Supplemental Pension Plan Review Preliminary Report to Small Municipality USA May 2012

1. Supplemental Pension Plan ReviewPreliminary Report to Small Municipality USAMay 2012

2. Project Mission • Help City meet its fiduciarial responsibilities to tax payers and employees • Review current program • Review future expense impact on City • Review alternative post-retirement approaches to the Supplemental Pension Plan that continue to meet the current goals and purpose for the City for retirement programs Supplemental Pension Plan Review May 2012

3. Current Goals and Purpose: When integrated with other retirement programs, the City's retirement benefits should aid with: • Recruitment – The plan should act as an incentive for recruiting high quality employees. The program must be competitive with other cities for which we compete for employees. • Retention - The program should act as an incentive for retaining high-quality employees and maintaining a stable workforce. The program should also be compatible with changing workforce and demographic trends. • Reward - The program should provide a solid foundation for retirement security following a career in public service. • Sustainability - The cost of each plan should be sustainable and predictable over the long term. • Fundability – The total cost of retirement plans should be reasonable and affordable for the City. • Affordability - The cost of each plan should be affordable for current and future employees. • Equity- The program benefits should be equitable for all employees. Supplemental Pension Plan Review May 2012

4. Current Program Three Defined Benefit Pension Plans • Kansas Public Employees Retirement System (1.75% of final pay) • Kansas Police and Fire System (2.5% of final pay) • Municipality Employees Supplemental Pension Plan (1%/.75% of final pay) Unmatched 457 Plan (ING Platform) • Elective employee contributions only • Employee directed investments Post Retirement Health Plan (OPEB) • City pays 50% of single premium for 5 years after retirement Supplemental Pension Plan Review May 2012

5. Current Post-Retirement Program • Compared with other employers (excluding Governments) – Generous • Compared with other governmental employers – Competitive to somewhat better than competitive • Competitive/adequacy comparison would need to consider all employee compensation • Most governmental agencies are currently reviewing their post-retirement promises and obligations Supplemental Pension Plan Review May 2012

6. *Assumes non pre-funded OPEB – if the OPEB is being pre-funded then these costs would be approximately .60% of payroll lower. **Note: These rates would be approximately 1.50% of payroll higher if KPERS billed the City for the Public Employees’ plan at the actual cost rate rather than the “statutory” rate set by the legislature. ***Note: Special amortization charge drops out of Kansas Police Officers and Firefighters Plan. Supplemental Pension Plan Review May 2012

7. A Quick and Dirty Review of “Contract Clause”Protection Under Kansas State Law • The Supplemental Pension Plan may create a contract between the City and the Plan members (probably at employment – possibly at vesting date) • If Plan is amended to the disadvantage of participants – an offsetting advantage should be provided • Plan can be amended to just the extent necessary to maintain its integrity • Future benefit accruals can be modified, or require employee contributions • Plan can be eliminated or provide lower benefits to future employees (as with 2010 Amendment) City should seek legal advice if it amends the Supplemental Pension Plan Supplemental Pension Plan Review May 2012

8. Supplemental Pension Plan Review May 2012

9. Retirement Program Alternatives Defined Benefit Plan (Supplemental Pension) Defined Contribution Plan 457 or 401(a) Emerging alternative for governmental employers Employee bears all investment and mortality risk Lower Maintenance Costs Employees invest Administration Discretionary funding requirements • Traditional governmental program • City bears all investment and mortality risk • High Maintenance Costs • Investment Advisory • Administrative • Actuaries • Essentially mandatory and potentially volatile Funding Requirements • Private sector is abandoning very conspicuously which is putting pressure on governments to do the same Supplemental Pension Plan Review May 2012

10. Supplemental Pension Plan Alternatives • Plan Termination – Benefits protected to the extent funded • Hard Freeze – No new plan participants – No new benefit increases • Soft Freeze – No new plan participants • Amend Plan(s) – change multiplier (Just done in 2010) • Defined Contribution Plan • Variations • Floor Plan • Cash Balance Plan Other Alternatives • Post-Retirement Health Account Plan Supplemental Pension Plan Review May 2012

11. Plan Termination • Benefits currently funded at 74% for all participants • If current retirees are kept whole then remaining participants are at 70% funded • Shortfall of approximately $2.5 to $3.0 million to buy everyone up to 100% - to avoid probable contract impairment issue • Lump sum benefits could be rolled into successor 457 or 401(a) plan at the unilateral election of the City – or distributed to plan participants Supplemental Pension Plan Review May 2012

12. Plan Freeze Supplemental Pension Plan Review May 2012

13. Amend Plan to Less Generous Traditional Benefit Structure • Reduce multiplier for the future – Just did this in 2010 (including raising NRD to 65) • Reduce combined benefit limit from 85% • Require employee contributions • Any reduction in pension plan could be partially off-set by matching or “profit sharing” contributions to the 457 or 401(a) plan • Possible contract impairment issue if applied to current plan participants Supplemental Pension Plan Review May 2012

14. Defined Contribution Plan • Primary retirement plan design for private sector • Account plan • Predictable contributions – Unpredictable retirement benefit outcomes (opposite of defined benefit plan) • City’s current employee-only funded 457 Plan is a defined contribution plan and could possibly be used as a successor plan for City contributions • If 457 Plan is not available, then City could adopt a “401(a)” Defined Contribution Plan instead • Equivalent level of City contributions (approximately 4% of payroll) probably will meet contract impairment requirement – need legal opinion. Supplemental Pension Plan Review May 2012

15. Defined Contribution Plan Percentage of Annual Pay Contribution into 457 or 401(a) Plan Needed to Equal Current Supplemental Plans Equivalent Benefit at Age 65 (General Employee – Post 2010 Plan) Supplemental Pension Plan Review May 2012

16. Floor Plan Supplemental Pension Plan Review May 2012

17. Pension Plan Based Retirement Program Alternatives Floor Plan – Simplified Example A floor Plan is a combination of a defined benefit plan and a defined contribution plan. Essentially, the City would contribute monies each year into its defined contribution plan for each eligible employee, as well as perhaps maintain a frozen or much more modest defined benefit plan. At retirement, though, the participant’s defined contribution account is converted into an equivalent annuity stream (for comparison purposes only) and if that equivalent annuity is less than some minimum annuity value then the defined benefit plan would provide the difference. Example: City sponsors a defined contribution plan but promises a minimum benefit of $1,000/month at age 62 Note: Minimum benefit can be determined under any basis (say, the current Supplemental Plan’s formula) and can be met by a combination of the 457 or 401(a) employer contributions and any retirement benefits provided by the defined benefit pension plan. Note Also: Neither 457 employee contributions nor matching contributions can be used for a Floor Plan. Supplemental Pension Plan Review May 2012

18. Cash Balance Plan • Defined Benefit Plan • Actuaries • City still bears investment and mortality risk – but investment risk is less because benefits are tied, to some extent, to capital markets • Funding Volatility – but much less then traditional final pay formula plans • Benefit structure is an “account” – just like a 457 or 401(a) plan • Modern Benefit Design – popular in private sector • At retirement, “account” is annuitized • City guarantees some level of investment return on the account – unlike a traditional defined contribution plan (like the 457 plan) • Current Supplemental Pension Plan could be amended into a Cash Balance Plan for future accruals • KPERS may adopt Cash Balance Plan Supplemental Pension Plan Review May 2012

19. Supplemental Pension Plan Review May 2012

20. Post-Retirement Health Account Plan • Can be used to replace some of any reduced benefits from the Supplemental Pension Plan • Exclusively to provide post-retirement health benefits • Could provide for retiree’s cost-sharing or post-65 benefits, for example • Defined contribution (i.e. account) benefit structure • Benefits are tax-free • Current expense is much less than apparent benefit. • Relatively straight-forward to administer Supplemental Pension Plan Review May 2012

21. Preliminary Recommendation – Cost Savings • Eliminate benefits for future hires – Review again in 3 years • If future economic conditions permit, the new hires could be made eligible for the plan with all past service benefits restored. • If City provides some other type of benefit (say, makes contributions to the 457 plan in behalf of new hires) then the new hires could be made eligible to the Supplemental Pension Plan sometime in the future with only service from that point credited for benefits. • City costs would decline to 0% of pay over 16 years at current amortizations. Supplemental Pension Plan Review May 2012

22. Cost Savings - Alternative • Add employee contributions – Reduce long term costs to approximately 2.5% of pay • 1% of pay for Fire and Police • 2% of pay for General Employers • Employees already make fairly significant contribution to State program • Uncertainty of KPERS/KP&F future contribution rates a concern Supplemental Pension Plan Review May 2012

23. Preliminary Recommendation – Cost Neutral • Keep Supplemental Pension Plan – Review again in 3 years • Replacement plans would cost about the same and create disruption • Long term costs = 4% of pay Supplemental Pension Plan Review May 2012

24. Cost Neutral - Alternative I • Hard Freeze Supplemental Pension Plan and add 3% of pay to each employee’s 457 (or new 401(a)) account beginning January 1, 2013 • Floor benefits for current employees using frozen Supplemental Pension Plan. New employees will not be covered by Floor Plan • Long term costs = 4% of pay Supplemental Pension Plan Review May 2012

25. Cost Neutral - Alternative II • Terminate Supplemental Pension Plan (after funding up benefits - $2.5 - $3.0 million) • Roll monies into 457 plan or new 401(a) plan • City match 457 employee contributions at 50% up to 4% of pay (i.e. 2% of pay maximum match) • City credits 2% of pay into Post-Retirement Health Account Plan • Long term costs = 4.0% of pay (including value of current plan buy-up) Supplemental Pension Plan Review May 2012

26. New Governmental Accounting Standards • GASB issued "Preliminary Views" on June 16, 2010 and “Public Comment” on June 27, 2011 (due by September 30, 2011). Final adoption expected June 2012. • Covers only Pension recognition issues (i.e. GASB 25/27) "Views" on note disclosures and supplemental information coming next • Principal concept - Separates Accounting from Funding (as in private sector) • Effective Date – Generally, period beginning June 15, 2013 Filling the GAAP Gap 2012 ACOPA Advanced Actuarial Conference

27. New Governmental Accounting Standards • Requires use of Entry Age Normal Cost Method - • Would require change back to EAN method – Modest revision to model • Requires use of Market Value of Plan Assets - • County already complies • Requires net liability on sponsor's balance sheet - • INCLUDING COST SHARING EMPLOYERS • More volatility in year to year "expense" charges • (shorter amortization periods - investment gains and losses treated separately) • Funding policy may well be disconnected from accounting recognition Filling the GAAP Gap 2012 ACOPA Advanced Actuarial Conference

28. Questions? Supplemental Pension Plan Review May 2012