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City of Fresno’s 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 City’s 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 COLA’s)

• 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 * 240=$408,590.11)

• Pension + DROP starts at $4,628.78 monthly ($2,926.32+1,702.46) 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 *2.75=55%)=$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 * 300=$694,827)

• Pension + DROP starts at $6,185.03 monthly ($3,868.94+2,316.09) or $74,220.36 annually.

• If the individual lives to age 85, the Pension plus COLA’s 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 member’s 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?