PSPRS Task Force Update and Recommendations

Presider: Michael LeVault, Mayor, YoungtownSpeakers: Greg Caton, Manager, Oro Valley, Task Force Member Scott McCarty, Finance Director, Queen Creek, Task Force

Chair

League Annual ConferenceAugust 19, 2015

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Introduction Reform WILL NOT Reduce Your Unfunded

Liability Actively Manage Your PSPRS Plan – Some

Decisions are made at the Local Level Consider Your Unfunded Liability as Debt Implement Employer Recommended

Practices Now is the Time to Act

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League’s Task Force

Formed in June, 2014 by the Executive Committee in Partnership with ACMA and GFOAz

All Related Information on League’s Website

15 Members

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• Scott Barber, HR Director, Town of Florence • Greg Caton, Town Manager, Town of Oro Valley• Karen Daines, Assistant City Manager, City of Sedona• Barbara Fleming, HR Director, City of Sierra Vista• Barbara Goodrich, Management Services Director, City of Flagstaff • Michael Kennington, Chief Financial Officer, City of Mesa • Alan Maguire, President and Principal Economist, The Maguire Company• Scott McCarty, Town of Queen Creek (Chairman)• James Menlove, Finance Director, Navajo County • Rick Naimark, Deputy City Manager, City of Phoenix (Retired)• Robert Nilles, Finance Director, City of El Mirage • Kathy Reyes, Benefits Administrator, City of Avondale• Marc Skocypec, Assistant Town Manager, Town of Gilbert• Mike Townsend, Assistant County Manager, Coconino County (Vice-Chairman)• Marge Zylla, Government Relations, City of Tempe

Task Force Members

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PSPRS Overview256 Employer (Individual) Plans ~32,000 Actives / Retirees

Same Employee Benefit StructureFinancial Condition Varies by Plan $6.2B Total Underfunded at 6/30/14

ER Contribution Rate Varies By PlanEE Contribution Rates are Fixed at 11.65%

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Employees & Retirees at 6/30/14

City/Town Po-lice Departments 14553

45%

City/Town Fire

Department

s766424%

All Other Members995531%

22,000+ (69%) are in City and Town Plans

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$6.2B. Total Unfunded Liability at 6/30/14

City/Town Po-lice Departments 3

48%

City/Town Fire

Department

s1.524%

All Other Members1.727%

$4.5B. (72%) Relates to Cities and Towns

74 Plans

46 Plans

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Task Force’s Approach: 3 Phases

Information and Education

Employer Recommended

PracticesThe Yardstick

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Phase #1: Information and Education

14 Presentations From Stakeholders and Subject Matter Experts Including:

Labor Associations PSPRS PSPRS Actuaries ASRS National Conference of Public Employee

Retirement Systems National Conference of State Legislators

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Phase #1: Information and Education (continued)

How Did We Get Here? Low Investment Returns Benefit Increases Pension Benefit Increase (PBI) Governance Issues

Experience Did Not Match Assumptions

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Phase #1: Information and Education (continued)

Pension Benefit Increase (PBI) ½ of the Annual Investment Returns

in Excess of 9% go to a Separate Pot Retiree Pension Increase = Pot

Amount divided by Number of Retirees

Retirees Receive the SAME AMOUNT FY 2014-15 PBI = $165 per Month

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Phase #1: Information and Education (concluded)

KEY TAKEAWAYS

1. Reform is Needed – Current Structure is Unsustainable

2. There is NO Silver Bullet3. Unfunded Pension Liability is Debt4. Employers Must Actively Manage

Their Pension Plans

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Phase #2: Employer Recommended Practices

Opportunities Exist to Improve Funded Status – Without Reform

Held Five Statewide Meetings to Communicate and Engage Employers

Proving to be Extremely Beneficial

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1. “Know Your Numbers”2. Prepay Your Budgeted

Contribution on July 1st

Examples of Employer Recommended Practices

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#1: “Know Your Numbers”

Town of Marana Police Department

ER Contribution Amount $1.2M

ER Contribution per Employee $17K

ER Contribution Rate 24.8%

ER Contribution Amount as a % of Operating Revenues 3.5%

Unfunded Liability (Debt) at 6/30/14 $9.1M

Percent Funded at 6/30/14 61%

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Town of Marana Police Department Rate Amount

Normal Cost 11.95% $599,521

Amortization of Unfunded Liabilities* 12.85% $644,673

Total Contribution 24.80% $1,244,194

#1: “Know Your Numbers” (continued)

* Represents 52% of Annual Amount.

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27 Entities Prepaid $135 M. 20% of Aggregate Annual Employer

Contributions Additional Interest Income Annually

$3.5M (Estimate)

#2: Prepay Your Budget Contribution on July 1st

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Phase #3: The Yardstick

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Key Questions

1. What should the Employee, Retiree, Employer, and Taxpayer get out of the System?

2. How is this Accomplished?– Type of Plan, Cost Sharing Allocation,

Annual Pension Increase Calculation

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The Yardstick: Guiding Principles

1. Adequate and Affordable2. Financially Solvent3. Transparent and Accountable

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The Yardstick: Its Purpose

Identifies the Goals, Characteristics, and Elements of a Viable and Sustainable Public Pension Safety System for the State of Arizona

A Tool to Evaluate the Current System and Reform Proposals

Communicates Our Position - Aids in Public Policy Discussion

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The Yardstick: Its Components

1. Defined Benefit Plan2. Free From Legal Challenge3. New Statewide Tier4. Plan Elements of the New Statewide Tier5. Governance Structure

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1. Defined Benefit Plan

The Pension Benefit is Predetermined by a Formula Based on Employee

Compensation, Age, and Tenure of Service

DB is Better Suited for Public Safety due to the Nature of the Job and Length of Retirement

Other Structures Studied

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2. Free From Legal Challenge

All Current Employees and All Current Retirees Remain in the Existing Tiers

Avoids Diminishing or Impairing Benefits Changes to Current Employees or Retirees

are Expected to be Litigated and Disallowed

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3. New Statewide Tier

For New Employees Hired After July 1, 2016

Avoids Possible Legal Challenges Existing Tiers Remain until All Members Pass

Away Previously Done by ASRS

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4. Plan Elements of the New Tier

Pooled Assets and Liabilities: Spreads Risk Across the Broadest Base

Extreme Financial Exposure Exists Under the Current System

Prescott: $70M / $165M Unfunded Liability Mirrors Services which are Performed Across

Jurisdictional Boundaries

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4. Plan Elements of the New Tier(continued)

Fully Funded: Assets at Least Equal Liabilities (at least

100%) over an Economic Cycle

Taxpayer and Member Equity is Achieved Only at 100%

Costs are Transferred to Future Taxpayers and Members if Funding is Less than 100%

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4. Plan Elements of the New Tier(continued)

Equal Cost Sharing: Equal Employer and Employee

Contributions Rates

One, Equal ER and EE Rate Both Sides Experience the Same Financial Impacts of

Decisions (Benefit Increases, Assumptions, Investment Risk)

Benefit Increases Must be Paid with Equal Contribution Increases

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4. Plan Elements of the New Tier(continued)

Pension Increases: To Maintain Purchasing Power

A Retiree’s Pension Should Neither Gain or Loose Relative Value

Current Structure Functions as a Dividend

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4. Plan Elements of the New Tier(concluded)

In-Lieu of Social Security Program: Mandatory Participation in an Employer-Matched Defined Contribution Plan for those Members not in Social Security

Issue Raised by Labor Associations Creates“Third Leg” of Retirement Stool Pension System would have Same Relative Value

to All Members

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5. Governance Structure

Board of Trustees:Independent, Qualified Professionals with

Fiduciary Responsibility of Ensuring Compliance with Plan Elements

One Financial Statement One Actuarial Report One Funded Status

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5. Governance Structure (concluded)

Administration:Consolidated and One Independent

Disability Committee of Qualified Experts

Reduces Costs Centralized Decision Making

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The Yardstick: Its Effects

Two Perspectives Employees and Retirees Taxpayers and Employers

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Its Effects: Employees and Retirees

No Benefit Changes to Existing Employees or Retirees

Creates “Third Leg” of Retirement Stool for Some

Achieves Fiscal Sustainability Attracts Quality Employees

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Its Effects: Taxpayers and Employers

Less Expensive Improves Governance

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How is it Less Expensive?

1. Limits Unfunded Liability of New Tier

Example: City of Phoenix PD (Current System)

Annual Salary = $100K 50% ER Contribution Rate = $50K

Normal Cost = $13K Unfunded Liability = $37K

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How is it Less Expensive? (continued)

2. Creates Resources which can be Redirected to Reduce Interest Costs of the Current Tiers

Savings from New Employees in New Tier Can Be Redirected to Pay Down the Current Tiers’ Unfunded Liability

$37K from Previous Slide

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Less Expensive (concluded)

3. Creates Affordable Retiree Pension Increases

CPI Built into Annual Contribution Eliminates “Dividend”

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Improves Governance

1. Simplifies Reporting One Set of Financial Information (not 256) Easier to Measure and Evaluate

Performance

2. Avoids Passing Costs on to Future Taxpayers

100% Funding Policy Requires Corrective Action in a Timely Manner

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CONCLUSIONS Reform is Needed - Current Structure is

Unsustainable An Unfunded Pension Liability is Debt Actively Manage Your Pension Plan The Yardstick is a Tool – Not a Proposal

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Legislative Pension Group

Led by Senator Lesko 2016 Legislation Anticipated Reason Foundation Participating in

this Process

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Feedbackand

Questions