.
Mayor Rick Meehan responded that there is nothing wrong with comparison, saying, “Looking at what the total costs are and the fact of what it is going to cost today and the taxpayers today if we make these changes. I think that’s relevant information.”
Councilwoman Mary Knight pointed out that if the town were to implement the defined contribution plan it would reduce the defined benefit costs over time but the costs for the new plan by 2020 more than doubles costing the town $400,000.
“These people that are over 55 [taxpayers] for potentially the next 20 years they’re going to be paying more money in taxes if we go to this defined contribution plan,” she said.
According to Mercer’s presentation, Ocean City would be among one of the first jurisdictions to change to an all defined contribution pension plan for new hires.
Gary explained that there are many other details to work out if the town were to go in the direction of switching over to a defined contribution plan, such as, the level of benefit to provide cost sharing, vesting schedule, available payment forms, investment options to offer, default investment options if necessary and employee education and communication.
In the need for the town to hire new full-time employees, Council President Jim Hall asked what the time line would be in order to place a defined contribution plan for new hires.
“I think it could be rather quickly, in the matter of weeks,” Gary said.
Hall is in favor of the defined contribution plan because it would eliminate long term-debt for the taxpayer. He explained that in every two-week pay period the employee adds their share towards their pension and the town matches it.
“The bill is paid, there is no remaining $30 million hanging out there at the end of the road and that is what is attractive to me,” he said.
In reviewing the rising estimated costs of the defined contribution plan over the years, Meehan said, “It’s just a difference of paying cash for house or paying a mortgage … if you want to pay it later or if you want to have today’s taxpayers pay for future benefits.”
Hall responded that he thinks that today’s taxpayers know that this this is the direction that the world is moving because private companies are going bankrupt by trying to support their defined benefit plans.
Councilman Joe Hall supported the “pay as you go” plan, saying, “I hope we move forward today in a direction of getting the right people to guide us in putting this plan together.”
Councilman Brent Ashley made a motion to set a 5-percent mandatory contribution from new general employees matched by a 5-percent contribution from the city. If the employee chooses to contribute 7 percent, the town will match 7 percent as well. The motion passed in a vote of 4-3, with Doug Cymek, Mary Knight and Lloyd Martin in opposition.