The Yardstick: Public Safety Pension Reform Recommendations Recommendations of the League of Cities and Towns’ PSPRS Task Force Scott McCarty, Chair ACMA Summer Conference July 22, 2015

Purpose of Presentation 1.Overview of the Task Force 2.Discuss Key Observations 3.Discuss the Yardstick 4.Discuss the Calendar and Process 5.Feedback and Questions 2

League’s Task Force  Formed in June, 2014  Partnership with ACMA and GFOAz  15 Members  Review all aspects of PSPRS, identify areas of improvement, and reform recommendations 3

Task Force Information Presentations and Materials located at: CLICK: ‘Legislative Issues’ Box CLICK: ‘Pension Task Force’ Line 4

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% 5

Key Observations re. Current System  An Unfunded Pension Liability is Debt  Reform WILL NOT Reduce Your Current Unfunded Liability (Debt)  Court Decisions Have Protected Employee and Retiree Benefits  Actively Manage Your Pension Plan  “Know Your Numbers”  Implement Employer Recommended Practices 6

Marana Police 7 ER Contribution Amount$1.2M ER Contribution per Employee$17K ER Contribution Rate24.80% ER Contribution Amount as a % of Operating Revenues3.5% Unfunded Liability (Debt) at 6/30/14$9.1M Percent Funded at 6/30/1461%

RateAmount Normal Cost11.95%$599,521 Amortization of Unfunded Liabilities*12.85%$644,673 Total Contribution24.80%$1,244,194 Marana Police 8 * Represents 52% of Annual Amount.

1.Budget Contributions for DROP Members 2.Prepay Your Budgeted Contribution 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 Plan 9

The Yardstick: It’s 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 10

The Yardstick: It’s 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 11

1. Defined Benefit Plan 12 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

2. Free From Legal Challenge 13 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

3. New Statewide System 14 For All Employees Hired After July 1, 2016  Avoids Possible Legal Challenges  Existing System Remains until All Members Pass Away  Previously Done in PSPRS and ASRS

4. Plan Elements of the New System 15 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

4. Plan Elements of the New System (continued) 16 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%

4. Plan Elements of the New System (continued) 17 Equal Cost Sharing: Equal Employer and Employee Contributions Rates  Neutral Position re. Benefit Increases  Same as ASRS

4. Plan Elements of the New System (continued) 18 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

4. Plan Elements of the New System (continued) 19 Pension Increases: To Maintain Purchasing Power  Retiree’s Pension Should Neither Gain or Loose Relative Value  Current Structure Functions as a Dividend

4. Plan Elements of the New System (concluded) 20 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

5. Governance Structure 21 System Design Funding Policy Investment Policy  One Set of Financial Information  One Funded Status  One Set of Performance Measures

5. Governance Structure (continued) 22 Board of Trustees: Independent, Qualified Experts with Fiduciary Responsibility of Ensuring Compliance with Plan Elements  Accountable for Public Monies

5. Governance Structure (concluded) 23 Administration: Consolidated and One Independent Disability Committee of Qualified Experts  Emphasis on Costs, Customer Service, Education and Training, and Accessibility of Information

Yardstick Calendar Recommendations Presented to League’s Executive Committee May 22 Feedback Period Stakeholder Meetings: Legislators, Labor, ATRA, Others May to August Final Recommendations and Report Delivered to League’s Executive Committee at Annual Conference August 22 24

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 25

Takeaways  Reform WILL NOT Reduce Your Unfunded Liability  Actively Manage Your PSPRS Plan  The Current System is Unsustainable  Reform in Needed  The Yardstick is a Tool - Not a Proposal 26

Feedback and Questions 27