NEW RETIREMENT REALITIES: PENSIONS AT A CROSSROADS

1. NEW RETIREMENT REALITIES:PENSIONS AT A CROSSROADS PRESENTATION By: Craig Mason Chief Pension Executive City of Houston

2. COH Pension SystemsIn Context - Overview 3 separate plans – civilians, police, firefighters, Administration of plans is outsourced to independent trust organizations: - Houston Municipal Employees Pension System (HMEPS) - Houston Police Officers’ Pension System (HPOPS) - Houston Firefighters Relief and Retirement Fund (HFRRF) The trust organizations are established and governed by separate state statutes to: - Manage the plan’s investments - Pay benefits when due The description of benefits is included in the state statutes HMEPS and HPOPS have ability to trump state statutes through Meet & Confer Unions do not bargain on pension benefits

3. COH Pension SystemsIn Context – Pension Board Composition • HMEPSHPOPSHFRRF • Elected active beneficiaries 4 3 5 • Elected retired beneficiaries 2 2 1 • Appointed by: ○ Mayor 1 1 1 ○ City Council 2 ○ City Controller 1 ○ City Finance Director 1 1 ○ All other trustees 2 ○ Elected beneficiary trustees 1 - Total trustees 11 7 10

4. COH Pension SystemsIn Context – Pension Participants and Assets HMEPSHPOPS HFRRF Actives 13,333 5,245 3,949 Retireds 8,340 2,878 2,550 Deferred Vesteds 5,742 22 8 _____ _____ _____ Total Members 27,415 8,145 6,507 Est. Assets 3/31/2010 $1.962B $3.085B $2.783B

5. COH Pension SystemsThe Challenge – City Contributions Increase to Unsustainable Levels, 2002-2005

6. COH Pension SystemsAddressing the Challenge – In General • Mayor White assumed office in January 2004 – Inherited the challenge • Orchestrated a general election in May 2004: • - Citizens of Houston elected to opt out of State constitutional provision • prohibiting localities from reducing accrued pension benefits • - Option available, but not used yet • Formed a task force of business leaders to assist in addressing the issues • Executed Meet & Confer Agreements with HMEPS and HPOPS • Created the position of Chief Pension Executive for the City

7. COH Pension SystemsAddressing the Challenge – HMEPS • Interim steps in 2004: • - reduced future benefit accrual rates • - increased eligibility age for retirement from “rule of 70” to “rule of 75” • - increased mandatory employee contribution rate from 4% to 5% • - transferred an asset valued at $300 million to the pension fund • - adopted a schedule of increasing dollar contributions for FY2005 thru FY2007 • Resulted in reduction in actuarially calculated contribution rate from 52% to 24%

8. COH Pension SystemsAddressing the Challenge - HMEPS Long term “reform” in 2007 – Adopted an objective based plan design for new employees - Integral element of total compensation - Basic Level of income replacement at no cost to employee - Promote “career” employment - Consider Social Security benefits - Enhance ability to hire “mid-career” employees - Provide employees capital accumulation opportunity/flexibility - Increase risk sharing/responsibility of employee Future City contributions of 15% of payroll

9. COH Pension SystemsThe New Plan - HMEPS Hybrid approach with both DB and DC features - Basic level of income replacement – City responsibility - Capital accumulation opportunity – employee responsibility Income replacement: - target full benefit at age 62 ** 45% + SS + EE at 25 yos ** 50% + SS + EE at 30 yos - options to retire “early” - optional survivor’s benefit - no COLA - no DROP - estimated City contribution rate, 6% of payroll Individual capital accumulation account provides supplemental benefits City risks reduced (investment, inflation, longevity) Employee risks increased with more flexibility, responsibility