League of AZ Cities and Towns PSPRS Pension Task Force August 15, 2014

The Purpose of PSPRS Arizona Revised Statutes § 38-841 Before the establishment of the public safety personnel retirement system, municipal firemen and policemen, employees of the Arizona highway patrol and other public safety personnel in the state of Arizona were covered under various local, municipal and state retirement programs. These heterogeneous programs provided for wide and significant differentials in employee contribution rates, benefit eligibility provisions, types of benefit protection and benefit formulas….In order to provide a uniform, consistent and equitable statewide program for public safety personnel who are regularly assigned hazardous duty in the employ of the state of Arizona or a political subdivision thereof, this retirement system was created effective as of July 1, 1968.

The Local Board System = Local Control/Local Accountability The Structure of PSPRS Arizona Revised Statutes § 38-847 The administration of the system and responsibility for making the provisions of the system effective for each employer are vested in a local board. The department of public safety, the Arizona game and fish department, the department of emergency and military affairs, the University of Arizona, Arizona State University, Northern Arizona University, each county sheriff's office, each county attorney's office, each county parks department, each municipal fire department, each eligible fire district, each community college district, each municipal police department, the department of law, the department of liquor licenses and control, the Arizona department of agriculture, the Arizona state parks board, each Indian reservation police agency and each Indian reservation fire fighting agency shall have a local board. The Local Board System = Local Control/Local Accountability

PSPRS Annual Aggregate Actuarial Valuation June 30, 2013 Employer Rate Funded Status Averages 32.54% 57.1%

Do you know where you stand and how you got there?

Total Plan Statistics Defined Benefit Plan Non-Retired PSPRS Active Members 18,436 Terminated Vested Members 1,442 DROP 1,482 Total Non-Retired Members 21,360 Retired Normal 7,444 Beneficiaries 1,305 Disability 1,410 Total Retired Members 10,159 Total Participants 31,519 Percentage Retired 32.2% John Version Date : 08-01-2014

Total Revenue June 30, 2013 PSPRS Net Investment Income 541,980,088 ER Contributions 378,701,291 Alternative Contributions 2,151,786 Court Fees EE Contributions 127,362,618 Service Purchase & Transfers 7,575,489 Total Revenue 1,057,771,272 John Version Date : 08-01-2014

Total Expenses June 30, 2013 PSPRS Pension Benefits 383,377,255 Survivor Benefits 51,443,297 Disability Benefits 57,486,396 Deferred Benefits 199,579 Insurance Benefits 13,383,444 DROP Benefits 60,213,930 Refunds 12,819,713 Administrative Expenses 5,104,446 Transfers 514,209 Total Expenses 584,542,269 John Version Date : 08-01-2014

Funding Levels Version Date : 08-01-2014

PSPRS – Aggregate Employer Rates John – Add 2012-13, keep 2002-03 *The aggregate computed contribution rates before application of the statutory minimum Version Date : 08-01-2014

PSPRS Changing Financial Status (in 000s) John *Market value does not include future benefit increase reserve Version Date : 08-01-2014

The Relationship between Funding Level, Rates and Returns

Rate Components and Funding Levels Understanding the Actuarial Valuation

Components of the Actuarial Valuation Present Value of Future Benefits - Present Value of all future benefits payable to current participants (active, retired, terminated vested). Actuarial Liability - Portion of PV of Future Benefits allocated to prior years. Normal Cost - Portion of PV of Future Benefits allocated to current year. Future Normal Costs - Portion of PV of Future Benefits allocated to future years. Future Normal Cost Actuarial Liability Normal Cost 12

Components of the Actuarial Valuation Actuarial Accrued Liability - Actuarial Value of Assets = Unfunded Actuarial Liability Annual Contribution = Normal Cost + Amortization of the Requirement Unfunded Liability 19

Development of Funded Ratio Funding Ratio will be different for every employer.

Development of Employer Contribution Employer contribution rate will be different for every employer.

Understanding Asset Smoothing Funding value for each employer is determined proportionately based on Market Value.

Understanding Asset Smoothing and Amortization methods Year 1 - phase in 1/7 of asset loss Step 1 – phase in 1/7 of asset loss Step 2 – amortize UAL over 23 years Year 2 – Year 1 results PLUS Step 1 – phase in additional 1/7 of asset loss Step 2 – amortize UAL over 22 years … Year 7 and beyond – Year 1 through 6 PLUS Step 1 – phase in final 1/7 of asset loss Step 2 – amortize UAL over remaining years

Understanding Asset Smoothing and Amortization methods Example of How 30% Loss on Assets Impacts Contribution

So Why Have Contribution Rates Been Increasing?

So Why Has the Contribution Rate Been Increasing? In most systems, assets losses and gains tend to offset each over time In PSPRS, asset gains also fund the Permanent Benefit Increases (PBI) The current return assumption is 7.85% One-half of excess return over 9% funds the PBI When markets are volatile, high returns will not completely offset the low returns

Comparison of COLA Provisions PSPRS Provisions Pre SB1609 Post SB1609 Investment Return Threshold 9% 10.5% COLA Maximum 4% of Average PSPRS Benefit Prior Year Varies from 2% to 4% Based on Funded Ratio Funded Status Threshold None 60% Reserve Accumulation Yes No COLA Delay 2 Years or age 55 Tier 1: 2 Years or Age 55 Tier 2: Age 55

SB1609 Reversal Fields case – restores original PBI formula for members who were retired as of Julye 1, 2011 Hall case – would restore original PBI formula for current active members and reverse changes in the employee contribution rate

SB1609 Reversal Impact on Employer Contributions Note that contribution requirements for FY2016 are expected to increase due to continued phase-in of assets losses from prior years.

SB1609 Reversal Impact on Employer Contributions Example of Impact of Fields Case Reversal

Things employers CAN’T control Investment performance PSPRS has some control over this Benefit Provisions Occasionally modified by statute Actuarial assumptions and methods Reviewed every 5 years by actuary

Things employers CAN control Managing funding levels Employers can contribute more than the minimum Managing workforce Hiring members with prior PSPRS service  increases cost Reducing workforce results in costs being spread over lower payroll base  increases cost as percentage of pay Disability approvals  can increase cost if not managed carefully Payroll management  allowing pay spiking can increase cost