Requesting Department: Finance HONORABLE MAYOR AND TOWN COUNCIL SCOTT MCCARTY, FINANCE DIRECTOR THROUGH: JOHN KROSS, TOWN MANAGER

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1 Requesting Department: Finance TO: FROM: HONORABLE MAYOR AND TOWN COUNCIL SCOTT MCCARTY, FINANCE DIRECTOR THROUGH: JOHN KROSS, TOWN MANAGER RE: CONSIDERATION AND POSSIBLE APPROVAL OF RESOLUTION No UPDATING THE TOWN S PENSION FUNDING POLICY AND AUTHORIZE THE NECESSARY BUDGET ADJUSTMENTS AND ACCOUNTING TRANSACTIONS DATE: JUNE 20, 2018 Staff Recommendation: Staff recommends approval of Resolution No updating the Town s Pension Funding Policy and authorize the necessary budget adjustments and accounting transactions. Relevant Council Goals Effective Government Safe Community Public Safety Discussion: The Pension Funding Policy was initially adopted in The Town staff recommends an update to the existing Policy. The update clarifies some language in the existing policy and expands the policy to address the three pension plans the Town participates in. The policy establishes a new Unfunded Pension Liability Reserve for the amount associated with the Town s contract with the Maricopa County Sheriff s Office (MCSO) and the Arizona State Retirement System (ASRS). The edits to the policy are identified in bold and underlined. Page 1 of 6

2 Managing the Town s pension costs is critical to our long-term financial stability. It cannot be emphasized enough the truly unique opportunity the Town has to address pension cost so they do not have an adverse impact on us in the future. We are in a very opportunistic position given our young age and our expected revenue growth in the next several years. To the best of staff s knowledge, this is among the most comprehensive Pension Funding Policy of any city or town in Arizona and, perhaps, the country. The objectives of our Pension Funding Policy are: 1. Fully funded pension plans. Maintain adequate assets so that current plan assets plus future contributions and investment earnings are sufficient to fund all benefits expected to be paid to members and their beneficiaries. The target funded ratio goal is 100% (full funding). Taxpayer and member equity is best achieved at full funding. At full funding, both the member and taxpayer have paid the appropriate costs incurred to date. 2. Maintain intergenerational equity. Pension costs are paid by the generation of taxpayers who receive the services. Fully funded pension plans are the best way to achieve taxpayer and member intergenerational equity. Pensions that are less than fully funded place the cost of service provided in earlier periods on the current and future taxpayers. If the plan is underfunded (less than 100%), future members and taxpayer are responsible for an unfair portion of plan costs. 3. Maintain stability of the Town s contribution amounts. 4. Maintain public policy goals of accountability and transparency. Each policy element is clear in intent and effect, and each should allow an assessment of whether, how and when the funding requirements of the plan will be met. Fiscal Impact The Town has three pension costs: 1. Sworn fire personnel; 2. Costs included in the Maricopa County Sheriff s Office (MCSO) Contract, 3. All other employees that are not sworn fire personnel that are covered by the Arizona State Retirement System (ASRS). Page 2 of 6

3 The total estimated unfunded liabilities are almost $41.4 million and annual costs to pay off those liabilities are about $2 million as shown in the schedule below. Pension Plan Unfunded Pension Liability at June 30, 2017 Annual Cost to Payoff Unfunded Pension Liability 1.Sworn Fire Personnel $668,490 $85,876 2.MCSO Contract $19,655,965 $1,077, ASRS $21,072,429 $843,967 TOTAL $41,396,884 $2,007,684 Each cost is explained below. 1. Sworn Fire Personnel The Public Safety Personnel Retirement System (PSPRS) provides a definedbenefit retirement system for all public safety employees in Arizona. PSPRS is an agent multiple-employer, public employee retirement system that acts as a common investment and administrative agent to provide retirement and death and disability benefits for public safety personnel who are regularly assigned hazardous duty in the employ of the State of Arizona or a political subdivision thereof. This is not a pooled system a separate account exist for police and fire employees of each participating political subdivision. Each plan has its own financial condition, funding status, etc. which varies greatly across the system. The Town has a Fire Pension Plan for our sworn fire personnel. The Pension Funding Policy requires the unfunded liability amount be paid off annually. As of June 30, 2017 (the most recent actuarial valuation available), the Town s Fire Plan had an unfunded liability is $668,490 and was 92% funded. This means liabilities of $8,309,699 were $668,490 in excess of assets of $7,641,209. This reflects a decrease in funded status from the prior year from 96% to 92%. The decrease is primarily the result of changes to several actuarial assumptions to reflect expected performance. The following assumption were changed: decreased interest rates, decreased wage growth assumptions, and increased life expectancy assumptions. Eliminating the unfunded liability reduces future costs paid by the Town. Staff estimates that eliminating the unfunded liability will reduce annual pension costs by about $86K. To make the recommended payment to eliminate the unfunded liability of $668,490, a budget adjustment is necessary. It is recommended that this amount Page 3 of 6

4 of budget authority be reallocated from the Capital Improvement Plan contingency account to the pension expense account in the Emergency Services Fund. 2. Maricopa County Sheriff s Office (MCSO) Contract MCSO has its own pension plan within PSPRS just as the Town does for fire. Additionally, MCSO passes its pension costs directly on to the Town via our service contract. The Town does not have a PSPRS plan for our share of the MCSO unfunded pension liability. As a result, an alternative approach has been developed to achieve the objectives identified in the Pension Funding Policy. Staff s recommendation is to create an MCSO Unfunded Pension Liability Reserve account on the Town s books to prefund our allocation of the MCSO unfunded pension liability. As of June 30, 2017, Town staff has calculated our allocation of MCSO s total unfunded liability at $19.7 million. In FY 18-19, about $1.1 million will be paid to MSCO for our share of their unfunded liability. Our amounts were allocated based on the Town s number of employees as a percentage of the total active MCSO employees. The Town s employees are about 6% of all MCSO employees. Because the Town does not have a plan within PSPRS for this liability, we cannot prepay our liability to PSPRS as we do with our fire plan. However, by creating the reserve, we are accomplishing the same objectives identified in the Pension Funding Policy and removing these costs from being paid with future year revenues. Specifically, this reserve will be drawn down by $1.1 million in FY to pay the Town s portion of unfunded pension liability. Then, when the next year s actuary report is issued, the Unfunded Pension Reserve will be reset to that amount. It is possible the Unfunded Pension Liability increases if actual results differ from expected results. Regardless, the intention is the annual portion of the unfunded liability payment will come from the reserve account and not existing year s revenues. Given the amortization timeline set by the PSRPS Board, the Unfunded Pension Liability will be paid off in It is important to note that this reserve does not save the Town money as prepaying off our PSPRS liability for our Fire plan does. Instead, the reserve ensures current year revenues are not used to pay prior year expenses and those revenues can be allocated to provide direct services to the community today. 3. Arizona State Retirement System (ASRS) Those employees that are not in the Town s Fire Pension Plan are in ASRS. As a result, most of our employees are in ASRS. Page 4 of 6

5 ASRS is administered as a cost-sharing, multiple-employer pension plan. This system has two main functions: 1) to comingle assets and liabilities of all member entities under its administration, thus achieving economy of scale for more cost efficient investments, and 2) serve as the statewide uniform administrator for the distribution of benefits. Under this system, each agency participating in the plan is allocated its individual share of assets and liabilities. As such, the Town does not have its own, separate plan as it does with Fire under PSPRS. As a result, an alternative approach has been developed to achieve the objectives identified in the Pension Funding Policy. Staff s recommendation is to create an ASRS Unfunded Pension Liability Reserve account on the Town s books to prefund our allocation of the ASRS unfunded pension liability. As of June 30, 2017, the Town s allocation of the ASRS unfunded pension liability is about $21 million. ASRS performs the Town s allocation calculation. Of this amount, it is allocated to the following funds and has the effect of reducing expenses paid by current revenues as shown below: Pension Plan Unfunded Pension Liability at June 30, 2017 Annual Cost to Payoff Unfunded Pension Liability Operating Budget $16,586,444 $664,300 Water Fund $3,776,154 $151,238 Wastewater Fund $387,767 $15,530 Solid Waste Fund $322,064 $12,899 TOTAL $21,072,429 $843,967 This reserve will work the same as the MSCO Unfunded Liability Reserve. Given the amortization timeline set by the ASRS Board, the Unfunded Pension Liability will be paid off in It is important to note that this reserve does not save the Town money as prepaying off our PSPRS liability for our Fire plan does. Instead, the reserve ensures current year revenues are not used to pay prior year expenses. Timing re. Funding of Unfunded Liability Reserves Page 5 of 6

6 The funding of these Unfunded Pension Liability Reserve accounts will take several years. As such, the policy outlines the order in which the reserves will be funded. Town staff expects the reserves to be fully funded as follows: By June 30, The ASRS Unfunded Pension Liability Reserves in the Water, Wastewater, and Solid Waste Funds will be fully funded. By June 30, The MCSO Unfunded Pension Liability Reserve will be fully funded. However, please note a significant amount of this Reserve will be funded as of June 20, 2018 and the $1.1 million in unfunded liability costs will be paid from this Reserve beginning in FY Town staff expects it to be fully funded by June 30, All resources in excess of the Town s Operating Budget s 25% Reserve policy will be used to fund this reserve. By June 30, Town expects the Operating Budget portion of the ASRS Unfunded Pension Liability to be funded by then. Per policy, this reserve is funded after the MCSO Unfunded Pension Liability Reserve is fully funded. Future Policy Updates Given the nature of the assumptions used to calculate the estimated unfunded liabilities, it is highly likely these amounts will increase in the future. Over the course of the next year, Town staff will be evaluating these assumptions and will make recommendations about how to ensure the actuary assumptions better reflect actual activity to reduce the growth of the unfunded liabilities. As a result, we expect another update to the Pension Funding Plan for FY Attachments: Resolution No Page 6 of 6

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