Presentation to the TLFFRA Educational Conference Keith Brainard Texas Pension Review Board Amarillo, September 30, 2019

W. Edwards Deming 1900-1993 Best known as a statistician and management guru Helped restore Japan’s post-WWII economy through management improvements Also helped Ford Motor Company redesign its manufacturing process: Quality is Job 1

Edwards Deming’s Teachings Organizations and institutions are systems System optimization requires coordination and cooperation of the parts Everybody in the system needs to understand how their effort or output fits into the system Interests of system participants must be aligned Problems occur when the system’s parts are not communicating or operating in concert with one another

Edwards Deming’s Takeaways for TLFFRA TLFFRA plan problems are mostly the result of a flawed system of governance Governance needs to be modified to align stakeholder objectives and to optimize plan outcomes: employer ability to recruit and retain retirement benefits that are adequate and funded benefits at a reasonable and predictable cost to plan members and taxpayers

TLFFRA Challenges Governance: Size: Pension funds and cities function largely independent of one another No legal requirement that plans be adequately funded, or that contributions be sufficient at any point Benefit levels may be determined without consideration of cost or funding Texas’ constitutional and statutory emphasis on amortization period creates a disproportionate focus on one actuarial metric Other considerations should include funding level, cost, reasonableness of assumptions, employer ability to pay, etc. Size: Many TLFFRA funds are small and relatively inefficient

2019 Legislation Public pension plans must develop a funding policy that identifies how the plan will reach a funding level of 100 percent Flaw: The legislation does not require employer involvement or commitment Public pension funds must commission an independent firm to evaluate the fund’s investment practices and performance, and to report its investment fees Funds with assets below $30 million are exempt

Latest Reported Amortization Periods and Funding Levels, TLFFRA Plans TX Pension Review Board 09-19

Average Investment and Administrative Expenses Based on Fund Size, Texas Plans TX Pension Review Board 09-19

Comparative Factors: TLFFRA vs. Non-TLFFRA Funding level ARC/ADC experience Investment returns Investment return assumptions

Latest Reported Actuarial Funding Level, All Texas Public Pension Plans TX Pension Review Board 09-19

Latest Reported Actuarial Funding Level, Non-TLFFRA Plans TX Pension Review Board 09-19

Latest Reported Actuarial Funding Level, TLFFRA Plans TX Pension Review Board 09-19

Latest Reported Actuarial Funding Level, All Plans TX Pension Review Board 09-19

10-Year Average ARC/ADC Experience, All Texas Public Pension Plans TX Pension Review Board 09-19

10-Year Average ARC/ADC Experience, Non-TLFFRA Plans TX Pension Review Board 09-19

10-Year Average ARC/ADC Experience, TLFFRA Plans TX Pension Review Board 09-19

10-Year Average ARC/ADC Experience, All Plans TX Pension Review Board 09-19

10-Year Average Investment Return, All Texas Public Pension Plans* *10-year ending period ranges from 12/31/17 to 12/31/18 TX Pension Review Board 09-19

10-Year Average Investment Return, Non-TLFFRA Plans* *10-year ending period ranges from 12/31/17 to 12/31/18 TX Pension Review Board 09-19

10-Year Average Investment Return, TLFFRA Plans* *10-year ending period ranges from 12/31/17 to 12/31/18 TX Pension Review Board 09-19

10-Year Average Investment Return, All Plans* *10-year ending period ranges from 12/31/17 to 12/31/18 TX Pension Review Board 09-19

Distribution of Investment Return Assumptions, All Texas Public Pension Plans TX Pension Review Board 09-19

Distribution of Investment Return Assumptions, Non-TLFFRA Plans TX Pension Review Board 09-19

Distribution of Investment Return Assumptions, TLFFRA Plans* TX Pension Review Board 09-19

Distribution of Investment Return Assumptions, All Plans TX Pension Review Board 09-19

Flexible Plan Designs: South Dakota Retirement System Fixed employee and employer contribution rates COLA linked to actual rate of inflation: minimum of 0.5 percent and a maximum of 3.5 percent Calculated annually based on the percentage that, if assumed to be paid in all future years, results in a funded ratio of at least 100 percent 2018 COLA was 1.89 percent If the funding ratio falls below 100 percent, the plan is required to recommend changes to restore the funding level to 100 percent

Flexible Plan Designs: City of Houston—Police, Fire, General Employees Target contribution rates with a five percent corridor If contribution rate goes outside the corridor, prescribed changes are made to: amortization period investment return assumption benefit levels contribution rates Investment return assumption of 7.0 percent prescribed in statute

Flexible Plan Designs: Galveston Firefighter Plan Effective in 2025, increases in the actuarially determined contribution rate are shared equally by employees and employers

Steps to Actuarial Soundness Be realistic in setting actuarial assumptions Enlist your city as a partner in your plan’s design and financing structure Insist on payment of the full actuarially determined contribution Consider flexible plan design and financing arrangements, to reflect future uncertainty Challenge your consultants Celebrate your retirement benefit !