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HomeMy WebLinkAbout1993-09-30 - Agendas - Final• • • AGENDA FIREMEN'S PENSION AND RELIEF BOARD September 30, 1993 11:00 a.m. City Hall Room 326 1. Approval of the minutes of the August 26, 1993 meeting 2. Approval of the Pension List for October, 1993 3. Old Business 1. Termination of Roxbury 2. Certificate of Insurance - Merrill Lynch 4. New Business 5. Adjournment • • MINUTES OF A MEETING OF THE FIRE PENSION BOARD A meeting of the Fayetteville Firemen's Pension and Relief Board was held on Thursday, August 26, 1993, at 11:15 a.m. in Room 326 of the City Administration Building, 113 W. Mountain1 Fayetteville, Arkansas. PRESENT: Retirees Darrell Judy and Richard Baird, Mayor Fred Hanna, City Clerk Sherry Thomas, and City Treasurer Glyndon Bunton. ABSENT: Marion Doss, Pete Reagan, and Ron Wood CALL TO ORDER Mayor Hanna called the meeting to order. MINUTES Judy, seconded by the July 29, 1993 PENSION LIST Baird, made a motion to approve the minutes of meeting. The motion was approved unanimously. Judy, seconded by Baird, made a motion to approve the pension list for September. There were no changes in the pension list. The motion was approved unanimously. Merlin Layer stated he thought there was an error on the pension list in that Clarence Tune is deceased and not Jess Tune. OLD BUSINESS NEW MEXICO CAPITAL Baird asked if a representative of New Mexico Capital came to the pension meeting. Judy stated they did. Thomas stated she would get a copy of the April minutes to Baird. ML FUTURES • Bunton stated he would like to get a report On the;ML FOttres' account. He hopes Richard Yada will come to the nextRmeeting and provide the Board with this information. ADJOURNMENT The meeting adjourned at 11:20 a.m. • • • • MINUTES OF A MEETING OF THE FIRE PENSION BOARD A meeting of the Fayetteville Firemen's Pension and Relief Board was held on Thursday, September 30, 1993, at 11:15 a.m. in Room 326 of the City Administration Building, 113 W. Mountain, Fayetteville, Arkansas. PRESENT: Marion Doss, Ron Wood, Pete Reagan (arrived late), Retirees Darrell Judy and Richard Baird, Mayor Fred Hanna, City Clerk Sherry Thomas, and City Treasurer Glyndon Bunton. CALL TO ORDER Mayor Hanna called the meeting to order. MINUTES Bunton, seconded by Wood, made a motion to approve the minutes of the August 26, 1993 meeting. The motion was approved unanimously. PENSION LIST Judy, seconded by Doss, made a motion to approve the pension list for October. There were no changes in the pension list. The motion was approved unanimously. OLD BUSINESS ROXBURY MANAGEMENT FUND Thomas stated she had received a check in the amount of $494.34 which was a refund of management fees after terminating Roxbury. She had given the check to Administrative Services Director Ben Mayes to put into the Fire Pension Fund. INSURANCE CERTIFICATES Thomas stated she had received certificates of insurance from the various insurance companies and policies for Merrill Lynch, Inc. Richard Yada, of Merrill Lynch, stated the City's auditors had requested a copy of these. NEW BUSINESS DROP PLAN Doss stated he had some materials on the Drop Plan. Thomas made and distributed copies. • Mayor Hanna suggested everyone read the information and discuss the plan at the next meeting. • • • September 30, 1993 CHASE MANHATTAN BANK LAWSUIT Thomas stated she had received information regarding a lawsuit filed against the Chase Manhattan Bank and informing investors of this litigation. She sent the information to City Attorney Jerry Rose who reviewed the material and replied that he did not see any problems associated with this litigation and the Pension Fund. INVESTMENTS Richard Yada stated the New Mexico Capital balance is $3,101,225 as of August 31. For the same period, Roxbury's balance was $856,646, and the income account had a balance of $3,116,515. He stated the City has a treasury bill invested for the fund that is about $157,000 and matures in October. He requested that Thomas asked Ben Mayes, the Administrative Services Director, the status and exact amounts of that treasury bill. Yada stated through August, New Mexico Capital was up 12.29%, Roxbury was up 7.21%, and the income account was up 6.63%. New Mexico has outperformed many of the managers. These are all pretty good incomes compared to the Dow Jones that was up 7.42%. The portfolio is invested about 58% in stocks and 42% in fixed income. Inflation through July was 1.76%. Yada stated a lot of the bonds that the fund has invested in are and will continue to be called. They are being called and paid off because of their higher interest rates. Then Merrill Lynch reinvests the money but at lower interest rates. The 30 year treasury is earning about 6%, so he feels the interest rates will continue to be low and inflation will not be a major factor for quite some time. Therefore, the rates of return for the pension fund will be coming down. The total portfolio value is in excess of $8 million. The total stock investment is about 30% of the portfolio. During these times when the stock market is doing better than the other markets, the money managers need to be able to invest more in the market. He talked with New Mexico last week, and they are invested about 58% in stocks which results in this fund being about 30%. They would like to have the Board's permission to invest up to 65% which would result in the pension fund being invested at about 33% in stocks. Most public pension plans are invested up to 40% in stocks. This pension fund is more conservative that the majority of pension plans. He does not feel it would increase the risk of the fund to increase the stock exposure from 30% to 33%. Yada stated that the management fee paid to New Mexico Capital had been .6 of 1%. He was able to negotiate with them because of transferring the Roxbury funds to that account and get the fee down to .5 of 1%. Roxbury's fee had been higher, so in all, this should save the pension fund about $4,000 per year. • • • September 30, 1993 Bunton stated with the interest rates staying low, he was comfortable with the fund being invested 33% in the stock market. Reagan, seconded by Judy, made a motion to transfer the Roxbury securities to New Mexico Capital and to allow New Mexico Capital's asset allocation to be as high as 65% in its portfolio that would result in about 33% of the Fire Pension Fund being invested in the stock market. The motion passed unanimously. Bunton stated he would like for Ben Mayes to provide the Board with information about the cap on stock investment of the fund. ADJOURNMENT The meeting adjourned at 11:45 a.m. • 1 SEP -27-93 MON 11:37 FIRE FIGHTER'S LOCAL 34 5015689181 RESOLUTION TO AUTHO; ZE Pi' ICIP • AY POLICEMEN AND FIREFWHTERS IN THE MJANSAS DEFERRED RJTIREMENT OPTION PLAN P.01 WHEREAS, Acts 757 and 1004 of 1993 authorized the establishment of a deferred retirement option plan by boards of trustees for local policemen's and firefighter's pension and relief funds, respectively; and, WHEREAS, the City of has ceded the administration of its local policemen's and firefighter's pension and relief funds to the Arkansas Local Police and:Fire Retirement System pursuant to Ark. Code. Ann. S24-10-302; and, WHEREAS, the Arkansas Local Police and Fire Retirement • System through its Board of Trustees has approved participation in the deferred retirement option plan for members of the City o f policemen's and firefighter's pension and relief fund; and, WHEREAS, the City of no longer has boards o f trustees for its policemen's and firefighter's pension and ✓ elief funds to approve participation in the plan as contemplated by Acts 757 and 1004 of 1993. IT IS THEREFORE RESOLVED, by the city council of the City o f hereby approves of the action of the Arkansas Local Police and Fire Retirement System and authorizes participation in the deferred retirement option plan by those policemen and firefighters eligible to participate in the plan as adopted and approved by the Arkansas Local Police and Fire Retirement System. r • • • SEP -27-93 MON 11:38 FIRE FIIJtIFER 1 C LDCHL 34 5015689181 This Resolution is effective on the date of the Resolution, but in no event, earlier than August 13, 1993. l Dated: (Signature) -2- arrr168 F.O2 SEP -2 • • • MON 11:38 FIRE FIGHTER'S LOCsL 34 5015od9181 A. The Little Rock Firemen's Pension and Relief Fund Board of Trustees here by agrees to offer the Deferred Retirement Option Plan (DROP) provisions of ACT 1004 of 1993 ASA under the authority of the Arkansas Statues by the following vote. Charles Nickerson -Chairman yes no Rubin Webb yes no Robbie Hancock yea no Louis Hawley yes no Frank Fredrick yes no Ralph Baldwin yea no Johnny Reap yes no • SEP -27-93 MON 11:38 FIRE FIGHTER'S LOCAL 34 5015689181 P.04 Application B. 1. The member of the Little Rock Firemen's Pension Relief Fund who elects to participate in the DROP must have at least 20 years of service to be eligible. 2. The member electing the DROP must complete an application form. The forma shall be available at all Little Rock Fire Stations and may be mailed to; Little Rock Firemen's Pension Fund Room 208 City Hall Markham & Broadway Little Rock, AR 72201 or DROP applications may be submitted to the office of Fire 01lef at Central Fire Station_ 3. The applications will be considered at the regular meetings of the Board. 4. When a member aubmits an application for the DROP. the decision is irrevocable once the Board has approved the application. • • • SEP -27-93 MON 11:39 FIRE FIGHTER'S LOCAL 34 5015689181 P.05 Member's Financial Contributions C. 1. The member's 6% contributions shall continued to be paid to the Little Rock Firemen's Pension Fund. City of Little Rock Financial Contributions D. 1. The City of Little Rook ehall continue to contribute 8% of salary with credit as follows; 3% will go to the member's DROP account 3% will go to the Little Rock Firemen's Pension Fund. Benefits E. 1. When the member's application has been approved the pension benefits are computed as if the member was retiring at that time. This amount will be credited to the member's DROP account. 2. The member's service retirement freezes and at no time will the member receive credit for additional years of service or salary increases. [EXCEPTION IS FOR A MEMBER WHO QUALIFIES FOR BENEFITS UNDER ACT 878 THAT ARE PAYABLE AT AGE 60] 3 SEP -27-93 MON 11:39 FIRE FIGHTER'S LOCAL 34 5015689181 P.06 • • 3. The member's DROP account will benefit from two contributions as follows; a. The Little Rock Firemen's Pension Fund shall declare an annual rate of return on investments and the fund shall credit the member's DROP account at the amount 2% below the declared rate of return. b. The member's DROP account shall also receive 3% of salary as stated in (D 1) 4. The member's DROP account can increase, however, if there is an increase approved by the Board of Trustees or by change in State law. SEP -27-93 MON 11:39 FIRE FIGHTER'S LOCAL 34 5015689181 P.07 • Term F. 1. When a member has been approved for participation in the DROP he/she may finally terminate employment with the city of Little Rock at any time with in the next five (5) years, however, the member must retire by the date established on the application form as the final date of him/her employment. • Payment G. 1. The Little Rock Firemen's Pension and Relief Fund may issue a check to the member retiring for a lump mum of the accumulated sum in the member's DROP account. 2. The member may select payment option B as follows; 3. After the DROP payment option has been paid the member's regular pension benefits will continue on a monthly basis as computed in section (g 1) 5 • • • • • • SEP -27-93 MON 11:39 FIRE FIGHTER'S LOCAL 34 5015689181 P.08 • • Disability H. 1. From the date member's application is approved the member has two options in the event that a member becomes injured in the line of duty; OPTION 1. The member may apply to the Board of Trustees for a line of duty diability. If the injury is declared as a line of duty disability, leaving the member totally and permanently disabled. The member may elect to receive a line of duty disability at the rate of 85% of his/her current salary rather than the amount computed in section (5 A.) OPTION 2. The member may elect to retire at the amount computed in section (5 A.) and receive the accumulated amount in the member's DROP account. 8 SEP -27-93 MON 11:45 FIRE FIGHTER'S LOCAL 34 5015689181 P.09 • • Death I. 1. After a member has elected to participate in the DROP the beneficiary listed on the DROP application shall be eligible for the following benefit in case of death of the member before retirement. a. The beneficiary shall be paid the lump sum accumulated in the DROP account and than receive the monthly pension benefits rate computed under provisions of Act 480 of 1993. If the beneficiary remarries after the death of the member, the benefits cease to the surviving spouse, however, benefits to dependent children continue until age 19. In case of marriage of said child, payment shall cease. 7 7 • • • SEP 3 MON 1 1 : 1 . F 4H TER •5 �- '"L 34 5015689181 DRAFT RULES AND REGULATIONS OF THE ARKANSAS LOCAL POLICE AND FIRE DEFERRED RETIREMENT OPTION PLAN The following shall represent the rules and regulations for implementation of Acts 757 and 1004 of 1993 which shall be effective on September 1, 1993. Act 757 of 1993 grants local policemen's pension and relief fund boards of trustees the opportunity to establish a Deferred Retirement Option P1$n. Act 1004 grants similar authority to local firemen's pension and relief funds. The Arkansas Local Police and Fire Retirement System Board of Trustees has exercised the option to establish such a plan and the following rules, regulations and protocols will be followed in its implementation. 1. The plan shall be known as the "Arkansas Local Police and Fire Deferred Retirement Option Plan (DROP)". 2. The plan shall be administered by the staff of the Board of Trustees of the Arkansas Local Police and Fire Retirement System. 3. The effective date of the plan shall be September 1, 1993. 4. Participants in the DROP must have a minimum of twenty (20) years of credited service with their respective local policemen's or firemen's pension and relief fund on or within sixty (60) days succeeding the date of application for participation in the DROP. • 5. Application for participation in the DROP must be received at the Arkansas Local Police and Fire Retirement System at least sixty (60) days prior to the effective date of participation. 6. Participation in the DROP is contingent upon completion of all applications and forms required by the Arkansas Local Police and Fire Retirement System. 7. DROP participation shall in all instances begin on the first day of the month following eligibility for participation. 8. Participation in the DROP is an irrevocable election upon the first payment into the DROP by the Arkansas Local Police and Fire Retirement System. 9. A participant may retire sooner, but in no event later than five years from the date of acceptance in the DROP. 10. The participants in the DROP shall continue to make their contribution to the Arkansas Local Police and Fire Retirement Fund. The employer's matching contribution shall be divided equally between the DROP account and the Arkansas Local Police and Fire Retirement Fund. 11. The amount which would have been paid to the participant had the participant elected to cease employment and receive a monthly retirement benefit shall be credited to the participant's DROP account. 12. The funds accumulated in the DROP account shall be invested in the same manner, and as a part of the funds of the Arkansas Local Police and Fire Retirement System. -2- zrrr148 HON 11:._ FIRE FiC.HIER"_: LUCi-+L 4 5015 '' 181 F.04 • 13. The participant's monthly retirement benefit calculated on the date the eligibility for participation in the DROP and which is credited to the DROP account shall not change during participation in the DROP regardless of interim salary increases. Provided, however, if a systemwide benefit increase is adopted, the participant's retirement benefit credited to the DROP may increase. The amount so calculated shall be the monthly benefit upon termination of employment. 14. If a participant is rendered permanently and totally disabled as a result of a duty related injury during the DROP, and as a result terminates employment, the monthly benefit shall be determined in accordance with A.C.A. §§24-11-423 and 24-11-819 and without regard to the limitation imposed herein. 15. The retirement benefit credited t0 the DROP will be credited on the last day of each month. 16. The DROP account shall earn simple interest at a rate of two (2). percentage points below the rate of return of the investment portfolio of the Arkansas Local Police and Fire Retirement System, but in no event shall the rate of interest be less than the actuarial assumed interest rate as certified by the actuary for the Arkansas Local Police and Fire Retirement System. 17. Simple interest shall be credited to the individual account balance of the participant annually on the anniversary of participation in the DROP. zrrr148 1 • • • SEF--;-__ Nun ...-1 5015689161 18. An annual statement of account shall be provided to each participant within thirty (30) days following the crediting of interest to the member's account. 19. Participants who terminate employment before the expiration of five years in the DROP shall be credited interest for the fractional part of the year of participation at the actuarial assumed rate found in the then most recent actuarial report. 20. Interest ceases to accrue on a participant's account upon the expiration of five years or at the termination of employment, whichever occurs first. 21. At least thirty (30) days prior to termination of employment, the participant must select a payment method and notify the fund administrator on a form to be provided by the fund administrator of that purpose. 22. The participant may elect a lump sum payment which shall be equal to the balance in the participant's DROP account less any required withholdings. Lump sum payments shall be made within five business days after the last contribution to the account is received following termination of employment. 23. A participant may select an annuity which is chosen based on the participant's own research and investigation. The participant's account balance will be transferred to the annuity provider selected by the participant only upon the written authorization of the participant. -4- zrrr148 } • • • • ION 11::1 rift= -14..N TER^o i_ULF1L 34 5015 24. A participant may elect to have a portion of the account balance paid to the participant and a portion to an annuity provider. 25. The payment of the balance of the participant's account to an annuity provider, to the participant, or to a combination thereof pursuant to a written authorization by the participant shall constitute a full release of the Arkansas Local Police and Fire Retirement System, its Board of Trustees, its agents and employees. 26. The Arkansas Local Police and Fire Retirement System shall not be subject to any fees or charges by any annuity provider. 27. If a participant in the DROP dies during participation or before final payment is made, a lump sum payment equal to the account balance of the participant shall be paid to the participant's designated beneficiary or contingent beneficiary, whose name shall be on file with the fund administrator. If no beneficiary or contingent beneficiary is designated, or if the designated beneficiary and contingent beneficiary predecease the participant, payment shall be made to the estate of the participant. THE ARKANSAS LOCAL POLICE AND FIRE PENSION AND RELIEF FUND HOARD OF TRUSTEES ASSUMES NO RESPONSIBILITY FOR ANY ADVERSE TAX CONSEQUENCES WHICH MAY ACCRUE TO A PARTICIPANT IN THE DEFERRED -5- zrrr148 SEF -45 - • 7- 93 MON 1 1: L L FIRE F I G H T E R^ 5 L O L. H L 34 5 0 1 5( 8 9 1 8 1 F • • RETIREMENT OPTION PLAN. THE ARKANSAS LOCAL POLICE AND FIRE RETIREMENT SYSTEM BOARD OF TRUSTEES HAS BEEN PROVIDED WITH A COPY OF A PRIVATE LETTER RULING FROM THE INTERNAL REVENUE SERVICE MAXING A FAVORABLE DETERMINATION ON THE APPLICATION OF THE OKLAHOMA POLICE PENSION AND RETIREMENT BOARD'S SUBMISSION OF A PLAN VERY SIMILAR TO THE ARKANSAS LOCAL POLICE AND FIRE RETIREMENT SYSTEM DEFERRED RETIREMENT OPTION PLAN* THE BOARD OF TRUSTEES HAS INSTITUTED THIS PLAN IN RELIANCE ON THAT LETTER. NO INDEPENDENT RULING OR OPINION HAS BEEN OBTAINED. PARTICIPANTS IN THIS PLAN ARE ENCOURAGED TO SEEK ADVICE FROM THEIR OWN TAX ADVISORS PRIOR TO ENROLLING FOR PARTICIPATION IN THIS PLAN. IF THE INTERNAL REVENUE SERVICE DETERMINES THAT THE ARKANSAS LOCAL POLICE AND FIRE RETIREMENT SYSTEM DEFERRED RETIREMENT OPTION PLAN IS NOT A QUALIFIED DEFERRED COMPENSATION PLAN, A PARTICIPANT MAY HAVE LIABILITY FOR NOT ONLY THE TAX DUE ON THE FUNDS DEPOSITED IN THEIR DROP ACCOUNT, BUT ALSO SUBSTANTIAL PENALTIES AND INTEREST MAY BE APPLICABLE. ARKANSAS LOCAL POLICE AND FIRE RETIREMENT SYSTEM ASSUMES NO LIABILITY FOR SUCH ADVERSE CONSEQUENCES., zrrr148 • • • • ARKANSAS FIRE AND POLICE PENSION REVIEW BOARD Administration of DROP Accounts Sample Rules for Local Pension Boards with Common Questions and Examples SECTION 1. Local Election of DROP Program 2. Individual Member Election of the DROP Option 3. Accumulation of DROP Account 4. Employee Contributions 5. Interest Rate Certification 6. Location and Administration of DROP Funds 7. Conclusion of the DROP Period 8. Disability Benefits 9. Distribution of DROP Account 10. Reporting Requirements 11. Tax Information Attachment 1 Resolution to Elect Participation in the DROP Attachment 2 Individual Member Election Form for DROP Attachment 3 Actuarial Equivalence Factors RECTION 1. Local Election of DROP Program A. Cost of DROP The pension board understands that adding the DROP option may increase the cost of the pension plan. New factors affecting cost may be activated by the adoption of the DROP provision. Some of these factors include present plan provisions, age and service when DROP is elected by a member, and the relationship between pay when DROP is elected and pay at the time of actual retirement. B. Resolution. In accordance with Attachment 1 to these rules is an executed resolution adopting the DROP program. SECTION 2. Individual Member Election of the DROP Option A. Eligibility. The DROP is a retirement option and can be elected when a member is eligible for service retirement; that is, anytime after attaining 20 years of service. Sunpk DROP Rules P• A E/0S • • • • B. Election Form. Attachment 2 of these rules is an election form for the member. This form must be completed at least 30 days prior to the member beginning the DROP. When an,,' individual elects the DROP they have agreed to two importiht" items: First, they have fixed their retirement benefit at the amount they would receive if they retired normally at this time. The retirement benefit will NOT change during the DROP period and will NOT change when the member actually quits the department. In other words, when you go on DROP, the monthly retirement you draw will be fixed at that time and will never* change, even when you actually retire. The member's benefit will NOT increase because of increased pay. The benefit will NOT increase because of the extra service. 'There are two exceptions: The age 60 bonus (based on over 25 years of service earned before the DROP period) starts at age 60; Any retiree raises granted to all retirees, or over- all benefit increases, are also given to persons on DROP. Second, they have agreed that they will be in the employ of the department for a period not to exceed 5 years. C. Optional. The DROP is an option in lieu of normal retire- ment benefit. A member is not required to go on DROP. This is an option that MAY be elected by a member. SECTION 3. Accumulation of DROP Account Each individual member's DROP account will be credited with the following items during the DROP period: A. DROP Payments. A member's DROP account will be credited monthly for the amount of the retirement benefit at the time the DROP is elected. These amounts are credited to the DROP account at the end of each month. For example, an officer whose final salary is $3,000 per month with exactly 20 years of service, who is a member of a standard police pension plan, would have 50% or $1,500 per month credited to his DROP account. This member would begin receiving this same $1,500 per month at the end of the DROP period. A11 increases earned at the time DROP is elected are reflected in the DROP payments. For example, if the above officer had 27 years of service his benefit would be: ($3,000 X 50%) + (5 X $20) = $1,600. When he reaches age 60 his payment will be increased by (2 X 1.25% X $3,000) _ $75 to $1,675. Sample DROP Rules p. 2 V05/93 DraR • • Question: What if our pension plan receives a benefit increase during the DROP period? Answer: There is an exception in the laws that would apply if the entire plan increased benefits under the usual procedure when the Arkansas Fire and Police Pension Review Board approves the increase. For example, if the pension plan received approval for a benefit increase to a base benefit of 60% of salary, the DROP payment in the example above would increase to 60% of $3,000 or $1,800 per month. This member would begin receiving this same $1,800 per month at the end of the DROP period. B. Employer Contributions. One-half of the employer matching contributions are credited to the DROP account. That is, for firefighter plans and police plans that do not partici- pate in Social Security, 3% of current salary. 2% of cur- rent salary is added to the DROP account for police plans which participate in Social Security. Plans that have voluntarily agreed to a rate higher than 6% would contribute one-half of that amount. These amounts will be credited to the DROP account at the end of each month C. Interest. Interest is to be credited to the DROP account at the end of each year. One year's interest is credited to the beginning of the year's balance in the DROP account. No interest is credited to the activity during the year. No interest will be credited for the year that the DROP account is distributed. Question: Can you give an example of how the DROP account accumulates? Answer: Let's use the example of the police officer with exactly 20 years of service. The pension plan is standard, that is, 50% of final salary They do not participate in Social Security. The officer's final salary is $3,000 per month. For this example, assume the salary does not change during the DROP period. He remains on DROP for 3 years (i.e., 36 months). Monthly DROP amount=503 of $3,000 = $1,500 per month 1/2 city match = 3% of $3,000 = $90 per month Supple DROP Rule. P. 3 8/05/93 Draft • • DROP payments=36 X $1,500 $ 54,000 City Match=36 X $90 3,240 Interest 2.324 DROP account at end of 36 months $ 59,564 Question: Can you give an example of the method of crediting interest? Answer: Assume the following facts. December 31, 1993 DROP balance $ 10,000 94 DROP payments 12 X $1,350 16,200 94 City match 12 X $81 972 Interest rate 7% The interest credited for 1994 is $ 10,000 X 7% $ 700 December 31, 1994 DROP balance $ 27,872 95 DROP payments 16,200 95 City match 972 95 Interest rate 63 The interest credited for 1995 is SECTION 4. Employee Contributions $ 27,872 X 6% $ 1,672 The member continues to make employee contributions at the same rate. These employee contributions are credited to the pension plan and not to the member's DROP account. SECTION 5. Interest Rate Certification The rate of interest that is to be credited to the DROP accounts is to be certified by the actuary for the Arkansas Fire and Police Pension Review Board. SECTION 6. Location and Administration of DROP Funds A member's DROP account remain a part of the pension fund until it is distributed. Sampk DROP Rula p.4 3/OS/93 DmA • • • • • Question: Answer: Question: Answer: Does the plan have to maintain separate and/or dis- tinct assets for the DROP accounts? No. The assets of the members' DROP accounts are commingled with the other pension assets. The DROP accounts are simply liabilities of the plan, and are accounted for separately. DROP accounts are book- keeping items and should not affect the investment of the pension fund. Where is the DROP account administered? The DROP accounts remain part of the local pension fund during the DROP period. The amount of each DROP account is calculated separately for each mem- ber who has elected the DROP. SECTION 7. Conclusion of the DROP Period The rules regarding the time of conclusion of the DROP period, the distribution of the DROP account, and the amount of the retirement benefit at the end of the DROP, will be the same as those under Board Rule #10 of the Arkansas Fire and Police Pen- sion Review Board. Question: What happens if the individual dies during the DROP period? Answer: One section of the member DROP election form allows the member to name a beneficiary. If a member dies during the DROP period, the named beneficiary would receive the balance of the DROP account in a lump sum payment. The member's widow (if there is one) would begin to receive the normal widow's benefit based on the benefit at the time the DROP was elected. If there is no living beneficiary then the DROP account would be paid to the deceased's estate. Question: What happens if the individual leaves the department during the DROP period? Answer: A member who leaves the department after electing the DROP option but before the five years have expired would begin receiving the same monthly Sample DROP Rula P• 5 1/05/93 Draft • • • retirement amount that had been going into the DROP account. They would also receive the DROP account either as a lump sum or as an annuity as discussed later in these rules. SECTION 8. Disability Benefits The rules regarding disability benefits will be the same as those under Board Rule 110 of the Arkansas Fire and Police Pension Review Board. Question: Can you give an example of how the disability bene- fit works? Answer: Let's use the following assumptions in looking at an example of a duty related disability. This example assumes that the member was disabled at age 50 after 3 years on DROP. Assume he elected DROP at exactly 20 years of service and was earning $30,000 per year at the time. DROP payments 5Ot X $30,000 X 3 City match 3% of salary per year Interest credited DROP account at the end of 3 years True annuity factor Additional benefit from DROP account Benefit at end of DROP period Equivalent monthly benefit Salary at date of Duty Disability 65% of salary for duty disability "Regular" disability benefit $ 45,000 2,700 2.919 $ 50,619 X .0065144 $ 329.75 1.250.00 $ 1,579.75 $ 34,000 X .65 $ 22,100 This member benefits from the disability benefit normally provided by the pension fund. Therefore, after the disability application is approved by the pension board, he would begin to receive $1,841.67 per month. He would not receive his DROP account. SECTION 9. Distribution of DROP Account A member who has a DROP account must be allowed to choose to receive his or her DROP account as either a lump sum or a true annuity, as described below. A table of conversion factors for a true annuity are given as Attachment 3. Sample DROP Rules p. 6 6/05!93 Dm* • • • A. Lump Sum. A lump sum amount equal to the accumulation of the DROP account as defined in Section 5 of these rules as of the date of the conclusion of the DROP period. B. True Annuity. A true annuity is payable monthly during the lifetime of the member only. If the true annuity is not purchased from an insurance company licensed to do business in the State of Arkansas, the monthly amount of the true annuity will be paid out of the pension fund. In this case, the monthly amount is the actuarial equivalent of the lump sum in A. above. The factors in Attachment 3 will be used. Question: Can you give an example of converting to an ann*sit $ Answer: We are given the following situation. DROP elected September 1, 1993 DROP payments (based on $3,000/mo pay) Police plan participating in Soc. Sec. 93 City match payments ($3,000/mo pay) 94 City match payments ($3,040/mo pay) 95 City match payments ($3,162/mo pay) 96 City match payments ($3,288/mo pay) 97 City match payments ($3,420/mo pay) 98 City match payments ($3,556/mo pay) Interest rate all years (Method 1) DROP account balance DROP account balance DROP account balance DROP account balance DROP account balance DROP account balance Age nearest birthday 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 8/31/98 Final of 55 on 8/31/98 DROP converted to monthly benefit Retirement benefit Total monthly income beginning 9/1/98 NOTE: If this member had NOT gone on the DROP, his retirement benefit on 9/1/98 would be based on $3,556 per month pay and would be: $ 1,500.00/mo. $ 6 25 45 67 89 102 X 0 1 240.00 729.60 758.88 789.12 820.80 568.96 6% , 240.00 , 344.00 , 623.52 , 150.05 ,999.85 , 568.81 . 0070869 726.90/mo. . 500.00/mo. $ 2 , 226.90/mo. $ 1,878.00/mo. Question: What would be paid when the member in the above example dies (after 9/1/98)? Sample DROP Rules p.7 8105193 Draft • • • is • Answer: Question: Answer: The $726.90 increment from the DROP stops since the true annuity has no widow benefit. If the retiree had an eligible spouse, she would receive $1,500 per month, assuming the plan qualifies for the ACT 397 widow's benefit. Does the plan have to purchase an annuity from an Insurance company at the end of the DROP period? No, the DROP account is converted to a monthly bene- fit and the separate DROP accounting is no longer necessary. The money leaves the plan as the calculated monthly increments are paid to the retired member. SECTION 10. Reporting Requirements The financial and member information required to be reported annually will be supplemented by a detailed listing of each mem- ber currently on DROP and the amount of their DROP account as of the end of the current reporting period. SECTION 11. Tax Information The Arkansas Fire and Police Pension Review Board and the Board of Trustees of this Pension Fund assume no responsibility for any adverse tax consequences which may accrue to a participant in the DROP. The Arkansas Fire and Police Pension Review Board has been provided with a copy of a private letter ruling from the Internal Revenue Service making a favorable determination on the applica- tion of the Oklahoma Police Pension and Retirement Board's sub- mission of a plan very similar to the Arkansas DROP. The Board of Trustees of this Pension Fund has instituted this plan in reliance on that letter. No independent ruling or opinion has been obtained. Participants in this plan are encouraged to seek advice from their own tax advisors prior to enrolling for partic- ipation in this plan. If the Internal Revenue Service determines that the DROP is not a qualified deferred compensation plan, a participant may have liability for not only the tax due on the funds deposited in their DROP account, but also substantial pen- alties and interest may be applicable. The Arkansas Fire and Police Pension Review Board and the Board of Trustees of this Pension Fund assume no liability for such adverse consequences.