The City of Frederick Mayor and Board of Aldermen Workshop Government Retirement Plans – What Is Going On? September 1, 2010

2 Background Government Retirement Plans –Recent Accounting Standards Changes –Significant Plan Asset Losses –Survey Says –Resulting Trends/Future Plan Prospects –Current Public Sector Plan Debate City of Frederick Concerns/Questions AGENDA

3 Employee Employer Social Security Background Traditional 3 Legged Stool – Retirement Income Sources:

4 Ideal employer sponsored retirement program: –Defined Benefit Plan (DB) – Base –Defined Contribution Plan (DC)– Supplemental Combined program provides blend of security, flexibility for employees Background

5 Public Sector: GASB 45 – New! –Covers retiree medical plans and other post- employment benefits –Account for annual cost, current liability –Funding is not required, but strongly encouraged Unfunded liability growth Discount rate Bond rating agencies Recent Accounting Standards Changes

6 DB Plans –Asset Losses: 20% - 35% of Market Value in 2008 –Increase in Unfunded Actuarial Liability –Significant funding requirement increases DC Plans: –Account balance losses –Employees delaying retirement Significant Plan Asset Losses

7 Investment consultants say: –There will be an asset recovery. –When? ……..? 3 to 7 years? –Returns: 8% + long term, including recovery Crisis is short term, temporary - ? –Depends on the economy Significant Plan Asset Losses

8 Private Sector vs. Public Sector IssueImpacts: Private SectorPublic Sector Pension Retiree MedicalPension Retiree Medical Federal Legislation Accounting Asset Losses Result: Increased volatility for Private Sector Pension Plans

9 Recent International Foundation of Employee Benefits Survey - Pension Plans: Impact of the Financial Crisis, September 2009 Top Concerns: 1.Market losses/underfunded Plans 2.Decreased job security 3.Changes to health care system 4.Delayed Retirement Eliminated employer-sponsored retirement benefits Survey Says

10 Other Results Worst of financial crisis over? – Split decision Slower recovery? – Yes Long Term Impact of Crisis –DB Plans: Moderate –DC Plans: Moderate DB Plan investment policy changes Survey Says

11 DB Plan Changes: Reviewed assumptions/plan design-70% Discontinued benefits -9% Closed plan to new hires -9% Survey Says

12 Increased communications: Financial Education campaign More plan design analysis – short term Funding relief – short term Increased plan costs Some more frozen DB plans – due to volatility Increased funding – Public Sector Retiree Medical plans Employer matching restoration Employee savings increase/decrease – depends on economic recovery Investment re-balancing DB to DC plan trend continues – DC plans with DB/annuity features? More DB/DC emphasis re-balancing? More hybrid plans? Finally-postponed retirement -phased retirement Resulting Trends/Future Plan Prospects

13 Current Public Sector Plan Debate

14 Actuarial Cost Viewpoint - Three Phases for Pension and OPEB Plans Baseline Actuarial Cost Funding Alternatives Plan Design Alternatives Concerns/Interested Parties: Budgets Taxpayers Unions Bond Rating Agencies Current Issue: Government Budgets cannot afford current Plans/volatility.

15 Actuarial Valuation Process Other Post Employment Plans (OPEB) – Retiree Medical: Major Cost Drivers Actuarial Assumptions - Discount rate assumption - Healthcare trend rate assumption - Retirement Plan Design - Retiree cost sharing - Eligibility (Retirement) - Spousal coverage

16 OPEB Plan Design Changes - significant cost/liability impact: Increase retiree contribution levels Cap employer contribution levels Tighten eligibility – different for pension plan Eliminate spouse/family coverage Revise benefit structure Soft Freeze: eliminate coverage for: –Future new hires –Future retirees –Future retirees not close to retirement Plan Design Changes

17 Plan Design Changes Increase employee contribution levels Retirement eligibility COLA’s Revise benefit structure Final average pay DROP’s Other Soft Freeze – State Protections DC Plan Hybrid Plans Pension Plan Design Changes – significant cost/liability impact:

18 City of Frederick Concerns/Questions Topics – in response to questions raised Key actuarial assumptions Greatest risks in plans Defined Benefit to Defined Contribution Conversion Plan comparisons

19 Key Actuarial Assumptions Pension OPEBDiscount Rate Salary IncreasesHealthcare Trend Mortality TableRetirement Age Retirement Age City of Frederick Concerns/Questions

20 Greatest Risks in Plans – Pension Plans City Cost volatility Cost Levels/Funding Levels Budget Control Investment Risks City of Frederick Concerns/Questions

21 Defined Benefit (DB) to Defined Contribution (DC) conversion Objective Setting DB Plan –Soft freeze? –Hard freeze? –Cost analysis –Benefit analysis – winners/losers DC Plan –Plan design –Cost levels –Employer matching: incentive to save –Administration Employee Communications Process takes six months to one year to implement City of Frederick Concerns/Questions

22 Plan Comparisons Plan design –Very competitive Plan Financing –Reasonable approach –High cost levels – as % of payroll –Cost volatility Vs. Private Sector –Benefits/costs are high –Also OPEB Plan City of Frederick Concerns/Questions

23 ? Questions