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Why Retirement Costs Are Up Over 40% In FY2012

Sheehan Breaks It Down

Why Retirement Costs Are Up Over 40% In FY2012

The largest single budget increase for FY2012 is the 40.35% increase in the Retirement Commission Budget.   Because Waterford is one of the eighty five Towns in Connecticut that are part of the Municipal Employees Retirement System (MERS), the Town has no control over the amount it is required to contribute to the Municipal Employees Retirement Fund (MERF).  The FY2012 funding requirement for MERF is $2,901,840. 

Besides the contributions to the MERF, the Town also supports twenty two persons who retired prior to the Town joining the MERS in 1987 and are members of the town’s Public Employees Retirement System (PERS).  The funding requirement for the PERS in FY2012 is $82,885. 

The employee contribution to the MERF is set by state statute at 2.25% for an employee who also contributes to Social Security.  The Town contribution changes annually as determined by the State Retirement Commission, a body inside the State Comptroller’s Office that was established by the State Legislature.  The MERS has been around since the 1950s but Waterford did not elect to participate until 1987.  The Town contribution requirement in 1987 was 7.07% for regular employees and 9.29% for Police and Fire Service Employees.  Between 2000 and 2002 the required contribution was as low as 2.75% for regular employees and 3.75% for Police and Fire Service employees.  Starting in 2004 the contribution requirement started to rise slowly to 7.00% for regular employees and 8.00% for Police and Fire Service employees in 2007.  Within the last two years the percent of payroll costs have risen 4.46% for regular employees and 8.37% for Police and Fire Service Employees to 11.56% and 16.37% respectively.  Waterford currently has 355 active participants and 224 retirees in the MERS.

Because of the significant increase in the percentage contribution required by the State Retirement Commission the Waterford Board of Finance (BOF) at its February 2011 meeting voted to send a to the local State Legislators and to the Chairs of the Legislature’s Labor and Public Employee Committee asking the legislature to pass proposed legislation to amend the Connecticut General Statutes to increase the employee contributions by 1% annually over the next three years to a total contribution of 5.25% and also support any proposed legislation that would permit a tiered benefit plan by grandfathering existing employees and offering a different plan with fewer benefits to new hires similar to the State of Connecticut Retirement Plan.

It is important to note, according to the Retirement Commission backup, that “The past service accrued liability for all participants in MERF B except police has been paid.  That liability is being amortized over 30 years….We are also making amortization payments to MERF B for military service purchased by participants.”  For FY2012 the police amortization is $420,790 and the Military Service Amortization is $14,782.

This is the first year that the State Retirement Commission informed the cities and towns in the system of the next fiscal year increase in time to appear in that fiscal year’s budget.  According to the Retirement Commission backup material for the FY2012 budget, “the estimated FY11 unbudgeted liability for pension is estimated to be in the area of $437,000.”   The Waterford Board of Finance (BOF) will probably be considering that additional appropriation at its May 2011 meeting so that the RTM will be able to approve the appropriation at its June 2011 meeting.

Although the State Retirement Commission is responsible for the administration of MERS, the State Treasurer is responsible for investing MERS funds for the exclusive benefit of MERS members.  As of December 31, 2010 the MERF fund had a balance of around $1.6 Billion and had an increase of 0.7% over the past three years.  According to the Retirement Commission letter to the Director of Finance “….The sizable increase in the contribution rate was primarily due to the continued recognition of a portion of the Fund’s significant investment losses that occurred in 2008.”  The employee contribution is fixed at 2.25% by Connecticut State Statute.

Employee retirement eligibility and benefits are set by state statute.  To be eligible for retirement, the employee must have attained the age of 55 with at least 5 years of continuous active service or 15 years of non-continuous active service with a MERS participating municipality.  If the employee has not attained the age of 55, an employee must have a total of 25 years of service, inclusive of aggregate service, consisting of at least 5 years of continuous active service or 15 years of non continuous active service with a MERS participating community.  An early retirement will result in an actuarially reduced retirement benefit.

The actual retirement benefit is determined by 1) Years and months of Service Credit in MERS; 2) The employees Final Average Pay (the average of pay for the three highest paid years of municipal service); and 3)  The earnings breakpoint for members covered by Social Security.  For clarification, pay means the annual salary, including overtime, temporary Workers’ Compensation payments, and the value of any food, lodging, fuel, or laundry provided by the town.  Pay excludes fees or allowances for expenses and any lump sum reimbursement for accrued sick and vacation time.

If an employee retires before age 62, the retirement benefit is 2% x Final Average Pay x Years of Service.  Upon reaching age 62 or if the employee retires after attaining age 62 then the basic annual retirement benefit calculation is a two step process.  1.5% x Final Average Pay up to the Year’s breakpoint x Years of Service plus 2.0% x Final Average Pay above the Year’s breakpoint x Years of Service.  According to the Connecticut Municipal Employees Retirement System Summary Plan Description, the 2011 break point is $58,100 and the 2012 breakpoint is $61,600.  Breakpoints increase annually 6% rounded to the nearest one hundred dollars.

 Retirement benefits are adjusted annually to offset rising costs of living starting  on the July 1st following the annuitant’s retirement date.  COLA for non-disability retirement is determined at 60% of the annual increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) up to 6% plus 75% of the annual increase in the CPI-W above 6%.

A quick sample calculation for an employee with 25 years of service and a Final Average Pay of $50,000, the retirement pay prior to reaching age 62 would be $25,000 per year and after age 62 would be $18,750 per year.  I will leave it to the reader to decide if that is a living retirement pension.

Much of the information for this article was derived from information on the CMERS website http://www.osc.state.ct.us/rbsd/cmers and associated pages and from the Waterford Retirement Commission FY2012 backup material.




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