ADMINISTRATIVE BUDGET 2019 - ESSEX REGIONAL RETIREMENT SYSTEM Final Budget Approved December 17, 2018
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ADMINISTRATIVE
BUDGET
2019
ESSEX REGIONAL RETIREMENT SYSTEM
Final Budget
Approved December 17, 2018
1
2019 ERRS ADMINISTRATIVE BUDGET
The total proposed 2019 administrative budget is $1,058,455 which is $17,620, or 1.6% less
than the 2018 administrative budget. In fact, the final 2019 administrative budget is less than
the administrative budgets approved in both 2016 and 2017. Going back to the
administrative budget I inherited when I was appointed as Executive Director in March of
2011, the 2019 administrative budget is $80,444 or 7.1% less than the 2011 administrative
budget. Amazingly, of the eight administrative budgets developed since I was appointed as
Executive Director, total administrative spending has been reduced from one year to the next
six times.
This budget includes a 2% cost-of-living adjustment and an additional amount for a
performance-based pay increase for ERRS employees, exclusive of the Executive Director.
This budget also includes funding for a longevity pay schedule approved by the Board at their
meeting on November 26, 2018, and funding for filling a currently vacation position. The
total amount allocated for employee salaries, however, has not changed from the earlier
version of the budget presented to the Advisory Council.
The reputation of ERRS has improved so much in recent years that our staff have become
attractive candidates for other retirement systems. This was borne out in 2018, as ERRS lost
two key staff to other retirement systems. To address this challenge, the Board took several
steps relative to personnel in the hopes of retaining experienced, qualified employees. It is
a daunting challenge to continue to operate with a level-funded budget while addressing a
competitive employment market and in the face of rising costs. But we will continue our best
efforts to deliver services in the most cost-efficient and effective manner possible.
Charles E. Kostro
Executive Director
[T]he 2019 administrative budget is $80,444 or 7.1% less than the 2011 administrative
budget. Amazingly, of the eight administrative budgets developed since I was
appointed as Executive Director, total administrative spending has been reduced from
one year to the next six times.
2Table of Contents
Introduction and Background ............................................................................................................................... 4
2019 Administrative Budget Summary …………………………………………………………………………………………………………………. 8
Salaries .............................................................................................................................................................. 13
Investment Consulting Fees ................................................................................................................................ 22
Legal Expense Budget ......................................................................................................................................... 23
Medical Records Budget ..................................................................................................................................... 24
Fiduciary Insurance Budget ................................................................................................................................. 24
Service Contracts Budget .................................................................................................................................... 25
Condominium Expense Budget ........................................................................................................................... 25
Professional Services Budget .............................................................................................................................. 27
Education and Training ....................................................................................................................................... 28
Administrative Expenses .................................................................................................................................... 29
Furniture and Equipment.................................................................................................................................... 34
Travel ................................................................................................................................................................ 34
Reserve Fund ..................................................................................................................................................... 35
Spending Plan Estimates for 2017 ....................................................................................................................... 36
Investment Management Fees............................................................................................................................ 36
Custodial Bank Fees............................................................................................................................................ 36
Other Expense.................................................................................................................................................... 36
Summary ........................................................................................................................................................... 38
Line-Item Budget................................................................................................................................................ 40
3INTRODUCTION AND BACKGROUND
The Essex Regional Retirement System (ERRS) is one of 104 public retirement systems in the
Commonwealth of Massachusetts and is a member of the Massachusetts Association of
Contributory Retirement Systems (MACRS). Retirement systems in the Commonwealth are
governed by Chapter 32 of the General Laws, which sets out the requirements by which
systems must operate, as well as determining the eligibility and benefits for members and
retirees. The Public Employee Retirement Administration Commission (PERAC) is the state
oversight agency for local and regional retirement systems throughout Massachusetts.
Membership in the ERRS is mandatory immediately upon the commencement of
employment for all non-teaching permanent, full time employees. In order for a part-time
employee to be eligible for membership in ERRS, the individual must be permanently
employed twenty or more hours per week by a single member unit of the system and is
required by statute to receive at least $5,000 in wages annually. The retirement system
considers permanently employed to mean that the individual is guaranteed twenty hours of
regular compensation each and every week.
Any elected official who earns at least $5,000 in wages may elect to become a member of the
retirement system within ninety days of election. Upon becoming a member, an elected
official must maintain the status of receiving $5,000 in wages annually to continue
contributing to the retirement system and accruing creditable service.
ERRS was founded as part of Essex County government in 1937 and became a regional
retirement system after the abolition of county government under changes made to Chapter
34B, Section 16, in 1996. Massachusetts General Law (MGL) Chapter 131 of the Acts of 2010
established the new Essex Regional Retirement System.1 A new Board was created under this
legislation to oversee the retirement system. The terms of office for the new Board members
began in December of 2010. A new Executive Director was hired in March of 2011.
1
Chapter 131 of the Acts of 2010 added Section 19A to Chapter 34B of the Massachusetts General Laws.
4ERRS is governed by a five-member Board who establish the policies under which the
retirement system operates. Board members also approve all financial transactions, including
the approval of retirement benefits to members. Board members are appointed or elected
as specified by MGL Ch. 34B, Section 19A for terms ranging from three to five years.
Current ERRS Board members are:
First Member: Alan J. Benson Term Expires: 12/01/2020
Second Member: Kevin A. Merz Term Expires: 12/01/2021
Elected Member: H. Joseph Maney Term Expires: 12/01/2019
Elected Member: Susan J. Yaskell Term Expires: 12/01/2019
Fifth Member: Vincent R. Malgeri Term Expires: 12/12/2020
The day-to-day operations of the retirement system are managed by the Executive Director.
The legislative body for the retirement system is an Advisory Council consisting of full-time
treasurers or other qualified officials of the member units. The Advisory Council meets twice
annually and is responsible for supervising and certifying the procedures involved in the
election of members to the retirement board.
As of December 31, 2017, the retirement system had 1,841 retirees and beneficiaries, 2,649
active participants and 1,132 inactive participants with a vested right to retirement benefits
or to receive a refund of their contributions.
The retirement system provides for retirement allowance benefits up to a maximum of 80%
of a member's highest three-year or five-year average annual rate of regular compensation.
Benefit payments are based upon a member's age, length of creditable service, level of
compensation, and group classification. There are three classes of membership in the
retirement system: Group 1, Group 2, and Group 4. Group 1 consists of general employees
which includes clerical and administrative positions. Group 2 consists of positions that have
5been specified as hazardous. Group 4 consists of police officers, firefighters, and other public
safety positions.2
A superannuation (or so-called regular) retirement allowance may be received upon the
completion of twenty years of service or upon reaching the age of 55 with ten years of service
if the member was hired after 1978 and if classified in Group 1 or Group 2.
A person who became a member on or after April 2, 2012 is eligible for a superannuation
retirement allowance upon reaching the age of 60 with ten years of service if in Group 1, 55
years of age with ten years of service if in Group 2, and 55 years of age if hired prior to 1978
or if classified in Group 4. 3
The investment of the retirement system’s funds is the responsibility of the Board. ERRS
Board members and employees are bonded by an authorized agent representing a company
licensed to do business in Massachusetts. The MACRS program for ERRS provides
$50,000,000 fiduciary protection for Trustees and employees, as well as a $1,000,000 fidelity
policy for crime coverage.
Approximately 97% of ERRS’ investments are in Pension Reserve Investment Trust (PRIT)
Fund. The PRIT Fund is administered by the Pension Reserves Investment Management
(PRIM) Board. Approximately 3% of the System’s funds are invested in pooled alternative
investments or reside in cash funds.
The most recent full valuation of the retirement system was completed in 2018. As of January
1, 2018, the actuarial accrued net liability of the system is $393.5 million. On an actuarial
basis, the funded ratio of the retirement system is 55.40%.
The Board has set the assumed rate of investment return at 7.50% with a full funding target
date of 2035.
2
Massachusetts General Law Chapter 32, Section 3 provides that officers and inspectors of the department of state police
are assigned to Group 3.
3
Please note that you must have performed the duties of the Group 2 or 4 position for at least 12 months immediately prior
to termination or retirement.
6The funds of the retirement system are held within six accounting categories. These six funds
are:
1. Annuity Savings Fund – Contains all member contributions allocated to each individual
member’s account. These funds pay for a portion of each retiree’s pension benefit.
2. Annuity Reserve Fund – Contains the investment income that is credited to this fund.
These funds also contribute to the payment of a retiree’s benefit.
3. Pension Fund – Contains the funds paid through the annual appropriation, 3(8)(c)
reimbursements received by ERRS and other reimbursements and settlements. This
fund contributes to the payment of a retiree’s benefit that is not funded by the Annuity
Savings Fund.
4. Military Service Fund – Contains monies paid by units for retirement credit earned by
employees serving in the military.
5. Expense Fund – Contains the investment funds credited to pay administrative expenses
of the retirement system.
6. Pension Reserve Fund – Contains ERRS investment income monies and is used to
support annual shortfalls, if any, in the Pension Fund.
ERRS files each year an Annual Statement of Financial Condition with PERAC. The annual
statements filed by the retirement system are available on-line in the Fiscal Reports section
of the ERRS website at www.essexregional.com.
ERRS has contracted with Powers & Sullivan to conduct annual audits of the retirement
system. Powers & Sullivan audits are also available on the Fiscal Reports page of the ERRS
website.
The ERRS annual spending plan is separated into two general sections. These two sections
are the (1) administrative budget and (2) the estimated spending on non-discretionary
accounts. Administrative costs include all personnel, contracted professional services, legal,
building and administrative expenses. Non-discretionary costs are those expenses ERRS is
mandated by law to pay, or whose costs are calculated on a basis points (bps) basis depending
on the amount of assets under control at the time of billing. A retirement system has no
7control over the payment of benefits, or payments required by statute, or fees based on a
bps calculation as stated in a fund agreement negotiated years earlier. These types of
transactions include retirement benefit obligations, retirement benefit allocations computed
under Massachusetts General Law Chapter 32, Section 3(8)(c) and payable to other
retirement systems, the refund or transfer of member accounts, and investment manager
fees.
2019 ADMINISTRATIVE BUDGET SUMMARY
The total spending proposed in the 2019 ERRS administrative budget is $1,058,445. This is
down from the $1,082,750 administrative budget presented to the Advisory Council in
October. The reduction in the administrative budget is due additional information that has
become available since the fall Advisory Council meeting. The key reductions are:
➢ Legal Fees: The final budget for legal fees was reduced by $5,000. This new amount
reflects actual spending in 2017 ($65,932) and actual spending through ten months in
2018 ($55,522.) The legal budget had been increased in recent years due to an
unexpected spike in disability cases discovered in 2015 which carried over into 2016.
Legal spending has returned to more traditional levels in the last two years and the
final 2019 administrative budget reflects that adjustment.
➢ Condominium Fees: The final budget reflects a reduction of $2,000 from the October
budget proposal. The actual monthly condo fees for 2019 have been received and the
final budget number reflect actual amounts for next year.4
➢ Health, Life and Dental Insurance: The increase in this line-item has been reduced
from the October proposal based on actual expenses through November of 2018.
➢ Newsletter Expense: This line-item was reduced by $2,500 based on the actual cost
of the two newsletters issued in 2018.
➢ Retirement Expense: This line-item was reduced by $13,170 in the final budget. ERRS
has spent most of 2018 operating short-handed as two employees have left to accept
higher paying positions in other retirement systems. Due to the cumbersome hiring
4
Please see the section of this report entitled “Condominium Expense Budget” for a full discussion of the proposed parking
lot repaving project and the potential fees associated with it.
8process at ERRS, the length of time that positions go unfilled is extensive. Although
this places an extraordinary burden on the remaining staff, it does reduce actual
spending on salaries for the retirement system. Since the retirement appropriation is
allocated based on each unit’s share of the total salaries of all members of the
retirement system, ERRS’ long periods of operating without full staff does result in a
lower retirement appropriation. The earlier budgets had been based on the
retirement system at full staffing.
The 2011 administrative budget was the last one issued prior to the hiring of the new
Executive Director in March of 2011. In comparison with the budget inherited in 2011, the
final 2019 administrative budget is $80,444 less than the administrative budget approved by
the Board and the Advisory Council in 2011. In six of the last eight years, the ERRS
administrative budget has actually decreased when compared with the prior year’s budget.
In fact, the average annual change in the administrative budget between 2011 and 2019 is a
negative (2.5%). The chart below shows the total budget for each year between 2011 and
2019 and percentage increase or decrease each year.
ERRS Administrative Spending Changes
2011 to 2019
Year Administrative Budget % Change
2011 1,138,899
2012 1,086,524 -4.6%
2013 1,059,698 -2.5%
2014 1,047,664 -1.1%
2015 1,035,976 -1.1%
2016 1,063,081 2.6%
2017 1,059,575 -0.3%
2018 1,076,075 1.6%
2019 1,058,455 -1.6%
Average Annual Change -2.5%
The staff at ERRS have been able to reduce costs in many areas of the administrative
budget by competitively bidding for services, and by routinely evaluating and
streamlining operations. For instance, competitively bidding services such as the office
9alarm system and cleaning services have resulted in thousands of dollars in cost
reductions.
Further, the staff at ERRS now perform several functions previously conducted by
outside consultants or vendors. For example, in the last few years the Board has
eliminated its investment consultant, its custodial bank, and the Board secretary, which
has reduced expenditures by nearly $100,000.5 However, the retirement system still has
approximately $10 million in privately managed investment funds which require
reporting and oversight. In addition, Board and Advisory Council meeting minutes still
must be recorded. All of these and other functions (such as the longstanding practice of
writing the twice annual newsletter in-house) are performed by ERRS staff and have
been done without any corresponding increase in pay and without the payment of
stipends to any ERRS employee for performing these functions.
The next chart shows the budget requests from 2011 to 2019.
ERRS Administrative Budget Requests
1,170,000
1,138,899
1,125,000
1,086,524
1,076,075
1,080,000 1,059,698 1,063,081
1,035,976
1,035,000 1,059,575 1,058,455
1,047,664
990,000
945,000
900,000
2011 2012 2013 2014 2015 2016 2017 2018 2019
5
The cost of the custodial bank (approximately $65,000) is not reflected in the administrative budget. This cost was based
on a bps calculation depending on the total assets of the retirement system and was reflected in Part II of the budget.
10The largest item in the budget is employee salaries, which is 46% of all administrative
spending. The percentage share of the budget for employee salaries has increased over
the past eight years. For instance, employee salaries in the 2011 budget represented
42% of administrative spending. However, employee salaries constitute a greater share
of the budget in 2019 due to decreased overall spending, not increased salary spending.
In fact, in 2011, the ERRS salary budget was $474,311. Eight years later, in 2019, the
ERRS salary budget is $490,375. This is a total increase in salaries over an eight-year
period of $16,064. This translates to a percentage change in salaries over eight years of
3.4%, or an average annual increase of 0.4%.
Overall since 2011, actual administrative spending has always been under budget and
has only exceeded $1 million once (in 2016 and then by only $4,284.) By contrast, from
2007 to 2010, actual administrative spending was never less than $1 million, with a high
of $1,235,910 in 2009.
Compared to 2009, the 2019 ERRS administrative budget is $177,455 less (a 14.4%
reduction). As the cost to administer the retirement system is eventually passed through
to the units of ERRS, these savings are eventually realized, not by the retirement system
itself, but by its employer units.
In fact, the just completed valuation study for January 1, 2018, provides independent,
third-party confirmation that the administrative cost savings generated by the
retirement system are being passed on to ERRS employer units. The January 1, 2018
valuation study stated:
Administrative expenses for the years ended December 31, 2017 and 2016 were
$983,842 and $989,207, respectively, compared to the assumption of $1,127,500
for calendar year 2016 and $1,172,600 for calendar year 2017. This resulted in a
gain of $436,169 for the two-year period, including an adjustment for interest.
11Based on information on expenses provided by the Retirement System, we have
lowered the assumption from $1,127,500 to $1,000,000 for calendar year 2018.6
It is no real trick to cut a budget – you simply spend less. The challenge in controlling
costs is always to do so while also improving the services provided and simultaneously
preserving or enhancing the organization’s operations.
Since 2011, ERRS has reduced administrative spending while also adding new programs
to improve the services provided to our retirees and members, and to create a more
efficient and accountable retirement system. Improvements include the
implementation of a new database system with enhanced capabilities for retirees and
members to access their individual accounts, and, in 2018, the addition of an employer
reporting system that is more accurate in the posting of member contributions.
In addition, beginning in 2012, ERRS hired a private audit firm to insure the integrity of
its financial management. The Government Accounting Standards Board (GASB)
subsequently added new reporting requirements for retirement systems and
municipalities, expanding the scope of the private audit firm’s responsibilities. It should
be noted that ERRS absorbed the cost of the municipal reporting (GASB 68) as part of its
audit costs, saving the towns within the retirement system this added expense.
No budget can go on indefinitely absorbing increases in costs while being reduced.
Further, no organization can continue to absorb reductions in resources without
eventually losing the ability to provide quality service or to retain capable staff.
However, for eight years, the staff at ERRS have managed to reduce costs while
maintaining or even improving the services provided to its retirees and members. The
proposed 2019 administrative budget, as will be described, does it’s best to maintain
this level of fiscal responsibility and exceptional performance.
6
Actuarial Valuation Results as of January 1, 2018 for the Essex Regional Retirement System, page 21. Segal Consulting
Group © 2018.
122019 ADMINISTRATIVE BUDGET NARRATIVE
SALARIES
The Salaries line-item is comprised of the stipend paid to Board members and the
salaries paid to the staff of the retirement system. Each section is discussed separately
below.
Board Stipend
Board members are paid an annual stipend of $4,500 which is paid out in twelve equal,
monthly installments and is paid whether the Board member attends the regular
meeting for a given month or misses the meeting. The stipend was increased from
$3,000 to its current amount of $4,500 by a vote of the Advisory Council on April 30,
2014. This is the maximum amount permitted by law for a retirement board member
stipend, so there is no increase in this line-item for 2019.
Employee Salaries
The Essex Regional Retirement System employees six full-time staff. Please see the chart
below for the employees and their titles.
ESSEX REGIONAL RETIREMENT SYSTEM ORGANIZATIONAL CHART
Charles E. Kostro
Executive Director
Michael Nicolazzo Katherine Carleton Traci Masterson Vacant
Scott Provensal
Retirement Retirement Membership Member Services
Director of Finance
Coordinator Coordinator Coordinator Analyst
13The recommended budget for employee salaries for 2019 is $490,375. This represents
a $8,600 decrease, or a 1.7% reduction, compared to the salary budget in 2018.
Remarkably, the ERRS salary budget in 2019 is only $3,371 more than the actual
spending on retirement system salaries in 2008, some twelve years ago. In fact, the 2019
proposed salary budget is actually $101,910 less than the amount spent on employee
salaries in 2009. The chart below illustrates the effort made in the last eight years to
reset employee salaries at the retirement system.
ERRS SALARY SPENDING
700,000
600,000
500,000
400,000
300,000
200,000
100,000
-
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
ERRS was able to achieve these results by eliminating abusive pay practices and
consolidating job responsibilities, particularly in the period of 2011 to 2014. From 2016
until 2018, ERRS also had a period of relative stability among its employees, leading to a
staff that was experienced and knowledgeable in retirement system practices and
procedures.
However, in recent years it has also been challenging to retain experienced and qualified
staff in light of opportunities offered in other retirement systems and other public
agencies. In 2018, ERRS lost its Director of Finance after six years to another retirement
system, and in November of 2018, ERRS lost another employee to a different
Massachusetts retirement system. The loss of two employees within six months has
been difficult to absorb for small retirement system staff comprised of only six people.
14Due to turnover and the lengthy hiring process at ERRS, the retirement system has been
short-handed for nearly six months in 2018. Any turnover on a small staff is challenging,
but losing two valued, long-serving employees within six months of one another has
been particularly daunting.
Notwithstanding the short-fall in staff, ERRS continued to meet all deadlines and not
only performed all of its required duties, but was able to meet an increased demand in
services during this period.
For instance, from January 1, 2018 to July 31, 2018, ERRS processed fifty superannuation
retirements (compared to 48 in the same period in 2017). ERRS also processed six
disability retirements (compared to three in the same period in 2017), and processed
thirty-eight service purchases (compared to twenty-three in the same period in 2017.)
In attempt to become competitive with other retirement systems, and to retain capable,
experienced employees, while also keeping costs under control, the ERRS budget
process in 2018 focused heavily on the Employee Salaries line-item.
At the August meeting of the Board, the preliminary 2018 budget was presented. As
part of that presentation, the Executive Director provided the Board with a memo
reviewing the discussion of the salary line-item in 2017. This memo also summarized
the development of the salary reserve line-item and how comparing COLAs negotiated
via a collective bargaining agreement were not apt comparisons to ERRS and its
employees. A summary of this memo is provided below.
When the new Board was established in 2011, it directed that employee pay raises must
be based on performance and that across the board annual pay increases would not be
permitted. Since 2011, therefore, employee performance reviews have been conducted
each year. From 2012 to 2014, the preliminary budgets presented to the Board and to
the Advisory Council did not contain proposed pay raises as these budgets were
developed prior to the completion of the employee performance reviews.
15Upon completion of the employee performance reviews in December, the Executive
Director would recommend to the Board pay increases for some or all of the employees
based on these performance reviews. At the last meeting of the year in December, the
Board would act on these recommendations. The recommended performance-based
pay increases would typically range from 0% to 5% for individual employees. These
increases were added to the salary line-item in the final budget, which would then be
distributed to the Chief Executives and the Advisory Council members.
However, this meant that the Advisory Council did not see the budget containing the
employee pay raises. Even though the final budget would be distributed to all ERRS Chief
Executives and Advisory Council representatives, this process did not seem to be in
keeping with our efforts at total transparency.
In 2014, the then-First Member of the Board suggested the creation of a salary reserve
line-item. The salary reserve line-item was added to the employee salaries line-item in
the 2015 budget. The Board instituted this line-item so that funds would be available to
match any offer an ERRS employee might receive from another employer. The salary
reserve line-item was also used to fund the annual performance-based merit increases.
Establishing the salary reserve line-item meant that total salary spending was included
in all budgets, including the one presented to the Advisory Council. This line-item was
typically capped at less than three percent of the total of all salaries for those employees
who would be eligible for a performance-based merit increase.
Including the salary reserve line-item in the administrative budget meant that total
spending on employee salaries was disclosed in the budget presentation to the Advisory
Council. This was a much more transparent process. But it did not mean that ERRS
employees were guaranteed an across the board pay increase – quite the opposite in
fact.
It should also be understood that using COLAs negotiated in collective bargaining
agreements (CBAs) as a basis for comparison with the retirement system’s employees is
something of an “apples to oranges” comparison. First, no ERRS employee is covered
16by a CBA and, second, using only the salary increases provided by an employer unit per
a CBA ignores pay increases granted to non-CBA, salaried and exempt employees – a
group that is more similar in nature to the employees at the retirement system. Further,
cherry-picking CBA guaranteed pay increases also ignored payments such as longevity,
which are available to many municipal employees and were not, until recently, available
to employees of the retirement system.
Such a comparison also fails to recognize that there are significant differences between
performance based, or merit-based pay increases and guaranteed, across-the-board
COLAs. Merit based pay increases are internally focused and based on performance.
Managers rate their employees based on performance over the last year. Top
performers get a larger raise, while lesser performers get a lower raise and so forth.
Merit based pay increases are supposed to be motivational. Top performers will work
harder for a larger raise.
COLAs are externally focused and are based on the expected or past cost of the goods
and services a typical person will buy. COLAs are broad-based and have no relation to
performance.
It should also be noted that all ERRS employees are at-will and are not covered by a CBA.
There are obvious differences between an at-will employee and a member of union
whose wages, benefits and rights are governed by a CBA. An at-will employee has none
of the rights or guarantees typically accorded to an individual protected by a CBA.
This comparison between randomly selected across-the-board COLA increases
guaranteed by a CBA, and the amount recommended in the salary reserve line-item also
misrepresented the wage growth history at ERRS. This comparison seemed to imply that
wages at the retirement system were growing faster than wages in the municipal units.
This implication turned the actual, factual salary history at ERRS on its head and, in light
of the efforts made over the last seven years to limit or reduce wages at the retirement
system, was unfair.
17The preliminary budget presented to the Board in August of 2018, therefore, dispensed
with the salary reserve line-item that had been included in the budget since 2014, and
eliminated the traditional practice of awarding annual performance-based merit
increases. Instead, a straight cost-of-living adjustment (COLA) for ERRS employees was
recommended.
To ascertain the appropriate pay increase recommendation for ERRS employees in the
2019 budget, the survey of COLA increases that was submitted by eighteen ERRS units
to the Board in December of 2017 was utilized. The survey showed that fifteen of the
eighteen ERRS units awarded COLAs of 2% or greater.
Based on the results from that survey, the preliminary budget recommended across the
board COLAs for all five ERRS employees (exclusive of the Executive Director) of 2%
effective as of January 1, 2019. The chart below compares ERRS with the 2018 COLAs
awarded by member units of the retirement system.
Unit FY18 COLA
Topsfield 2%-4.5%
Newbury 3.00%
Lynnfield Water 3.00%
Salisbury 3.00%
Ipswich 2.50%
Merrimac 2.50%
Manchester 2.50%
Middleton 2.50%
Pentucket 2.50%
West Newbury 2.00%
Groveland 2.00%
Hamilton 2.00%
Essex 2.00%
Byfield Water 2.00%
ERRS 2.00%
Masco 1.0%-1.75%
Boxford 1.50%
Rowley 1.00%
18At the August meeting, the Board voted to add a $3,000 sub-line-item in the salary
budget for performance-based merit increases. The performance-based merit increases
would be in addition to the 2% COLA increase.
In light of the Board’s addition of the performance-based funds, at the September Board
meeting, certain guidelines were recommended on how the COLA and performance-
based adjustments will be awarded. These guidelines were approved by the Board as
part of the draft budget and are described below.
First, any new employee, or any current employee who has been promoted to a new
position, must successfully complete their six-month probationary period prior to
receiving the COLA increase. Also, any new employee, or newly promoted employee,
must complete at least one full year in their position before they are eligible for any
merit-based pay increase. (It should be noted that the requirement of completing at
least one full year in a new position prior to receiving a performance-based increase is a
longstanding practice at ERRS.)
The practical effect of these guidelines is that two employees hired and/or promoted in
2018 will be eligible for the COLA but not for any additional performance-based merit
increase. These guidelines will also avoid the occurrences in the past where some
employees went nearly two years without any pay adjustment because they were hired
early in the calendar year. This should be helpful in retaining existing employees and
preserving stability among the staff.
The draft budget presented in September also included guidelines for awarding merit-
based pay increases. As $3,000 was available for the five employees of the retirement
system, a cap of $600 per employee was established.
For example, a top performing employee receiving the highest possible rating will
receive a maximum $600 pay increase. Other employees, depending on their
performance rating, would then receive merit increases proportional to their
performance. For instance, an employee who is above average in their performance
19might receive $500, compared to the employee whose performance was excellent and
who received the $600 maximum.
Under these guidelines all employees would have a chance at an equal performance
bonus. Further, any increase is capped so that no one (or two) employees would receive
a disproportional share of the funds.
Limiting the merit increases to eligible employees only and capping increases at $600
per employee, means that the average of all pay increases if the maximum amount is
spent in 2019 is 2.2%. This is because two employees will be eligible only for the 2%
COLA and the Executive Director’s pay increase is contractually limited to 1.5%.
Nine of the eighteen units surveyed in 2017 provided an increase of 2.5% or more to
their employees according to the survey conducted after the Advisory Council meeting
last year. Therefore, at a 2.2% maximum increase, ERRS would be awarding pay
increases to its employees that would be less than what one-half of the surveyed units
awarded to its employees on an across-the-board basis and without any performance
evaluations or standards. The chart below shows where ERRS would stand compared
to the units who responded to the COLA survey last year if all eligible retirement system
employees received the maximum possible salary increase under the proposed 2019
budget and pay guidelines.
Unit FY18 COLA
Topsfield 2%-4.5%
Newbury 3.00%
Lynnfield Water 3.00%
Salisbury 3.00%
Ipswich 2.50%
Merrimac 2.50%
Manchester 2.50%
Middleton 2.50%
Pentucket 2.50%
ERRS 2.20%
West Newbury 2.00%
Groveland 2.00%
Hamilton 2.00%
Essex 2.00%
20Byfield Water 2.00%
Masco 1.0%-1.75%
Boxford 1.50%
Rowley 1.00%
At their meeting in November, the Board also approved a modest longevity pay schedule
for retirement system employees. This schedule was adopted in an effort to limit the
rate of turnover at the retirement system. A total of $1,000 was set aside for all
longevity payments to be made in 2019, and this amount was included within the
existing total allocated for salaries in the 2019 budget. The adoption of the longevity
pay schedule does not result in any increase in the 2019 employee salary line-item that
was provided to the Advisory Council in October.
In November, the Board also established a personnel subcommittee comprised of two
Board members and the Executive Director. This subcommittee was charged with
developing a new position description to fill the vacancy created by the departure of an
employee in November. Although the retirement system is in need of additional staff,
adding a new position does not seem probable at this time.
Rather, the goal of the personnel subcommittee was to develop a new position
description for the existing vacant position that would meet the operational needs of
the retirement system within the current staffing and budgetary limitations. A revised
position description was approved by the Board at its meeting on December 17, 2018.
The Executive Director also proposed pay increases for individual employees based on
the parameters contained in the 2019 budget at the December 17, 2018 Board meeting.
The chart below shows each position’s salary as of January 1, 2019 based on the Board’s
approval of the Executive Director’s recommendations. In addition, a new line-item is
added for longevity payments. Funds for this new line-item were transferred from the
salary reserve line-item. The next chart also contains the new position that will be
presented to the Board and its proposed salary.
21ERRS EMPLOYEE SALARY HISTORY BY POSITION
2016 2017 2018 2019 2019 2019
Salary Salary Salary Salary $ %
Employee Budget Budget Budget Budget Change Change
Executive Director 141,450.00 143,575.00 145,725.00 147,900.00 2,175 1.5%
Director of Finance 85,587.50 93,000.00 94,860.00 85,680.00 (9,180) -9.7%
Retirement Counselor 68,000.00 69,700.00 71,094.00 73,115.88 2,022 2.8%
Retirement Counselor 69,700.00 71,800.00 73,236.00 69,360.00 (3,876) -5.3%
Membership Coordinator 61,384.62 60,000.00 60,000.00 61,600.00 1,600 2.7%
Member Services Analyst - - - 51,675.00 51,675 0.0%
Administrative Assistant 51,467.81 48,750.00 49,725.00 - (49,725) 0.0%
Longevity - - - 1,000.00 1,000
Salary Reserve Fund 1,872.57 75.00 4,335.00 44.12 (4,291) -99.0%
Overtime - 500.00 - - - 0.0%
Total 479,462 487,400 498,975 490,375 (8,600) -1.7%
Year over Year Change 0.0% 1.7% 2.4% -1.7%
Just Employee Salaries 477,589.93 486,825.00 494,640.00 489,330.88
Year over Year Change 1.1% 1.9% 1.6% -1.1%
INVESTMENT CONSULTING FEES
In December of 2017, the Board voted to terminate its agreement with its professional
investment advisor. At that time, 97.1% of all ERRS assets were invested in the state
managed Public Retirement Investment Trust (PRIT) Core Fund. An additional 0.6% of
assets were held in cash accounts, including the PRIT Cash Fund. However, $10.4 million
of ERRS assets are still held in privately managed funds.
Since ERRS no longer has a contractual agreement with any private investment
consultant, no funds are allocated to this line-item in 2019.
22LEGAL EXPENSE
ERRS has employed two law firms since 2010. The Law Offices of Michael Sacco provides
legal services on retirement matters under Massachusetts General Law (MGL) Chapter
32. Murphy, Hesse, Toomey & Lehane provide legal services on management issues,
including Open Meeting Law compliance and personnel matters. Both firms were hired
in 2010 and were rehired after a competitive procurement process was completed in
2015.
In recent years, legal spending has been focused primarily on retirement matters, such
as the application of MGL Chapter 32, the adaption of ERRS policy and practices to new
court or administrative law decisions, and to the processing of disability applications.
The 2019 administrative budget recommends a $4,800 reduction in legal expense. This
reduction is based on the actual legal expenditures experienced in 2017 and through ten
months of 2018.
Murphy, Hesse, Toomey & Lehane remains under contract with ERRS, although their
services have not been necessary in recent years. As they remain under contract with
ERRS, they are annually requested to confirm any outstanding legal matters to our
independent auditor. Murphy, Hesse, Toomey & Lehane bills ERRS for responding to
this required inquiry from the auditors. The bill in 2018 was less than $200. As there
are no other anticipated expenses for Murphy, Hesse, Toomey & Lehane for 2019, only
this $200 expense is included in their line-item.
The Law Office of Michael Sacco finished well under budget in 2017 (actual spending in
2017 was $65,932 versus a budget of $75,000) and actual spending through ten months
in 2018 is on pace to be well under-budget (only $55,522 has been spent through
October versus a budget of $80,000.) Barring some extraordinary event, the legal
budget should be at or under-budget again in 2018.
The legal budget had been increased in recent years due to an unexpected spike in
disability cases discovered in 2015 which carried over into 2016. Legal spending has
23returned to more traditional levels in the last two years and the final 2019 administrative
budget reflects that adjustment.
MEDICAL RECORDS EXPENSE
Medical Records Expense generally pays for pre-employment physicals for newly hired
employees. Expenses in this line-item tend to be minimal to non-existent, although
when there is turnover in personnel the expenditures for this item will spike. This is
what occurred in 2018. While there is no guarantee that ERRS employees will not
continue to leave for better offers elsewhere in 2019, only $200 is allocated to this line-
item, which is the same amount as in 2018. Barring an exodus of employees in 2019,
any over-runs in this line-item should be minimal and can be funded from the Reserve
Fund contained within the administrative budget.
FIDUCIARY INSURANCE
Fiduciary liability coverage insures trustees and staff members who oversee retirement
systems and public employee pension funds against violations of their fiduciary
responsibilities. In the private sector, any corporation with similar assets to a retirement
plan has similar coverage. In relative measure to the size of the fund, the cost of this
coverage is small. The cost also depends on the size of the total fund, not just those
assets invested directly by the system. Purchasing fiduciary insurance is also considered
to be a prudent act on the part of the Board.
ERRS Board members and employees are bonded by a policy issued through the MACRS
fiduciary insurance program. There are ninety-five retirement systems covered by these
policies.
The term for the fiduciary and fidelity coverage is March 1 to March 1 of each year. The
policy provides $50,000,000 fiduciary protection for Trustees and employees, as well as
a $1,000,000 fidelity policy for crime coverage. Amity Insurance Agency, Inc., of North
Quincy is the agent and the coverage is underwritten by Travelers Casualty & Surety,
Co., National Union Fire Insurance, and Alterra American Insurance Co.
24An analysis of the annual increase in the fiduciary insurance premium over the last
several budget years shows that charges increase an average of less than 3.0%. ERRS
has typically anticipated 3.0% increases each year and this line-item usually ends up with
a small surplus. Accordingly, ERRS is adjusting its budget forecast for fiduciary insurance
in 2019 and recommending only a 1.9% increase, or an additional $550.
SERVICE CONTRACTS
The total amount requested for service contracts in 2019 is $57,250, or only $200 more
than in the 2018 budget. This is an increase of 0.4%.
There are only small cost adjustments either up or down for all of the items that
constitute Service Contracts in the 2019 budget. The additional $1,350 for Database
Software recognizes the escalating cost of the annual support fee that is contained in
the agreement between the retirement system and the database software vendor. No
other adjustment in the Service Contracts line-items exceed $500.
CONDOMINIUM EXPENSE
ERRS owns two office suites at the Hathorne Office Park located in Danvers, MA. These
properties were purchased in 2000 for $185,000 and $190,000 apiece.7 Hathorne Office
Park is an office condominium complex and ERRS is a member of the Hathorne
Condominium Office Park Trust. The office park is managed by Gemini Properties. As a
member of the condominium trust, ERRS pays a monthly condominium fee. Charles
Kostro, ERRS’ Executive Director, is a member of the Board of Trustees. Allocations of
costs for annual fees or other special charges is done on a per square foot basis. ERRS is
the second largest tenant in the office park condominium trust by square footage.
ERRS received the monthly condominium fee for 2019 in November. The actual costs
for this line-item were less than had been included in the budget presented to the
7
Deeds are recorded at the South Essex Registry of Deeds, BK 16422, PG 520, and BK 16422, PG 525.
25Advisory Council in October. Therefore, only an additional $150 is requested for the
monthly fee in 2019.
The trust which manages the condominium properties undertook two major projects in
2018. One, was the replacement of a failing cooling tower. Problems with the cooling
tower directly led to the flooding of roughly 50% of one of the office suites owned by
ERRS. This necessitated a costly rug replacement project by the retirement system,
although 90% of the cost of the replacement project was covered by insurance. ERRS
staff also moved office furniture and supplies themselves to keep costs down.
The second major project planned in 2018 was a repaving and sidewalk replacement
project for the parking lot. This project was originally scheduled for August of 2018, then
it was delayed until the fall of 2018. It was later re-scheduled for December 2018 and
the was eventually moved to 2019.
To fund the parking lot project, the condo board was approved for a loan. The trust’s
capital fund also needs to be replenished. The cost of the loan and the replenishment
of the capital fund will be paid by individual unit owners. Unit owners have two payment
options. The first is to pay a lump sum which will become due sometime prior to the
start of the paving project. The second option is to pay for these projects over a ten-
year period at a fixed interest rate of 5.5%. Those unit owners that choose to pay over
time will have this cost added to their monthly assessment.
A lump sum payment is estimated to cost ERRS $15,140. Paying the cost over time is
estimated to cost ERRS $19,769. Paying the one-time, lump sum amount will save the
retirement system an estimated $4,629.
However, the paving project has been an extremely confused endeavor with multiple
scope changes and schedule delays. Problems with materials and apparent design issues
(such as a failure to conduct any soil testing) have made the project nearly untenable. It
is a possibility that the entire project as presently planned will be scrapped, and a new
project designed and re-bid. Further, the monthly assessments and loan figures are
constantly changing (as the project costs are also constantly changing.)
26ERRS is planning, therefore, to pay its assessment for the project loan via a lump sum
payment. With the uncertainty of the project, however, the lump sum cost is not
included in the budget. Rather, should the project go forward, the lump sum cost an be
covered from a payment from the Reserve Fund. It is a possibility that this project will
not occur in 2019, or ever.
PROFESSIONAL SERVICES
The professional services category includes the cost of contracts with vendors who
provide actuarial services, IT consulting services and the annual audit of financial
statements.
Actuarial Consulting Services
ERRS completed a procurement for Actuarial Consulting Services in 2017 and hired Segal
Company as its new actuary. Massachusetts retirement boards are required to perform
an actuarial valuation study every two years. Segal Company completed the most recent
valuation study in 2018. In accordance with their price proposal, Segal Company has
only $5,000 in its agreement for 2019. The only work anticipated for 2019 will likely be
related to the GASB 67 & 68 report. This change is reflected in the 2019 budget,
although the Actuarial Consulting Fees line-item will increase again in 2020 when the
next valuation is performed.
Board Secretary
The Board did not replace the Board Secretary in 2016 when the long-time secretary left
to pursue a full-time position with an ERRS unit. The recording of minutes of public
meetings of the retirement system has been performed by the Executive Director ever
since, saving the retirement system $3,850 annually. There does not appear to be any
plan to replace the Board secretary so no funds are allocated to this line-item again in
2019.
27IT Consulting Services
In 2015, ERRS hired HIQ Computers of Medford, MA as its new IT Consultant under a
three-year agreement. ERRS is retaining HIQ Computers under a state contract, which
expires in March of 2019. ERRS is working to either amend the current state contract
and extend its agreement with HIQ past March of 2019, or it will retain HIQ under any
new or extended state contract. HIQ Computers have proven to be a responsive and
efficient vendor and, notwithstanding the continuing IT needs of the retirement system,
no increase is proposed for this line-item.
Annual Audit
ERRS conducted a competitive procurement for audit services in 2015, as the three-year
agreement originally awarded in 2012 to Powers & Sullivan had expired. In November
of 2015, the ERRS Board again chose Powers & Sullivan for another three-year
agreement. The annual price for audit services, which includes the review of the
financial statements and the GASB 67 & 68 reporting, was $40,000.
The Board completed a procurement for audit services in August of 2018 and again
selected Powers & Sullivan as the firm providing the best combination of price and
quality. The new agreement with Powers & Sullivan is for five years with two, one-year
extension options available at the Board’s discretion. Powers & Sullivan’s bid price
remains at $40,000 for the length of the contract.
EDUCATION AND TRAINING
This line-item funds registration costs for training conferences attended by ERRS Board
members.
Pension reform legislation passed in 2011 required that Board members receive 18
hours of training during their terms of office. Board members must receive a minimum
of three hours of training per year and cannot receive credit for more than nine hours
of training in any one year. PERAC holds numerous training sessions in their offices
28throughout the year and has also worked with MACRS to provide training session credits
at the annual spring and fall conferences.
Nearly all of the spending in this line-item pays the registration fees for the spring
MACRS conference, which is typically attended by three to four Board members.
In 2018, three Board members attended the spring MACRS Conference and ERRS paid
$380 for a registration fee for another Board member attending a municipal conference
for which PERAC provided training credits. No change in the recommended funding of
this line-item is recommended for 2019.
ADMINISTRATIVE EXPENSES
ERRS is requesting $257,475 in administrative expenses in the 2019 budget. This is a
14.5% increase compared to the 2018 budget.
Health, Life and Dental Insurance
ERRS employs eleven individuals, six full-time staff and five Board members. In 2011,
ERRS was advised by the Group Insurance Commission (GIC), who provides health,
dental, life and other insurance options to ERRS employees, that Board members are not
eligible for insurance coverage.
Through 2015, only a limited number of full-time employees elected to participate in
health insurance through the GIC. This limited participation in the GIC helped ERRS keep
employee insurance costs low over the last several years.
Beginning in 2016, more employees have become covered by the health benefits
provided by ERRS. Based on the actual expenditures in 2017, ERRS proposed a $8,000
increase in the Health, Life and Dental Insurance line-item for 2018. With the turnover
of 33% of its staff in 2018, it is difficult to accurately budget for insurance costs for 2019.
However, using actual costs through November 2018 as a guide, ERRS has reduced the
increase in this line-item in the final budget to $5,500.
29Medicare Tax
ERRS is not requesting any increase for this line-item in 2019 based on actual
expenditures through November of 2018.
Unemployment Insurance Charges
ERRS is not requesting any increase for this line-item in 2019 based on actual
expenditures through November of 2018. This line-item pays the state unemployment
insurance tax, as well as other related state charges.
Workers Compensation Insurance
Based on actual spending for workers compensation insurance in recent years, ERRS is
not requesting any increase in this line-item for 2019.
Postage
The Board has discussed increasing ERRS’ communications with its retirees and
members by supplementing its twice annual newsletter with smaller communications
throughout the year. In anticipation of this initiative, ERRS is requesting an additional
$2,500 in the Postage line-item in 2019.
Telephone/Internet
Comcast is the ERRS telephone and internet service provider for its office phones and
computers, and costs have been consistent for this service in recent years. Based on
actual expenditures in 2018 thus far, ERRS is recommending a small $400 decrease in
this line-item in 2019.
30Dues
ERRS pays $400 in dues to the Massachusetts Association of Contributory Retirement
Systems (MACRS) each year. Last year, ERRS eliminated dues payments to the Eastern
Massachusetts Treasurers and Collectors Association (EMTCA). As the MACRS dues are
the only ones paid by the retirement system, this line-item remains at $400, which
should be sufficient unless MACRS increases its dues next year.
Newsletter Expense
The production of the ERRS newsletter has been done in-house by ERRS staff since 2011.
The only costs associated with the production of the newsletter are the printing and
mailing costs, which is done by a private vendor. Based on actual costs to produce two
newsletters in 2018, ERRS is requesting an increase of $1,000 for 2019. It should be
noted that prior to 2011, the cost to produce two newsletters per year was
approximately $60,000. Having ERRS staff produce two newsletters per year in-house
has saved approximately $50,000 per year.
Office Supplies
The office supply budget was reduced to $12,500 several years ago. It is challenging to
stay within this amount each year, but ERRS has been slightly below the budgeted
amount in both of the most recently completed budget years. But the cost of materials
and supplies continues to increase. Therefore, a small increase of $1,500 is
recommended for the 2019 budget.
Electricity
ERRS’ electricity is supplied by the Town of Danvers electric department. Electricity costs
have risen modestly in recent years, but did not rise as much as ERRS anticipated in 2018.
In the 2018 budget, ERRS is on pace to be below the budget for electricity. Therefore,
the electricity line-item for 2019 is recommended to be reduced by $350.
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