(April 19, 2013) Ocean City government will soon make an abrupt change of course on its retirement policy, as a provision of the Fraternal Order of Police’s new labor contract stipulates a return to the defined-benefit, or guaranteed payment, pension system. This is even though city officials seem to be unclear of the potential impact the change will have.
Under the FOP’s contract, ratified this week by the council for a two-year duration beginning in July, the 22 officers whom the Ocean City Police Department have hired since 2011 will have their individualized retirement accounts converted back into the group pension trust, which the council had moved just two years ago to begin phasing out.
In the ordinance introduced to council this week authorizing the switch, the city asserts “the Mayor and City Council have devised a defined benefit plan, which has a financial impact relatively similar to the cost of a defined contribution plan.”
A Maryland Public Information Act request filed by this newspaper to review the financial studies that address this, however, will be delayed.
City Manager David Recor said he “did not want to release that information prior to the second reading of the ordinance by the council, because it was closed session material.”
Recor later clarified that the council itself had not yet seen the bulk of the financial study, and reviewed only an executive summary of pension reform options during a union negotiation briefing in February.
Regardless, the council voted 5-1, with Councilwoman Margaret Pillas absent, to advance the ordinance to its next stage.
Councilman Brent Ashley was the sole dissenter, as the only council member in attendance who had voted two years earlier to begin eliminating the pension trust system.
“Virtually every city in the country, as well as the federal government, are looking for ways to reduce long-term debt and enact pension plan reforms,” Ashley said.
“Ocean City was one of the first cities to achieve this with the adoption of an excellent 401(a) pension plan for new hires,” he said. Now, despite the success of the 401(a) plan and a large unfunded liability in the public safety defined-benefit plan, the FOP and the majority of this council want to go back to the defined benefit plan, further increasing the long-term debt.”
The success of the 401(a) plan apparently led to the local chapter of the International Association of Firefighters to opt out of a switch to the defined benefit pension system in its new contract. Although the council votes were there to restore the IAFF’s former pension program as well, the union membership declared its preference for the 401(a).
Under a defined benefit system — the traditional pension — employees contribute a certain amount of their paycheck each week to a group retirement investment fund. Police and fire employees, who have a separate fund from the general employee body, contribute eight percent of their pay, and the city matches this amount with its own contribution,
Upon retirement, public safety employees continue to receive 60 percent of their salary if they meet the vesting threshold of 25 years of service. The pensions for those with less service are pro-rated down by the fraction of time they are short.
Following a series of heated debates in city council from late 2010 through the spring of 2011, the pension fund was closed to new hires. While employees currently enrolled in the defined-benefit system will stay in the plan, all new hires after April of 2011 have a system of individualized 401(a) accounts.
The benefit of this is the elimination of long-term liability, once the plan is closed and all of its participants are deceased. At that time, all employees would be responsible for their own 401(a) retirement accounts, the sustainability of which is not the problem of the city, but the responsibility of the employee.
As such, the city began raising its amortization payments in 2011, contributing a level amount each year instead of the current percentage of retiree pay. But the total amount of funding in the pension trusts – about 70 percent of what is projected to be needed to compensate al the city’s retirees – has largely leveled off due to a reversal in investment earnings.
Because no new employees are paying into the plan with money to support those already retired, the city has had to increase its payments further.
The decision to put the FOP’s new members back into the pension plan is less financial, according to the FOP, and more recruitment-oriented. Its position is that the lack of a city-secured pension puts it at a disadvantage versus other jurisdictions in attracting quality officers.
“It’s an essential component to them for recruiting,” Mayor Rick Meehan said. “I think they agreed, after the way we presented it, that it was the best way for them to move forward and for us to continue to be able to offer that plan at a reduced benefit.”
The new plan for post-2011 employees will offer a slightly less generous benefit, requiring the retiree to be aged 55 as well as having 25 years of service, and basing their pay off the average of the last five years of work, instead of their last three.
In order to do so, however, the 22 officers hired under the 401(a) system since July 2011 will need to surrender the monies in their individual accounts to the city’s pension trust.
All officers will receive the same pension benefit regardless of how much their initial contribution was, something that Ashley found to be akin to “forced socialization of the retirement system.”
According to FOP President Shawn Jones, all 22 officers agreed to the switch prior to the negotiations being finalized.
