November 21, 2023
City of Keizer PERS Accounting Issue: Frequently Asked Questions (FAQ)
What is the issue?
In 1993 and 1994, the City of Keizer started employer contributions to the 457 plan for union and non-union employees respectively. Those employer contributions were not included in employees’ reportable wages to PERS as they were not considered made at the employee’s election. Within the last year, the City learned that this may have been incorrect. Reportable wages or subject salary is the basis for calculating PERS retirement benefits.
We cannot say for sure why the decision was made to account for it in the way that it was because employees who made that decision are no longer working for the city. However, we believe they were following the PERS Employer Handbook, which is not consistent with state statute.
What are the parts to the PERS retirement plan?
In Oregon, PERS has three classes of members. Employees are Tier 1 members if they worked for a PERS participating employer before January 1, 1996. Tier 2 members are those who were first employed on or after January 1st, 1996, and before August 29, 2003. Employees hired on or after August 29, 2003, are Tier 3 or OPSRP members. Each tier provides different retirement benefits based on state statutes and the Legislature clearly instructs PERS to treat Tier 1 and 2 differently from OPSRP. All three tiers of PERS programs have two parts. The first part is a traditional defined benefit pension program. The second part is the IAP Individual Account Program (IAP), which is similar to a private sector 401(k) plan.
What is a 457 retirement account?
The 457 Plan, an additional benefit, is a voluntary deferred compensation retirement account that is similar to a private sector 401(k) plan. Employers may make a matching contribution to this plan. The 457 plan and the subsequent employer contribution were added as an employee benefit to make the City of Keizer more consistent with other government agencies that participate in Social Security (i.e. Keizer does not participate in Social Security), PERS, and in some cases a deferred compensation plan.
How and when was this accounting issue identified?
In late 2022, during collective bargaining preparations with the Keizer Police Association, the City identified a potential issue with reporting of 457 contributions. Management identified a potential difference in the formula used to calculate what is reported to PERS as reportable or subject wages.
What has the City of Keizer done?
Once the issue was raised, the City of Keizer worked with outside legal counsel in good faith to determine whether the city’s understanding of the PERS Employer Handbook was correct. After receiving legal counsel, city staff reached out to PERS for their interpretation. Ultimately, the city requested a formal PERS staff determination.
What has PERS said about the identified issue?
On November 8, 2023, PERS responded to the City of Keizer’s request for a formal determination. In the letter, PERS held that:
The City of Keizer is working with legal counsel to ensure it complies with the legal obligations to Tier 1 and Tier 2 members as determined by PERS.
How will this impact retiree’s accounts?
Given the recent PERS formal determination and ongoing tort claims notices, the City of Keizer is working with affected parties and necessary stakeholders. Given the long-term duration of the underreporting and complex retroactive accounting fixes that may be needed, the City of Keizer will communicate as expeditiously as possible to ensure accurate and responsive information. The City of Keizer will comply with our legal obligations.
How much is this going to cost the city?
The City will be working with accounting and actuarial professionals to determine the cost. The goal is for the City to comply with its legal obligations.
Where do we go from here?
The Keizer City Council voted on November 20, 2023 to not appeal the determination letter by PERS, which stated that 457 contributions for Tier 1 and Tier 2 employees are considered subject salary for purposes of PERS reporting and OPSRP members are considered non-subject salary. Staff will be working with retirees and their representatives to pursue a resolution for those affected by this situation as quickly and accurately as possible.