SUPPLEMENTAL COLA APPROVED
Q. Mike, in the August 2010 POA Journal you wrote that the Retirement Board would determine, at its December meeting, if a supplemental COLA (Cost of Living Allowance) would be paid for fiscal year 2010-2011. What happened?
A. Good news! At its meeting of December 14, 2010 the Retirement Board approved a full supplemental COLA of 1.5% (the maximum allowed) retroactive to July 1, 2010. This supplemental COLA applies to all retirees and survivor beneficiaries. It comes on top of the basic cola of 2% paid to all miscellaneous retirees and new public safety plan (Tier II) retirees. Tier I public safety (police and fire) retirees received a basic COLA based on the MOU wage increases for active police officers and firefighters; that basic COLA was less than 2%. The Good News for Tier I retirees is that, with receipt of the supplemental COLA, their total COLA for FY 2010-2011 will now be calculated at 3.5% - the same as Tier II.
The Retirement Board’s consulting actuarial firm, Cheiron, determined that there were sufficient excess earnings to pay the full supplemental COLA. Cheiron determined that there was an excess of $430 million for the fiscal year ending June 30, 2010 to provide the additional supplemental COLA. Excess earnings are those that exceed the Retirement Systems expected return of 7.75% for FY 2009-2010. The trust funds actual market value earnings were $1,655, 017,000 with an expected return of $1,224,964,000; the difference of $430,053,000 is the excess earnings which will be used to pay the supplemental COLA.
I expect that the supplemental COLA will be paid with the February retirement check and will also include a retroactive supplemental COLA for the months of July 2010 through January 2011.
And the trust fund earnings for the first quarter of FY 2010-2011 showed growth of 8.83% - already ahead of their expected return of 7.75%. If this performance keeps up for the next three quarters, there will surely be another supplemental COLA declared effective July 1, 2011.
Let’s hear the applause for our Retirement Board and their management/investment team. What a wonderful job they did to produce these sterling investment returns.
LONG-TERM CARE INSURANCE INCREASES
Mike, I have a long-term care policy with CAL-PERS. I have had it for some years now. On July 1, 2010, I received a 9% rate hike. I considered dropping the policy, but I decided to keep it. Did I make the right financial decision?
Yes, in my judgment you made the right decision – to keep your long term care insurance. By way of disclosure, I also have, as does my wife, a long term care policy with CAL-PERS. I kept my policy but took a small drop in potential benefits in order to incur no raise in premium.
Consider this! In September 2010 insurer John Hancock announced that it would ask state regulators for permission to boost premiums on many of its long term care policies by an average of 40%. In October Genworth, another major player in the long-term care arena, announced that it would request an 18% rate increase for most policy holders who purchased insurance between 1994 and 2004 – affecting about one-forth of its policy holders. MetLife, another industry giant, announced in November that it would no longer sell new individual or group long term care insurance policies but would continue to service existing ones.
Almost every long-term care insurer has raised rates at least once, and many are on their second round of price hikes. These insurers have found that the number of claims, the length of claims and the use of benefits from 1990 to 2010 were much higher than the companies expected. Hence the need for rate hikes. While the private insurers need permission from regulators in most states before the premium increases can take effect, they have not had much trouble in the past obtaining their requested rate hikes. The CAL-PERS board of directors, a public entity, must approve any hikes in long-term care policies that it has issued; it did approve the July 2010 increase for which a compelling case was presented to support the increase.
When you received the notice of a 9% rate hike effective July 2010, you essentially had 3 real options. Keep your policy in force and pay the higher premium (which I believe you did), scale back the coverage to reduce the cost (keep the premium from rising; this is what I did), or drop your policy. Despite the rate hike you experienced, insurance is the most cost-effective way to protect yourself and your family from the potentially devastating expense of long-term care. The latest annual survey by the MetLife Mature Market Institute found that the national average rate for a private room in a nursing home increased 4.6% in 2010 to $83,585 per year ($229 per day). The average hourly rate for a home health aide remained unchanged at $21, totaling $210 for a ten-hour day. The costs in California and in the SF Bay Area are about 25% more than the national average.
There are only four ways to cover the potential costs of long-term care should you or a family member require it: pay for 100% out of your pocket, have family members pay the costs, qualify for Medicaid by nearly completely spending down your estate/assets, or you can purchase long-term care insurance. Despite present and future rate hikes, I believe that long-term insurance, to the extent you can afford coverage, is the best option.
DISTRIBUTION OF FUNDS AFTER COMPLETION OF DROP
Mike, I am about to complete my third year in DROP. What are my options with respect to the monies that I have accumulated in my DROP account?
What a wonderful financial concern to have! Within 30 days after exiting from DROP (Deferred Retirement Option Plan), you must elect either a direct lump-sum distribution or a direct rollover of your account. If you choose the direct rollover, you must give the San Francisco Retirement System written instructions to roll your account into a qualified retirement plan. If you select the lump sum payable directly to you, you will be taxed, in the year of receipt, for the full amount – a tax disaster.
You would have the option to roll DROP funds into the CCSF 457 Deferred Compensation Plan (DCP). But to do so, you must currently be a participant in the deferred compensation plan. So if you want to roll over the DROP monies into the CCSF deferred compensation plan, just make sure that you are a member/participant immediately prior to your roll over. To roll over DROP funds into the City’s DCP, make an appointment with a SFERS counselor by calling 415-487-7085 or use the SFERS website (www.sfgov/sfers, under Active Members/Safety Members/DROP) to complete the necessary form (Rollover Assets for Police Pensions). If you choose this option, the Retirement System will send these roll-over assets to Great-West for deposit into your DCP account. The DROP roll over funds are placed in a separate DCP account so that you would have 2 accounts with Great-West: a contribution account and a roll over account. The roll over account provides the same investment options that are now available for the contribution account.
Note: Great West currently advises that distributions from DROP funds deposited into the DCP plan will not be subject to the “under-age 59 ½ 10% special excise tax penalty” if: (1) you retire during the year in which you reach the age of 55 or older, (2) your receive a distribution from your roll over DCP account, and (3) you take a distribution between the ages 55 and 59 ½.
Your roll over can be partial or complete; that is, you can roll over all or a part of your DROP account monies. Remember, if you do a partial rollover and receive the remainder, you have created a fully taxable event. You also, of course, have the option to roll over your DROP monies into your IRA or 401(k) plans. This can be complicated. If you are unsure as to what to do, contact your financial advisor/planner/CPA for advice.
The annual contribution limits for the CCSF deferred compensation plan for 2011 remain the same as for 2010. The maximum deferral amount is $16,500. There is an additional age 50+ catch-up contribution of $5,500, which means that you can contribute up to a maximum of $22,000 to the plan if you are age 50 or older during the 2011 calendar year. The standard catch-up contribution amount will also remain at $16,000 in 2011, which means that you can contribute up to a maximum of $33,000 to the plan if you are within 3 years of normal retirement age (for police/fire that is age 50).
Mike Hebel has been the POA’s Welfare Officer since January 1974. He is an attorney and a certified financial planner. He has received awards/recognition as a Northern California “super lawyer” and included amongst “America’s top financial planners.” He represents POA members at the City’s Retirement Board and at the Workers’ Compensation Appeals Board. He also advises on investment matters pertaining to the City’s deferred compensation plan. He is currently the chair-person on the SF Police Credit Union’s Supervisory Committee. Mike served with the Police Activities League (PAL) as president and long-term Board member. Mike retired from the SFPD in 1994 after a distinguished 28 year career. He is a frequent and long-time contributor to the POA Journal. If you have a question for Mike, send an e-mail to mike@sfpoa.org or call him at 861-0211.
