Fire and Police Retirement System Funding Plan March

Fire and Police Retirement System Funding Plan March 28, 2010

Outline for Discussion Fire and Police Retirement System • Background Information • Statement of the Challenges • Staff Recommendation 2

Background Fire and Police Retirement System • Established by Article XV of the City Charter in mid 1930’s • Oversight provided by 5 member Retirement Board Two System members: one police, one fire > Two qualified electors of the City (citizens) > One member of the City Council > Board has exclusive control of administration & investment of the System - Charter Section 1502 and consistent with Prop. 162 > • Uncapped Cost of Living Adjustment (COLA) Effort in 1981 to cap COLA failed (PPOA v. City) > System underfunded, as of June 30, 1998 assets were less than 1/3 liabilities > 3

1999 Contribution Agreement Fire and Police Retirement System • City issued $100 million pension obligation bonds (POBs) – funds System at 70% Actuarial Accrued Liability (AAL) • Funding to increase ½% each year for 20 years to reach 80% AAL • Supplemental contributions required if short of annual funding target • Assumptions: 8% discount rate & 3. 8% inflation based on average of retirement systems operating under the County Employees Retirement Law of 1937 4

2004 Settlement & Release Agreement Fire and Police Retirement System • Stock market collapse in 2000 significantly reduced plan assets • Dispute arose over the widening gap between Actuarial Value and Market Value of portfolio • City issued $40 million POBs as part of settlement and release agreement • Funding for 1999 and 2004 POBs made possible by SB 481 which authorized the repayment of prior advances from the General Fund to the Downtown Redevelopment Project Area 5

Current Membership Fire and Police Retirement System Service Retirees Disability Retirees Beneficiaries Age 118 105 52 TOTAL 275 Avg Benefit $ 73. 7 71. 2 80. 8 Avg Mo. # 5, 288 4, 075 3, 027 74. 1 4, 398 ($14. 5 M annually) 6

Actuarial Valuation (000’s) Fire and Police Retirement System • Actuarial Accrued Liability (AAL) 166, 096 • Actuarial Value of Assets (AVA) 109, 740 • AVA Unfunded AAL • AVA Funded Percent • Market Value of Assets (MVA) 91, 915 • MVA Unfunded AAL 74, 181 • MVA Funded Percent 56, 356 66. 1% 55. 3% 7

Retirees & Benefit Payments Fire and Police Retirement System 8

The Challenge Fire and Police Retirement System • $56. 4 M Unfunded Liability • SB 481, source of funding City’s obligation to the System, expires December 31, 2014 • Annual supplemental obligation is increasing • Mandatory tender (balloon payment) of $81 million due in 2015 on prior pension obligation bonds • Appropriateness of assumptions used to value the System’s portfolio 9

Fire and Police Retirement System 10

FPRS Taskforce Fire and Police Retirement System • Established Spring 2009 to provide recommendations to City Manager > > > Margaret Mc. Austin Sid Tyler David Goodrich Jaynie Miller Studenmund Dennis Murphy • Sense of urgency in dealing with the pension issues, not just FPRS • Final report April 2010 11

FPRS Taskforce Recommendations Fire and Police Retirement System > Improve working relationship with System > Ask System to undertake selection process for financial advisor > Consolidate administrative functions with City > Consider “buy-outs” > Pursue new revenue sources > Consider using surplus SB 481 funds to increase plan assets > Modify investment assumptions > Reconsider investment strategy 12

Staff Recommendation Fire and Police Retirement System • Issue new POB to fund the System at 85% AAL Interest rates generally favorable > 30 year term, “all in” T. I. C. 7. 5% > 13

Staff Recommendation Fire and Police Retirement System • Amend contribution agreement Decouple from ’ 37 Act Systems > Reset discount rate to 6. 5% and inflation to 3. 0% and review annually > • Refinance $81 mandatory tender in 2015 with new POBs 14

New System Investment Assumptions Fire and Police Retirement System • Current discount rate 8% and 3. 8% inflation • Last 10 years average returns: FPRS – 3. 51% > Cal. PERS – 3. 44% > S&P 500 (calendar years) – 3. 62% > • Inflation last 10 years average 2. 49% • Recommendation 6. 5% and 3. 0% reviewed annually 15

Current General Fund Debt Profile Fire and Police Retirement System 16

Debt Profile With New 2011 & 2015 POBs Fire and Police Retirement System 17

Net Impact on General Fund Debt Profile Fire and Police Retirement System 18

Impact to General Fund Fire and Police Retirement System 19

Alternative Funding Cost Fire and Police Retirement System 20

Recommendations Fire and Police Retirement System • Issue new POB to fund the System at 85% AAL Interest rates generally favorable > 30 year term, “all in” T. I. C. 7. 5% > • Amend contribution agreement Decouple from ’ 37 Act Systems > Reset discount rate to 6. 5% and inflation to 3. 0% and review annually > • Refinance $81 mandatory tender in 2015 with new POBs 21