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PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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Page 1: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

PSPRSDon’t Stop Thinking

About TomorrowGFOAz Conference

August 7, 2014

Page 2: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Presentation Outline• PSPRS Overview

– Jared Smout, Deputy Administrator, PSPRS

• Rate Components and Funding Levels – Understanding the Actuarial Valuation– Mark Buis, Gabriel Roeder Smith & Co.

• PSPRS Investment Strategy– Mark Steed, Lead Portfolio Manager/Chief of Staff, PSPRS

• Town of Paradise Valley’s PD Pension Study– Scott McCarty, Finance Director, Town of Paradise Valley

Page 3: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

PSPRS Overview

Page 4: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

The Purpose of PSPRSArizona Revised Statutes § 38-841

Before the establishment of the public safety personnel retirement system, municipal firemen and policemen, employees of the Arizona highway patrol and other public safety personnel in the state of Arizona were covered under various local, municipal and state retirement programs. These heterogeneous programs provided for wide and significant differentials in employee contribution rates, benefit eligibility provisions, types of benefit protection and benefit formulas….In order to provide a uniform, consistent and equitable statewide program for public safety personnel who are regularly assigned hazardous duty in the employ of the state of Arizona or a political subdivision thereof, this retirement system was created effective as of July 1, 1968.

Page 5: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

The Local Board System = Local Control

Arizona Revised Statutes § 38-847The administration of the system and responsibility for making the provisions of the system effective for each employer are vested in a local board. The department of public safety, the Arizona game and fish department, the department of emergency and military affairs, the University of Arizona, Arizona State University, Northern Arizona University, each county sheriff's office, each county attorney's office, each county parks department, each municipal fire department, each eligible fire district, each community college district, each municipal police department, the department of law, the department of liquor licenses and control, the Arizona department of agriculture, the Arizona state parks board, each Indian reservation police agency and each Indian reservation fire fighting agency shall have a local board.

The Structure of PSPRS

Page 6: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

County Investigators

County Sheriffs

Fire Districts

Marshals

Municipal Fire

Municipal Police

State Agencies

Tribal Fire

Tribal Police

0 10 20 30 40 50 60 70 80

Distribution of Employers by Type

Page 7: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

'69 '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '140

50

100

150

200

250

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Growth of PSPRSEmployers Membership

Page 8: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

PSPRS Annual AggregateActuarial Valuation

June 30, 2013 Employer Rate Funded StatusAverages 32.54% 57.1%

Page 9: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

5% - 10% 10% - 15% 15% - 20% 20% - 25% 25% - 30% 30% - 35% 35% - 40% 40% - 45% 45% - 50% 50% - 55% 55% - 60% 60% - 65% 65% - 70% 70% - 75%+

# of ERs

8 68 45 35 18 16 18 4 8 4 5 2 3 2

5

15

25

35

45

55

65

75

ER Rate Distribution by # Employers

Page 10: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

5% - 10%

10% - 15%

15% - 20%

20% - 25%

25% - 30%

30% - 35%

35% - 40%

40% - 45%

45% - 50%

50% - 55%

55% - 60%

60% - 65%

65% - 70%

70% - 75%+

5% - 10%

10% - 15%

15% - 20%

20% - 25%

25% - 30%

30% - 35%

35% - 40%

40% - 45%

45% - 50%

50% - 55%

55% - 60%

60% - 65%

65% - 70%

70% - 75%+

# of ERs

8 68 45 35 18 16 18 4 8 4 5 2 3 2

Membership

10 2262 2774 2505 2072 3822 11368 195 2146 1311 2552 90 335 77

515253545556575

1,000

3,000

5,000

7,000

9,000

11,000

ER Rate Distribution by # Employers and Membership

Page 11: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

0% - 10% 10% - 20% 20% - 30% 30% - 40% 40% - 50% 50% - 60% 60% - 70% 70% - 80% 80% - 90% 90% - 100% >= 100%

# of ERs 6 2 1 12 25 30 35 41 25 20 39

2.5

7.5

12.5

17.5

22.5

27.5

32.5

37.5

42.5

Funding Level Distribution by # of Employers

Page 12: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

0% - 10%

10% - 20%

20% - 30%

30% - 40%

40% - 50%

50% - 60%

60% - 70%

70% - 80%

80% - 90%

90% - 100%

>= 100% 0% - 10%

10% - 20%

20% - 30%

30% - 40%

40% - 50%

50% - 60%

60% - 70%

70% - 80%

80% - 90%

90% - 100%

>= 100%

# of ERs

6 2 1 12 25 30 35 41 25 20 39

Membership

39 47 29 903 7533 13247 3953 2665 1134 876 1093

2.57.5

12.517.522.527.532.537.542.5

1,000

3,000

5,000

7,000

9,000

11,000

13,000

Funding Level Distribution by # of Employers and Membership

Page 13: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Do you know where you stand and how you got there?

Page 14: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Copyright © 2014 GRS – All rights reserved.

Rate Components and Funding Levels

Understanding the Actuarial Valuation

Page 15: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

15

Present Value of Future Benefits - Present Valueof all future benefits payable to current participants(active, retired, terminated vested).

Actuarial Liability - Portion of PV of Future Benefits allocated to prior years.

Normal Cost - Portion of PV of Future Benefits allocated to current year.

Future Normal Costs - Portion ofPV of Future Benefits allocated to future years.

Present Value of Future Benefits

ActuarialLiability

Future Normal

Cost

NormalCost

Components of the Actuarial Valuation

Page 16: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

16

Actuarial Accrued Liability - Actuarial Value of Assets

= Unfunded Actuarial Liability

Annual Contribution = Normal Cost + Amortization of the Requirement Unfunded Liability

Components of the Actuarial Valuation

Page 17: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Development of Funded Ratio

17

2012 2013

A. Accrued Liability

1. For retirees and beneficiaries $ 5,045,392,933 $ 5,262,215,315

2. For DROP members 1,318,879,833 1,390,054,474

3. For vested terminated members 22,200,487 25,997,914

4. For present active members

a. Value of expected future benefit payments 6,456,407,513 6,525,217,636

b. Value of future normal costs 2,517,350,780 2,379,945,434

c. Active member accrued liability: (a) - (b) 3,939,056,733 4,145,272,202

5. Total accrued liability 10,325,529,986 10,823,539,905

B. Present Assets (Funding Value) 6,051,595,012 6,185,073,611

C. Unfunded Accrued Liability: (A.5) - (B) 4,273,934,974 4,638,466,294

D. Stabilization Reserve 13,132,786 16,068,231

E. Net Unfunded Accrued Liability: (C) + (D) $ 4,287,067,760 $ 4,654,534,525

F. Funding Ratio: (B) / (A.5) 58.6% 57.1%

June 30,

Funding Ratio will be different for every employer.

Page 18: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Development of Employer Contribution

Employer contribution rate will be different for every employer.18

Contribution for Fiscal Year

Pension Normal cost requirement Service pensions Disability pensions Survivors of active members Refunds of members' accumulated contributions Total normal cost requirement Employee Contributions Total employee rate Less portion not used to reduce employer's contribution Net employee rate

Employer normal cost requirement Amortization of unfunded liabilities Total pension contribution requirement

Health Normal cost requirement Amortization of unfunded liabilities Total health contribution requirement

Total contribution requirement

29.05% 31.03% 16.01% 18.48%

7.65% 7.65%

17.28% 16.65%1.73 1.770.59 0.591.09 1.19

20.69% 20.20%

10.35

June 30,2012 20132014 2015

11.05 2.70 3.40

13.04% 12.55%

30.44% 32.54%

0.33% 0.34% 1.06% 1.17% 1.39% 1.51%

Page 19: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Understanding Asset Smoothing

Funding value for each employer is determined proportionately based on Market Value.19

2013 2014 2015 2016 2017 2018 2019

A. Funding Value Beginning of Year (Including Future Benefit Increases) 6,051,595,012$

B. Market Value End of Year 5,557,274,418

C. Market Value Beginning of Year 5,074,687,874

D. Non Investment Net Cash Flow (68,751,086)

E. Investment Income E1. Total: B-C-D 551,337,630 E2. Amount for Immediate Recognition: (8.00%) 481,377,558 E3. Amount for Phased in Recognition: E1-E2 69,960,072

F. Phased in Recognition of Investment Income F1. Current Year: E3 / 7 9,994,296 F2. First Prior Year (75,653,848) 9,994,296$ F3. Second Prior Year 42,476,982 (75,653,848) 9,994,296$ F4. Third Prior Year 9,922,277 42,476,982 (75,653,848) 9,994,296$ F5. Fourth Prior Year (192,391,612) 9,922,277 42,476,982 (75,653,848) 9,994,296$ F6. Fifth Prior Year (124,481,914) (192,391,612) 9,922,277 42,476,982 (75,653,848) 9,994,296$ F7. Sixth Prior Year 50,985,946 (124,481,913) (192,296,967) 9,922,277 42,476,985 (75,653,847) 9,994,296$ F8. Funding Value Corridor Adjustment 0 F9. Total Recognized Investment Gain (279,147,873) (330,133,818) (205,557,260) (13,260,293) (23,182,567) (65,659,551) 9,994,296

G. Funding Value End of Year G1. Preliminary Funding Value End of Year: (A+D+E2+F1:F7) 6,185,073,611 G2. Upper Corridor: (120% x B) 6,668,729,302 G3. Lower Corridor: (80% x B) 4,445,819,534 G4. End of Year: (G1 subject to max of G2 and min of G3) 6,185,073,611

H. Difference Between Market Value & Funding Value: (B-G4) (627,799,193) (297,665,375) (92,108,115) (78,847,822) (55,665,255) 9,994,296 0

I. Market Rate of Return 10.9%

J. Recognized Rate of Return 3.4%

K. Ratio of Funding Value to Market Value 111.3%

Year Ended June 30:

Page 20: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Understanding Asset Smoothing and Amortization methods

Year 1 - phase in 1/7 of asset loss Step 1 – phase in 1/7 of asset loss Step 2 – amortize UAL over 23 years

Year 2 – Year 1 results PLUS Step 1 – phase in additional 1/7 of asset loss Step 2 – amortize UAL over 22 years

… Year 7 and beyond – Year 1 through 6 PLUS

Step 1 – phase in final 1/7 of asset loss Step 2 – amortize UAL over remaining years

20

Page 21: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Understanding Asset Smoothing and Amortization methods

21

Example of How 30% Loss on Assets Impacts ContributionHigh Low

Total Ratio Ratio

1. Assets (in millions) 5,557.0 415.5 17.5 2. Payroll (in millions) 1,370.0 63.1 7.0 3. Ratio 4.1 6.6 2.5

4. 30% Asset Loss ( Item 1 x 30%) 1,667.1 124.7 5.3 5. Asset Loss as % of Payroll (Item 4 / Item 2) 121.7% 197.5% 75.0%YEAR 16. Smooth assset loss over 7 years (Item 5 / 7) 17.4% 28.2% 10.7%7. Amortize UAL over 23 years (Item 6/ 16.4) 1.1% 1.7% 0.7%YEAR 28. Smooth asset loss over 7 years (Item 5 / 7) 17.4% 28.2% 10.7%9. Amortize UAL over 22 years (Item 8/ 15.9) 1.1% 1.8% 0.7%10. Add to Year 1 results (Item 7 plus Item 9) 2.2% 3.5% 1.4%

Page 22: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

So Why Have Contribution Rates Been Increasing?

22

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

% o

f P

ay

Year

PSPRS Contribution Rates

Employer Normal Cost & Other Asset Loss Payroll decline Assumptions & Methods

Page 23: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

So Why Has the Contribution Rate Been Increasing?

In most systems, assets losses and gains tend to offset each over time

In PSPRS, asset gains also fund the Permanent Benefit Increases (PBI)

The current return assumption is 7.85% One-half of excess return over 9% funds the PBI When markets are volatile, high returns will not

completely offset the low returns

23

Page 24: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

So Why Has the Contribution Rate Been Increasing?

24

Volatility Low High Average AverageMeasure Return Return Before PBI PBI After PBI+/- 1.00% 6.85% 8.85% 7.85% 0.00% 7.85%+/- 2.00% 5.85% 9.85% 7.85% 0.43% 7.64%+/- 3.00% 4.85% 10.85% 7.85% 0.93% 7.39%+/- 4.00% 3.85% 11.85% 7.85% 1.43% 7.14%+/- 5.00% 2.85% 12.85% 7.85% 1.93% 6.89%+/- 6.00% 1.85% 13.85% 7.85% 2.43% 6.64%+/- 7.00% 0.85% 14.85% 7.85% 2.93% 6.39%+/- 8.00% -0.15% 15.85% 7.85% 3.43% 6.14%+/- 9.00% -1.15% 16.85% 7.85% 3.93% 5.89%

+/- 10.00% -2.15% 17.85% 7.85% 4.43% 5.64%

Page 25: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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 55Tier 2: Age 55

25

Page 26: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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

26

Page 27: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

SB1609 ReversalImpact on Employer Contributions

27Note that contribution requirements for FY2016 are expected to increase due to continued phase-in of assets losses from prior years.

Fields Fields and HallValuation Lawsuit LawsuitsResults 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

Page 28: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

SB1609 ReversalImpact on Employer Contributions

28

Example of Impact of Fields Case ReversalHigh Low

Total Ratio Ratio1. Retiree Liability (in millions) 5,142.0 3.6 12.1 2. Total Liability (in millions) 10,544.0 4.9 54.3 3. Ratio 49% 73% 22%

4. Contribution rate before SB1609 reversal 31.0% 41.0% 17.6%5. Contribution rate after SB1609 reversal 36.2% 49.2% 19.2%6. Increase in Contribution rate 5.1% 8.2% 1.6%

7. Optional phase-in plan - Year 1 1.7% 2.7% 0.5% - Year 2 3.4% 5.5% 1.1% - Year 3 5.1% 8.2% 1.6%

Page 29: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Things employers CAN’T control

Investment performance PSPRS has some control over this

Benefit Provisions Occasionally modified by statute

Actuarial assumptions and methods Reviewed every 5 years by actuary

29

Page 30: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Things employers CAN control

Managing funding levels Employers can contribute more than the minimum

Managing workforce Hiring members with prior PSPRS service increases cost Reducing workforce results in costs being spread over lower

payroll base increases cost as percentage of pay Disability approvals can increase cost if not managed

carefully Payroll management allowing pay spiking can increase

cost

30

Page 31: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

PSPRS Investment Strategy

Towards a more resilient portfolio

Page 32: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Portfolio is managed according to a set of investment beliefs

1. Mandate to achieve assumed earnings rate of at least 7.85% over long-periods of time2. Markets are difficult to time so diversification offers the best chance to achieve the

assumed earnings rate 3. Investment universe should be as wide as possible so as to increase likelihood of

accomplishing diversification4. Risk is defined as the potential for a loss of capital. It can be approximated using

statistical conventions but will never be exact 5. The best results come from people who are empowered to make decisions. Human and

cognitive diversity are the best tools for solving novel problems in complex systems6. Making sound decisions requires not only robust quantitative models but sound human

judgment. People make models better and models make people better 7. Success depends, in part, on recognizing the role that “randomness”, or chance, plays in

any particular market

Page 33: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Portfolio returns are derived from a simple equation

Total Return = Risk Free Rate (Cash) + Asset Allocation + Active Management

Since 1970, traditional portfolios averaged the following:

10.0% = 5.6% (Historical Risk Free Rate) + 4.4% (Asset Allocation) + 0% (Active Management)

However, the reduction in the risk-free rate due to monetary stimulus puts the burden of total return on asset allocation and active management

6.1% = 1.7% + 4.4% + 0%

Page 34: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

This reality leads to two distinct strategic initiatives

1. Improve returns from asset allocation Passively holding more or less of certain asset classes

Problem: The low-rate environment incentivizes investors to purchase riskier assets with higher returns, thus bidding up bond and stock prices and bidding down future returns. Also, markets can behave erratically creating the appearance of randomness.Solution: Focus on a strategic mix of assets that offer the highest probability of success in the aggregate, regardless of the business cycle. Focus on odds.

2. Improve active management decisions Making relative value decisions within asset classes

Problem: This is a zero-sum game, if we win, someone loses. Therefore, opportunities are fleeting because information travels quickly.Solution: Do not assume the rules of the game are fixed. By focusing on the Trust’s competitive advantages (liquidity, time horizon and size), we can make active decisions in opaque markets where informational asymmetry can be exploited

Page 35: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Sidebar: What drives outcomes, skill or luck? Strategies should be different depending on what drives the outcome.

To what extent does luck or skill determine success for sports teams?

What does the dispersion of success look like? How would it be different if the outcome were completely dependent on luck?

League Contribution of Luck

Contribution of Skill

Season Ending

NBA 10% 90% 2013

Premier League

31% 69% 2011

MLB 34% 66% 2011

NFL 53% 47% 2012

2013 NBA season calculated by author using “True Score Theory”. All other statistics are for the five seasons ending in the designated year and are taken from Mauboussin, M. The Success Equation. 2012. Harvard Business Review Press.

Page 36: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Initiative #1 Total Return = Risk Free Rate (Cash) + Asset Allocation + Active ManagementThere are numerous asset classes but they usually fit in one of four quadrants

Growth Inflation

Rising EquitiesCommodities

Corporate CreditEM Credit

Private Equity

IL BondsCommodities

EM CreditLiquid Loans

Falling Nominal BondsIL Bonds

Direct Lending

EquitiesNominal Bonds

*The key to having a more resilient portfolio is ensuring you hold assets that will perform during any business cycle. Portfolio construction is about balance.**Allocating equal capital to each of the four quadrants will not work (balance will not be achieved) because some assets are more volatile than others. If one asset is twice as volatile as another, it should receive half the capital.

Page 37: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

With this in mind, the Investment Team has pursued a path that better diversifies the portfolio against macro risks

6/30/2006 5/31/20140

10

20

30

40

50

60

70

80

90

100

Total Equity, 70

Total Equity, 30

Fixed Income, 22

Fixed Income, 9

Real Estate, 3

Real Estate, 11

Cash, 5 Cash, 5

Private Equity, 14

Credit Opportunities, 9

GTAA, 9

Real Assets, 6Risk Parity, 3

Absolute Return, 4

Page 38: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

While forecasts and simulations are far from certain we are at least able to say today’s portfolio is better insulated from known macro-economic shocks than has been the case historically.

Today’s Portfolio PSPRS Trust Actual

Stock Market Crash of 2002 -4.5% -21.1%

Credit Crunch 2008 -8.2% -23.1%

Crisis 2009 (Jan – Feb) -4.9% -12.9%

Page 39: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Initiative #2 Total Return = Risk Free Rate (Cash) + Asset Allocation + Active Management

As markets approach efficiency, returns are driven less by skill and more by luck

Page 40: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

If you are an underdog, make rules of the game as flexible as possible

Nassim Taleb author of Outliers likes to use the example of David and Goliath

Page 41: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Over the last five years, the PSPRS Trust has negotiated strategic relationships with key research institutions and asset managers to build a best-in-class information network

57

16 14

26

19

14

Page 42: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Results PSPRS maintains one of the most superior risk-adjusted (as measured by the sharpe ratio) portfolios in the nation, placing ahead of 90% of their peers over the last three years.

Risk

Ratio of PSPRS Risk to 60/35/5

Chart taken from “Modern Pension Fund Diversification”. Figure 4. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2426593. To be published in the Journal of Asset Management

Page 43: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Historical Returns (through 5/31/2014, Gross of Fees)

Month Ending Fiscal YTD Calendar YTD 1 Year 3 Years 5 Years 10 Years

PSPRS Trust 1.98% 12.94% 4.86% 12.01% 7.48% 10.94% 6.02%

Benchmark 1.19% 12.38% 3.57% 10.99% 8.12% 10.90% 4.79%

Excluding legacy Real

Estate

2.08% 14.78% 5.07% 13.35% 8.54% 12.65% N/A

Page 44: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Accolades• 2013, Nominee, Innovator Award. Asset

International Chief Investment Officers• 2011, Recipient, Mid-Size Fund of the Year.

Money Management Magazine• 2011, Nominee, Small Public Fund of the Year.

Institutional Investor Magazine

Page 45: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

GFOAz Conference

August 7, 2014

POLICE PENSION STUDY

Page 46: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

46

Contribution Rate ~63%

Contribution Amount $1.7M

Contribution Amount as % of Operating Budget

8%

Percent Funded 30%

Unfunded Liability $19.7M

Active Employees 23

Retirees/DROP Members 37

OUR KEY STATISTICS – PD ONLY

Page 47: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

47

PVPSPRS Average

Normal Cost Requirement 12.27% 12.89%

Amortization of Unfunded Liabilities

50.17% 19.65%

Contribution Rate 62.44% 32.54%

“NO ONE IS AVERAGE”

The Town’s Unfunded Liability is the Most Significant Factor in Our Contribution Rate

Page 48: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

48

Actual Experience Has Not Matched Projections in the Following Areas:1. Investment Earnings (Can’t Control)2. Court Rulings (Can’t Control)3. Retirees Outnumber Actives (CAN

INFLUENCE) Benefits Have Been Earned

STUDY RESULTS: UNFUNDED LIABILITY

Page 49: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

49

PV VS. PSPRS IN FY 12-13ACTIVES VS. RETIREES

PV PSPRS0%

10%20%30%40%50%60%70%80%90%

100%

41%

68%

59%

32%

RetireesOutnumber

Actives

ActivesOutnumber

Retirees

Page 50: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

50

1. Relatively Constant Number of Active Positions

2. Only Hire Laterals3. Large Number of Disability

Retirements with Less Than 20 Years of Service

4. DROP Program

STUDY RESULTS- WHY OUR RETIREES OUTNUMBER EMPLOYEES

Page 51: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

51

UNFUNDED LIABILITYGROWS TO A PEAK OF $23M THEN

DECLINES20

13

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

$-

$5.0

$10.0

$15.0

$20.0

$25.0

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Plan Year

Unf

unde

d L

iabi

lity

($m

illio

n)

Fun

ded

Sta

tus

Unfunded Liability

Page 52: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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EMPLOYER CONTRIBUTION STEADILY INCREASES AND GROWS TO 15% OF OPERATING REVENUES

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

$0.50

$1.50

$2.50

$3.50

$4.50

$5.50

$6.50

Plan Year

Con

trib

utio

n A

mou

nt (

$mill

ion)

Page 53: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

53

CONTRIBUTION RATE STEADILY INCREASES TO 80%

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Plan Year

Con

trib

utio

n R

ate

Page 54: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

54

TOTAL CONTRIBUTION: NORMAL COST + UNFUNDED LIABILITY

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

2045

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

Plan Year

Contr

ibuti

on A

mount

Normal Cost

Unfunded Liability

$53.5MTotal Cost

Page 55: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

55

What are We Doing About It?

Page 56: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

56

DROP has an Adverse Financial Impact per Actuary Study

FY 14-15 Budget Includes Contributions for All Authorized PSPRS Positions (33)

Added $235k for 4 DROP Members

1. STARTED MAKING DROP MEMBER CONTRIBUTIONS

EFFECTIVE JULY 1ST

Page 57: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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Expected Results $90k Additional Interest Income 3 Percentage Point Rate Reduction

Investment Income is Based on the Town’s Average Balance

Average Balance = Beginning Balance + 50% of Annual Changes

2. PREPAID $2M CONTRIBUTIONS ON JULY 1ST

Page 58: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

58

What is a Pension Funding Policy? A Comprehensive Document with

the Objective of Ensuring Financial Resources Exist to Fund Pension Obligations

3. DEVELOPING A PENSION FUNDING POLICY

Page 59: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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Components of the Policy Defines Funding Levels Defines Contribution Rates & Amounts Avoids “Kicking the Can Down the Road” Defines Actuary Assumptions Identifies Roles of Responsible Parties

3. DEVELOPING A PENSION FUNDING POLICY (CONCLUDED)

Page 60: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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Focusing on Addressing $14.3M Unfunded Retiree Liability (Not Total $19.7M Unfunded Liability)

Limited Capacity Under State’s Annual Expenditure Limitation

Reserve is an Interim Option

4. CONSIDERING ADDITIONAL PAYMENTS TO DIRECTLY BUY-DOWN

THE LIABILITY

Page 61: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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Safety Programs Wellness Programs Role of Local PSPRS Board Role of Council

5. IMPLEMENTING BEST PRACTICES

Page 62: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

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League Task Force Ability to Issue Pension Obligation

Bonds

6. EVALUATE LEGISLATIVE OPTIONS

Bond Issue Example

Status Quo (7.85%) $53.5M

Bonds (3.7%) $31.3M

Estimated Savings $22.2M

Page 63: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

63

1. Do a Study What Percent of Your Operating

Budget Goes to PSPRS? We’re Extreme, Are You? “No One is Average”

2. Create a Pension Funding Policy Don’t Wait Until It’s Too Late

YOUR HOMEWORK

Page 64: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

64

Questionsand

Comments

Page 65: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

65

The following section is a placeholder re. GASB and will be discussed if time permits

Page 66: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Copyright © 2014 GRS – All rights reserved.

New GASB Standards

Page 67: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

GASB Changes - Overview

New GASB Accounting Standards Statements No. 67 and No. 68 will create accounting results separate from funding results Funding calculations are not impacted GASB created a new Net Pension Liability (NPL)

and Pension Expense Statement No. 67 replaces Statement No. 25 Statement No. 68 replaces Statement No. 27

28

Page 68: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Summary of Key Changes Under the GASB’s current standards, there is a

close link between the accounting and funding measures. Under the new statements, the two are disconnected:

68

Funding Purposes Accounting Purposes

Discount Rate Long-term rate of investment return

Long-term investment return and potentially a municipal bond rate

Asset Valuation May be smoothed Fair (market) value

Amortization Considerable flexibility Strict requirements and likely shorter periods

Actuarial Cost Method Considerable flexibility Traditional entry age normal

Page 69: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

GASB Changes – Overview

Key differences for employer accounting New GASB rules do not allow smoothing of assets New GASB rules may require lower (or blended)

discount rate to value liabilities Key takeaways

New GASB rules do NOT change the funding contribution rate

New GASB rules do provide a second set of actuarial numbers (may lead to confusion)

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Page 70: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Single Discount Rate The NPL is similar to the Unfunded

Actuarial Accrued Liability (UAAL) that many state and local governments use for funding purposes (based on Market Value of Assets)

However, a key difference is the “Single Discount Rate” which is: Based on the long-term expected investment

return to the extent projected plan fiduciary net position (assets) is sufficient to pay future benefits; and

Based on a tax-exempt municipal bond index rate to the extent projected plan fiduciary net position (assets) is not sufficient to pay future benefits

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Page 71: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

Determining the Discount Rate – (GASB)

71

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

0 5 10 15 20 25 30 35

Illustrative Projected Benefits and Projected Plan Net Position

Projected Benefit Payments

Projected Plan Net Position

This portion of projected benefits is discounted using a AA tax-exempt municipal bond index rate

This portion of projected benefits is discounted using the long-term expected rate of return.

Page 72: PSPRS Don’t Stop Thinking About Tomorrow GFOAz Conference August 7, 2014

GASB Overview

GASB Statement No. 67 is effective for fiscal years beginning after June 15, 2013 PSPRS will receive plan results this fall

GASB Statement No. 68 is effective for fiscal years beginning after June 15, 2014 Employers will receive separate GASB report next

spring based on June 30, 2014 measurement date This will allow auditors to receive information prior

to June 30, 2015 fiscal year end

72