Fort Smith police and fire pension issue includes ‘Old Plans’ and ‘New Plans’

The Local Police and Fire (LOPFI) retirement fund for the city of Fort Smith has 13 years before insolvency for “Old Plans” (i.e. retirees prior to Jan. 1, 1983). While “New Plans,” or the programs for employees and retirees since that date are fully funded through a mix of employee and city contributions, the Old Plans are not.

Old Plans were established in accordance with Arkansas statutes and were closed, by state law, to new employees effective Jan. 1, 1983. On Sept. 20, 1990, the city entered into an agreement with the LOPFI retirement system whereby LOPFI assumed responsibility for administration and a portion of the obligation of the Old Plans pursuant to Act 364 of 1981, as amended, and Act 655 of 1983 of the General Assembly of the State of Arkansas.

Per the agreement between the city and LOPFI, the city would contribute an actuarially determined rate sufficient to support plan benefit levels and fund the Old Plan’s net pension obligation over a 40-year period. Fort Smith Finance Director Jennifer Walker noted this does not mean the city’s obligation to the Old Plans would run out in 2030. Rather rates are recalculated each year for the prescribed window, “so effectively, every year the actuary calculates how much it would take to keep the plan open for another 40 years,” and “in 2007 that period changed to 30 years.”

“I don’t have records that old except for the permanent records (final CAFR document), so I don’t know why (or) how it changed, but it has remained at 30 years each year since,” Walker said.

She continued: “It’s far more complicated than just taking the total plan cost and dividing by 40 (or 30). That calculation is impacted by things like the market rate of return, life expectancy, changes to benefits payments, etc. For example, if the benefits were changed to provide a 3% increase per year, that would greatly increase the total cost of the plan and would extend the cost out several more years. Significant economic impacts like the market in 2008 also have unforeseen impacts. That is why they are recalculated each year.”

THE ENDPOINT
Still, there is an endpoint to the funding issue for Old Plans, but it won’t be any time in the foreseeable future. As an “extreme” example, Walker said if no employees were allowed to be on the old pension plan after 1983, and the youngest member of the plan at that time was 18 years old, it is likely the employee and his (or) her spouse would not be receiving benefits after a reasonable life expectancy.

“So, very conservatively, if that was 100 years, there would not be any plan expenses after the year 2065, and they would have dwindled to very small amounts by that point,” Walker said.

Unlike the federal consent decree related to sewer system improvements, LOPFI is an issue where kicking the proverbial can is a viable solution. While full funding would require an additional $1.5 million annually, any extra contribution the city’s Board of Directors can make will stretch the horizon line. In 2015, for example, city directors approved a $700,000 contribution that stretched the plan’s estimated insolvency to 21 years. In 2016, the additional contribution went down to $150,000, sliding expectations back to 13 years.

“The 13-year window assumes we’re not making any extra contributions,” Walker explained. “That’s why we’re making those extra contributions. The estimate was down to five or six years, and that’s when we figured, ‘Okay we have to do something.’ (The $700,000.) It goes quick. Those extra contributions have to be made every year in order for it to count. You can make them one year and get that number up, but the next year, it is going to go right back down if you don’t make the contribution again.”

BENEFITS STRUCTURE
The Old Plan’s benefit structure remained unchanged under LOPFI’s administration. There are about 262 members under the Old Plan structure, including 147 in the fire department and 115 in police. The plans include benefits, such as 3% annual increases in perpetuity and transfer to spouses while the New Plans do not, and they were in “bad shape” financially when rolled into the LOPFI program. This created a liability on the city’s books. Historically, those liabilities were simply a footnote on financial statements, but the Governmental Accounting Standards Board (GASB) would later rule cities would have to record their liabilities onto the balance sheet. Walker said cities “were ignoring those liabilities and they were just getting higher and higher and higher.”

Other pension benefits of the Old Plans include eligibility for membership from the first date of employment and 20 years of employment for vesting. Vested members of the Old Plans receive a benefit payable monthly for life equal to one-half of the participant’s annual salary.

Arkansas state statutes require yearly contributions at a level percentage of covered payroll sufficient to cover the costs of benefit commitments made to participants for their service rendered in that year and, over a reasonable period of time, to fully cover the unfunded costs of benefit commitments for services previously rendered. The city is required to contribute the actuarially required normal costs and amortized costs of the unfunded actuarial accrued liability. In addition, active employees are required to make contributions equal to 6% of their gross salary.

Participants in the New Plans — employees hired subsequent to Dec. 31, 1983 — are covered by the state-administered  LOPFI. There are 271 employees in the New Plans system (111 fire; 160 police). Participants who retire at or after age 55 with 20 years of credited service are entitled to retirement benefits payable annually for life equal to 2.5% of final average pay for each year of credited service prior to Jan. 1, 2004.

The city adopted Benefits Program 2 for members of the New Plans effective Jan. 1, 2004. Benefit Program 2 provides retirement benefits payable annually for life equal to 3% of final average pay for each year of credited service that began Jan. 1, 2004 and after. The total benefit cannot exceed 80% of final average pay. Benefits are fully vested after 10 years. State statutes require active participants of the New Plans to make contributions equivalent to 6% of their gross salary and their contributions are 100% vested.