Retirement Reform

October 2012

Section 1: The Problem

Retirement Costs are Jacksonvilles Fiscal Cliff

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

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

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.

Thats an increase from $65 million to $150 million in just four years with the same size budget.
5

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

Retirement Reform Process

For the Brown Administration, this process started back in June 2011 with the detailed work of then Mayor-elect Browns Pension Transition Committee. Peyton Administration laid foundation with 2011-400

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?

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 citys financial needs while meeting the states legal requirements?

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)

Retirement reform experts, continued

Jeff Williams of the Siegel Group to evaluate the General Employees Pension Plan (GEPP) and assist in making reform recommendations Mayors Special Adviser on Pensions, Kevin Hyde.

COJ Pension Plans

Police and Fire Pension Fund (PFPF) General Employees Pension Plan (GEPP)
Includes Corrections Employees

12

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)
13

City PFPF Contributions (General Fund) FY 2002 - 2013

FY 2001-02 FY 2002-03 FY 2003-04 FY 2004-05 FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13 $ 9.9 million $ 9.7 million $ 22.1 million $ 25.8 million $ 34.7 million $ 42.9 million $ 47.1 million $ 49.2 million $ 81.1 million $ 75.0 million $ 77.2 million $121.3 million

2. PFPF Significantly Underfunded

Unfunded Actuarial Liability (UAAL)

Actuarial accrued liability (value of benefits) Minus Net assets available for benefits = Unfunded Actuarial Accrued Liability (bigger number means bigger problem)

15

Increase in UAAL
UAAL
1600 1400 1200 1000 800 600

UAAL

400
200 0

Oct. '03

Oct. '06

Oct. '08

Oct.'11

16

Pension Report Card Grade for PFPF

F
Source: Tough Choices Facing Floridas Government November 2011 based on 2009 data Leroy Collins Institute
Reason: Plan was less than 50% funded
17

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.

18

Pension Cost Components 1. Normal Cost annual cost of current benefits, without unfunded actuarial accrued liability (UAAL) payment 2. UAAL Amortization Payment [UAAL = assets minus liabilities = debt] Actuarial losses Plan improvements
19

Recommended City Contribution $ Millions 50 100 150 200 250 300 0 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 2031-32 2032-33 2033-34 2034-35 2035-36 2036-37 2037-38 2038-39 2039-40 2040-41 2041-42 2042-43

Projected Contributions Under Status Quo

Employer Normal Cost UAL Amortization

Recommended City Contribution

20

Projected Contribution Trend Under Status Quo

Projection of Recommended City Contribution

300

Recommended City Contribution (millions)

250

200

150

100

50

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 $ 132 144 151 158 164 169 175 179 182 190 198 207 216 226 235 219 218 229 239 251 261 274 254 265 278 269 281 249 259 272 174

21

Projected UAAL Trend Under Status Quo

1,800 1,600 1,400 1,200

Projection of Unfunded Actuarial Accrued Liability ($ millions)

UAAL ($ millions)

1,000 800 600 400 200 0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 $ 1,41 1,54 1,59 1,62 1,64 1,66 1,67 1,68 1,68 1,68 1,68 1,67 1,66 1,64 1,60 1,56 1,51 1,46 1,43 1,37 1,31 1,23 1,14 1,04 950 846 726 611 479 376 260

22

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: FY 2015: FY 2016: FY 2017: FY 2018: FY 2019: $144 million $151 million $158 million $164 million $169 million $175 million
23

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 underfunding).

24

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.
25

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
26

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)
27

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
28

Recommended City Contribution $ Millions 50 100 150 200 250 0 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 2031-32 2032-33 2033-34

Contribution Projection: Same Benefits, New Rate

Employer Normal Cost UAL Amortization

2034-35
2035-36 2036-37 2037-38 2038-39 2039-40 2040-41 2041-42 2042-43

Recommended City Contribution

29

Contribution Trend: Same Benefits, New Rate

Projection of Recommended City Contribution
300

250

200

150

100

50

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 $ 167 181 186 190 194 197 200 201 202 207 212 218 223 228 233 218 215 221 227 233 238 245 229 234 241 233 239 216 221 227 120

30

UAALTrend: Same Benefits, New Rate

2,500

Projection of Unfunded Actuarial Accrued Liability ($ millions)

2,000

1,500

UAAL ($ millions)

1,000

500

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 $ 1,79 1,95 1,97 1,98 1,97 1,96 1,94 1,92 1,90 1,87 1,84 1,81 1,77 1,72 1,66 1,60 1,52 1,46 1,40 1,33 1,24 1,15 1,05 942 840 729 607 487 355 241 117

31

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
32

COJ Reform Options

Fundamental Operating Principles Utilization of Freeze Concept The Reform Plan

33

Fundamental Operating Principles

1. Reform will not rely on an increase in the millage rate. 2. Any reform must use realistic assumptions on rate of return and payroll growth. 3. Current retirees will not be affected.

34

Fundamental Operating Principles, continued

4. All current employees will keep what they have already earned but will experience change once the reform plan is implemented.

5. 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
35

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
36

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
37

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

38

Current System vs. DB Reforms

Benefit-by-Benefit Comparison

39

Benefit Cap
CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

None

None

Cap of $99,999

40

Normal Retirement Age

CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

20 years

55/10 years or 65/5<10yrs

60 years of age AND 27 years of work

41

Employee Contribution
CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

7%

8%

14%

42

Benefit Accrual Rate

CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

3% (for 2.8% (for 1.667% with 20yrs); then 25yrs); then a cap at 50% 2% for cap 2% for cap at 80% at 80%

43

COLA
CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

3%, 3mos. after DROP

3%, 24 mos. Elimination, after if not separation accrued

44

DROP
CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

DROP Delay DROP Eligibility at Eligibility to 20 yrs 25 yrs

Elimination

45

Average Final Contribution

CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

Avg. last 24 mos. (52 pay pds.)

Avg. of last 5

Avg. of last 5

46

Disability Pension
CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

60% of earning 50% of earning 60% of earning base base

47

Pensionable Wages
CURRENT JAX POLICE OFFICERS & FIREFIGHTERS 2011-400 PROPOSED CHANGES

No Change

No change

Exclude Shift and Differentials

48

Recommended City Contribution $ Millions 50 100 150 200 250 0 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 2031-32 2032-33 2033-34 2034-35 2035-36 2036-37 2037-38 2038-39 2039-40 2040-41

DB Reform: City Contribution

Employer Normal Cost UAL Amortization

2041-42 2042-43

Recommended City Contribution

49

DB Reform: Contribution Trend

Projection of Recommended City Contribution
250 Recommended City Contribution Percentage

200

150

100

50

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 $ 122 133 138 142 146 149 153 155 156 160 165 171 177 182 188 173 170 175 181 186 191 197 181 185 191 182 187 164 168 173 74

50

DB Reform: UAAL Trend

Projection of Unfunded Actuarial Accrued Liability ($ millions)

2,000

1,800
1,600 1,400 1,200 UAAL ($ millions) 1,000 800 600 400 200 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 $ 1,71 1,83 1,86 1,86 1,86 1,86 1,85 1,83 1,82 1,80 1,79 1,76 1,74 1,70 1,66 1,61 1,55 1,50 1,45 1,40 1,33 1,25 1,17 1,07 988 892 784 680 564 466 359

51

Key Data Points for DB Reform (Level Percent of Pay)

Retirement benefits modified in DB model Rate of return lowered to 6.9% Anticipated FY 2013 Contribution: $122m Recommended COJ Contributions:
FY 2014: FY 2015: FY 2016: FY 2017: FY 2018: FY 2019: $133 million $138 million $142 million $146 million $149 million $153 million
52

Bottom Line for Next Budget

Lets look at this in two ways. If we simply compare this to how much we are slated to pay next year under the status quo, $133 million is $11 million less than $144 million.

But that $133 million means we are not underfunding the plan.
53

More on Next Budget

And $133 million is $48 million less than $181 million. If we make the rate of return more realistic without changing benefits, we would have to spend $181 million next year to fully fund our obligations. If we use more realistic assumptions, modify DB benefits, and use the level percentage of payroll approach, COJ will save $48 million and still fully fund plan.
54

What Does $48 Million Mean?

$48 million means the jobs of 800 City of Jacksonville employees if you assume an average compensation amount of $60K (salary + benefits). $48 million means approximately the combined FY 2013 budgets for Public Libraries and Parks & Recreation.
55

Retirement Reform Process

We havent negotiated directly with the Police and Fire Pension Fund or with the General Employees Pension Plan because the law says that employee benefits should be negotiated with unions. Judicial decisions hold that retirement benefits are a mandatory subject of collective bargaining with unions.
56

More Retirement Reform Process

And in the contracts that they signed and that City Council overwhelmingly ratified, several unions agreed that they would sit down with the City and discuss retirement reform.

That process starts this week with meetings with four COJ employee unions.

57

Schedule of Meetings
Monday, 10/29: FOP Tuesday, 10/30: AFSCME Wednesday, 10/31: FOP

Thursday, 11/1: LIUNA and JSA

58

Retirement Reform Resources

Web Page at www.coj.net Fact Sheet

Employee Q&A
Side-by-Side Links to studies
59