The Yardstick: Public Safety Pension Reform Recommendations

Recommendations of the League of Cities and Towns’ PSPRS Task Force

Scott McCarty, Chairscott.mccarty@queencreek.org

ACMA Summer ConferenceJuly 22, 2015

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Purpose of Presentation

1. Overview of the Task Force2. Discuss Key Observations3. Discuss the Yardstick4. Discuss the Calendar and Process5. Feedback and Questions

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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

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Task Force Information

Presentations and Materials located at:

www.azleague.orgCLICK: ‘Legislative Issues’ Box

CLICK: ‘Pension Task Force’ Line

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PSPRS Overview256 Employer (Individual) Plans ~32,000 Actives / Retirees

Same Benefits for All PlansFinancial Condition Varies by Plan $6.2B Total Underfunded

ER Contribution Rate Varies By PlanEE Contribution Rates are Fixed at 11.65%

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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

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Marana Police ER Contribution Amount $1.2M

ER Contribution per Employee $17K

ER Contribution Rate 24.80%

ER Contribution Amount as a % of Operating Revenues 3.5%

Unfunded Liability (Debt) at 6/30/14 $9.1M

Percent Funded at 6/30/14 61%

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Rate Amount

Normal Cost 11.95% $599,521

Amortization of Unfunded Liabilities* 12.85% $644,673

Total Contribution 24.80% $1,244,194

Marana Police

* Represents 52% of Annual Amount.

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1. Budget Contributions for DROP Members2. Prepay Your Budgeted Contribution3. Do Not Defer the Fields Case4. Review Local Board Practices5. Prepare a Comprehensive Study6. Payoff Unfunded Liability (Debt) Earlier7. Create a Pension Funding Policy

Employer Recommended Practices to Best Manage Your Plan

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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

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The Yardstick: It’s Components

1. Defined Benefit Plan2. Free From Legal Challenge3. New Statewide System4. Plan Elements of the New Statewide System5. Governance Structure

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1. Defined Benefit Plan

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

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2. Free From Legal Challenge

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

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3. New Statewide System

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

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4. Plan Elements of the New System

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

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4. Plan Elements of the New System(continued)

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%

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4. Plan Elements of the New System(continued)

Equal Cost Sharing: Equal Employer and Employee

Contributions Rates

Neutral Position re. Benefit Increases Same as ASRS

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4. Plan Elements of the New System(continued)

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

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4. Plan Elements of the New System(continued)

Pension Increases: To Maintain Purchasing Power

Retiree’s Pension Should Neither Gain or Loose Relative Value

Current Structure Functions as a Dividend

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4. Plan Elements of the New System(concluded)

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

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5. Governance Structure

•System Design•Funding Policy•Investment Policy

One Set of Financial Information One Funded Status One Set of Performance Measures

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5. Governance Structure (continued)

Board of Trustees:Independent, Qualified Experts with Fiduciary Responsibility of Ensuring

Compliance with Plan Elements Accountable for Public Monies

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5. Governance Structure (concluded)

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 CommitteeMay 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

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Legislative Pension Group

Working Towards 2016 Legislation Led by Senator Lesko and Representative

Olson Reason Foundation Studying Four

Scenarios1. Firefighter Proposal2. Police Proposal3. Hybrid Plan4. Defined Benefit Plan

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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

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Feedbackand

Questions