1. Statewide Meetings February 2015 02.02.15 version LEAGUE OF ARIZONA CITIES AND TOWNS: PSPRS PENSION TASK FORCE

2.  Formed in June, 2014  Partnership with ACMA and GFOAz  15 Members  Review all aspects of PSPRS, identify areas of improvement, and reform recommendations TASK FORCE 2

3.  Scott Barber, HR Director, Town of Florence  Greg Caton, Town Manager, Town of Oro Valley  Karen Daines, Assistant City Manager, City of Sedona  Barbara Fleming, HR Director, City of Sierra Vista  Barbara Goodrich, Management Services Director, City of Flagstaff  Kelly Gottschalk, Chief Financial Officer/ACM, City of Tucson  Alan Maguire, President and Principal Economist, The Maguire Company  Scott McCarty, Town of Queen Creek (Chairman)  James Menlove, Finance Director, Navajo County  Rick Naimark, Deputy City Manager, City of Phoenix  Robert Nilles, Finance Director, City of El Mirage  Kathy Reyes, Benefits Administrator, City of Avondale  Marc Skocypec, Assistant Town Manager, Town of Gilbert  Mike Townsend, Assistant County Manager, Coconino County (Vice-Chairman)  Marge Zylla, Government Relations, City of Tempe 15 TASK FORCE MEMBERS 3

4. Presentations and Materials located at: www.azleague.org CLICK: ‘Legislative Issues’ Box CLICK: ‘Pension Task Force’ Line TASK FORCE 4

5.  256 Employer (Individual) Plans  ~32,000 Actives / Retirees  Same Benefits for All Plans  Financial Condition Varies by Plan  $6.6B Total Underfunded  ER Contribution Rate Varies By Plan  EE Contribution Rates are Fixed by AZ Law at 11.65% (as of 7/1/15) PSPRS OVERVIEW 5

6. Phase 1  Information and Education Phase 2  Employer Recommended Practices Phase 3  Yardstick: Characteristics of a Well- Designed Plan TASK FORCE APPROACH 6

7. Phase 1 7

8.  14 Presentations  Stakeholder Collaboration  Employers  AZ PSPRS Board and Administration  Arizona Firefighters’ Association  Arizona Fraternal Order of Police  Arizona Police Association  6 Major Observations PHASE 1 INFORMATION AND EDUCATION 8

9. 1.Causes of Deteriorating Financial Condition A.Great Recession  Investment Income B.Benefit Plan Design  Annual Retiree Pension Benefit Increase (PBI) C.Actuary Assumptions  Future PBIs EXCLUDED from Contribution Calculation D.Benefit Increases  DROP MAJOR OBSERVATIONS 9

10. 2.Success Is A Combined Responsibility MAJOR OBSERVATIONS (CONTINUED) 10 State Legislature PSPRS Local Legislative Body Local Board

11. 3.PSPRS Employers are Managing…or Not Managing…a Pension Plan  PSPRS in Not ASRS  Assumptions Used vs. Local Reality  Fiduciary Responsibility Exists  Legislative Body and Local Board MAJOR OBSERVATIONS (CONTINUED) 11

12. 4.“Know Your Numbers”  Normal Cost vs. Unfunded Liability  Focus on Dollar Amounts, Not Rates  Don’t be Fooled by Low Contributions Today, They Will Increase  Plan Maturity / Demographics  Retiree Annual PBI MAJOR OBSERVATIONS (CONTINUED) 12

13. 5.Improve Employer Engagement  Task Force  Clearing House for Concerns and Thoughts  Presentations to Councils, Organizations MAJOR OBSERVATIONS (CONTINUED) 13

14. 6.Plan Changes that Effect Existing Members or Retirees are Not Possible (Legally Challengeable)  Fields’ Case (Decided-$375 million impact)  Restored PBI Formula for Retirees as of 6/1/11  Hall Case (Pending)  Restore PBI formula Active Members  Reduce EE Contributions Back to 7.65% MAJOR OBSERVATIONS (CONCLUDED) 14

15. Phase 2 15

16.  Employers Can Improve Their Plan’s Financial Condition Today Without Waiting for Resolution of Pending Litigation or Legislative Changes  See Separate Section of Presentation for Detailed Discussion PHASE 2 EMPLOYER RECOMMENDED PRACTICES 16

17. Phase 3 17

18. PHASE 3 DESIGN A WELL-STRUCTURED PLAN (A YARDSTICK) 18 Goal Principles Plan Design Elements

19.  What should the Employee, Retiree, Employer, and Taxpayer get out of the System?  How is this Accomplished?  Type of Plan, Cost Sharing, Annual Pension Increase (PBI), etc. KEY QUESTIONS 19

20. 1.Adequate and Affordable 2.Financially Solvent 3.Transparent and Accountable GUIDING PRINCIPLES 20

21. 1.Pension Amount 2.Retirement Age 3.COLA / PBI 4.Cost / Risk Sharing 5.Funded Status 6.DROP 7.Pooled Assets and Liabilities 8.Investment Strategies 9.Dedicated Revenues 10.Governance 11.Loan Program 12.Legal 13.Smoothing (Deferring) 14.Funding Policy 15.Healthcare 21 KEY PLAN DESIGN ELEMENTS

22.  Recommendation to League’s Executive Committee  Tool to Evaluate Reform Proposals THE YARDSTICK 22

23. Employer Recommended Practices 23

24. 1.What is the Financial Condition of My Plan? 2.How Can I Improve the Financial Condition of My Plan Now?  Increase Assets  Decrease Liabilities DESIGNED TO ANSWER TWO KEY QUESTIONS 24

25. 1.Unfunded Liability 2.Funded Status (Funded Ratio) 3.Pension Funding Formula ACTUARY 101 25

26. UNFUNDED LIABILITY (DEBT) 26 Liabilities - Assets = Unfunded Liability (Debt)

27.  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 27 UNFUNDED LIABILITY (DEBT)

28.  Identifies the Assets Available to Fund the Liabilities (in Today’s Dollars)  Goal: 100% Funded or Greater FUNDED STATUS (FUNDED RATIO) 28 Assets Liabilities

29. Total Accrued Liability$28.8M Total Assets$7.6M Unfunded Liability$21.2M Assets as a % of Liabilities (Funded Status)26% Unfunded Liability Per Capita$1,630 PARADISE VALLEY’S UNFUNDED LIABILITY AT 6/30/14 29

30. C + I = B + E Contributions Interest Benefits Expenses PENSION FUNDING EQUATION 30

31. Two Components: 1.Normal Cost: Annual Cost of Pension Benefits “Earned” in the Current Year 2.Unfunded Liability: Cumulative Effect of Previous Normal Costs in Excess of Assets  Likely Larger in More Mature Plans  Significant Component of Contribution CONTRIBUTIONS 31

32. Town of Paradise Valley FY 15-16 Rate FY 15-16 Amount Normal Cost12%$0.4M Amortization of Unfunded Liabilities*60%$1.7M Total Contribution72%$2.1M HOW MUCH OF YOUR CONTRIBUTION RELATES TO UNFUNDED LIABILITIES? 32 * Represents 83% of the Contribution Rate and Amount.

33. The Employer Recommended Practices Are... 33

34. 1.Budget Contributions for DROP Members 2.Prepay Your Budgeted Contribution 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 34

35.  DROP Has A Cost Even Though ER Contributions are Not Required  ER Contributions Have Been Budgeted Since Hire and Get Put Back In to Budget Once Replacement EE is Hired  Avoids Future Budget Increase 1. BUDGET CONTRIBUTIONS FOR DROP MEMBERS 35

36.  Results in Two Outcomes 1.Increases Your Investment Income 2.Reduces Your Unfunded Liability 2. PREPAY YOUR BUDGETED CONTRIBUTION 36

37.  The Sooner You Put Assets in Your Account, the More Interest Income Your Account Earns  ER Investment Return: ~1%  PSPRS 6/30/14 Investment Return: ~14%  Model Exists to Calculate Increased Income  Full Payment July 1 st is Best 2. PREPAY YOUR BUDGETED CONTRIBUTION (CONTINUED) 37

38.  The Actuary Amount is Only an Estimate – The Minimum Amount  Any Amount is Excess of the Minimum Reduces the Unfunded Liability 2. PREPAY YOUR BUDGETED CONTRIBUTION (CONTINUED) 38

39. 2. PREPAY YOUR BUDGETED CONTRIBUTION (CONCLUDED) 39 Contribution Annual Increased Interest Income * $2M (Paid July 1)$78k $2M (Paid Quarterly)$9k * Assumes 7.85% PSPRS Interest Rate.

40.  PSPRS Board Adopted a Policy to Allow for a 3-Year Deferral Due to the Potential Financial Impact on Employers  Your Decision is Due by 3/1/15  Deferral Will Cost More over Next 22 Years  Model Created to Calculate Cost of Deferral  Available on PSPRS and League’s Website 3. DO NOT DEFER THE FIELDS CASE 40

41. 6/30/14 Unfunded Liability 22-Year Cost of Deferral City of Tucson Police$466M$15M City of Tempe Police$146M$4M City of Chandler Fire$35M$1.4M 3. DO NOT DEFER THE FIELDS CASE (CONTINUED) 41 Fields Case Deferral Decision Model

42.  If Defer  Annual Contribution in FY 15-16 and FY 16- 17 are Lower but Higher in Remaining 20 Years  If Do Not Defer  Annual Contribution in FY 15-16 and FY 16- 17 are Higher but Lower in Remaining 20 Years 3. DO NOT DEFER THE FIELDS CASE (CONTINUED) 42

43. CITY OF TEMPE POLICE: $4M DIFFERENCE DEFERRING VS. NOT DEFERRING 43

44. Reasons Not to Defer: 1.It’s Not About Fields…It’s a Correction 2.Another Contribution Increase Coming if Hall Case Upheld 3.Best to Offset Bad News Against Today’s Good Investment Earnings 4.Sooner is Better… Deferring Masks Your Plan’s True Financial Condition 5.Recommended in Governor’s Budget 3. DO NOT DEFER THE FIELDS CASE (CONCLUDED) 44

45. A.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 4. REVIEW LOCAL BOARD PRACTICES 45

46. B.Hire Outside, Independent Legal Counsel C.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 4. REVIEW LOCAL BOARD PRACTICES (CONTINUED) 46

47. D.Create a Structure to Encourage Relationship with Elected Officials  Annual Joint Meeting to Discuss Financial Status, Census Changes, etc. E.Staff Appropriately  Manager, Finance, and HR 4. REVIEW LOCAL BOARD PRACTICES (CONCLUDED) 47

48.  “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 5. PREPARE A COMPREHENSIVE STUDY 48

49.  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 5. PREPARE A COMPREHENSIVE STUDY (CONCLUDED) 49

50.  Sooner Is Fairer  Currently Being Paid Off Over 22 Years at 7.85% Interest Rate in Your Contribution Amount  PV: $21M Unfunded Now; $49M Final Cost  Treat and Manage as Any Other Debt  What is the Impact to Your Operating Budget?  What is the Best Way to Reduce or Eliminate this Debt? 6. PAYOFF UNFUNDED LIABILITY (DEBT) EARLIER 50

51. Options to Reduce or Eliminate: 1.Use Positive Variances from Operating Budget 2.Use Reserves 3.Issue Debt for Projects You Were Planning to Pay Cash For 4.Add a New Line Item to Your Budget to Make a Direct Payment Against It 6. PAYOFF UNFUNDED LIABILITY (DEBT) EARLIER (CONCLUDED) 51

52.  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…” 7. CREATE A PENSION FUNDING POLICY 52

53.  Policy Components  Defines Funded Status Goal  EXAMPLE: Not Less Than 80%  Defines Annual Contribution Amount  EXAMPLE: Contribution Not Greater Than 10% of Operating Revenues  Defines Actuary Assumptions  Identifies Roles and Responsibilities 7. CREATE A PENSION FUNDING POLICY (CONCLUDED) 53

54.  Paradise Valley  Completed Comprehensive Analysis  Developing Pension Funding Policy  Sierra Vista, Apache Junction  Developing Comprehensive Report  Youngtown  Considering Payoff of Entire Unfunded Liability WHAT ARE OTHER EMPLOYERS DOING? 54

55.  Education and Collaboration  Employer Engagement  Employer Recommended Practices  Yardstick  Legislative Solutions Will Take Time TASK FORCE SUMMARY 55

56. WE NEED YOU FINAL THOUGHT 56

57. Questions and Comments 57