City may opt out of PERS for hires

Soldotna studies ways to decrease employee retirement systems costs

Posted: Tuesday, March 28, 2006

When the state Public Employees Retirement System and Teachers’ Retirement System switch from a traditional pension program to a defined contribution plan in July, some may consider opting out.

Soldotna is looking at the possibilities for its new employees.

Current Soldotna city employees are covered under either Tier 1, Tier 2 or Tier 3 of the PERS defined benefit pension plan.

Any new employees hired after July 1 will be in Tier 4, unless they were previously eligible through earlier government employment under a different tier.

Tier 1 employees are those who were hired between Jan. 1, 1961 and June 30, 1986; Tier 2 were hired on or after July 1, 1986; and Tier 3 were hired on or after July 1, 1996.

Instead of the defined benefit pension plan of earlier public employees, all new employees hired on or after July 1, 2006, will be enrolled in the defined contribution retirement plan.

The city, however, may elect to not participate in PERS for its new employees who would be in Tier 4.

Under the more traditional, existing pension plan, the employer is liable for assuring adequate funding for retirement benefits due to employees upon retirement.

The defined contribution plan, likened by City Manager Tom Boedeker to a 401k plan, puts the requirement on the employees to decide their own investment direction.

Participants would be allowed to invest in a number of funds, including the T. Rowe Balanced Fund, Standard and Poors 500 Fund, Government-Corporate Bond Fund, T. Rowe Money Market Fund and others.

“In some of these, if you put your contribution in for your 30 years, you could have a much bigger pension than under the existing plan,” Boedeker said.

Employee and employer contribution rates are mandated under the new PERS plan with employees being required to contribute 8 percent of their salary and employers required to put in 5 percent.

Employees may make additional contributions to the plan up to annual limits as allowed by the federal government.

Members are immediately vested in terms of their own contributions and are 100 percent vested in employer contributions after accruing five years.

At two years service, the member is 25 percent vested in employer contributions; at three years, the member is 50 percent vested; and at four years, the member is 75 percent vested.

Employers also are required to contribute 1.75 percent to group health and life benefits, 0.4 percent to PERS occupational death and disability for peace officers and firefighters, 0.3 percent to occupational death and disability for all others, and 3 percent to the Health Reimbursement Arrangement Plan.

Boedeker said the HRA plan is similar to a flexible spending account, and may be used by the employee to pay for medical insurance monthly premiums upon retirement or certain medical care expenses not covered by health insurance.

Unlike the existing PERS retirement plan, the new plan allows employees to designate a beneficiary. The existing plan has a survivor benefit for the spouse of the retiree only.

Under the new plan, a participant may designate beneficiaries. A spouse is automatically the 50 percent beneficiary unless the spouse waives the right.

Children or surviving parents may also be designated as beneficiaries.

Retirement medical insurance also is provided under the new plan as long as the participant retires directly from the plan, has been an active member at least 12 months immediately before applying for medical benefits, and either has 30 years service — 25 if a peace officer or firefighter — or is eligible for Medicare at the time of retirement and has a minimum of 10 years service.

Boedeker said, at this time, the city is exploring options for its new employees. No decision has been made with regard to getting out of the PERS system.

If the city does opt out for Tier 4 employees, un-vested Tier 3 employees could also choose to opt out of PERS. Currently the city has 10 un-vested Tier 3 employees.

“We’re not going to get out. We’re just going to look at it to see if there would be a benefit,” Boedeker said.

He said it would not be possible to have he research completed by July and have an alternate pension plan set up and qualified by then, but the information would be useful for planning the coming year budget.

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