arizona public safety personnel retirement system (psprs) special board of trustees meeting 6/5/2014

PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEMSPECIAL BOARD OF TRUSTEES MEETING

June 5, 2014

AGENDA

ASpecialMeetingoftheBoardofTrusteesofthePublicSafetyPersonnelRetirementSystem(thePSPRSorSystem)willbeheldinthemainpublicconferenceroomoftheadministrativeofficesofPSPRS,3010EastCamelbackRoad,Suite200,Phoenix,Arizona85016,commencingat11:30a.m.onThursday,June5,2014.Themeetingwillcontinueuntil5:00p.m.oruntilthematterssetforthinthisagendaareotherwiseaddressed.MembersoftheBoardofTrusteeswillattendeitherinpersonorbytelephonicconferencecall.TheBoardofTrusteesmayvotetoholdanexecutivesession,whichwillnotbeopentothepublic,todiscusscertainmatters.TheBoardofTrusteesreservestherighttoconsideragendaitemsoutoftheirlistedorder.

ThismeetingisavailabletothepublicthroughGotoMeetingovertheInternetorinperson.Pleaseseewww.psprs.comforthecomputerlinktothemeeting.Allpersonswishingtoattendareinvited.

1. CalltoOrder;RollCall;OpeningremarksMr. Brian P. Tobin, Chairman

2. CalltothePublic.

Thisisthetimeforthepublictocomment.MembersoftheBoardofTrusteesmaynotdiscussitemsthatarenotspecificallyidentifiedontheagenda,excepttoaddresscriticismfromthepublic.Therefore,pursuanttoA.R.S.38-431.01(H),theBoardofTrusteesreactiontoanypubliccommentislimitedtoaddressingcriticismorrecommendingthattheBoardofTrusteesorStaffrespondorstudysuchcommentorschedulethesubjectmatterforfurtherconsiderationatalaterdateafterappropriatenotice.

3. DiscussionandpossibleActionregardingtheBoard'ssupportfor(i)legislationproposedbytheProfessionalFireFightersofArizonatoimprovethefiscalhealthofthePSPRSandmakeotherchangestotheSystem,and(ii)legislativeproposalsbycorrectionsofficersandelectedofficialstoimprovethefiscalhealthoftheCORPand/ortheEORPandmakeotherchangestothoseplans.

Mr. Jim HackingAdministrator

4. DiscussionofandpossibleAction onaproposaltomitigateintheshortterm,theimpactoftheFields'casedecisiononplanemployercontributionrates.

Mr. Jim Hacking

5. Adjournment.

A copy of the agenda background material that is provided to the Board of Trustees (with theexception of materials relating to possible executive sessions and/or materials exempt by law frompublic inspection) is available for public inspection at the PSPRS offices located at 3010 EastCamelback Road, Suite, 200, Phoenix, Arizona. The agenda is subject to revision up to 24 hoursprior to the meeting.

BoardofTrusteesMeetingJune5,20141of1

April 25, 2014 Mr. James M. Hacking Administrator Arizona Public Safety Personnel Retirement System 3010 East Camelback Road, Suite 200 Phoenix, Arizona 85016-4416 Re: Arizona Public Safety Personnel Retirement System COLA Scenario Study Dear Jim: Enclosed are the results of a supplemental actuarial valuation to measure the financial effect of various scenarios for the Arizona Public Safety Personnel Retirement System (PSPRS). The valuation was based upon data furnished by PSPRS. This data is summarized on page 2. Actuarial methods and assumptions, except as noted, were the same as those used in the last regular annual actuarial valuation as of June 30, 2013. Please call if you have any questions regarding the calculations enclosed. Sincerely, Mark Buis, FSA, EA, MAAA MB:sc Enclosures cc: Jared Smout, PSPRS

James D. Anderson, GRS Francois Pieterse, GRS

4/25/2014 -1-

ARIZONA PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM COLA SCENARIO STUDY REVISED COLA START DATE

AS OF JUNE 30, 2013 REQUESTED BY: Mr. James Hacking, Administrator DATE: April 25, 2014 SUBMITTED BY: Mark Buis, FSA, EA, MAAA and Francois Pieterse, ASA, MAAA

Gabriel, Roeder, Smith & Company

This report contains an actuarial valuation of proposed changes to the Arizona Public Safety Personnel Retirement System (PSPRS). The purpose of the report is to analyze the financial impact the proposed changes would have on the Plan. This report should not be relied on for any other purpose. The report has been prepared at the request of the Fund Administrator. Mark Buis and Francois Pieterse are Members of the American Academy of Actuaries (MAAA) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. The signing actuaries are independent of the plan sponsor.

The date of the valuation was June 30, 2013. This means that the results of the supplemental valuations are based upon the June 30, 2013 data and assumptions, unless otherwise stated. Supplemental valuations do not predict the result of future actuarial valuations. Rather, supplemental valuations give an indication of the probable long-term cost of the plan changes only without comment on the complete end result of the future valuations.

This valuation was based upon information furnished by the Fund Administrator for use in the June 30, 2013 valuation of the Plan. We checked for internal consistency, but did not otherwise audit the data. We are not responsible for the accuracy or completeness of the information provided by PSPRS. All actuarial assumptions, methods, and Plan provisions valued in this report, are as described in the June 30, 2013 valuation report except as explicitly described in this document.

Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements; and changes in plan provisions or applicable law. Due to the limited scope of the actuarys assignment, the actuary did not perform an analysis of the potential range of such future measurements.

4/25/2014 -2-

ARIZONA PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM

COLA SCENARIO STUDY REVISED COLA START DATE AS OF JUNE 30, 2013

Actuarial assumptions and methods were consistent with those used in the regular actuarial valuation of the Retirement Plan on the valuation date, unless otherwise noted. Actuarial assumptions are adopted by the Retirement Board of Trustees. In particular:

The assumed rate of interest was 7.85%. The valuation method was the aggregate entry age actuarial cost method. An amortization period of 23 years were used in the calculation of contribution rates

and funded rates in 2013. The amortization period was reset to a closed 30 year period in 2014 for all scenarios.

A brief summary of the data, as of June 30, 2013, is presented below:

Years ofNo. Age Service 2013 2012

Actives 18,436 39.5 11.1 $74,344 $72,767 Retirees & Beneficiaries 10,159 63.1 49,571 49,480 DROP 1,482 53.6 63,236 62,308 Inactive Vested 1,442 37.6

31,519

Summary of Covered Population DataJune 30, 2013

Annual Pay orRetirement Allowance

Averages

4/25/2014 -3-

ARIZONA PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM COLA SCENARIO STUDY STUDY 1 (ORIGINAL WITH 30 YEAR

AMORTIZATION) AS OF JUNE 30, 2013

BASE SCENARIO (THESE PROVISIONS APPLY TO ALL SCENARIOS UNLESS OTHERWISE STATED):

SB 1609 for PSPRS would remain intact.

COLAs would be paid based on the following schedule:

20 to 25 years of service at retirement: COLA delayed 10 years after commencement of

benefits.

25 or more years of service at retirement: COLA delayed 5 years after commencement of

benefits.

Tier 2 members can retire at 25 years of service (minimum age removed).

Employee Self funded Inflation Protection Program (IPP) provided for all active generations.

Allow an employee to select retirement date in the past for IPP.

Employee contributions of 11.65% (which includes 4% maintenance of effort contribution).

Pensionable income limited to $180,000 indexed with CPI.

Scenario A:

Eliminate the current excess earnings model for the COLA.

Reduce employee contribution rate to 7.65% (eliminating the 4% maintenance of effort

contribution).

Create a new account funded by 4.0% employee contributions (plus actual investment income)

which would fund an annual COLA payable after 3 full years of contributions.

A COLA would be paid each year based on funds available.

Scenario B:

Same as Scenario A except add $100 million in seed money to the COLA fund.

Scenario C:

Same as Base scenario but eliminate the 10.5% investment return threshold for the COLA (and

follow the graded COLA schedule based on funded status of the System).

Scenario D:

Replace current COLA model with the following COLA:

Members retired prior to 2000 receive a full COLA based on CPI (no cap).

All other members receive a COLA based on 75% of CPI with a 3% cap.

4/25/2014 -4-



Scenario E:

Replace current COLA model with a COLA based on CPI with a 3% cap.

4/25/2014 -5-



Executive Summary The table below compares the employer contribution rate and average COLA for each scenario. The projections were performed stochastically and therefore produce a range of outcomes with probabilities instead of one single deterministic result. Therefore, results should not be relied upon as a prediction of either the exact contribution rate or COLA that can be paid in the future, but rather as a basis for comparison between the scenarios.

ScenarioContribution Rate

(Median) Average COLA Comments

A Increases to 32.3% over the next 15 years

1% to 2% COLA varies with payroll

B Increases to 32.3% over the next 15 years

1.25% to 2.25% COLA varies with payroll

C Varies from 45.0% to 36.4% over the next 25 years

3.00% average - varies from 0% to 4.00% over the next

30 years

COLA varies with funded status, higher initial

contribution rate

D Varies from 40.6% to 32.6% over the next 25 years

2.90% pre-2000 2.00% post-2000

COLA varies with CPI, higher initial contribution rate

E Varies from 41.8% to 33.7% over the next 25 years

2.40% COLA varies with CPI, higher initial contribution rate

4/25/2014 -6-



Scenario A and B The graph below shows the median contribution rate and funded status for both Scenarios A and B compared to SB1609 and Reversal of SB1609. Under both Scenarios A and B, the current COLA program and 4% maintenance of effort employee contribution is eliminated and replaced with a COLA that is funded with a 4% employee contribution. The contribution rates are similar to but slightly higher than the Base Scenario. Scenario A and B will provide a COLA that is not dependant on excess investment income.

Contribution Rates 2013 2018 2023 2028 2033 2038 2043 2048 2053Scenario A/B 31.4% 31.4% 31.7% 32.3% 32.1% 31.5% 19.7% 8.0% 8.0%

SB 1609 31.0% 30.7% 30.9% 31.3% 31.5% 30.5% 17.4% 8.0% 8.0%Reversal of SB 1609 31.7% 31.8% 33.8% 36.6% 39.7% 44.9% 33.2% 8.0% 8.0%

Median Funded Rate 2013 2018 2023 2028 2033 2038 2043 2048 2053Scenario A/B 58.0% 57.0% 64.1% 70.4% 78.0% 86.9% 96.8% 102.6% 103.9%

SB 1609 58.7% 59.1% 65.3% 70.9% 77.5% 86.4% 97.7% 102.8% 105.0%Reversal of SB 1609 56.4% 53.3% 55.3% 57.9% 62.4% 72.0% 88.6% 98.8% 101.4%

0%

20%

40%

60%

80%

100%

120%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2013 2018 2023 2028 2033 2038 2043 2048 2053

Fund

ed St

atus

Cont

ribut

ion

Rate

Year

PSPRS Projection ResultsOpen Group

Median funded status - Scenario A/B

Median funded status - SB 1609

Median funded status - reversal of SB 1609

Median contribution rate - Scenario A/B

Median contribution rate - SB 1609

Median contribution rate - reversal of SB 1609

4/25/2014 -7-



Scenario A and B (continued) Under Scenario A, the new COLA program is funded with a 4% employee contribution. Under Scenario B, the new COLA is funded with a 4% employee contribution and is seeded with an additional $100 million. The table below shows the average annual COLA that could be produced under both Scenarios A and B with a 50% confidence level. Please note that these estimates are based on a 4.5% payroll growth assumption. To the extent that payroll grows less than 4.5%, the amount of COLA that can be provided will be less. For example, if payroll only grows at a rate of 3% annually, the average COLA of 2.0% in Scenario A would be reduced to an average COLA of about 1.4%.

Average AnnualCOLA

Scenario A Level - 2.00% avgScenario B Level - 2.25% avg

4/25/2014 -8-



Scenario C The graph below shows the median contribution rate and funded status for Scenario C compared to SB1609 and Reversal of SB1609. Under Scenario C, the 10.5% investment return threshold is eliminated and the COLA (graded from 0% to 4% based on the funded status) is paid out regardless of investment income. This produces an average annual COLA of approximately 3.0% over the next 30 years. Under this scenario, the contribution rates increase immediately to approximately 45.0% due to the fixed nature of the COLA (i.e. it is no longer linked to investment return).

Contribution Rates 2013 2018 2023 2028 2033 2038 2043 2048 2053Scenario C 45.0% 43.3% 42.8% 42.1% 40.2% 36.4% 8.0% 8.0% 8.0%

SB 1609 31.0% 30.7% 30.9% 31.3% 31.5% 30.5% 17.4% 8.0% 8.0%Reversal of SB 1609 31.7% 31.8% 33.8% 36.6% 39.7% 44.9% 33.2% 8.0% 8.0%

Median Funded Rate 2013 2018 2023 2028 2033 2038 2043 2048 2053Scenario C 48.0% 52.5% 63.4% 72.9% 82.5% 92.5% 101.4% 105.2% 108.1%

SB 1609 58.7% 59.1% 65.3% 70.9% 77.5% 86.4% 97.7% 102.8% 105.0%Reversal of SB 1609 56.4% 53.3% 55.3% 57.9% 62.4% 72.0% 88.6% 98.8% 101.4%

0%

20%

40%

60%

80%

100%

120%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2013 2018 2023 2028 2033 2038 2043 2048 2053

Fund

ed St

atus

Cont

ribut

ion

Rate

Year


Median funded status - Scenario C



Median contribution rate - Scenario C



4/25/2014 -9-



Scenario D The graph below shows the median contribution rate and funded status for Scenario D compared to SB1609 and Reversal of SB1609. Under Scenario D, the current COLA program is replaced by a true COLA based on CPI with members who retired prior to 2000 receiving the full CPI and all other members receiving 75% of CPI with a 3% cap. Based on CPI patterns of the last 30 years, this would provide a 2.9% average compound COLA for members who retired prior to 2000 and a 2.0% annual COLA for all others. Under this scenario, the contribution rates increase immediately to approximately 40.6% of pay due to the fixed nature of the COLA.

Contribution Rates 2013 2018 2023 2028 2033 2038 2043 2048 2053Scenario D 40.6% 39.2% 38.7% 38.0% 36.0% 32.6% 8.0% 8.0% 8.0%

SB 1609 31.0% 30.7% 30.9% 31.3% 31.5% 30.5% 17.4% 8.0% 8.0%Reversal of SB 1609 31.7% 31.8% 33.8% 36.6% 39.7% 44.9% 33.2% 8.0% 8.0%

Median Funded Rate 2013 2018 2023 2028 2033 2038 2043 2048 2053Scenario D 50.7% 54.5% 64.9% 73.9% 83.6% 93.3% 101.9% 105.6% 108.8%

SB 1609 58.7% 59.1% 65.3% 70.9% 77.5% 86.4% 97.7% 102.8% 105.0%Reversal of SB 1609 56.4% 53.3% 55.3% 57.9% 62.4% 72.0% 88.6% 98.8% 101.4%

0%

20%

40%

60%

80%

100%

120%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2013 2018 2023 2028 2033 2038 2043 2048 2053

Fund

ed St

atus

Cont

ribut

ion

Rate

Year


Median funded status - Scenario D



Median contribution rate - Scenario D



4/25/2014 -10-



Scenario E The graph below shows the median contribution rate and funded status for Scenario E compared to SB1609 and Reversal of SB1609. Under Scenario E, the current COLA program is replaced by a true COLA based on full CPI with a 3% cap for all members. Based on CPI patterns of the last 30 years, this would provide a 2.4% average compound COLA for all members. Under this scenario, the contribution rates are similar to, but slightly higher than Scenario D.

Contribution Rates 2013 2018 2023 2028 2033 2038 2043 2048 2053Scenario E 41.8% 40.4% 39.9% 39.2% 37.2% 33.7% 8.0% 8.0% 8.0%

SB 1609 31.0% 30.7% 30.9% 31.3% 31.5% 30.5% 17.4% 8.0% 8.0%Reversal of SB 1609 31.7% 31.8% 33.8% 36.6% 39.7% 44.9% 33.2% 8.0% 8.0%

Median Funded Rate 2013 2018 2023 2028 2033 2038 2043 2048 2053Scenario E 50.1% 54.0% 64.7% 73.9% 83.4% 93.3% 101.8% 105.5% 108.5%

SB 1609 58.7% 59.1% 65.3% 70.9% 77.5% 86.4% 97.7% 102.8% 105.0%Reversal of SB 1609 56.4% 53.3% 55.3% 57.9% 62.4% 72.0% 88.6% 98.8% 101.4%

0%

20%

40%

60%

80%

100%

120%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2013 2018 2023 2028 2033 2038 2043 2048 2053

Fund

ed St

atus

Cont

ribut

ion

Rate

Year


Median funded status - Scenario E



Median contribution rate - Scenario E



May 6, 2014

Mr. James M. Hacking

Administrator

Arizona Public Safety Personnel Retirement System

3010 East Camelback Road, Suite 200

Phoenix, Arizona 85016-4416

Re: Arizona Corrections Officer Retirement Plan COLA Scenario Study

Dear Jim:

Enclosed are the results of a supplemental actuarial valuation to measure the financial effect of a

proposed scenario for the Arizona Corrections Officer Retirement Plan (CORP).

The valuation was based upon data furnished by PSPRS. This data is summarized on page 2.

Actuarial methods and assumptions, except as noted, were the same as those used in the last regular

annual actuarial valuation as of June 30, 2013.

Please call if you have any questions regarding the calculations enclosed.

Sincerely,

Mark Buis, FSA, EA, MAAA

MB:sc

Enclosures

cc: Jared Smout, PSPRS

James D. Anderson, GRS

Francois Pieterse, GRS

5/6/2014 -1-

ARIZONA CORRECTIONS OFFICER RETIREMENT PLAN

COLA SCENARIO STUDY

AS OF JUNE 30, 2013

REQUESTED BY: Mr. James Hacking, Administrator

DATE: May 6, 2014

SUBMITTED BY: Mark Buis, FSA, EA, MAAA and Francois Pieterse, ASA, MAAA


This report contains an actuarial valuation of proposed changes to the Arizona Corrections Officer

Retirement Plan (CORP). The purpose of the report is to analyze the financial impact the proposed

changes would have on the Plan. This report should not be relied on for any other purpose. The

report has been prepared at the request of the Fund Administrator. Mark Buis and Francois Pieterse

are Members of the American Academy of Actuaries (MAAA) and meet the Qualification

Standards of the American Academy of Actuaries to render the actuarial opinion contained herein.

The signing actuaries are independent of the plan sponsor.

The date of the valuation was June 30, 2013. This means that the results of the supplemental

valuations are based upon the June 30, 2013 data and assumptions, unless otherwise stated.

Supplemental valuations do not predict the result of future actuarial valuations. Rather,

supplemental valuations give an indication of the probable long-term cost of the plan changes only

without comment on the complete end result of the future valuations.

This valuation was based upon information furnished by the Fund Administrator for use in the June

30, 2013 valuation of the Plan. We checked for internal consistency, but did not otherwise audit the

data. We are not responsible for the accuracy or completeness of the information provided by the

Fund Administrator. All actuarial assumptions, methods, and Plan provisions valued in this report,

are as described in the June 30, 2013 valuation report except as explicitly described in this

document.

Future actuarial measurements may differ significantly from the current measurements presented in

this report due to such factors as the following: plan experience differing from that anticipated by

the demographic assumptions; changes in economic or demographic assumptions; increases or

decreases expected as part of the natural operation of the methodology used for these

measurements; and changes in plan provisions or applicable law. Due to the limited scope of the

actuarys assignment, the actuary did not perform an analysis of the potential range of such future measurements.

5/6/2014 -2-


COLA SCENARIO STUDY

AS OF JUNE 30, 2013

Actuarial assumptions and methods were consistent with those used in the regular actuarial

valuation of the Retirement Plan on the valuation date, unless otherwise noted. Actuarial

assumptions are adopted by the Retirement Board of Trustees. In particular:

The assumed rate of interest was 7.85%.

The valuation method was the aggregate entry age actuarial cost method.


Years of

No. Age Service 2013 2012

Actives 14,580 39.7 8.0 $41,431 $41,773

Retirees & Beneficiaries 3,810 63.3 25,319 25,293

Inactive Vested 1,463 39.6

19,853

Summary of Covered Population DataJune 30, 2013

Annual Pay orRetirement Allowance

Averages

5/6/2014 -3-


COLA SCENARIO STUDY

AS OF JUNE 30, 2013

Proposed Scenario:


Create a new account funded by 2.0% employee contributions and 1.0% employer contribution

(plus actual investment income) which would fund an annual COLA payable after 3 full years of

contributions.


COLAs would be paid based on the following schedule:

20 to 25 years of service at retirement: COLA delayed 10 years

25 or more years of service at retirement: COLA delayed 5 years.

Tier 2 members can retire at 25 years of service (minimum age removed).

Pensionable Compensation includes overtime pay.

Retroactive DROP provision is replaced by a prospective DROP provision.

Disability benefits are changed to mirror PSPRS.

All employees will contribute 7.96% to the Retirement Plan in addition to contribution stated

above for COLA.

Provide death benefits to CORP that are identical to PSPRS.

5/6/2014 -4-


COLA SCENARIO STUDY

AS OF JUNE 30, 2013

The graph below shows the median contribution rate and funded status for the proposed scenario

compared to SB1609 and Reversal of SB 1609. Under the proposed scenario, the current COLA program is eliminated and replaced with a COLA that is funded with a 2% employee contribution

and 1% employer contribution. The employer contribution rates shown below include the

additional 1% contribution to the COLA fund.

Contribution Rates 2013 2018 2023 2028 2033 2038 2043

Proposed 15.6% 17.1% 17.2% 18.2% 20.3% 7.0% 7.0%

SB 1609 13.2% 14.7% 15.1% 16.1% 19.5% 6.7% 6.0%

Reversal of SB 1609 13.9% 15.6% 16.6% 18.4% 22.5% 8.1% 6.0%

Median Funded Rate 2013 2018 2023 2028 2033 2038 2043

Proposed 66.7% 67.3% 75.2% 81.7% 89.9% 99.9% 104.4%

SB 1609 69.7% 68.8% 75.1% 80.9% 88.7% 98.7% 102.7%

Reversal of SB 1609 67.8% 66.4% 72.1% 78.1% 86.9% 97.9% 101.4%

0%

20%

40%

60%

80%

100%

120%

0%

5%

10%

15%

20%

25%

2013 2018 2023 2028 2033 2038 2043

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n R

ate

Year

CORP Projection ResultsOpen Group

Median funded status - Proposed



Median contribution rate - Proposed



5/6/2014 -5-


COLA SCENARIO STUDY

AS OF JUNE 30, 2013

Comments

Comment 1 Results under the old law scenario show a gradual increase in contribution rates and liabilities due to recognition of COLAs granted each year. However, if SB1609 is completely

reversed, liabilities and contribution rates might increase immediately. New GASB standards

require that Systems with gain-sharing mechanisms explicitly recognize all future COLAs in the liabilities that are reported for accounting purposes. While the methodology required by the new

GASB standards does not necessarily apply to the funding calculations that determine the

contribution rate, this method may be appropriate for funding calculations in the future. For

illustrative purposes, we have shown the impact of valuing a 2% annual COLA for all current and

future retirees on the June 30, 2013 actuarial valuation for CORP:

Reversal of

Lawsuits

2% Assumed

Current COLA

Contribution Rate 13.23% 21.40%

Funded Status 69.7% 55.9%

Comment 2 All scenarios are based on stochastic simulations of 1000 trials with a mean return of 7.85% and standard deviation of 9.4%. To the extent that either the mean or standard deviation

of the portfolio is different, results will vary. Results should not be relied upon as a prediction of

either the exact contribution rate or COLA that can be paid in the future, but rather as a basis for

comparison between the scenarios.

Comment 3 Based on data supplied by the Fund Administator, overtime hours were assumed to be 5% of base pay on average. To the extent that overtime hours exceed this estimate, contribution

rates under the proposed scenario will be higher.

Comment 4 Under the proposed scenario, the estimated COLA is based on a payroll growth assumption of 4.5%. If payroll grows at a slower rate, the COLA that can be provided will be much

lower. Additionally, employee contributions are being used to fund current retiree benefits. This

may result in intergenerational inequiites, especially if the the System is closed to new hires at some

point in the future. We recommend that any new COLA structure be reviewed by legal and

fiduciary counsel.

5/6/2014 -6-


COLA SCENARIO STUDY

AS OF JUNE 30, 2013

Comments (concluded)

Comment 5 If you have reason to believe that the information provided in this report is inaccurate, or is in any way incomplete, or if you need further information in order to make an

informed decision on the subject matter of this report, please contact the authors of the report prior

to making such decision. This report is intended to describe the financial effect of the proposed

plan changes. No statement in this report is intended to be interpreted as a recommendation in favor

of the changes, or in opposition to them. Except as otherwise noted, potential effects on other

benefit plans were not considered.

Comment 6 A full review of the proposal for compliance with Federal, State, or Local laws or regulations was out of the scope of this study and not performed.

May 19, 2014

Mr. James M. Hacking, Administrator

Arizona Public Safety Personnel Retirement System

3010 East Camelback Road, Suite 200

Phoenix, Arizona 85016-4416

Re: Arizona Elected Officials Retirement Plan Updated Defined Contribution Study

Dear Jim:

Enclosed are the results of a supplemental actuarial valuation to measure the financial effect of

changes in the provisions for the Arizona Elected Officials Retirement Plan (EORP).

The valuation was based upon data furnished by PSPRS. This data is summarized on page 2.

Actuarial methods and assumptions, except as noted, were the same as those used in the last regular

annual actuarial valuation as of June 30, 2013.

Please call if you have any questions regarding the calculations enclosed.

Sincerely,

Mark Buis, FSA, EA, MAAA

MB:dj

Enclosures

cc: Jared Smout, PSPRS

James D. Anderson, GRS

Francois Pieterse, GRS

5/19/2014 -1-

ARIZONA ELECTED OFFICIALS RETIREMENT PLAN DEFINED CONTRIBUTION PLAN STUDY

AS OF JUNE 30, 2013

REQUESTED BY: Mr. James M. Hacking, Administrator

DATE: May 19, 2014

SUBMITTED BY: Mark Buis, FSA, EA, MAAA; James D. Anderson, FSA, EA, MAAA and

Francois Pieterse, ASA, MAAA


This report contains an actuarial valuation of proposed changes to the Arizona Elected Officials Retirement Plan (EORP). The purpose of the report is to analyze the financial impact the proposed

changes would have on the Plan. This report should not be relied on for any other purpose. The

report has been prepared at the request of the Fund Administrator. Mark Buis, James Anderson and

Francois Pieterse are Members of the American Academy of Actuaries (MAAA) and meet the

Qualification Standards of the American Academy of Actuaries to render the actuarial opinion

contained herein. The signing actuaries are independent of the plan sponsor.

The date of the valuation was June 30, 2013. This means that the results of the supplemental

valuations are based upon the June 30, 2013 data and assumptions, unless otherwise stated.

Supplemental valuations do not predict the result of future actuarial valuations. Rather,

supplemental valuations give an indication of the probable long-term cost of the plan changes only

without comment on the complete end result of the future valuations.

This valuation was based upon information furnished by the Fund Administrator, for use in the June

30, 2013 valuation of the Plan. We checked for internal consistency, but did not otherwise audit the

data. We are not responsible for the accuracy or completeness of the information provided by

PSPRS. All actuarial assumptions, methods, and Plan provisions valued in this report, are as

described in the June 30, 2013 valuation report except as explicitly described in this document.

Future actuarial measurements may differ significantly from the current measurements presented in

this report due to such factors as the following: plan experience differing from that anticipated by

the demographic assumptions; changes in economic or demographic assumptions; increases or

decreases expected as part of the natural operation of the methodology used for these

measurements; and changes in plan provisions or applicable law. Due to the limited scope of the

actuarys assignment, the actuary did not perform an analysis of the potential range of such future measurements.

5/19/2014 -2-


AS OF JUNE 30, 2013

Actuarial assumptions and methods were consistent with those used in the regular actuarial

valuation of the Retirement Plan on the valuation date, unless otherwise noted. Actuarial

assumptions are adopted by the Retirement Board of Trustees. In particular:

The assumed rate of interest was 7.85%.

The valuation method was the aggregate entry age actuarial cost method.


Summary of Covered Population Data

June 30, 2013

Years of

No. Age Service 2013 2012

Actives 839 54.9 8.0 $80,459 $80,395

Retirees & Beneficiaries 1,057 72.1 44,658 44,264

Inactive Vested 160 54.9

2,056

Averages

Annual Pay or

Retirement Allowance

5/19/2014 -3-


AS OF JUNE 30, 2013

SUMMARY OF SCENARIOS

SCENARIO A: Base scenario as of June 30, 2013 prior to Supreme Court ruling (Fields case)

SCENARIO B: Scenario following Supreme Court ruling (Fields case) where original post-

retirement benefit increases (PBI) are restored to members retired as of July 1, 2011, effective June

30, 2013.

SCENARIO C: Same as Scenario B except also assume Hall lawsuit has reversed Senate Bill 1609

and original PBI is restored for active members and employee contribution rate reverts to 7% of

pay, effective June 30, 2013.

SCENARIO D1: Same as Scenario A except that excess earnings model is eliminated and replaced

by a separate COLA account funded with 4% employee contributions for current DB plan members.

Employee contributions to fund defined benefit plan are changed from 13% to 9%.

SCENARIO D2: Same as Scenario D1 except that COLAs are retroactively paid to retirees for July

1, 2011, July 1, 2012 and July 1, 2013 in accordance with the decision on the Fields case.

SCENARIO E1: Same as Scenario D1 except eliminate Defined Contribution plan and open the

Defined Benefit plan back up to new hires with the new COLA fund.

SCENARIO E2: Same as Scenario D2 except eliminate Defined Contribution plan and open the

Defined Benefit plan back up to new hires with the new COLA fund.

5/19/2014 -4-


AS OF JUNE 30, 2013

Executive Summary The following table summarizes the estimated flat rate necessary to pay off the unfunded liability

within 30 years for Scenarios A - D. Due to the sensitivity of the proposed funding mechanism

to the actuarial assumptions, we recommend these rates be reviewed annually.

Scenario Contribution COLA

A Flat rate of 23.5% of DB plus DC payroll Averages 0.5% to 1.0%

B Flat rate of 32.0% of DB plus DC payroll Averages 3.0% to 3.5% for current retirees only

C Flat rate of 40.0% of DB plus DC payroll Averages 3.0% to 3.5% for current and future retirees

D1 Flat rate of 23.0% of DB plus DC payroll Averages 0.5% to 1.0%, but may not be available for future retirees

D2 Flat rate of 26.0% of DB plus DC payroll Averages 0.5% to 1.0%, but may not be available for future retirees

E1 and E2 Rate varies based on actuarial valuation Averages 0.5% to 1.0%

Comment 1 - The proposed structure in Scenarios A through D will result in most of the unfunded

liability being paid off in the last few years of the 30-year program. Similar programs have been

used in Illinois and other places and have resulted in very low funded ratios and the potential to run

out of system assets prior to all benefits being paid to plan participants.

Comment 2 - The current present value of retiree benefits exceeds the market value of assets which

results in additional drain on the fund. This is because the restored PBI mechanism applies the

excess return over 9% to the present value of retiree benefits (instead of the actual assets). For

example, as of June 30, 2013 the Market Value of Assets in the EORP trust was approximately

$312 million while the present value of retiree benefits is approximately $431 million. Suppose the

fund were to earn a 30% rate of return. Then the excess over 9% is 21%. The 21% is then applied

to the present value of retiree benefits resulting in a $90.5 million transfer to the excess reserve

account. This $90.5 million represents 29% of the assets being diverted to the excess fund (leaving

only 1% of the 30% actual return to fund benefits). Additionally, due to the funding mechanism of

paying a larger share of the unfunded liability towards the end of the 30-year period, this situation

could persist for the next 10 to 15 years. Since the Plan is now closed to new hires, and retiree

liabilities are greater than plan assets, we recommend this policy be reviewed and perhaps

modified to limit the transfer of reserves in excess of those actually earned on plan assets.

5/19/2014 -5-


AS OF JUNE 30, 2013

Executive Summary (continued) Comment 3 - The funding of the closed DB plan is based on a 7.85% rate of return. When a plan

closes, steadily increasing cash flow requirements will make earning the assumed rate of return

more difficult. For example, if the fund is only able to earn 6.85% per year, the flat rate

contribution in Scenario A would need to be immediately increased by approximately 3.0% of

payroll.

Comment 4 - The funding of the Closed DB plan also depends on payroll increases (at a rate of

4.0% per year) for new hires in the DC plan. To the extent that pay increases are less than 4.0% or

that the active population decreases, the Closed DB plan runs additional risks of running out of

money. For example, if pays only increased at a rate of 3.0% per year, the flat rate contribution in

Scenario A would need to be immediately increased by approximately 2.0% of payroll.

Comment 5 - The funding of the Closed DB plan also depends on the ultimate number of new hires

in the DC plan. The results are based on a static population, so that retiring members are replaced

by new hires in the DC plan. If the population declines due to enrollment with ASRS or other

reductions in workforce, the costs will be higher. For example, if the combined active population in

EORP (DB plus DC plan) ultimately declines by 10%, the flat rate contribution in Scenario A

would need to be immediately increased by approximately 2.5% of payroll.

Comment 6 - The excess earnings formula is very sensitive to volatile swings in the market. Our

analysis is based on volatility measure of 9.4% standard deviation as provided by the Plans investment manager. When markets have higher volatility, there is a higher probability of having

higher excess returns in some years and lower returns in other years. For example, if the standard

deviation of the portfolio was 10.4% instead of 9.4%, the flat rate contribution in Scenario A would

need to be immediately increased by approximately 3.0% of payroll.

Comment 7 - The proposed funding structure will result in contributions that will be less than the

GASB Statement No. 25 Annual Required Contribution in the early years of the projection. This

will likely result in a Net Pension Obligation (NPO) on the Systems financial statements. However,

GASB Statements No. 25 and No. 27 are being replaced by GASB 67 and 68. An analysis of the

effect of this proposal on GASB Statement No. 68 reporting was not within the scope of this study.

Comment 8 - If you have reason to believe that the information provided in this report is

inaccurate, or is in any way incomplete, or if you need further information in order to make an


to making such decision. This report is intended to describe the financial effect of the proposed

plan changes. No statement in this report is intended to be interpreted as a recommendation in favor

of the changes, or in opposition to them. This report is intended to describe the financial effect of

5/19/2014 -6-


AS OF JUNE 30, 2013

Executive Summary (concluded)

the proposed plan changes on the Retirement Plan. Except as otherwise noted, potential effects on

other benefit plans were not considered. A full review of the proposal for compliance with Federal,

State, or Local laws or regulations was out of the scope of this study and not performed. We

recommend that the structure be reviewed by legal and fiduciary counsel.

5/19/2014 -7-


AS OF JUNE 30, 2013

Actuarial Analysis

Scenario A

Under Scenario A, SB 1609 remains intact. The graph below shows a flat rate of 23.5% would be

needed to pay off the unfunded liability within 30 years with a 75% probability.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2013 2018 2023 2028 2033 2038 2043

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n D

olla

rs (m

illio

ns)

Year

EORP Stochastic Projection ResultsDC Plan with 23.5% flat rate plus $15 million in additional revenue

Funded Status - Median Funded Status - 75% Confidence Contribution Amount - Proposed

Scenario B

Under Scenario B, the PBI is restored for current retirees only. The graph below shows a flat rate of

32.0% would be needed to pay off the unfunded liability within 30 years with a 75% probability.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2013 2018 2023 2028 2033 2038 2043

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n D

olla

rs (m

illio

ns)

Year



5/19/2014 -8-


AS OF JUNE 30, 2013

Actuarial Analysis (continued)

Scenario C Under Scenario C, in addition to the restoration of the PBI for current retirees, the additional employee

contributions are refunded and the additional 6% employee contribution for current active members is

eliminated. As a result, the flat rate would need to be increased to make up for these differences. The

graph below shows a flat rate of 40% would be needed to pay off the unfunded liability within 30 years

with a 75% probability.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2013 2018 2023 2028 2033 2038 2043

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n D

olla

rs (m

illio

ns)

Year



Scenario D1

Scenario D1 is the same as Scenario A except that COLAs are now funded outside the system by an account created by 4% DB member contributions. DB members would contribute 9% of pay to

the DB plan. The graph below shows a flat rate of 23.0% would be needed to pay off the unfunded

liability within 30 years with a 75% probability. Please note that since the new COLA is being

funded by current active member pay and that the DB plan is closed to new hires, there may

not be funds available to pay for COLAs of future retirees.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2013 2018 2023 2028 2033 2038 2043

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n D

olla

rs (m

illio

ns)

Year



5/19/2014 -9-


AS OF JUNE 30, 2013

Actuarial Analysis (continued)

Scenario D2

Scenario D2 is the same as Scenario D1 except that that COLAs have been restored retroactively as of July 1, 2011, July 1, 2012 and July 1, 2013. Future COLAs would be paid out of the new COLA

fund. The graph below shows a flat rate of 26.0% would be needed to pay off the unfunded liability

within 30 years with a 75% probability. Please note that since the new COLA is being funded by

current active member pay and that the DB plan is closed to new hires, there may not be

funds available to pay for COLAs of future retirees.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2013 2018 2023 2028 2033 2038 2043

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n D

olla

rs (m

illio

ns)

Year



Scenario E1

Scenario E1 is the same as Scenario D1 except that the Defined Contribution Plan is eliminated and

the Retirement Plan is re-opened to all new members.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2013 2018 2023 2028 2033 2038 2043

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n R

ate

Year

EORP Projection ResultsFinal

Funded Status - Median Funded Status - 75% Confidence Contribution Rate - Median Contribution Rate - 75% Confidence

5/19/2014 -10-


AS OF JUNE 30, 2013

Actuarial Analysis (concluded)

Scenario E2

Scenario E2 is the same as Scenario D2 except that the Defined Contribution Plan is eliminated and

the Retirement Plan is re-opened to all new members.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2013 2018 2023 2028 2033 2038 2043

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n R

ate

Year

EORP Projection ResultsFinal

Funded Status - Median Funded Status - 75% Confidence Contribution Rate - Median Contribution Rate - 75% Confidence

FIXING THE PSPRS PENSION FUND

Whats the problem with our pension system?

As of June 2013, PSPRS was only

57% funded.

0%

28%

55%

83%

110%

05 06 07 08 9 10 11 12 13

PSPRS CORP EORP

As the funding levels goes down, employer contribution rates go up.

For 2014, the aggregate employer contribution rate was 32.5%.

0%

10%

20%

30%

40%

2003- 04 2004- 05 2005- 06 2006- 07 2007- 08 2008- 09 2009- 10 2010- 11 2011- 12 2012- 13 2013- 14 2014- 15

PSPRS CORP

In 2011, the Arizona Legislature tackled so-called pension reform.

We told them that their solution SB1609 was not Constitutional.

They ignored us. We were right.

PHOTO BY: Willem van Bergen

SB1609 illegally diminished benefits of pension recipients.

SB1609 illegally changed the retiree COLA formula.

Retired Judge Ken Fields PHOTO BY: Jack Kurtz/The Arizona Republic

In Fields in March 2014, the Arizona Supreme Court ruled that

Forced new hires (after 1/12) to work 25 years for a pension

Eliminated or changed DROP for new hires and those with less than 20 years.

SB1609 also

PHOTO BY: Willem van Bergen

$375 million. $40 million in back

payments to retirees

$335 million to re-establish the Excess Earnings Account

Making these payments will push employer contribution rates to more than 55%.

This ruling will cost the fund (and AZ taxpayers)

0%

15%

30%

45%

60%

2003- 04

2004- 05

2005- 06

2006- 07

2007- 08

2008- 09

2009- 10

2010- 11

2011- 12

2012- 13

2013- 14

2014- 15

XX

PSPRS Employer Contribution Rate

The biggest change?

Fixing the Excess Earnings Account problem, which today funds COLAs.

With small modifications, we can protect our retirement system and ensure COLAs for retirees, actives and the unborn.

The other half goes into the Excess Earnings Account. By draining the main fund during profitable years, we slow its recovery and lower the funded level.

Actuaries say the Excess Earnings Account is 80% of PSPRS problem.

Why? Because for 28 consecutive years retirees have received a 4% annual COLA. That simply isnt sustainable.

Today, if PSPRS earns over the 9% assumed earnings rate, half that money stays in the Fund.

PSPRS Earnings EEA Contribution

BREAK EVEN

Even worse, this leaves the our pension system with a huge problem:

How can we legally restore funding levels without crippling our employers? We need a plan that secures our retirement, helps cities and taxpayers and ensures COLAs for retirees.

Fortunately, we have a solution.

Why offer one, you ask? 1. Its our retirement at stake.

If the system fails, we lose most of all.

2. Higher employer contribution rates mean salary cuts, inability to hire replacements for retirees and, in extreme cases, may even lead to lay-offs.

Fortunately, we have a solution.

Our answer relies on accepting most of the provisions of SB1609, which we have been living with since 2011.

New employees hired after 1/2012 will have to work 25 years.

Pension = 62.5%

Eliminates requirement that you be age 52.2 to collect a pension.

Employers will have a minimum 10% contribution rate.

DROP will become the

Employee Self-Funded Inflation Protection Program. Tier 1 (members with 20 or more years on the job as of 1/2015)

No contributions

Interest rate = assumed rate of return for PSPRS

Tier 2 (everyone else) Contributions during the program period

Interest rate = minimum 2% or 7-year average of PSPRS investment returns (whichever is greater)

Return of member contributions

Return of member contributions reverse employee self funded inflation protection program.

Costs of the Three Types of ESFIPP Non contributory costs=0.6% Contributory with return of contribution costs 0.4% Reverse earns fund 0.8%

Our solution?

Our contribution rate will remain at 11.65%. 7.65% to main PSPRS fund.

4% to new employee-funded COLA fund.

How will the new COLA fund work? We will contribute to the fund for 3 years before paying any COLAS.

After that, all COLA eligible workers get an annual increase of up to 2%.

Increase could be less. Cannot use more than 25% of fund annually.

This is an improvement over SB1609, which practically eliminated COLAs.

COLA qualification will be retired for 7 years or age 60.

What is the impact of our solution?

The average employer contribution rate would fall from over 55% to mid-30%.

PSPRS 80% funded in 13 years.

PSPRS 100% funded in 18 years. Average employer contribution rate falls to the new 10% statutory minimum.

0%

25%

50%

75%

100%

125%

2013 2028 2033

PSPRS % Funded

0%

15%

30%

45%

60%

2013 2018 2023 2028 2033 2038 2043 2048

Our Solution Reversal of SB 1609

Special session to pass a bill and a referendum containing the changes we need and put on the November 2014 ballot.

The bill will be structured to protect the constitutional language that says pensions cannot be diminished nor impaired.

Step 1:

The referendums basic language? The benefits of the beneficiaries shall neither be diminished nor impaired except for the provisions on Bill xxxx, as passed by the Legislature in 2014.

Step 1:

Get the referendum passed by Arizonas voters. This would be a statewide campaign. We would fund it and run it.

We anticipate a full political operation, with TV advertising, direct mail and a statewide grassroots effort.

Step 2:

This proactive effort represents the best chance for public safety to protect our employers, our taxparyers, our pensions, our pension fund, our retirees, our actives and our future members.

QUESTIONS

Date: June 3, 2014

To: James Hacking and Jared Smout, Arizona Public Safety Personnel Retirement

System (PSPRS)

From: Mark Buis, FSA, EA, MAAA and Francois Pieterse, ASA, MAAA

Re: Summary of proposed changes for PSPRS

SB 1609 SCENARIO:

This scenario is based on results prior to the reversal of Senate Bill 1609.

REVERSAL OF SB1609 SCENARIO:

This scenario is based on results after the reversal of Senate Bill 1609.

PROPOSED SCENARIO:

COLA delayed until 7 years after commencement of benefits or age 60.

Tier 2 members can retire at 25 years of service (no minimum age required).

Employee Self funded Inflation Protection Program (IPP) provided for all active generations.

Members can participate in a Non-contributory, Contributory or Reverse IPP (dependent on

the date of hire).

Pensionable income limited to $180,000 indexed with CPI.


Reduce employee contribution rate to 7.65% (eliminating the 4% maintenance of effort

contribution).

Create a new account funded by 4.0% employee contributions (plus actual investment income)

which would fund an annual COLA payable after 3 full years of contributions.


Proposed Scenario

The graph on the next page shows the median contribution rate and funded status for the proposed

Scenario compared to SB1609 and Reversal of SB1609. Under the proposed scenario, the current COLA program and 4% maintenance of effort employee contribution is eliminated and

replaced with a COLA program that is funded with a 4% employee contribution. The Proposed

Scenario contribution rates are similar to but slightly higher than the SB 1609 Scenario. Lastly, the

COLA under the proposed scenario is not dependent on excess investment income.

Mr. James Hacking

Proposed Scenario June 3, 2014

Page 2

The scenarios were based upon data furnished by PSPRS. All actuarial assumptions, methods, and

plan provisions valued in this report, are as described in the June 30, 2013 valuation report

except as explicitly described in this document.

Contribution Rates 2013 2018 2023 2028 2033 2038 2043 2048 2053

Proposed Scenario 31.4% 35.6% 35.8% 36.5% 36.6% 9.7% 8.0% 8.0% 8.0%

SB 1609 31.0% 35.0% 35.9% 37.3% 36.7% 8.0% 8.0% 8.0% 8.0%

Reversal of SB 1609 31.7% 36.7% 40.1% 45.4% 55.3% 15.1% 8.0% 8.0% 8.0%

Median Funded Rate 2013 2018 2023 2028 2033 2038 2043 2048 2053

Proposed Scenario 58.0% 58.6% 68.6% 78.5% 89.7% 100.6% 104.5% 105.4% 107.2%

SB 1609 58.7% 60.6% 69.7% 79.1% 90.3% 101.0% 104.1% 105.5% 107.7%

Reversal of SB 1609 56.4% 54.9% 60.3% 67.6% 79.8% 96.4% 100.3% 102.6% 105.5%

0%

20%

40%

60%

80%

100%

120%

0%

10%

20%

30%

40%

50%

60%

2013 2018 2023 2028 2033 2038 2043 2048 2053

Fun

ded

Sta

tus

Co

ntr

ibu

tio

n R

ate

Year


Median funded status - Proposed Scenario



Median contribution rate - Proposed Scenario



Mr. James Hacking

Proposed Scenario June 3, 2014

Page 3

Comments

Comment 1 Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience

differing from that anticipated by the demographic assumptions; changes in economic or

demographic assumptions; increases or decreases expected as part of the natural operation of the

methodology used for these measurements; and changes in plan provisions or applicable law. Due

to the limited scope of the actuarys assignment, the actuary did not perform an analysis of the potential range of such future measurements.

Comment 2 All scenarios are based on stochastic simulations of 1000 trials with a mean return of 7.85% and standard deviation of 9.4%. To the extent that either the mean or standard deviation

of the portfolio is different, results will vary. Results should not be relied upon as a prediction of

either the exact contribution rate or COLA that can be paid in the future, but rather as a basis for

comparison between the scenarios.

Comment 3 Under the proposed scenario, the estimated COLA is based on a payroll growth assumption of 4.5%. If payroll grows at a slower rate, the COLA that can be provided will be

much lower. Additionally, employee contributions are being used to fund current retiree benefits.

This may result in intergenerational inequities, especially if the System is closed to new hires at

some point in the future. We recommend that any new COLA structure be reviewed by legal and

fiduciary counsel.

Comment 4 If you have reason to believe that the information provided in this report is inaccurate, or is in any way incomplete, or if you need further information in order to make an


to making such decision.

Comment 5 This report is intended to describe the financial effect of the proposed plan changes. No statement in this report is intended to be interpreted as a recommendation in favor of

the changes, or in opposition to them. Except as otherwise noted, potential effects on other benefit

plans were not considered.

Comment 6 A full review of the proposal for compliance with Federal, State, or Local laws or regulations was out of the scope of this study and not performed.

Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this communication (or any attachment)

concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-

related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related

matter addressed within. Each taxpayer should seek advice based on the individual's circumstances from an

independent tax advisor. This communication shall not be construed to provide tax advice, legal advice or investment

advice.

Background

Senate Bill 1609 Lawsuit Reversals

New Accounting Standards for Governmental Plans (GASB)

Benefit Changes Closure of EORP

Funding Policy

2

Comparison of COLA provisions

PSPRS Provisions Pre SB1609 Post SB1609

Investment Return Threshold 9% 10.5%

COLA Maximum 4% of Average PSPRS

Benefit Prior Year

Varies from 2% to 4%

Based on Funded Ratio

Funded Status Threshold None 60%

Reserve Accumulation Yes No

COLA Delay 2 Years or age 55 Tier 1: 2 Years or Age 55

Tier 2: Age 55

3

Provisions are similar for CORP and EORP.

SB1609 Reversal

Fields case restores original PBI formula for members who were retired as of June 1, 2011

Hall case would restore original PBI formula for current active members and reverse changes in the employee contribution rate

4

COLA Examples PSPRS & CORP

PSPRS CORP

1. Market Value at End of Year (millions) 5,529.1 1,409.6

2. Rate of Return on Assets 10.64% 10.64%

3. Excess Return (2 minus 9%) 1.64% 1.64%

4. 1/2 of Average Net Assets 2,599.0 674.1

5. Transfer to COLA fund (3 x 4) 42.6 11.1

6. Transfer as % of MV (5 / 1) 0.77% 0.79%

7. Net return to fund DB plan (2 minus 6) 9.87% 9.85%

5

Calculation of Asset Transfer as of June 30, 2013

COLA Example - EORP

Actual

1. Market Value at End of Year (millions) 310.9 310.9 310.9 310.9

2. Rate of Return on Assets 10.64% 15.00% 20.00% 30.00%

3. Excess Return (2 minus 9%) 1.64% 6.00% 11.00% 21.00%

4. Present Value of Retiree Benefits 460.2 460.2 460.2 460.2

5. Transfer to COLA fund (3 x 4) 7.5 27.6 50.6 96.6

6. Transfer as % of MV (5 / 1) 2.41% 8.88% 16.28% 31.07%

7. Net return to fund DB plan (2 minus 6) 8.23% 6.12% 3.72% -1.07%

Hypothetical

6

Present Value of Retiree Benefits

Originally much smaller than Market Value of Assets Now much larger than Market Value of Assets Closure of DB plan with flat rate funding will prolong this situation PSPRS and CORP changed basis of excess earnings transfer from Present

Value of Retiree Benefits to of Average Assets in 1991

Calculation of Asset Transfer as of June 30, 2013

GASB Changes

ARC under GASB 25 established the current funding policy

New GASB standards divorce funding from accounting (no more ARC)

GASB 67 is effective for the FYE 6/30/2014

All plans will need formal funding policy

GASB requires gain sharing provisions be explicitly measured in liabilities

7

Question 54 of GASB 68 Implementation Guide

QA defined benefit pension plans enabling statute provides for a cost-of-living adjustment (COLA) if the investment earnings rate for the plans fiscal year exceeds the actuarially assumed rate. Should this COLA be treated as an automatic COLA?

AYes. Paragraph 24 of Statement 68 requires that the effects of any COLAs that are embedded in the benefit terms and for which there is no discretion as to timing or amount be included in the projection of future benefit payments. In this example, although a certain economic condition is required to be met for the COLA to be effective, if that condition is met, there is no discretion regarding whether the COLA will be granted.

8

Value of automatic COLA should be measured explicitly in the calculation of the liabilities

How much is the COLA Worth?

Pre SB 1609 Post SB 1609

PSPRS 2.00% 0.50%

CORP 2.25% 0.75%

EORP 3.00% 0.50%

9

Results estimated based on stochastic simulation of 1,000

trials for each of the next 20 years. Results will vary based

on the volatility of the portfolio.

Estimated Annual Compound COLA Applied to Benefit

Impact on Employer Contributions

10

Note that contribution requirements for FY2016 are expected to increase due to

continued phase-in of assets losses from prior years.

Fields Fields and Hall

Valuation Lawsuit Lawsuits

Results Reversed Reversed

Assumed COLA for future retirees 0.00% 0.00% 2.00%

Assumed COLA for current retirees 0.00% 2.00% 2.00%

Actuarial Accrued Liability (millions)

- Future Retirees $ 5,402 $ 5,402 $ 6,274

- Current Retirees 5,142 6,309 6,364

- Total $10,544 $11,711 $12,638

Assets (millions) $ 6,185 $ 6,185 $ 6,185

Unfunded Liability $ 4,359 $ 5,526 $ 6,453

Funded Status 58.7% 52.8% 48.9%

Contribution Rate

- Employer Normal Cost 12.55% 12.55% 14.96%

- 23 year amort UAL payment 18.48% 23.62% 27.53%

- Total 31.03% 36.17% 42.49%

Hypothetical Results as of June 30, 2013 - PSPRS


11

Note that contribution requirements for FY2016 are expected to increase due to

continued phase-in of assets losses from prior years.







- Future Retirees $1,256 $1,256 $1,571

- Current Retirees 981 1,224 1,267

- Total $2,237 $2,480 $2,838

Assets (millions) $1,560 $1,560 $1,560

Unfunded Liability $ 677 $ 920 $1,278

Funded Status 69.7% 62.9% 55.0%

Contribution Rate



- Total 13.23% 15.67% 21.88%

Hypothetical Results as of June 30, 2013 - CORP


12

Please note that actual contribution is currently set by statute.







- Future Retirees $197 $197 $258

- Current Retirees 424 581 581

- Total $621 $778 $839

Assets (millions) $351 $351 $351

Unfunded Liability $270 $427 $488

Funded Status 56.5% 45.1% 41.8%

Contribution Rate



- Total 55.29% 78.32% 91.78%

Hypothetical Results as of June 30, 2013 - EORP

Funding Methodology Components

Amortization Method

Actuarial Cost Method

Asset Valuation Method

Funding Target

Gains and Losses

Risk Sharing

Implementation

Overfunding

Benefit Changes

Assumption Changes

13

Amortization Policy

Level $ vs. Level % of pay Level $ front loads funding

Level % can produce negative amortization

Closed vs. Open period Open period never actually pays off UAL

Open period will result in lower discount rate for GASB calculations

Clopen closed period (decreasing) for awhile and then open (constant), refinance each year

14

Funding Policy Alternatives

Reset Amortization Period 30 Years for All Unfunded Liability

Layered Amortization Period Reset Amortization Period to 30 Years for Each Years New Unfunded Liability

Phase-in Contribution Rate Increase (3 to 5 Years)

Combination of Above

15

Examples - PSPRS

16


Lawsuit Lawsuits

Reversed Reversed

Current Policy (23 year amortization) 5.14% 11.46%

Change Amortization to 30 years for all UAAL 1.44% 7.15%

Change Amortization to 30 years for new liability 4.02% 7.22%

Phase in Contribution Increase over 3 years

- Year 1 1.71% 3.82%

- Year 2 3.43% 7.64%

- Year 3 and later 5.14% 11.46%

Increase in Contribution due to Recognition of COLA in liabilities - PSPRS

Examples - CORP

17

Increase in Contribution due to Recognition of COLA in liabilities - CORP


Lawsuit Lawsuits

Reversed Reversed





- Year 1 0.81% 2.88%

- Year 2 1.63% 5.77%

- Year 3 and later 2.44% 8.65%

Examples - EORP

18

Please note that actual Employer Contribution rate for EORP is currently set

by statute.


Lawsuit Lawsuits

Reversed Reversed





- Year 1 7.68% 12.16%

- Year 2 15.35% 24.33%

- Year 3 and later 23.03% 36.49%

Increase in Contribution due to Recognition of COLA in liabilities - EORP

Amortization Example

19

-

1,000

2,000

3,000

4,000

5,000

6,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

UA

L (i

n $

mill

ion

s)

Years

23 Year vs 30 Year Amortization of UAL

UAL (using 23 amortization)

UAL (using 30 amortization)

Comparison of Methods

20

Approach Employer Contribution Funded Status Employer Consistency

30 year amortization

Provides longer term contribution relief

Unfunded liability is not reduced for next 13 years

Some employers may see contribution decrease

30 year amortization on new liability

Provides modest contribution relief

New unfunded liability is not reduced for first 13 years

Consistent treatment among employers

Phase-in contribution increase over 3 years

Provides shorter term contribution relief

UAAL is paid down on original schedule

Consistent treatment among employers

Recommendations

Adopt formal policy prior to July 1, 2014 valuation

Consider 3 year phase-in approach if only Fields lawsuit is reversed

Consider 5 year phase-in approach if both Fields and Hall lawsuits are reversed

21

Disclosures

Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individuals circumstances from an independent tax advisor.

This presentation shall not be construed to provide tax advice, legal advice or investment advice.

The actuaries submitting this presentation are Members of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein.

The purposes of the actuarial valuation are to measure the financial position of PSPRS, CORP, and EORP, to assist the Board in establishing employer and employee contribution rates necessary to fund the pension defined benefits provided by the Systems, and to provide actuarial reporting and disclosure information for the Systems financial report.

22

Disclosures

The actuarial valuation was based upon information furnished by the Executive Director and staff, concerning Retirement System benefits, financial transactions, plan provisions and active members, terminated members, retirees and beneficiaries. We checked for internal and year-to-year consistency, but did not otherwise audit the data. We are not responsible for the accuracy or completeness of the information provided.

This is one of multiple documents comprising the actuarial report. Additional information regarding actuarial assumptions and methods, and important additional disclosures are provided in our full report.

If you need additional information to make an informed decision about the contents of this presentation, or if anything appears to be missing or incomplete please contact us before using this presentation.

23

Disclosures

Future actuarial measurements may differ significantly from the current measurements presented in this presentation due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plans funded status); and changes in plan provisions or applicable law.

24

Agenda_616ATT_GRS 2014-04-25 PSPRS COLA Scenariosas of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013as of June 30, 2013Comments

ATT_GRS 2014-05-06 CORP COLA ScenarioATT_GRS 2014-05-19 EORP DC StudyATT_PFFA PresentationFIXING THE PSPRS PENSION FUNDAs of June 2013, PSPRS was onlyFor 2014, the aggregate employer contribution rate wasWe told them that their solution SB1609 was not Constitutional. SB1609 illegally diminished benefits of pension recipients.Forced new hires (after 1/12) to work 25 years for a pensionEliminated or changed DROP for new hires and those with less than 20 years.$375 million.Fixing the Excess Earnings Account problem, which today funds COLAs.The other half goes into the Excess Earnings Account. Even worse, this leaves the our pension system with a huge problem: Fortunately, we have a solution.Fortunately, we have a solution.Employee Self-Funded Inflation Protection Program. Return of member contributions reverse employee self funded inflation protection program.Costs of the Three Types of ESFIPPOur contribution rate will remain at 11.65%. How will the new COLA fund work?What is the impact of our solution?Special session to pass a bill and a referendum containing the changes we need and put on the November 2014 ballot.The referendums basic language?Get the referendum passed by Arizonas voters.Slide Number 22Slide Number 23

ATT_GRS 2014-06-03 PSPRS COLA Scenario Summary_617ATT_GRS Arizona PSPRS 2014 Funding Policy

arizona public safety personnel retirement system (psprs) special board of trustees meeting 6/5/2014

Documents

psprs james

psprs offices

jim hacking5

actuarial methods

theexception of materials

eastcamelback road

east camelback road

law frompublic inspection