ACTION REQUESTED:
Title
Communication from the City Manager and Finance Director with a Request to APPROVE a RESOLUTION Adopting an EARLY RETIREMENT INCENTIVE to Eligible Members of the Illinois Municipal Retirement Fund.
Body
BACKGROUND: The COVID-19 pandemic has caused significant revenue loss for the City of Peoria. Based on preliminary revenue projections, the City is anticipating a budget deficit of approximately $46.5 million for FY2020. Though this is an improvement over the initial projection of $51.5 million, it is still a sizeable gap that must be addressed.
The City Council has taken steps to close the revenue shortfall:
1. Capital expenses in the amount of $27.5 million have been reduced for 2020.
2. The City will restructure 2020 debt service payments to reduce $10.25 million of payments by the end of the year.
3. 28 vacant positions, 17 filled positions, and temporary positions would be eliminated beginning August 1. Elimination of these 45 non-sworn and temporary positions, coupled with operating reductions from departments reduce expenses in 2021 by $5.6 million.
4. Restructure the organization and re-engineer processes so that the remaining, smaller workforce can effectively deliver a reduced set of services.
Offering an incentive to employees at the upper end of the pay scale to retire would create flexibility in the restructuring plan and minimize the need for workforce reduction. One vehicle to implement this action would be to offer an Early Retirement Incentive (ERI) to eligible employees who are members of the Illinois Municipal Retirement Fund (IMRF). This tool was specifically developed by IMRF in order for municipalities to address significant budget issues. Through an ERI, both the City and its eligible employees purchase up to five years of service. Eligibility is defined as any employee who is at least 50 years old and has 20 years of service with an IMRF or reciprocal employer. Through the ERI, an eligible employee can retire, if he/she can afford it and is interested, as though they are 5 years older and have 5 more years of service than they actually do. The ERI is offered over a one-year period (for example, from August 1, 2020 through July 31, 2021 or January 1, 2021 through December 31, 2021); employees can retire at any point within that window. A full explanation of the program is attached (“IMRF Early Retirement Incentive - Employer Information”).
The implementation of an ERI can be a valuable instrument for a community because it can help offset greater job loss by focusing departures on more expensive, high-tenure employees. The initial reduction of 45 positions is based on not offering the ERI. Since the City’s workforce is highly unionized, terminations must be based on seniority. Beyond salary, longer tenured employees in the AFSCME unit also earn longevity payments, a considerable cost that is not reduced as much by a straight reduction-in-force which would target more junior employees.
The originally planned level of workforce reduction will have a dramatic impact on service delivery. Most services will need to be reduced and some will need to be stopped altogether. Implementing an ERI, however, provides the Council and Administration with flexibility. Every employee who elects to participate in the ERI creates an opportunity: if deemed essential to continued operations, the position can be filled by a new employee making a lower salary. The position could also remain vacant, creating a greater savings than the originally planned layoff.
FINANCIAL IMPACT: If early retirement is elected, both the employee and the City agree to purchase the service years needed. Before a community can offer an ERI, IMRF must complete a cost estimate. IMRF has conducted this estimate (attached; “Actuarial Analysis of the Potential Effect of IMRF’s Early Retirement Incentive Program for 03379 - City of Peoria, 1 Year Window Beginning 8/1/2020” and “Actuarial Analysis of the Potential Effect of IMRF’s Early Retirement Incentive Program for 03379 - City of Peoria, 1 Year Window Beginning 1/1/2021”). For purposes of the following discussion, the January 1, 2021 cost estimate is being used.
According to IMRF’s analysis, a total of 77 employees would be eligible for retirement under this incentive. This includes regular City staff (57) as well as employees of the Peoria Public Library (20). All civilian City employees are members of IMRF. In the unlikely event that all 77 eligible employees elected to take the ERI, the total additional liability to the City would be $10,998,720. It is important to note that this figure represents the maximum additional liability. As noted above, there is a significant cost to the employee as well, which can impact an eligible employee’s ability to take advantage of the offer. Other employees may not be ready to retire or have other issues that prevent them from doing so. If 60% took the offer, the total cost to the City would be $6,599,232.25.
Generally, employers borrow this money from IMRF over a span of 5 to 10 years at 7% interest. An amortization schedule for IMRF borrowing can be found on page three of the Actuarial Analysis. The City can also finance this in other ways. In 2011, the City Council approved paying off the remainder of the 2011-2012 IMRF ERI by borrowing from its own reserve funds at 2% interest (vs. the 7% interest being paid to IMRF). A similar strategy may be available to help reduce the overall cost. The average City cost of the ERI would be $227,950.54 per employee. Should the city seek a reduced interest rate by borrowing the funds internally at a lower interest rate, this per employee cost would be reduced.
In exchange for the cost, the City expects significant salary and benefit savings. Focusing just on the City employees and not the library, the 57 employees who are eligible to retire under this program have a combined estimated 2020 salary of $4,410,710.12. When the employer share of IMRF, Social Security and Medicare are included, the total estimated cost of these employees to the City in 2020 is $6,174,994.16. The average salary and benefits for an eligible City employee is $108,333.23.
To understand the potential impact of the incentive, staff analyzed two possibilities:
• Full replacement. In this scenario, every eligible employee availed themselves of the incentive and every exiting employee was replaced with a new employee at 90% of the current salary. The annual cost would be over $800,000, inclusive of salary, IMRF, Social Security and Medicare. Thus, in order to pay for the ERI, the City would have to keep some of positions vacant that opt to retire early.
• Partial replacement. An exit of this magnitude would allow the City Manager and City Council to make structural changes to the organization. Not replacing exiting employees would generate savings for the City. The table below shows the payback period on different backfill constraints. Since the City cannot yet know who might take the ERI, the analysis is based on the average cost of $108,333.23 per retiring employee.
|
Backfill Constraint à |
1 out of 2 |
2 out of 3 |
3 out of 4 |
|
Avg. Cost of ERI Per Employee |
$227,950.54 |
$227,950.54 |
$227,950.54 |
|
# of Retirees |
2 |
3 |
4 |
|
Total Cost of ERI |
$455,901.08 |
$683,851.62 |
$911,802.16 |
|
Avg. Salary Per Employee Not Replaced |
$108,333.23 |
$108,333.23 |
$108,333.23 |
|
# Employees Not Replaced |
1 |
1 |
1 |
|
Total Number of Years |
11 |
11 |
11 |
|
Total Salary Avoided |
$1,191,665.54 |
$1,191,665.54 |
$1,191,665.54 |
|
Total Savings |
$735,764.45 |
$507,813.91 |
$279,863.37 |
|
Time of Payback (in Years) |
4.2 |
6.3 |
8.4 |
|
Annual Savings Per Employee Not Filled |
$66,887.63 |
$46,164.90 |
$25,442.12 |
Three additional factors must be considered. First, all new employees would join IMRF as Tier II members, resulting in an approximately 3% reduction in benefits. This has a positive long-term impact on the City’s pension obligation. Second, reducing the overall size of the workforce with a conservative backfilling strategy will result in a smaller GASB45 liability and potentially reduced health care costs. Third, replacement employees would generally make less than employees eligible for ERI. These three factors would all further reduce the payback period of an ERI program.
In conclusion, if an ERI was adopted, some layoffs could be avoided. Depending on the amount of backfilling, the City would generate more savings to offset layoffs.
NEIGHBORHOOD CONCERNS: N/A
IMPACT IF APPROVED: The City will offer the ERI to eligible employees beginning August 1, 2020 or January 1, 2021. Upon Council approval, the Human Resources Department will organize informational meetings with employees so that they have an opportunity to evaluate their options.
IMPACT IF DENIED: The City will not offer an ERI to employees.
ALTERNATIVES: The administration could create an alternative incentive, such as the Voluntary Separation Initiative.
EEO CERTIFICATION NUMBER: N/A
WHICH OF THE GOALS IDENTIFIED IN THE COUNCIL’S 2017 - 2032 STRATEGIC PLAN DOES THIS RECOMMENDATION ADVANCE?
1. Financially Sound City
WHICH CRITICAL SUCCESS FACTOR(S) FROM THE COMPREHENSIVE PLAN DOES THIS RECOMMENDATION IMPLEMENT?
1. Keep taxes and fees competitive.
2. Have an efficient government.
DEPARTMENT: City Manager's Office