pension manual

8/3/2019 Pension Manual

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Centerfor LocalGovernment

Services

Governors

Pension Manual

for Pennsylvania

Local Government

Commonwealth of PennsylvaniaTom Ridge, Governor

www.state.pa.us

Department of Community and Economic DevelopmentSam McCullough, Secretary

www.dced.state.pa.us

DCED

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County Officials City Officials Township Officials Borough Officials Council of Governmen
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Pension Manualfor Pennsylvania

Local Government

First Edition

Harrisburg, April 2000

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Comments or inquiries on the subject matter of this publication should be addressed to:

Governors Center for Local Government Services

Department of Community and Economic Development

325 Forum Building

Harrisburg, Pennsylvania 17120

(717) 720-7395

1-888-223-6837

Printing of this edition ofPension Manual for Pennsylvania Local Governments was funded from

appropriations of the General Assembly of the Commonwealth of Pennsylvania.

Copyright 2000, Pennsylvania Department of Community and Economic Development, all rights reserved.

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Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Overview of Municipal Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Fiduciary Responsibility of Governing Body . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Act 205 of 1984 - The Municipal Pension Plan Funding Standard and Recovery Act. . . . . . . . . . . . . 7

Act 600 of 1956 - The Municipal Police Pension Plan Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Regional Police Departments and Purchase of Service Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 12

Third Class City Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

General Municipal Pension System State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Budgeting for Annual Pension Plan Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Starting a New Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Amending Existing Pension Plans and Collectively Bargained Plans . . . . . . . . . . . . . . . . . . . . . . . . 30

Plan Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Plan Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Record Keeping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Plan Audits and the Governmental Accounting Standards Board (GASB) . . . . . . . . . . . . . . . . . . . . 36

Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Reference Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Definitions of Commonly Used Pension Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Calendar of Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

NOTE: As you read through the manual, if you come across a term or statute with which you are unfa-

miliar, refer to the sections entitled Reference Statutes (page 39) or Definitions of Commonly Used

Pension Terms (page 41) for clarification.

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Introduction

Pennsylvania has a large number of local governments. More than 80% of Pennsylvanias municipalities have

populations under 5,000 and are ably served by dedicated elected and appointed officials. Municipal and

County pension plans cover approximately 133,224 employees in Pennsylvania. There are over 1,100 munici-

pal police departments.

Financial security for these county and municipal employees is as important in the public sector as it is in the

private sector. To assist in obtaining this security, Pennsylvania local governments operate 2,913 individual

pension plans, the most of any state in the country. These plans vary in size, participation and structure giving

Pennsylvania the unique distinction of being the leading state in the number and diversity of public sector pen-

sion plans.

The material included in this publication is for the purpose of providing general information on municipal pen-

sion plans. Statements do not represent legal opinion on any particular issue, either by the author or by the De-

partment of Community and Economic Development. Any viewpoints expressed within this publication are

solely those by the author and do not represent positions or policy of the Department.

The information provided in this manual is based on legislation currently in effect at the time of publication.

Changes frequently occur through federal and state legislation, as well as, court decisions. A thorough research

of legal questions should be undertaken prior to enacting or making policy decisions.

The Department would like to express its gratitude to William Asay and Colleen Deer who authored this publi-

cation and to Mockenhaupt Associates who permitted them the time to devote to writing this manual. The De-

partment also thanks the Pennsylvania Department of the Auditor General and to the Public Employees

Retirement Commission (PERC) for their review and commentary on the contents of this publication.

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Overview of Municipal Pension Plans

Sponsors and administrators of municipal pension plans are responsible to plan participants, the governing

body, and the taxpayers of their community.

There are many reasons why a municipality maintains a pension plan for its employees:

Reward employees for years of service with the municipality

Attract good employees

Retain good employees

Comply with legal requirements (Act 600 and Third Class City Code)

Utilize available state aid

A municipality may have multiple plans. The most common covered groups are police, paid full-time firefight-

ers, and non-uniformed employees. Sometimes there is more than one plan for non-uniformed employees. Re-

cords, reports and filings must be maintained separately for each plan.

Boroughs and Townships - Police

If your municipality is a borough or township and has a police department of three or more full-time officers,

you must provide a defined benefit pension plan for the full-time officers. Refer to the section entitled Act 600

of 1956 (page 10) for details. Municipalities with fewer than three full-time officers may provide a pension

plan for the officers. If the municipality does provide a plan, it can be an Act 600 plan or another benefit struc-

ture determined by the governing body (defined benefit or defined contribution) subject to the applicable provi-

sions in the borough or township codes. If the municipality has a non-Act 600 plan and subsequently increases

the force to three full-time officers, the plan must be amended to conform to Act 600 on a prospective basis.

Boroughs and Townships - Non-Police

Boroughs and townships may provide a pension plan for non-uniformed employees or paid firefighters. There

are no statutes outlining plan provisions for these plans. In general, when a non-uniformed or firefighter plan is

started, the governing body determines the benefits. Refer to the section titled Starting a New Pension Plan

(page 28) for more information about setting up plan provisions and other matters to consider for a new plan.

If your municipality already sponsors a plan for non-police employees, the governing body may amend any of

the provisions at any time. However, if union employees participate in the plan, and pension benefits are sub-

ject to bargaining, you may need to negotiate benefits. Before adopting changes to a defined benefit plan, an

actuarial study must be performed to evaluate the financial impact on the plan. Refer to the section titled

Amending Existing Pension Plans and Collectively Bargained Plans (page 30) for details.

Third Class Cities

A Third Class City must provide a defined benefit pension plan for its police officers and paid firefighters in

accordance with the provisions of the Third Class City Code. It may provide a plan for non-uniformed employ-

ees. If it does, the benefits must comply with the Third Class City Code under the plan for officers and employ-

ees or the optional plan for officers and employees. Refer to the section entitled Third Class City Code (page

13) for details.

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Pennsylvania Municipal Retirement System (PMRS)

Any municipality, whether a borough, township, or city can establish a plan with or transfer a plan to PMRS.

This includes police, fire and/or non-uniformed plans.

The PMRS is governed by a state law (Act 15 of 1974) that creates a separate pension system. It establishes an

entire administrative and investment program including a choice of various levels of benefit provisions. For

pension purposes, a plan maintained under PMRS must comply with the PMRS statute rather than Act 600 orthe Third Class City Code, where applicable.

If a plan transfers out of PMRS, it must then only comply with Act 600 or the Third Class City Code, if appli-

cable. A transfer out of PMRS must be approved by the governing body, a 75 percent vote of the plan mem-

bers, and by the PMRS Board of Trustees.

All Municipal Plans

The above discussion relates to the types of plans sponsored and the statutes that govern plan provisions. All

local government plans in Pennsylvania, however, are governed by the funding and reporting requirements of

the Municipal Pension Plan Funding Standard and Recovery Act, Act 205 of 1984. This law sets forth the way

in which a municipality must calculate and pay the annual contribution to the plan, the reports that need to be

prepared, filing deadlines, and when state aid entitlements are determined. All of this information is discussed

in detail within this manual.

Defined Benefit Pension Plan

A defined benefit retirement plan is designed to pay a specific benefit to a retiree upon retirement. The benefit

is calculated according to a specific formula that may be a percentage of the participants final average salary, a

percentage of the participants average pay multiplied by the participants credited service, or a dollar amount

multiplied by the participants credited service. The benefit is typically payable monthly for the remainder of

the retirees lifetime.

Other options may be available. When a retirement plan is created, plan provisions defining the benefit struc-

ture and events that trigger benefit payments should be established in a governing document. The benefit struc-

ture must be designed to comply with applicable laws. Plans may have varying benefits that reflect the needs

and desires of plan participants within the limits set by law.

Defined Contribution Pension Plan

A defined contribution retirement plan is designed to accept fixed contributions, which are allocated to individ-

ual accounts to provide a benefit upon retirement. The benefit is determined based upon the accumulated con-

tributions, investment earnings, and experience gains and losses credited to the individuals account. The

benefit is typically paid in a lump sum.

Investment Trust Account

An Investment Trust Account is opened by the plan Trustee/Administrator when a plan is created. The purpose

of the Trust Account is to serve as a bank account into which contributions are deposited and from which ex-

penses and benefit payments are disbursed (see illustration on page 4).

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Annual Funding Requirements

For defined benefit plans, the annual amount to be contributed/deposited (funding requirement) is calculated by

an actuary based upon certain facts and assumptions, including the following:

Benefit provisions/specifications

Return on investment

Future salary increases

Timing and likelihood of participant termination, death and/or disability

Generally, if there are no changes to the plan provisions, and if the assumptions used in calculating the required

contributions match the actual plan experience, the annual funding requirements will remain relatively con-

stant, as a percentage of payroll. If, however, actual experience differs from the assumptions (for example,

higher/lower investment earnings are realized; higher/lower salary increases are granted; and /or plan provi-

sions change), then the contribution requirement will change.

For defined contribution plans, the annual contribution is typically fixed by the plan provisions as a percentage

of pay or a flat dollar amount. Contribution requirements are not affected by investments gains or losses.

Funding

As the foregoing illustration indicates, there are five sources of funding that will eventually be used to pay

benefits: (1) state aid; (2) employee contributions; (3) municipal contributions; (4) investment earnings; and

(5) gifts.

State Aid

The Commonwealth of Pennsylvania provides for an annual allocation to municipal pension plans from a spe-

cial fund dedicated exclusively to fund retirement plans. The source of the fund is taxes paid on foreign fire

and casualty insurance premiums.

The amount each municipality receives depends on such factors as the financial need of its plans, the number of

full-time employees participating in a plan, if the plan is an eligible plan, if the plan has been in effect for three

Employer Contributions

Investment Earnings

State Aid

Gifts Employee Contributions

PLAN ASSETS

Benefit PaymentsExpenses

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or more years, if all forms were filed in a timely fashion, total payroll of eligible plan members and if there is

an Order to Show Cause outstanding due to non-compliance with state regulations.

One check is sent to each municipality, around October 1, regardless of the number of plans sponsored (unless

the municipality is part of a regional plan). The governing body must allocate the check among the plans and

make the deposits to the respective funds within 30 days. If additional funds are needed to meet the minimum

obligation, the municipality must contribute the balance by December 31.

Refer to the sections on General Municipal Pension System State Aid (page 18) and Budgeting for Annual

Pension Plan Costs (page 22) for more detail on state aid allocations and minimum obligations.

Employee Contributions

Typically, in defined benefit plans, employee contributions serve to reduce the cost to the employer. In defined

contribution plans, employee contributions enhance the retirement benefit. They can be a significant source of

funding for your plan. Employee contributions may be mandatory or may be reduced or eliminated (Act 600

police plans require employee contributions), depending upon the laws governing your plan.

Traditionally, these contributions have been deducted from the employees paycheck on an after-tax basis.

However, it is permissible to deduct mandatory employee contributions on a tax-deferred basis for federal taxpurposes (refer to IRS Code 414(h)(2)). This change would reduce the negative impact the contributions would

have on the employees net pay. Total wages, including contributions to the retirement plan, will remain sub-

ject to social security (to the annual maximum), state, and local taxation. It is important to note that these tax-

deferred contributions would be subject to federal tax at the time of distribution from the plan, either by termi-

nation payout or disability or retirement benefits. To adopt the tax-deferred method of collecting employee

contributions, you must maintain a qualified plan under the Internal Revenue Code and amend your plan prior

to making this change.

Statutory Requirements

There are numerous regulations and acts that affect municipal retirement plans and dictate procedures and re-porting requirements. This manual contains summaries of several of the more important provisions with which

you should be familiar.

It is important that you contact your actuary prior to making changes in your pension plan. Act 205 requires an

actuary to prepare a study for defined benefit plans before any change is adopted.

Internal Revenue Code (IRC)

Municipal pension plans are exempt from the provisions of the Employee Retirement Income Security Act

(ERISA); however, they are not exempt from certain provisions of the IRC. Since it is the IRC that provides

the plan participant with special tax advantages, it is extremely important that the plan document meet those re-

quirements in order to be considered a qualified plan. Refer to the section entitled Plan Documents (page32) for more information regarding federal compliance.

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Fiduciary Responsibility of Governing Body

Responsibility of the Municipal Officials

In designing and administering a public pension plan, many questions arise from the governing body and the

participants. The following are some of the most commonly asked questions.

This is the employees pension plan, shouldnt they run it? After all, its their money.

What benefits can we give them?

What are the costs of adding benefits?

If the investments lose money, can we be held responsible?

What does fiduciary responsibility mean to us?

Answers

The ultimate responsibility for any pension plan rests with the governing body. The governing body has a fidu-ciary responsibility for the ongoing administration of the pension plan. A fiduciary is defined as a person who

has a duty to transact business or handle the money, not for his (or her) own benefit but for the benefit of an-

other. A fiduciary relationship imposes a duty to act in good faith and candor, with a special regard to the in-

terest of the person who places this trust and confidence in the fiduciary.

The governing body has certain responsibilities under state statutes, whether it is Act 600, Act 205, the Third

Class City Code, or other statutes that have a direct impact on the pension plan. It is important for the govern-

ing body to be aware of and comply with the statutory requirements that are further detailed in this handbook.

In addition, because this is a qualified plan under the Internal Revenue Code, other IRS specific items must be

included so that the pension plan maintains its tax-qualified status. Refer to the section entitled Plan Docu-

ments (page 32).

The responsibility for the plans solvency and proper investment management rests with the governing body.

Refer to the section entitled Investment Management (page 38). Benefits are granted to employees through

collective bargaining or unilaterally. The benefits are then formalized in the labor contract, ordinance or resolu-

tion and plan document. In a defined benefit pension plan, if the plan assets lose their value or do not perform

to expectations, the governing body must make up any additional contributions (directly or through increased

state aid). It is not only mandated by statute but also fiscally responsible for a municipality to have an actuarial

study performed prior to making any benefit changes. The study should provide a reasonable estimate of the fi-

nancial impact on the plan.

Delegation of Duties

The governing body has the authority to delegate certain duties to committees or boards and/or to investmentmanagers, third party administrators, trustees, or custodians. A pension board can serve a valuable function in

the ongoing administration of the pension plan. It should, however, act in an advisory capacity (except for

those responsibilities specifically outlined in the Third Class City Code). The ultimate responsibility rests with

the governing body.

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Act 205 of 1984 The Municipal Pension Plan FundingStandard and Recovery Act

This municipal pension reform legislation was signed on December 18, 1984. Act 205 includes reforms for thefunding, reporting, and financing of municipal pensions in Pennsylvania. The legislation addresses the follow-

ing major issues.

Standardized actuarial and financial reporting

Minimum employer contribution requirements

Revision of the allocation formula for distributing state aid to pension plans (including funding for non-uniformed plans)

Recovery plan and additional state funding for distressed pension plans

Revision of the distribution of State Foreign Fire Insurance taxesfor VolunteerFirefighters Relief Associations

Actuarial and Financial ReportingFor the plan year commencing in 1985, each municipality and authority must have an actuarial report prepared

for each defined benefit pension plan. The valuation must follow a prescribed format, and be calculated using

standardized assumptions and cost methods. In addition, plan valuations must be performed biennially (every

odd year - 1987, 1989, etc.). The retirement plan biennial valuation must be prepared and signed by an ap-

proved actuary. The definition of approved actuary is a person who has at least five years of actuarial experi-

ence with public pension plans and who is either enrolled as a member of the American Academy of Actuaries

or enrolled as an actuary pursuant to the Federal Employee Retirement Income Security Act of 1974.

The reports must be submitted to the Public Employee Retirement Commission (PERC) every other year (bien-

nially) beginning with 1985, regardless of the size of the plan, unless the plan is sponsored by a distressed mu-

nicipality receiving Supplemental State Assistance. A distressed municipality must submit reports annually.

Plans with 1,000 or more members must also submit a five-year experience investigation report every four

years.

Filing Requirements

Act 205 actuarial reporting forms for all plans, including defined benefit and defined contribution, must be

filed with PERC no later than the last business day of March following the year of valuation. The law clearly

places the responsibility for supervision and direction of the plan with the Chief Administrative Officer of the

pension plan, who is also responsible for filing the document. In the event the report is not filed in a timely

fashion, all financing that the Commonwealth provides to the municipality for the pension plan may be with-

held until the report is filed. In some instances, the withheld Commonwealth financing may be less than it

would have been otherwise. All pension plans may pay the fees associated with the preparation of the actuarialreports and consulting services from the assets of the pension plan.

Amortization of Unfunded Liabilities

An unfunded liability is the amount by which the plans liabilities exceed the assets. Effective January 1, 1985,

the unfunded liability was recalculated for all municipal pension plans. The amount of the initial unfunded li-

ability was required to be amortized over the next 30 years or the average future service of the active partici-

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pants, whichever is less. Any change in the unfunded liability after 1985 is required to be amortized as

follows.

Any change in actuarial assumptions, or modification of benefits for active members, was required to be amor-tized over the next 20 years or the average future service of the active participants whichever is less.

Any modification in benefits for retired employees that results in increased unfunded liabilities was required tobe amortized over ten years.

Any increase or decrease in the unfunded liability caused by actuarial experience (actuarial loss or gain) was re-quired to be amortized over 15 years or theaverage futureservice of theactive participantswhichever is less.

Municipal pension plans sponsored by distressed municipalities are permitted to apply different rules to amor-

tize their initial unfunded liability. In addition, the municipality may use the maximum amortization periods al-

lowed for changes in unfunded liability without regard to the average future service.

Act 61 of 1997 permits a municipality to make an irrevocable election to eliminate the existing amortization

bases, periods and annual payments in favor of a straight 10 year amortization of the current unfunded actuarial

accrued liability. Municipalities considering this option should consult their actuary or consultant to discuss

the short and long term advantages and disadvantages of this election.

Contribution Requirements

Annually, Act 205 requires the Chief Administrative Officer of the pension plan to determine the total financial

requirement and the Minimum Municipal Obligation (MMO) for the next year based upon the most recent actu-

arial report prepared under the requirements of Act 205 and submitted to PERC. Refer to the section on Budg-

eting for Annual Pension Plan Costs (page 22) for more information.

Benefit Changes

Prior to the adoption of any benefit plan modification by the governing body of the municipality, Section 305

of Act 205 requires that the Chief Administrative Officer of the pension plan provide the governing body withan actuarial study of the financial impact of the change.

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Act 600 of 1956 - The Municipal Police Pension Law

Compliance

Act 600 applies to police pension plans for full-time police officers in a borough, town or township, and thoseregional police departments established after May 10, 1996. Municipalities with one or two full-time police of-

ficers may comply with Act 600; however, municipalities with three or more full-time police officers and re-

gional police departments must comply with Act 600. (Plans operating under Act 15, the PennsylvaniaMunicipal Retirement Law, will differ slightly). Act 600 includes mandatory and optional provisions for bene-

fits.

Note: As of the date of this manual, it is the opinion of the Department of the Auditor General that all home

rule municipalities, which would otherwise be required to follow Act 600, must comply with the provisions of

Act 600.

Mandatory ProvisionsAge and Service Requirements for Retirement

A participant must attain age 55 and complete 25 years of service in the same municipality to be eligible for a

normal retirement benefit.

Monthly Pension Benefit

The monthly pension benefit is fifty percent of the average monthly salary. The average monthly salary must be

based on a period of not less than 36 months and not more than 60 months immediately prior to retirement. For

those municipalities where police officers are covered by the Federal Social Security Act, the municipality

may, at its discretion, offset the monthly pension benefit upon attainment of normal social security retirement

age. The offset may be up to 75 percent of the primary social security benefit as calculated using wages earned

by the participant while employed as a police officer by the municipality.


Plans not covered by social security have a mandatory employee contribution rate of between 5 and 8 percent

of the officers total monthly compensation. For plans whose members are covered by social security, the man-

datory rate is 5 percent, if there is no social security offset.

If the retirement benefit is offset by social security, the maximum mandatory employee contribution will be cal-

culated as follows:

5% minus (3% social security offset percentage)

For example, if your plan includes a 75 percent offset, the mandatory employee contribution rate is calculated

this way:

5% (3% 75%) = 5% 2.25% = 2.75%.

Return of Employee Contributions

Employees who are ineligible to receive a pension benefit for any reason must have their total contributions

plus interest refunded by the plan upon termination of employment. If the reason for payment is due to the

death of the employee, then the refund is paid to the beneficiary.

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Intervening Military Service

A regularly appointed member of the police force who has been employed as such for at least six months, and

who enters active military service for the United States, must receive retirement credit for the period of active

military service. To be eligible, the person must return to employment within six months of separation from

such military service and be ineligible to receive military retirement pay as a result of that service.

In-Service Disability

The plan must provide for a disability benefit if a police officer incurs a total and permanent disability as a di-

rect result of, and in the line of duty of, employment as a police officer. Specific benefit provisions are to be

determined by the governing body.

Optional Provisions

Reduced Retirement Age

A reduction in the retirement age from 55 to as low as 50 may be provided if an actuarial cost study indicates

that it is feasible. The completion of at least 25 years of service is still required.

Reduce Social Security Offset

The social security offset to pension benefits may be reduced or eliminated. Such a reduction would changethe mandatory employee contribution rate (refer to Employee Contributions on page 9).

Vesting Provisions

A vesting provision may be added allowing an employee who terminates with 12 or more years of service to re-

ceive a partial pension benefit. The benefit would commence when the employee would have become eligible

for normal retirement.

Elimination/Reduction of Employee Contributions

Employee contributions may be reduced or eliminated on an annual basis if this does not result in the need for a

municipal contribution. This elimination/reduction must be actuarially certified and authorized by the govern-

ing body annually by ordinance or resolution.

Surviving Spouse BenefitA benefit designed to pay the spouse of a deceased police officer who was retired or eligible to retire at the

time of death. The benefit is equal to 50 percent of the normal pension benefit to which the participant was en-

titled or was actually receiving.

Killed-in-Service Provision

The plan may adopt a benefit for spouses or dependent children of officers killed in service. The benefit struc-

ture is to be determined by the municipality.

Length of Service Increments

Additional retirement benefits may accrue to participants for each year of completed service in excess of 25

years. The maximum additional benefit may not exceed $100 per month.

Cost-of-Living Adjustments (COLA)The plan may provide for an annual increase of retiree benefit payments, which may not exceed the percentage

change in the Consumer Price Index. The total benefit plus increases may not exceed 75 percent of the average

salary used for computing retirement benefit. Further, the total increases may not exceed 30 percent of the

original benefit. No COLA shall be granted which would impair the actuarial soundness of the fund. For plans

whose assets exceed the Present Value of Future Benefits, that is, fully-funded, the COLA increase may exceed

the limits listed above for the retirees that have received benefits for 20 or more years.

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Non-Intervening Military Service

This provision provides that a participant may purchase retirement credit for up to five years of active military

service with the United States which occurred before employment with the municipality began, if the partici-

pant is not eligible to receive military retirement pay for that service. The participant must pay an amount equal

to the statewide average normal cost for similar municipalities (but not more than 10 percent), times the partici-

pants average annual compensation during the first three years of employment as a police officer, plus interest

at the rate of 4.75 percent compounded annually, from the participants date of hire to the date of payment.

Early Retirement Provision

This recently enacted provision allows members with 20 or more years of service the option of retiring prior to

normal retirement. The benefit is the actuarially reduced accrued benefit. The actuarial reduction is based on

the interest rate and mortality table used in the latest actuarial report submitted to the state.

Example: A police officer is hired at age 30 with a normal retirement age of 55. The officer is currently 50

with an average monthly salary of $4,000. The latest actuarial report submitted to the state used a UP-84 mor-

tality table and 7.5 percent interest rate assumption resulting in a reduction factor of 62.7 percent. The benefit

would be calculated in the following manner.

Normal Retirement Benefit

Average Monthly Salary x 50% = Monthly Benefit$4,000 x 50% = $2,000

Accrued Benefit (payable at Normal Retirement Date) (NRD)Actual Yrs of Yrs from Hire x Monthly Normal = Accured Benefit

Early Retirement Benefit (payable immediately)

Accrued Benefit x Actuarial Equivalent = Early Retirement

Reduction Factor Benefit

$1,600 x 62.7% = $1,003.20

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Regional Police Departments and Purchase of ServiceAgreements

History

Prior to the passage of Act 33 of 1996, it was generally concluded by regional pension plan sponsors that re-

gional police departments and the associated pension plans were created by Act 180, the Intergovernmental Co -

operation Act. Accordingly, they believed that they could transfer participation credits, transfer plan assets,

grant benefits that exceeded Act 600 limitations, and do all the things necessary to administer the new pension

plan.

For those municipalities that entered into agreements with other municipalities to create a regional police de-

partment and a regional police pension plan, it was widely accepted that the benefit structure would include the

best provisions of each of the original participating police pension plans.

Act 33 of 1996

There is now a benefit structure mandated by statute. All regional police pension plans created on or after May

9, 1996, must comply with the provisions of Act 600 (on page 9). Plans established prior to that date may con-

tinue to provide benefits previously granted, but any subsequent amendments must comply with the provisions

of Act 600.

Mandated Requirements for Proposed Regional Plans

Prior to the establishment of the new pension plan, the specific benefit structure must be determined and an ac-

tuarial study must be completed to determine the cost of the new plan. The pension plan must be adopted by or-

dinance by each of the participating municipalities with a consistent structure. Participants of the regionalpolice pension plan shall be credited with all of their time spent in the prior plan, if they are employed by the

regional department within six months of its creation.

Purchase of Service Agreements

What happens when a municipality disbands their full-time police department and purchases police services

from another municipality that hires their officers? Prior to Act 33, the police officers could not receive credit

for the previous full-time employment. Now, unless the municipality is a city, an officers service credit and

appropriate assets may be transferred from the purchasers pension plan, provided that the transfer is addressed

in the original intermunicipal agreement and that the officer is employed within six months of the date that the

purchasing municipalitys police force was terminated.

Should the purchasing municipality decide to terminate the agreement, they may rehire the police officer within

six months and transfer the appropriate assets from the pension plan of the municipality that provided the po-

lice service.

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Third Class City Code

Application

The Third Class City Code includes sections pertaining to the establishment of retirement plans for employeesof Third Class Cities. These cities must establish a pension fund for police officers and one for paid firefight-

ers. The cities may establish a pension fund for other city employees using the regular city plan requirements or

the optional plan requirements. The following is an overview of the pension sections of the Third Class City

Code; however, due to vagueness in the original statute and various lawsuits that have been decided, certain

provisions have been interpreted differently from one city to another. The City should seek the advice of their

solicitor for interpretation of the individual provisions applicable to their plan.

Note: As of the date of this manual, it is the opinion of the Auditor General that home rule municipalities that

were previously third class cities must maintain pension plans that comply with the Third Class City Code.

Police Pension Fund Mandatory ProvisionsAge and Service Requirements for Retirement

The city shall establish a minimum service requirement of no less than 20 years of service as a police officer in

the same city to be eligible for a normal retirement benefit. If a minimum age is prescribed, it must be age 50.


The monthly pension benefit is 50 percent of the average monthly salary. The average monthly salary is the

greater of the highest average monthly salary during any five years of service or the rate of monthly pay at the

date of termination of employment. Refer to 53 PS 39303, Third Class City Code.


The mandatory employee contribution rate will be up to 5 percent of the officers compensation, plus one dollar

per month to provide for the service increment benefit.


Employees who become ineligible to receive a pension benefit for any reason must have their total contribu-

tions, without interest, refunded by the plan. If the reason for payment is due to the death of the employee, then

the refund is paid to the beneficiary.

Length of Service Increment

Additional retirement benefits accrue to attainment of age 65 to participants whose length of service exceeds

the minimum required for retirement. The amount of additional benefit is 1/40 times the monthly pension bene-

fit for each year over the minimum; it may not exceed $100 per month.

Surviving Spouse Benefit

A benefit is paid to the surviving spouse or dependent children of a deceased police officer who was retired orkilled in service. The benefit is equal to 50 percent of the normal pension benefit to which the participant was

entitled, without reduction for early commencement. The benefit continues until the later of the death of the

spouse or attainment of age 18 of the participants children.


The plan provides for a disability benefit if a police officer incurs a total and permanent disability as a direct re-

sult of, and in the line of duty of, employment as a police officer. The benefit will be the normal monthly pen-

sion benefit.

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Police Pension Fund Elective Provisions

Vesting Provisions

Vesting provisions may be included to allow a terminated participant with at least 12 years of service to leave

employment and receive a partial pension benefit. The benefit will commence when a participant would have

become eligible for normal retirement.

Disability

A disability benefit may be provided for a police officer who incurs a total and permanent disability not as a di-

rect result of, and in the line of duty of, employment as a police officer. If the participant has fewer than ten

years of service, the benefit will be 25 percent of the annual compensation benefit; and if more than ten years

of service, the benefit will be 50 percent of the annual compensation benefit. Refer to 53 PS 39303, Third Class

City Code.

Cost-of-Living Adjustments

The plan may provide for cost-of-living adjustments to the pension benefit, but they may not permit a retiree to

receive a benefit that exceeds 50 percent of the salary of a patrolman of the highest pay grade. Increases must

be on a uniform scale.

Non-Intervening Military ServiceThis provision provides that a participant may purchase retirement credit for up to five years of active military

service with the United States, which occurred before employment with the city began, if the participant is not

eligible to receive military retirement pay for that service. The participant must pay the employee contributions

that would have been paid during the service, plus the equivalent of the contributions of the city as a result of

that service.

Surviving Spouse Benefits

The plan may increase the killed-in-service or retiree death benefit for surviving spouses to 100 percent of the

normal retirement benefit. Also, a benefit may be provided for spouses of participants whose death did not oc-

cur in the line of duty. For deaths before 10 years of service, the benefit may be 25 percent of compensation

and after 10 years of service may be 50 percent of compensation.

Firefighters Pension Fund Mandatory Provisions

Age and Service Requirements for Retirement

The city shall establish a minimum service requirement of no less than 20 years of service as a firefighter in the

same city to be eligible for a normal retirement benefit. If a minimum age is prescribed, it must be age 50.


The benefit is 50 percent of the average monthly salary. Average monthly salary is the greater of the highest

average monthly salary during any five years of service or the rate of monthly pay at the date of termination of

employment.

Employee ContributionsThe mandatory employee contribution rate will be up to 5 percent of the firefighters compensation, plus up to

one dollar per month to provide for the service increment benefit.





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Length of Service Increment

Additional retirement benefits accrue to participants to attainment of age 65 whose length of service exceeds

the minimum required for retirement. The amount of additional benefit is 1/40 times the monthly pension bene-

fit for each year over the minimum; it may not exceed $100 per month.


A benefit is paid to the surviving spouse or dependent children of a deceased firefighter who was retired or

killed in service. The amount of the benefit is the amount the member was receiving or would have been re -

ceiving if he were retired. The benefit continues until the later of the death of the spouse or attainment of age

18 of the participants children.


The plan provides for a disability benefit if a firefighter incurs a total and permanent disability as a direct result

of, and in the line of duty of, employment as a firefighter. The amount of benefit and the date of commence-

ment will be determined under the terms of the plan and will not take into consideration any benefits provided

under applicable workers compensation laws.

Firefighters Pension Fund Elective Provisions

Vesting Provisions


employment and receive a partial pension benefit. The benefit will commence when a participant would other-

wise have become eligible for normal retirement.


The plan may provide for cost-of-living adjustments to the pension benefit, but may not permit the benefit to

exceed 50 percent of the then current rate of pay to active firefighters of the highest pay grade.

Non-Intervening Military Service

This provision provides that a participant may purchase retirement credit for up to five years of active military

service with the United States, which occurred before employment with the city began, if the participant is not

eligible to receive military retirement pay for that service. The participant must pay the employee contributionsthat would have been paid during that service, plus the equivalent of the contributions of the city for that serv-

ice, and interest on the city contribution amount.

Officers and Employees Pension Fund Mandatory Provisions


A participant must complete at least 20 years of service in the employment of the same city and have attained

age 60 to be eligible for a normal retirement benefit.


The benefit is 50 percent of the average monthly salary. Average monthly salary is the greater of the average

monthly salary during the last or any five years of service. The monthly benefit will be reduced by 40 percent

of the participants primary social security insurance amount (if covered) at the time that the participant be-

comes eligible to receive the social security primary insurance benefit.


The mandatory employee contribution rate will be 3.5 percent of the monthly compensation on which social se-

curity allowances are payable and 5 percent of any monthly compensation in excess of that amount. (However,

should the officers and employees not be covered by social security, then the contribution rate will be 2 per-

cent.)

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Early Termination Provisions

A participant who has completed at least 20 years of service but has not attained age 60 shall be entitled to a

deferred pension provided the participant continues paying monthly employee contributions equal to the last

amount due while in active employment. Payments must continue until employee reaches the age of 60.

Disability

The plan provides for a disability benefit if an employee incurs a total and permanent disability after complet-

ing at least ten years of service and before attaining age 60. The benefit is calculated in the same way as the

normal retirement benefit but without offset for social security benefits.

Officers and Employees Pension Fund Elective Provisions


A benefit may be provided to the surviving spouse of a deceased participant who has retired or was killed inservice. The benefit is equal to 50 percent of the pension benefit to which the participant was entitled as of the

date of death. City Council may require additional contributions by employees of up to 1 percent of compensa-

tion, if deemed necessary, to fund this benefit.

Elimination of Social Security Reduction

The pension board may permit a participant to elect to receive a monthly pension benefit without any reduction

for the payment of social security benefits provided that the participant pays the fund an amount equal to the

difference between what was actually contributed to date and the amount which would have been contributed if

the contribution rate had always been 5 percent of pay. Those participants must continue to make contributions

of 5 percent after such election.

Vesting Provisions

Vesting provisions may be included to allow a terminated participant with at least 12 years of service to leaveemployment and receive a partial pension benefit. The benefit will commence when a participant would other-


Optional Plan for Officers and Employees Mandatory Provisions


A participant must complete at least 20 years of service in the employment of the same city and have attained

age 60 to be eligible for a normal retirement benefit.


The benefit is 50 percent of the average monthly salary. Average monthly salary is the greater of the average

monthly salary during any five years of service or the rate of monthly pay at retirement. The monthly benefit

will be reduced by 40 percent of the participants primary social security insurance amount (if covered) at the

time that the participant becomes eligible to receive the social security primary insurance benefit.


The mandatory employee contribution rate will be 3.5 percent of the monthly compensation on which social se-

curity allowances are payable and 5 percent of any monthly compensation in excess of that amount. However,

should the officers and employees not be covered by social security, then the contribution rate will be 3 per-

cent.

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Early Termination Provisions

A participant who retires or is terminated after 20 years of service shall be entitled to a deferred pension pro-

vided the participant continues paying monthly employee contributions equal to the last amount due while in

active employment. Payments must continue until employee reaches the age of 55.

A participant who is involuntarily terminated after 12 years of service, but before 20, shall be entitled to a pro-

rated benefit (based on ratio of completed service to 20 years) payable at age 60 (or immediately if already past

age 60). Contributions must continue until the participant has contributed for 20 years.

Disability

The plan provides for a disability benefit if an employee incurs a total and permanent disability after complet-

ing at least 15 years of service and before attaining age 55. The benefit is calculated in the same way as the nor-

mal retirement benefit but without offset for social security benefits.

Optional Plan for Officers and Employees Pension Fund Elective Provisions


A benefit may be provided to the surviving spouse of a deceased participant who has retired, who was eligible

to retire, or was killed in service. The benefit is equal to 50 percent of the pension benefit to which the partici-

pant was entitled as of the date of death. City Council may require additional contributions by employees of up

to 1 percent of compensation, if deemed necessary, to fund this benefit.

Elimination of Social Security Reduction

The pension board may permit a participant to elect to receive a monthly pension benefit without any reduction

for the payment of social security benefits provided that the participant pays the fund an amount equal to the

difference between what was actually contributed to date and the amount which would have been contributed if

the contribution rate had always been 5 percent of pay. Those participants must continue to make contributionsof 5 percent after such election.

Vesting Provisions


employment and receive a partial pension benefit. The benefit will commence when a participant would other-


Service Increment

A participant can receive a monthly service increment benefit in addition to the monthly pension for complet-

ing more than 20 years of service. The service increment is calculated by multiplying the number of full years

of service completed in excess of 20 years by 1/40th of the monthly pension benefit. Service completed after

age 65 may not be counted. Eligible employees must contribute an additional 1/2 of 1 percent of their compen-sation.


The plan may provide for cost-of-living adjustments to the pension benefit, but may not permit the benefit to

exceed 50 percent of the current salary being paid to non-uniformed employees of the highest pay grade.

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ticipants. The financial need calculation and the unit value calculation are determined by the Department of the

Auditor General for each municipality that sponsors a retirement plan. The municipality will receive the lesser

of those amounts each year.

Financial Need Calculation

The financial need calculation is based upon the total payroll reported on the AG-385 Form filed with the De-partment of the Auditor General (AG) and the cost components contained in the most recent actuarial report

filed with the Public Employee Retirement Commission (PERC).

For each defined benefit retirement plan, PERC certifies to the AG, the Normal Cost Percentage (NCP) and ei-

ther the amortization contribution or the funding adjustment (10 percent of the amount by which assets exceed

the actuarial accrued liability). Your plan should never have both an amortization contribution and a funding

adjustment. The NCP is the normal cost (NC) plus the average administration expense (AAE) minus the mem-

ber contributions (MC), divided by the total annual payroll (TAP). These figures can be found on the Act 205

Form.

(NC + AAE MC) / TAP = NCP

The normal cost percentage is multiplied by the payroll on the AG-385 Form. (Note that this normal cost per-centage is different from the Normal Cost Percent used on your Minimum Municipal Obligation). The Depart-

ment of the Auditor General either adds the amortization contribution to the normal cost, or subtracts the

funding adjustment from the normal cost to determine the need for each plan.

(NCP x Payroll) + Amortization Payment (or) Funding Adjustment = Financial Need

The defined contribution Normal Cost Percentage is either the stated contribution rate or the contribution rate

determined by dividing the employer contribution by the payroll on the Act 205 Form. The Normal Cost Per-

centage is then multiplied by the AG 385 payroll to determine the financial need of the plan. The need for each

of the plans sponsored by a municipality is added together to determine the total municipal financial need.

Unit Calculation

The unit calculation is based upon the number of units for the municipality multiplied by the State Aid Unit

Value, as determined by the Department of the Auditor General.

The number of units for the municipality is determined by adding the applicable number of units that are attrib-

utable to each eligible employee. An eligible employee is an active member of an eligible pension plan, em-

ployed on a full-time basis (at least 35 hours per week), for a minimum of six consecutive months in the prior

year. The applicable number of units for each eligible employee is as follows:

Police Officer 2 units

Firefighter 2 units

All other employees 1 unitThe State Aid Unit Value is determined on an annual basis by the Department of the Auditor General based

upon the total amount of aid available, the total number of units certified by all eligible municipalities, and cer-

tain adjustments required by law. The chart on the following page shows the State Aid Unit Value amounts

through 1999.

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Allocation of State Aid

The State Aid amount for all plans sponsored by the municipality will be paid in one disbursement to the mu-

nicipality around October 1 of each year. The governing body of the municipality will decide how the funds

will be allocated among the eligible retirement plans sponsored by the municipality. It is important to remem-

ber that all of these funds must be used for the pension plans, and must be deposited into the plan(s) within 30

days after being received by the municipality.

The Department of the Auditor General periodically audits each of the retirement plans of the municipality to

ensure the proper allocation and administration of State Aid funds to provide retirement benefits.

In addition, if applicable, a separate disbursement is made to municipalities who continue to qualify under Act

147 of 1989, the Ad Hoc Cost of Living provision. The act mandated COLA increases for individual police

and firefighters retiring normally before February 1984 and under the disability provision of the plan with less

than 10 years of service. The act also provided for an annual reimbursement of these COLA increases as long

as the municipality submits an AG 490 Form and attachments on a timely basis. (April 1st

of each year).

Should the municipality grant a COLA after the enactment of the Act, February 1989, the new COLA will af-

fect any COLA granted under Act 147 and the amount of reimbursement from the Auditor General.

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The disbursement is made to the municipality and need not be deposited into the pension funds.

Type of Retirement Amount Years Retired as of January 1, 1989

Normal $25/mo. At least 5, but less than 10

Normal $75/mo. At least 10, but less than 20

Normal $150/mo. At least 20

Disability $50/mo. Less than 10 and retired prior to January 1, 1985

Under court order, the surviving spouse of the retiree may continue to receive the survivor portion of the Ad

Hoc COLA if the plan provided for such a benefit.

Year Value Change Year Value Change Year Value Change

1985 1,146$ 1990 2,501$ -23.5% 1995 2,311$ 1.1%1986 1,624$ 41.7% 1991 2,490$ -0.4% 1996 2,200$ -4.8%

1987 2,173$ 33.8% 1992 2,331$ -6.4% 1997 2,248$ 2.2%

1988 2,746$ 26.4% 1993 2,310$ -0.9% 1998 2,437$ 8.5%

1989 3,269$ 19.0% 1994 2,286$ -1.0% 1999 2,217$ -9.1%

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Budgeting for Annual Pension Plan Costs

Minimum Municipal Obligation

The required municipal contribution, referred to as the Minimum Municipal Obligation (MMO), is calculated

annually. The MMO represents the municipalitys annual funding requirement. The calculation must be pre-

pared for the upcoming calendar year, certified by the Chief Administrative Officer, and submitted to the

municipalitys governing body by the last business day of September. Note that if the plans assets exceed the

present value of future benefits, based on the last valuation prepared for filing with the Public Employee Retire -

ment Commission, no MMO is required.

MMOs for Defined Benefit Plans

Normal Cost

This is the annual cost component of funding a pension plan. The actuarial report contains the amount ex-

pressed as a percentage of payroll.

Administrative Expense

Act 205 allows actuarial and certain other administrative expenses to be paid from plan assets at the option of

the Plan Sponsor. If expenses are paid from plan assets, an amount representing an estimate of the expenses for

the upcoming year should be included in the MMO. The last actuarial report may contain an estimate of the av-

erage administrative expense, which may be expressed as a percentage of payroll.

Amortization Payment

This figure is from the actuarial report and reflects the net annual amortization payment of the Unfunded Actu-

arial Accrued Liability, if any. If the actuarial report indicates that the plan has an Amortization Payment, there

will be no Funding Adjustment.

Estimated Total Annual PayrollThis figure is the estimated pay for each member of the plan during the current year (which is the year before

the payment is due). This figure should be your best estimate of pay for the current year determined by adding

current year W-2 pay up to the date of calculation to the projected salary or base wages to year end, using the

payroll rates in effect from the date of calculation to year end. Payroll should only be included for active plan

members at the time you are preparing the calculation.


Multiply the estimated payroll above by the contribution rate anticipated for next year.

Funding Adjustment

This figure is from the most recent actuarial report and reflects 10 percent of the excess of the Actuarial Value

of Assets over the Actuarial Accrued Liability, if any. If the actuarial report indicates that the plan has a Fund-ing Adjustment, there will be no Amortization Payment.

Insurance Premiums

If the pension plan owns life insurance policies, determine net insurance premiums payable from plan assets for

the next plan year using your best estimate.

State Aid

State Aid is no longer included in the Minimum Municipal Obligation (MMO) calculation. The financial re -

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quirement calculation is reduced only by employee contributions and the funding adjustment. Municipalities

are now required to deposit the full MMO using state aid and municipal contributions. A separate estimate

should be made for anticipated state aid to be received for budgeting purposes.

If budgeted state aid is overestimated, the community must make up the shortfall by year-end, even though the

shortfall amount was not included in the original budget. Just the opposite will occur if the state aid is underes-

timated. In that case, the municipal share is simply reduced or eliminated.

An accurate estimate of state aid will enable municipalities to include an appropriate amount in the budget for

local contributions and avoid surprises the following October when the state aid is received. This is especially

important if the employee contribution rate depends on whether a local contribution will be needed (as in an

Act 600 plan).

MMOs for Defined Contribution Plans

Though preparing an MMO for a defined contribution plan is required, the amount calculated may not be equal

to the actual employer contribution obligation. This is unlike a defined benefit plan in which the MMO is ex-

actly equal to the employer obligation. In a defined contribution plan, the MMO should be viewed as more of a

budget estimate. The actual contribution is determined by the employer contribution rate, actual plan yearpayroll and actual eligible participants. The payroll that should be used for the MMO calculation should be the

projected payroll for the budget year (upcoming year) including projected increases in salaries and membership.

Amending an MMO

An MMO may, but is not required to, be amended after September 30 to increase the estimated payroll, or if a

more current actuarial valuation report is completed for filing with PERC. However, it is important that the

employee contribution rate of the final MMO matches the actual rate for the upcoming year. The final MMO

must be adopted by the time the final municipal budget is adopted.

Contribution Due DatesState aid must be deposited to the individual plan(s) within 30 days of receipt (approximately October 30). The

balance of the MMO or employer contribution must be deposited to the appropriate plan by December 31.

Interest Payment/Penalty

For late deposits of state aid, interest must be deposited based on the actual rate that would have been earned by

the plan. Any unpaid portion of the MMO after December 31 must be paid along with an interest penalty. The

interest penalty is calculated based on the greater of the interest rate assumption used in the actuarial report or

the six- month Treasury Bill rate on the last business day of the plan year. The interest is calculated from the

beginning of the plan year in which it was due through the month of payment, compounded monthly.

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Questions:

1. Can we pay our plans MMO at the beginning of the year so that we can earn as much interest as

possible?

Yes! Depositing all or part of the contribution at the beginning of the year for that year will help in-

crease plan earnings for the year. Then, when the state aid is allocated around October 1, you may sim-

ply reimburse the municipality for the amounts already deposited.

2. We deposit the employer contribution for our defined contribution plan on each payday with the

employee contribution. Can we use state aid for this?

Yes. When the state aid check comes, you can reimburse the municipality for contributions made year

to date (as long as they were for the current plan year) and reserve an amount needed to pay contribu-

tions for the balance of the year in an interest bearing account.

3. What should we do if we get more state aid than we need to pay our MMOs?

If you have funded the full amount of the MMO for your defined benefit plans and the required em-

ployer contribution for your defined contribution plans, you may use the rest in any of the following

ways:

Extra contribution to a defined benefit plan

Extra contribution to more than one defined benefit plan

Reimburse the municipality for any plan administrative expenses incurred duringthe year which were paidby the general fund

If none of these apply (because you only have a defined contribution plan and have no further administra-tive expenses to reimburse) you should contact the Department of the Auditor General to see if the excessshould be returned.

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_____________________Pension PlanSample Defined Benefit MMO for 20___

A. Normal Cost

1. Normal Cost as a Percent of Payroll ______________ %

2. Estimated 20__ payroll for active participants $______________

3. Normal Cost (A1 A2) $______________

B. Financial Requirement

1. Normal Cost (From A3) $______________

2. Anticipated insurance premiums (if applicable) $______________

3. Anticipated administrative expense $______________

4. Amortization payment, if any $______________

5. Financial requirement (B1 + B2 + B3 + B4) $______________

C. Minimum Municipal Obligation

1. Financial requirement (from B5) $______________

2. Anticipated employee contributions $______________

3. Funding adjustment, if any $______________

4. Minimum Municipal Obligation (C1 - C2 - C3) $______________

Notes

Any deposit equal to the MMO must be made by December 31, 20___ to avoid an interest penalty.

20___ General MunicipalPension SystemState Aidmay be used to fund part or all of themunicipal obligation.

Anydelinquent MMOs from prior years must be included in the20___budget along with an interest penalty.

Certification

I hereby certify that the above calculations, to the best of my knowledge, are true, accurate and conform with

the provisions of Chapter 3 of Act 205 of 1984.

Prepared using the January 1, _________ Valuation.

________________________________________ _________________

Chief Administrative Officer Date

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Starting a New Pension Plan

Do you have employees working for your municipality who are not covered by a pension plan? If so, do you

want to start a new plan? If you already have a plan, do you want to expand the eligibility requirements to

cover your other employees? There are many questions that need to be answered before proceeding with a new

plan or expanding your current plan.

Police Employees

If the employees you are considering covering with a pension plan are full-time police officers, three questions

will guide your decision.

Do you have three or more full-time officers?

If you are a borough or a township with three or more full-time officers, you must construct the plans benefit

provisions in compliance with Act 600 (see section on Act 600, page 9). If you have fewer than three full-time

officers, the municipality may determine the benefit provisions at its discretion.Will you have three or more full-time officers in the foreseeable future?

If you dont currently have three or more full-time officers but will at a future date, the plan will have to be

amended at that point to comply with Act 600. The more provisions of the plan that are different from Act 600,

the more difficult the transition. If you dont anticipate ever having three or more full-time officers, you are not

required to conform with Act 600; however, you may choose to comply with Act 600.

Are you considering covering part-time officers?

You may not cover part-time police officers in an Act 600 plan.

Non-Police and One or Two-Member Police Departments

Do you want to give credit for past service?

If not, you have much more flexibility in plan design. Cost containment is simple. More careful plan design is

required if the plan is to credit past service to current employees. A defined benefit plan would more likely be

the type of plan that will meet this goal. You should consult an approved actuary to determine how the granting

of past service will affect plan costs.

What are your primary goals and objectives in providing a pension plan for your employees?

Reward long-service employees

Entice and retain employees with a valuable retirement program

Utilize state funding

Supplement a total benefits package

Do you want to include part-time employees in the plan?

You can include part-time employees; however, you wont be eligible for state aid for those employees.

Should you have a defined benefit plan or a defined contribution plan?

A defined benefit plan is one in which the amount of monthly benefit at retirement is defined by a formula. It is

payable for the lifetime of the participant, and possibly to a beneficiary as well. A defined contribution plan is

one in which the amount of the annual contribution is defined. The retirement benefit is based on the value of

the participants account at the time of distribution.

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Defined Benefit Plans

Benefit formula

Can be based on years of service

Can be based on final average salary

Can be based on final average salary and years of service

Can be a flat dollar amount

Retirement eligibility requirements

Minimum age

Minimum service

Early retirement with a reduction

Ancillary benefits

Total and permanent disability pension Death or survivor benefits

Vested pension

Advantages

Secure retirement income to retirees because benefit is guaranteed for life

Easier for employees to judge level of income provided by pension plan

Employee bears no investment burden

Can credit past service for current employees

State aid is provided for administrative expenses paid from plan

If investments perform better than expected, contributions may go down or be eliminated

Disadvantages

Employer bears investment burden; if investments underperform, contributions increase

Dependingon the formula, canbe difficultto understand howmuch of a benefit hasbeen earnedat a given time

Contribution levels can fluctuate

Must employan actuary to evaluate the plan biennially andany time benefit improvementsare being considered

Benefits are not typically portable

Defined Contribution PlansContribution rate

Can be a percentage of pay

Can be a flat annual dollar amount

Can be a weekly or hourly rate

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Hire an investment manager/custodian for the fund

Invest and manage assets

Handle deposits and payments

Maintain record of fund transactions

Provide periodic value of assets

Appoint a Chief Administrative Officer

Should be someone familiar with state regulations and involved in the day-to-day operations of the plan.

Make sure that you obtain and file the necessary forms

Act 205 Form prepared biennially as of January 1 every other odd-numbered year, and due to be filed 15 monthslater; obtain from Public Employee Retirement Commission (for defined benefit plans, form must be certifiedby an Approved Actuary).

AG-385 Form prepared annually; report employee payroll for calendar year; filing deadline is March 31 afterthe end of the year; forms can be obtained from the Department of the Auditor General.

Starting your plan effective the beginning of a year (January 1) will entitle your municipality to state aid sooner.

The state requires that a municipality fund a new plan for three full years before being eligible for state aid.

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Amending Existing Pension Plans and CollectivelyBargained Plans

Pension Plans Covering Union Employees

Most unions bargain over pension benefits. It