City may change pension distribution
With the number of city employees eligible for retirement at one of its highest points in history, city officials are concerned pension funds could face some issues and are mulling over changing its distribution methods.
"At this point in time in our history, I don't think we've had more employees eligible for retirement than we do right now," City Administrator Shawn Kessel said during a City Commission meeting at City Hall, Monday evening. "We've had several retire already within the last six months and we have 11 more who are eligible to retire tomorrow if they so chose."
If all 11 chose to retire at one time it would be a difficult situation for the city of Dickinson, Kessel said.
In the early '90s, the option of taking a lump-sum distribution of retirement funds as opposed to an annuity, or monthly lifetime payments, was added to employee benefits, Kessel said.
"In the beginning, the first five to seven years, that option wasn't taken advantage of very often," Kessel said.
But, recently, things have changed.
In about the last five years, nearly all employees have chosen to take lump-sum distributions from their retirement plan, Kessel said.
And that has city officials concerned.
"You don't have those dollars to reinvest and therefore garner additional revenue down the road," Kessel said. "Considering we have so many people who are eligible to retire, the concern is that moving into the future, if we continue to offer the lump-sum payment, it will have an affect on the principle balances and obviously a strong one."
The average lump-sum distribution is about $500,000.
In the defined benefit plan, commonly known as a pension, the employee contributed 5 percent and the city made up the difference for what was required in the fund.
To meet that requirement from 2009 to 2010, the city increased its contribution by 55 percent, said Tina Johnson, city accounting manager.
In 2009, the city contributed about $284,000 to the defined benefit plan and the balance sits at about $5.5 million. As of April, eight employees will be eligible for retirement.
That same year, the city contributed about $130,000 to the police retirement fund, which now has a balance of about $4.3 million and as of April, three employees will be eligible for retirement.
The city's defined benefit plan closed in April 2006 and any employee hired after that date participates in the defined contribution plan, which is similar to a 401(k) with the city contributing 5 percent and the employee contributing 5 percent.
Mayor Dennis Johnson said stock market prices will also affect lump-sum accounts.
If the stock market is low and a person decides to retire with a lump sum, the city must make up the difference, he said.
"I think it's an unintended consequence from a decision that was made, I think it was made in 1992, to offer the lump sum," Dennis Johnson said.
Kessel said while it is possible the accounts could zero out, the likelihood is minimal.
"You get the right scenario here and the fund will go to zero," Johnson said.
The lump-sum option is also restricting possible increased profitability on annuity retirement accounts, Johnson said.
Few cities offer lump-sum retirement payments, Kessel said.
Jamestown was one such city.
Jay Sveum, deputy auditor and human resource officer in Jamestown, said the city cut out lump-sum payments about two to three years ago.
The proposed Dickinson ordinance would phase out lump-sum retirement within three years or if the balance zeroed out.
The new ordinance would let the employee decide where to invest their funds, whereas previously the employer decided where to invest pooled funds.
The new ordinance would then only guarantee the retiree what money was in his or her account at the time of retirement.
The Retirement Board has not acted on the proposed changes and will discuss the matter at their April 21 meeting.