July 17, 2012 – Many local government officials have contacted SEMCOG about reducing the legacy costs associated with pensions. As a result, SEMCOG has partnered with MERS, the Michigan Employees Retirement System, to co-develop the following list of recommended actions that local governments can apply to address ever-rising benefit costs:
Review Paid Time-Off Accrual Polices
• Paid vacation, sick, and personal leave time is a benefit offered to employees.
• The most cost-effective policies are designed as “use-it or lose-it.” Policies that allow employees to accrue leave time and carry it over each year increases employer liability due to pay increases in the future, but also can increase Defined Benefit pension liabilities over time. This is sometimes known as FAC padding.
• Review policies that cap the amount of leave that can be rolled over from year to year. Options could be given to employees to cash-out eligible leave, donate their leave to other workers, or roll it into programs like a Health Care Savings Program. Tax savings is achieved for both the employer and employee.
Consider Tax-Favored Savings
• Participating in programs like the MERS Health Care Savings Program offers employers and employees the ability to save FICA taxes on contributions.
• With no cost to the employer to participate, these programs are a great way to help employees save money to combat rising costs of health care.
Re-evaluate Current Benefit Structures
• Create a lesser Defined Benefit Plan for new hires.
• Create a Hybrid Plan for new hires.
Consider Group Buying Solutions
• MERS leverages its buying power to save municipalities’ cost on Group Life and Disability Insurance. The average savings is 30%.
• There are many added benefits that can actually increase the value of the benefit to your employees without increasing the premiums.
Consider Pooling Investments
• Use a team of proven investment professionals to manage the portfolio, saving you time with the added benefit of trained expertise.
• Spread your risk. Diversification is designed to reduce exposure to volatility, by combining a variety of investments (such as stocks, bonds, real estate, and commodities), which are unlikely to all move in the same direction.
• Pooling reduces investment administration costs, because the investment professional handles all the administration for you.
I encourage SEMCOG members to contact me (firstname.lastname@example.org) for more information. Additional information is also available on the MERS Web site.
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