1. PSPRS Task Force Update and Recommendations Presider: Michael LeVault, Mayor, Youngtown Speakers: Greg Caton, Manager, Oro Valley, Task Force Member Scott McCarty, Finance Director, Queen Creek, Task Force Chair League Annual Conference August 19, 2015

2. 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 2

3. 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 3

4. 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 4

5. PSPRS Overview  256 Employer (Individual) Plans  ~32,000 Actives / Retirees  Same Employee Benefit Structure  Financial Condition Varies by Plan  $6.2B Total Underfunded at 6/30/14  ER Contribution Rate Varies By Plan  EE Contribution Rates are Fixed at 11.65% 5

6. Employees & Retirees at 6/30/14 6 22,000+ (69%) are in City and Town Plans

7. $6.2B. Total Unfunded Liability at 6/30/14 7 $4.5B. (72%) Relates to Cities and Towns 74 Plans 46 Plans

8. Task Force’s Approach: 3 Phases 8 Information and Education Employer Recommended Practices The Yardstick

9. 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 9

10. 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 10

11. 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 11

12. Phase #1: Information and Education (concluded) KEY TAKEAWAYS 1.Reform is Needed – Current Structure is Unsustainable 2.There is NO Silver Bullet 3.Unfunded Pension Liability is Debt 4.Employers Must Actively Manage Their Pension Plans 12

13. 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 13

14. 1.“Know Your Numbers” 2.Prepay Your Budgeted Contribution on July 1 st Examples of Employer Recommended Practices 14

15. #1: “Know Your Numbers” 15 Town of Marana Police Department ER Contribution Amount$1.2M ER Contribution per Employee$17K ER Contribution Rate24.8% ER Contribution Amount as a % of Operating Revenues3.5% Unfunded Liability (Debt) at 6/30/14$9.1M Percent Funded at 6/30/1461%

16. Town of Marana Police DepartmentRateAmount Normal Cost11.95%$599,521 Amortization of Unfunded Liabilities*12.85%$644,673 Total Contribution24.80%$1,244,194 #1: “Know Your Numbers” (continued) 16 * Represents 52% of Annual Amount.

17.  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 17

18. Phase #3: The Yardstick 18

19. 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 19

20. The Yardstick: Guiding Principles 1.Adequate and Affordable 2.Financially Solvent 3.Transparent and Accountable 20

21. 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 21

22. The Yardstick: Its Components 1.Defined Benefit Plan 2.Free From Legal Challenge 3.New Statewide Tier 4.Plan Elements of the New Statewide Tier 5.Governance Structure 22

23. 1. Defined Benefit Plan 23 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

24. 2. Free From Legal Challenge 24 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

25. 3. New Statewide Tier 25 For New Employees Hired After July 1, 2016  Avoids Possible Legal Challenges  Existing Tiers Remain until All Members Pass Away  Previously Done by ASRS

26. 4. Plan Elements of the New Tier 26 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

27. 4. Plan Elements of the New Tier (continued) 27 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%

28. 4. Plan Elements of the New Tier (continued) 28 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

29. 4. Plan Elements of the New Tier (continued) 29 Pension Increases: To Maintain Purchasing Power  A Retiree’s Pension Should Neither Gain or Loose Relative Value  Current Structure Functions as a Dividend

30. 4. Plan Elements of the New Tier (concluded) 30 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

31. 5. Governance Structure 31 Board of Trustees: Independent, Qualified Professionals with Fiduciary Responsibility of Ensuring Compliance with Plan Elements  One Financial Statement  One Actuarial Report  One Funded Status

32. 5. Governance Structure (concluded) 32 Administration: Consolidated and One Independent Disability Committee of Qualified Experts  Reduces Costs  Centralized Decision Making

33. The Yardstick: Its Effects Two Perspectives  Employees and Retirees  Taxpayers and Employers 33

34. 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 34

35. Its Effects: Taxpayers and Employers  Less Expensive  Improves Governance 35

36. 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 36

37. 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 37

38. Less Expensive (concluded) 3.Creates Affordable Retiree Pension Increases  CPI Built into Annual Contribution  Eliminates “Dividend” 38

39. 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 39

40. 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 40

41. Legislative Pension Group  Led by Senator Lesko  2016 Legislation Anticipated  Reason Foundation Participating in this Process 41

42. Feedback and Questions 42