1. League of AZ Cities and Towns PSPRS Pension Task Force August 15, 2014

2. The Purpose of PSPRS
Arizona Revised Statutes § Before the establishment of the public safety personnel retirement system, municipal firemen and policemen, employees of the Arizona highway patrol and other public safety personnel in the state of Arizona were covered under various local, municipal and state retirement programs. These heterogeneous programs provided for wide and significant differentials in employee contribution rates, benefit eligibility provisions, types of benefit protection and benefit formulas….In order to provide a uniform, consistent and equitable statewide program for public safety personnel who are regularly assigned hazardous duty in the employ of the state of Arizona or a political subdivision thereof, this retirement system was created effective as of July 1, 1968.

3. The Local Board System = Local Control/Local Accountability
The Structure of PSPRS
Arizona Revised Statutes § The administration of the system and responsibility for making the provisions of the system effective for each employer are vested in a local board. The department of public safety, the Arizona game and fish department, the department of emergency and military affairs, the University of Arizona, Arizona State University, Northern Arizona University, each county sheriff's office, each county attorney's office, each county parks department, each municipal fire department, each eligible fire district, each community college district, each municipal police department, the department of law, the department of liquor licenses and control, the Arizona department of agriculture, the Arizona state parks board, each Indian reservation police agency and each Indian reservation fire fighting agency shall have a local board.
The Local Board System = Local Control/Local Accountability

6. PSPRS Annual Aggregate Actuarial Valuation
June 30, 2013
Employer Rate
Funded Status
Averages
32.54%
57.1%

11. Do you know where you stand and how you got there?

12. Total Plan Statistics Defined Benefit Plan
Non-Retired
PSPRS
Active Members
18,436
Terminated Vested Members
1,442
DROP
1,482
Total Non-Retired Members
21,360
Retired
Normal
7,444
Beneficiaries
1,305
Disability
1,410
Total Retired Members
10,159
Total Participants
31,519
Percentage Retired
32.2%
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13. Total Revenue June 30, 2013 PSPRS Net Investment Income 541,980,088
ER Contributions
378,701,291
Alternative Contributions
2,151,786
Court Fees
EE Contributions
127,362,618
Service Purchase & Transfers
7,575,489
Total Revenue
1,057,771,272
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14. Total Expenses June 30, 2013 PSPRS Pension Benefits 383,377,255
Survivor Benefits
51,443,297
Disability Benefits
57,486,396
Deferred Benefits
199,579
Insurance Benefits
13,383,444
DROP Benefits
60,213,930
Refunds
12,819,713
Administrative Expenses
5,104,446
Transfers
514,209
Total Expenses
584,542,269
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15. Funding Levels
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16. PSPRS – Aggregate Employer Rates
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*The aggregate computed contribution rates before application of the statutory minimum
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17. PSPRS Changing Financial Status (in 000s)
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*Market value does not include future benefit increase reserve
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18. The Relationship between Funding Level, Rates and Returns

19. Rate Components and Funding Levels
Understanding the Actuarial Valuation

20. Components of the Actuarial Valuation
Present Value of Future Benefits - Present Value
of all future benefits payable to current participants
(active, retired, terminated vested).
Actuarial Liability - Portion of PV of
Future Benefits allocated to prior years.
Normal Cost - Portion of PV of
Future Benefits allocated to current year.
Future Normal Costs - Portion of
PV of Future Benefits allocated to future years.
Future
Normal
Cost
Actuarial
Liability
Normal
Cost 12

21. Components of the Actuarial Valuation
Actuarial Accrued Liability
- Actuarial Value of Assets
= Unfunded Actuarial Liability
Annual Contribution = Normal Cost + Amortization of the
Requirement Unfunded Liability 19

22. Development of Funded Ratio
Funding Ratio will be different for every employer.

23. Development of Employer Contribution
Employer contribution rate will be different for every employer.

24. Understanding Asset Smoothing
Funding value for each employer is determined proportionately based on Market Value.

25. Understanding Asset Smoothing and Amortization methods
Year 1 - phase in 1/7 of asset loss
Step 1 – phase in 1/7 of asset loss
Step 2 – amortize UAL over 23 years
Year 2 – Year 1 results PLUS
Step 1 – phase in additional 1/7 of asset loss
Step 2 – amortize UAL over 22 years …
Year 7 and beyond – Year 1 through 6 PLUS
Step 1 – phase in final 1/7 of asset loss
Step 2 – amortize UAL over remaining years

26. Understanding Asset Smoothing and Amortization methods
Example of How 30% Loss on Assets Impacts Contribution

27. So Why Have Contribution Rates Been Increasing?

28. So Why Has the Contribution Rate Been Increasing?
In most systems, assets losses and gains tend to offset each over time
In PSPRS, asset gains also fund the Permanent Benefit Increases (PBI)
The current return assumption is 7.85%
One-half of excess return over 9% funds the PBI
When markets are volatile, high returns will not completely offset the low returns

29. Comparison of COLA Provisions
PSPRS Provisions
Pre SB1609
Post SB1609
Investment Return Threshold 9%
10.5%
COLA Maximum
4% of Average PSPRS Benefit Prior Year
Varies from 2% to 4% Based on Funded Ratio
Funded Status Threshold
None
60%
Reserve Accumulation
Yes No
COLA Delay
2 Years or age 55
Tier 1: 2 Years or Age 55
Tier 2: Age 55

30. SB1609 Reversal
Fields case – restores original PBI formula for members who were retired as of Julye 1, 2011
Hall case – would restore original PBI formula for current active members and reverse changes in the employee contribution rate

31. SB1609 Reversal Impact on Employer Contributions
Note that contribution requirements for FY2016 are expected to increase due to continued phase-in of assets losses from prior years.

32. SB1609 Reversal Impact on Employer Contributions
Example of Impact of Fields Case Reversal

33. Things employers CAN’T control
Investment performance
PSPRS has some control over this
Benefit Provisions
Occasionally modified by statute
Actuarial assumptions and methods
Reviewed every 5 years by actuary

34. Things employers CAN control
Managing funding levels
Employers can contribute more than the minimum
Managing workforce
Hiring members with prior PSPRS service  increases cost
Reducing workforce results in costs being spread over lower payroll base  increases cost as percentage of pay
Disability approvals  can increase cost if not managed carefully
Payroll management  allowing pay spiking can increase cost