PSPRS Task Force Update and Recommendations
Presider: Michael LeVault, Mayor, YoungtownSpeakers: Greg Caton, Manager, Oro Valley, Task Force Member Scott McCarty, Finance Director, Queen Creek, Task Force
Chair
League Annual ConferenceAugust 19, 2015
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Introduction Reform WILL NOT Reduce Your Unfunded
Liability Actively Manage Your PSPRS Plan – Some
Decisions are made at the Local Level Consider Your Unfunded Liability as Debt Implement Employer Recommended
Practices Now is the Time to Act
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League’s Task Force
Formed in June, 2014 by the Executive Committee in Partnership with ACMA and GFOAz
All Related Information on League’s Website
15 Members
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• Scott Barber, HR Director, Town of Florence • Greg Caton, Town Manager, Town of Oro Valley• Karen Daines, Assistant City Manager, City of Sedona• Barbara Fleming, HR Director, City of Sierra Vista• Barbara Goodrich, Management Services Director, City of Flagstaff • Michael Kennington, Chief Financial Officer, City of Mesa • Alan Maguire, President and Principal Economist, The Maguire Company• Scott McCarty, Town of Queen Creek (Chairman)• James Menlove, Finance Director, Navajo County • Rick Naimark, Deputy City Manager, City of Phoenix (Retired)• Robert Nilles, Finance Director, City of El Mirage • Kathy Reyes, Benefits Administrator, City of Avondale• Marc Skocypec, Assistant Town Manager, Town of Gilbert• Mike Townsend, Assistant County Manager, Coconino County (Vice-Chairman)• Marge Zylla, Government Relations, City of Tempe
Task Force Members
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PSPRS Overview256 Employer (Individual) Plans ~32,000 Actives / Retirees
Same Employee Benefit StructureFinancial Condition Varies by Plan $6.2B Total Underfunded at 6/30/14
ER Contribution Rate Varies By PlanEE Contribution Rates are Fixed at 11.65%
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Employees & Retirees at 6/30/14
City/Town Po-lice Departments 14553
45%
City/Town Fire
Department
s766424%
All Other Members995531%
22,000+ (69%) are in City and Town Plans
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$6.2B. Total Unfunded Liability at 6/30/14
City/Town Po-lice Departments 3
48%
City/Town Fire
Department
s1.524%
All Other Members1.727%
$4.5B. (72%) Relates to Cities and Towns
74 Plans
46 Plans
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Task Force’s Approach: 3 Phases
Information and Education
Employer Recommended
PracticesThe Yardstick
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Phase #1: Information and Education
14 Presentations From Stakeholders and Subject Matter Experts Including:
Labor Associations PSPRS PSPRS Actuaries ASRS National Conference of Public Employee
Retirement Systems National Conference of State Legislators
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Phase #1: Information and Education (continued)
How Did We Get Here? Low Investment Returns Benefit Increases Pension Benefit Increase (PBI) Governance Issues
Experience Did Not Match Assumptions
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Phase #1: Information and Education (continued)
Pension Benefit Increase (PBI) ½ of the Annual Investment Returns
in Excess of 9% go to a Separate Pot Retiree Pension Increase = Pot
Amount divided by Number of Retirees
Retirees Receive the SAME AMOUNT FY 2014-15 PBI = $165 per Month
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Phase #1: Information and Education (concluded)
KEY TAKEAWAYS
1. Reform is Needed – Current Structure is Unsustainable
2. There is NO Silver Bullet3. Unfunded Pension Liability is Debt4. Employers Must Actively Manage
Their Pension Plans
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Phase #2: Employer Recommended Practices
Opportunities Exist to Improve Funded Status – Without Reform
Held Five Statewide Meetings to Communicate and Engage Employers
Proving to be Extremely Beneficial
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1. “Know Your Numbers”2. Prepay Your Budgeted
Contribution on July 1st
Examples of Employer Recommended Practices
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#1: “Know Your Numbers”
Town of Marana Police Department
ER Contribution Amount $1.2M
ER Contribution per Employee $17K
ER Contribution Rate 24.8%
ER Contribution Amount as a % of Operating Revenues 3.5%
Unfunded Liability (Debt) at 6/30/14 $9.1M
Percent Funded at 6/30/14 61%
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Town of Marana Police Department Rate Amount
Normal Cost 11.95% $599,521
Amortization of Unfunded Liabilities* 12.85% $644,673
Total Contribution 24.80% $1,244,194
#1: “Know Your Numbers” (continued)
* Represents 52% of Annual Amount.
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27 Entities Prepaid $135 M. 20% of Aggregate Annual Employer
Contributions Additional Interest Income Annually
$3.5M (Estimate)
#2: Prepay Your Budget Contribution on July 1st
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Phase #3: The Yardstick
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Key Questions
1. What should the Employee, Retiree, Employer, and Taxpayer get out of the System?
2. How is this Accomplished?– Type of Plan, Cost Sharing Allocation,
Annual Pension Increase Calculation
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The Yardstick: Guiding Principles
1. Adequate and Affordable2. Financially Solvent3. Transparent and Accountable
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The Yardstick: Its Purpose
Identifies the Goals, Characteristics, and Elements of a Viable and Sustainable Public Pension Safety System for the State of Arizona
A Tool to Evaluate the Current System and Reform Proposals
Communicates Our Position - Aids in Public Policy Discussion
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The Yardstick: Its Components
1. Defined Benefit Plan2. Free From Legal Challenge3. New Statewide Tier4. Plan Elements of the New Statewide Tier5. Governance Structure
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1. Defined Benefit Plan
The Pension Benefit is Predetermined by a Formula Based on Employee
Compensation, Age, and Tenure of Service
DB is Better Suited for Public Safety due to the Nature of the Job and Length of Retirement
Other Structures Studied
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2. Free From Legal Challenge
All Current Employees and All Current Retirees Remain in the Existing Tiers
Avoids Diminishing or Impairing Benefits Changes to Current Employees or Retirees
are Expected to be Litigated and Disallowed
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3. New Statewide Tier
For New Employees Hired After July 1, 2016
Avoids Possible Legal Challenges Existing Tiers Remain until All Members Pass
Away Previously Done by ASRS
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4. Plan Elements of the New Tier
Pooled Assets and Liabilities: Spreads Risk Across the Broadest Base
Extreme Financial Exposure Exists Under the Current System
Prescott: $70M / $165M Unfunded Liability Mirrors Services which are Performed Across
Jurisdictional Boundaries
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4. Plan Elements of the New Tier(continued)
Fully Funded: Assets at Least Equal Liabilities (at least
100%) over an Economic Cycle
Taxpayer and Member Equity is Achieved Only at 100%
Costs are Transferred to Future Taxpayers and Members if Funding is Less than 100%
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4. Plan Elements of the New Tier(continued)
Equal Cost Sharing: Equal Employer and Employee
Contributions Rates
One, Equal ER and EE Rate Both Sides Experience the Same Financial Impacts of
Decisions (Benefit Increases, Assumptions, Investment Risk)
Benefit Increases Must be Paid with Equal Contribution Increases
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4. Plan Elements of the New Tier(continued)
Pension Increases: To Maintain Purchasing Power
A Retiree’s Pension Should Neither Gain or Loose Relative Value
Current Structure Functions as a Dividend
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4. Plan Elements of the New Tier(concluded)
In-Lieu of Social Security Program: Mandatory Participation in an Employer-Matched Defined Contribution Plan for those Members not in Social Security
Issue Raised by Labor Associations Creates“Third Leg” of Retirement Stool Pension System would have Same Relative Value
to All Members
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5. Governance Structure
Board of Trustees:Independent, Qualified Professionals with
Fiduciary Responsibility of Ensuring Compliance with Plan Elements
One Financial Statement One Actuarial Report One Funded Status
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5. Governance Structure (concluded)
Administration:Consolidated and One Independent
Disability Committee of Qualified Experts
Reduces Costs Centralized Decision Making
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The Yardstick: Its Effects
Two Perspectives Employees and Retirees Taxpayers and Employers
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Its Effects: Employees and Retirees
No Benefit Changes to Existing Employees or Retirees
Creates “Third Leg” of Retirement Stool for Some
Achieves Fiscal Sustainability Attracts Quality Employees
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Its Effects: Taxpayers and Employers
Less Expensive Improves Governance
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How is it Less Expensive?
1. Limits Unfunded Liability of New Tier
Example: City of Phoenix PD (Current System)
Annual Salary = $100K 50% ER Contribution Rate = $50K
Normal Cost = $13K Unfunded Liability = $37K
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How is it Less Expensive? (continued)
2. Creates Resources which can be Redirected to Reduce Interest Costs of the Current Tiers
Savings from New Employees in New Tier Can Be Redirected to Pay Down the Current Tiers’ Unfunded Liability
$37K from Previous Slide
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Less Expensive (concluded)
3. Creates Affordable Retiree Pension Increases
CPI Built into Annual Contribution Eliminates “Dividend”
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Improves Governance
1. Simplifies Reporting One Set of Financial Information (not 256) Easier to Measure and Evaluate
Performance
2. Avoids Passing Costs on to Future Taxpayers
100% Funding Policy Requires Corrective Action in a Timely Manner
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CONCLUSIONS Reform is Needed - Current Structure is
Unsustainable An Unfunded Pension Liability is Debt Actively Manage Your Pension Plan The Yardstick is a Tool – Not a Proposal
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Legislative Pension Group
Led by Senator Lesko 2016 Legislation Anticipated Reason Foundation Participating in
this Process
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Feedbackand
Questions
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