The Yardstick: Public Safety Pension Reform Recommendations Recommendations of the League of Cities and Towns’ PSPRS Task Force Scott McCarty, Chair GFOAz Summer Conference August 5, 2015

Additional Materials Included 1.August 3, 2015 Letter to League’s Executive Committee includes: – The Yardstick and Its Effects – Use of the Yardstick Current System Evaluation Fire Proposal Evaluation 2

Included Materials (concluded) 2.Task Force’s Employer Recommended Practices 3.Town of Queen Creek’s Pension Funding Policy 3

Purpose of Presentation 1.Discuss the Task Force 2.Identify Key Observations 3.Discuss the Yardstick 4.Discuss the Yardstick’s Effects 5.Outline the Upcoming Calendar 6.Get Feedback 4

League’s Task Force 5

 Formed in June, 2014  Partnership with ACMA and GFOAz  15 Members  Review all aspects of PSPRS, identify areas of improvement, and reform recommendations 6

Task Force Information Presentations and Materials located at: CLICK: ‘Legislative Issues’ Box CLICK: ‘Pension Task Force’ Line 7

PSPRS Overview  256 Employer (Individual) Plans  ~32,000 Actives / Retirees  Same Benefits for All Plans  Financial Condition Varies by Plan  $6.2B Total Underfunded  ER Contribution Rate Varies By Plan  EE Contribution Rates are Fixed at 11.65% 8

$6.2B. Total Unfunded Liability at 6/30/14 9 $4.5B. (72%) Relates to Cities and Towns

Employees & Retirees at 6/30/ ,000+ (69%) are in City and Town Plans

3 Key Observations 11

#1 There Is No Silver Bullet 12 Court Decisions Have Protected Employee and Retiree Benefits

Or... Shown Another Way 13

#1 There Is No Silver Bullet 14

#2 Your Unfunded PSPRS Pension Liability is Debt 15

#3 Actively Manage Your Plan 16 “Know Your Numbers” Implement Recommended Practices

“Know Your Numbers” 17 Town of Marana Police Department ER Contribution Amount$1.2M ER Contribution per Employee$17K ER Contribution Rate24.8% ER Contribution Amount as a % of Operating Revenues3.5% Unfunded Liability (Debt) at 6/30/14$9.1M Percent Funded at 6/30/1461%

Town of Marana Police DepartmentRateAmount Normal Cost11.95%$599,521 Amortization of Unfunded Liabilities*12.85%$644,673 Total Contribution24.80%$1,244,194 “Know Your Numbers” 18 * Represents 52% of Annual Amount.

1.Prepay Your Budgeted Contribution 2.Budget Contributions for DROP Members 3.Do Not Defer the Fields Case 4.Review Local Board Practices 5.Prepare a Comprehensive Study 6.Payoff Unfunded Liability (Debt) Earlier 7.Create a Pension Funding Policy Employer Recommended Practices to Best Manage Your PSPRS Plan 19

The Yardstick 20

The Yardstick: Its Purpose  Identifies the Goals, Characteristics, and Elements of a Viable and Sustainable Public Pension Safety System for the State of Arizona  Tool to Evaluate the Current System and Reform Proposals  Aids in Public Policy Discussion 21

The Yardstick: Its Components 1.Defined Benefit Plan 2.Free From Legal Challenge 3.New Statewide System 4.Plan Elements of the New Statewide System 5.Governance Structure 22

1. Defined Benefit Plan 23 The Pension Benefit is Predetermined by a Formula Based on Employee Compensation, Age, and Tenure of Service  DB is a More Effective Structure for Public Safety because:  Pools Assets, Addresses Ratio of Years of Service to Length of Retirement  Defined Contribution Structure Studied

2. Free From Legal Challenge 24 All Current Employees and All Current Retirees Remain in the Existing System  Avoids Diminishment or Impairment of Benefits  Changes to Current Employees or Retirees are Expected to be Litigated and Upheld

3. New Statewide System 25 For All Employees Hired After July 1, 2016  Avoids Possible Legal Challenges  Existing System Remains until All Members Pass Away

4. Plan Elements of the New System 26 Pooled Assets and Liabilities: Spreads Risk Across the Broadest Base  Extreme Financial Exposure Exists Under the Current System  Prescott: $70M / $165 Unfunded Liability  Consistent with Services which are Performed Across Jurisdictional Boundaries

4. Plan Elements of the New System (continued) 27 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%

4. Plan Elements of the New System (continued) 28 Equal Cost Sharing: Equal Employer and Employee Contributions Rates  Neutral Position re. Benefit Increases  Same as ASRS

4. Plan Elements of the New System (continued) 29 Funding New Benefits or Benefit Increases: Funded as a System Component and only if System is Determined to be Fully Funded Before and After the Change  Benefit Increases Must be Paid for by Contribution Increases  Aligns with the Equal Cost Sharing Element

4. Plan Elements of the New System (continued) 30 Pension Increases: To Maintain Purchasing Power  Retiree’s Pension Should Neither Gain or Loose Relative Value  Current Structure Functions as a Dividend

4. Plan Elements of the New System (concluded) 31 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

5. Governance Structure 32 System Design Funding Policy Investment Policy  One Set of Financial Information  One Funded Status  One Set of Performance Measures

5. Governance Structure (continued) 33 Board of Trustees: Independent, Qualified Professionals with Fiduciary Responsibility of Ensuring Compliance with Plan Elements  Accountable for Public Monies

5. Governance Structure (concluded) 34 Administration: Consolidated and One Independent Disability Committee of Qualified Experts  Emphasis on Costs, Customer Service, Education and Training, and Accessibility of Information

The Yardstick’s Effects 35

Its Effects  Employees and Retirees  Taxpayers and Employers 36

Its Effects: Employees and Retirees 1.Achieves Fiscal Sustainability 2.Attracts Quality Employees 3.Creates “Third Leg” of Retirement Stool 37

Its Effects: Taxpayers and Employers  Less Expensive  Strategically Governed / More Transparent 38

Less Expensive 1.Lowers Costs for New Employees (Unfunded Liability Eliminated)  Example: City of Phoenix PD (Current System)  Annual Salary = $100K  50% ER Contribution Rate = $50K  Normal Cost = $13K  Unfunded Liability = $37K  $37K Savings in New System 39

Less Expensive (continued) 2.Reduces / Avoids Interest Costs of the Current System  Savings from New Employees Can Be Redirected to Pay Down the Current System’s Unfunded Liability 40

Less Expensive (continued) 3.Equalizes Contributions for Employees and Employers  11.65% Employee Cap Eliminated 41

Less Expensive (continued) 4.Reduces Employer Contribution Volatility  Pooled of Assets and Liabilities Absorbs Entity Specific Shocks 42

Less Expensive (continued) 5.Creates Affordable Retiree Pension Increases  Goal to Maintain Purchasing Power  Eliminates “Dividend”  Severe Adverse Financial Impacts to System 43

Less Expensive (concluded) 6.Reduces Administrative Costs  Consolidate ASRS and PSPRS to One Statewide System with Two Divisions  Eliminate the Operations Related to 256 Individual Plans at the State and Local Level 44

Strategically Governed / More Transparent 1.Avoids Passing Costs on to Future Taxpayers  100% Funding Policy Requires Corrective Action in a Timely Manner 45

Strategically Governed / More Transparent (concluded) 2.Improves Governing, Managing, and Reporting  One System, not 256  Easier to Evaluate Actuary Assumptions  Costs and Implications of Decisions are Easier to Understand  Benefit Increases 46

What’s Next 47

Yardstick Calendar Recommendations Presented to League’s Executive Committee May 15 Feedback Period Stakeholder Meetings: Legislators, Labor, PSPRS, ATRA, Others May to August Final Recommendations and Report Delivered to League’s Executive Committee at Annual Conference August 18 48

Legislative Pension Group  Working Towards 2016 Legislation  Led by Senator Lesko and Representative Olson  Reason Foundation Studying Four Scenarios 1.Firefighter Proposal 2.Police Proposal 3.Hybrid Plan 4.Defined Benefit Plan 49

FINAL THOUGHTS  There is No Silver Bullet: Reform WILL NOT Reduce Your Current Unfunded Liability (Debt)  An Unfunded Pension Liability is Debt  Actively Manage Your Pension Plan  Reform is Needed  The Yardstick is a Tool – Not a Proposal 50

Feedback and Questions 51