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08/17/2009 PENSION TRUSTEES AGENDA Location: Council Chambers - City Hall Date: 8/17/2009- 9:00 AM 1. Call to Order 2. Approval of Minutes 2.1 Approve the minutes of the July 13, 2009 Pension Trustees Meeting as submitted in written summation by the City Clerk. Attachments 3. Pension Trustee Items 3.1 Approve the transfer of assets from Independence Investments to Lee Munder and authorize staff to sign the appropriate documents and authorize Cap Trust to conduct a small cap growth manager search. Attachments 3.2 Presentation on Pension Benefit Strategies and Pension Plan Alternatives. Attachments 4. Other Business 5. Adjourn Pension Trustees Agenda Council Chambers - City Hall Meeting Date:8/17/2009 SUBJECT / RECOMMENDATION: Approve the minutes of the July 13, 2009 Pension Trustees Meeting as submitted in written summation by the City Clerk. SUMMARY: Review Approval:1) Clerk Cover Memo Item # 1 Attachment number 1 Page 1 of 3 Item # 1 Attachment number 1 Page 2 of 3 Item # 1 Attachment number 1 Page 3 of 3 Item # 1 Pension Trustees Agenda Council Chambers - City Hall Meeting Date:8/17/2009 SUBJECT / RECOMMENDATION: Approve the transfer of assets from Independence Investments to Lee Munder and authorize staff to sign the appropriate documents and authorize Cap Trust to conduct a small cap growth manager search. SUMMARY: Just before the Trustee meeting of May 15th staff received word that Independence Investments was having some difficulty and might be closing. At the Trustee meeting of May 15th the Trustees gave staff permission to terminate Independence Investments and place the money with Northern Trust in a small cap growth index fund. The Trustees were also concerned about the high cost of moving small cap asset around and direct staff to find the lowest cost way given the situation. Since the meeting of May15th significant changes have been made relative to the situation. The parent company of Independence Investments has purchased the investment management firm of Lee Munder Capital Group. The viable products including the one we are invested in at Independence Investments are being transferred over to Lee Munder Capital Group and Lee Munder will be the surviving entity. No changes will be made in personnel or style with the product we have by Lee Munder. Lee Munder currently has their own viable small cap growth product. Our Pension Plan investment consultant, Cap Trust, is concerned with how long Lee Munder can run two separately managed products in the same space. The consultants believe that at some point in the future the two products will be combined. Cap Trust is recommending that we stay with Independence/Lee Munder for the near future. They also recommend we start the process to find a replacement manager. Cap Trust has the ability to conduct the search and the cost of the search is included in their current contract. The pension plan can save significant money by waiting to do this transition once a new manager is selected. This would require one transition movement as opposed to the two if we use Northern Trust as a temporary place to hold the money. Investment performance for Independence is as follows: Last Qtr Last 12 Months Independence 22.88% 36th -23.69% 33rd Russell 2000 Growth 23.38% 33rd -24.85% 37th CAI Sm Cap Growth 20.38% 50th -28.38% 50th Review Approval:1) Clerk Cover Memo Item # 2 Pension Trustees Agenda Council Chambers - City Hall Meeting Date:8/17/2009 SUBJECT / RECOMMENDATION: Presentation on Pension Benefit Strategies and Pension Plan Alternatives. SUMMARY: At the May 2009 Pension Trustee meeting, Donna White from PriceWaterhouseCoopers (Pension Plan actuary) and Robert Klausner from Klausner and Kaufman (Pension Plan attorney) discussed pension plan alternatives. As a result of that meeting, the Trustees gave direction to staff to bring back to a subsequent meeting more refined cost data related to making changes to the plan to include the following: - Modify the normal form of benefit to a life annuity (10 year certain and continuous for hazardous duty) - Elimination of overtime pay in benefit determination (in excess of 300 hours for Police) - Modify retirement eligibility (elimination of "20 and out" for hazardous duty and "30 and out" for non-hazardous duty - Placing limits on service credit - Second tier for newly hired employees Donna White from PriceWaterhouseCoopers will make a presentation on some more refined alternatives on Retirement Benefits Strategies and Plan Design Alternatives. Staff from Human Resources, Finance and City Management will be available to provide information as needed. Following discussion by the Trustees, staff would like direction from the Trustees' on any further action that they wish staff to pursue. Review Approval:1) Clerk Cover Memo Item # 3 City of Clearwater Plan Design Alternatives August 2009 PwC Item # 3 Agenda –Considerations in Retirement Plan Strategy –Plan Alternatives Item # 3 Considerations in Retirement Plan Strategy –Recruiting and retention goals –Financial considerations –Union considerations PricewaterhouseCoopers August 2009 Slide 3 –Union considerations –Employee understanding and appreciation –Salary replacement percentages Item # 3 Plan Alternatives –Modify the normal form of payment to a life annuity –Elimination of overtime pay in benefit determination –Modify retirement eligibility PricewaterhouseCoopers August 2009 Slide 4 –Service limit –Second-tier plan for newly hired employees Item # 3 Modify the normal form of payment Plan Alternatives –Plan currently provides an automatic spousal benefit at no cost to the employee –Normal form could become life annuity for non-hazardous duty and 10 year certain and life for hazardous duty –Optional forms of benefit would require actuarial reduction in benefit –A change in the normal form of payment would result in savings of PricewaterhouseCoopers August 2009 Slide 5 –A change in the normal form of payment would result in savings of approximately $3,000,000 annually 2009 2010 2011 2012 If payment form assumption changed (7.5% asset return)20,951,000 20,253,639 21,753,479 27,691,283 Estimated percent of payroll 25.52%24.35%25.73%32.22% Current plan projections - no changes (7.5% asset return)23,949,000 23,139,140 24,682,239 30,566,895 Estimated percent of payroll 29.17%27.82%29.19%35.57% Estimated City Required Contribution Item # 3 Modify the normal form of payment –Can not eliminate for those currently eligible to retire –If married, current form of benefit compared to a single life benefit provides a 6% higher benefit for a 45 year old and 18% for a 65 year old –Atypical to provide spousal benefits without a reduction Plan Alternatives PricewaterhouseCoopers August 2009 Slide 6 –Atypical to provide spousal benefits without a reduction in benefits Item # 3 Elimination of overtime pay in benefit determination –Plan currently uses all overtime pay in benefit calculations –Florida statutes require use of overtime pay up to 300 hours for police Other Plan Changes PricewaterhouseCoopers August 2009 Slide 7 hours for police –Eliminating overtime in excess of 300 hours would decrease the City’s contribution by approximately $50,000 annually Item # 3 –Observations are that overtime increases as employee nears retirement in order to increase pay for retirement calculation –Impact on funding contribution is minimal because does not anticipate increase in overtime near retirement –Savings will be seen in the actual trust payments to retirees Elimination of overtime pay in benefit determination Other Plan Changes PricewaterhouseCoopers August 2009 Slide 8 –Savings will be seen in the actual trust payments to retirees –As an example, a 30 year employee working excessive overtime, might get a 20% higher retirement benefit but with the 300 hour limit the increase would be 6% –Controls on overtime pay might be able to accomplish some savings without this plan change Item # 3 Modify retirement eligibility Plan Alternatives –Current plan normal retirement eligibility is: Hazardous Duty - 20 years of service - age 55 w/10 years of service Non-Hazardous Duty - 30 years of service - age 55 w/ 20 years of service - age 65 w/ 10 years of service –Elimination of eligibility at 20 years of service for hazardous duty and 30 PricewaterhouseCoopers August 2009 Slide 9 2009 2010 2011 2012 If retirement eligibility changed (7.5% asset return)21,940,000 21,300,773 22,742,140 28,316,606 Estimated percent of payroll 26.72%25.61%26.88%32.83% Current plan projections - no changes (7.5% asset return)23,949,000 23,139,140 24,682,239 30,566,895 Estimated percent of payroll 29.17%27.82%29.19%35.57% Estimated City Required Contribution –Elimination of eligibility at 20 years of service for hazardous duty and 30 years for non-hazardous would result in approximately $2,000,000 annual savings Item # 3 –Can not change for those currently eligible to retire –Eliminates ability of employee hired very young to retire at early age, collecting full pension and moving on to new career Modify retirement eligibility Plan Alternatives PricewaterhouseCoopers August 2009 Slide 10 –May encourage some to remain employed until age 55 Item # 3 Service limit –Currently benefit limit is 100% of pay, which is equivalent to a service limit of 36.36 years –Implementing a 30 year limit on service in benefit determination would decrease the City’s contribution by approximately, $500,000 annually Plan Alternatives PricewaterhouseCoopers August 2009 Slide 11 approximately, $500,000 annually 2009 2010 2011 2012 If service capped at 30 (7.5% asset return)23,353,000 22,595,370 24,168,959 30,112,755 Estimated percent of payroll 28.44%27.16%28.59%35.04% Current plan projections - no changes (7.5% asset return)23,949,000 23,139,140 24,682,239 30,566,895 Estimated percent of payroll 29.17%27.82%29.19%35.57% Estimated City Required Contribution Item # 3 –Can not implement for those currently eligible to retire –May encourage people to leave earlier Service limit Plan Alternatives PricewaterhouseCoopers August 2009 Slide 12 Item # 3 –Implementation of all changes would result in savings of approximately $5,500,000 annually Implementation of all prior alternatives Plan Alternatives PricewaterhouseCoopers August 2009 Slide 13 Item # 3 Creation of a second tier plan –Current employees keep current plan –New employees receive reduced benefits –No noticeable changes in funding for several years Plan Alternatives PricewaterhouseCoopers August 2009 Slide 14 –For example impact of reducing benefit multiplier to 2% for new employees would be a reduction in underlying long- term normal cost of 5% of payroll of the new employees –Appropriate option if the consensus is that benefits are too rich, but do not want to “take away” from expectations of current employees Item # 3 This document was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. © 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Ltd., each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP. PwC Item # 3 City of Clearwater Retirement Benefits Strategy and Plan Design Analysis May 2009 PwC May 2009 Item # 3 Agenda Comparison of Defined Benefit and Defined Contribution Plans Current Plan Projections Plan Alternatives Item # 3 A General Comparison DB vs DC Plans – General Comparison Category Defined Benefit Defined Contribution Investment Control Employer controls investments Employee controls investments Investment Risk Employer bears risk/reward Employee bears risk/reward Funding Flexibility/ Variability in funding Consistent funding - not flexible Employee Understanding Employee may not be able to appreciate value Easier for employee to understand Retirement benefit Benefit determinable at retirement for remainder of lifetime (usually paid in the form of an annuity) -guaranteed benefit Benefit is amount of DC balance (paid in a lump sum ) PricewaterhouseCoopers May 2009 Slide 3 -guaranteed benefit Employees attracted and/or most benefited Longer tenure and/or older employees Shorter tenure and/or younger employees Job Tenure Patterns Encouraged Longer tenure because employees receive greatest benefit accruals at end of long-time service. May lock people into jobs they would otherwise leave. Although employees receive benefits based on salary, not tenure, may encourage employees to change jobs in order to receive access to lump-sum distribution from retirement accounts. Inflation Risk Employer assumes preretirement inflation risk when the formula is based on final average earnings.Employee assumes all inflation risk. Mortality Risk Annuity form of payment results in employer bearing longevity risk. Lump sum results in employee bearing longevity risk. Item # 3 Defined Benefit Plan Pros/Cons Guaranteed Retirement Income for Participants • The guaranteed nature provides income and financial planning security • Enhanced by Cost of Living Adjustments (currently 1.5%) • More important for the City which does not participate in Social Security • Responsibilities of the employees are few Investment Efficiencies DB vs. DC – Summary of Key Ideas PricewaterhouseCoopers May 2009 Slide 4 • Money managers generally consult on plan assets • Additional asset classes are available (private real estate, commodities, etc.) for better diversification • More important for the City’s employees, which do not participate in Social Security Flexibility in plan design • The Plan can protect participants (and spouses) against disability and death • The Plan can increase benefits through various ways: increasing COLA’s or benefit percentages; providing additional early retirement windows and subsidies Item # 3 Defined Benefit Plan Pros/Cons Funding • The City assumes all investment risk; in periods of poor asset or demographic performance contributions can increase considerably Portability • Particularly for younger employees who change jobs more frequently DB vs. DC – Summary of Key Ideas PricewaterhouseCoopers May 2009 Slide 5 Complexity • The general nature and regulatory requirements of DB plans are more complex from an administration standpoint • Participants may struggle with the idea when compared to the cash balance nature of DC plans Item # 3 Defined Contribution Plan Pros/Cons Guaranteed Retirement Income • Responsibility is shifted to the employees • While the possibility of superior returns exists for certain individuals, the majority of participants will experience returns less than that of a professional managing DB funds, with a higher chance of employees being less financially prepared for retirement Inflation Risk DB vs. DC – Summary of Key Ideas PricewaterhouseCoopers May 2009 Slide 6 Investment Risk • Passing investment risk to the employees may lead to employees being less prepared to retire • Consistently managing and allocating personal accounts appropriately requires diligence Item # 3 Defined Contribution Plan Pros/Cons Funding • Required contributions are predictable and easy to calculate • Unfunded liabilities do not exist given the pay-as-you-go nature Portability • Benefits vest after a minimum of three years (employee contributions are always vested) DB vs. DC – Summary of Key Ideas PricewaterhouseCoopers May 2009 Slide 7 Complexity • Inherently easier to administer and understand Item # 3 Current City of Clearwater Retirement Plan Plan Characteristics Current and Historical Funding Needs Projected Funding RequirementsProjected Funding Requirements Participant Examples Item # 3 City of Clearwater Employees’ Pension Plan The current defined benefit plan is a 2.75% of Average Monthl y Compensation multiplied by Years of Service Current employee contributions are 8% of wages and salaries actually paid to a participant Retirement, disability, and death benefits are all paid; vesting occurs after 10 years of service Eligibility varies –Hazard duty: Current City of Clearwater Retirement Plan PricewaterhouseCoopers May 2009 Slide 9 –Hazard duty: - 20 years of service, or - age 55 with 10 years of service; – Non-Hazard: - 30 years of service, or - age 55 with 20 years of service Item # 3 Current and Historical Funding Needs -The city required contribution for the fiscal year beginning October 1, 2009 is approximately $24 million, or 29% of payroll. -This large increase is primarily the result of poor asset performance over the last year. Current City of Clearwater Retirement Plan PricewaterhouseCoopers May 2009 Slide 10 performance over the last year. (in millions)Fiscal year beginning 2006 2007 2008 2009 Total contribution $15.4 $12.5 $10.0 $23.9 As a percentage of payroll 20.3% 15.77% 12.54% 29.17% Historical City Contributions Item # 3 Projected Funding Requirements - Future city contribution requirements are very much dependent on asset return and demographic experience. - Barring unexpected returns, the large asset loss that occurred during 2008 (27%) will take years to recover from. It would take a gain of approximately 48% during 2009 to approach the values from January 1, 2008. Current plan projections have the following assumptions: • Current population will remain static, with exiting employees replaced by new actives with appropriate gender, age and jobs (hazard vs. non-hazard). • Salaries are assumed to continue to increase at 6% Current City of Clearwater Retirement Plan PricewaterhouseCoopers May 2009 Slide 11 • Mortality tables do not change (the state has considered updating mortality as a requirement) • Discount rate remains 7.5% (in millions)Fiscal year beginning 2010 2011 2012 2013 Total contribution – assets return 7.5% $23.1 $24.6 $30.6 $35.3 As a percentage of payroll – assets return 7.5% 27.8%29.2% 35.6% 40.4% Projected City Contributions Item # 3 Projected Funding Requirements Current City of Clearwater Retirement Plan 2009 2010 2011 2012 If current assumptions are met (7.5% asset return)23,949,000 23,139,140 24,682,239 30,566,895 Estimated percent of payroll 29.17%27.82%29.19%35.57% At 0% asset return 23,949,000 28,082,000 32,085,000 36,236,000 Estimated percent of payroll 29.17%33.76%37.95%42.16% At 15% asset return 23,949,000 18,813,000 22,298,000 24,925,000 Estimated percent of payroll 29.17%22.62%26.37%29.00% Estimated City Required Contribution PricewaterhouseCoopers May 2009 Slide 12 As seen above, future city contribution requirements are very much dependent on asset returns. These estimates incorporate asset information through December 31, 2008. Item # 3 Defined Benefit Retirement Benefits Participant Illustrations – Hazard Employee Current City of Clearwater Retirement Plan Age 45 values: Expected FAE $113,000 Defined Benefit $62,000 401(k) Not applicable Total $62,000 Hire Age - 25, Salary - $42,000 50000 60000 70000 efitPricewaterhouseCoopers May 2009 Slide 13 Normal retirement is 20 years of service or age 55 with 10 years of service. In this example, the participant’s NRD is age 45. Includes employee contributions of 8% per year. 0 10000 20000 30000 40000 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 AgeAccrued BenefitEmployer provided accrued benefit Employee provided defined benefit Item # 3 Defined Benefit Retirement Benefits Participant Illustrations – Non-Hazard Employee Current City of Clearwater Retirement Plan Age 55 values: Expected FAE $121,000 Defined Benefit $100,000 401(k) Not applicable Total $100,000 Hire Age - 25, Salary - $25,000 80000 100000 120000 efitPricewaterhouseCoopers May 2009 Slide 14 Normal retirement is 30 years of service, age 55 with 20 years of service, or age 65 with 10 years of service. In this example, the participant’s NRD is age 55. 0 20000 40000 60000 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 AgeAccrued BenefitEmployer provided accrued benefit Employee provided accrued benefit Item # 3 Plan Alternatives Freeze Defined Benefit and replace with Defined Contribution Creation of a second tier plan Decreasing the multiplier in the current plan Other plan changes/options Item # 3 Freeze Defined Benefit replace with Defined Contribut ion Two options – A complete freeze of the DB plan or closing the plan to new entrants. Option 1 represents the most savings; the City’s contribution requirements would drop from the current percent of pay to the Plan Alternatives PricewaterhouseCoopers May 2009 Slide 16 requirements would drop from the current percent of pay to the proposed DC contribution rate plus continued funding of the plan’s UAL (when applicable). Option 2 would create small savings initially, with the full impact of the change not recognized for an estimated 30 years (until the current DB plan is reduced to inactives). Item # 3 Current benefit costs may or may not provide equivalent benefits for a career employee if provided solely by a defined contribution arrangement. Much depends on individual asset returns. Expected benefits for the average and late career employee Plan Alternatives Freeze Defined Benefit replace with Defined Contribution PricewaterhouseCoopers May 2009 Slide 17 Expected benefits for the average and late career employee would most likely be significantly lower. Item # 3 Freeze Defined Benefit replace with Defined Contribut ion - Projected Contributions Freezing the current defined benefit plan will lower the costs for the City – although only a “total freeze” would see any immediate savings. Savings associated with freezing the plan to new entrants would not be recognized until years down the road. The following projections have the following assumptions: • Current population will remain static • Salaries are assumed to continue to increase at 6% • Mortality tables do not change (the state has considered updating mortality as a requirement) Plan Alternatives PricewaterhouseCoopers May 2009 Slide 18 • Discount rate remains 7.5% • Employee contributions continue at 8.0% (allowing for equivalence with the current defined benefit plan) • Employee contributions earn 6% per year • Lump sum values are converted to annuities using funding mortality and interest, with the same form of benefit provided by the defined benefit plan. Males are married to a spouse 5 years younger. • The plan’s funding method after the freeze is unit credit Item # 3 Freeze Defined Benefit replace with Defined Contribut ion - Projected Contributions Plan Alternatives Option 2010 2011 2012 I No plan change (7.5% asset return)23,139,140 24,682,239 30,566,895 Estimated percent of payroll 27.82% 29.19% 35.57% II Defined Benefit plan contribution - DB frozen to new actives 22,440,219 23,373,512 28,962,965 Estimated percent of payroll 28.86% 31.50% 40.97% Hazard - Defined Contribution plan contribution 410,965 782,814 1,155,413 Hazard - Estimated percent of payroll 20.00% 20.00% 20.00% Non-Hazard - Defined Contribution plan contribution 337,055 642,029 947,618 Non-Hazard - Estimated percent of payroll 10.00% 10.00% 10.00% Projected City Required Contribution PricewaterhouseCoopers May 2009 Slide 19 DC plan contribution - total 748,020 1,424,844 2,103,032 Total contribution with a DC plan for new actives 23,188,239 24,798,355 31,065,996 Estimated percent of payroll 27.87% 29.33% 36.15% III Defined Benefit plan contribution - with total plan freeze 3,190,788 3,254,603 3,907,495 Estimated percent of payroll 3.84% 3.85% 4.55% Hazard - Defined Contribution plan contribution 6,301,289 6,404,054 6,510,213 Hazard - Estimated percent of payroll 20.00% 20.00% 20.00% Non-Hazard - Defined Contribution plan contribution 5,168,037 5,252,320 5,339,387 Non-Hazard - Estimated percent of payroll 10.00% 10.00% 10.00% DC plan contribution - total 11,469,326 11,656,374 11,849,600 Total contribution with a defined benefit plan freeze 14,660,114 14,910,977 15,757,095 Estimated percent of payroll 17.62% 17.64% 18.33% Item # 3 Freeze Defined Benefit replace with Defined Contribut ion – Impact Comparison Participant Illustrations – Hazard Employee Plan Alternatives Age 45 values: Expected FAE $113,000 Defined Benefit only $62,000 401(k)only $54,000 Hire Age - 25, Salary - $42,000 50000 60000 70000 PricewaterhouseCoopers May 2009 Slide 20 Frozen DB $17,000 New 401(k) $27,000 Total $44,000 Normal retirement is 20 years of service or age 55 with 10 years of service. In this example, the participant’s NRD is age 45. DC contributions total 28%; 20% from the City and 8% from the employee. 0 10000 20000 30000 40000 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 AgeAccrued BenefitCurrent Plan - no change New hire after Freeze Participant with 10 YoS at Freeze Item # 3 Freeze Defined Benefit replace with Defined Contribut ion – Impact Comparison Participant Illustrations – Non-Hazard Employee Plan Alternatives Age 55 values: Expected FAE $121,000 Defined Benefit only $100,000 401(k)only $59,000 Frozen DB $12,000 Hire Age - 25, Salary - $25,000 80000 100000 120000 PricewaterhouseCoopers May 2009 Slide 21 Frozen DB $12,000 New 401(k) $39,000 Total $51,000 Normal retirement is 30 years of service, age 55 with 20 years of service, or age 65 with 10 years of service. In this example, the participant’s NRD is age 55. DC contributions total 18%; 10% from the City and 8% from the employee. 0 20000 40000 60000 80000 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 AgeAccrued BenefitCurrent Plan - no change New hire after Freeze Participant with 10 YoS at Freeze Item # 3 Creation of a second tier plan •Current employees keep current plan •New employees receive reduced benefits •No noticeable changes in funding for several years Plan Alternatives PricewaterhouseCoopers May 2009 Slide 22 •Impact of reducing benefit multiplier to 2% for new employees would be a reduction in underlying long-t erm normal cost of 5% of payroll of the new employees. Item # 3 Creation of a second tier plan Participant Illustrations – Hazard Employee - Impact of a decrease in accrual Plan Alternatives Age 45 values: Expected FAE $113,000 Original DB Plan $62,000 New DB Plan $45,000 Hire Age - 25, Salary - $42,000 50000 60000 70000 PricewaterhouseCoopers May 2009 Slide 23 Normal retirement is 20 years of service or age 55 with 10 years of service. In this example, the participant’s NRD is age 45. 0 10000 20000 30000 40000 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 AgeAccrued BenefitCurrent Plan 2% Accrual Plan Item # 3 Creation of a second tier plan Participant Illustrations – Non-Hazard Employee - Impact of a decrease in accrual Plan Alternatives Age 55 values: Expected FAE $121,000 Original DB Plan $100,000 New DB Plan $73,000 Hire Age - 25, Salary - $25,000 100000 120000 PricewaterhouseCoopers May 2009 Slide 24 Normal retirement is 30 years of service, age 55 with 20 years of service, or age 65 with 10 years of service. In this example, the participant’s NRD is age 55. 0 20000 40000 60000 80000 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 AgeAccrued BenefitCurrent Plan 2% Accrual Plan Item # 3 Decreasing the multiplier in the current plan An alternative to creating a second tier plan would be to decrease the current multiplier for all years of service. •Current accrued benefits would be a minimum. •Most participants would see no accruals for the next 3-4 years. •The exhibit below shows the impact on funding of this change; no other assumption changes from our initial projection. Plan Alternatives PricewaterhouseCoopers May 2009 Slide 25 2009 2010 2011 2012 If current assumptions are met (7.5% asset return)4,823,000 5,650,329 7,717,930 14,655,507 Estimated percent of payroll 5.87%6.79%9.13%17.05% Estimated City Required Contribution Item # 3 Decreasing the multiplier in the current plan Participant Illustrations – Hazard Employee Plan Alternatives Age 45 values: Expected FAE $113,000 Original DB Plan $62,000 New DB Plan $45,000 Hire Age - 25, Salary - $42,000 50000 60000 70000 efitPricewaterhouseCoopers May 2009 Slide 26 Normal retirement is 20 years of service or age 55 with 10 years of service. In this example, the participant’s NRD is age 45. 0 10000 20000 30000 40000 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 AgeAccrued BenefitCurrent Plan - no change Decreased multiplier Item # 3 Creation of a second tier plan Participant Illustrations – Non-Hazard Employee - Impact of a decrease in accrual Plan Alternatives Age 55 values: Expected FAE $121,000 Original DB Plan $100,000 New DB Plan $73,000 Hire Age - 25, Salary - $25,000 80000 100000 120000 PricewaterhouseCoopers May 2009 Slide 27 Normal retirement is 30 years of service, age 55 with 20 years of service, or age 65 with 10 years of service. In this example, the participant’s NRD is age 55. 0 20000 40000 60000 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 AgeAccrued BenefitCurrent Plan - no change Decreased multiplier Item # 3 Other Plan Changes/Options to Consider Increasing employee contributions from the current 8% Eliminate/decrease the COLA Service limit Elimination of overtime pay in excess of 300 hours Eliminate the “Twenty and Out” provision for new hiresEliminate the “Twenty and Out” provision for new hires Increase normal retirement age to a minimum of 55 and 10 Modify the normal form of payment to a life annuity Voluntary reduction in force FRS Item # 3 Increased Participant Contribution Rates Current participant contribution rate – 8% Increasing the percentage to 9% would decrease the City’s contribution by approximately 1% of pay, or $800,000. Other Plan Changes PricewaterhouseCoopers May 2009 Slide 29 2009 2010 2011 2012 Participants contribute 8% (7.5% asset return)23,949,000 23,139,140 24,682,239 30,566,895 Estimated percent of payroll 29.17%27.82%29.19%35.57% Participants contribute 9% (7.5% asset return)23,949,000 22,276,077 23,811,057 29,687,036 Estimated percent of payroll 29.17%26.78%28.16%34.54% Participants contribute 10% (7.5% asset return)23,949,000 21,413,014 22,939,876 28,807,178 Estimated percent of payroll 29.17%25.74%27.13%33.52% Estimated City Required Contribution Item # 3 COLA changes Current cost of living adjustment – 1.5% Decreasing the percentage .5% (to 1.0%) would decrease t he City’s contribution by approximately $600,000 in 2010, with the impact increasing in future years. Other Plan Changes PricewaterhouseCoopers May 2009 Slide 30 impact increasing in future years. 2010 2011 2012 If current assumptions are met (7.5% asset return) 23,139,140 24,682,239 30,566,895 Estimated percent of payroll 27.82% 29.19% 35.57% If COLA is reduced to 1% in 2010 22,456,065 23,960,571 29,808,020 Estimated percent of payroll 26.99% 28.34% 34.68% Estimated City Required Contribution Item # 3 This document was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. © 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Ltd., each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP. PwC Item # 3 Attachment number 3Page 1 of 10 Item # 3 Attachment number 3Page 2 of 10 Item # 3 Attachment number 3Page 3 of 10 Item # 3 Attachment number 3Page 4 of 10 Item # 3 Attachment number 3Page 5 of 10 Item # 3 Attachment number 3Page 6 of 10 Item # 3 Attachment number 3Page 7 of 10 Item # 3 Attachment number 3Page 8 of 10 Item # 3 Attachment number 3Page 9 of 10 Item # 3 Attachment number 3Page 10 of 10 Item # 3