Labor Relations and Pension Reform

1. Labor Relations andPension Reform The Naples Experience FLCU Seminar - Ft. Myers February 21, 2013

2. Labor Relations - Strategy • Remain competitive (external equity). • Provide for internal equity across union/non-union workforce – treat employees fairly and consistently. • Reduce retirement benefits and costs to reduce the cost of labor.

3. Labor Relations • Unique Conditions Prior to Pension Reform • Negotiated union agreements passed health insurance cost increases to members • Health insurance costs were due to increase substantially • City agreed to a new formula for sharing health insurance cost increases in exchange for pension reform

4. Pension Reform in Naples • Voluntary agreements with most unions - All general employees and police – Impasse with fire • Benefits of current employees frozen • Future benefits reduced – similar to current FRS benefits • Savings projection: $112 million over 30 years • Savings projection will increase due to revised interpretation provided in “Naples Letter” • Unfunded Liability Reduced by almost $15 million

5. Retirement Benefit Basics • Mandatory subject of bargaining if unionized • Legal duty to bargain in good faith • Multiple Benefit Options and Combinations • Long term vision and strategy important • Different options will have different costs • No magic short term fix • Transition to defined contribution plan may not be lowest cost option due to accrued unfunded liability

6. Retirement Benefit Basics • Defined benefit plans apply to most public employees • Defined contribution plans are becoming more common for general employees in the public sector • Fire and Police – defined contribution plans are rare • FRS is the standard for most state and county employees, as well as for some municipal employees (more than 100 cities participate in FRS)

8. Reducing Pension Benefits: Legal Guidelines • Accrued pension benefits (benefits earned in the past) cannot be reduced or taken away. • Future benefits can be reduced for current employees who have not reached retirement status. • Employer is ultimately responsible for unfunded pension liabilities – even if current plan is closed, frozen or terminated, and even if employees are transferred to another employer. 8

9. Premium Tax Funds • Premium tax revenue may be obtained from the state to fund municipal fire and police pensions under Florida law (Chapters 175 & 185) • Reducing benefits may have implications on premium tax revenue • In Naples is was determined that reducing benefits saved money even if premium tax revenue was lost • Examine options carefully and get professional advice

10. Premium Tax Funds • The “Naples Letter” has changed the playing field • March 2012 - Division of Retirement – reducing benefits below 1999 levels in the police retirement plan made the City ineligible for premium tax funds • Naples Mayor John Sorey wrote a letter to Governor Scott complaining about the interpretation of the Division of Retirement. • August 2012 - Response from the Department of Management Services: • The previous interpretation by the Division of Retirement “appears inaccurate.”

11. Premium Tax Funds • After the Naples Letter, minimum benefits must be provided only to the extent they can be funded with premium tax revenues in excess of the amount received in 1997. Once there are sufficient additional premium taxes to fund the chapter minimum benefits, any subsequent additional premium tax revenues must be used to provide extra benefits. • This new interpretation offers the opportunity to reduce benefits (and costs) while maintaining premium tax funding • Approximately 12 cities have received similar letters

12. Premium Tax – Naples Police • As a result of the Naples Letter the City engaged an actuary to determine the cost of the minimum chapter benefits in excess of the 1997 base premium tax. • The cost of the minimum chapter benefits • 22% of payroll • The amount of additional premium tax • 0.4% of payroll • Naples anticipates all premium tax revenue may be used to fund the plan, even though benefits have been reduced below 1999 level

13. Pension Legislation • Legislation to change laws governing pension has been introduced for this legislative session – Unions are trying to change the “Naples Letter” interpretation • The Florida League of Cities is monitoring. • The League's policy goals for reforming city police officer and firefighter pensions are: allow cities to bargain collectively all police and firefighter pension benefits and the use of city insurance premium tax revenues, without state interference. • Keep informed and actively involved.

14. Professional Advice • Advice from an attorney familiar with Florida’s public employee pension law is critical • Actuarial cost projections of options are essential in the decision making process • Cost projections and trends are complicated and dependent on assumptions and experience • Do not rely on the Pension Board attorney or actuary – obtain independent advice

15. Pension Reform The Naples Experience February 21, 2013 Questions?