1. The Yardstick: Public Safety Pension Reform Recommendations Recommendations of the League of Cities and Towns’ PSPRS Task Force Scott McCarty, Chair scott.mccarty@queencreek.org GFOAz Summer Conference August 5, 2015

2. Additional Materials Included 1.August 3, 2015 Letter to League’s Executive Committee includes: – The Yardstick and Its Effects – Use of the Yardstick Current System Evaluation Fire Proposal Evaluation 2

3. Included Materials (concluded) 2.Task Force’s Employer Recommended Practices 3.Town of Queen Creek’s Pension Funding Policy 3

4. Purpose of Presentation 1.Discuss the Task Force 2.Identify Key Observations 3.Discuss the Yardstick 4.Discuss the Yardstick’s Effects 5.Outline the Upcoming Calendar 6.Get Feedback 4

5. League’s Task Force 5

6.  Formed in June, 2014  Partnership with ACMA and GFOAz  15 Members  Review all aspects of PSPRS, identify areas of improvement, and reform recommendations 6

7. Task Force Information Presentations and Materials located at: www.azleague.org CLICK: ‘Legislative Issues’ Box CLICK: ‘Pension Task Force’ Line 7

8. PSPRS Overview  256 Employer (Individual) Plans  ~32,000 Actives / Retirees  Same Benefits for All Plans  Financial Condition Varies by Plan  $6.2B Total Underfunded  ER Contribution Rate Varies By Plan  EE Contribution Rates are Fixed at 11.65% 8

9. $6.2B. Total Unfunded Liability at 6/30/14 9 $4.5B. (72%) Relates to Cities and Towns

10. Employees & Retirees at 6/30/14 10 22,000+ (69%) are in City and Town Plans

11. 3 Key Observations 11

12. #1 There Is No Silver Bullet 12 Court Decisions Have Protected Employee and Retiree Benefits

13. Or... Shown Another Way 13

14. #1 There Is No Silver Bullet 14

15. #2 Your Unfunded PSPRS Pension Liability is Debt 15

16. #3 Actively Manage Your Plan 16 “Know Your Numbers” Implement Recommended Practices

17. “Know Your Numbers” 17 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%

18. Town of Marana Police DepartmentRateAmount Normal Cost11.95%$599,521 Amortization of Unfunded Liabilities*12.85%$644,673 Total Contribution24.80%$1,244,194 “Know Your Numbers” 18 * Represents 52% of Annual Amount.

19. 1.Prepay Your Budgeted Contribution 2.Budget Contributions for DROP Members 3.Do Not Defer the Fields Case 4.Review Local Board Practices 5.Prepare a Comprehensive Study 6.Payoff Unfunded Liability (Debt) Earlier 7.Create a Pension Funding Policy Employer Recommended Practices to Best Manage Your PSPRS Plan 19

20. The Yardstick 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  Tool to Evaluate the Current System and Reform Proposals  Aids in Public Policy Discussion 21

22. The Yardstick: Its Components 1.Defined Benefit Plan 2.Free From Legal Challenge 3.New Statewide System 4.Plan Elements of the New Statewide System 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 a More Effective Structure for Public Safety because:  Pools Assets, Addresses Ratio of Years of Service to Length of Retirement  Defined Contribution Structure Studied

24. 2. Free From Legal Challenge 24 All Current Employees and All Current Retirees Remain in the Existing System  Avoids Diminishment or Impairment of Benefits  Changes to Current Employees or Retirees are Expected to be Litigated and Upheld

25. 3. New Statewide System 25 For All Employees Hired After July 1, 2016  Avoids Possible Legal Challenges  Existing System Remains until All Members Pass Away

26. 4. Plan Elements of the New System 26 Pooled Assets and Liabilities: Spreads Risk Across the Broadest Base  Extreme Financial Exposure Exists Under the Current System  Prescott: $70M / $165 Unfunded Liability  Consistent with Services which are Performed Across Jurisdictional Boundaries

27. 4. Plan Elements of the New System (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 System (continued) 28 Equal Cost Sharing: Equal Employer and Employee Contributions Rates  Neutral Position re. Benefit Increases  Same as ASRS

29. 4. Plan Elements of the New System (continued) 29 Funding New Benefits or Benefit Increases: Funded as a System Component and only if System is Determined to be Fully Funded Before and After the Change  Benefit Increases Must be Paid for by Contribution Increases  Aligns with the Equal Cost Sharing Element

30. 4. Plan Elements of the New System (continued) 30 Pension Increases: To Maintain Purchasing Power  Retiree’s Pension Should Neither Gain or Loose Relative Value  Current Structure Functions as a Dividend

31. 4. Plan Elements of the New System (concluded) 31 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

32. 5. Governance Structure 32 System Design Funding Policy Investment Policy  One Set of Financial Information  One Funded Status  One Set of Performance Measures

33. 5. Governance Structure (continued) 33 Board of Trustees: Independent, Qualified Professionals with Fiduciary Responsibility of Ensuring Compliance with Plan Elements  Accountable for Public Monies

34. 5. Governance Structure (concluded) 34 Administration: Consolidated and One Independent Disability Committee of Qualified Experts  Emphasis on Costs, Customer Service, Education and Training, and Accessibility of Information

35. The Yardstick’s Effects 35

36. Its Effects  Employees and Retirees  Taxpayers and Employers 36

37. Its Effects: Employees and Retirees 1.Achieves Fiscal Sustainability 2.Attracts Quality Employees 3.Creates “Third Leg” of Retirement Stool 37

38. Its Effects: Taxpayers and Employers  Less Expensive  Strategically Governed / More Transparent 38

39. Less Expensive 1.Lowers Costs for New Employees (Unfunded Liability Eliminated)  Example: City of Phoenix PD (Current System)  Annual Salary = $100K  50% ER Contribution Rate = $50K  Normal Cost = $13K  Unfunded Liability = $37K  $37K Savings in New System 39

40. Less Expensive (continued) 2.Reduces / Avoids Interest Costs of the Current System  Savings from New Employees Can Be Redirected to Pay Down the Current System’s Unfunded Liability 40

41. Less Expensive (continued) 3.Equalizes Contributions for Employees and Employers  11.65% Employee Cap Eliminated 41

42. Less Expensive (continued) 4.Reduces Employer Contribution Volatility  Pooled of Assets and Liabilities Absorbs Entity Specific Shocks 42

43. Less Expensive (continued) 5.Creates Affordable Retiree Pension Increases  Goal to Maintain Purchasing Power  Eliminates “Dividend”  Severe Adverse Financial Impacts to System 43

44. Less Expensive (concluded) 6.Reduces Administrative Costs  Consolidate ASRS and PSPRS to One Statewide System with Two Divisions  Eliminate the Operations Related to 256 Individual Plans at the State and Local Level 44

45. Strategically Governed / More Transparent 1.Avoids Passing Costs on to Future Taxpayers  100% Funding Policy Requires Corrective Action in a Timely Manner 45

46. Strategically Governed / More Transparent (concluded) 2.Improves Governing, Managing, and Reporting  One System, not 256  Easier to Evaluate Actuary Assumptions  Costs and Implications of Decisions are Easier to Understand  Benefit Increases 46

47. What’s Next 47

48. Yardstick Calendar Recommendations Presented to League’s Executive Committee May 15 Feedback Period Stakeholder Meetings: Legislators, Labor, PSPRS, ATRA, Others May to August Final Recommendations and Report Delivered to League’s Executive Committee at Annual Conference August 18 48

49. Legislative Pension Group  Working Towards 2016 Legislation  Led by Senator Lesko and Representative Olson  Reason Foundation Studying Four Scenarios 1.Firefighter Proposal 2.Police Proposal 3.Hybrid Plan 4.Defined Benefit Plan 49

50. FINAL THOUGHTS  There is No Silver Bullet: Reform WILL NOT Reduce Your Current Unfunded Liability (Debt)  An Unfunded Pension Liability is Debt  Actively Manage Your Pension Plan  Reform is Needed  The Yardstick is a Tool – Not a Proposal 50

51. Feedback and Questions 51