COH PENSION SYSTEMS

STATUS UPDATE

BUDGET & FISCAL AFFAIRS COMMITTEE

December 7, 2010

Craig MasonChief Pension Executive

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COH Pension SystemsIn 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

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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

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COH Pension Systems

In Context – Pension Participants and Assets

HMEPS HPOPS HFRRF

Actives 13,333 5,245 3,949Retireds 8,340 2,878 2,550Deferred Vesteds 5,742 22 8

_____ _____ _____Total Members 27,415 8,145 6,507

Est. Assets 6/30/2010 $1.833B $2.972B $2.713B

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Benefit Decisions in 2000-2002 Increased the Plans' Liabilities Resulting in Unanticipated and Undesirable Increases in City Contributions as of 2005

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HFRRF HMEPS HPOPS

COH Pension SystemsThe Challenge – City Contributions Increase

to Unsustainable Levels, 2002-2005

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

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HMEPS HPOPS HFRRF

FY 2005 Contribution

FY 2011 Contribution

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COH Pension SystemsAddressing 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

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COH Pension SystemsAddressing 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

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COH Pension SystemsAddressing 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

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COH Pension SystemsAddressing 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

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COH Pension SystemsAddressing 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.

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COH Pension SystemsAddressing 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

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COH Pension SystemsAddressing 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.