An overhaul of the retirement plan that covers most New Orleans city employees would slow the rate at which new hires earn benefits and would prevent any retirees from receiving a cost-of-living adjustment unless the system is almost fully funded.
The plan, pushed by Councilwoman Stacy Head and passed by the City Council on Friday, would also limit the amount of new employees' salary used to calculate benefits through the New Orleans Municipal Employees' Retirement System — known as NOMERS — to $100,000 a year.
It would not make any changes in the way current employees earn benefits or alter their retirement eligibility.
The council approved the plan on a 4-1 vote, with members Nadine Ramsey and James Gray absent.
Councilman Jason Williams, the only member to vote against the proposal, said he disagreed with the cap on benefits and had legal concerns about the changes to the rate at which benefits accrue.
The ordinance now heads to Mayor Mitch Landrieu for his signature or veto. The Landrieu administration has not weighed in on the proposal, designed to put the retirement system on a more financially solid basis.
NOMERS covers nearly all city employees except firefighters and most police officers. Sewerage & Water Board employees are enrolled in a separate pension system.
As of last year, NOMERS covered 2,620 employees and had 2,096 retirees and beneficiaries and was 68.2 percent funded. It is not unusual for retirement systems to be less than fully funded because they continue to take in yearly contributions and have other financial investments.
“I feel like we’re financially strong,” NOMERS Director Jesse Evans Jr. said.
Head and a variety of groups, including the Bureau of Governmental Research, have been urging changes to the city's pension system for years.
Head initially called for an overhaul that would have affected some existing employees. On Friday, she argued that the changes would help increase the plan’s health, reduce costs for the city and potentially free up money to give higher salaries to attract employees.
Under the city’s pension system, an employee’s retirement allowance is based on their average annual pay for, in most cases, their final five years. They receive 2.5 percent of that amount per year for the first 25 years they worked and 4 percent per year after that. They can earn the maximum pension benefit, 100 percent of their final five years' salary, after 34 years and five months.
For new hires, Head’s ordinance will reduce the annual benefit to 1.9 percent for all years of service.
It also requires that some new employees must work longer before retiring. Employees are now eligible for retirement at any age after 30 years of service, at age 60 if they have at least 10 years of service, at age 65 with five years of service or at any point that their age and years of service total 80, the so-called “rule of 80.”
The ordinance would eliminate the option to retire at 60, replacing it with a requirement that those who wish to retire at 62 must have at least 20 years of service. It would also eliminate the rule of 80.
It also would prevent retirees from getting a cost-of-living adjustment or “13th check,” essentially a bonus, until the system is 95 percent funded.
Another change would place a cap on the amount used to determine new employees' benefits at retirement. Currently, the full salary of their highest earning years is averaged to determine that benefit. But under the ordinance, only the first $100,000 of their pay would be used for that calculation.
The $100,000 limit would increase with inflation.
One issue that still needs to be resolved is whether employees who make more than $100,000 a year would have their payments to the retirement system calculated on their full salary or only the amount under that limit.
The NOMERS board threw its support behind a few elements of the plan when it considered the matter earlier this year, agreeing that 62-year-old employees should have 20 years of service to retire and signing off on the elimination of the rule of 80. It also recommended employees should need to have 10 years of service to be vested in the plan rather than five.
The board did not support the new cap on retirement benefits or the additional requirements for a cost-of-living adjustment.
Because nearly all the changes in Head's proposal will apply only to new hires, the city is unlikely to see significant savings until there is significant turnover in the workforce.
“The actual cost savings and funded ratio improvements would be gradually reflected over many years in the future,” Evans said.
Editor's note: This story was changed on Dec. 4, 2017, to correct an error in explanations about how the ordinance would impact retirement benefits for employees who make more than $100,000 a year.