Fire and Police Retirement System Funding Plan March 28, 2010

Fire and Police Retirement System 2 Outline for Discussion Background Information Statement of the Challenges Staff Recommendation

Fire and Police Retirement System 3 Background Established by Article XV of the City Charter in mid 1930’s Oversight provided by 5 member Retirement Board  Two System members: one police, one fire  Two qualified electors of the City (citizens)  One member of the City Council  Board has exclusive control of administration & investment of the System - Charter Section 1502 and consistent with Prop. 162 Uncapped Cost of Living Adjustment (COLA)  Effort in 1981 to cap COLA failed (PPOA v. City)  System underfunded, as of June 30, 1998 assets were less than 1/3 liabilities

Fire and Police Retirement System Contribution Agreement City issued $100 million pension obligation bonds (POBs) – funds System at 70% Actuarial Accrued Liability (AAL) Funding to increase ½% each year for 20 years to reach 80% AAL Supplemental contributions required if short of annual funding target Assumptions: 8% discount rate & 3.8% inflation based on average of retirement systems operating under the County Employees Retirement Law of 1937

Fire and Police Retirement System Settlement & Release Agreement Stock market collapse in 2000 significantly reduced plan assets Dispute arose over the widening gap between Actuarial Value and Market Value of portfolio City issued $40 million POBs as part of settlement and release agreement Funding for 1999 and 2004 POBs made possible by SB 481 which authorized the repayment of prior advances from the General Fund to the Downtown Redevelopment Project Area

Fire and Police Retirement System 6 Current Membership AvgAvg Mo. #AgeBenefit $ Service Retirees ,288 Disability Retirees ,075 Beneficiaries ,027 TOTAL ,398 ($14.5M annually)

Fire and Police Retirement System 7 Actuarial Valuation (000’s) Actuarial Accrued Liability (AAL)166,096 Actuarial Value of Assets (AVA)109,740 AVA Unfunded AAL 56,356 AVA Funded Percent 66.1% Market Value of Assets (MVA) 91,915 MVA Unfunded AAL 74,181 MVA Funded Percent 55.3%

Fire and Police Retirement System 8 Retirees & Benefit Payments

Fire and Police Retirement System 9 The Challenge $56.4M Unfunded Liability SB 481, source of funding City’s obligation to the System, expires December 31, 2014 Annual supplemental obligation is increasing Mandatory tender (balloon payment) of $81 million due in 2015 on prior pension obligation bonds Appropriateness of assumptions used to value the System’s portfolio

Fire and Police Retirement System 10 Fire and Police Retirement System

11 FPRS Taskforce Established Spring 2009 to provide recommendations to City Manager  Margaret McAustin  Sid Tyler  David Goodrich  Jaynie Miller Studenmund  Dennis Murphy Sense of urgency in dealing with the pension issues, not just FPRS Final report April 2010

Fire and Police Retirement System 12 FPRS Taskforce Recommendations  Improve working relationship with System  Ask System to undertake selection process for financial advisor  Consolidate administrative functions with City  Consider “buy-outs”  Pursue new revenue sources  Consider using surplus SB 481 funds to increase plan assets  Modify investment assumptions  Reconsider investment strategy

Fire and Police Retirement System 13 Staff Recommendation Issue new POB to fund the System at 85% AAL  Interest rates generally favorable  30 year term, “all in” T.I.C. 7.5%

Fire and Police Retirement System 14 Staff Recommendation Amend contribution agreement  Decouple from ’37 Act Systems  Reset discount rate to 6.5% and inflation to 3.0% and review annually Refinance $81 mandatory tender in 2015 with new POBs

Fire and Police Retirement System 15 New System Investment Assumptions Current discount rate 8% and 3.8% inflation Last 10 years average returns:  FPRS – 3.51%  CalPERS – 3.44%  S&P 500 (calendar years) – 3.62% Inflation last 10 years average 2.49% Recommendation 6.5% and 3.0% reviewed annually

Fire and Police Retirement System 16 Current General Fund Debt Profile

Fire and Police Retirement System 17 Debt Profile With New 2011 & 2015 POBs

Fire and Police Retirement System 18 Net Impact on General Fund Debt Profile

Fire and Police Retirement System 19 Impact to General Fund

Fire and Police Retirement System 20 Alternative Funding Cost

Fire and Police Retirement System 21 Recommendations Issue new POB to fund the System at 85% AAL  Interest rates generally favorable  30 year term, “all in” T.I.C. 7.5% Amend contribution agreement  Decouple from ’37 Act Systems  Reset discount rate to 6.5% and inflation to 3.0% and review annually Refinance $81 mandatory tender in 2015 with new POBs