statewide meetings february 2015 02.02.15 version league of arizona cities and towns: psprs pension...
TRANSCRIPT
Statewide Meetings
February 2015
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LEAGUE OF ARIZONA CITIES AND TOWNS:
PSPRS PENSION TASK FORCE
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Formed in June, 2014 Partnership with ACMA and GFOAz 15 Members Review all aspects of PSPRS,
identify areas of improvement, and reform recommendations
TASK FORCE
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Scott Barber, HR Director , Town of F lorence Greg Caton, Town Manager, Town of Oro Val ley Karen Daines, Assistant Ci ty Manager, C i ty of Sedona Barbara F leming, HR Director , C i ty of S ierra Vista Barbara Goodr ich, Management Services Director , C i ty of F lagstaff Kel ly Gottschalk, Chief Financia l Offi cer/ACM, City of Tucson
Alan Maguire, President and Pr incipal Economist , The Maguire Company Scott McCarty, Town of Queen Creek (Chairman) James Menlove, Finance Director , Navajo County Rick Naimark, Deputy City Manager, C i ty of Phoenix Robert Ni l les, Finance Director , C i ty of E l Mirage Kathy Reyes, Benefi ts Administrator , C i ty of Avondale Marc Skocypec, Assistant Town Manager, Town of Gi lbert Mike Townsend, Assistant County Manager, Coconino County (Vice-Chairman) Marge Zyl la , Government Relat ions, C i ty of Tempe
15 TASK FORCE MEMBERS
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Presentations and Materials located at:
www.azleague.orgCLICK: ‘Legislative Issues’ BoxCLICK: ‘Pension Task Force’ Line
TASK FORCE
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256 Employer (Individual) Plans ~32,000 Actives / Retirees
Same Benefits for All Plans Financial Condition Varies by Plan
$6.6B Total Underfunded ER Contribution Rate Varies By Plan EE Contribution Rates are Fixed by AZ
Law at 11.65% (as of 7/1/15)
PSPRS OVERVIEW
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Phase 1 Information and EducationPhase 2 Employer Recommended PracticesPhase 3 Yardstick: Characteristics of a Well-
Designed Plan
TASK FORCE APPROACH
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14 Presentations Stakeholder Collaboration
Employers AZ PSPRS Board and Administration Arizona Firefighters’ Association Arizona Fraternal Order of Police Arizona Police Association
6 Major Observations
PHASE 1INFORMATION AND EDUCATION
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1. Causes of Deteriorating Financial Condition A. Great Recession
Investment Income
B. Benefit Plan Design Annual Retiree Pension Benefit Increase (PBI)
C. Actuary Assumptions Future PBIs EXCLUDED from Contribution Calculation
D. Benefit Increases DROP
MAJOR OBSERVATIONS
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2. Success Is A Combined Responsibility
MAJOR OBSERVATIONS (CONTINUED)
State Legislatu
rePSPRS
Local Legislativ
e Body
Local Board
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3. PSPRS Employers are Managing…or Not Managing…a Pension Plan
PSPRS in Not ASRS Assumptions Used vs. Local Reality
Fiduciary Responsibility Exists Legislative Body and Local Board
MAJOR OBSERVATIONS (CONTINUED)
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4. “Know Your Numbers” Normal Cost vs. Unfunded Liability Focus on Dollar Amounts, Not Rates Don’t be Fooled by Low Contributions
Today, They Will Increase Plan Maturity / Demographics Retiree Annual PBI
MAJOR OBSERVATIONS (CONTINUED)
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5. Improve Employer Engagement Task Force
Clearing House for Concerns and Thoughts Presentations to Councils, Organizations
MAJOR OBSERVATIONS (CONTINUED)
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6. Plan Changes that Effect Existing Members or Retirees are Not Possible (Legally Challengeable)
Fields’ Case (Decided-$375 million impact)
Restored PBI Formula for Retirees as of 6/1/11
Hall Case (Pending) Restore PBI formula Active Members Reduce EE Contributions Back to 7.65%
MAJOR OBSERVATIONS (CONCLUDED)
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Employers Can Improve Their Plan’s Financial Condition Today Without Waiting for Resolution of Pending Litigation or Legislative Changes
See Separate Section of Presentation for Detailed Discussion
PHASE 2 EMPLOYER RECOMMENDED
PRACTICES
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What should the Employee, Retiree, Employer, and Taxpayer get out of the System?
How is this Accomplished? Type of Plan, Cost Sharing, Annual
Pension Increase (PBI), etc.
KEY QUESTIONS
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1. Adequate and Affordable2. Financially Solvent3. Transparent and Accountable
GUIDING PRINCIPLES
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1. Pension Amount2. Retirement Age3. COLA / PBI4. Cost / Risk Sharing5. Funded Status6. DROP7. Pooled Assets and
Liabilities
8. Investment Strategies9. Dedicated Revenues10.Governance11.Loan Program12.Legal13.Smoothing (Deferring)14.Funding Policy15.Healthcare
KEY PLAN DESIGN ELEMENTS
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1. What is the Financial Condition of My Plan?
2. How Can I Improve the Financial Condition of My Plan Now?
Increase Assets Decrease Liabilities
DESIGNED TO ANSWER TWO KEY QUESTIONS
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PSPRS Liabilities are Not Pooled (256 plans)Unfunded Liabilities have been Earned and Cannot be Diminished or Impaired Pension Clause and Field’s Decision
The Amount and Timing of Your Contribution Directly Impacts the Funded Status of Your Plan
A More Appropriate Term for Unfunded Liabilities is Debt
UNFUNDED LIABILITY (DEBT)
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Identifies the Assets Available to Fund the Liabilities (in Today’s Dollars)
Goal: 100% Funded or Greater
FUNDED STATUS (FUNDED RATIO)
AssetsLiabilities
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Total
Accrued Liability $28.8M
Total Assets $7.6M
Unfunded Liability $21.2M
Assets as a % of Liabilities (Funded Status)
26%
Unfunded Liability Per Capita $1,630
PARADISE VALLEY’S UNFUNDED LIABILITY AT 6/30/14
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Two Components:1. Normal Cost: Annual Cost of Pension
Benefits “Earned” in the Current Year2. Unfunded Liability: Cumulative Effect of
Previous Normal Costs in Excess of Assets Likely Larger in More Mature Plans Significant Component of Contribution
CONTRIBUTIONS
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Town of Paradise ValleyFY 15-16
RateFY 15-16Amount
Normal Cost 12% $0.4M
Amortization of Unfunded Liabilities*
60% $1.7M
Total Contribution 72% $2.1M
HOW MUCH OF YOUR CONTRIBUTION RELATES TO UNFUNDED LIABILITIES?
* Represents 83% of the Contribution Rate and Amount.
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1. Budget Contributions for DROP Members
2. Prepay Your Budgeted Contribution3. Do Not Defer the Fields Case4. Review Local Board Practices5. Prepare a Comprehensive Study6. Payoff Unfunded Liability (Debt) Earlier7. Create a Pension Funding Policy
EMPLOYER RECOMMENDED PRACTICES
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DROP Has A Cost Even Though ER Contributions are Not Required
ER Contributions Have Been Budgeted Since Hire and Get Put Back In to Budget Once Replacement EE is Hired
Avoids Future Budget Increase
1. BUDGET CONTRIBUTIONS FOR DROP MEMBERS
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Results in Two Outcomes1. Increases Your Investment Income2. Reduces Your Unfunded Liability
2. PREPAY YOUR BUDGETED CONTRIBUTION
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The Sooner You Put Assets in Your Account, the More Interest Income Your Account Earns ER Investment Return: ~1% PSPRS 6/30/14 Investment Return: ~14%
Model Exists to Calculate Increased Income
Full Payment July 1st is Best
2. PREPAY YOUR BUDGETED CONTRIBUTION (CONTINUED)
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The Actuary Amount is Only an Estimate – The Minimum Amount
Any Amount is Excess of the Minimum Reduces the Unfunded Liability
2. PREPAY YOUR BUDGETED CONTRIBUTION (CONTINUED)
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2. PREPAY YOUR BUDGETED CONTRIBUTION (CONCLUDED)
ContributionAnnual
IncreasedInterest Income *
$2M (Paid July 1) $78k$2M (Paid Quarterly) $9k
* Assumes 7.85% PSPRS Interest Rate.
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PSPRS Board Adopted a Policy to Allow for a 3-Year Deferral Due to the Potential Financial Impact on Employers
Your Decision is Due by 3/1/15 Deferral Will Cost More over Next 22 Years
Model Created to Calculate Cost of Deferral Available on PSPRS and League’s Website
3. DO NOT DEFER THE FIELDS CASE
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6/30/14Unfunded Liability
22-YearCost of Deferral
City of Tucson Police $466M $15M
City of Tempe Police $146M $4M
City of Chandler Fire $35M $1.4M
3. DO NOT DEFER THE FIELDS CASE (CONTINUED)
Fields Case Deferral Decision Model
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If Defer Annual Contribution in FY 15-16 and FY
16-17 are Lower but Higher in Remaining 20 Years
If Do Not Defer Annual Contribution in FY 15-16 and FY
16-17 are Higher but Lower in Remaining 20 Years
3. DO NOT DEFER THE FIELDS CASE (CONTINUED)
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CITY OF TEMPE POLICE: $4M DIFFERENCE
DEFERRING VS. NOT DEFERRING
FY 15-16 FY 16-17 FY 17-18 FY 18-19 FY 19-20$6
$7
$8
$9
$10
$11
$12
$13
$10.0$10.4
$10.9$11.3
$11.7
$7.9
$9.4
$11.1$11.6
$12.1
Annual C
ontr
ibuti
on (
in m
illio
ns)
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Reasons Not to Defer:1. It’s Not About Fields…It’s a Correction2. Another Contribution Increase Coming if Hall
Case Upheld3. Best to Offset Bad News Against Today’s
Good Investment Earnings4. Sooner is Better… Deferring Masks Your
Plan’s True Financial Condition5. Recommended in Governor’s Budget
3. DO NOT DEFER THE FIELDS CASE (CONCLUDED)
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A. Employer Board Appointments Local Board Members: 5
ER Appointments: 3 Mayor/Designee is Chair Staff and/or Citizens May Establish Your Own Qualifications
EE Appointments: 2
4. REVIEW LOCAL BOARD PRACTICES
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B. Hire Outside, Independent Legal CounselC. Require Board Polices and Procedures
Pre-Existing Conditions at Hire Disability Retirements
Disability Retirements for EEs with Less Than 20 Years of Service have an Adverse Financial Impact on Your Plan
Workers’ Compensation is a Key Indicator
4. REVIEW LOCAL BOARD PRACTICES (CONTINUED)
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D.Create a Structure to Encourage Relationship with Elected Officials
Annual Joint Meeting to Discuss Financial Status, Census Changes, etc.
E. Staff Appropriately Manager, Finance, and HR
4. REVIEW LOCAL BOARD PRACTICES (CONCLUDED)
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“A Movie”: Establishes a Baseline Annual Valuation Report is a “Picture” Where are You in the Pension Life
Cycle? Young Today, Mature Tomorrow…
Reconstructs Your Current Financial Condition
5. PREPARE A COMPREHENSIVE STUDY
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Provides Census Information Ratio of Actives to Retirees Turnover Rates given DROP, Staffing
Levels Identifies ER Specific Practices Final Salary Components (e.g. Spiking) Impact of Lateral Hires
5. PREPARE A COMPREHENSIVE STUDY (CONCLUDED)
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Sooner Is Fairer Currently Being Paid Off Over 22 Years at 7.85%
Interest Rate in Your Contribution Amount PV: $21M Unfunded Now; $49M Final Cost
Treat and Manage as Any Other Debt What is the Impact to Your Operating Budget? What is the Best Way to Reduce or Eliminate
this Debt?
6. PAYOFF UNFUNDED LIABILITY (DEBT) EARLIER
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Options to Reduce or Eliminate:1. Use Positive Variances from Operating
Budget2. Use Reserves3. Issue Debt for Projects You Were Planning
to Pay Cash For4. Add a New Line Item to Your Budget to
Make a Direct Payment Against It
6. PAYOFF UNFUNDED LIABILITY (DEBT) EARLIER (CONCLUDED)
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A Comprehensive Document with the Objective of Ensuring Financial Resources Exist to Fund Pension Obligations
Accounting Standard Requirement Engages Elected Officials Avoids or Fixes “Kicking the Can Down the
Road” “If that, then this…”
7. CREATE A PENSION FUNDING POLICY
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Policy Components Defines Funded Status Goal
EXAMPLE: Not Less Than 80% Defines Annual Contribution Amount
EXAMPLE: Contribution Not Greater Than 10% of Operating Revenues
Defines Actuary Assumptions Identifies Roles and Responsibilities
7. CREATE A PENSION FUNDING POLICY (CONCLUDED)
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Paradise Valley Completed Comprehensive Analysis Developing Pension Funding Policy
Sierra Vista, Apache Junction Developing Comprehensive Report
Youngtown Considering Payoff of Entire Unfunded
Liability
WHAT ARE OTHER EMPLOYERS DOING?
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Education and Collaboration Employer Engagement Employer Recommended Practices Yardstick Legislative Solutions Will Take
Time
TASK FORCE SUMMARY