1. COH PENSION SYSTEMS STATUS UPDATE BUDGET & FISCAL AFFAIRS COMMITTEE December 7, 2010 Craig Mason Chief Pension Executive

2. 1 COH Pension Systems In Context - Overview 3 separate plans – civilians, police, firefighters, Administration of plans is outsourced to 3 separate independent trust organizations: - Houston Municipal Employees Pension System (HMEPS) - Houston Police Officers’ Pension System (HPOPS) - Houston Firefighters Relief and Retirement Fund (HFRRF) The administrative/trust organizations are established and governed by separate state statutes to: - Manage the plan’s investments - Pay benefits when due The description of benefits (plan design) is included in the state statutes HMEPS and HPOPS have ability to trump state statutes through Meet & Confer Unions exclude pension benefits from collective bargaining process

3. 2 COH Pension Systems In Context – Pension Board Composition HMEPS HPOPS HFRRF -Elected active beneficiaries 4 3 5 -Elected retired beneficiaries 2 2 1 -Appointed by: ○ Mayor 1 1 1 ○ City Council 2 ○ City Controller 1 ○ City Finance Director 1 1 ○ All other trustees 2 ○ Elected beneficiary trustees 1 - Total trustees 11 7 10

4. 3 COH Pension Systems In Context – Pension Participants and Assets HMEPS HPOPS HFRRF Actives 13,333 5,245 3,949 Retireds 8,340 2,878 2,550 Deferred Vesteds 5,742 22 8 _____ _____ _____ Total Members27,415 8,145 6,507 Est. Assets 6/30/2010$1.833B $2.972B $2.713B

5. 4 COH Pension Systems The Challenge – City Contributions Increase to Unsustainable Levels, 2002-2005

6. Meet & Confer Agreements at HMEPS and HPOPS Significantly Reduced City Contributions to Their Current Levels

7. 6 COH Pension Systems Addressing the Challenge – In General Mayor White assumed office in January 2004 – Inherited the challenge Orchestrated a general election in May 2004: - Citizens of Houston elected to opt out of State constitutional provision prohibiting localities from reducing accrued pension benefits - Option available, but not used yet Formed a task force of business leaders to assist in addressing the issues Executed Meet & Confer Agreements with HMEPS and HPOPS Created the position of Chief Pension Executive for the City

8. 7 COH Pension Systems Addressing the Challenge – HMEPS 2004 Meet & Confer Agreement: - reduced future benefit accrual rates - increased eligibility age for retirement from “rule of 70* ” to “rule of 75* ” - increased mandatory employee contribution rate from 4% to 5% - transferred an asset valued at $300 million to the pension fund - adopted a schedule of increasing dollar contributions for FY2005 thru FY2007 - added 2 Council appointees and a Controller appointee to HMEPS board Resulted in reduction in actuarially calculated contribution rate from 52% to 24% of payroll Considered by City to be an interim step *age + years of service

9. 8 COH Pension Systems Addressing the Challenge - HMEPS Long term “reform” in 2007 Meet & Confer Agreement Adopted an objective based plan design for new employees: - Integral element of total compensation - Basic Level of income replacement at no cost to employee - Promote “career” employment - Consider availability of Social Security benefits - Enhance ability to hire “mid-career” employees - Provide employees capital accumulation opportunity/flexibility - Shift some risk sharing/responsibility to employee City funding level objective – 15% of payroll

10. 9 COH Pension Systems Addressing the Challenge – HMEPS New Plan Hybrid approach with both Defined Benefit and Defined Contribution features - Basic level of income replacement – City responsibility - Capital accumulation opportunity – employee responsibility (voluntary) Reduced income replacement levels: Employees hired after January 1, 2008 - target full benefit at age 62 - options to retire “early” with reduced benefit - optional post retirement survivor’s benefit - no COLA (Cost of Living Adjustment) - no DROP (Deferred Retirement Option Plan) Individual capital accumulation account provides supplemental benefits City risks reduced (investment, inflation, longevity) Employee risks increased with more flexibility, responsibility

11. 10 COH Pension Systems Addressing the Challenge – HPOPS 2004 Meet & Confer Agreement: - Eliminated provisions conducive to “gaming the system”. This agreement uses a 3 year average instead of highest two week pay period - Adopted new plan for Police Officers hired after 10/09/04 - reduced benefit levels - increased employee contributions (10.25% vs 9.0%) - minimum retirement age 55 - no DROP - Adopted a long term funding policy of gradually increasing City contributions (from approximately 19% of payroll currently to approximately 25% of payroll over the next few years) The future City contributions, coupled with the reduction in future liabilities due to the influx of new Police Officers, are projected to be both sustainable and sufficient.

12. 11 COH Pension Systems Addressing the Challenge – HFRRF The Mayor has informed the HFRRF board that the projected City contributions of over 35% of payroll for the current plan of benefits is unsustainable. In order to provide firefighters with secure, sustainable benefits, the Mayor has requested that the HFRRF Board collaborate with the City Administration in Developing a revised plan of benefits for future firefighters to be submitted to the State Legislature in 2011. City funding level objective – 20% of payroll

13. 12 COH Pension Systems Addressing the Challenge – Work In Process HMEPS – Meet & Confer to develop a near term funding policy to take into consideration the long term impact of the projected reduction in liabilities due to the influx of new employees HPOPS – Continue to monitor the sustainability and sufficiency of the existing long term funding policy HFRRF – Development of revised plan to submit to City Council and State Legislature.