1. Actuarial Status Update of the Employees’ Retirement Fund of the City of Fort Worth May 4, 2010 Presented by Doug Anderson, EA, ASA, MAAA Gallagher Benefit Services, Inc. 1

2. Agenda Summary of Benefits Cost of Member Benefits Historical Funding Status Contribution Requirements Projected Funding Status Conclusions 2

3. 3 Summary of Benefits

4. Glossary of Benefit Terms 4 TermDefinition Compensation BaseHighest average 3 years of Earnings EarningsBase Pay and Overtime Credited ServiceYears of Service with the City Rule of 80Combination of Age and Credited Service 25 and OutPolice Officer provision allowing unreduced benefits after 25 years of service regardless of age DROPDeferred Retirement Option Program COLACost of Living Adjustment Replacement Ratio% of salary replaced by retirement benefit

5. Key Retirement Provisions 5 Retirement Benefit 3.0% x Compensation Base x Credited Service Example: Compensation - $60,000 Credited Service - 30 years Benefit = 3.0% x $60,000 x 30 years = $54,000 year = $4,500/month Retirement Eligibility Earliest of Age 65 or Rule of 80 25 and out for Police Officers Cost of Living Adjustments (COLAs) Vested Active & Retired Members electing in 2007 to retain the existing structure receive: All other Members receive: 2.0%/year GuaranteedAd Hoc (conditional)

6. Ad Hoc (Conditional) COLA 6 Tier Funding Period (in Years) COLA % Increase 128.1 or greater0.0% 224.1 to 28.02.0% 3 18.1 to 24.03.0% 418.0 or less4.0% A 4% COLA was granted as of January 1, 2009 (13.8 Year Funding Period) No COLA was granted as of January 1, 2010 (Infinite Funding Period) No COLA is expected as of January 1, 2011 (40.5 Year Funding Period) * * Based on preliminary GRS valuation results reported to ERF on April 28th

7. 7 Cost of Member Benefits

8. 8 Historical Annual Cost of Active Member Benefits (as a % of pay)

9. 9 Historical Funding Status

10. Glossary of Funding Terms 10 AcronymTermDefinition MVAMarket Value of AssetsActual assets in the Fund AVAActuarial Value of AssetsHypothetical value of assets reflecting a 5-year averaging of gains and losses AALActuarial Accrued Liability The liability for benefits earned by Plan Participants FRFunding RatioAssets divided by liabilities UAALUnfunded Actuarial Accrued Liability The difference between assets and liabilities ARCAnnual Required Contribution The amount required to be paid by the City each year to fully fund the Plan over 30 years. 30 years is the maximum period allowed by GASB. Employee Contribution Rates City & Fire Employees – 8.25% Police Employees – 8.73%

11. 11 Historical Assets & Accrued Liabilities (millions) The Fund assets should equal or exceed liabilities

12. 12 Historical Funding Ratio The Fund assets should equal or exceed 100% of liabilities

13. 13 Unfunded Liabilities (millions) The Fund should have $0 Unfunded Liability

14. Primary Causes of Unfunded Liability (1993 – 2009) 14 * Includes GBS estimated $30M decrease in liability during 2009

15. 15 Actual vs Required Contributions (in millions) From 2003-2009, actual contributions have been $66 million less than the ARC From 1993-2002, actual contributions were $15 million more than the ARC $7M City one-time UAAL contribution $25M City UAAL amortization payment $34M City Normal Cost contribution $31M Member contribution

16. 16 Market Value of Asset Changes Since 2008 (in millions) Approximately $163 Million Asset Gain (positive 21% return) Expected Growth of Assets $710 Million Asset Loss (negative 29% return) Expected Growth of Assets $1,584 * Breakdown of 2010 asset components determined by GBS

17. 17 Contribution Requirements

18. Market Value vs. Actuarial Value (in millions) 18 Development of Actuarial Value of Assets as of January 1, 2009 Market Value$1,330 Net deferred investment losses 527 Preliminary Actuarial Value$1,857 120% of Market Value$1,596 Final Actuarial Value = Min {Preliminary Actuarial Value, 120% of Market Value}$1,596 Market Value at 1/1/2009 Actuarial Value at 1/1/2009 Amount of Overstatement $1,330$1,596$266 The use of Actuarial Value of Assets understates the magnitude of the problem

19. 19 Actuarial Value vs Market Value (millions) The use of Actuarial Value of Assets understates the magnitude of the problem

20. 20 Unfunded Liabilities: Actuarial vs Market Value The use of Actuarial Value of Assets understates the magnitude of the problem

21. 21 Actual & 2009 Annual Required Contributions (ARC) Funding Gap 3.36% = $12M annually 27.71% = $103M 24.35% = $91M Funding Gap 7.78% = $29M annually 32.13% =$120M

22. Updated to reflect January 1, 2010 Member data Updated to reflect 21% market value return in 2009 No benefit changes during 2009 Updated actuarial assumptions: – Based on actual 2006-2009 experience and future expectations – Fund’s actuary recommends assumption changes to the Board – Board approves or rejects recommendations 22 Actual & 2010 Annual Required Contributions (ARC)

23. Market Value vs. Actuarial Value (in millions) 23 Development of Actuarial Value of Assets as of January 1, 2010 Market Value$1,584 Net deferred investment losses 285 Preliminary Actuarial Value$1,869 120% of Market Value$1,901 Final Actuarial Value = Min {Preliminary Actuarial Value, 120% of Market Value}$1,869 Market Value at 1/1/2010 Actuarial Value at 1/1/2010 Amount of Overstatement $1,584$1,869$285 The use of Actuarial Value of Assets understates the magnitude of the problem

24. Cost Impact of Recommended Assumptions 24 AssumptionRecommended Change Normal Cost Change Unfunded Liability Change ARC Change Salary Increases 0.5% productivity reduction for all employees Modifications to step-rate & promotions for Police (1.0%)($20M)(1.3%) Gross Pay 19.0% to 14.5% for Firefighters 6.25% to 4.75% for Municipal Employees 0.0%($14M)(0.1%) Average Earnings Overtime Load 2.75% to 5.8% for Firefighters 3.0% to 5.5% for Police Officers 1.0% to 0.5% for Municipal Employees 0.2%$12M0.4% Payroll Growth Rate 3.75% to 3.50%0.0%$0.00.2% Sick Leave Conversion 3.4% to 2.0% for Firefighters 2.9% to 2.5% for Police Officers 3.5% to 3.75% for Municipal (0.0%)($4M)(0.1%) * Above estimates determined by GBS based on 2010 participant data

25. Cost Impact of Recommended Assumptions 25 AssumptionRecommended Change Normal Cost Change Unfunded Liability Change ARC Change Mortality Rates1-Year setback added for Male Firefighters 0.0%$4M0.1% Retirement RatesIncreased rates for Firefighters 0.1%$7M0.2% Termination Rates Decreased for Municipal employees under age 50 with more than 8 years of service Firefighter rates decreased to 70% of previous rates 0.3%$7M0.4% Disability Rates50% reduction in rates (0.1%)$2M(0.0%) DROP Election %Increased to 40% for Police Officers (0.0%)($1M)(0.0%) Combined cost impact of all above assumptions recommended by GRS and approved by ERF Board (as determined by GRS) (0.1%)($6M)(0.1%) Cost impact of assumptions recommended by GRS and not approved by ERF Board (8.5% to 8.25% investment return – estimated by GBS) 0.9%$61M1.8% * Above estimates determined by GBS based on 2010 participant data

26. 26 Public Pension Fund Return Assumptions

27. 27 Actual and Annual Required Contributions (ARC) 24.36% $90M 27.71% $102M 31.74% * $117M 25.19% $93M 26.96% * $99M 30.09% $111M

28. 28 Projected Funding Status

29. ERF Projections from 2008 & 2009 Valuation Reports 29 The Fund is projected to become insolvent

30. The Danger of Investment Return Volatility 30 The Fund is on track for insolvency If short-term investment returns exceed 8.5% The funding status improves Ad HOC COLAs are granted Additional liabilities are incurred The funding status declines When investment returns are less than 8.5% Reliance on asset returns above 8.5% is not a long-term solution

31. Future GASB Implications Investment returns – Long term expected yield for funded benefits – Municipal bond index rates for unfunded benefits Recognition of AD Hoc COLAs as a liability Reduced amortization periods Recognition of Unfunded Liability on Balance Sheet 31 Government Accounting Standards Board (GASB) is currently considering new standards

32. 32 Conclusions

33. Insolvency is expected to occur around 2050 based on the 2009 actuarial valuation results Insolvency is expected to occur around 2065 based on the 2010 actuarial valuation results The use of actuarial value understates the magnitude of the problem Based on all assumptions adopted by the Board, increased contributions and/or reduced benefits must be implemented to avoid insolvency 33

34. Cost Impact of Benefit Changes The following pages demonstrate the cost impact of various benefit changes All costs were developed using January 1, 2010 Member data and assumptions approved by the ERF Board The costs were determined assuming changes are implemented immediately The benefit changes do not fully recognize changes in Member behavior that may lead to assumption changes These changes and costs are for discussion purposes. Actual implementation would require consideration of transition and assumption changes 34

35. Cost Impact of Benefit Changes 35 Change Normal Cost Decrease Unfunded Liability Decrease ARC Decrease Eliminate COLA for everyone 0.7%$127M2.8% Change Compensation Base from 3-year to 7-year average 1.4%$87M2.9% Change from Rule of 80 to Rule of 90 1.1%$79M2.4% Establish age 55 as minimum retirement age 1.1%$79M2.4% Lower the multiplier by 0.1% 0.6%$33M1.1% Eliminate average earnings overtime load 0.5%$32M1.0% Eliminate Sick Leave Service Conversions 0.4%$30M1.0% Eliminate Police Officer 25 & Out 0.3%$24M0.8% Change postretirement survivor for active Members from 75% to 50% 0.4%$23M0.8% Increase Vesting period from 5 to 10 Years 0.1%$0M0.1% Reduce the rate of interest on Member contributions 0.1%$0M0.1%

36. Cost Impact of Benefit Changes 36 Change Normal Cost Decrease Unfunded Liability Decrease ARC Decrease Eliminate post-termination service accruals for Rule of 80 eligibility 0.0%$0M0.0% Eliminate the early retirement option for pre age 50 terminations 0.0%$0M0.0% Eliminate the DROP (0.1%)($6M)(0.2%) Remove non-vested Members from the Fund * 4.4%$28M4.9% Reduce benefits for new hires only No immediate change, gradual transition of Normal Cost to rate applicable for new hires Eliminate COLA for non-vested Members only No change since the Ad Hoc COLA is currently assumed to have no cost Increase Member’s contribution by 1% --- 1.0% Increase City’s contribution by 1% --- * Excludes cost of replacement benefits

37. 37 Questions