Charting a Future Course

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Charting a Future Course
2007, Texas Municipal Retirement System
Rev 9/18/07
2
Public Pensions Today

• Generational change Baby Boomers
• Private vs. public sector retirements
• Funding and legal issues
• Media focus on plans San Diego, Fort Worth,
  etc.

3
Fiduciary Duty

• Plan trustees and administrators are required by
  law to protect the soundness of the plan
• The Texas Constitution requires assets to be held
  in trust for the benefit of members
• Trustees act solely and exclusively in the
  interest of members and beneficiaries

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TMRS 60 Years of Security

• TMRS basics
• TMRS plans are hybrid plans (Defined
  Contribution plans with some Defined Benefit
  characteristics)
• System created by law in 1947 to provide secure
  retirement for municipal employees
• At year-end 2006, we had 821cities in System,
  each with its own customized agency plan
• 80 of members are in plans that provide annually
  repeating USC and COLAs

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TMRS 60 Years of Security

• Sound funding
• Plan costs amortized over 25 years
• Contributions cover Normal Cost
• System as a whole is 82.1 funded
• Annual actuarial valuations
• Detailed examination of assumptions every 5
  years
• Long history of cities making required
  contributions

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TMRS Investments

• TMRS has historically invested in long-term bonds
  
• Investment objective is to preserve principal
  and earn interest at or above the statutory rate
• Investment policy has valued low volatility

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TMRS Investments

• Focus of TMRS investment policy has been on
  providing at least an annual 5 yield for members
• Proper emphasis should be on providing a
  reasonable benefit at a reasonable cost to
  employers

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TMRS Investments

• Will employers tolerate some short-term
  volatility in contribution rates in exchange for
  higher investment returns and lower rates in the
  long run?

9
Some City Concerns

• Workforce growth slowing
• Retiree-to-active ratios increasing
• Rising liabilities
• Rising contribution rates
• Funded ratios decreasing
• Annuity Increases funded only one year at a time
• Some employers accruingcosts they are not fully
  aware of

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Why Are Costs Going Up?

• Ratio of retirees to active members is rising
• Lower investment earnings along with rise in
  long-term interest rates that reduces the market
  value of the current portfolio
• Annually repeating Updated Service Credit (USC)
  and Annuity Increases (COLAs)
• Slower turnover (affects withdrawal)
• Slower payroll growth
• Aging workforce, even at new-hire level
• Current actuarial method does not fully reflect
  liabilities arising from annually repeating COLAs

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Updated Service Credit (USC) and Annuity Increases

• What is USC, and how does it affect the citys
  rate?
• Defined Benefit-like feature
• Updates members benefitto match current salary
  andplan design
• Cities can choose between annually repeating and
  ad hoc increases
• Current actuarial method does not distinguish
  between ad hoc and annually repeating increases
• Number of cities adopting annually repeating
  increases has risen over the years

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Meeting City Concerns

• Strategic initiative begun in 2006
• Examining funding methods and long-term
  liabilities
• Analyzing assets and investments

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Possible TMRS Changes

• Change actuarial funding method
• Adopt closed amortization period
• Change the investment policy and strategy

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Why Make Changes?

• Provide a reasonable retirement benefit at a
  reasonable cost to employers, funded in a sound
  manner
• Provide better long-range rate forecasts for
  budget purposes
• Improve funded ratios over time
• Adapt to a different economic and demographic
  environment

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Why Make Changes? (cont.)

• Reflect widespread adoptions of annually
  repeating increases
• Improve employer awareness of costs associated
  with annually repeating COLAs
• BOTTOM LINE Assure that TMRS remains on sound
  footing

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Legislation

• Possible for 2009
• May be needed to help improve investment returns
  and help improve plans funding

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1) Actuarial Funding Method

• Current method is Unit Credit actuarial cost
  method
• Potential change is to Projected Unit Credit
  method

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1) Actuarial Funding Method (cont.)

• WHY - provides a better method of fully
  recognizing future liabilities
• Results
• For cities with annually repeating USC and
  Annuity Increases, the citys rate will increase,
  possibly significantly, under the Projected Unit
  Credit method. This requires higher contributions
  to amortize liabilities and assure that promised
  benefits will be soundly funded
• Cities without repeating USC/Annuity Increases
  will see little if any rate increase under
  Projected Unit Credit change alone

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2) Amortization Changes

• Current amortization period is 25-year open
  period
• Potential change is to 25-year closed period

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2) Amortization Changes (cont.)

• WHY fund a larger share of liabilities each
  year and improve funded ratio over time
• Results higher contributions for most cities,
  but faster annual improvement in funding ratios

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Actuarial Second Opinion

• Reported to TMRS Board in September
• Concurred in recommendations
• Recommended Projected Unit Credit for all cities
• Suggested a five-year implementation schedule

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3) Investment Policy

• Current investment policy is in long-term bonds
  and other fixed income instruments
• Has performed well as long-term interest rates
  have declined has lagged behind other public
  sector retirement funds
• Potential change diversify TMRS investments
  to maximize return with an acceptable level of
  risk

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3) Investment Policy (cont.)

• WHY seek ways to increase investment revenue,
  within prudent levels of risk and liquidity
• Historical strong performance has benefited from
  falling long-term interest rates. TMRS is not
  optimistic about future returns
• TMRS allocation lacks the diversification
  necessary to assure consistent and robust
  long-term investment returns
• Total return will suffer as interest rates rise
• Increased returns can give employers relief from
  rising costs and protect employees benefits

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Whats Next?

• Changes will be phased in gradually and
  thoroughly evaluated
• Stay tuned to TMRS communications(e-bulletins,
  Web updates, andcity mailings)
• Understand the funding of your plan to help you
  consider future actions

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Actuarial Experience Study

• At least every 5 years, TMRS actuary examines
  assumptions
• Mortality rates and interest assumptions were
  part of study
• Study was reported to Board in September
• Changes will be reflected in 2008 Actuarial
  Valuation

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TMRS Staff Actuary

• TMRS is adding a staff actuarial position to help
  cities chart their future course
• Actuary will increase resources for city support

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TMRS Advisory Committee

• New charter
• Open membership requirements
• Generate interest in serving
• Give Committee a defined mission
• Give TMRS stakeholders a voice
• Increase transparency

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Timeline for Change

• E-Bulletins sent to cities every 2-3 weeks
• August 2007 First letter sent to cities
• Funding history
• Valuation progress
• September Letter to cities with sample data
• September TMRS Board meeting Board heard
  results of 5-year actuarial experience study and
  second opinion
• September E-Bulletin with results of Board
  meeting

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Timeline for Change (cont.)

• October TMRS Annual Training Seminar Focus on
  Funding
• October 2007 Detailed projections sent to each
  city
• December TMRS Board meeting Decisions made on
  future directionand options
• December 2007 Letter sent to cities about
  Board decisions

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Annual Training Seminar

• This years seminar, Focus on Funding, is
  geared toward City Managers and CFOs
• Seminar will offer two training tracks, covering
  city funding issues and TMRS administration

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Information Mailings

• September mailing showed effects on a sample
  city, with and without USC and Annuity Increases
  
• Three line graphs are included for the sample
  city. The graphs show the effects on the citys
  rate, funded ratio, and UAAL over time, if the
  TMRS Board decides to change to

• Projected Unit Credit actuarial funding method
• Closed, 25-year amortization period

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Information Mailings (cont.)

• Example graphs for City X
• 7 deposit rate
• 2 to 1 City Match
• Full annually repeating USC and Annuity Increase
• 5-year vesting
• 20 years, any age retirement

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2008 and Beyond

• Cities can make additional contributions
  beginning in 2008
• Other changes from Board decisions and 2007
  legislation will be phased in gradually

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Continuing Communication

• TMRS E-Bulletin for cities
• Breaking News on Website
• Toll-free number 800-924-8677
• City visits from members of the Travel Team
• Annual Seminar, Focus on Funding
• Active TMRS Advisory Committee
• Local funding workshops in 2008
• New publication coming soon TMRS FACTS for City
  Officials

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2008 and Beyond

• Contribution rates will not change in 2008
• Option to pay additional city contributions above
  recommended rate
• Board will set reasonable timeframe for phasing
  in new options

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Questions?