1. Nick Ponder Pension Policy Analyst
PSPRS Reform Update
Nick Ponder
Pension Policy Analyst

2. History of PSPRS
Prior to 1968 individual employers began establishing their own retirement plans for police and fire
In 1968 the legislature established a single plan for public safety personnel called PSPRS to pool investments, provide relatively equal benefits between employers, and simplicity in transferring from one employer to another
Public entities contribute to PSPRS in many ways (city-town police/fire, county sheriff, Department of Public Safety)
Reforms in 2011 and 2016 created three tiers of benefits, by enrollment date:
Tier 1: 1968 – 12/31/2011 (7.65% employee rat)
Tier 2: 01/01/2012 – 06/30/2017 (11.65% employee rate)
Tier 3: 07/01/2017 forward (50/50 shared contri butions and risk pool for employers w/ < employees)

3. History of PSPRS
Under Tiers 1 & 2 of the PSPRS system each employer has its own funded status and its own contribution rate(s), plan aggregate funded rate is 46%

4. PSPRS, A Historical Perspective

5. Permanent Benefit Increase (PBI)
In 1986 the PSPRS plan was funded in excess of 100%
Retirees were not receiving an increase in their monthly retirement benefits
Unions approached the legislature to receive an annual adjustment to the retiree benefit and to equalize disparity between urban and rural pensions
Negotiations resulted in the PBI rather than a traditional COLA
PBI takes any investment earnings in excess of 9% and gives ½ of the excess to retirees by way of an increase to their monthly pension based on the average PSPRS benefit
Capped annual payments requiring anything exceeding cap to be rolled to subsequent year

6. ½ Earnings above 9%...

7. PBI Disbursement Cap
PBI Annual Cap
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6

8. PBI Under the Microscope
Fiscal Year
Investment Return
Monthly PBI (in $)
Statewide Aggregate Funded Status
2000
12.31%
87.37
124.7%
2001
-16.86%
93.24
129.9%
2002
-15.07%
98.17
113.0%
2003
6.67%
102.53
100.9%
2004
14.97%
111.90
92.4%
2005
9.11%
116.82
82.1%
2006
8.30%
121.76
77.0%
2007
17.05%
127.06
66.4%
2008
-7.27%
134.34
66.5%
2009
-17.73%
138.66
68.2%
2010
13.47%
146.74
65.8%
2011
17.37%
152.84
61.9%
2012
-0.79%
159.13
58.6%
2013
10.64%
121.19
57.1%
2014
13.28%
65.20
50.4%
2015
3.68%
0.00
49.0%
2016
0.60%
47.3%

9. PBI Disproportionately Impacted Rural Employers
Average Monthly Pension
$4,300
X 4% PBI Increase
$172
Rural PD Retiree Pension
$3,000
PBI
% Increase for Rural Pension
5.7%
Urban Retiree Pension
$5,600
% Increase for Urban Pension
3.07%

10. PBI Disproportionately Impacted Rural Employers
Year
Rural PD
Phoenix PD
2000
$17,000
$32,500
2016
$40,500
$58,800
$ Increase
$23,500
$26,300
% Increase
138%
81%

11. Deferred Retirement Option Plan (DROP)
Passed in 2000
Allows participants to enter into an agreement for up to 5 years stopping the calculation of their retirement but pooling money to be paid as a lump sum at the end of their agreement
INTEREST RATE EARNED 7.40%
MOS.
BEGIN BALANCE
BALANCE + INTEREST
MONTHLY PENSION
END OF MONTH 1 $ $
$ ,200.00
$ ,200.00 2 $
$ ,419.73 3
$ ,419.73 $
$ ,659.32 4
$ ,659.32 $
$ ,918.89 5
$ ,918.89 $
$ ,198.55 55
$ ,309.49
$ ,259.91
$ ,769.40 56
$ ,769.40
$ ,287.41
$ ,256.81 57
$ ,256.81
$ ,315.08
$ ,771.90 58
$ ,771.90
$ ,342.93
$ ,314.82 59
$ ,314.82
$ ,370.94
$ ,885.77 60
$ ,885.77
$ ,399.13
$ ,484.90

12. Deferred Retirement Option Plan (DROP)
Example:
Problems w/ DROP are that employers are not required to pay contributions once a participant enters DROP AND the plan is guaranteeing a high rate of return on DROP balances
DROP Participant
No DROP
Monthly Salary
$6,400
$7,680
Years of Service 20 25
Multiplier
50%
62.5%
Monthly Pension
$3,200
$4,800
DROP + Interest
$192,000 + $ = $231,484.90 $0

13. Is there a “healthy” funded status?
There has been significant public debate regarding what is an acceptable funded status for pension plans
The number circulating publicly over the last couple decades has been 80%
Some argue 100% or more is the only acceptable funded status while others indicate an amount as low as 70% is acceptable
We must first separate public from private pensions
What is the inherent difference between a corporation and a city?
IS IT THAT EASY?

14. Is there a “healthy” funded status?

15. Is there a “healthy” funded status?
There has been significant public debate regarding what is an acceptable funded status for pension plans
The number circulating publicly over the last couple decades has been 80%
Some argue 100% or more is the only acceptable funded status while others indicate an amount as low as 70% is acceptable
We must first separate public from private pensions
What is the inherent difference between a corporation and a city?
IS IT THAT EASY?
NO!
We cannot just look at funded status in a silo!

16. What Happened in 2001?
DROP
PBI

17. So, how did we get here? Permanent Benefit Increase (1986)
Good intentions gone bad – helping RURAL retirees
No funding level requirement
Year-to-year investment returns and the “bucket”
Actuarial calculations did not contemplate the PBI, was using outdated life expectancy tables, historically assumed 9% return
Global investment losses twice
“Dot.com” loss of $1.7 billion
Funding level drop from 127% to 101%
“Great Recession” crunch
By FY 2010 funding level drops to 66%
DROP
Failure of 2011 reforms due to lawsuits
Demographic shifts
2000: 2.7 active members to 1 pension; 2016: 1.6 actives to 1 pension

18. Pension Reform – Round 1 Increased contribution rates
SB1609 (2011)
Increased contribution rates
Barnes v. ASRS, Hall v. EORP, Parker v. PSPRS
Reduced PBI formula for active and retired members
Fields v. EORP (2014), Hall v. EORP
Restricted Service Purchase
Pendergast v. ASRS
Capped employer contribution rates for EORP
Fields v. EORP (2017)
Established Tier 2 requiring employees to pay higher contribution rates and remain in the system longer before retirement
On each of these reforms, except the creation of Tier 2, the courts struck down modifications ruling they were only applicable prospectively

19. PSPRS Legal Challenges
Arizona Constitution Contracts Clause
Section 25. No law impairing the obligation of a contract, shall ever be enacted.
Arizona Constitution Gifts Clause
Section 7. Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever…make any donation or grant, by subsidy or otherwise, to any individual…
Case Law Prior to 1998
(1965) Yeazell v Coppins
Court ruled that anything that was in statute at the beginning of an employees participation in a retirement plan was a contract and the employee beginning to work and remitting contributions was acceptance of said contract
(1994) Thurston v EORP
Court ruled any increases in benefits in a plan could not just apply to new member but applied to all existing members in the plan (in other words benefits could only get enhanced, never diminished)
Arizona Constitution Pension Clause (1998)

20. PSPRS Legal Challenges
If the pension clause were removed could a future court take up the 1965 and 1994 Arizona Supreme Court cases?
General Premise of Law is future Supreme Courts are bound by decisions of prior courts
Plessey v. Ferguson (1896)
Upheld state segregation clause under the doctrine separate but equal
Brown v. Board of Education (1954)
Had to provide substantial evidence that separate was not equal, burden of proof on the appellant
Future cases to the AZ Supreme Court would have the burden of proof suggesting pensions are not a contract and do not vest at the beginning of employment

21. League Task Force - Yardstick
Yardstick Element
Included in Tier 3?
1. Defined Benefit Plan
2. Free from Legal Challenge
3. New Statewide System
4. Plan Elements
Full Pooling
Equal Cost Sharing
Circumstantial Pension Increases
DC Supplement Those w/o Soc. Sec.
5. Governance Structure
Board of Trustees
Disability Boards

22. Pension Reform – Round 2 SB1428 (2016)
Created a Tier 3 for public safety members
Required employees to share equally in cost of pension, 50/50 contribution rate
Greater age requirement before being eligible for retirement
Different graded multiplier structure for maximizing pension benefits
DB Pension = Avg. Salary × Years of service × Graded Multiplier
Capped contributions on first $110,000 of salary
Employee has option to join DB or DC plan
Retiree must be retired 7 years or age 60 AND plan must be funded in excess of 70% for COLA’s to be awarded
Required PSPRS to study risk pooling and consolidating local boards
Changed make-up of PSPRS Board, granting more representation to taxpayer representatives

23. Round 2 (continued) Proposition 124 (2016)
Struck the PBI from statute and replaced it w/ COLA 2% per year
Voter approved amendment to the constitution permitting the transition from PBI to COLA
Approved with > 70% public support
More predictable for PSPRS and easier to prefund

24. 2017 Legislative Session SB1063 HB2485
Created a risk pool for employers w/ 250 or fewer police or fire employees
Employers with 251 or more employees will be in a single employer plan
HB2485
Granted PSPRS employers the permission to switch from a 20-year to a 30-year amortization period
Alterations to the transfer statute, ensuring that new employer doesn’t pay for liabilities accrued in previous employment

25. League Task Force - Yardstick
Yardstick Element
Included in Tier 3?
1. Defined Benefit Plan
2. Free from Legal Challenge
3. New Statewide System
4. Plan Elements
Full Pooling
Equal Cost Sharing
Circumstantial Pension Increases
DC Supplement Those w/o Soc. Sec.
5. Governance Structure
Board of Trustees
Disability Board
YES, default w/ option of DC
YES, prospective
YES, pools assets for all 230 plans
PARTIAL, pooled for 250 EE’s or fewer
YES, EE & ER share 50/50 in contributions
YES, COLA paid based on funded %
YES, 3% EE & ER contributions to DC plan
PARTIAL, 4 labor, 4 taxpayer, 1
advisory committee
TBD

26. Cost Savings Employees sharing equally in costs
EE Contributions ER Contributions Investment Returns
Employees sharing equally in costs
Tier 1 Share: EE = 17%, ER = 83% of incoming funds
Tier 2 Share: EE = 23.7%, ER = 76.3% of incoming funds
Tier 3 Share: EE = 50%, ER = 50% of incoming funds

27. Cost Savings (cont.) Greater age requirement
Tier 1: 20 years of service, no age requirement; or 15 years of service, age 62
Tier 2: 25 years of service; or 52.5 years of age & 15 years of service (-4% per year for each year of service under 25)
Tier 3: 55 years of age & 15 years of service
Reduced graded multiplier formula
DB = Average Compensation × Years of Service × Graded Multiplier
Tier 3 averages 3.15% savings over Tier 2 (8.19% savings over Tier 1)
Capped pensionable contributions at $110,000 (adjusted for CPI)
Federally capped for Tier 1 & 2 ($215,000 approx)
Employee option to join DB or DC
Employer contribution rate to DC = 9%, no liabilities

28. Cost Savings (cont.)
Retiree must be retired 7 years or age 60 AND plan must be funded in excess of 70% for COLA’s to be awarded
70 – 79.99% funded = 1.0% cap
80 – 89.99% funded = 1.5% cap
90% or greater funded = 2.0% cap
Required PSPRS to study risk pooling and consolidating local boards
Risk pooling passed w/ SB1063 (2017) for employers of 250 employees of fewer
Change in allocation of liabilities for transfer employees
Changed make-up of PSPRS Board, granting more representation to taxpayer representatives

29. PSPRS-Related News
Mayor’s Summit (organized by Mayor Oberg of Prescott)
Held 3 meetings (Scottsdale, Prescott Valley, Payson)
Prescott passed 0.75% sales tax to pay down PSPRS unfunded liabilities w/in 10 years
House PSPRS Ad Hoc Committee
Held 5 meetings (Flagstaff, Bisbee, Phoenix, Globe, Yuma)
Objective was to educate public with an overview of PSPRS both historical and current, impacts of actuarial assumptions, impacts of recent PSPRS reforms, impacts of rising contribution rates on employers, and stakeholder concerns.
Talking points = additional revenue & repeal pension clause

30. PSPRS-Related News (cont.)
Additional Revenue?
Projected $100M budget shortfall
K-12 funding lawsuit
Brnovich lawsuit against universities
Promise to stop sweeping HURF (≈ $1.1B since 2001)
EORP lawsuit >$300M
TPT Exemptions, Annual State of the State promise of tax cuts
Pension Clause of Arizona Constitution
Passed in 1998, its intent was to protect plans from having state sweep funds
However, apart from pension clause state has protections of 1965 (Yeazell) and 1994 (Thurston) case laws protecting pension benefits as part of a contract
League, legislature, and other stakeholders made a deal in 2016 and a repeal would be seen as going back on such a deal

31. Future PSPRS Legislation
Working group, initiated by Scott McCarty, has been meeting to discuss potential tools employers can use to pay down liabilities, tools may require legislation
Asset transfer, lease/ lease-back, state loan program
EORP lawsuit will require additional funds from all employers but overwhelmingly counties
Unlike PSPRS, EORP is a fully pooled plan and consequently individual employers cannot pay off their liabilities up front
PSPRS administration established a working group to discuss these issues
Repeal of “dead pool” (§ )
PSPRS Advisory Committee has been meeting to discuss consolidation of Local Boards

32. Alternative Investments
Recent attention has been paid to $170M in “fees” paid by PSPRS in their alternative investment portfolio
Traditionally plans were invested 60% stocks and 40% fixed income
With a low interest rate environment plans have turned to alternatives (private equity, private debt, hedge funds, real estate, & commodities)
Are we concerned and, if so, to what extent?
What are the returns provided by managers?
Is your fee structure comparable to peers?
2% and/OR 20%

33. Alternative Investments (cont.)
“Hurdle year”
PSPRS returns
Private equity mgr. returns
So, if you gave me $10 and 6 years later I brought you back $23.17 with relatively low risk, would you be bothered that our agreement allowed me to keep $2.53?

34. PSPRS LOCAL BOARDS, DISABILITY IMPACTS
GFOAz 2017 Budget Forum
Scott Barber – HR Director, Town of Florence

35. Local Boards “It’s your plan…..”
A.R.S. § states:
D) ….a local board shall have such powers as may be necessary to discharge the following duties:
1. To decide all questions of eligibility for membership, service credits and benefits and determine the amount, manner and time of payment of any benefits under the system
2. To prescribe procedures to be followed by claimants in filing applications for benefits
3. To make a determination and handle member appeals based on board determinations
4. To coordinate with employers and the Board

36. Local Boards Local Board Membership: Mayor (or designee)
2 members elected by members via secret ballot
2 citizens appointed by mayor w/council approval , 1 of which is head of “merit system”(typically the city/town manager or designee)
these serve on both police and fire local boards, if both are present

37. Local Boards 259 total Plans in PSPRS; 6 have no active participants
18,706 active participants; avg. 75 actives per Plan
Remove the top 13 Plans based on actives = avg. 58 actives/Plan
Remove all Plans over 150 actives (23) = avg. 30 actives/Plan
108 plans (45%) have ≤ 25 actives
MESSAGE? Most of the Plans are small, but all Local Boards must follow the same rules.

38. Medical Board A.R.S. § 38-859 states:
A. The purposes of a medical board are to:
1. Identify a physical or mental condition or injury that existed or occurred prior to the member's date of membership in the system
2-5. Evaluate a member's eligibility for an accidental, ordinary, temporary, and catastrophic disability pension.
6. For death benefits, determine through appropriate medical evidence the proximate cause of death for members who are killed in the line of duty if the death occurs more than one year after the date of injury.
B. For the purpose of determining a disability, the medical board shall be composed of a designated physician or physicians working in a clinic other than the employer's regular employee or contractee.

39. Current Disability Process

40. Current Disability Process
Member applies for disability and provides relevant medical docs to local board
Local board reviews application and determines whether to order an Independent Medical Examination (IME)
Local board orders IME and provides information to medical board
Medical board completes IME report and submits recommendation to local board
Local board approves (or denies) medical board recommendation and submits report to PSPRS
PSPRS reviews documentation for approval and, if approved, authorizes disability payments

41. Issues with Current Process
Some employers are very active in their local board process while others are not
Apart from medical board review, which some employers have little familiarity with, there are typically no other medical professionals involved in the process
Creates additional bureaucracy
Despite all the apparent fail-safe measures in the stated process there are wide discrepancies in disability rates by employer
Governance-related training varies greatly by local board

42. Cortex Recommendation
3 Alternatives:
Maintain current structure of 230+ local boards
Have one unified local board for the entire state
Establish individual local boards based on county and maintain local boards for employers w/ > 250 employees
Recommendation was to maintain Local Board structure for all employers w/ more than 250 employees
Establish an additional 27 Local Boards (separate boards for police and fire) along county lines and 1 state Local Board
Total Local Boards = 45
Board membership is unclear but seems to consist of 3 non-members

43. City/Town Data FY2016 Valuation
Fire Personnel Data
4,704 active, 2,069 retired, 239 disabled
Disabilities account for 3.4% of total
Police Personnel Data
7,989 active, 4,106 retired, 899 disabled
Disabilities account for 6.9% of total
System-Wide:
Total disability pensions 1,587 - $43,467 average
Disability retired members average age = 57.7
Disability retired members average service = 14.4 years
Average disability retirement = 44.1
On the surface these numbers aren’t unreasonable

44. Correlation Analysis

45. Fire Disability Data

46. Fire Disability Data

47. Police Disability Data

48. Police Disability Data

49. Analysis
While total disability rates are relatively low there are some high rates of disability on an individual employer level
This analysis is consistent with the analysis from Cortex which indicates there are inconsistencies in governance, education, and determinations at the Local Board level
There is weak correlation between average age by employer and rates of disability
The PSPRS Board as well as PSPRS staff are not made up of experienced medical professionals
Apart from employment eligibility, the Local Board structure adds an unnecessary layer of bureaucracy where most information can be handled directly with PSPRS
Based on risk pooling outlined in SB1603 the current structure is antiquated and could present issues if left unchanged

50. Recommendation
1 Medical Board for employers in the risk pool while non-pooled employers would maintain their Local Boards or opt-in to the singular pooled Medical Board
Local Boards remain for all issues except disability
Medical decisions made by medical professionals
Independent Medical Examiner (IME) receives medical documents, employer incident report, any additional relevant information
IME can request secondary review by independent doctor/physician w/in miles of member’s current employer
Establish a 3 person Medical Board of licensed doctors who will review IME recommendation and make final determination
Establish ad hoc agreements amongst large and small employers to assist in light duty situations

51. Proposed Process (simplified)
Member applies for disability through “Medical Board”
Medical Board assigns IME to member’s case
Member provides medical information & employer statement to IME
IME reviews member’s case
IME determines information provided does not support disability claim [END]
IME recommends approving disability claim, forwards report to medical board
IME requests/ schedules independent doctor review
Medical Board reviews IME report
Medical Board accepts IME recommendation (approval or denial determination) [END]
If Medical Board disagrees w/ IME the Medical Board can reinitiate process

52. Legislative Authority
SB1428 (2016) established the PSPRS Advisory Committee as a liaison between the PSPRS Board, members, and employers
PSPRS was asked to study risk pooling and local board consolidation with the results to be presented to the PSPRS Board by 01/15/2017 with recommendations made to the legislature by 02/15/2017
SB1603 (2017), based in part by recommendations that came out of the study required under 1428, established a risk pool for employers with ≤ 250 employees and individual employer plans for employers with > 250 employees
SB1603 did not address local board consolidation leaving that discussion for a subsequent session
Based upon the statutorily established framework of the Advisory Committee, it is well within the Committee’s scope to discuss and make recommendations on board consolidation

53. Advisory Committee Membership
Cities/Towns
Counties
State
Tribes
Fire districts
Elected officials/judiciary
Corrections officers
Law enforcement
Firefighters
Retirees

54. Advisory Committee Action
Voted on September 20th to recommend to the PSPRS Board of Trustees partial Local Board consolidation for disability determinations only
Voted on October 18th to hold the prior recommendation subject to further review…
…after a police and a fire union representative tag-team presentation in general opposition to the partial consolidation proposal, but conceding there is some basis for partial consolidation.
THE TAKEAWAY? Not likely to see any legislative proposal addressing the Local Board issue in the 2018 legislative session.

55. So What Now? ·Keep doing what we’re doing ·Hope the Advisory Committee can push through the “stuff” and send a recommendation to the Legislature for partial consolidation (my opinion)

56. Employer Recommended Practices

57. What is the financial condition of our plan?
Two Key Steps
What is the financial condition of our plan?
How can we improve the financial condition of our plan?
Increase Assets
Decrease Liabilities

58. Funded Status (Funded Ratio) Pension Funding Formula
Actuary 101
Unfunded Liability
Funded Status (Funded Ratio)
Pension Funding Formula

59. Know your numbers! Actual liability
What the numbers are AND how the numbers are calculated.
Actual liability
Changing the yearly multiplier changes the actual pension amount to be paid in the future.
Cost of Living (PBI) increases pension payments.
Estimated liability
Changing the assumed rate of return changes the estimated present value of the liabilities and the funded status, but not the actual pension.

60. Unfunded Liability Market Value of Assets are the assets as of TODAY!
Future liabilities are discounted to a present value estimate using the assumed rate of return as the discount rate.
The difference is the over funded or unfunded liability.

61. Unfunded liability (debt)
PSPRS Liabilities are Not Pooled (256 plans)
Unfunded Liabilities have been Earned and Cannot be Diminished or Impaired
Pension Clause and Field’s Decision
The Amount and Timing of Your Contribution Directly Impacts the Funded Status of Your Plan
A More Appropriate Term for Unfunded Liabilities is Debt

62. Funded status (funded ratio)
Market Value Assets
Liabilities (present value)
Identifies the Assets Available to Fund the Liabilities (in Today’s Dollars)
Goal: 100% Funded or Greater

63. Pension funding equation
C + I = B + E
Contributions Interest Benefits Expenses

64. Contributions have 2 components:
Normal Cost: Annual Cost of Pension Benefits “Earned” in the Current Year
Unfunded Liability: Cumulative Effect of Previous Normal Costs not funded
Straight line amortization (currently 19 yrs)

65. How much of your contribution relates to unfunded liabilities?
Town of Paradise Valley
FY 15-16
Rate
Amount
Normal Cost
12%
$0.4M
Amortization of Unfunded Liabilities*
60%
$1.7M
Total Contribution
72%
$2.1M
* Represents 83% of the Contribution Rate and Amount.

66. Assumed rate of return 7%
Assets = $50
PV Liabilities = $100
Assets earn the assumed rate of return:
Year 2 value of assets invested $53.5
Amortization of unfunded $50 x 1/19 = $2.63
Liabilities discounted one less year:
Year 2 PV of liabilities $107
Normal cost is assumed to have no impact
Assets = $56.13, Liabilities = $107
Unfunded liability = $50.87
ARC paid, unfunded liabilities increased

67. The Employer Recommended Practices Are . . .

68. Think Chicago Politics…
Vote early and vote often!
For pensions:
Pay early and pay often!

69. Think credit cards… Your current balance is $300.
Making the minimum payments you will pay a total of $697 in interest.
Making the minimum payments you will pay off the balance in 37 years.
The Actuary Amount (ARC) is only an Estimate – The Minimum Amount

70. Employer recommended practices
Budget Contributions for DROP Members
Prepay Your Budgeted Contribution
Review Local Board Practices
Prepare a Comprehensive Study
Payoff Unfunded Liability (Debt) Earlier
Create a Pension Funding Policy

71. Budget contributions for DROP members
ER Contributions Have Been Budgeted Since Hire and Get Put Back In Once Replacement EE is Hired
When an employee enters DROP, the unfunded pension liability DOES NOT go away.
The resulting decreased contributions are NOT a savings. (Think total $’s and %’s)

72. Prepay your Budgeted contribution July 1st
Results in Two Outcomes
Increases Your Investment Income
Even if the pension investments do not earn the assumed rate of return, the investment returns over time will be higher than those of local governments.
Reduces Your Unfunded Liability

73. Review local board practices
Employer Board Appointments
Local Board Members: 5
ER Appointments: 3
Mayor/Designee is Chair
Staff and/or Citizens
May Establish Your Own Qualifications
EE Appointments: 2

74. Review local board practices (continued)
Hire Outside, Independent Legal Counsel
Require Board Polices and Procedures
Pre-Existing Conditions at Hire
Disability Retirements
Disability Retirements for EEs with Less Than 20 Years of Service have an Adverse Financial Impact on Your Plan
Workers’ Compensation is a Key Indicator

75. Review local board practices (concluded)
Create a Structure to Encourage Relationship with Elected Officials
Annual Joint Meeting to Discuss Financial Status, Census Changes, etc.
Staff Appropriately
Manager, Finance, HR - Critical

76. Prepare a comprehensive study
“A Movie”: Establishes a Baseline
Annual Valuation Report is a “Picture”
Where are You in the Pension Life Cycle?
Young Today, Mature Tomorrow…
Reconstructs Your Current Financial Condition

77. Prepare a comprehensive study (concluded)
Provides Census Information
Ratio of Actives to Retirees
Turnover Rates given DROP, Staffing Levels
Identifies ER Specific Practices
Final Salary Components (e.g. Spiking)
Impact of Lateral Hires

78. Payoff unfunded liability (DEBT) earlier
Sooner Is Fairer
Currently Being Paid Off Over 19:
$21M Unfunded Now; $49M Final Cost
Treat and Manage as Any Other Debt
“Hard vs. Soft” is Incorrect
Policy Question: What is the Best Way to Reduce or Eliminate this Debt?

79. 6. Payoff unfunded liability (DEBT) earlier (concluded)
Options to Reduce or Eliminate:
Use Positive Variances from Operating Budget
Use Reserves
Issue Debt for Projects You Were Planning to Pay Cash For
Add a New Line Item to Your Budget to Make a Direct Payment Against It

80. 7. Create a pension funding policy
A Comprehensive Document with the Objective of Ensuring Financial Resources Exist to Fund Pension Obligations
Accounting Standard Requirement
Engages Elected Officials
Avoids or Fixes “Kicking the Can Down the Road”
“If that, then this…”

81. 7. Create a pension funding policy (concluded)
Policy Components
Define Funded Status Goal
EX: Not Less Than 80%
Define Annual Contribution Amount
EX: Contribution Not Greater Than 10% of Operating Expenses
Define Actuary Assumptions
Identify Roles and Responsibilities

82. Use the market cycle to evaluate your funded status
Market Cycle (Asset Value)
Funded Status A

83. What are other employers doing?
Paradise Valley
Completed Comprehensive Analysis
Developing Pension Funding Policy
Sierra Vista, Apache Junction
Developing Comprehensive Report
Youngtown
Considering Payoff of Entire Unfunded Liability

84. Questions and Comments

85. Tier 3 Phoenix PD Example: Less Cost
Current System
Tier 3
Normal Cost
18%
10%
Unfunded Liability
50% 0%
Total
68%
ER Cost (on $50K Salary)
$34K
$5K
Savings per New Hire
$29K

86. Questions? @AZCities 602-258-5786 1820 W. Washington St.
Phoenix, AZ 85007
@AZCities