Report to the
City of Sample

Management Benefits Analysis and Recommendations

Prepared By

City of Sample
Management Benefits Analysis and Recommendations

1. Background

The City of Sample, California, is currently evaluating its compensation, position structures and benefits for its management and senior professional personnel who are not otherwise covered by a collective bargaining agreement. Total Compensation Group Consulting (TCG Consulting) was requested by the City’s Management Consultant to assist in the evaluation the City’s current benefit and retirement programs for management personnel. The goals of these benefit programs are aimed at improving employee compensation, retention, loyalty, morale, as well as providing security for retirement. In meetings with the City Manager, head of Human Resources and other management the items listed below were discussed related to the goals for improving current programs.

a. There is currently compensation compression between the heads of certain departments and the top individuals reporting to them. A way needs to be found to address this problem.
b. Benefits that would add less taxable income and greater retirement financial security would be well received, particularly by those who are within ten years of retirement.
c. Benefits must be appropriate given the public attention that such benefits will receive.
d. In the long term, benefits must be acceptable to the City for other groups of employees if they want to add similar benefits through collective bargaining.
e. The City is considered to be an attractive place to work; thus the primary focus of the benefits package is not necessarily recruiting or retention. However, when turnover does occur with key employees it can be disruptive. Thus, benefits that facilitate an orderly transition of key employees should be considered.
f. Current benefits should be evaluated to be sure they are competitive relative to trends among public agencies and take maximum advantage of newer tax laws.

2. Recommendations:

In consideration of the background items, reviewing current trends in benefit for state and local government agencies and in consultation with the City’s Management Consultant regarding other changes being recommended, TCG Consulting is proposing that the following options be considered:

a. Retirement Bonus Plan for the Executive Management group. This contribution of a percentage of pay to a supplemental retirement plan for Senior Executive Management and Executive Management would help in addressing retirement needs and salary compression.
b. Matching Plan for the City’s Section 457 Voluntary Salary Deferral Plan for all Management groups. This is a rapidly growing trend among public agencies.
c. An enhanced Section 125 Cafeteria Plan for all Management groups. The current credit provided by the City would be increased and a new Flexible Spending Account program would be added to pay aims with a VISA or MasterCard Debit Card at point of service.
d. Deferred Compensation Plan (“Golden Handcuffs” program) for the City Manager and Chief of Police. The City would establish conditions for earning this extra compensation, with an amount contributed each year to a supplemental retirement plan on a tax deferred basis.
e. Deferred Retirement Option Plan (DROP) for Senior Executive Management, Executive Management and Administrative Management. DROPs are growing in popularity nationwide because they can be used to enhance retirement benefits and aid in retirement/succession planning.

3. Explanation of Benefit Options:

a. Retirement Bonus Plan. Under this plan, the City would contribute a percentage of salary to a supplemental 401(a) defined contribution plan. This plan would be for the Senior Executive Management and Executive Management groups and would vest immediately. We have proposed that the City contribute 6.5% of pay for the Senior Executive management and 3.0% of pay for the Executive Management. Under the federal limits on contributions to such a plan, effective January 1, 2002, up to $40,000 per year could be contributed to this and other plans recommended below. The money would be tax deferred and could be rolled to an Individual Retirement Account when the employee retires or leaves for other reasons.

b. Matching Plan.

A matching plan that will benefit all levels of management is recommended. The plan would work by allowing participants to contribute a percentage of salary into the City’s current 457 Voluntary Salary Deferral Plan and receive a matching contribution by the City to a supplemental 401(a) defined contribution plan. To address the fact that many of the other additional benefits recommended provide greater benefits to the top two groups of management, the recommended match would give greater proportional benefits to the other management groups. The breakdown of employee percentage of pay and City match proposed are as follows:

Additionally, TCG Consulting recommends that the City setting up a vesting schedule for this benefit. Imposing a vesting schedule helps reduce the cost of the plan and encourages employee loyalty. The following is an example of the two types of vesting schedules:

Of course, this benefit can also be made immediately vested.

c. 125 Cafeteria Plan Cash or Credit. The City currently provides a credit of $450.00 per month for employees to use toward benefits available under the Section 125 Cafeteria Plan. This plan would be enhanced by increasing the amount of the credit for all management groups by $100 per month. It is also recommended that a new flexible spending account plan be offered in which claims are paid though a VISA or MasterCard debit card. These programs are popular with employees and are growing nationally. They generally increase the number of people who can afford to participate in flexible spending account arrangements. The State of Texas recently adopted such a plan for all of its employees and it has proven to be very popular.

d. Deferred Compensation Plan. The “Golden Handcuff” plan would be used to encourage retention of hard to replace personnel, specifically, the City Manager and the Chief of Police and to address salary compression in these positions. TCG Consulting is recommending a contribution of $10,000 be placed in a plan for each employee. If the limits under the contributions to the 401(a) supplemental defined contribution plan are exceeded with the combination of this money, then the remainder would go into a 457(f) deferred compensation plan.

The employee would defer any rights to the funds based on predetermined condition(s) established by the City and the employee. To the extent that the contributions and earnings are placed in the 401(a) plan, the funds would be completely tax deferred and could be rolled over to an Individual Retirement Account after the employee (a) becomes entitled to the funds and (b) retires or otherwise terminates employment.

If any funds have to be placed in a 457(f) plan (due to exceeding the contribution limits for the 401(a) plan) the money would be taxable when it becomes fully vested.

e. Deferred Retirement Option Plan. The “DROP” plan would be used by the City to increase retirement benefits for Senior Executive Management, Executive Management and Administrative Management in return for allowing the City to plan for replacing these employees. This will give the City the opportunity to do better succession planning. The program allows for the participants to receive additional compensation of 5% of pay (above normal salary increases) during the last 5 years of employment as a taxable income which would also increase compensation for PERS benefits.

In addition to the above mention benefits to both employer and participant, the program has several caveats that must be taken into consideration. Participants who elect to take part in this plan must be eligible for retirement (age 55 or above, age 50 for Safety employees), must give a commitment for retirement on a certain date (no more than 5 years from the commitment date), must agree to work until that date (good faith is assumed here), and the City will terminate the employee’s employment at the end of the time period.

TCG Consulting is aware of previous issues that the City has had with “PERSing Up” salaries to increase retirement benefits. However, we believe that the proposed DROP program would serve legitimate purposes and is not intended simply increase PERS benefits without benefit to the City. It is recommended that the City obtain an actuarial opinion from PERS as to the increased cost of the PERS benefits to the City if the DROP is implemented.

4. Summary and Cost Analysis:

The following matrix outlines the proposed benefits and estimated costs associated with each plan, as well as the estimated total first year cost to the City.

We appreciate your consideration of these options and look forward to discussing them to help determine which options best fit the City’s needs.

Prepared September 3, 2001
TCG Consulting
4201 Bee Caves Road, Suite C-101
Austin, TX 78746
Phone: (512) 306-9939 Fax: (512) 306-9959