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Retirement Reform

Retirement Reform. October 2012. Section 1: The Problem. Retirement Costs are Jacksonville’s Fiscal Cliff. An Everywhere Challenge.

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Retirement Reform

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  1. Retirement Reform October 2012

  2. Section 1: The Problem Retirement Costs are Jacksonville’s Fiscal Cliff

  3. An Everywhere Challenge • Municipalities throughout the nation and throughout the State of Florida are facing significant budget challenges brought on by compounding compensation and benefit obligations that are growing at alarming rates. • Municipalities that fail to take timely action to address the increasing costs associated with compensation and benefits find themselves with budget deficits, layoffs, and the elimination of needed services. • Worse case scenario: Stockton, CA or Central Falls, RI

  4. City Revenue Going Down • Decline in revenues from FY 11/12 ($958 million) to FY 12/13 ($948 million) • Passage of Amendment Four could reduce revenue by $7 million in FY 13/14 and $13 million in FY 14/15

  5. City Retirement Costs Going Up • Just four years ago, the City of Jacksonville spent less than 7% -- $65 million – of its budget on overall pension costs. • This coming year, the City is projected to spend nearly 16% of its budget – nearly $150 million – on overall pension costs.   • That’s an increase from $65 million to $150 million in just four yearswith the same size budget.

  6. Retirement Reform Priority • Mayor Brown has made retirement reform the top priority of his second year as mayor. • His promise: unveil a retirement reform plan by the end of 2012. • The goal was to have a plan that would respect and protect both hard-working city employees and taxpayers

  7. Retirement Reform Process • For the Brown Administration, this process started back in June 2011 with the detailed work of then Mayor-elect Brown’s Pension Transition Committee. • Peyton Administration laid foundation with 2011-400

  8. The Retirement Reform Process, continued • Those efforts, along with other community analyses, helped to frame up four key questions for our retirement reform initiative: • (1) What is the scope of the problem?

  9. The Retirement Reform Process, continued • (2) How have other municipalities dealt with retirement cost challenges? • (3) What limitations does Florida law place on the reform of retirement benefits? • (4) What reform plan(s) address the city’s financial needs while meeting the state’s legal requirements?

  10. Retirement Reform Experts • To help answer those questions, we turned to three experts: • Attorney Jim Linn of Lewis, Longman, and Walker in Tallahassee • Actuary Robert Dezube of the Milliman Group to evaluate the PFPF and assist in making reform recommendations (Milliman is the actuary for the FRS)

  11. Retirement reform experts, continued • Jeff Williams of the Siegel Group to evaluate the General Employees Pension Plan (GEPP) and assist in making reform recommendations • Mayor’s Special Adviser on Pensions, Kevin Hyde.

  12. COJ Pension Plans • Police and Fire Pension Fund (PFPF) • General Employees Pension Plan (GEPP) • Includes Corrections Employees

  13. Specific PFPF Challenges 1. Annual Contributions Skyrocketing Fiscal Year 10/11: $76.1 million (8% of overall general fund) Fiscal Year 12/13: 121.3 million (Nearly 13% of overall general fund)

  14. City PFPF Contributions (General Fund)FY 2002 - 2013 • FY 2001-02 $ 9.9 million • FY 2002-03 $ 9.7 million • FY 2003-04 $ 22.1 million • FY 2004-05 $ 25.8 million • FY 2005-06 $ 34.7 million • FY 2006-07 $ 42.9 million • FY 2007-08 $ 47.1 million • FY 2008-09 $ 49.2 million • FY 2009-10 $ 81.1 million • FY 2010-11 $ 75.0 million • FY 2011-12 $ 77.2 million • FY 2012-13 $121.3 million

  15. 2. PFPF Significantly Underfunded Unfunded Actuarial Liability (UAAL) Actuarial accrued liability (value of benefits) MinusNet assets available for benefits = Unfunded Actuarial Accrued Liability (bigger number means bigger problem)

  16. Increase in UAAL

  17. Pension Report Card Grade for PFPF “F” Source: Tough Choices Facing Florida’s Government November 2011 – based on 2009 data Leroy Collins Institute Reason: Plan was less than 50% funded

  18. The Cost of Inaction • If the COJ takes no action – PFPF benefits stay the same and we rely on the same assumptions as to rate of return on investments (7.75%) – we will continue to underfund the PFPF while steadily increasing general fund contributions.

  19. Pension Cost Components • Normal Cost – annual cost of current benefits, without unfunded actuarial accrued liability (UAAL) payment • UAAL Amortization Payment [UAAL = assets minus liabilities = debt] • Actuarial losses • Plan improvements

  20. Projected Contributions Under Status Quo

  21. Projected Contribution Trend Under Status Quo

  22. Projected UAAL Trend Under Status Quo

  23. Key Status Quo Data Points • Retirement benefits stay the same • Rate of return remains at 7.75% • Anticipated FY 2013 Contribution: $122m • Recommended COJ Contributions: • FY 2014: $144 million • FY 2015: $151 million • FY 2016: $158 million • FY 2017: $164 million • FY 2018: $169 million • FY 2019: $175 million

  24. Bottom Line for Next Budget • If nothing changes – benefits stay the same, the assumed rate of return stays the same – the City will devote an additional $22 million in general fund revenue to the PFPF (yet still be under-funding).

  25. The Rate Debate • Growing consensus that the assumed rate of return (7.75%) is too optimistic given recent market conditions. • The State of Florida has worked to utilize more realistic assumptions in the Florida Retirement System (FRS) and urged municipal governments to do the same.

  26. More on the Rate Debate • In September, Florida State Board of Administration Exec. Dir. Ash Williams recommended that the state lower its rate of return from 7.75% to 7.25%. • PFPF Executive Director John Keane and actuary Jarmon Welch say they want to lower the PFPF rate “in stages”

  27. Even More on the Rate Debate • In September, PFPF provided data from its investment advisers showing an expected actual return of 6.9% over the next 10 years. • Based on that data, our actuary recommended an assumed rate of return of 6.5% (6.9% minus .4% commission for PFPF investment advisers)

  28. The Costs of Inaction with a Realistic Rate of Return • Adjusting the rate of return from 7.75% to a more realistic 6.9% is a fiscally conservative and prudent step that limits PFPF underfunding. • But it causes annual COJ contributions to the PFPF to grow substantially

  29. Contribution Projection: Same Benefits, New Rate

  30. Contribution Trend: Same Benefits, New Rate

  31. UAALTrend: Same Benefits, New Rate

  32. Key Data Points for Same Benefits, New Rate of Return • Retirement benefits stay the same • Rate of return lowered to 6.9% • Anticipated FY 2013 Contribution: $122m • Recommended COJ Contributions: • FY 2014: $181 million • FY 2015: $186 million • FY 2016: $190 million • FY 2017: $194 million • FY 2018: $197 million • FY 2019: $200 million

  33. COJ Reform Options • Fundamental Operating Principles • Utilization of “Freeze” Concept • The Reform Plan

  34. Fundamental Operating Principles • Reform will not rely on an increase in the millage rate. • Any reform must use realistic assumptions on rate of return and payroll growth. • Current retirees will not be affected.

  35. Fundamental Operating Principles, continued • All current employees will keep what they have already earned but will experience change once the reform plan is implemented. • Any reform must reduce the unfunded liability, not merely extend the time for payment. Debt will not pay for debt. • We will not propose Pension Obligation Bonds or Pension Liability Reduction Bonds

  36. The “Plan Freeze” • The current plan will be “frozen” as of date certain (the “Frozen Plan”). • Employees’ vested benefits as of that date will be fixed at whatever level the employee was entitled to as of date certain • Example – employee who had worked 10 years had vested at 30% (10 x 3% yearly) in the plan. Upon retirement the employee is entitled to retirement benefit at 30% of pay. • Employee will not accrue any additional benefits under the frozen plan for subsequent years of service

  37. After the “Plan Freeze” • A new plan will be implemented from a date certain going forward • Employees will begin accruing benefits under the new plan or all service after the Frozen Plan fixed date. • The new plan will have different benefits from what was available in the Frozen Plan • This approach is not unique – the most effective way to achieve meaningful savings on a short and long term basis

  38. The Plan: Maintain Defined Benefit (DB) model but reform benefit package • Working with our experts, we crafted a reform package that we believe will credibly: • Fund COJ pension obligations • Control costs short and long term • Comply with law to retain Chapter funds • Reduce UAAL

  39. Current System vs. DB Reforms Benefit-by-Benefit Comparison

  40. Benefit Cap

  41. Normal Retirement Age

  42. Employee Contribution

  43. Benefit Accrual Rate

  44. COLA

  45. DROP

  46. Average Final Contribution

  47. Disability Pension

  48. Pensionable Wages

  49. DB Reform: City Contribution

  50. DB Reform: Contribution Trend

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