NEW RETIREMENT REALITIES: PENSIONS AT A CROSSROADS PRESENTATION By: Craig Mason Chief Pension Executive City of Houston

COH Pension Systems In Context - Overview 3 separate plans – civilians, police, firefighters, Administration of plans is outsourced to independent trust organizations: - Houston Municipal Employees Pension System (HMEPS) - Houston Police Officers’ Pension System (HPOPS) - Houston Firefighters Relief and Retirement Fund (HFRRF) The trust organizations are established and governed by separate state statutes to: - Manage the plan’s investments - Pay benefits when due The description of benefits is included in the state statutes HMEPS and HPOPS have ability to trump state statutes through Meet & Confer Unions do not bargain on pension benefits Typically when one thinks of infrastructure the first thing that comes to mind is streets, bridges and highways. Of course every summer the heavy rains remind us of the flooding issues in Houston. Water and waste water lines along with sewer and storm drainage round out Public Work’s CIP. Additionally, the city’s infrastructure plan includes development promoting quality of life facilities such as parks, libraries, multi-service and community centers, even entertainment facilities. Public Safety also plays a large role in the CIP this includes not only police and fire stations, but also items like radio communications infrastructure. Finally, the Airport system for the city also has a five year plan for growth and increased security projects.

COH Pension Systems In Context – Pension Board Composition HMEPS HPOPS HFRRF Elected active beneficiaries 4 3 5 Elected retired beneficiaries 2 2 1 Appointed by: ○ Mayor 1 1 1 ○ City Council 2 ○ City Controller 1 ○ City Finance Director 1 1 ○ All other trustees 2 ○ Elected beneficiary trustees 1 - Total trustees 11 7 10 Typically when one thinks of infrastructure the first thing that comes to mind is streets, bridges and highways. Of course every summer the heavy rains remind us of the flooding issues in Houston. Water and waste water lines along with sewer and storm drainage round out Public Work’s CIP. Additionally, the city’s infrastructure plan includes development promoting quality of life facilities such as parks, libraries, multi-service and community centers, even entertainment facilities. Public Safety also plays a large role in the CIP this includes not only police and fire stations, but also items like radio communications infrastructure. Finally, the Airport system for the city also has a five year plan for growth and increased security projects.

COH Pension Systems In Context – Pension Participants and Assets HMEPS HPOPS HFRRF Actives 13,333 5,245 3,949 Retireds 8,340 2,878 2,550 Deferred Vesteds 5,742 22 8 _____ _____ _____ Total Members 27,415 8,145 6,507 Est. Assets 3/31/2010 $1.962B $3.085B $2.783B Typically when one thinks of infrastructure the first thing that comes to mind is streets, bridges and highways. Of course every summer the heavy rains remind us of the flooding issues in Houston. Water and waste water lines along with sewer and storm drainage round out Public Work’s CIP. Additionally, the city’s infrastructure plan includes development promoting quality of life facilities such as parks, libraries, multi-service and community centers, even entertainment facilities. Public Safety also plays a large role in the CIP this includes not only police and fire stations, but also items like radio communications infrastructure. Finally, the Airport system for the city also has a five year plan for growth and increased security projects.

COH Pension Systems The Challenge – City Contributions Increase to Unsustainable Levels, 2002-2005 Typically when one thinks of infrastructure the first thing that comes to mind is streets, bridges and highways. Of course every summer the heavy rains remind us of the flooding issues in Houston. Water and waste water lines along with sewer and storm drainage round out Public Work’s CIP. Additionally, the city’s infrastructure plan includes development promoting quality of life facilities such as parks, libraries, multi-service and community centers, even entertainment facilities. Public Safety also plays a large role in the CIP this includes not only police and fire stations, but also items like radio communications infrastructure. Finally, the Airport system for the city also has a five year plan for growth and increased security projects.

COH Pension Systems Addressing the Challenge – In General Mayor White assumed office in January 2004 – Inherited the challenge Orchestrated a general election in May 2004: - Citizens of Houston elected to opt out of State constitutional provision prohibiting localities from reducing accrued pension benefits - Option available, but not used yet Formed a task force of business leaders to assist in addressing the issues Executed Meet & Confer Agreements with HMEPS and HPOPS Created the position of Chief Pension Executive for the City Typically when one thinks of infrastructure the first thing that comes to mind is streets, bridges and highways. Of course every summer the heavy rains remind us of the flooding issues in Houston. Water and waste water lines along with sewer and storm drainage round out Public Work’s CIP. Additionally, the city’s infrastructure plan includes development promoting quality of life facilities such as parks, libraries, multi-service and community centers, even entertainment facilities. Public Safety also plays a large role in the CIP this includes not only police and fire stations, but also items like radio communications infrastructure. Finally, the Airport system for the city also has a five year plan for growth and increased security projects.

COH Pension Systems Addressing the Challenge – HMEPS Interim steps in 2004: - reduced future benefit accrual rates - increased eligibility age for retirement from “rule of 70” to “rule of 75” - increased mandatory employee contribution rate from 4% to 5% - transferred an asset valued at $300 million to the pension fund - adopted a schedule of increasing dollar contributions for FY2005 thru FY2007 Resulted in reduction in actuarially calculated contribution rate from 52% to 24% Typically when one thinks of infrastructure the first thing that comes to mind is streets, bridges and highways. Of course every summer the heavy rains remind us of the flooding issues in Houston. Water and waste water lines along with sewer and storm drainage round out Public Work’s CIP. Additionally, the city’s infrastructure plan includes development promoting quality of life facilities such as parks, libraries, multi-service and community centers, even entertainment facilities. Public Safety also plays a large role in the CIP this includes not only police and fire stations, but also items like radio communications infrastructure. Finally, the Airport system for the city also has a five year plan for growth and increased security projects.

COH Pension Systems Addressing the Challenge - HMEPS Long term “reform” in 2007 – Adopted an objective based plan design for new employees - Integral element of total compensation - Basic Level of income replacement at no cost to employee - Promote “career” employment - Consider Social Security benefits - Enhance ability to hire “mid-career” employees - Provide employees capital accumulation opportunity/flexibility - Increase risk sharing/responsibility of employee Future City contributions of 15% of payroll

COH Pension Systems The New Plan - HMEPS Hybrid approach with both DB and DC features - Basic level of income replacement – City responsibility - Capital accumulation opportunity – employee responsibility Income replacement: - target full benefit at age 62 ** 45% + SS + EE at 25 yos ** 50% + SS + EE at 30 yos - options to retire “early” - optional survivor’s benefit - no COLA - no DROP - estimated City contribution rate, 6% of payroll Individual capital accumulation account provides supplemental benefits City risks reduced (investment, inflation, longevity) Employee risks increased with more flexibility, responsibility