Pension ReformTF Agenda October 6 2011 - phoenix.gov Barquin, Mark Dobbins and Roger Peck were...

NOTICE OF PUBLIC MEETING PENSION REFORM TASK FORCE

Pursuant to A.R.S. Section 38-431.02, notice is hereby given to the members of

the PENSION REFORM TASK FORCE and to the general public, that the PENSION REFORM TASK FORCE will hold a meeting open to the public on October 6, 2011 at 4:00 p.m. located in the Subcommittee Room, 12th Floor, Phoenix City Hall, 200

West Washington St., Phoenix, Arizona. The agenda for the meeting is as follows: 1. Call to Order Chair DeGraw,

Rick Naimark, Deputy City Manager

2. REVIEW AND APPROVAL OF THE SEPTEMBER 13, 2011 PENSION REFORM TASK FORCE MEETING MINUTES

Chair DeGraw

3. UPDATE ON TASK FORCE REQUESTS FOR INFORMATION Staff and consultants will provide an update on outstanding Task Force requests for information. For Information and Discussion.

Rick Naimark, Deputy City Manager Donna Buelow, Retirement Program Administrator Kim Nicholl and Matt Strom, The Segal Company

4. EXECUTIVE SESSION Pursuant to A.R.S. Section 38-431.03.(A) (2), (3) and (4). The Pension Reform Task Force may vote to convene in executive session to consult with the Task Force Attorney for legal advice on pension reform.

Susan Hoffman, Littler Mendelson

5. Call to the Public: Consideration, discussion, and concerns from the public. Those wishing to address the Subcommittee need not request permission in advance. Action taken as a result of the public comment will be limited to directing staff to study the matter or rescheduling the matter for further consideration and decision at a later date.

Chair DeGraw

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6. FORMATION OF RECOMMENDATIONS OF THE PENSION REFORM TASK FORCE The Task Force will discuss, and may take action to make recommendations to City Council regarding changes to the City of Phoenix Employees’ Retirement System. This item is for discussion and possible action.

Chair DeGraw

7. Request for Additional Research and Future Agenda Items; Future Meeting Dates

Chair DeGraw Rick Naimark, Deputy City Manager

8. Adjournment Chair DeGraw For further information, please call Brandie A. Ishcomer, Management Assistant, City Manager’s Office at 602-262-7684. Persons paid to lobby on behalf of persons or organizations other than themselves shall register with the City Clerk prior to lobbying or within five business days thereafter, and must register annually to continue lobbying. If you have any questions about registration or whether or not you must register, please contact the City Clerk’s Office at 602-262-6811. For reasonable accommodations, call Brandie A. Ishcomer at Voice/602-262-7684 or TTY/602-534-5500 as early as possible to coordinate needed arrangements. Pension Reform Task Force Committee members: Rick DeGraw , Chair Ron Ramirez Bill Barquin Richard Rea Libby Bissa Karen Schroeder Gene Blue Ann Seiden Mark Dobbins Martin Shultz Don Hamill Charlene Tarver Tee Lambert Jack Thomas Roger Peck Donna Buelow, ex officio October 3, 2011

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City of Phoenix Pension Reform Task Force

Summary Minutes Tuesday, September 13, 2011

Subcommittee Room Phoenix City Hall, 12th Floor 200 West Washington Street Phoenix, Arizona Task Force Members Present Task Force Members Absent Rick DeGraw, Chair Bill Barquin Libby Bissa Mark Dobbins Gene Blue Roger Peck Don Hamill Tee Lambert Ron Ramirez Richard Rea Karen Schroeder Ann Seiden Martin Shultz Charlene Tarver Jack Thomas Donna Buelow, ex officio Staff Present Public Present Rick Naimark Wesley Stockard, Littler-Mendelson Gary Verburg Mark Ogden, Littler-Mendelson Anna Martinez Susan Hoffman, Littler-Mendelson Bill Greene Kim Nicholl, The Segal Company Wanda Lee Matthew Strom, The Segal Company Brandie Ishcomer Carol Mercer, The Segal Company Lorizelda Contreras Dawnell Navarro Virginia Olguin Ed Blundon Michael Hughes Susan Howard Elizabeth Compton Jim Mann Mary Kyle Sheryl Jeremiah Tammy Ryan Greg Fitchet Jackie Temple Amber Cole 1. Call to Order

Chairman DeGraw called the meeting to order at 4:08 p.m. Task Force members Libby Bissa, Gene Blue, Ron Ramirez, Ann Seiden, Martin Shultz, Charlene Tarver, Jack Thomas and Donna Buelow were present. Don Hamill, Tee

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Lambert, Richard Rea and Karen Schroeder joined the meeting after 4:00 p.m. Bill Barquin, Mark Dobbins and Roger Peck were absent.

2. Review and Approval of the August 23, 2011 Pension Reform Task Force

Meeting Minutes Mr. Thomas moved for approval of item 2, the August 23, 2011 meeting minutes. Mr. Shultz seconded the motion, which passed 8:0.

3. Update on Task Force Request for Information Chairman DeGraw stated that no items on the agenda were posted for action, and invited Ms. Nichol to present information requested by the Task Force. Ms. Nicholl referred to slide one of the presentation, which described requests generated from Task Force members at the August 23 meeting. The consultants analyzed additional projections and tables including:

Grandfather criteria of age 50 with 15 years of service, or within ten points (five years) of Rule of 80

Grandfathering all active participants, with benefit changes only applicable to new hires

Additional “layer” showing impact of limiting pensionable earnings for non-grandfathered employees to Social Security Taxable Wage Base ($106,000 in 2011), indexed at three percent

Investment return assumption lowered to seven percent Participation in current defined benefit plan closed to new hires

Ms. Nicholl explained the impact of alternative scenarios on expected benefits would be demonstrated using “straw employees.” Mr. Naimark stated Ms. Bissa requested the consultant model an alternate contribution structure applied to all members with a five-year phase in for current members after the last Task Force meeting. Mr. Hamill and Mr. Rea arrived at 4:10 p.m. Mr. Naimark noted the consultant was unable to fulfill Mr. Hamill’s request for a model of an option allowing current employees to opt-in to a defined contribution plan on a voluntary basis. He explained it was not possible to predict how many employees would opt in; therefore it would be difficult to model this accurately. Ms. Nicholl reviewed page two of the presentation. She explained under the design scenarios modeled, existing active members that meet certain criteria would be “grandfathered” into the current plan design and contribution structure. The modeled grandfather group includes active employees who are age 50 with 15 years of service or within ten points of the Rule of 80. Ms. Lambert arrived at 4:13 p.m.

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Ms. Nicholl explained that additional scenarios were modeled where all current active members are grandfathered, but new employees would be subject to the design scenarios. Ms. Nicholl referred to page three of the presentation, which continued an explanation of the design scenarios modeled. The following lists variables showing where costs could be modeled and savings identified.

Increase asset-smoothing period from four years to five years (not subject to grandfathering).

Increase current employee contribution rate of five percent of salary (approximately 21.57 percent of actuarially determined total for current fiscal year) to 44 percent of actuarially determined total (approximately eight to ten percent of salary).

o New hires contribute at new level immediately. o Increase for non-grandfathered existing employees would be

phased in over five years (initially 26 percent of total rate, increasing by 4.5 percent each year for five years).

o Grandfathered employees continue to contribute at five percent of salary.

o City pays remaining portion of actuarially determined total (56 percent long term).

Ms. Nicholl explained the table on page four depicting an example of how the grandfathering and phase-in impacts the City contribution rates and employee contribution rates of varying classes of employees (grandfathered existing actives, non-grandfathered existing actives, and new hires). Ms. Nicholl stated based on plan design changes discussed at the last meeting, beginning in fiscal year 2012, the total actuarial rate of 20.22 percent of payroll will decrease to 18.04 percent in 2016. Mr. Naimark stated in year one of the phased-in increased employee contribution rates, the non-grandfathered employee contribution rate would increase from five percent of salary to 5.26 percent. Ms. Nicholl said the existing employee contribution rate for non-grandfathered employees would increase from 5.26 percent in 2012 to 7.94 percent in 2016. She stated the City contribution rate would decrease from 14.63 percent to 10.38 percent in 2016. Mr. Rea asked what assumptions were used for the number of new hires. Ms. Nicholl said the model reflected a level workforce. Ms. Nicholl reviewed slide five of the presentation, a continued list of the design scenarios modeled:

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Change multiplier for future accruals to 1.5 percent Modify retirement eligibility by eliminating age 62 with five years of service,

change age 60 with ten years of service to age 63 with ten years of service and change the Rule of 80 to the Rule of 83.

Eliminate vacation and sick time payouts in pensionable earnings calculations

Eliminate travel, communications or technical allowances in pensionable earnings calculations

Pensionable earnings limited to Social Security Taxable Wage Base ($106,000 in 2011), indexed at three percent

Mr. Strom reviewed slide six of the presentation, which illustrated the grandfathered group size. The grandfather criteria is age 50 with 15 years of service, or within ten points (five years) of Rule of 80. The total number of City employees in the COPERS system is 8,896. The grandfathered group would include 3,003 employees; the non-grandfathered group would include 5,893 employees. Mr. Strom stated in eight years, approximately half of the employee population will consist of new hires. In 15 years, nearly the entire active population will be comprised of the non-grandfathered group. In 30 years, 99 percent of employees will be new hires. Mr. Thomas asked if staff has seen an increase in mid-year retirements. Ms. Buelow stated on an annual basis the number of retirements have increased over the past three years. Mr. Thomas said he has noticed an increase in membership in the retiree organization, especially over the past several months. Mr. Naimark stated in general, the City’s workforce is aging. He added the flattening of salaries may be a factor employees consider when making retirement decisions. Mr. Shultz asked for a summary of key assumptions used during the modeling process. Ms. Nicholl stated the assumptions are the same as the assumptions used by the contracted actuary in the annual valuations. Mr. Naimark asked the consultants to prepare a summary sheet of key assumptions. Ms. Nicholl said they would prepare this summary. Mr. Strom reviewed slide seven of the presentation. The graph depicted the baseline projection of the estimated City contribution rate and the estimated funded percentage. He noted if no changes are made, the estimated City contribution rate will increase over the next four to five years, but would decrease to slightly lower than the current rate by 2021.

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Mr. Strom referred to the graph on page eight “Projection of City Contribution Rates and Funded Percentage Reflecting Scenarios Modeled.” The charts show the layered impact to the City contribution rate and the estimated funded percentage of all scenarios modeled reflecting the revised grandfather criteria (50 years of age with 15 years of service or within 10 points of Rule of 80). Mr. Strom explained the funded percentage would reach approximately the same place, regardless of changes made to COPERS, so long as the City continues to contribute the actuarial determined amount. Chair DeGraw said changes made to limit salaries to the Social Security income limits would result in highly compensated employees not receiving a pension reflective of their salary. This may have a negative impact on the City’s ability to competitively recruit this level of employee. The City may have to create a separate retirement program for highly compensated executives. Mr. Shultz asked about the difference between highly compensated and regularly paid employees. Chair DeGraw said under a retirement system that limits pensionable earnings to the Social Security limit of $106,000, highly compensated employees’ pensions would not reflect their salary. In private sector organizations, a supplemental program is offered to executives to attract and retain these employees. Mr. Thomas stated there may be a trend in employees retiring based on recommendations made by the Task Force. This may lead to a decline in institutional knowledge and skill sets in the City’s workforce. Mr. Strom referred to slide nine of the presentation, “Projection of City Contribution Rate and Funded Percentage Reflecting Scenarios Modeled.” The graphs showed the layered impact to the estimated City contribution rate and the estimated funded ratio of all scenarios modeled reflecting grandfathering of all current active employees, with changes in benefits and contributions for new hires only. Mr. Strom explained slide ten of the presentation. The graph showed the impact of the alternate contribution structure applied to new hires only compared to all employees. All current employees would retain existing benefits but pay increased contributions. Mr. Strom referred to slide 11, which reflected the revised grandfathering of age of 50 and 15 years of service or within 10 points of Rule of 80 and a decreased investment return assumption of seven percent. Ms. Nicholl said the chart on slide 11 is the same chart as slide eight, but included a decreased investment return assumption rate of seven percent.

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Chair DeGraw stated the assumption rates for investment return for other cities ranged from seven plus percent to a eight plus percent. Decreasing the COPERS assumption to seven percent represents a large drop in the City’s current assumption. Mr. Strom reviewed slide 12, which showed the impact of freezing participation in the defined benefit plan with all new hires participating in a five percent mandatory defined contribution plan. A 50 percent match would be made for five years grading up to 100 percent over the next five years. He noted the increase shown on the graph reflects paying off the defined benefit plan. Ms. Nicholl referred to slide six to show the size of the grandfathered group in five years. At that time 1,284 employees would fall into the grandfathered group. This number will continue to decrease over time. Chair DeGraw stated over a 20-year period, the City would pay more to freeze the defined benefit plan. Only after this period would a savings occur. Ms. Nicholl explained slide 13, which focused on the Fiscal Year 2017 City contribution rate and plan funded ratio modeling the revised grandfather criteria. The revised grandfather criteria include active employees with 50 years of age and 15 years of service or ten points from the Rule of 80. The employee contribution rate of 44 percent of the actuarially determined rate would be fully phased in by 2017. Mr. Naimark observed modeling the new Social Security salary limits and making the change from five points to ten points did not make sizeable changes to the impacts. Ms. Nicholl referred to slide 14, which showed the impact on the City’s contribution rate and the plan funded ratio in Fiscal year 2017 if all current active employees are grandfathered. The 44 percent sharing of the actuarially determined rate would be fully phased in for these employees by 2017. A change to the employee contribution structure would decrease the estimated City contribution rate by 1.55 percent. Ms. Nicholl said the impact of grandfathering a larger group of active employees would diminish over time. Ms. Nicholl explained several changes to additional criteria and their impacts on the estimated City’s contribution rate and the estimated plan funded ratio for fiscal year 2017 including: adding five year smoothing; multiplier; eligibility; removal of sick, vacation and allowances in pensionable earnings; and limiting pensionable earnings to the Social Security limit.

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Mr. Strom referred to slide 15, which was an analysis of the impact on the City’s contribution rate and the plan funded ratio in Fiscal Year 2017 modeled on a seven percent assumed rate or return and the revised grandfather criteria of 50 years of age and 15 years of service or ten points from the Rule of 80. A seven percent investment return assumption rate would increase the City’s contribution rate by five percent in 2017. Mr. Strom stated a decrease in the investment return assumption has an initial negative impact on the funded percentage, which will gradually be made up over time through higher required contribution rates. Mr. Strom reviewed slide 16 of the presentation, “Demonstration of Benefit Change Impact.” Replacement ratios (retirement benefit to final salary) were calculated for several sample “straw” employees before and after application of the design scenarios modeled. Mr. Strom stated the first three samples consider the impact on current non-grandfathered active employees and the next three samples consider impact on new hires. Mr. Thomas asked what the first column on page 16 signified. Mr. Strom explained for sample four, the ages of 30 and 35 with 25 years of service corresponds with retirement ages of 55 and 60. Ms. Nicholl referred to the appendix of the presentation. Slide 18 explained the actuarial assumptions and methods. The estimated market value of assets as of June 30, 2011 is $1.82 billion. The amortization of unfunded actuarial liability is determined using a four percent payroll growth assumption beginning in the 2012 projection year. Mr. Naimark asked if there is a way to model replacement income including Social Security to show how changes to COPERS might impact the Task Force’s goals for a pre-retirement income ratio. Ms. Nicholl said employee savings could be modeled. Income from Social Security could be utilized, but this income cannot be received prior to 62 years of age, which could be reflected in future models. Chair DeGraw stated the Task Force is charged with making recommendations and added that no votes would be made today. He distributed a draft handout. He noted the handout is a draft for Task Force discussion. Chair DeGraw asked what the Task Force thought about increasing the retirement age from 60 to 63 years of age with ten years of service. This age would also include changing the Rule of 80 to the Rule of 83. Mr. Shultz asked for data that demonstrates average life expectancy and how it has increased over the years. Mr. Naimark said this would be provided.

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Mr. Shultz asked for current sick pay policy requirements and its history in the organization. Ms. Schroeder arrived at 5:05 p.m. Chair DeGraw referred to item number four on the handout, the multiplier. He stated changing the current pension pay multiplier from three different levels to one multiplier amount, such as 1.5 percent, 1.6 percent or 1.7 percent per year of service should be evaluated. Chair DeGraw said if COPERS were to earn higher returns than expected, these funds could be set aside for retirement plan purposes. He stated the Task Force could consider eliminating either the Pension Equalization Program or the 13th Check option. Mr. Rea left the meeting at 5:08 p.m. Chair DeGraw stated it was not the Task Force’s responsibility to make final decisions on pension reform, but rather to provide recommendations to City Council. Mr. Shultz asked that the recommendations made show specific changes, as well as their impact to the City and to employees. He said the Task Force should make recommendations that are data-based and legally defensible. Chair DeGraw agreed. Mr. Thomas referred to item five on the handout regarding recommending the elimination of PEP or the 13th Check. He requested the word “stabilize” be removed from the verbiage. Chair DeGraw agreed and reiterated the handout was in draft form. Chair DeGraw stated item six is regarding recommending terminating any existing minimum pension fund requirements. Mr. Shultz asked for a history of minimum pension and why it was established. Ms. Tarver asked for information regarding what percentage of retirees receive a minimum pension. Chair DeGraw suggested the Task Force may want to consider recommending changing the determination of time of service to reflect actual service time. The change could require a month of service must include at least 20 days of service before a month of service can be credited. The change could require a year of service must include at least 240 days of service before a year of service can be credited.

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Chair DeGraw suggested the Task Force may want to consider recommending removing travel, communications and technical allowances from final average compensation for pension and calculations. Chair DeGraw suggested the Task Force may want to consider recommending changing from a four-year smoothing period to a five-year smoothing period. Chair DeGraw requested the consultant model multiplier changes at 1.6 percent, 1.7 percent, 1.8 percent and 1.9 percent. Mr. Ramirez left the meeting at 5:15 p.m. Chair DeGraw referred to the grandfathered group consisting of employees over the age of 50 with 15 years of service or within 10 points of the Rule of 80. He said the current number of employees considered part of the grandfathered group totaled 3,003; non-grandfathered employees consist of 5,893 employees. Mr. Thomas said he was concerned about losing a significant number of employees to retirement soon, which may create an organizational knowledge gap. Chair DeGraw stated COPERS should be competitive enough to recruit new employees. He stated changing the retirement plan contribution rate from the current five percent to approximately nine or ten percent of salary will provide a competitive edge over the State’s contribution rate of 11 percent of salary. Mr. Shultz asked if the retirement plan contribution rate increase could be phased in. Chair DeGraw stated that under his proposed scenario, the non-grandfathered group could be phased in over a five year period, and new hires could contribute 44 percent of the actuarially determined total automatically upon hire. Mr. Shultz asked if it was possible to phase in new hires, as an additional tool to recruit quality candidates. Mr. Naimark explained challenges with this type of phase-in in relationship to the compensation structure. Mr. Thomas asked if local governments could opt out of participating in the Social Security program. He noticed a couple of cities in the multi-city survey did not participate in Social Security. Mr. Stockard stated a city could opt out of Social Security if certain parameters were met. A city that elected to join the Social Security system could not rescind that decision. The decision is irrevocable. Mr. Naimark said the City of Phoenix participated in Social Security for general, non public safety employees.

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Mr. Naimark said based on the multi-city survey, Phoenix is below average for employee contribution rates. The average contribution rate among the cities surveyed was approximately seven percent. Mr. Verburg reminded the Task Force that no voting was planned for today’s meeting and voting items could be posted on future agendas. Chair DeGraw asked if any Task Force members had concerns regarding a change to time of service, item seven on the handout. Ms. Bissa asked for background information on any administrative concerns with modifying the formula for time of service. Ms. Buelow stated the time of service provision has been in place for decades and that she would provide background information at the next meeting. Mr. Hamill said changing the time of service provision did not dramatically impact the City contribution rate. Ms. Tarver asked how the Family Medical Leave Act (FMLA) impacts time of service. Chair DeGraw stated FMLA would not impact this provision since it is based on sick leave time. Mr. Naimark said history and background information for the time of service provision would be provided at the next meeting. Chair DeGraw asked if any Task Force members had concerns with eliminating travel, communications and technical allowances from the pension calculator. Ms. Bissa stated she was concerned that employees who have planned based on these provisions for a significant period of time may be affected if the provisions were eliminated. Mr. Hamill suggested as a starting point, discussing the items on Mr. DeGraw’s handout in terms of applying to new hires only. Mr. Naimark suggested legal issues concerning changes to provisions be discussed during the executive sessions. Mr. Thomas asked if income from travel, communications and technical allowances was considered taxable income. Mr. Naimark stated the allowances are a piece of the total compensation and are considered taxable income. Chair DeGraw asked if the Task Force had any concerns with excluding travel, communications and technical allowances from pensionable compensation for new employees. No concerns were raised.

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Chair DeGraw asked if the Task Force had any concerns with excluding vacation and sick pay from final average compensation calculations for new employees. No concerns were raised. Chair DeGraw asked if the Task Force had any concerns with increasing the retirement age for new employees. No concerns were raised. Chair DeGraw said a report on minimum pensions is forthcoming and asked if there were any concerns regarding this provision. Ms. Tarver said she had a concern. Chair DeGraw asked if the Task Force had any concerns with changing the smoothing period from four to five years. No concerns were raised. Chair DeGraw asked if there were any concerns regarding the termination of PEP and/or the 13th Check for new hires. Mr. Thomas clarified the difference between the PEP and the 13th Check. Ms. Bissa commented that most employees would prefer to give up the 13th Check over PEP. Mr. Thomas agreed. Chair DeGraw asked if there were any concerns with changing the retirement plan contribution rate for new hires after July 1, 2012. This rate would increase to approximately 8.9 percent from five percent. Mr. Hamill asked for clarification of contribution percentages. Chair DeGraw stated percentages are expressed as a percentage of pay to stay consistent with City Charter language. Mr. Shultz asked for data explaining the stability of the fund over time. Chair DeGraw referred to slide 20 of the presentation, “Projection of City Contribution Rate and Funded Percentage Reflecting Scenarios Modeled (20 years).” The red line shows that if all active employees were to be grandfathered and the contribution rate increase was to only affect new hires, over a 20 year period, the City would experience a reduction in contribution rate from 18 percent to 12.5 percent in 2021. Ms. Tarver asked what percentage of employees earns less than $35,000 per year. Mr. Naimark said this information would be provided at the next meeting. Ms. Tarver stated that the additional mandatory contribution rate increase might have a significant impact on the take home pay of lower wage earners.

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Mr. Naimark asked a question on behalf of Mr. Rea who left the meeting earlier. He stated Mr. Rea asked if there were any retirement plans in existence that have a progressive contribution rate. Ms. Nicholl said she had never seen such a plan. Chair DeGraw agreed. Mr. Blue asked for more data and history regarding the minimum pension provision. Mr. Naimark said this information would be provided at the next meeting. Ms. Lambert asked how changes to the provisions would be implemented. Mr. Naimark said this information would be provided at the next meeting. Chair DeGraw said a significant portion of the next Task Force meeting would be held in executive session to obtain legal advice on pension reform. Mr. Shultz reiterated the Task Force was charged with making recommendations, and requested the next agenda reflect possible action. Chair DeGraw stated he would like the consultants to prepare models reflecting three “straw” employees and the impacts of a multiplier change to 1.6, 1.7 1.8 and 1.9 percent. Mr. Thomas said he had a conflict with the next Task Force meeting date and asked for a briefing of the meeting. Mr. Verburg said a briefing would be provided. Mr. Stockard asked for a brief executive session. Chair DeGraw called for public comment.

5. Call to the Public Item taken out of order. Ms. Elizabeth Compton stated a change to the employee contribution rate is more palatable than a change to the multiplier and eligibility age of retirement. These changes would have a significant impact on many employees. She said if these levers were to change it would be reneging on a contractual obligation to employees. She made plans based on the retirement plan at the time of hire. Ms. Tammy Ryan said she had a concern with grandfathering. She also stated changing the multiplier would have a negative effect on recruitment. She asked the Task Force to look at the point system, rather than age.

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Mr. Ed Blundon said the Los Angeles County Retirement Plan in 1970 used a variable rate multiplier dependent on age at retirement. He asked the Task Force to consider this variation. Mr. Shultz moved to convene in Executive Session. Mr. Hamill seconded the motion, which passed 10:0.

4. Executive Session Task force entered Executive Session at 6:10 p.m.

6. Request for Additional Research and Future Agenda Items; Future Meeting Dates

No additional items were discussed. 7. Adjournment Meeting adjourned at 6:25 p.m.

Respectfully submitted,

Lorizelda Contreras Management Intern

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Capturing the personalities, politics and pulse of Phoenix.

Pension reform has become an issue in the Phoenix mayor's race, with candidate Wes Gullett recently releasing plans to overhaul the system in an attempt to save Phoenix money. Many of his proposals are some that Greg Stanton has put forward too: ending "double dipping," increasing the , increasing employee contributions and preventing pension spiking.

Gullett, however, has called for he city to tranistion off the pension system completely, shifting city to a 401k-style retirement system similar to many private employers. Gullett's solution, however, could take more than 20 years for Phoenix to realize savings and be more expensive in the short term, a study previously found.

Phoenix would also have to ask voters to change the city charter to move employees off a pension system.

A model produced for the city's Task Force shows that the city would be spending more money in the short term if it were to shift from a defined benefit plan ( system) to a defined contribution plan (similar to 401k).

That's because the city would have to pay more to make up for the unfunded liability in the system left from the new employees who aren't contributing to the existing pension plan as it is being phased out, according to a report created for the task force generated by pension consultants. The city wouldn't start saving money until at least 2033 according to the model.

Gullett acknowledges that some parts of his pension reform plan wouldn't yield immediate savings. But he said it's important to lay out the ground work and transition the city to "build our house on a rock of fiscal sanity."

He said the reforms will not be easy and there will be legal challenges involved, but "someone has to put down a marker and say this is what we're going to do," Gullett said.

Stanton has criticized Gullett's reform proposal.

"The biggest difference between our two plans, mine will save taxpayers money, his will cost them money," Stanton said.

Stanton's proposal also calls for reforming the pension plan for elected officials. Gullett does not. But the elected officials' retirement plan is run by the state. Stanton's campaign said it would willing to advocate that the state legislature reform the elected officials' pension system because it allows individuals to retire in their 30s.

Gullett's plan also calls for elimination the city's deferred compensation plan. The plan is an additional plan beyond the city pension that is voluntary. For certain employees, the city contributes a

certain percentage of each employee's salary to the as an alternative to salary increases, Deputy City Manager Rick Naimark said. It is possible to get rid of the system, but it would have to be negotiated with employee unions.

Gullett said eliminating the plan could save Phoenix $40 million. According to the city's human resources department, Phoenix currently contributes $26 million to employees' deferred compensation. That number is reduced from the roughly $40 million Gullett references because of employee concessions union groups accepted to cut wages and salaries to help during Phoenix's budget crisis.

Pension reform has become a hot button issue across the country. A recent study by the Arizona Republic shows that in the past 10 years, the cost to fund pensions in Phoenix increased 277 percent, to $88.1 million a year.

Check out each candidate's pension reform proposals here and here.

--Lynh Bui, [email protected]

Tuesday, September 20, 2011 at 04:42 PM Report a Violation

Topics: greg stanton, rick naimark, PHOENIX NEWS, Wes Gullett, pensions, Phoenix elections

5 COMMENTS FROM 4 USERS

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Phoenix mayoral candidates spar over pension plans

posted by years30on on Sep 20, 2011 at 05:48 PM Report Violation

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Page 1 of 5azcentral.com blogs - PHXBeat - Phoenix mayoral candidates spar over pension plans

9/21/2011http://www.azcentral.com/members/Blog/PHXBeat/142572

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Yawn. Is it over yet?

posted by hhr75 on Sep 20, 2011 at 07:27 PM Report Violation

Stop the insane retirement for elected officials!

Do any of you get to work for only a few years then get a retirment for the rest of your life? Only the people who make the rules!

There are many officals that are double dippers, DiCiccio is one and now I believe Waring is too!

posted by Rondy on Sep 20, 2011 at 10:16 PM Report Violation

Leave the pensions alone. You are talking about our firemen and police . I want them secure in their retirement, because I am secure with them being there every day for all of us!

posted by AveragePhxJoe on Sep 21, 2011 at 09:26 AM Report Violation

Is Greg Stanton currently drawing from his City Council Pension?

posted by AveragePhxJoe on Sep 21, 2011 at 09:26 AM Report Violation

Actually Rondy - Police and Fire fall under a seperate pension system. They can only be changed by the state. (Nice scare tactic though)

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9/21/2011http://www.azcentral.com/members/Blog/PHXBeat/142572

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Chapter 5

Public Pensions and State and LocalBudgets: Can Contribution Rate CyclicalityBe Better Managed?

Parry Young

The payment of annual pension contributions is an ongoing concern forgovernment sponsors of pension plans worldwide (Brainard 2008). Duringevery budget cycle, the financial officers of US state and local governmentsmust deal with this issue, as most are sponsors of defined benefit (DB)plans. Unlike more stable, slow-growing costs such as building maintenanceor even payroll, employer pension contributions are unpredictable evenover the medium term. In an industry like government, which tends to beservice-oriented and thus quite labor intensive (almost three-quarters ofschool district expenses, e.g., may be related to people), benefit costs are amajor cost factor.

To make matters even more interesting from a planning perspective,employer pension costs may be volatile in either direction, up or down. Theactuarial methods used to determine rates generally aim for rate stability,but they have been unable to contain volatility in recent times due to aconfluence of factors. This chapter reviews some of the major strategiesused by employers to try to tame such rate fluctuations. Next we look athistorical practices and also actions and adjustments made in responseto recent pressures. New approaches may provide ideas for employerscurrently grappling with this issue.

Pension contributionsDB pension plans receive revenues from two principal sources: contribu-tions and investment income earned on those contributions. The contribu-tions come from employees, generally at a fixed rate, and employers, at arate reset annually. In some cases the employer may pick up the employ-ees’ share. The employer contribution rate reflects the Annual RequiredContribution (ARC) calculated by the system’s actuary. It includes the costallocated to the current fiscal year plus an amount to amortize unfunded


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actuarial accrued liabilities. In most years the majority of employers con-tribute 100 percent of the ARC but some employers may pay only 60 or70 percent (or 0%) of the ARC. A contribution of less than 100 percentof the ARC may reflect a weakness in the employer’s current financialposition, or specific funding policies or restrictions. In rare instances, apayment may be more than 100 percent of the ARC. Reasons for this ‘over-payment’ would include a catch-up for underpayments in prior years, forexample.

Not paying the full required amount in any one year or over a period oftime tends to add to contribution volatility, in that these shortfalls will mostlikely have to be made up with correspondingly higher payments at somefuture point. Barrett and Greene (2007) reported that only 50 percentof the state pension funds received the full ARC from their sponsors in2006. Pension funding statutes, procedures, and policies vary greatly fromstate to state and even between local systems within a state. For example,in California, the code mandates that the full pension contribution bepaid annually by certain counties, including Los Angeles, San Diego, andSacramento counties. If the county board of supervisors fails to make theappropriation to the retirement system, the county auditor is required totake any available monies from county funds and deposit them with theretirement system (California Government Code Section 31581).

The Recent Record of Contribution Volatility. The experience of USpublic pension funds over the past decade presents ample evidence ofemployer contribution rate volatility. Data for state and local governmentemployers shows pension contribution rates declining from a high of 10.5percent of payroll in fiscal 1997 to a low of 6.8 percent in fiscal 2002, beforerising again (see Figure 5-1 and Table 5-1). The compilation covers the 12fiscal years from 1995 to 2006 (NASRA 2008). For the five fiscal years endedin 2002, rates declined in each year by a mean of 8.3 percent. Even thoughthe average rate never fell below 6.8 percent of payroll, many fund sponsorsactually experienced contribution ‘holidays’ (no employer contribution)during this period. This declining rate trend reflected the strong improve-ment in funded ratios (the actuarial value of assets divided by the actuarialaccrued liabilities) during the 1990s. Driving this improvement were anincreased emphasis on equity investments by public funds and very stronginvestment returns for these public plan assets. Public funds increased theirallocation to domestic equities to 45 percent in 2000 from 39 percent in1992, and international equities to 16 percent from 4 percent during thesame period (PPCC 1993, 2001). The average annual increase for the S&P500 index of domestic equities for fiscal years 1995–2000 was an extremelyrobust 22.2 percent, more than double historical averages.

While the idea of a pension contribution holiday may sound attractive toan employer, especially if it is experiencing fiscal stress from other quarters,


5 / Public Pensions and State and Local Budgets 77

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1994 1996 1998 2000 2002 2004 2006 2008

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Figure 5-1 Employer contributions as percent of state and local government pay-roll. Source: NASRA (2008).

such a reprieve actually has at least one negative side effect. This dangeris that the sponsor falls out of the (good) habit of appropriating for andmaking pension contributions. When the contribution holiday is over andthe time to make contributions comes again, which is inevitable, it seems asif the current pension cost is now a new expense. This new cost will likelycause the sponsor’s budget to increase at a faster pace than the normalizedone and it tends to be difficult for revenues to keep pace in offsetting theincrease.

Employer contribution rates to public plans continued to decline in 2001and 2002, in spite of reversals in investment returns because it generally

Table 5-1 Employer contributions as a percent ofstate and local government payroll

Fiscal Year Percent of Payroll Percent Change

1997 10.5 −1998 9.3 −11.41999 8.8 −5.42000 8.0 −9.12001 7.3 −8.82002 6.8 −6.82003 7.8 +14.72004 10.1 +29.52005 9.4 −6.92006 9.7 +3.2

Source: NASRA (2008).


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takes at least a year or two for these changes to be reflected in the actuarialrates. This delay is due to slow reporting and the active methods in placeto moderate such swings. In fiscal 2000, the S&P 500 index rose 5 percent,and then it fell dramatically in fiscals 2001 (16%) and 2002 (19%). Suchperformance contributed to a rapid decline in public plan funding ratiosand, subsequently, to the concomitant increases in employer contributionrates. The mean employer rate increases for fiscals 2003 and 2004 werea sizable 14.7 percent and 29.5 percent, respectively (NASRA 2008). Formost governmental units such increases represented painful budget hits,underscoring the desire for rate stability.

It may be argued that recent contribution rate volatility is the unintendedside effect of the pursuit of higher return-higher risk asset allocation strate-gies that have evolved over the last two decades. When public pensionportfolios were more conservative and consisted largely of fixed incomeinstruments, rate volatility was not a major issue. The more recent, equity-oriented portfolios have increased asset and rate volatility, but they havealso added tens of billions of dollars of investment income which wouldnot have been earned under the more conservative strategies. Without thatincome, funding shortfalls would have required higher contributions, theother revenue source. On a net basis, public pension systems are ahead ofthe game financially but in exchange they have had to manage wider rateswings. It is unlikely that a switch to a significantly lower investment returnpolicy in return for reduced rate volatility would be widely popular. Theresultant loss of income and the negative effect such a change would haveon the calculation of plan liabilities and average contributions would be avery high price to pay.

Strategies to modulate rate volatilityLarge changes in public pension asset values from investment incomevariability and their effect on funded ratios must be held responsible fora large part of contribution rate swings over the last 10 years. Asset changesare much more volatile today compared to liability increases which have ahistory of more predictable growth. Asset peaks and valleys translated intoadvances and declines in funding ratios ahead of corresponding changesto contribution rates. Most US public funds use some kind of an actuarialsmoothing process whereby gains or losses are spread over various periods,generally three to five years, without which methods the recent rate changeexperience would have been even more volatile. However, existing controlsproved to be largely inadequate to the task of reining in contribution rateincreases, in most cases.



Asset Valuation. In response to significant changes in employer contribu-tion rates, the actuarial staff of the California Public Employees RetirementSystem (CalPERS), the largest US public pension fund with assets of almost$250 billion, instituted a study of this issue earlier in the decade (Seeling2008). The objectives of the asset smoothing study included finding thebest method which, at the same time, would: minimize the negative impacton the plans’ funded status, minimize volatility in employers’ contributions,and minimize average future employer contributions. Based on this study,the CalPERS board adopted a new set of policies to address the prob-lem which reduced employer rate volatility by at least 50 percent. Thesenew policies included the spreading of asset gains or losses over 15 yearscompared to the prior policy of three years. The system also changed thecorridor for the actuarial value of assets to a minimum of 80 percent ofmarket value and a maximum of 120 percent compared to the previouscorridor of 90 to 110 percent, respectively. Employers who have a fundedstatus of more than 100 percent would now have to make a minimumcontribution of the plan’s normal cost less a 30-year amortization, whereasunder the earlier policies there was no minimum contribution.

The effect that these recommended changes would have on theemployer rates for one class of CalPERS employees, school employees, canbe seen in Figure 5-2 (see CalPERS 2005). Actual employer rates (rounddata points) declined sharply after fiscal 1998 and were at 0 percent for fourstraight fiscal years—1999–2002—and then began a rapid rise. Normal cost(dotted line) increased in fiscal 2002 reflecting the effectiveness of benefitincreases. Giving effect to the recommended smoothing methods (triangu-lar data points)—assuming the recommended changes were implemented10 years earlier—would yield employer rate changes with the same generaltrends but not as sharp. Note that there would be at least some annualcontributions in each year under the proposed new methods.

The 2008 issue paper on smoothing policies by CalPERS’ Chief ActuaryRon Seeling provided an update on the topic. He stated that ‘. . . about 75percent of all public agency plans experienced an employer rate changeof less than 1 percent of pay between 2005–2006 and 2006–2007. Theremaining 25 percent of plans included those that improved benefits andhad a planned change in employer rate’ (Seeling 2008: 9).

Liability Increases and Employer Rates. While asset changes have beenthe major factor in contribution volatility of late, increasing liabilities can-not be overlooked as another significant component. In 2008, CalPERSstated that about 80 percent of the decline in its funded status earlier inthe decade was the result of the decline in asset values and 20 percentfrom benefit increases. Any increase in liabilities above assumed amounts(actuarial losses) would put upward pressure on rates. Benefit increases

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0%

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Figure 5-2 Estimated impact of recommended method as if implemented 10years ago. Note: Actual employer contribution rates versus estimated rates underrecommended rate stabilization method: schools. Source: GALPERS (2005).

have historically been a factor driving this disparity, but certain uncontrol-lable factors have also been pushing up liabilities in recent years. Thesefactors include plan experience which differs from the expected, includingdemographic changes such as members living longer. Demographic factorscan result in sizable additions to liabilities and may be ongoing (not justone-time). Furthermore, changes to actuarial assumptions can boost lia-bilities. Any decrease in the investment return assumption would increaseliabilities, for example, and recent trends have seen public funds loweringtheir investment return assumption more than raising it.

Employer contribution rates go up when pension benefits rise (all otherthings equal), adding to asset change-related rate pressures. Too often ben-efits have been enhanced without fully vetting the long-term consequencesof such a move. Part of the problem of benefit increases is that there isfrequently a time period disconnect between the current administrationgranting the increase, and the future administrations and taxpayers tobe charged with the fulfillment of these promises. This may be viewedas the shifting responsibility for benefit enhancements from one groupto another. Further, not having a long-term plan for identifying the newrevenue source to cover the increased costs in later years places this strategyin the same category as unfunded mandates: requiring funds to be used



for a specific purpose in the future but with no solid plan to pay for it.New sources for financing new pension benefits are rarely identified, inpractice.

Another problem is that pension benefit enhancements have often beenmade when other alternatives were not then economically feasible. Forexample, benefits may be increased when management believes its labor’scompensation is below where it should be but the budget cannot absorbsalary increases at that time. The thought (or hope) is that, by the time thathigher contribution rates are required, the government’s financial positionwill have improved to accommodate these increased costs. Misconceptionsrelated to pension funding levels have also led to benefit increases andadded to employer rate pressures. This situation can occur when a pensionsystem has a funded ratio of more than 100 percent and is perceived tobe ‘over-funded’ or to have ‘excess assets,’ two unfortunate terms. In thelate-1990s some public pension plans with funding ratios exceeding 100percent came under pressure to increase benefits based on the fallacy thatthe assets exceeding accrued liabilities were no longer required by thesystem and could be allocated to plan members. The investment lossesin 2001 and 2002 brought home the fact that the so-called excess fundswere actually needed to maintain sound funding levels. Increasing benefitsbased solely on a point-in-time overfunded position should be stronglydiscouraged.

Checks on Benefit/Liability Increases. Granting new benefits withoutfully vetting the ramifications is a potential problem that some govern-ments have sought to correct. For example, the state of Georgia has aconstitutional requirement which requires ‘actuarial soundness’ in pensionsystems, as follows: ‘It shall be the duty of the General Assembly to enact leg-islation to define funding standards which will assure the actuarial sound-ness of any retirement or pension system supported wholly or partially frompublic funds and to control legislative procedures so that no bill or resolu-tion creating or amending any such retirement or pension system shall bepassed by the General Assembly without concurrent provisions for fundingin accordance with the defined funding standards’ (Georgia State Consti-tution Article III Section X Paragraph V). Georgia state statutes require aminimum period of one year between the introduction of any retirementbill which would have a fiscal impact and its effectiveness. This provisionallows for a reasonable amount of time to examine the ramifications of aproposal, preventing changes from being rushed through a busy session.Further, an actuarial investigation must be performed to fully highlight theeconomics of each proposal. Too often benefits in other jurisdictions areenhanced without adequate study of the full, long-term effects on costs.Before a benefit change bill in Georgia can become effective, it must beconcurrently funded.


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Another method used to contain benefit (and rate) increases has beenadopted by San Francisco. This city requires that any proposed benefitchanges must be approved by voters. This feature carries the implicitunderstanding that voters, as taxpayers, hold the ultimate responsibility forpaying any increased pension costs in employer rates resulting from benefitimprovements. Therefore, at least some portion of the citizens on the hookfor paying increased contributions must agree to do so. San Francisco’shistorically strong funded ratio may, at least in part, be attributed to thisprotective mechanism.

Decreasing Volatility Through Rate Floors. As we have seen, strict imple-mentation of actuarial recommendations can still result in employer ratevolatility. For instance, many employers were pleased in the 1990s whentheir annual actuarial valuations reported that their Annual Required Con-tribution was in fact zero, due largely to the above average investmentreturn climate. In response, some systems have decided to override theactuarially determined rate when it produces a low or zero contributionresult, so as to ease potential contribution shock in the future (the expe-rience of fiscals 2003 and 2004). New York State offers an example. InMay 2003, Governor George E. Pataki signed into law a bill requiring thestate and local sponsors to make a minimum contribution of 4.5 percentof payroll into the state pension system. At the time of the law’s passage,the State Comptroller estimated that, had the bill been implemented in1998, an additional $4.8 billion in employer contributions would have beencollected which would have resulted in a reduction in fiscal 2004 rates by2 percentage points.

Automatic Stability: Fixed Rates. Strategies that mitigate rate volatilitymust include those that outright restrict rate changes. An illustration of thiswould be establishing a set contribution rate which may not be changedwithout legislative action. A by-product of such an approach, however, isthat if rates cannot be raised to offset actuarial losses, then funding statusmay suffer. For example, California State Teachers’ Retirement System(CalSTRS) Defined Benefit Program has statutory contribution rates formembers (6% of earnings) and employers (8.25%). In addition, the stateas a non-employer contributor makes a payment (3.3% in 2006), resultingin a total contribution rate of about 17.6 percent. A presentation to theCalSTRS board in 2006 found that the unfunded actuarial obligation forthe DB program as of 2005, was $20.3 billion and did not amortize over anytime period (CalSTRS 2006). To achieve full funding, the program wouldhave to attain the equivalent of an increase of 3.753 percent of salariesover 30 years. Earlier, in December 2005, CalSTRS’ staff had presentedthe board with 13 options to address the funding shortfall, including cer-tain changes to benefits, increases in contributions, the sale of pensionobligation bonds, and the extension of the amortization period for the

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unfunded obligation. Clearly, the fixing of the contribution rate does notassure funding stability.

ConclusionContribution rate volatility is a major concern for public sector DB plans.Rates have increased rapidly in recent years due to a number of factorsincluding significant investment losses, benefit increases, and demographicchanges, leaving managers with little time to adapt. As traditional smooth-ing techniques have not held rates in check, planners have explored,and some have adopted, new strategies to help ease rate swings. Theseinclude the extension of period over which asset gains and losses are spread(changed from 3 to 15 years in CalPERS’s case) and the implementationof minimum rates (4.5% of payroll in New York State). Others have con-trolled liability growth by keeping close checks on benefit changes (Georgiarequires an actuarial valuation to fully vet costs and San Francisco requiresvoter approval). No one strategy is a perfect fit for all plans, but financialofficers looking for rate volatility solutions can benefit from the experienceof those that have made changes in the past.

In spite of the efforts to reduce DB plan contribution rate volatility,some volatility will remain as long as US public pension fund asset allo-cation strategies continue to emphasize the higher-risk, equity asset classes,which include greater volatility by definition. It is unclear as to how farthe principal stakeholders in these systems, including members, employ-ers, taxpayers, and the pension funds themselves, will move down thescale toward a less risky investment profile in exchange for a more stablerate environment. The costs of reduced rate volatility under this scenarioinclude lower investment returns and higher average rates.

ReferencesBarrett, Katherine and Richard Greene (2007). Promises with a Price, Public Sector

Retirement Benefits. Pew Center on the States. Washington, DC: Pew CharitableTrusts.

Brainard, Keith (2008). Employer Contributions Compilation, 2008. Georgetown, TX:National Association of State Retirement Administrators.

California Government Code, § 31581.California Public Employees’ Retirement System (CalPERS) (2005). ‘CalPERS

Rate Stabilization Study.’ April. Sacramento, CA: California Public Employees’Retirement System.

California State Teachers’ Retirement System (CalSTRS) (2006). ‘Strategic Packagesfor Addressing Unfunded Actuarial Obligation,’ September 8. Sacramento, CA: Cali-fornia State Teachers’ Retirement System.

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Brandie Ishcomer/MGR/PHX

10/03/2011 04:21 PM

To

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Subject Fw: Disclaimer Language For Task Force Documents / Communications

From: "Hoffman, Susan K." Sent: 09/30/2011 06:35 AM AST To: "Stockard, Wesley E." ; Rick Naimark Subject: RE: Disclaimer Language For Task Force Documents / CommunicationsFrom today’s BNA Pension and Benefits Daily: DB Plan When Given Choice, Study FindsKey Topic: Report finds that new state employees, when given the choice, overwhelmingly choose defined benefit plans over defined contribution plans.Key Takeaway: States are finding that defined benefit plans are more popular with employees and more cost -efficient.State employees strongly prefer defined benefit pensions over tax code Section 401(k)-type defined contribution individual accounts when given a choice, according to a study of retirement plan choice in the public sector issued Sept. 29 by the National Institute on Retirement Security.The study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers , analyzed seven state retirement systems that offer a choice for new hires between defined benefit and defined contribution plans . It found that between 75 percent and 98 percent of the employees chose defined benefit plans.In addition, the report found that defined benefit pensions are more cost-efficient than defined contribution plans due to higher investment returns and longevity risk-pooling.One option for states offering defined benefit plans is to require employees to contribute toward the plans , the report said. In this way, states can take advantage of the efficiencies of defined benefit plans while contributing no more than they would toward defined contribution plans, it said.Contributions Toward DB PlansDuring a Sept. 29 webinar on the report, co-authors Mark Olleman, consulting actuary and principal at Milliman Inc., and Ilana Boivie, economist and director of programs at NIRS, said the reason private-sector employers have been moving away from DB plans for many years in favor of DC plans is that the tax code makes it nearly impossible for private employers to require employees to contribute toward their DB plans.In contrast, they said, state governments can ask for such contributions. Utah has done so by setting up, effective July 1, an optional hybrid DB/DC plan for new state employees that requires employer contributions of 10 percent of employees' salaries. (New employees also have the option of establishing a DC account.) If the target defined benefit in the hybrid plan cannot be achieved through the employer contribution—for example, because enrollees are living longer than assumed, they explained—the plan calls for an increase in the defined contribution to make up the shortfall .The point is that DB and hybrid plans offer a better retirement package and can be achieved by state employers using the same amount of funds as DC plans, they said. When states shift from DB pensions to DC accounts, they added, such a shift often does not close funding shortfalls and can increase retirement costs because the same dollar amount spent on a DC plan does not produce a benefit equal to that available through a DB plan.In addition, they said, DC accounts lack supplemental benefits such as death and disability protection . Although these can be provided, they require extra contributions outside the DC plan.Seven Systems in Six StatesThe study looked at seven retirement plans offered in six states, including Colorado, Florida, Montana, North Dakota, Ohio, and South Carolina. Data for some of the plans spanned the period from January 2010 through December 2010, while the other plans were studied between July 2010 and June 2011, the report said.New hire elections for the plans were as follows: • Colorado Public Employees' Retirement Association—88 percent chose DB plan enrollments, compared with 12 percent who chose DC plan enrollments;• Florida Retirement System—75 percent DB, 25 percent DC;

• Montana Public Employee Retirement Administration—97 percent DB, 3 percent DC;• North Dakota Public Employees Retirement System—98 percent DB, 2 percent DC;• Ohio Public Employees Retirement System—95 percent DB, 4 percent DC, 1 percent combined plan;• State Teachers Retirement System of Ohio—89 percent DB, 9 percent DC, 2 percent combined plan; and• South Carolina Retirement Systems—82 percent DB, 18 percent DC.Olleman said during the webinar that beyond the six states where new hires ' preferences were studied, the experiences of Nebraska and West Virginia offer additional insight.Both states chose to put new hires in a DC plan, and then later changed to a DB plan, he said, noting that Nebraska offered some employees hired between 1964 and 2003 only a DC plan, but also maintained a DB plan for other employees.“Over 20 years, the average investment return in the DB plan was 11 percent, and the average return in the DC plans was between 6 and 7 percent,” he said.West Virginia similarly closed their teachers' DB plan to new hires in 1991 in response to funding problems and put all new hires into a DC plan. This did not solve the funding problem, and many teachers found it difficult to retire when relying only on the DC plan, he said.In a study performed by West Virginia, he said, the state found that a given level of benefits could be funded for a lower cost through a DB plan. As a result, it put all teachers hired after July 1, 2005, into the DB plan as a cost-saving measure.“So both Nebraska and West Virginia found a DC plan did not achieve their goals and changed from DC to DB,” Olleman said.Boivie added that public employees in the study showed a clear preference for DB plans over DC accounts . These findings are not surprising and are consistent with earlier polling from NIRS that found that 83 percent of Americans believe those with pensions are more likely to have a secure retirement, she said.DB plans also offer a benefit to the national economy, Boivie added. Studies have shown that during economic downturns, retirees in DB plans do not curtail their spending to the same extent as those with DC accounts , she said.Other studies show that retirees in DB plans are less likely to face difficulties in securing necessities such as food and shelter , Boivie noted.By Louis C. LaBrecqueThe study is available at http://subscript.bna.com/UTILS/lk.nsf/r/llbe8m6t78?opendocument .

City of Phoenix Ahwatukee Foothills Public Information Office September 28, 2011 News Clippings

Candidates square off over pension reform

Photos by Allison Hurtado and Darryl Webb/AFN

Stanton, Gullett celebrate election reults

The first battle to be Phoenix’s next mayor is over, and Wes Gullett and former City Councilman Greg Stanton are headed for a runoff. (Left) At a celebration in downtown Phoenix Tuesday night, Stanton told supporters this was only the beginning. (Right) Gullett held his own celebration in Phoenix at Alexis Grill.

Posted: Wednesday, September 28, 2011 11:00 am

Candidates square off over pension reform By Allison Hurtado, Ahwatukee Foothills News Ahwatukee Foothills News |

0 comments

The two candidates for Phoenix mayor can agree when it comes to pension reform: There's a

need to increase employee contributions, eliminate "double dipping," eliminate "pension

spiking" and raise the retirement age. But from there, the two plans bring up complex

questions of possible savings now, or sustainability in the future.

Greg Stanton is hoping to make elected officials' benefits more equal with other city

employees - something that can only be changed at the state level. Recently, the state made

a small shift to reform pensions, but Stanton says he wants to see more and he'd like to work

with the state, as mayor, to do more.

"In the last legislative session they reformed the elected officials plan and I think we need to

make additional reforms," Stanton said. "The elected officials should not have a plan that is

so significantly different from regular employees.

"By way of example, I served nine years in the council. I could actually be collecting a

pension right now for the rest of my life. I chose not to do that. That's a system that needs to

be reformed when someone in his 30s could retire and double dip. I chose not to double dip."

Wes Gullett's idea is more drastic and calls for wholistic reform to the city's government,

including pension reform. Gullett wants to reform pensions by moving away from the current

defined benefit plan and beginning a transition toward a defined contribution plan, similar to a

401k. He'd also like to get rid of the city's 401a option for managers. Gullett believes that

when combined with other changes to city government, his plan can save the taxpayers

money now and have greater savings in the future.

A Pension Reform Task Force at the city has been studying different models of pension

reform since February and is expected to make its recommendations by Dec. 31.

Rick Naimark, deputy city manager, said when the task force looked into switching to a 401k

they saw a large cost to the city up front.

"The model they did showed that it saved money in year 2033. But in the short term, if you

don't make any other changes, contribution to the pension system would have to go up in that

intermediary period in order to cover the unfunded liability that is projected," Naimark said. "In

the long run it does save money, but not right away."

Stanton said it's the right away he's worried about it. He says the wait for savings is the

reason the Legislature didn't move toward 401k plans when they made changes.

"My plan reforms the system in a way that reduces costs," Stanton said. "It's not inaccurate to

say that his plan, in the short term, increases costs. It would eventually decrease costs, but

not for a very long period of time. The problem is, we're in a crisis now. The community

demands that we reduce costs, not 22 years from now, but we reduce costs now."

Whether a defined contribution plan would increase costs, however, is still being argued.

A study done by the National Institute of Retirement Security found that, in the long run, a

defined benefit plan was 46 percent more cost effective for taxpayers than a defined

contribution plan. That study, and an internal study done by the state Legislature, is the

reason Texas decided not to transfer to a defined contribution plan.

"During the last session of the Legislature in Texas, which concluded in May, HB 2506 failed

to pass and, in fact, it was never even voted out of committee because it couldn't garner any

substantial support," said William Rogers, a member of the Texas State Employees Union.

"The main reason it couldn't gather any support was that the legislative budget board did a

fiscal note on the fiscal impact of that bill. It said it would cost $3.1 billion to implement for just

the first two years of implementation. We think that no doubt the cost would continue to

escalate after that."

The fiscal note did not go past two years, nor did it make any attempt to account for the long

term.

Byron Schlomach, Ph.D., chief economist for the Goldwater Institute, has studied government

pension reforms for years. He said he believes that it would be very difficult to do the math on

when the city might see some savings and he's not sure Phoenix's task force's math is

justified.

"When people say it's going to cost a lot of extra money, they are correct and they aren't

correct," Schlomach said. "Nobody knows how much extra money it might cost into the future

because we don't know what the returns on the current investments might do, for example.

When somebody says it'll be 20-odd years before we start to see benefit from this change,

they're making a lot of assumptions. I don't know that those assumptions are accurate."

Schlomach says he favors the idea of switching to a 401k because the future savings

outweigh any initial cost there might be. Schlomach says the only way he can see to sustain

the current system is to raise taxes.

"If anyone was suggesting that you convert the pension system immediately to 401ks and just

pay people the value of their future pensions and put it in the bank, that ought to tell you

something," Schlomach said. "If you have to put a ton of money into the current pension

system in order to do that, it's way under-funded. That tells you how much it's going to

continue to cost well into the future if we don't do something now. You can't have it both

ways. Either it's extremely costly to get out from under and that means it's extremely costly to

keep it; or it's relatively inexpensive to get out from under and it's not expensive to keep it.

They want to argue it's not expensive to keep it, but it's really costly to get out from under it.

The truth may be somewhere in between but in the long term I don't see that we have a

choice."

Gullett is not requesting that the city switch over all at once. He says it is impossible right now

to determine how they might transition to a defined contribution plan, or how long the

transition might take, but that is the direction he wants to go.

"There is some potential savings," Gullett said. "We can say how much we're going to spend

on the transition. If there's no way we can do it for that amount of money, then we have to

decide how can we use that money so that in 2013 we can start to move to defined

contribution."

According to Naimark, the city is also looking at the employee benefits package. That study

will be combined with recommendations from the Pension Reform Taskforce before the city

goes into labor negotiations at the beginning of the year. Naimark added that many

provisions in the retirement system are included on the city's charter so any changes made

would most likely end up on a ballot at some point.

• Contact writer: (480) 898-7914 or [email protected]

City of Phoenix Arizona Republic Public Information Office September 24, 2011 News Clippings

Hell to pay? Hopefuls unveil pension plans by Laurie Roberts, columnist - Sept. 24, 2011 12:00 AM The Arizona Republic

Ten months ago, The Republic's Craig Harris wrote a front-page story exposing the city of Phoenix pension program. Specifically, the fact that the taxpayers' cost to cover city pensions has nudged up just a bit.

Like, say, 277 percent over the last decade.

City employees contribute far less to their pensions than state employees and far, far less than taxpayers. Yet they retire sooner and collect, on average, $10,000 more than those enrolled in the Arizona State Retirement System.

Naturally, in light of Harris' revelations, the city took bold and decisive action.

It appointed a blue-ribbon task force.

"It's something we have to address," Mayor Phil Gordon said at the time.

Ten months later, we are still waiting.

Fortunately, there's a mayoral election coming up, so the wait will soon be over. Greg Stanton and Wes Gullett this week unveiled plans for pension reform.

Both are calling for employees to pay more and work longer, changes that would have to be approved by voters. Gullett, though, is going further, calling for fundamental reform - no doubt a bid to get "tea party" voters to come out in November. (Because I have a feeling he won't be getting the city-employee vote.)

Both candidates are proposing increases in employee pension contributions, which now stand at 5 percent of an employee's salary while taxpayers kick in 18 percent. Both want to raise the retirement age, which averages 58.9.

Both want to eliminate double-dipping and pension spiking, a sweet little maneuver that allows employees to lump bonuses, pay for decades of unused sick and vacation leave (calculated at their current rate of pay, of course), travel allowances and even deferred compensation into their "salary" - the one that's used to determine the size of their pensions.

Gullett's plan goes further. For the first time, he's calling for an end to the city's 58-year-old pension plan, transitioning new employees to a 401(k)-style program - a move that would require voter approval.

He also wants to scrap the city's $26.5 million deferred-compensation program. Essentially, it's a second retirement plan for firefighters and city managers and supervisors, one that requires the city to kick another 5 percent to 9.6 percent into a 401(a) account.

"The account has been collectively bargained over time and has been in lieu of wage increases," city spokeswoman Toni Maccarone told me.

Expect a dogfight over that one should Gullett get elected, though not from police or rank-and-file employees, who somehow got left off this gravy train.

Stanton opposes elimination of deferred compensation. He would instead reduce the city's contribution and require employees to match it.

He also opposes moving away from pensions, saying it's "nothing less than shocking" that Gullett is proposing a plan that adds to the public's burden.

"Does it ultimately save the city money 20 years from now? Yes," he said. "But for a long period of time, it will actually cost the taxpayers more money."

He's right about that. Because the city's pension system is substantially underfunded, contributions from future employees are needed to pay the obligations to those already in the system. Without them, taxpayers would have to make up the difference until the current crop of employees is gone.

What that would cost, we don't yet know.

Gullett acknowledges that it would be expensive to make the changeover all at once. He envisions a phase-in over time, using savings that would come from boosting pension contribution rates and abolishing both deferred compensation and the city's present system of giving across-the-board pay raises that reward attendance rather than performance.

"What we need to do is say we're going to do this and start figuring a way to do it and figure out how much it's going to cost, instead of saying, 'Oh, it's going to cost so much money so we can never do it,' so we bury our heads in the sand and the next thing you know we have a 277 percent increase in expenses," Gullett said.

Speaking of heads in sand, Gordon in January appointed the Pension Reform Task Force, two months after Harris disclosed the 277 percent boost in the taxpayers' tab. Strange that the city hadn't noticed it before Harris brought it up, but I digress.

Gordon's task force will make its recommendations in December. I, for one, can't wait to see them.

Reach Roberts at laurie.roberts@arizonarepublic .com or 602-444-8635.

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City of Phoenix AZ Republic

Public Information Office Communities News Clippings

Phoenix mayoral election 2011: Pension reform by Lynh Bui - Sept. 28, 2011 11:26 AM The Arizona Republic

Pension reform has become a hot-button issue across the country and now it has become a debate in the Phoenix mayoral election.

A recent study by The Arizona Republic shows that in the past 10 years, the cost to fund pensions in Phoenix increased 277 percent, to $88.1 million a year. Both candidates Wes Gullett and Greg Stanton have released pension-reform plans. While they agree in some areas they say need reform, they differ on how the reforms should occur.

The runoff election is Nov. 8.

WES GULLETT

How are the plans similar?

End "double dipping" - the practice of returning to work immediately after retiring to earn a salary and draw pension payments.

End "pension spiking" - using benefits such as vacation time and sick leave to increase compensation in the final years before retirement to receive larger pensions.

Raise the retirement age two years.

Require employees to contribute more to their own retirement.

How are the plans different?

Gullett has called for the city to transition off the pension system completely, shifting city employees to a 401(k)-style retirement system similar to many private employers. This would require asking voters to change the city charter.

Gullett's plan also calls for elimination of the city's deferred-compensation plan - which costs the city about $30 million to $40 million annually. The plan is an additional retirement savings plan beyond the city pension that is voluntary. For certain employees, the city contributes a certain percentage of each employee's salary to the deferred-compensation plan as an alternative to salary increases, Deputy City Manager Rick Naimark said. It is possible to get rid of the system, but it would have to be negotiated with employee unions. It is something the city currently is reviewing.

The criticism

September 28, 2011 Phoenix

A city study shows Gullett's plan to move to a 401(k)-style retirement system could take more than 20 years for Phoenix to realize savings and be more expensive in the short term. That's because the city would have to pay more to make up for the unfunded liability in the system left from the new employees who aren't contributing to the existing pension plan as it is being phased out. The city wouldn't start saving money until at least 2033, according to the model created for the city's Pension Reform Task Force.

"The biggest difference between our two plans, mine will save taxpayers money, his will cost them money," Stanton said. Stanton also said for months that Gullett has used savings from pension reform as part of the solution for eliminating the food tax.

But Stanton said, "Wes Gullett should stop misleading voters by telling them that these savings can be used in the near future to cover his campaign promises." Stanton now has accused Gullett of changing positions on where food-tax revenue would be replaced since pension reform won't cover all if it.

At a debate on Sept. 20, Gullett said there is $115 million sitting in the city budget that can be used to replace the food tax when for months he's been saying government reforms he proposes, including pension reform, could make up for lost food-tax revenue.

The response

Gullett acknowledges that some parts of his pension-reform plan wouldn't yield immediate savings. But there would be substantial savings in the long run, as confirmed by Naimark, the deputy city manager. But Gullett said it's important to lay out the ground work and transition the city to "build our house on a rock of fiscal sanity."

He said the reforms will not be easy and there will be legal challenges involved, but "someone has to put down a marker and say this is what we're going to do," Gullett said. Scarpinato also said that there will be savings if the city does eliminate the deferred compensation plan.

GREG STANTON

How are the plans similar?

End "double dipping."

End "pension spiking."

Employees will have to work longer before retiring.

Require employees to contribute more to their own retirement.

How are the plans different?

Stanton calls for reforming the pension plan for elected officials. Gullett does not. But the Elected Officials' Retirement Plan is run by the state. Stanton's campaign said it would be willing to advocate that the state Legislature reform the elected officials' pension system because it allows individuals to retire in their 30s.

The criticism

Stanton needs to do his research, said Gullett spokesman Daniel Scarpinato. The Legislature approved several pension-reform measures in the last session that address some issues that Stanton says are problems with the Elected Officials' Retirement Plan. Scarpinato said Stanton's plan avoids "true pension reform."

"Greg Stanton wants to kick the can down the road and resist real pension reform," Scarpinato said. "Wes Gullett knows we need to have the courage to make real reform now if we are ever going to see long-term savings."

Gullett's campaign cites a study from the Goldwater Institute that says new government employees should be placed in 401(k)-style systems to capture long-term savings in retirement plans for cities and towns. Gullett's campaign also criticizes Stanton because he is part of the Elected Officials' Retirement Plan from his nine years serving on the Phoenix City Council. If Stanton were to become mayor, he could be part of that system again and be eligible for increased benefits because Stanton would be making more as mayor.

"He's a beneficiary of the system that he's criticizing," Scarpinato said. Jim Hacking, a spokesman for the Elected Officials' Retirement Plan, said Stanton is required to remain in the system and cannot opt out unless he is in a position where he is term-limited.

The response

Stanton said national pension- and retirement-system experts don't agree whether there are long-term costs with eliminating pension plans in favor of defined contribution plans. He cites a study from the Texas Association of Employee Retirement Systems that says pension plans cost 40 percent less than 401(k)-style plans.

"At some point he'll take it because he earned it," Stanton spokesman Robbie Sherwood said of Stanton's pension. "They're desperately trying to change the subject because their plan will cost more money after months of crowing that it will save the city money."

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City of Phoenix Arizona Republic Public Information Office September 27, 2011 News Clippings

Wes Gullett, Greg Stanton differ on pensions by Lynh Bui - Sept. 27, 2011 12:00 AM The Arizona Republic

Phoenix is in the middle of overhauling its employee pension system, with a task force of residents and members of the business community working on recommendations for reform.

Mayoral candidates Wes Gullett and Greg Stanton also have their own ideas about how to keep the pension system from burdening Phoenix's budget.

Pension reform has become a controversial topic locally and throughout the country. In Phoenix, pension problems were highlighted when critics of then-Public Safety Manager Jack Harris said he shouldn't have been "double-dipping" or drawing a pension after retiring as police chief while getting a salary for returning to work in Phoenix as the public-safety manager.

Phoenix Mayor Phil Gordon created the city's pension-reform task force after a recent study by The Arizona Republic showed that in the past 10 years, the cost to fund pensions in Phoenix increased 277 percent, to $88.1 million a year.

Today, The Republic reviews each candidate's pension-reform proposals to highlight where they agree and disagree.

Details, B3

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