HomeMy WebLinkAbout1993-09-30 - Agendas - Final•
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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
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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
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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.
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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.
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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.
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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.
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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.
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SEP -27-93 MON 11:38 FIRE FIIJtIFER
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LDCHL 34 5015689181
This Resolution is effective on the date of the Resolution,
but in no event, earlier than August 13, 1993.
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Dated:
(Signature)
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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
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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.
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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]
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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
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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.
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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)
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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.
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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.
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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.
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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.
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HON 11:._ FIRE FiC.HIER"_: LUCi-+L 4 5015 '' 181 F.04
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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.
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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.
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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
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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
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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.,
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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
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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
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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
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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
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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
•
•
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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.