ANNUAL BUDGET. January 1 - December 31, OHIO POLICE & FIRE PENSION FUND // Securing the future for Ohio s police & firefighters

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1 2014 ANNUAL BUDGET January 1 - December 31, 2014 OHIO POLICE & FIRE PENSION FUND // Securing the future for Ohio s police & firefighters f.org w.op.org

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3 Annual Budget for Fiscal Year 2014 Ohio Police & Fire Pension Fund Prepared through the combined efforts of the OP&F staff. 140 East Town Street Columbus, Ohio f.org

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5 Annual Budget for Fiscal Year 2014 TABLE OF CONTENTS Table of Contents Executive Summary Distinguished Budget Presentation Award vi OP&F Mission, Vision and Core Values...vi Budget Message Letter from Executive Director... 1 Budget Policy and Trends OP&F Overview... 6 Fund Policy... 7 Benefit Funding Policy... 8 Long-term Goals and Objectives... 8 Funding Administration... 9 Reserve and Fund Balances...12 Debt Obligations...14 Budget Financial Categories...14 Additions to Total Plan Assets...14 Deductions from Total Plan Assets...17 Budget Management and Other Planning Processes...18 Budget Structure...21 Budget Production, Preparation and Adoption...22 Budget Oversight...23 Overview of Budget Process...24 Reserve and Fund Balances...25 Funding Structure...26 Total Plan Assets Budget Projected Changes in Total Plan Assets Budget...28 Total Plan Assets Budget Review...28 Plan Additions...29 Plan Deductions...32 Statement of Changes in Total Net Plan Assets...34 Total Plan Assets Budget Revenues by Category...36 Total Plan Assets Budget Expenses by Category...36 Employer and Member Contributions vs. Benefits Paid Chart..36 Administrative Operating Budget OP&F Organizational Chart...50 Total Administrative Operating Budget...51 Total Administrative Operating Budget Review...52 Budget Summary...54 Three-Year Capital Budget Summary...54 Operating Budget Highligts...55 Initiative Highlights...55 Executive Summary of OP&F Budget...56 Personnel Highlights...56 Administrative Operating Summary Totals by Department...56 Administrative Operating Budget and Actual Comparison...56 Personnel Position Changes...56 Position Summary by Department...56 Departmental Review Tabs Administration Department...58 Finance Department...66 Information Services Department...72 Investment Department...78 Member Services Department...86 Board of Trustees...92 Supplemental and Glossary of Terms Active and Retired Member Statistics Average Benefit Payments and Expenses...97 Number of Employer Units...98 Short-Term Solvency test...99 Contribution and Actuarial Interest Rate History Demographics and Economic Impact Glossary of Terms Capital Outlay Budget Capital Outlay Budget by Category...38 Capital Outlay Budget...39 Purpose of Separate Capital Budget...39 Priorities...39 Depreciation Methods, Estimated Useful Lifes and Salvage Values...40 Status of Capital Projects, New Initiatives...40 Status of Capital Projects, Review of 2013 Initiatives...43 OP&F page v

6 EXECUTIVE SUMMARY Annual Budget for Fiscal Year 2014 Distinguished Budget Presentation Award 2013 The Government Finance Officers Association of the United States and Canada (GFOA) presented a Distinguished Budget Presentation Award to Ohio Police & Fire Pension Fund (OP&F), for its annual budget for the fiscal year beginning January 1, In order to receive this award, a governmental unit must publish a budget document that meets program criteria as a policy document, as an operational guide, as a financial plan and as a communications device. This award is valid for a period of one year only. OP&F believes our current budget continues to conform to program requirements, and we are submitting it to GFOA to determine its eligibility for another award. OP&F s Mission, Vision and Core Values Mission Securing the future for Ohio s police and firefighters. Vision The Ohio Police & Fire Pension Fund will continue to be a leader and model among retirement systems, providing peace of mind to our members and a level of service that exceeds expectations. Core Values Prudence OP&F will make prudent decisions while delivering our benefit services, selecting our investment strategies and executing our operational practices. Integrity The integrity of our organization is based on accuracy, credibility and ethical conduct at all times. Empathy OP&F will respond in an appropriate and timely manner with respect and honesty to all inquiries from every audience. OP&F page vi

7 Budget Message Letter from the Executive Director Annual Budget for Fiscal Year 2014 EXECUTIVE SUMMARY 140 East Town Street / Columbus, Ohio / Tel. (614) / f.org Dec. 18, 2013 Trustees of the Ohio Police & Fire Pension Fund (OP&F), I am pleased to submit this proposed Total Plan Assets and Annual Administrative Operating Budget for fiscal year 2014, along with the Capital Outlay Budget covering fiscal years for your review and approval. All indications show that our investments are headed toward another excellent year of returns. This and the implementation of landmark pension reform legislation have greatly improved OP&F s long-term pension funding. Despite these considerable accomplishments, we remain committed to a fiscally responsible approach. Our process examines each line item throughout the organization s budget and scrutinizes every corner of our operation. It is important that our members and the Ohio s elected officials are aware of these responsible and conservative spending practices. The Administrative Operating Budget for 2014 is $62.5 million, which represents a decrease of 0.2 percent from This includes routine operating costs and direct paid investment costs. Fortunately, we continue to benefit from a steadily improving economy and generally positive investment environment. A significant reason for the overall decrease in the Operating Budget is a 1.7 percent decrease in Investment management fees, or $702,602. While a general upturn in the capital markets over the past year increased our asset base by roughly 7.4 percent, the decrease in fees is attributable to a shift of assets to managers that deduct fees from their fund assets rather than OP&F paying the fees directly to the managers. Other categories showing a noteworthy decrease from last year s budget are the Office Equipment budget, down 13.3 percent, or $14,398 and the Personnel Recruitment budget, down 52.0 percent, or $16,400. Two significant increases to note are the Health Insurance budget within the Personnel Services budget, which will increase 6.8 percent increase, or $144,143; and the Other Professional Services budget, which is up 93.7 percent, or $133,927 due to a network security assessment and the addition of a trustee election in OP&F did not hold any trustee elections in OP&F s 2014 operating costs are budgeted for $21.6 million, representing an increase of 2.8 percent from While containing costs as much as possible, the increase allows us to again improve services to our members and support OP&F s commitment to its mission, vision and core values. Based on trends observed in recent years and using an actuarial investment rate of return of 8.25 percent, OP&F is budgeting net assets to increase approximately $385.6 million in Our Capital Outlay Budget is $2.8 million for the three-year cycle from OP&F continues to see an increase in size of benefits paid out over the amount of contributions received. In 2014, OP&F is anticipating a 4.8 percent increase in total contributions over the 2013 actual forecast. Additionally, OP&F is anticipating benefit payments of $1.4 billion versus the $704.8 million in contribution receipts. Changes included in pension reform legislation have helped stem this trend, and will continue to do so OP&F page 1

8 EXECUTIVE SUMMARY Annual Budget for Fiscal Year 2014 Budget Message Letter from the Executive Director over the long-term. As has been the trend, investment income is depended on to balance these payments versus receipts and is budgeted at $1.2 billion in A REVIEW OF 2013 As described within this budget, OP&F again had several significant accomplishments in 2013: Pension reform legislation was signed on Sept. 26, However, implementation took place throughout System changes and updates, communications with members and employers and the production of updated publications and forms were crucial to a smooth implementation of the provisions included in this landmark legislation. Highlights include: Require employers to submit all payments (employer and member contributions) monthly. Previously, the employer contributions were paid quarterly; An increase the active member contribution rate from 10 percent to percent, in annual increments of 0.75 percent each year beginning on July 2, 2013; The normal service retirement age increased from 48 to 52 for new members hired as of July 2, 2013 and provides a reduced benefit option for those who still desire to retire at age 48 with 25 years of service; The cost-of-living adjustments (COLA) are now either the Consumer Price Index or three percent, whichever is less, for those members who have less than 15 years of service credit or who are hired as of July 2, 2013; COLAs are now delayed until age 55 for all benefit recipients, excluding statutory survivors and members receiving permanent and total disability benefits effective July 1, 2013; The average annual salary is redefined as the highest five years of contributions for those members who have less than 15 years of service credit as of July 2, 2013 or who are hired as of July 2, 2013; The minimum Deferred Retirement Option Plan (DROP) participation period has been changed from three years to five for members who become DROP participants as of July 2, 2013; COLAs have been eliminated during DROP for members who become DROP participants as of July 2, Members who were in DROP prior to that date will receive COLAs while in DROP if they are at least age 55 and have participated in the plan for 12 months; There is a reduction in the percentage of the member contribution that is credited to DROP for members who become DROP participants as of July 2, 2013; A new salary benchmark is established under which certain increases are excluded from salary for the purpose of determining average annual salary for members who have 15 or more years of service before July 2, 2013; and The Board of Trustees now has the authority to adjust the age and service credit requirements and member contribution rate (higher or lower) beginning Nov.1, 2017, and every five years afterward. The Pension Administration System V3 Browser Version Upgrade continued and was completed in November This initiative upgraded the previous version of V3 to the new browser-based version. A majority of the upgrade work was done by Vitech resources using our previous V3 system as a guideline for the new browser system. A new vendor was selected in 2013 to supply, install and maintain new mailing equipment. Our new equipment is built with updated technology needed to increase efficiency and performance for the next several years. OP&F page 2

9 Annual Budget for Fiscal Year 2014 EXECUTIVE SUMMARY In 2013, four full-time positions were eliminated in the Member Services Department. These positions were eliminated through attrition and no employees were laid off. One full-time position was permanently eliminated when the Processing team moved to an all electronic handling of disability work. Three management team positions were also eliminated by consolidating two teams under a single supervisor and manager, thus eliminating the second supervisor and manager positions. The Processing Supervisor position was also eliminated. LOOKING AHEAD TO 2014 OP&F continues to strive to become the most efficient and dynamic organization possible. In 2014 we will once again undertake a series of initiatives designed to position OP&F for future growth. Examples of 2014 initiatives are: OP&F expects to contract with a company in 2014 to perform a security assessment of our network and websites. This would involve a full review of all security equipment currently installed, a complete checkup of the corporate infrastructure and recommended fixes, and specifying an industry standard of security. The last assessment was in Effective Jan.1, 2014, the Contributions Manager position within Member Services will be eliminated due to retirement. The Processing Supervisor position will be reestablished to lead the day-to-day management of that team and will report directly to the Member Transactions Manager, whose role and responsibility will expand to also include the Pension Calculations and Prior Service teams. These changes are made to streamline reporting lines, recognize a promotional opportunity and consolidate work routines within the department. OP&F expects to retain the services of an independent consultant in 2014 to assist with private market investments. Hiring a consultant to assist in investment sourcing and due diligence efforts is expected to result in a significant reduction in total costs over time, even with the addition of the consultant s associated fees. Additionally, the consultant will provide staff with additional knowledge with respect to sourcing and due diligence efforts. The OP&F Administration Department will add one full-time Member Education Representative to the Member Education Group in The position would be responsible for conducting member preretirement interviews, assisting with member walk-ins, preparing pension estimates for interviews, mail out requests, and assist with OP&F pre-retirement seminars and special request meetings as needed. In conjunction with Ohio s other public retirement systems, OP&F plans to participate in this comprehensive study that aims to measure the positive impact Ohio s pension funds have on the state s economy. OP&F is currently projecting a 16 percent return in 2013, once again exceeding our 8.25 percent target return. This marks the fourth time in the five years since the 2008 financial market crisis that OP&F has significantly outgained our assumed return. We remain committed to sound investment principles and our team of consultants and staff continue to provide the Board with investment strategies and options in the best interests of our membership. The portfolio value currently stands at approximately $14.1 billion. This budget is the first to reflect a full year of impact of the contribution and benefit changes made in pension reform legislation. These changes were well thought-out by first the Board of Trustees and also by the Ohio General Assembly in crafting Senate Bill 340 in The changes bring long-term financial stability to OP&F and bring us within reach of the state s 30-year funding requirement. OP&F continues to work with the Ohio Retirement Study Council and the Ohio General Assembly toward the funding goals that remain. OP&F page 3

10 EXECUTIVE SUMMARY Annual Budget for Fiscal Year 2014 The annual pension actuarial valuation completed by Buck Consultants, shows that our funding ratio as of Jan. 1, 2013, is 64.2 percent based on the actuarial value of assets, an improvement over the 63.1 percent from the previous valuation. Additionally, the valuation shows a significant improvement in OP&F s funding period. Investment returns and the effect of pension reform legislation have moved the funding period from infinity to 47 years. The report confirms that we continue to be able to meet our current and future pension obligations ADMINISTRATIVE OPERATING BUDGET The proposed budget for 2014 is $62.5 million, which represents.45 percent of OP&F s projected assets as of Dec. 31, As described below, this is a.2 percent decrease overall from OP&F s revised 2013 budget. Operating Costs $21,568, % increase from 2013 Investment Management 40,905, % decrease from 2013 TOTAL BUDGET $62,474, % DECREASE FROM 2013 We continue to organize OP&F s departmental structure to increase efficiency and streamline operations. Other significant highlights of our operating budget are as follows: Since a formal budget process was put in place in 1998, OP&F has not exceeded its annual budget in actual spending, with the exception of investment management fees during 2010 which was driven by market increases. The full-time headcount is 142 for 2014, up one net position from 141 in This includes the addition of a member education position, the addition of a systems administrator, and the elimination of an accounting specialist. In 2014, investment management fees are budgeted at $40.9 million, representing a 1.7 percent decrease from The decrease is attributable to a shift of assets to managers that deduct fees from their fund assets rather than OP&F paying the fees directly to the managers. In closing, I wish to express my gratitude to each of Department Director and their staffs for the efforts in preparing of this budget. It is a team effort and has resulted in a budget that I believe will serve as an effective financial and management guide for the coming year. I welcome the opportunity to address any questions that you may have regarding this document. Respectfully submitted, John J. Gallagher, Jr. Executive Director OP&F page 4

11 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS Budget Policy and Trends Annual Budget for Fiscal year East Town Street Columbus, Ohio f.org OP&F page 5

12 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 OP&F Overview OP&F is a cost sharing multiple-employer public employee retirement system, providing pension and disability benefits, and an optional health care plan to qualified participants. In addition, survivor and death benefits and an optional health care plan are provided to qualified spouses, children, and dependent parents. OP&F is designed to provide an adequate retirement income to participants and their beneficiaries when they need it most when they stop working, become disabled or in the event of death. The Ohio General Assembly (OGA) created OP&F in 1965, to replace 454 separate local police and firefighter s relief and pension funds, many of which were close to financial insolvency. The statewide fund began operating Jan. 1, 1967, when the local pension funds transferred their assets and liabilities to OP&F. Assets transferred to OP&F were about $75 million, with accrued liabilities at just under $500 million. Since then, OP&F has grown to become the 119th largest pension plan in the United States (Pensions & Investments, Feb. 3, 2014), with approximately $ billion in assets under management at the end of Dec OP&F covers police and fire employers in Ohio cities, villages and townships. Total membership is more than 54,000 individuals, including both active employees and OP&F pensioners and their survivors. Membership in OP&F is mandatory under Ohio law for all full-time police officers and firefighters in Ohio. There are 917 active participating employers representing 27,444 current active members and 27,243 retirees and beneficiaries. Governance The Board of Trustees is the governing body of the organization and is responsible for the administration, control and management of OP&F including, but not limited to: Ohio s five public retirement systems adopting administrative rules and policies for the operation of the fund; approving and disapproving disability grants; approving and disapproving the appointment of external investment managers; adopting an annual administrative budget; reviewing annual actuarial reports and the financial audit; and administering and determining the plan design and level of benefits for the OP&F sponsored health care program. Ohio law provides for the OP&F Board of Trustees to consist of nine members, including six employee members elected to four year terms by their respective member groups: Two representatives of police departments; Two representatives of fire departments; One retired firefighter; and One retired police officer. The Board also has an additional three members with professional investment experience: One appointed by the Governor; One by the Treasurer of State; and One appointed jointly by the Senate President and Speaker of the House. Although OP&F remains an independent organization, the ORSC provides legislative oversight on behalf of the OGA. The ORSC assists the state legislature, governor, and other public officials in the formation of sound public pension policy. The ORSC provides legislative oversight to each of Ohio s five public retirement systems: OP&F, the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the School Employees Retirement System of Ohio and the Ohio Highway Patrol Retirement System. Active Retirees and Net Assets * Retirement System Members Beneficiaries (in millions) Ohio Public Employees Retirement System (OPERS) 348, ,832 $ 74,030.9 State Teacher s Retirement System of Ohio (STRS) 169, ,221 68,654.5 Ohio Police & Fire Pension Fund (OP&F) 27,444 27,243 14,068.0 School Employees Retirement System of Ohio (SERS) 121,642 78,017 11,679.8 Ohio Highway Patrol Retirement System (OHPRS) 1,645 1, TOTALS: 668, ,939 $ 169,151.1 *STRS & SERS based on fiscal year ending 06/30/13, remaining are calendar year ending 12/31/12. OP&F page 6

13 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS Fund Policy OP&F is a separate financial reporting entity in accordance with criteria established by Governmental Accounting Standards Board (GASB) Statement No. 14 The Financial Reporting Entity. This statement was issued by the GASB to establish standards for defining and reporting on the financial reporting entity. The concept underlying the definition of the financial reporting entity is that elected officials are accountable to their constituents for their actions. Fiscally independent governments have the ability to complete certain essential fiscal events without substantive approval by a primary government. This includes determining its annual budget without another government s having the authority to approve and modify that budget. Because OP&F is legally separate, a voting majority of the governing board is not appointed by the State of Ohio, and it is fiscally independent of other state and local governments, OP&F does not employ governmental fund accounting when preparing the annual budget and does not have a legally adopted budget. The Board of Trustees, who monitors and sets spending levels each fiscal year approve OP&F s budget. OP&F does not operate under a balanced budget approach and pays the costs of administering the plan by a transfer from the guarantee fund each year. This transfer occurs first from investment income and then from pension reserves when necessary. OP&F s budget, consistent with its accounting policies, is constructed on an accrual basis, and utilizes a January through December fiscal year. The accrual basis recognizes all revenues when earned and expenses in the period in which they are incurred. This budget is targeted to meet our actuarial rate of return-on-investments of 8.25 percent and our legal requirement under ORC Section of achieving a pension fund actuarial amortization period of 30 years or less by December 2006, and every year thereafter. If the amortization period is not met, then a plan must be approved and submitted to the General Assembly outlining how to achieve the required funding levels. This plan could include changes to mandated or discretionary benefits and will be submitted each year until the legal level is achieved. It is also driven by requirements set forth by other governing statutes and OP&F organizational goals and objectives. OP&F s Fund Balance or Total Plan Assets is the amount of net assets available to provide statutory and discretionary benefits as of the financial statement date. The Fund Balance includes the value of assets and is reduced by liabilities. Total Plan Assets at the end of the year 2014 are projected to be $12.0 billion versus $11.6 billion, or a 3.3 percent increase over the 2013 forecast, with net income of $385.6 million budgeted for OP&F also has a separate Capital Outlay Budget used to segregate capital purchases and details of that budget are contained in the Capital section. Comparative information for prior capital purchases has been adjusted to reflect this change as these items were previously included in the Administrative Operating Budget. The Ohio Revised Code (ORC) contains the laws of Ohio, which are enacted by the Ohio General Assembly. OP&F s governing laws outline the basis for which the financial policies related to the contributions, benefit eligibility and benefit calculations are based. The Board of Trustees in the governing body that is responsible for the administration, control and management of the organization. They are responsible for administering the laws, appointing professional staff, and adopting annual spending budgets. Within the framework of the administering the laws, OP&F must also maintain the financial reporting requirements set forth by the ORSC, maintain a comprehensive investment policy, and maintain other financial policies and goals to help administer the fund. Included in the other financial policies and goals are the following: Mission, Vision and Core Values Benefit Funding Policy and Administration Guide Reserve and Fund Balances Long-Term Goals and Objectives Strategic Planning Annual Budgets OP&F s three-year Strategic Plan and Mission, Vision, and Core Values are all linked to the Benefit Funding Policy and Administration Guide to help provide guidance for our future budget requirements and long-term requirements of the fund. The Benefit Funding Policy and Administration Guide includes high-level financial, retirement, and financial policies as well as an overview of the administration activities that go along with managing those policies. An outline of the policy follows. OP&F page 7

14 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 Benefit Funding Policy Purpose This document establishes the goals, objectives, and protocols for the Ohio Police and Fire Pension Fund (OP&F) under the direction of the Board of Trustees (Board) to outline established benefit funding guidelines. The purpose of this Policy is to: Provide an understanding of the benefit funding goals and objectives; Provide a brief summary of acceptable benefit funding levels; and Articulate OP&F s requirements on providing statutory and discretionary benefits. The execution of this Policy shall be accomplished in a manner that fulfills the statutory requirements outlined in Chapter 742 of the Ohio Revised Code and justly represents the entire membership body. This Policy will be actively managed as part of the decisionmaking process related to finances, benefits, reserve fund balances, accounting, revenues and expenses to ensure that this policy remains comprehensive and sound. All Policy statements are on a combined basis representing police officers and firefighters, mutually inclusive. This Policy will complement other OP&F policies. Long Term Goals and Objectives Financial OP&F has established the following goals, while not all-inclusive, related to financial requirements of funding benefits: Continue our path toward reducing our funding amortization period and enhancing our funding Policy; Continue to pay all benefits and expense obligations when due; Continue to improve OP&F s funded status with regard to the accumulated benefit obligation; Control administrative costs and manage assets prudently to maximize the investment rate of return; Control spending through the administrative operating budget; Establish a plan to maintain a 30-year or less amortization period; and Preserve a discretionary health care option for eligible members. Retirement Benefits Statutory benefits will be considered sufficiently funded if the: Amortization period of the Unfunded Actuarial Accrued Liability is 30 years or less in the year of the actuarial valuation; and The Actuarial Accrued Liability funded status of the assets is at a percentage deemed prudent by the Board or is greater than or equal to 95%; and All actuarially determined, deferred investment gains and losses are fully smoothed into the actuarial value of assets in the year of the actuarial valuation. This means the calculations will be done both based on the Actuarial Value of Assets and the Market Value of Assets. If all the above conditions are not met, the Board will monitor all financial components to determine if changes in plan provisions should be considered. In addition, when Section 1 above alone is not met, the Board must approve a written plan to achieve compliance and submit that plan to the General Assembly as required. If all of the above conditions are met, the Board may then consider recommending to the General Assembly benefit enhancements and/or contribution reductions or make contribution allocation changes. This would be done based on Board priorities. Prior to any recommendations for benefit changes being presented to the General Assembly, an actuarial analysis and a full understanding of the short-term and long-term financial effects on the change will be completed by the actuary. In addition, recommended benefit changes will be submitted to the General Assembly not later than sixty days from the date of introducing the legislation for changes as required by law. Health Care Benefits Health care benefits are not statutorily mandated; however, the goal of the Board is to provide access to these benefits to both current and future members and survivors and their eligible dependents, according to the terms of the Health Care Plan. The funding goal for the Section 115 Health Care Trust Fund, which is not considered to be pre-funded, will be sufficiently funded if: It is forecasted to be solvent for at least a 15-year future projection period (which means that the current balance can sustain the aggregate of the next fifteen years of projected net cash flows as determined by the actuary). OP&F page 8

15 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS There are no requirements to fund future projected health care benefits at any set level; rather, these costs must be measured and disclosed as required as long as health care plan benefits are offered. Summary of Funding Administration This summary will provide an overview related to the following stakeholder/individuals to pursue action on the following items, which is not all-inclusive. The division of responsibilities and action of these items helps to ensure the effective execution of the Policy. The Ohio General Assembly Establish contribution rates for active members and employers to ensure funding adequacy levels are maintained as appropriate; Set Cost of Living Adjustment (COLA) percentages; Perform contribution rate adequacy studies on an annual basis; Perform an independent fiduciary audit on request or at least once every ten years; Review 30-year Funding Plans (if applicable); and Review OP&F Annual Budget. The Board of Trustees Set the actuarial valuation interest rate percentage; Authorize investment transactions as a fiduciary, based on the prudent person standards and Board established guidelines; Work with Investment Consultants to conduct an asset liability valuation study and investment structure reviews; Target the highest level of investment return within an acceptable framework of risk and return expectations; Set the interest rates on various benefit transactions; Report every two years to the General Assembly on the condition of the retirement system; Establish the amount of OP&F s health care subsidy on an annual basis, consistent with OP&F s health care funding policy; Establish the percentage of employer contributions allocated to the health care accounts; Make recommendations to the General Assembly related to contribution rates to assist in funding objectives and requirements; Establish Board Committees and OP&F staff action items and guidelines to execute the benefit funding plan; Establish the rate at which Medicare Part B will be reimbursed; and Maintain comparable prescription drug program within federal guidelines to maintain eligibility for the Medicare Part D subsidy. Professional Services (Consultants, Custodians, Counsel, Actuaries and Auditors) OP&F either retains the service of or has appointed qualified outside organizations to perform professional services on behalf of the Board in specialized areas as listed below. Perform an independent external financial statement audit on an annual basis and issue an opinion, which will be incorporated within the Comprehensive Annual Financial Report (Currently selected by the Auditor of State); Perform an actuarial valuation of the assets, liabilities and funding requirements on an annual basis and submit the report to the General Assembly (This is conducted by our current actuary); Review actuarial assumptions on a Quinquennial, every five years basis (This is conducted by our current actuary); Perform an actuarial cost and financial impact analysis on potential legislation and plan provision changes (This is conducted by our current actuary); Conduct a cost neutrality study for DROP at least every five years to determine the status of the program and recommend changes to the Board as necessary (This is conducted by our current actuary); Perform an actuarial audit at least once every 10 years (This is performed by outside actuary); Perform asset liability valuation study and investment structure review every three-to-five years or as needed (this is completed by current investment consultant); and Implement new accounting standards as required. OP&F Staff Action Items Implement the Board approved asset liability valuation study and investment structure review recommendations; Provide an adequate cash management function to ensure funds are available to pay benefits and operating costs when due; Prepare an annual health care report; OP&F page 9

16 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 Prepare reports on disability experience, ethics and other areas as required to monitor events; Manage transaction flows among the established reserve and trust funds; Allocate administration expenses to the health care trust fund each year in accordance with Government Accounting Standards Board pronouncements; Request state subsidy payments in accordance with requirements; Seek out cost saving efforts related to health care costs and behaviors; Make plan provision recommendations; and Ensure appropriate internal controls and accounting and financial reporting on all fund balances and financial transactions. OP&F Staff - Compliance and Monitoring Functions The following functions, while not all-inclusive, will be monitored in connection with the goals and objectives of the Benefit Funding Policy. Monitor the costs of the administrative operating and capital budget; Monitor all revenue sources and monies due and payable to ensure receipts are made; Monitor and maintain appropriate levels of administrative insurance; Investment income to the health care funds will be on a prorated basis at a rate equal to the actual return on investments; Maintain a segregated Internal Revenue Service (IRS) Code Section 401(h) account for Medicare Part B reimbursements; Maintain a segregated IRS Code Section 115 trust for accrual of health care fund financial activities; Ensure Medicare Part D subsidies are credited to the Section 115 health care trust; Ensure revenues and expenses are projected based on objective forecasting assumptions each year as part of the budget process to monitor anticipated changes; Ensure proper levels and types of collateral are maintained on all loaned investment securities; Safeguard all assets on deposit with the named custodial agent; Continue to seek alternative vehicles for medical/ prescription savings needs; Ensure proper agency administration of the State of Ohio Public Safety Officers Death Benefit Fund in accordance with statute; Remain compliant with the IRS for qualified plan status; Comply with court orders and applicable statutory provisions on member and survivor benefits; and Maintain all accounting and financial reporting systems in conformity with Generally Accepted Accounting Principles. Long-term objectives The key long-term objectives for OP&F have been established in conjunction with a comprehensive review of the current and projected financial requirements. In addition, the Board of Trustees and OP&F senior staff members participate in off-site retreats annually to review prior year achievements and highlights and to set organizational goals for future periods. These goals are used to develop the Total Plan Assets Budget items and to ensure that OP&F incorporates input from staff and members into the annual planning process. 1. Objective: Continue our path toward reducing our funding amortization period and enhancing our funding policy; Meeting the objective: Staff, consultants and the Board of Trustees again put together a funding plan aimed at meeting the thirty-year amortization requirement. This is in addition to the Sept legislative changes. The additional pension legislative changes include additional member contribution increases, reducing the health care allocation of employer payroll, further reducing cost-of-living adjustments and equalizing employer contributions between the police and fire divisions. In addition to legislative changes, the Board of Trustees continually works on making changes to discretionary health care benefits, administrative costs, investment strategies and other parts of the funding plan that can be accomplished without legislative actions. Careful consideration is put into each item prior to adopting changes to ensure a well balanced approach is taken to protect the long-term funding goals. They also approve every five years the actuarial consultants comprehensive experience study looking at trends in several categories, including membership, health care and funding sources. This study was completed in the fall of 2012 to cover the experience for calendar years There were eight recommended changes, all of which were approved by the Board of Trustees. OP&F page 10

17 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS These changes included: An increase in withdrawal rates to reflect experience; An increase and a decrease in disability retirements based on age groups; A reduced retirement rate of service retirees due to the DROP experience and 90 percent of eligible members electing to enter the program; Updated mortality tables for pre and post-retirement; Decrease to 75 percent the assumed married members; An adjustment in the percentage of joint and survivor elections; A reduction in salary increase assumptions to reflect experience; and A reduction to reflect experience in the payroll growth assumption. As of Jan.1, 2013 (the most recent actuarial valuation) OP&F s funding level is 64.2 percent. The previous year s funding ratio was 63.1 percent. For the first time since our 2002 valuation this valuation resulted in a 47 year amortization period as opposed to last year and prior years when the amortization period was infinite. An infinite amortization period means that OP&F s contributions are not adequate enough to cover the liabilities within a 30 year time horizon given the current plan assumptions. OP&F has the legislation that we believe will address the long-term funding issues. OP&F is currently readdressing the 30-year funding issue to identify how the legislation and recent financial market improvements will help and additional changes will be recommended as a result. The DROP cost neutrality was also performed as part of the study and it confirms that the program does not result in additional annual costs and continues to increase the amount of time members remain on the job. The program extends the careers of members over two years and OP&F does not incur health care costs while members are in the program. 2. Objective: Continue to pay all benefit and expense obligations when due; Meeting the objective: OP&F is fully able to meet all of its obligations while adjustments are made to ensure long-term fund soundness. The State of Ohio requires that the public pension systems must be able to pay off unfunded accrued liabilities in a 30- year period. If a system is not able to meet this requirement, the state requires that each system have a plan in place to fall within the 30-year period. While OP&F met this requirement in the late 1990s, stock market performance drove the funding period above 30 years to infinity. Legislation passed in the fall of 2012 has paved the way for additional revenues and reduces benefits to greatly assist in the amortization period. Our plan to meet this requirement is mentioned in objective #1 and will be combine with a variety of other cost saving strategies and cash flow management. To meet daily, weekly and monthly obligations, the OP&F Investment Department coordinates with the Finance Department to assure that a cash allocation is available. 3. Objective: Continue to improve the funded status with regard to the accumulated benefit obligation; Meeting the objective: There was a decrease in the funded status of the plan last year due to prior year investment gains and slightly lower salary pay increase for members. This is offset somewhat by longer life spans for retirees and their beneficiaries. The funding level also reflects our desire to preserve discretionary health care benefits and the Board of Trustees has not yet reduced the allocation of contributions to the health care reserves due to this desire. OP&F s funding level was 64.2 percent as of Jan. 1, The portfolio is projected to end 2013 with a net plan asset value of $ billion. 4. Objective: Control administrative costs and manage the assets prudently to maximize the investment rate of return; Meeting the objective: Fiscal responsibility drives the annual budget process at OP&F, with the goal of reducing administrative expenses whenever possible. This is done with a consistent approach to the annual budget process and with Executive Director s involvement with the process. Each area is required to meet with the Executive Director and explain all budget details. With increased focus on all public retirement systems, we want our membership and the general public to be aware of our conservative spending practices. The 2014 administrative operating budget for OP&F is down 0.2 percent from the previous year which includes a 2.8 percent increase in operating cost and a 1.7 percent decrease in investment management fees paid directly through the budget. Overall management fees increased, however, the amount paid indirectly increased and the amount paid directly decreased. OP&F page 11

18 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 OP&F must also present the annual budget to the ORSC for examination and questions. OP&F again presented the budget as requested. Additionally, the Board, staff and consultants regularly examine investment strategies and develop asset allocation models that will help to maximize potential investment returns. OP&F has a stringent Investment Policy that has been adopted by the Board that helps ensure staff has direction and guidance for making prudent decisions on all investment matters. 5. Objective: Control spending through the Administrative Operating Budget; Meeting the objective: OP&F s budget process is a bottom-up execution with Senior Management and the Board of Trustees review and ultimate approval. Since a formal budget process was put into place at OP&F in 1998, the Fund has never exceeded its annual operating portion of the budget in actual spending with the exception of management fees in Positive returns lifted our asset levels and required additional fees be paid by contract. Baseline spending is recalculated each year to eliminate carryovers, non-essential spending and one-time costs. New initiatives are also carefully scrutinized to ensure that their undertakings are both necessary and achievable. Other controls in place include a central purchasing unit that researches contracts, and extends bids for goods and services. 6. Objective: Establish and maintain a 30-year or less amortization period on pension assets; Meeting the objective: Ohio law requires OP&F to establish and maintain the industry standard 30-year or less amortization period. With that, many repeated efforts have been undertaken to develop plans that will help achieve this legal requirement as mentioned in number 1 and number 2 above. Efforts will continue with our oversight board and our Board of Trustees to manage this requirement. Please visit our web site at www. op-f.org for more information and news about our funding activities. 7. Objective: Preserve a discretionary health care option for eligible members; Meeting the objective: The Board of Trustees has established a 15-year solvency goal for the health care program and will continue all efforts to maintain this coverage. The Board of Trustees approved modest increases to premiums for retirees and survivors in order to help maintain the solvency. The Board of Trustees also adopted an Internal Revenue Code Section 115 Health Care Trust in 2006 to ensure the non-taxable status of the benefits currently being offered to our members will continue into the foreseeable future. Reserve and Fund Balances OP&F s budget is prepared on a combined police and fire basis. The state statute requires that several reserve funds be maintained annually for tracking fund activities for both police and fire. OP&F budgets for the revenue and expense activities that flow through these accounts. OP&F does not budget for the annual funding balance transfers that occur due to active and retired membership transitions. Additionally, OP&F does not prepare a budget for the Death Benefit Agency Fund. Each year-end the reserve funds are managed and allocations are done to reflect the revenue and expense activities and funding balance transfers due to changes in membership status from active to retired. The Guarantee Fund and Expense Fund is always zero at the end of each year as they are used to fund the Pension Reserve Fund from investment gains and losses and to account for the Administrative Operating Expenses. The reserve funds are described below. Please see the back of this section for charts outlining the reserve fund activities. Police Officers and Firefighters Contribution Funds (Members Contributions) This fund is credited with the contributions deducted from the salaries of members of police and fire departments and paid into OP&F, as provided by section of the ORC, and that percentage of the employers accrued liability that is attributable to deductions previously made from the salaries of members of the police and fire departments who are still in the active service at the time that portion of the employers accrued liability is paid. Upon retirement the accumulated contributions of a member of a police and fire departments shall be transferred at the member s retirement from the police and fire officers contribution fund to the police and fire officers pension reserve fund. OP&F page 12

19 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS Police Officers and Firefighters Employers Contribution Fund (Employers Contributions) This fund is credited with the employer share contributions received from the police and fire officer employers, as provided by section of the ORC, and that percentage of the employers accrued liability that is attributable to the employers liability for prior service of members of the police and fire department who are still in the active service at the time that portion of the employers accrued liability is paid, and that portion of the state contribution allocated to such fund, as provided by section of the ORC. Members of a police and fire department retiring in the future or their qualified beneficiaries shall be paid from the reserves for such pensions and other benefits transferred to the police and fire officers pension reserve fund. Guarantee Fund The fund from which interest is transferred and credited on the amounts in the funds described in divisions (C), (D), (E), and (F) of this section, and is a contingent fund from which the special requirements of said funds may be paid by transfer from this fund. All income derived from the investment of funds by the board of trustees of OP&F as trustee under section of the ORC, together with all gifts and bequests or the income there from, shall be paid into this fund. Any deficit occurring in any other fund that will not be covered by payments to that fund, as otherwise provided by sections to of the ORC, shall be paid by transfers of amounts from the guarantee fund to such fund or funds. Should the amount in the guarantee fund be insufficient at any time to meet the amounts payable Budget Category to Fund Allocation Health Death Reserve Budget Category or Pension Care Benefit Fund Agency Classification Fund Fund Fund Budgeted Revenues Employer contributions Employers Cont. Member contributions Members Cont. Health care contributions Pension Reserve Investment income Guarantee Interest on employers liability Employers Cont. Other income Guarantee Expenses Pension benefits Pension Drop benefits Pension Health care benefits Pension Administrative expenses Expense Depreciation expense capital Expense Refunds Members Cont. Other expense Guarantee Balance sheet Asset N/A Liability N/A Reserve Fund Fund Balance Fund Balance Members Contribution $2,106,026,506 $2,065,743,825 Employers Contribution 890,561, ,575,948 Pension Reserve 8,541,851,000 7,501,180,000 Guarantee Expense Death Benefit TOTAL $11,538,439,448 $10,468,499,773 OP&F page 13

20 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 there from, the amount of such deficiency, with regular interest, shall be paid by an additional employer rate of current contribution as determined by the actuary and shall be approved by the board of trustees of OP&F, and the amount of such additional employer contribution shall be credited to the guarantee fund. The Board may accept gifts and bequests. Any funds that may come into the possession of the board in this manner, or any other funds whose disposition is not otherwise provided for, shall be credited to the guarantee fund. Expense Fund The fund from which shall be paid the expenses for the administration and management of OP&F, as provided by sections to of the ORC and to which shall be credited from the guarantee fund an amount sufficient to pay the expenses of operation. Death Benefit Agency Fund This is an agency fund, which is fully funded by the State of Ohio. This fund is part of our Total Plan Assets only to segregate funds reserved for payments of death benefits to families of local police and fire officers that have been killed in the line of duty or have died as a result of previous on-the-job injuries. OP&F is required to request these funds from the State on an annual basis. For more information please see the supplemental section of this book. This fund is not budgeted. Pension Reserve Fund The pension fund maintains the majority of all income and expenses budgeted and accounted for in OP&F s Total Plan Assets Budget. This balance represents funds available to pay pensions obligations and administer the Fund into the future. This fund is comprised of all the member contributions, employer contributions, guarantee fund and expense fund. Health Care Stabilization Fund This is a discretionary fund and is part of the Pension Reserve Fund. OP&F segregates this fund to put some funding aside to pay for future health care costs. It is part of the Total Plan Assets Budget for monitoring the balance available for post employment health care benefits for members and is used to accumulate expected health care contributions and expenses. While all contributions for health care premiums and all health care expenses are recorded to this category, only a portion of employer contributions, the related share of investment income and a portion of administrative costs are allocated to this fund. OP&F page 14 Debt Obligations OP&F does not have any debt obligations or issuances of any type outstanding. No budget for interest or debt service is included. OP&F is not governed by any legal debt limits. Budget Financial Categories Budget categories, as summarized in the Total Plan Assets Budget, include all the major revenue and expense categories of OP&F and are budgeted based on a variety of methods, depending on the category. A more detailed analysis of the budgeting logic used for the financial categories is available in the total plan assets section of this book. Additions to Total Plan Assets Additions to Total Plan Assets include employer and member contributions, health care contributions for members with coverage, investment income, interest on employers liability and other income. Revenue Categories (additional information on revenue calculations can be found in the Total Plan Assets section of this book) OP&F relies on combined employer and member contributions for nearly 40 percent of all revenue categories. These revenues are generated based on the Total Annual Payroll of our membership. This payroll number is the aggregate amount of all members anticipated salary for the year and is used to calculate the contributions due OP&F on a monthly and quarterly basis, member contributions and employer contributions respectively, based on the current rates in effect. OP&F currently has 27,444 active members contributing to the Fund along with 917 employers. Please see the supplemental section of this book for more active member valuation data. Total Annual Payroll is projected based on actual experiences and assumptions set forth in our most recent actuarial valuation. Our actuary has included projected salary increases of 5.0 percent-11.0 percent, depending on age and service and 3.0 percent cost-of-living adjustments for all of our existing members as well as a 1.0 percent increase in the number of members covered. Membership counts are lower than the previous year and salary increases are less than expected.

21 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS Employer Contributions Employer contribution rates, which have not changed since 1986, are set a 19.5 percent and 24 percent, for police and fire, respectively. Employer contributions to the Fund are budgeted based on the total annual payroll of $1,953.4 million, multiplied by the respective employer contribution rate or 21.6 percent on a blended basis, which equates to the $422.3 million budget. OP&F is anticipating a 6.3 percent increase in the amount of dollar contributions from the previous year, 6.0 percent of the increase is from the total annual payroll and the 0.3 percent is based on experiences in membership. OP&F is forecasting actual contributions in this category for 2012 at approximately $409.2 million. While the new pension legislation did not increase the amount of employer contributions as a percentage of total annual payroll, the legislation did include OP&F s longtime desire to collect the employer contributions on a monthly basis, rather than the current quarterly basis. This will accelerate the cash flow and in turn will also help assist in the overall funding goals. percent each year for three years for all active members of the Fund. Member contributions to the Fund are budgeted based on the total annual payroll of $1,991.8 million, multiplied by the estimated contribution rate of 11.1 percent. The rate is a blend of the percent rate with the new 11.5 percent starting in July This amounts to approximately $220.9 million, and is then increased by $7 million in member purchases and reduced by $23.6 million which represents member contributions kept in DROP accounts as part of their accrual. The net impact is the $204.3 million budgeted for OP&F estimates an increase of 11.7 percent over the 2013 budget and 8.8 percent over the 2013 forecast actual. There is a 3.4 percent increase in active membership included and the remaining amount of the increase is due to the fact that the contribution rates that members pay will increase by 0.75 percent in mid A full detailed listing of member rates from 1967 until present can be found in the Supplemental Section of this book. The employer contributions line also includes purchased service credits made by employers on behalf of members, penalties and interest charged to employers for late submissions of contributions and other minor amounts from related activities. Employer contributions currently represent 24.5 percent of all of OP&F current sources of revenues. A full detailed listing of employer contribution rates from 1967 until present can be found in the Supplemental Section. Member Contributions Member contribution rates increased to during Rates are scheduled to increase to 11.5 percent in 2014 and to percent in Pension reform allowed for this rate increase by.75 Total Annual Payrol, Active Members, ($ in Millions) $2,000 $1,900 $1,800 $1,700 $1,600 $1,500 $1,400 $1,300 $1,200 $1,100 $1,000 $1,644 $1,901 $1,895 $1,897 $1,783 $1,831 $1,869 $1,756 $1,683 $1, $1,992 As displayed on the graph above, OP&F anticipates Total Annual Payroll of $1.992 billion in Total Plan Assets Budget 2014 Percent of Percent change Revenue Category Budget Totals Budget from 2013 Budget Budget Total Budget Total Employer Contributions $430,420, % 1.9% $422,315,322 $397,352,386 Member Contributions 204,338, % 11.7% 183,003, ,542,369 State of Ohio - Subsidies 580, % 0.0% 580, ,900 Health Care Contributions 69,492, % 1.4% 68,562,063 65,136,580 Investment Income*** 1,136,400, % 10.6% 1,027,125, ,000,000 Interest on Employers Liability 1,092, % 16.0% 1,300,000 1,000,000 Other Income 20,691, % 0.0% 20,691,100 25,428,362 Total Plan Additions $1,863,015, % 8.1% $1,723,577,706 $1,642,154,597 OP&F page 15

22 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 Health Care Contributions to OP&F for health care coverage is collected from eligible retired members, survivors and beneficiaries. Rates at which these individuals are required to pay are set by the Health Care Committee and require Board of Trustee approval. These costs represent the amount of money OP&F charges our retired membership and their beneficiaries or dependents for their monthly health insurance premiums. Co-payments and deductibles are paid by the covered member and are not paid by OP&F as part of plan design. Total budgeted contributions for health care are expected to increase next year by approximately 1.4 percent from 2013 levels. OP&F anticipates this increase due to increases in covered lives and an increase in contributions from covered benefit recipients. The Board of Trustees, as always, looks at changes to prolong the solvency of the health care stabilization fund for fifteen or more years. In 2014, the projected ending balance of the fund is $1,030.1 million or 0.8 percent increase from the 2013 budget. This increase is due to projecting positive market returns in 2014 and overall revenues to the fund being higher than costs. Health care is not a guaranteed benefit and is funded on a pay-asyou-go-basis. OP&F dramatically restructured our current health care plan in an effort to maintain the stabilization fund for a fifteen-year solvency period. Annually, OP&F will make plan changes and request OP&F benefit recipients to choose benefit options and monitor the cost sharing ratios between OP&F and our benefit recipients. OP&F will decrease the allocation to 2.85 percent from 4.69 percent of employer contributions to this fund. As always OP&F is required to fund mandated pension and Medicare Part B reimbursement benefits as a priority, so this allocation can potentially change each year, depending on our funding status. In fact, the Board of Trustees did vote to change the rate allocated to 0.5 percent since this budget was approved, so that will impact the balances budgeted starting in Jan Investment income is allocated based on the actual rate of return on investments achieved by the Fund and the balance in the stabilization fund. In 2014, our estimated rate of return is 14 percent and the stabilization fund is projected to be impacted with positive income of $84.6 million. Investment Income Investment income represents 61 percent of our anticipated revenues. Included are positive earnings related to dividends, interest, rental income, currency contracts, securities lending income and realized and unrealized gains and losses on the investment portfolio. There is a projected increase in the 2014 budget related to gains and losses on investment income year to year due to the fact that the market value of assets is higher due to positive returns in 2013 and Currently our actuarial investment return is 8.25 percent based on our current asset allocation and market valuation and that will be our budget target as well. This will assist us in determining if we are below or above our target at any point throughout the year. Estimated investment income is expected to increase by that same rate 8.25 percent in the fiscal year 2014 over 2013 for budget Investment Income Budget to Actual Comparison (in thousands) $3,000,000 $2,000, % 16.15% 15.83% 13.29% 10.5% $1,000, % 2.60% 0 $1,000,000 $2,000,000 Investment Income (thousands) $3,000,000 $4,000, % 12.75% 16.00% % 20% 10% 0% 10% 20% 30% 40% Return on Investment Actual income Budget income Investment rate of return OP&F page 16

23 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS purposes. OP&F expects to experience a 16 percent return in 2013, however, this budget was based on a 14 percent return due to the timing of the overall budget production and adoption versus getting the final returns from our investment consultant in Feb Interest on Employers Liability In 1967 all of the local police and fire pension funds were merged together to form OP&F. At that time, an actuarial analysis was performed to determine the difference between pension liabilities and the assets being transferred to OP&F as a result of the merger. This shortfall of assets compared to liabilities is referred to as the Employers Accrued Liability. This unfunded liability is being paid to OP&F over a 65- year period at an interest rate of 4.25 percent. The budgeted amount represents the expected receipts of interest in 2014, based on the ending 2013 balances. Local governments began repayments in 1969 and payments are scheduled to continue until the year The outstanding balance at Dec. 31, 2013 was $26.1 million. Other Income This category represents rebates and recoveries received for vendor contract compliance issues, member transfers in interest and contributions and miscellaneous income. Deductions from Total Plan Assets Deductions from Total Plan Assets for 2014 include expenses related to pension benefits, health care benefits for members with coverage, administrative costs, depreciation expense, member refunds and other expense. Pensions and DROP Consistent with OP&F s mission, this category represents the largest single expense for OP&F. Payments for pension benefits including; retirement, disability and survivor benefits account for 63.2 percent of all expenses this budget year. Plan benefits are established under Chapter 742 of the ORC. The budgeted amount is based on the actuarial projections and assumptions by staff on new retirements and members exiting the DROP program. The estimated $934.4 million in pension benefit payouts for 2014 includes a 6.4 percent increase in the expectation for members exiting the DROP program, 3.6 percent increase for new retirees, survivors and beneficiaries. Additionally, OP&F estimates that $241.1 million will be accrued in pension, cola and interest in the participant accounts of our DROP program, net of account withdrawals. Health Care OP&F offers an excellent health care coverage for eligible retired members, survivors and beneficiaries. This category encompasses all costs to OP&F for prescriptions, medical coverage and Med B participant reimbursements. The cost of these benefits are expected to increase by 14.5 percent over last year, based on 2013 experience levels, DROP retirees, requirements under the new federal law and the most recent actuarial estimates of health care cost trends for OP&F. Administration This category represents the portion of the Total Plan Assets Budget referred to as the Administrative Operating Budget and encompasses all of OP&F s operating and administrative activities. This includes personnel services, work environment, investment management fees, professional services, personnel recruitment, training and travel, legal and building operating expenses. OP&F has an annual budget process to determine the levels at which spending will occur and what new goals will be accomplished each year. Please see the detailed Executive Director s message and in the Administrative Operating Budget sections of this book. This section also contains detailed budget to actual comparisons for each category. Depreciation This expense represents the annual depreciation OP&F assumes on previously capitalized goods and services. Assets are depreciated over their useful life using the straight-line method. Capital items are purchased through OP&F s new Capital Outlay Budget. Items costing $5,000 or more or having an estimated useful life of one or more years or a part of a large project will be budgeted to the capital accounts and depreciated over the expected useful life. A decrease of 15.8 percent reflects the fact that OP&F has started to fully expense dollars as allocated in the budget as items are used to their full expected life. Capital project spending priorities for building and computer related items have caused shifts in the amounts expected to be depreciated. Refunds There are a variety of member refunds, transfers and eligible rollovers of contributions that occur throughout the year from OP&F upon member separation of employment or legislative actions. A historical analysis is used to budget for these occurrences. Refunds are paid to former OP&F members upon request or as part of death payouts, when no survivors are eligible for benefits. OP&F anticipated refunds to remain flat during the coming year. OP&F is also required to record an estimate each OP&F page 17

24 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year Total Plan Assets Budget 2014 Percent of Percent change Expense Category Budget Totals Budget from 2013 Budget Budget Total Budget Total Pension Benefits $934,383, % 9.8% $850,960,676 $820,928,012 DROP Benefits and Interest 241,114, % 12.8% 213,672, ,708,134 Health Care Benefits 219,162, % 14.5% 191,346, ,582,884 Administrative Expenses 62,474, % 0.2% 62,592,043 58,677,744 Depreciation Expense 1,600, % 15.8% 1,900,000 2,300,000 Refunds 18,652, % 27.0% 25,555,678 22,926,438 Other Expenses 50, % 400.0% 10,000 40,000 Total Plan Deductions $1,477,437, % 9.8% $1,346,036,871 $1,332,163,212 year in this category for non-active, non-vested employee members who are eligible to refund their contributions, but have elected not to do so at this time. Other Expense This category represents refunds to employers for payroll reporting errors, miscellaneous pension expense and writeoffs for uncollectible pension overpayments. Budget Management and Other Planning Processes The budget management role at OP&F is vital in preparing, controlling, communicating and monitoring all stages of the budget process. This role is currently assigned to the Controller of the Finance Department. As a member of the Finance Department, this role was designed to add consistency and accountability to the process and to allow a central point of contact for all related budgeting issues. Preparing financial reports, providing variance analysis, determining budget category methodology, monitoring additions/deductions and establishing and monitoring goals are the primary focuses of this role. Additionally, the Controller works with the Executive Director and Financial Services Director to gather information from a variety of other planning processes that go on throughout the year to ensure their inclusion in the budget is determined. Three of the major planning processes are listed below: Annual Board Retreat At this retreat, the Board of Trustees hears from the senior management the activities accomplished during the year and future activities that are planning to be undertaken in the departmental areas. In turn, the Executive Director works with the Trustees to determine the annual priorities. Board of Trustee Committee Meetings OP&F has various committees that meet each month to handle detailed aspects of matters that require Board approval. Often times during these meetings, Board members and staff express desirable and required budget undertakings for the next budget cycle. The Executive Director gathers this information and ensures that the items are incorporated into the budget. Strategic Planning The strategic plan was designed to connect internal and external goals and approaches that will drive our strategies in the future. It was developed by an internal professional team with a wide variety of knowledge and experience. This team was charged with identifying the critical success factors required, and then target the approaches necessary to accomplish each goal. Any budgetary needs are reviewed each year and incorporated into the next budget process. Please visit our web site at for full details under the OP&F reports section of the Information Center. Seven critical success factors identified by the team: 1. Establish and maintain a 30-year funding period for pension benefits; 2. Preserve a discretionary health care option for eligible members; 3. Enhance service and education levels to OP&F membership; 4. Enhance service and education levels to OP&F employers; 5. Improve organizational effectiveness and efficiencies; 6. Advocate and manage external change to assist OP&F in achieving its long-term objectives; and 7. Accelerate employer payments and improve employer reporting compliance. OP&F page 18

25 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS Goals and Approaches The The following section will detail the goals and approaches associated with each critical success factor. 1. Establish and maintain a 30-year funding period for pension benefits A primary objective for OP&F is to establish and maintain a maximum 30-year amortization period for unfunded actuarial accrued pension liability. Goals: Achieving a steadily increasing funding ratio and identify and understand temporary and permanent changes in the funding ratio at the time of each actuarial valuation; Targeting the highest investment return feasible within acceptable risk tolerances and given a low return environment; Ensuring that actuarial valuation assumptions are reliable and accurate; assumptions should add stability to the valuation process; Evaluating pension plan provisions; Evaluating Deferred Retirement Option Plan (DROP) provisions. Strategic approaches: Work for legislation to meet the 30 year amortization requirement (increase in member contributions, increase the minimum retirement age, reduce Cost of Living Adjustment (COLA) availability, increase the years used for final average salary, change DROP interest, contributions and minimum requirements, and balance discretionary health care solvency and contributions with pension contributions); Work with OP&F s actuarial consultant to study payroll growth rate, valuation interest rate and mortality rate assumptions to ensure they reflect current economic environment and adopt changes as necessary; Analyze changes in funding ratio and determine temporary and permanent impacts each year; Conduct a cost neutrality study of the DROP program; Implement changes as recommended by the asset and liability study and the investment structure review; Amend the benefit funding policy; Review the interest rate paid to accounts in DROP; Incorporate recommendations from Contribution Rate Adequacy study; Examine COLA formula; Examine the re-employed retiree benefit calculation against other plan provision offerings; Review joint and survivor annuity options available and recommend for changes; Implement portable alpha strategies within the investment portfolio; Explore new value-added investment strategies. 2. Preserve a discretionary health care option for eligible members Goals: Redesign the sponsored health care plan to streamline benefit offerings and reduce internal administration; Maintain a minimum projected 15-year solvency period for the health care stabilization fund without jeopardizing the pension funding status; Strategic approaches: Evaluate and model scenarios for health care plan provision changes; Eliminate the use of HMO providers; Review subsidy levels each year and adjust accordingly; Examine eligibility requirements for participation; Establish a retiree medical trust program, and propose appropriate legislation; Propose legislation to cap the Medicare B reimbursements; Examine using contributing versus paid-time for time eligibility requirements; Amend the Board of Trustee s Health Care Funding Policy. 3. Enhance Service and Education Levels to our Membership Goals: Enhance service and communication levels to OP&F membership; Enhance benefit formulas where feasible and affordable; Enhance education opportunities available for OP&F members; Improve OP&F s understanding of occupational diseases and management of related illnesses; Refine training programs and resources for OP&F staff. Strategic approaches: Establish metrics on responding to member inquiries; Use technology to increase the levels of service OP&F page 19

26 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 and communication to both our active and retired membership; Conduct a customer satisfaction survey. Analyze results and work to strengthen areas indicated as weak or missing; Study pension benefit formulas and analyze opportunities for improved plan provisions; Employ the member education group to educate the membership; Create informational videos to assist in areas of education; Explore alternative methods of education such as mid-career seminars; Analyze member inquiries on a quarterly basis to determine if any issues exist or improvements in communication or education levels are warranted; Conduct a cancer research project and implement recommended education, communication, and other corrective actions as deemed appropriate; Provide consistent training sessions and follow-up training as needed; Complete a member forms and correspondence review. 4. Enhance Service & Education Levels to our Employers Goals: Enhance service levels to OP&F employers; Enhance education opportunities available for OP&F employers. Strategic approaches: Establish an education certification program; Employ the employer education group to educate our employers on compliance and reducing penalties; Update the employer education manual and distribute to employers; Establish metrics on responding to employer inquiries; Analyze employer inquiries on a quarterly basis to determine any improvement in communication or education levels; Conduct an employer satisfaction survey. Analyze results and work to strengthen areas indicated as weak or missing; Use technology to increase the amount of data exchanged with employers; Complete an employer forms and correspondence review. 5. Improve Organizational Effectiveness and Efficiencies Goals: Control the cost of the administrative operating expenses; Integrate the annual budget process with the longterm objectives; Reengineer processes to achieve efficiencies; Maintain qualified staff. Strategic approaches: Continue to monitor method used to ensure control of administrative operating expenses; Implement audit recommendations; Review organizational structure annually for necessary realignment; Maintain industry-leading technology for staff; Continue to perform bottom-up budget analysis when creating the fund budgets; Continue to perform work group process studies to identify operating improvements; Perform annual critical job audits on positions identified annually by department directors; Analysis of career ladders and grade changes; Review organizational processes to evaluate areas for efficiencies and enhance communication within the fund; Continue to evaluate employee benefits to assist in maintaining qualified staff while meeting fund objectives. 6. Advocate and Manage External Change to assist OP&F in achieving its Long-Term Objectives Goals: Remain active in Social Security reform debate and potential impacts; Implement new legislation to ensure compliance; Monitor employer budgets for changes; Understand workers compensation offset; Protect assets against inflationary changes; Understand OP&F membership. Strategic approaches: Propose legislation to change ORC to add a projection period to the 30-year amortization requirement that will minimize plan provision changes due to market volatility; Keep current on all pending and new legislation to ensure compliance can occur when enacted; Attend local, regional and state group meetings related to member topics; OP&F page 20

27 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS Implement global inflation protected securities mandate; Explore real asset investments; Seek employer and/or monitor employer financial status. 7. Accelerate Employer Payments and Improve Employer Reporting Compliance Goals: Accelerate payments due from employers; Ensure member and employer contribution reporting and payments are on time and accurate according to OP&F reporting requirements. Strategic approaches: Propose legislation to make employer share contributions due monthly along with the member share contributions; Escalate problem employers; Certify employers with past due balances through an efficient and consistent process with the county of residence; Increase participation in the Automated Clearing House program for employer payments; Increase participation in the electronic reporting of member contribution payroll reports; Provide employers with a Web-based contribution reporting and payment system; Require employers to report using the standard OP&F approved reporting forms; Improve the internal process for posting payrolls to the reporting system; Study the need for employer billing; Establish and implement an Employer Advisory Group (EAG) with active employers; Establish a ruling and appeals committee for past due contribution reporting and payment penalties. Budget Structure OP&F has three distinct budgets 1. Total Plan Assets Budget; 2. Administrative Operating Budget; and 3. Capital Outlay Budget. The Executive Director, Financial Services Director and Controller are responsible for preparing the all budgets. The basis of budgeting each of the budget expense line items and plan assets categories is the combination of the analysis set forth in the asset allocation, financial forecast study, historical experience, operating needs and goals established internally and externally. OP&F uses external specialized consultants and actuaries to prepare studies that analyze trends, growth rates and legislation consistent with OP&F operations in order to predict plan additions and deductions. The annual Administrative Operating Budget is one piece of the Total Plan Assets Budget, which is the responsibility of each individual Department Director. Each Department Director is responsible for preparing their departmental budget based on the goals set forth for the coming fiscal year and must be done following a prescribed format. The individual department budgets are then combined to create the Administrative Operating Budget. This should include baseline or continuation budget items and initiatives. The Capital Outlay Budget is prepared with the combined efforts of the information systems and project management staff that survey and assess capital needs and priorities. Baseline or Continuation Items OP&F starts the Administrative Operating Budget with a budget based on continuation of current levels of staffing and services. This continuation budget contains no consultant contracts excluding those with on-going retainer relationship (auditing, actuarial, legislative relations, legal and investments). It does contain the first seven months actual expenses incurred by OP&F by department and category and in addition to the remaining five months of the prior year budgeted expenses. An adjustment is then made for non-recurring items or onetime expenses from last year s budget. Initiatives Initiatives represent resources other than those currently utilized in the continuation budget that will be required to OP&F page 21

28 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 either address the current workload placed upon OP&F, begin to put into place the groundwork for easing future workloads or for improving future service or statutory deliverables. Each Department Director is required to assess departmental needs, which are linked to OP&F s shortterm and long-term goals. This planning stage is converted into initiatives during the budget process, allocating time, money and resources to achieve the overall goal. Initiatives must be fully justified when presented to the Executive Director and must align with the overall direction of OP&F. Initiatives are then presented to their respective committee for approval before inclusion in the overall annual budget. Capital Outlay Capital expenditures for OP&F are included in the separate Capital Outlay Budget and include purchases of computer hardware and software, projects, furniture, equipment, building improvements and other related items. Items costing $5,000 or greater or have an estimated useful life in excess of one year will be budgeted to the capital accounts and depreciated on a straight-line basis. Major capital projects are also capitalized and typically involve software and hardware initiatives. The purchase of a capital item is recorded directly to the asset account and then to the fixed asset system so that tracking and depreciation can begin. This will allow OP&F to periodically expense the cost of these items over their useful life as part of the depreciation expense line item. The straight-line method is used for all assets. Asset useful lives range from three to 10 years for office furniture, computers and equipment. The Fund uses 40 years for building and improvements. These assets are also tracked in detail in the Fixed Asset Accounting System for inventory and depreciation purposes. For more details on the capital planning please see the Capital Outlay Budget section of this book. Budget Production, Preparation and Adoption In late July, individual and group meetings will occur between the Executive Director, Board Trustees, Department Directors, Controller and Budget Assistants to communicate linkages in the budget across departments and establish broad goals for measuring the results. During these meetings the Executive Director will establish budget directives for all departments. These directives summarize the initial goals of the operating budget so that the individual departments have a uniform starting point. The first budget request will include three parts 1) current operating needs 2) proposed initiatives that address our highest priority goals and objectives and 3) an examination of the current baseline needs. In early August, the Controller will communicate to the Department Directors their baseline budget for the year, the prescribed format and the deadline for submitting their portion of the budget. The Financial Services Director and Human Resource Manager will also make salary budget guideline recommendations to the Administration Committee. This includes estimated number of new hires and a salary increase assumption. In September, department directors formulate individual department budgets for submission to the various Board committees. Prior to the committee presentations, each Department Director will present their proposed budget to the Executive Director and Financial Services Director. The Controller and Financial Services Director present the Total Plan Assets Budget to the Executive Director. During these meetings, each department presents their requests to the Executive Management team and gives any additional information necessary to justify increases or planned initiatives. A thorough review is done on each baseline adjustment made by the departments versus the baseline prepared by the Finance Department. Once all departmental meetings are complete, each directive is reviewed to determine if they were accomplished, next decisions are made by the Executive Director as to which items will be included in the proposed budget. This information is then formally communicated to the individual departments. Then in October, all departmental budgets will be presented to the various committees for their input and approval. Committee members are given a chance to OP&F page 22

29 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS hear the proposed budget and make recommendations for change or to approve or disapprove the budget. Once approved, the budget moves to the Finance Committee. If the committee disapproves a particular department budget item, then a special meeting will be held in an effort to achieve a consensus between the Committee and the Executive Director. In November, once the individual department budgets are combined, the Finance Committee members then review the entire Total Plan Assets Budget, which includes the Administrative Operating Budget approved by the various committees. The Finance Committee then recommends that the package be presented to the entire Board of Trustees for approval. The Finance Committee is comprised of three Trustee members, the Executive Director and the Financial Services Director. In December, the final total combined budget is presented to the Board of Trustees for approval. Once the budget is approved, it is then communicated to all stakeholders and monitored through normal operations. Budget Distribution The approved budget will be submitted to all Department Directors, Budget Assistants, the Ohio Retirement Study Council and other interested parties as requested, similar to that of the Comprehensive Annual Financial Report. Budget Amendments The approved budget can be amended in two ways: 1. Budget Transfers Budget transfers are usually related to the Administrative Operating Budget and are due to necessary changes in allocation of expense account line items, departmental transfers, change in concept or period changes due to project or initiatives timing. Budget transfers do not result in a dollar increase or decrease from the approved budget, rather they are movements between budget categories already approved. Transfers between different account line items need the Executive Directors signature. Budget transfers between OP&F s three separate budgets do not occur. All transfers require the signature of the Department Directors, Financial Services Director and Budget Manager. 2. Budget Changes Budget changes are also related to the Administrative Operating Budget. When the budget is approved, final details of a major project may not be available for submission. Because of this, a project would then be submitted through the normal approval channels at a later time. Changes usually result in a dollar increase in the approved budget. These material changes are taken back to the Finance Committee for approval. Budget Oversight The Controller and Departmental Budget Assistants will analyze budget-to-actual administrative operating expenses and total plan assets on an as needed basis. Departmental Budget Assistants will first analyze variances in the administrative budget on a year-to-date plan level and determine all categories that are less than 80 percent or greater than 120 percent of the budget and differ by more than $1,000 for materiality purposes. Then each operating initiative will be analyzed. Initiatives must be monitored regularly to ensure completion of planned items. Once these determinations are made, the Departmental Budget Assistants will be responsible for determining the reasons for the variances for their respective areas and work with their respective area to determine the reasons and need for additional money for the remainder of the year. If there are areas under budget in a particular area, then a determination is made as to what is not getting accomplished to ensure goals are being accomplished. OP&F has a procurement system, which serves as an additional control to isolate budget variances prior to the department approving the expenditure. This procurement system has a zero tolerance between the individual department request and the approval of expenditures. When the department requests an item to be purchased or a service to be rendered, they must enter a requisition into the procurement system based on the budget category line item and the department s designated individual must authorize the requisition against the budget loaded at the beginning of the year. If there is insufficient money in the budget category, the department must request a budget transfer prior to authorizing the expense. This process has improved the monitoring of budget to actual expenses rather than waiting until formal reporting channels highlight the budget variance issues. The Controller will also analyze the entire Total Plan Assets Budget and Capital Outlay Budget on a monthly basis, above and beyond the variance levels, to ensure line items are properly recorded and reported. Any notable OP&F page 23

30 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 areas or instances will be reported to the Financial Services Director for guidance and resolution. In addition, the Controller schedules meetings, locations and gathers pertinent data for each budget presentation. The results of the budget-to-actual Total Plan Assets Budget and Capital Outlay Budget will be presented to the Finance Committee quarterly. Overview of Budgeting Process December Full budget approved by the OP&F Board of Trustees (public meeting) OP&F initiates a new budget January November October Each revised departmental budget is presented to the appropriate Trustee committee (public meeting) Full revised budget is presented to the Trustee Finance Committee (public meeting) Changes are recommended Changes are recommended Overview of the OP&F Budget Process Special organizational initiatives are developed during the annual Trustee Retreat April New baseline budget recalculated by Budget Manager October Budget submitted to ORSC September Changes are recommended Departmental budgets arepresented to the ED, Financial Services Director and the Budget Manager to clarify spending levels September Budgets are developed by each Director in accordance with targets and directives A Budget Kickoff Meeting between the ED, Directors and key personnel assistants from each department is held Directives, spending targets and areas of emphasis are communicated by the ED to all parties August August July OP&F page 24

31 Annual Budget for Fiscal Year 2014 BUDGET POLICY AND TRENDS Reserve and Fund Balances Members Employers Annuitant and Guarantee Expense Death Benefit Totals Contribution Funds Contribution Funds Pension Reserve Funds Fund Fund Fund FUND BALANCE AT BEGINNING OF YEAR: $2,065,743,825 $901,575,949 $7,501,180,000 $ $ $ $10,468,499,773 $10,793,229,945 Changes for the year: Contributions: Employers 417,038, ,038, ,472,828 Members 177,533, ,533, ,812,961 Medical benefits 65,066,253 65,066,253 62,528,377 State of Ohio subsidies 580, , ,099 Death benefit fund 20,000,000 20,000,000 20,000,000 Investment income 1,697,091,715 1,697,091, ,320,178 Interest on local funds receivable 1,276,330 1,276,330 1,337,967 Other income 28,826,060 28,826,060 38,568,179 Benefits: Retirement (529,864,440) (529,864,440) (490,182,582) Disability (232,832,996) (232,832,996) (225,044,299) Health care (187,445,986) (187,445,986) (176,340,482) Survivor (74,173,583) (74,173,583) (71,607,186) Death Benefit Fund (20,000,000) (20,000,000) (20,000,000) DROP (212,092,447) (212,092,447) (241,048,734) Administrative expenses (54,604,913) (54,604,913) (52,170,959) Refund of member contributions (26,448,520) 716 (26,447,804) (21,990,672) Other expenses (11,611) (11,611) (24,846) Transfers (94,057,842) (446,074,453) 2,277,080,452 (1,791,553,074) 54,604,913 Net Changes 57,027,393 (27,758,722) 1,040,671,000 1,069,939,675 (324,730,170) FUND BALANCE AT END OF YEAR: $2,122,771,218 $873,817,227 $8,541,851,000 $ $ $ $11,538,439,448 $10,468,499,773 Projected Fund Balances:...as of 12/31/2013: $2,210,521,218 $941,104,227 $8,420,874,893 $ $ $ $11,572,500, Forecast...as of 12/31/2014 $2,314,859,802 $1,021,524,615 $8,621,693,736 $ $ $ $11,958,078, Budget See Reserve and Fund Balances section for a narrative explanation. OP&F page 25

32 BUDGET POLICY AND TRENDS Annual Budget for Fiscal Year 2014 Funding Structure Ohio Police & Fire Pension Fund Funding Structure Police officers and firefighters reserve funds FUNDS Member s Contribution Fund Employer s Contribution Fund Guarantee Fund Expense Fund Pension Reserve Fund Death Benefit Agency Fund Health Care Stabilization Fund Revenues and Expenses Member Contributions Member Refunds/ Transfers Member Share Employer Contributions Interest Accrued Liability Member Refunds/ Transfers Employer Share Investment Gains and Other Income State Subsidies Invesment losses and other expenses Administrative Operating Expenses Retirement Benefits Survivor Benefits $1,000 Lump Sum Death Benefit Health care premiums Other Income Health care Benefits and Medicare Part B Reimbursements State Subsidies Death Benefits Funding Balance Transfers Transfer out to Pension Reserve Fund Transfer out to Pension Reserve Fund Transfer in from Pension Reserve Fund Transfer out to Pension Reserve Fund Transfer out to Expense Fund Transfer in from Guarantee Fund Transfer in from Guarantee Fund Transfer in from Members Contribution Fund Transfer in from Employers Contribution Fund Investment Gain or Loss Allocation Employer Contribution Allocation Transfer out to Guarantee Fund Administrative Operating Expense Allocation OP&F page 26

33 Annual Budget for Fiscal Year 2014 TOTAL PLAN ASSETS BUDGET Total Plan Assets Budget Annual Budget for Fiscal year East Town Street Columbus, Ohio f.org OP&F page 27

34 TOTAL PLAN ASSETS BUDGET Annual Budget for Fiscal Year 2014 Projected Changes in Total Plan Assets Budget Budget vs Forecast Budget vs Budget Budget Fund or Category Budget Forecast $ Change % Change Budget $ Change % Change Annual Projected Additions: Employer Contributions $430,420,388 $417,287,000 $13,133, % $422,315,322 $8,105, % Member Contributions 204,338, ,750,000 16,588, % 183,003,563 21,335, % State of Ohio - Subsidies 580, , % 580, % Health Care Contributions 69,492,323 66,819,541 2,672, % 68,562, , % Investment Income* 1,136,400,000 1,768,307,328 (631,907,328) 35.7% 1,027,125, ,275, % Interest on Employers Liability 1,092,000 1,390,000 (298,000) 21.4% 1,300,000 (208,000) 16.0% Other Income 20,691,100 26,198,132 (5,507,032) 21.0% 20,691, % TOTAL ADDITIONS $1,863,015,052 $2,468,332,657 $(605,317,605) 24.5% $1,723,577,706 $139,437, % Annual Projected Deductions: Pension Benefits (Service & Disability) $934,383,067 $874,258,852 $60,124, % $850,960,676 $83,422, % DROP Benefits & Interest 241,114, ,932,380 34,182, % 213,672,059 27,442, % Health Care Benefits 219,162, ,659,722 17,503, % 191,346,415 27,816, % Administrative Expenses 62,474,058 61,281,138 1,192, % 62,592,043 (117,985) -0.2% Depreciation Expense 1,600,000 1,630,000 (30,000) 1.8% 1,900,000 (300,000) 15.8% Refunds 18,652,680 18,500, , % 25,555,678 (6,902,998) 27.0% Other Expenses 50,000 70,000 (20,000) 28.6% 10,000 40, % TOTAL DEDUCTIONS $1,477,437,238 $1,364,332,092 $113,105, % $1,346,036,871 $131,400, % Net Plan Asset Increase $385,577,814 $1,104,000,565 $(718,422,751) 65.1% $377,540,835 $8,036, % Pensions 10,550,464,349 9,688,358, ,106, % 10,366,815, ,649, % Health care 1,022,035, ,141, ,894, % 917,331, ,704, % Balances Beginning of Year: $11,572,500,338 $10,468,499,773 $1,104,000, % $11,284,146,387 $288,353, % Pensions 10,928,010,296 10,550,464, ,545, % 10,678,221, ,788, % Health care 1,030,067,857 1,022,035,990 8,031, % 983,465,406 46,602, % Balances End of Year: $11,958,078,153 $11,572,500,338 $385,577, % $11,661,687,222 $296,390, % *In 2013 and 2014, investment income is assumed to be 8.25 percent of expected Beginning of Year Assets. Total Plan Assets Budget Review The Total Plan Assets Budget Review is an outline of the recommended total plan assets budget for This analysis will highlight the formulation of the budget and the variances between the 2014 budget compared to the 2013 actual forecast and the 2013 approved budget. OP&F budgets for all plan additions and deductions using a variety of assumptions including; active and retired membership rolls, observed trends in previous years, known upcoming future impacts on experiences (economic and legislative), an investment rate of return in line with the actuarial rate of 8.25 percent, and other known activities. The purpose of this budget is to have a functional financial plan for the primary purpose of analyzing financial statements throughout the year. Having this financial plan allows OP&F to monitor benefit payment and contribution receipt levels and it will help highlight when items fall outside the assumption levels. OP&F is anticipating a beginning net asset balance of $11.6 billion which equates to a $13.8 billion market value of assets as of Dec. 31, For the 2014 year, OP&F is budgeting for a net assets increase approximately $385.6 million. The budgeted end of year net plan asset balance of $12.0 billion equates to a $14.9 billion market value of assets as of Dec. 31, These figures are based estimating a 14 percent return on investments in 2013 and assuming an 8.25 growth rate of the beginning of the year market value in Actual results will vary with the actual direction of the financial markets during the remainder of 2013 and during This is unlike the other categories in this budget which are more precise and predictable and vary with contribution and benefit experiences beyond what is expected and not based on a specific target. Contributions for employers and members are based primarily on the total annual payroll for all of OP&F s estimated 915 multiple employers. OP&F is projecting $1.992 billion in annual payroll compared to $1.842 billion or an 8.1 percent increase from the 2013 budget. This is calculated by taking the estimated 28,141 membership times the $70,778 average annual member salary which equates to the $1.992 billion in projected payroll. Increases in the membership rolls and the salaries OP&F page 28

35 Annual Budget for Fiscal Year 2014 TOTAL PLAN ASSETS BUDGET paid to existing members are the major components of the base for contributions. Active membership is expected to increase to 28,141 from 27,222 or 3.4 percent and the average annual salary is expected to increase by 4 percent for the 2014 budget year, 1 percent of this is based on the 2013 forecast. This budget will subsequently reflect a 1.9 percent increase in employer contributions budget and a 11.7 percent increase in member contributions. Another factor contributing to this increase is that member contributions as a percentage of total annual payrolls are set to increase to percent from the current percent in July of 2014, this is a 7.0 percent increase in the rate. Also, actual contributions are currently 8.8 percent above our budget for 2014 due to purchases of prior service demands due to changes in the law Plan Additions Employer Contributions (Employers share of contributions 19.5 percent for police / 24 percent for fire) OP&F is budgeting for employer contributions to increase in 2014 by 3.1 percent or to $430.4 million over the 2013 actual forecast of $417.3 million. The 2014 budget equates to a 1.9 percent increase over the 2013 budget is attributed to a 4.6 percent increase in the average annual salary for active members and a 3.4 percent increase in actual active members than budgeted in 2013 which equates to approximately 1 percent from the actual forecast of membership. Historically, employer contributions have fluctuated from a high of 9.1 percent growth rate in 2000 to a decrease of 1.6 percent in The expected five year average growth rate increased from.8 percent to 1.7 percent last year. Member Contributions Members share of contributions percent Jan., 2014 June, 2014 and percent July, 2014 Dec. 2014, for both Police and Fire An increase of 8.8 percent to $204.3 million in 2014 over a 2013 actual forecast of $187.8 million is being budgeted. This primarily relates to member contributions as a percentage of total annual payroll are set to increase to percent from the current percent in July of 2014, this is a 7.0 percent increase the rate. Also anticipated is that membership counts overall will increase to 28,141 members; payroll growth will be higher due to current experiences and an average salary growth of 3 percent for members. The 2014 budget for this category is 12.6 percent higher than the 2013 budget. The DROP program allows the member to keep their contributions in a separate account, thus decreasing the total member contributions. DROP enrollment is expected to increase in 2014 to 4,007 members from the 2013 forecast of 3,967 members this is 6.4 percent higher than the 2013 budget of 3,765 members. The contributions category also includes $7 million in estimated member purchases of prior service credit and transferring in from other Ohio retirement systems. Member contributions have fluctuated from a high of 11 percent growth rate in 2002 to a negative low of 2.4 percent in The five year average growth rate is 1.5 percent which is up from.4 percent last year. State of Ohio Subsidies State contributions to fund certain legislated increases in benefits For 2014 we have budgeted $580,657 for state subsidies. This is based on a declining membership population for which OP&F receives subsidized contributions from the State of Ohio. Health Care Contributions Benefit recipients contributions/premiums to the cost of their health care Benefit recipients are expected to pay $69.5 million towards the cost of their health care in This reflects a 4 percent increase from 2013 actual forecasted data. This increase takes into consideration the addition of new benefit recipients as well as members terminating from DROP. Calculations were based on Buck Consultant s health care solvency review and data analyzed by internal staff. OP&F page 29

36 TOTAL PLAN ASSETS BUDGET Annual Budget for Fiscal Year 2014 Contribution Income (in thousands) Contribution type 2014 Budget 2013 Forecast* 2012 Actual 2011 Actual 2010 Actual Employer Contributions $430, % $417, % $417, % $407, % $414, % Member Contributions 204, % 187, % 177, % 176, % 175, % State of Ohio - Subsidies % % % % % Health Care Premiums 69, % 66, % 65, % 62, % 58, % Total Contributions $704, % $672, % $660, % $647, % $649, % *2013 Actual forecast is based upon the most recent actuarial valuation, actual data thru Sept. 30, 2013 and scheduled revenue receipts. Investment Income Represents realized and unrealized gains and losses on the sale of investments, unrealized appreciation and depreciation on investments held, interest, dividends and allocated income, as well as other investment income which includes securities lending. As of Oct. 2013, OP&F is estimating a 16 percent rate of return on investments for For purposes of this budget, OP&F forecast 14 percent due to the timing of the budget process. The beginning of the year market value of investments is estimated to grow based on the actuarial rate of 8.25 percent. This equates to a budget of approximately $1.136 billion in 2014 for the investment income category. This assumption is based upon an estimated beginning plan net asset balance of $11.6 billion and an estimated beginning plan market value of $13.8 billion on Jan. 1, Due to volatility in the financial markets and changes in the allocation of the Fund s assets, these numbers can fluctuate dramatically from one year to the next. Please see the analysis below for additional information related to investment income trends. The past five years has shown actual rates of return between our low of negative percent in 2009 to a high of positive percent in The 20 year annualized return equates to 8.23 percent based on the actual experiences and an estimate for OP&F will continue to target the 8.25 percent actuarial rate for purposes of budgeting until such a time as that rate is changed by the Board of Trustees. This allows staff to report and monitor results that vary from that target. Investment Portfolio Rates of Return, (14.0% was used to calculate the 2014 budget) Year Rate of Return Year Rate of Return Year Rate of Return Year Rate of Return % % % % % % % % Gain (Loss) on Investments This reflects the realized gains and losses and unrealized appreciation and depreciation on our investments. Realized gains and losses are specifically tied to general market forces and investment performance. In addition, they are related to manager transitions and other specific buy and sell transactions. The unrealized portion of our investment income is also tied to general market forces and investment performance. However, this category is the gain or loss on securities that OP&F is currently holding in our investment portfolio. OP&F is budgeting for a $692.6 million net gain on investments in OP&F takes a steady approach in predicting asset growth at the actuarial rate of 8.25 percent. This is done in an effort to manage our overall fiscal plan compared to the actuarial rate of return and not attempt to predict future market returns. Interest and Dividend Income This reflects the realized gains and losses and unrealized appreciation and depreciation on our investments. Realized gains and losses are specifically tied to general market forces and investment performance. In addition, they are related to manager transitions and other specific buy and sell transactions. The unrealized portion of our investment income is also tied to general market forces and investment performance. However, this category is the gain or loss on securities that OP&F is currently holding in our investment portfolio. OP&F is budgeting for a $812.0 million net gain on investments in OP&F page 30

37 Annual Budget for Fiscal Year 2014 TOTAL PLAN ASSETS BUDGET OP&F takes a steady approach in predicting asset growth at the actuarial percentage rate of 8.25 percent. This is done in an effort to manage our overall fiscal plan compared to the actuarial rate of return and not attempt to predict future market returns. Interest and Dividend Income This category typically runs consistent with historical trends and is tied to the mix of investments between equities and fixed income products. Accordingly we have budgeted figures for 2014 to be consistent with trends observed as well as future trends in asset allocation. In 2013, master limited partnership income was added to this category. Allocated Income This line item contains income from our commingled real estate, venture capital, and commercial mortgage investment holdings. We are planning for allocated income to decrease in 2014 compared with the 2013 actual forecast. Other Investment Income This category includes securities lending income, interest on commercial paper and international cash equivalents as well as miscellaneous income from security litigation settlements and other miscellaneous investment transactions. Investment Income (in thousands) 2014 Budget 2013 Forecast* 2012 Actual 2011 Actual 2010 Actual (at 8.25%) (at 14%) (at 14.89%) (at 2.60%) (at 15.83%) Gain (Loss) on Investments $812,000 $1,490,529 $1,412,953 ($3,159) $1,444,222 Fixed Income Interest 153, , , , ,467 Dividend Income 136, , ,766 92,533 89,213 Allocated Income 28,000 29,819 30,910 28,481 20,313 Other Interest Income 5,800 1,825 5,026 2,263 4,925 Total Invest. Income $1,136,400 $1,768,307 $1,697,092 $266,320 $1,685,140 *2013 Actual forecast is based upon actual data thru Sept. 31, 2013, projected through Dec. 31, The gain (loss) on investments line item will vary heavily on year-end financial market results. Interest on Employers Liability Represents the long-term employer unfunded accrued liability to be paid off based on pre-determined amortization periods scheduled through the year A budget of $1.1 million in 2014 is estimated for the interest on employer s liability based on the current accrued liability amortization schedules. This line item will continue to decline over time as the scheduled interest payments for employer s that have a long-term accrued liability continue to decrease with the principal amount due. Other Income Represents the interest and employer contributions for members transferring into OP&F, recoveries, rebates and Medicare Part D reimbursements for health care costs, fines for late filing of pre-employment physical documentation and other miscellaneous income. In 2014 we are budgeting approximately $22 million for other income related to the items listed above. This includes $3.7 million for member s interest on transferring into OP&F, and $17 million for health care recoveries, rebates and Medicare Part D reimbursements. The reduction in this category in related to the fact that OP&F received a large volume of interest from transfers from other retirement systems in Ohio due to the legislative changes that required members purchase before July 1, Below is a table showing trends in Interest on Employers Liability and Other Income with the percentage change from previous year. Benefits 2014 Budget 2013 Forecast * 2012 Actual 2011 Actual 2010 Actual Interest on Employer s Liability $1, % $1, % $1, % $1, % $1, % Other Income 20, % 26, % 28, % 38, % 23, % Total Other Income $21, % $27, % $30, % $39, % $25, % (Shown in thousands) *2013 Actual forecast is based upon actual data thru Sept. 30, 2013 and the health care expectations based on the actuarial assessments. OP&F page 31

38 TOTAL PLAN ASSETS BUDGET Annual Budget for Fiscal Year 2014 Plan Deductions Pension Benefits (Service, Disability and Survivor benefits paid to members and survivors) Benefits for retirees and survivors are expected to increase to $934.4 million in 2014 over 2013 actual forecast of $874.3 million. This is a 6.9 percent increase from the 2013 actual forecast and an 8.7 percent increase over the 2013 budget. There is a 3.0 percent cost-of-living adjustment for those eligible and due to the new pension legislation members will not receive an adjustment in 2014 if they are not age 55. Below is a table showing trends in Pension Benefits and the percentage change from previous year (shown in thousands). Benefits 2014 Budget 2013 Forecast* 2012 Actual 2011 Actual 2010 Actual Service $612, % $559, % $529, % $490, % $444, % Disability 243, % 238, % 232, % 225, % 217, % Survivor 77, % 76, % 74, % 71, % 69, % Total Benefits $934, % $874, % $836, % $786, % $731, % (Shown in thousands) *2013 Actual forecast is based upon the most recent actuarial valuation, actual data thru Sept. 30, 2013 and scheduled cost-of-living adjustments. DROP Benefits and Interest (Benefits for participants in the Deferred Retirement Option Plan (DROP) including pension, COLA and interest) In 2014, we are anticipating expenditures for DROP liabilities incurred to the DROP accrual accounts to increase primarily due to estimating a 3.5 percent interest rate. DROP benefits for the year 2014 are expected to increase by 16.5 percent to $241.1 million compared to the 2013 actual forecast. Members in this program have seen a major change to the interest rate accruing on their accounts. Below is a table showing trends in DROP Benefits with the percentage change from previous year. Benefits 2014 Budget 2013 Forecast* 2012 Actual 2011 Actual 2010 Actual DROP Benefits $241, % $206, % $212, % $241, % $240, % (Shown in thousands) *2013 Actual forecast is based upon the most recent actuarial valuation, actual data thru Sept. 30, 2013, plan benefit arrangements and scheduled cost-of-living adjustments. Health Care Benefits (Health Care coverage provided to members, dependents and survivors) Health care benefit payments are expected to be $201.2 million in 2014, up from an actual forecast of $184.4 million in Separately, Medicare Part B reimbursements are expected to be $17.9 million in 2014, up from an actual forecast of 17.2 in 2013, this is due to a budgeted 4 percent increase in eligible members, there is no increase in the premium for 2014 (please see the last chart of this write up for the entire health care stabilization fund budget). Below is a table showing trends in health care benefits with the percentage change from previous year. Benefits 2014 Budget 2013 Forecast* 2012 Actual 2011 Actual 2010 Actual Health Care $201, % $184, % $ 171, % $ 161, % $ 145, % Medicare B 17, % 17, % 15, % 14, % 13, % Total Health Care $219, % $201, % $ 187, % $ 176, % $ 159, % (Shown in thousands) *2013 Actual forecast is based upon actual data thru Sept. 31, 2013 and adjusted for known plan changes. Administrative Expenses See separate narrative regarding the Administrative Operating Budget. OP&F page 32

39 Annual Budget for Fiscal Year 2014 TOTAL PLAN ASSETS BUDGET Depreciation Expense (Non-cash line item to recognize previously capitalized expenses) Depreciation expenditures are budgeted at $1.6 million in 2014 for a decrease of 1.8 percent over the 2013 actual forecast. This is based on prior year actual levels as well as future capital purchases through the capital budget. Depreciation 2014 Budget 2013 Forecast* 2012 Actual 2011 Actual 2010 Actual Depreciation expenses $1, % $1, % $ 1, % $ 1, % $ 1, % (Shown in thousands) *2013 Actual forecast is based upon actual data thru Sept. 30, 2013 divided by 9 and multiplied by 12. Member Refunds (Refund of member contributions due to the members withdrawal from OP&F) This category is an estimate of the amount of refunds OP&F expects to pay out to members in In 2014, OP&F is budgeting $18.7 million in member refunds, which is a.8 percent increase over the 2013 actual forecast of approximately $18.5 million. The 5 year average increase is 13.2 percent. Other Expense (Miscellaneous expenses associated with plan administration) OP&F is estimating $50,000 for 2014 in other expenses based upon trends observed. Below is a table showing trends in Member Refunds and Other Expenses with the percentage change from previous year. Other Expenditures 2014 Budget 2013 Forecast* 2012 Actual 2011 Actual 2010 Actual Member Refunds $18, % $18, % $26, % $21, % $15, % Other Expense % % 11, % % % Other Expenditures $18, % $18, % $38, % $22, % $15, % (Shown in thousands) *2013 Actual forecast is based upon actual data thru Sept. 30, 2013 divided by 9 and multiplied by 12. Health Care Stabilization Fund (HCSF) balances as of Dec. 31 The below table is displayed for informational purposes only. As part of the budget process the health care stabilization fund is also budgeted. Components of this fund are budgeted based on experiences with enrollment, past cost histories, projected cost trends and other components are based on the employer contributions received and the investment earnings of the plan. Benefits 2014 Budget 2013 Forecast* 2012 Actual 2011 Actual 2010 Actual Beginning Balance on January 1 $1,022,036 $935,605 $780,142 $717,730 $573,399 Retiree health care costs (201,241) (184,426) (171,667) (161,907) (145,957) Medicare Part B reimburesement (17,922) (17,233) (15,780) (14,433) (13,956) Retiree premium contribution 69,492 66,820 65,066 62,528 58,923 Rebates and recoveries 8,430 7,028 12,148 19,912 10,268 Medicare Part D subsidies 8,570 8,570 9,078 8,735 6,441 Employer contribution allocation 56,765 68, , , ,775 Investment return allocation 84, , ,894 18, ,525 Administrative expense allocation (680) (680) (563) (716) (688) Projected Ending Balance as of Dec. 31 $1,030,068 $1,022,036 $935,605 $780,142 $717,730 (Shown in thousands) *The employer contribution allocation rate for 2014 was reduced to 2.85 percent of total annual payroll which represents 13.2 percent of dollars employers pay for contributions. Police employers pay 19.5 percent and fire employers pay 24 percent of total annual payroll, which is a blended rate of percent based on the last actuarial valuation. This rate was changed as part of the overall funding plan changes approved by the Board of Trustees in Feb For , the employer allocation rate was 6.75 percent of total annual payroll. The rate changed twice in 2012 once in January to 4.69 percent and then again in June to OP&F page 33

40 TOTAL PLAN ASSETS BUDGET Annual Budget for Fiscal Year 2014 Statement of Changes in Total Net Plan Assets % 2012 Budget Fund Or Category Budget Forecast Budget Difference Actual Annual Projected Additions Employer contributions $430,420,388 $417,287,000 $422,315, % $417,038,685 Member contributions 204,338, ,750, ,003, % 177,533,755 State of Ohio subsidies 580, , , % 580,657 Health care contributions 69,492,323 66,819,541 68,562, % 65,066,253 Investment income 1,136,400,000 1,768,307,328 1,027,125, % 1,697,091,715 Interest on employers liability 1,092,000 1,390,000 1,300, % 1,276,330 Other income 20,691,100 26,198,132 20,691, % 28,826,060 Total Additions $1,863,015,052 $2,468,332,657 $1,723,577, % $2,387,413,455 Annual Projected Deductions Pension Benefits $934,383,067 $874,258,852 $850,960, % $836,871,019 DROP Benefits and Interest 241,114, ,932, ,672, % 212,092,447 Health Care Benefits 219,162, ,659, ,346, % 187,445,986 Administrative expenses, Excluding Capital 62,474,058 61,281,138 62,592, % 52,805,945 Depreciation Expense 1,600,000 1,630,000 1,900, % 1,798,968 Refunds 18,652,680 18,500,000 25,555, % 26,447,804 Other expense 50,000 70,000 10, % 11,611 Total Deductions $1,477,437,238 $1,364,332,092 $1,346,036, % $1,317,473,780 Net Asset Increase $385,577,814 $1,104,000,565 $377,540, % $1,069,939,675 Balances Beginning of Year* Pension and other assets $10,550,464,349 $9,688,358,143 $10,366,815, % $9,688,358,143 Health Care Stabilization Fund 1,022,035, ,141, ,331, % 780,141,630 Total Plan Assets Balance $11,572,500,338 $10,468,499,773 $11,284,146, % $10,468,499,773 Balances End of Year Pension and other assets $10,928,010,296 $10,550,464,349 10,678,221, % $10,602,833,997 Health Care Stabilization Fund 1,030,067,857 1,022,035, ,465, % 935,605,451 Total Plan Assets Balance $11,958,078,153 $11,572,500,338 $11,661,687, % $11,538,439,448 *Opening balance has been adjusted to reflect market results and actual experiences in each category at the time the budget is prepared. OP&F page 34

41 Annual Budget for Fiscal Year 2014 TOTAL PLAN ASSETS BUDGET 2012 % % % Budget Difference Actual Budget Difference Actual Budget Difference $397,352, % $407,472,828 $410,675, % $414,026,839 $408,000, % 162,542, % 176,812, ,951, % 175,477, ,600, % 694, % 639, , % 692, , % 65,136, % 62,528,377 60,862, % 58,923,329 59,900, % 990,000, % 266,320, ,500, % 1,685,140, ,600, % 1,000, % 1,337,967 1,351, % 1,379,830 1,385, % 25,428, % 38,568,179 18,919, % 23,776,549 20,764, % $1,642,154, % $953,679,589 $1,603,956, % $2,359,416,993 $1,491,026, % $820,928, % $786,834,067 $803,231, % $731,282,051 $724,062, % 239,708, % 241,048, ,468, % 240,954, ,178, % 187,582, % 176,340, ,584, % 159,913, ,154, % 58,677, % 50,292,935 54,483, % 46,535,241 45,566, % 2,300, % 1,878,024 2,300, % 1,881,981 2,300, % 22,926, % 21,990,673 19,440, % 15,789,397 14,012, % 40, % 24, , % 22, , % $1,332,163, % $1,278,409,761 $1,293,658, % $1,196,379,790 $1,192,422, % $309,991, % ($324,730,172) $310,297, % $1,163,037,203 $298,603, % $9,978,248, % $10,075,500,004 $9,642,370, % $9,056,793,588 $8,725,353, % 799,396, % 717,729, ,873, % 573,399, ,912, % $10,777,645, % $10,793,229,945 $10,307,243, % $9,630,192,742 $9,274,266, % 10,215,300, % $9,688,358,143 $9,884,027, % $10,075,500,004 $8,955,473, % 872,335, % 780,141, ,512, % 717,729, ,396, % $11,087,636, % $10,468,499,773 $10,617,540, % $10,793,229,945 $9,572,870, % OP&F page 35

42 TOTAL PLAN ASSETS BUDGET Annual Budget for Fiscal Year Total Plan Assets Budget Revenues by Category (in thousands) 1 Investments: 61.0%, $1,136, Employer: 23.1%, $430, Member: 11.0%, $204,339 4 Health Care Contributions: 3.7%, $69, Other Income: 1.1%, $20,691 6 Employers Interest: 0.1%, $1, State Subsidy: 0.0%, $ Total Plan Assets Budget Expenses by Category (in thousands) 1 Pension Benefits: 63.3%, $934,383 2 DROP: 16.3%, $241,114 3 Health Care: 14.8%, $219, Administrative: 4.2%, $62,474 5 Refunds: 1.3%, $18,653 6 Capital Depreciation Expenses: 0.1%, $1,600 7 Other Expenses: 0.0%, $ Employer and Member Contributions Received Versus Pension Benefits Paid (in thousands) Amount in millions $1,200 $1,000 $800 $600 $400 $200 $868 $816 $850 $713 $755 $663 $520 $528 $539 $570 $578 $573 $903 $590 $1,028 $584 $1,053 $1,061 $1,175 $595 $605 $635 $ Actual 2005 Actual 2006 Actual 2007 Actual 2008 Actual 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Forecast 2014 Budget Pension benefits paid, including DROP accruals Employer and Member payroll contributions received OP&F page 36

43 Annual Budget for Fiscal Year 2014 CAPITAL OUTLAY BUDGET Capital Outlay Budget Annual Budget for Fiscal year East Town Street Columbus, Ohio f.org OP&F page 37

44 CAPITAL OUTLAY BUDGET Annual Budget for Fiscal Year Capital Outlay Budget by category Budget Budget Forecast Prior Year 1st Year 2nd Year 3rd Year Three Year Carry Over Total Office Building Carpet replacement $338,000 $ $338,000 $12,000 $ $ $350,000 Replace Leibert Air Conditioning Units 79,000 79,000 Sub-Total $417,000 $79,000 $338,000 $12,000 $ $ $350,000 Furniture and Equipment Office Furniture Replacement (OFR) $30,000 $4,300 $25,700 $4,300 $30,000 $30,000 $90,000 Mail Equipment replacement/upgrade on all parts 115, , ,000 Sub-Total $145,000 $119,300 $25,700 $4,300 $30,000 $30,000 $90,000 Computer Hardware PC Replacements $25,000 $25,000 $25,000 $200,000 $25,000 $275,000 Server/Network Replacements (Cisco) 75, , , ,000 75, ,000 Notebook Computers 26,400 26,400 26,400 Network Printers 8,000 5,100 2,900 5,100 8,000 8,000 24,000 Scanners for Imaging 10,000 5,000 5,000 10,000 5,000 25,000 Sub-Total $144,400 $110,100 $59,300 $260,100 $443,000 $113,000 $875,400 Computer Software VV3 Change Orders $193,800 $150,000 $43,800 $206,200 $250,000 $250,000 $750,000 V3 Browser Version Upgrade 745, , ,000 5, ,000 Identity Finder Replacement 9,000 9,000 9,000 Partitioning Option for Oracle Database 50,510 50,510 Required 3rd Party Software - V3 Browser Project 31,000 31,000 Upgrade SCCM to Version 2007 R3 16,000 16,000 Upgrade Door Access System 5,600 4,700 Secure Board Book Solution 120, ,074 Information Services Development Tools Request 40,500 40,500 Electronic Records Management (ERM) 18,990 18,990 71,010 90,000 Share Point Upgrade 60,000 60,000 60,000 V3 Browser Co-Development 55,000 55,000 55,000 OCRA Cash Management Software Upgrade 12,000 12,000 12,000 Create a Linux/BoardVantage Test Environment 15,500 15,500 Replace Web Log Explorer 10,000 10,000 Network Device Management Software 10,720 10,720 Security Information Event Mgt. Log Manager 35,400 35,400 Protocol Analyzer/Packet Filtering Appliance 10,000 10,000 42,200 52,200 Higher Level of Vmware Commitment 35,600 35,600 CODA Upgrade or New Financials 30,000 30,000 PAM Upgrade 14,500 14,500 Fraudline Software 25,000 25,000 Sub-Total $1,367,400 $851,784 $503,790 $501,130 $250,000 $250,000 $1,504,920 TOTALS $2,073,800 $1,160,184 $926,790 $777,530 $723,000 $393,000 $2,820,320 OP&F page 38

45 Annual Budget for Fiscal Year 2014 CAPITAL OUTLAY BUDGET Capital Outlay Budget The capital outlay budget allows OP&F to plan and manage for the financing of major fixed assets and capital projects by segregating these activities from the administrative operating budget. The budget is projected over a rolling three-year period beginning in 2014 and ending in 2016, the first capital budget was approved in The budget will be reviewed annually for changes based on priorities, technological advances and needs assessments. While 2005 is the first year for the creation of the capital outlay budget, previous years capital budgets have been reallocated to this separate budget for comparison. Capital assets will be recorded at cost and managed according to OP&F s internal Fixed Asset Accounting and Inventory Policy. Each asset will then be expensed through depreciation over a useful life period using the straight-line method. The useful life is determined based on warranty terms, historical experience, and expected experience. Capital expenditures include purchases of computer hardware and software, projects, furniture, equipment, building improvements and other related items. Items costing $5,000 or greater or have an estimated useful life in excess of one year will be budgeted to the capital accounts and depreciated on a straight-line basis. Major capital projects are also capitalized and typically involve software and hardware initiatives. Purpose of Separate Capital Budget The dynamic nature of a capital budget will assist management with issues that previously arose when capital assets were planned in static administrative operating budget. Historically, OP&F experienced budget-spiking, delays in updating technology with the annual budget cycle and lacked the ability to communicate replacement cycles in dollars. The new environment will benefit OP&F long-term with assessing the needs of the organization, making timely adjustments, and planning for future acquisitions and cash requirements. purchases for our current PCs and server equipment. OP&F can purchase and maintain warranties on computer hardware items to extend the life cycle and eliminate the need for staff resources to make repairs and rebuild. Within the timeframe of the capital budget, PCs will be on a five-year replacement schedule with the first three years being under warranty and the last two years on a replace-as-needed basis. This five-year schedule will allow OP&F to stay in the forefront of technology advances while at the same time decrease unnecessary spending and therefore save money. Due to security and technological advances in servers, all servers will be on a three-year replace-as-needed schedule. Planning for capital outlay needs will help ensure that an effective inventory is kept on existing capital assets and replacement cycles. This will also help identify items that may not be living up to their expected life cycle due to wear, technology changes and reliability. Priorities for 2014 OP&F sets priorities for capital outlay based on the direction of the Executive Director, the Deputy Executive Director and the Board of Trustees. Factors that impact those priorities include the economy, technological needs and the work environment. Work on V3 Browser and V3 Classic change orders as required Replace computer hardware according to the schedule or changes in priorities Upgrade software as requested to keep a secure and up-to-date work environment for staff Monitor the inventory of existing assets to determine remaining service levels and establish a replacement cycle for existing capital assets Obligations for future infrastructure needs will be segregated from routine operations and Fund management will be able to keep priorities and adjust priorities as needs and emergencies arise. In addition, cash outlays can be anticipated and projected for communication with our Investment Department. This capital budget will meet OP&F s technology requirements and allow for financial planning of necessary OP&F page 39

46 CAPITAL OUTLAY BUDGET Annual Budget for Fiscal Year 2014 Depreciation Methods, Estimated Usefull Lifes and Salvage Values Capitalized assets will be adjusted for accumulated depreciation over their economic useful lives based on the following schedule. Special consideration will be given to unusual assets or assets with particular circumstances surrounding their acquisition. Any special consideration will be fully documented in the accounting and inventory records Salvage Asset Type # of Years Method Values Automobiles 5 years Straight-Line $0 Copiers 6 years Straight-Line $0 Computer Hardware 2-3 years Straight-Line $0 Computer Software 3-10 years Straight-Line $0 Land improvement 20 years Straight-Line $0 Equipment 10 years Straight-Line $0 Furniture and Fixtures 10 years Straight-Line $0 Building and Improvements 40 years Straight-Line $0 Other assets 2-6 years Straight-Line $0 Status of Capital Projects: New Initiatives for 2014 Hire a Linux/Windows Systems Administrator Request Request addition of one full time employee in the role of Systems Administrator. Result This person is required to have Linux experience to support the BoardVantage system. Additionally, having another Systems Administrator on staff will allow for segregation of tasks resulting in a faster turnaround and will also provide much needed redundancy to the position. Currently, some items must wait if our Systems Administrator is unavailable to address due to higher priorities, or if out of the office. Linux/Windows Systems Administrator... $75,00 annually Create a Linux/Board Vantage test environment Request Purchase and install software to create a Linux test environment. Result Having a Linux test environment will allow us to perform modifications and explore features in a non-production instance of BoardVantage. Additionally, operating system upgrades and security enhancements can be applied and tested without impacting functionality. Linux/BoardVantage test environment...$15,500 OP&F page 40 Replace Web Log Explorer Request Identify and purchase a replacement for Web Log Explorer Result The current version of Web Log Explorer is several years old. When pursuing an upgrade, it was discovered that the software is based out of Russia. Purchasing a new product will allow us to provide detailed level reporting of Internet Web traffic for trending and analysis. Web Log Explorer Replacement...$10,000 Network device management software Request The ability to utilize software tools to automate the configuration, administration, and backup of OP&F s Cisco networking assets. Result These tools will provide enhanced troubleshooting and problem management capabilities as well as configuration management that will assist in recovery situations and increase the overall security stature of OP&F s internal and external networking devices. Network device mgt. software...$10,000 First Year Maintenance and Support... $720 Total...$10,720

47 Annual Budget for Fiscal Year 2014 CAPITAL OUTLAY BUDGET Security information event Management log manager Request Compare, assess and then purchase a Security Information Event Management (SIEM) Log Manager to aggregate and analyze logs from the corporate infrastructure. Result This tool will be a single pane dashboard into the health of the network. In order to drill down into an issue, logs from various infrastructure components need to be correlated to comprehend the root cause and assist in resolving the problem. Security Information Event Management (SIEM) Log Manager...$30,000 First Year Maintenance and Support... 5,400 Five year ROI...$35,400 SharePoint Uupgrade Request Upgrade from SharePoint 2007 to SharePoint Microsoft free mainstream support for SharePoint 2007 ends in October 2012, and paid extended support ends October To ensure that we provide a high level of uptime and service for the knowledge management process and procedures and Intranet (EmployeeNet) sites, we should upgrade to the latest version of SharePoint. This will entail purchasing the latest version of SharePoint and paying a consultant company to assist with the migration from 2007 to Result Will allow OP&F personnel to continue to use the knowledge management process and procedures and Intranet (EmployeeNet) sites on a vendor maintained platform. SIEM log manager...$30,000 First year maintenance and support... $5,400 Total...$35,400 Protocol analyzer/packet filtering appliance Request Compare, assess and purchase a protocol analyzer/ packet filtering appliance to help troubleshoot latency, configuration problems and more. Result Since this device will sit on the core switch, it will log and monitor every packet traversing it. It has the capability of being configured to store, replay and analyze transactions, with alerting functionality. It can be used in this fashion or in an investigative method in helping pin point trouble before users see it. Protocol analyzer/packet fltering appliance...$40,000 Training... 5,000 First year maintenance and support... 7,200 Total... 52,200 Higher Level of VMware Commitment Request OP&F has been utilizing a free version of VMware on four servers that will soon be five years old. This version is limited in its scope of use, support and utility. We must commit ourselves to a more robust and capable platform. Virtualization also impacts Microsoft licensing. In order to run a virtual Windows server, the base hardware must have a Windows license as well, even when not installed. Result This commitment will assure that OP&F is better prepared to utilize the latest version of VMware virtual technology, including support, monitoring and proper Windows licensing. TVMware vsphere with Operations Management Standard, vcenter Server Foundation and Windows 2012 DataCenter...$32,900 First year maintenance and support... $2,700 Total...$35,600 OP&F page 41

48 CAPITAL OUTLAY BUDGET Annual Budget for Fiscal Year 2014 RFP for Financial and Procurement System Request The current CODA System used at OP&F was purchased in In 2009, we upgraded to the browser version of the software which added improved procurement capabilities. This fall there is an upgrade potential with CODA. Since it has been a while that OP&F has conducted an RFP on what other software is available for comparison, we are requesting an RFP to be done the latter part of 2014 to determine what is beneficial of OP&F. Result A RFP will allow OP&F to ability to review other software packages to determine other capabilities compared to the CODA software. If a decision to go with another product is made it would be part of the 2015 budget request. The upgrade on CODA could be done in 2014 or moved to 2015 as well. This initiative is to conduct a RFP for financial software. (EmployeeNet) sites on a vendor maintained platform. Disability Anti-Fraud Hot Line Request This initiative will establish a dedicated toll-free number for OP&F members and the general public to use to report suspected abuse of the OP&F disability benefits and the granting process. Result Software purchased will allow for a central data collection and processing point for allegations of disability benefit fraud. Total...$25,000 CODA upgrade... approximately $30,000 (pending RFP responses) PAM upgrade Request Princeton Financial Systems (PFS) is requiring OP&F to replace the current PAM for Securities application that was implemented in 2000 with their new product, PAM for Investments. This product, built around the Windows. NET platform, has a Windows-based interface and a Microsoft Office-like navigation. Result According to PFS, Pam for Investments offers the following enhancements to the PAM for Securities that we currently use: Risk management Web-based reporting with user-defined dashboards Full Net Asset Value (NAV) calculations for single or multi-class funds Implementation and cost budget as follows: Implementation and training...$12,500 Travel expenses... ($1,000 x2) $2,000 Total... $14,5000 OP&F page 42

49 Annual Budget for Fiscal Year 2014 CAPITAL OUTLAY BUDGET Status of Capital Projects: Review of 2013 Initiatives Of the 19 planned initiatives for 2013, five were completed, four are scheduled for completion, six were moved to 2014 and four are on a three-year cycle. Completed: Upgrade Door Access System Request Upgrade the software that controls our door access system. This software is over eight years old and will not be compatible with current PC or server 64-bit operating systems. Result Upgrading WinPak will allow us to replace the server the application runs on as it is over nine years old, is out of support and also needs to be upgraded. Upgrade WinPak... $5,600 (actual amount was $4,659) Completed: Replace Liebert air conditioning units Request Replace the aging air conditioning units that cool the server room. These units have failed several times in recent years resulting in high temperatures that could ultimately result in failure of critical telephony and server hardware. The ongoing maintenance and repairs of these units is also costly. Result New units should cost less to operate, be more reliable and allow for maintaining a more consistent room temperature. Replace air conditioning units...$75,000 (actual amount was $79,000) Completed: Secure Board Book solution Request Implement a solution, Software as a Service (SaaS) and/ or Mobile Device Management, that will secure electronic Board materials regardless of the type of device used to access. Result Maintain the integrity and security of electronic Board documents while still allowing ease of access. Secure Board Book solution...$55,000 (actual amount was $109,074 plus travel which has not been finalized) Completed: Third party software for V3 Browser project Request This list of third party software was provided by Vitech as being required for the V3 browser project. It will need to be purchased at the beginning of the project so that it is available for use as necessary. Adobe Acrobat Pro version 9 complete package -Includes 1st year upgrades and support Qoppa Software jpdfwriter licenses Qoppa Software jpdfwriter one year -upgrades and support Daeja ViewONE Pro licenses Daeja ViewONE Pro Annotations module Daeja ViewONE Pro PDF module Daeja ViewONE Pro maintenance and support Result Purchase of these products will ensure that we have all of the third party software required for the project. Third party software for V3 Browser project...$28,000 (actual amount was $30,929) Completed: Partitioning option for Oracle Database Request Purchase Oracle partitioning licenses for use with current Oracle database software. Result The result is efficiency which can lead to quicker response times for users and batch processes running in less time. The partitioning option allows for more efficient access to data in large tables, especially where data can be easily broken up into smaller parts; i.e. by date range. For example, it is much less time and resource intensive to query against one month or year (a single partition) of disbursement data than querying against a whole table where most of the data might not be of interest for a given task. Some organizations use the Oracle partitioning option to allow them to maintain normal user response times without having to separate historical data into a separate data warehouse as the data grows. This saves money that would be needed for additional software, hardware and time in managing a separate data warehouse, OP&F page 43

50 CAPITAL OUTLAY BUDGET Annual Budget for Fiscal Year 2014 not to mention complexity for reports that would have to look at both current and historical data. Partitioning for Oracle database for development for $33, named user plus licenses = $27, named user software update license and support for first year = $6,023 Partitioning for Oracle database for production for $44,531 Four processor perpetual licenses = $36,501 Four processor software update license and support for first year = $8,030 Three Year Total for Oracle partitioning...$77,930 (actual amount for 2013 was $36,478 Planned for completion in 2013: V3 Browser version upgrade Request The goal of this initiative is to upgrade the current version of V3 to the new browser based version of V3. Vitech released the browser version in 2004 and has been rolling it out to their customers. They also have a number of upgrade projects being performed to move current customers from the client server version to browser. The browser based version will provide OP&F with a number of improvements. Vitech has provided OP&F with an estimated timeframe and cost for the project. The project will take approximately two and a half years to complete. A majority of the upgrade work will be done by Vitech resources using our current V3 system as a guideline for the new browser system. This project will not require the amount of OP&F user department resources that the original project required. Proactive upgrade Our goal is to be proactive in our approach to the V3 upgrade. Our current version of V3 was purchased seven years ago. The current version was originally released in 1998 and is now twelve years old. Software systems lifecycles are typically five-to-seven years, so our current system is well past the normal lifecycle timeframe. At the time we purchased the current version, Vitech was working on its replacement, but it was not complete enough for us to use. Vitech released the browser version in 2004 and it is now the version that they sell to new customers. For a period of time, Microsoft will continue to support older versions of their operating systems like Windows XP after they release newer operating systems such as Vista and Windows 7. Microsoft discontinued mainstream support for XP in April Like Microsoft, Vitech is supporting both the client server version that OP&F currently uses, and the new browser version. Yet, also like Microsoft, Vitech will eventually discontinue all support for the client server version. It is in OP&F s best interest to upgrade to the browser version on our schedule as opposed to being forced to upgrade at some future date set by Vitech. It would be best to plan the conversion at a point in time when there are no foreseeable major systems chang es. Over the next two years, we do not foresee any major system changes being required, so it would be a good time to perform this upgrade. Provides OP&F with more control OP&F currently develops all reports, exports, queries, letters and workflows within the V3 system. In total, this saves OP&F over $300,000 per year. The browser version of V3 was developed by Vitech so that the customer can make changes to the application. A number of areas have been opened up so that OP&F would be able to change features and functions that we cannot do in the current version. This flexibility will allow OP&F the ability to respond more quickly to high priority requests such as legislative changes and board requests. Here are some examples of changes that were done in the past and the cost difference between using Vitech resources and OP&F resources: Vitech Cost OP&F Cost Multiple Beneficiaries $59,400 $14,850 JSA Option for Re-employed Retirees Older Than Age 60 $14,700 $3,675 WPI% $5,400 $1,350 Mortality Table Changes $7,400 $1,850 Allowing OP&F to accept more responsibility for making changes would reduce the number of change orders that would further reduce the cost of ownership of the browser system. The current version of V3 is developed in an environment that does not match the OP&F development staff skill set and is not industry standard. If Vitech should cease to maintain the V3 pension system, OP&F would have difficulty maintaining the current version. The browser version was developed in an industry standard environment that the current development team could OP&F page 44

51 Annual Budget for Fiscal Year 2014 CAPITAL OUTLAY BUDGET easily transition to so that OP&F could maintain the system if necessary. If OP&F had to take over maintenance of the V3 system, there would be a need to train staff in the current development environment and would also require the purchase of the necessary tools. Neither of these would be a large expense, as training and tools could be purchased for under $15,000. New features and better usability In 2008, Vitech provided OP&F with a demonstration of the new browser based V3. There are a number improvements made to the system based on customer feedback over the last several years. The navigation within the browser system is much more intuitive and the functions are grouped together in a logical manner. Overall speed of the system has improved, and this will be a direct benefit to our users and members. Member self service and employer self service are faster, and our customer service group will be able to provide information to our members more quickly. There are new features in the system that will help make Member Services, Finance and Information Services departments more efficient. Some examples are: a completely new customer service module, major reworking of the batch scheduling system, a complete redesign of the imaging system and the use of an alternate identifier instead of SSN for lookups. Result An increase in department efficiencies utilizing the product, better service to our membership, reduced ownership expenses and reduced risk. V3 Browser upgrade...$2.825 million (amended cost is $2.1 million) Planned for completion in 2013: Upgrade SCCM to Version 2007 R3 Request Purchase System Center Configuration Manager (SCCM) 2007 R3. This will be an upgrade from the current version, R1. drivers for hardware, applications, and custom settings are easily updated and rolled out to the fund once the initial setup has been made. SCCM has already been utilized for regular updates to Adobe Flash Player, Acrobat Reader, Crystal Reports, and the Oracle client upgrade. As for the software imaging aspect, SCCM will eliminate the excess time and effort required to maintain multiple images for different departments and/or workstation types as there will be only one image. Lastly, the reporting features allow accurate information from the PCs to be gathered quickly, rather than referencing outdated documentation or manually verifying info from each computer. Overall, this will reduce support costs across the board, minimize user downtime, and ensure that software is rolled out in an error-free manner. Microsoft SCCM server 2007 R3... $ SCCM server Management cicenses... $6, SCCM client Management licenses... $9,500 SCCM upgrade...$16,000 (actual amount was $13,318) Planned for completion in 2013: Mail Equipment Replacement/Upgrade Request This initiative is being requested to obtain a vendor to supply, install, and maintain new (not remanufactured or refurbished) mailing equipment and associated maintenance. Result The goal of this initiative is to obtain equipment built with current technology that will perform successfully and maintain higher performance levels for several years. Mail System Upgrade... $115,000 (actual amount was $99,335) Result Allows fully-automated deployment of operating systems, applications, and custom task sequences for intricate software installations. Built-in features for transitioning of users from Windows XP to Windows 7, along with components that can reduce manual steps for monthly server maintenance. The key advantage with SCCM 2007 R3 is that everything is modular. The operating system, OP&F page 45

52 CAPITAL OUTLAY BUDGET Annual Budget for Fiscal Year 2014 Planned for completion in 2013: Information Services Development Tools Request Development would like to purchase tools that will upgrade or replace tools that are currently in use. The versions currently in use are either out of date or no longer supported by their respective vendor. These tools will allow the Information Services department to do their daily jobs. Upgrade to Team Foundation Server 2012: Cost $12,500 Upgrade to Crystal Reports 2011: Cost $6,000 Upgrade to Visio 2012: Cost $9,000 Upgrade to Project 2012: Cost $9,000 Upgrade to Ultra Edit V18: Cost $1000 Purchase Snag It for V3 Browser implementation: Cost $3000 Result The IS department will continue to use tools that are supported by their respective vendors. Many of these tools will allow us to continue to make productivity gains due to new features incorporated into the tool. Development tools...$40,500 (actual cost currently unknown as all products have not been purchased at this time) Carryover to 2014: SharePoint Upgrade Request Upgrade from SharePoint 2007 to SharePoint Microsoft free mainstream support for SharePoint 2007 ends in October 2012, and paid extended support ends October To ensure that we provide a high level of uptime and service for the knowledge management process and procedures and Intranet (EmployeeNet) sites, we should upgrade to the latest version of SharePoint. This will entail purchasing the latest version of SharePoint and paying a consultant company to assist with the migration from 2007 to Carryover to 2014: Purchase Protocol Analyzer Request Purchase a commercial protocol analyzer to replace WireShark for troubleshooting and monitoring the network. WireShark is free and has been utilized at OP&F in the past, but it needs to be replaced for Information Services to remain in compliance with the Fund s policies on Open Source Software. Result The protocol analyzer will provide the Systems and Network Group the ability to analyze network traffic for troubleshooting and monitoring purposes. Protocol analyzer...$10,000 Carryover to 2014: Replace Identity Finder Request Perform a search for a new product to replace Identity Finder. Identify Finder is the software currently used to verify files sent via our Secure Online System to outside associates do not contain SSNs. The software is several years old and newer products on the market will provide more protection. Result A more current product will aid in protecting OP&F from a possible future breach. The newer products on the market do a better job of finding SSNs within a document or file and provide less false positives (the software thinks the file has an SSN in it but it does not). We would also be looking for a product that could identity if the file contains other personnel information like addresses and members names. Replace Identity Finder... $9,000 Result Will allow OP&F personnel to continue to use the knowledge management process and procedures and Intranet (EmployeeNet) sites on a vendor maintained platform. SharePointupgrade...$60,000 OP&F page 46

53 Annual Budget for Fiscal Year 2014 CAPITAL OUTLAY BUDGET Carryover to 2014: Electronic Records Management Request This initiative will involve researching, determining feasibility, and implementing a product. Electronic Records Management (ERM) will be an extension of our current paper records management process. The goal of ERM is to classify and manage all electronic records by assigning them a records retention category. The classified record will then follow the rule of the category in which it has been classified. The requested budget dollars will be used to bring in a consulting company to help OP&F choose, install, configure and implement a product into production. Jointly, these resources will: Design a framework and folder structure Set permissions for user access Prepare for implementation Train staff Implement the new product Purge unnecessary and duplicate electronic records Result OP&F would gain the following benefits from the implementation of ERM: ERM would replace the OP&F common and shared network drives. OP&F will only keep electronic documents for as long as they are needed based on the retention policy. This should reduce the amount of redundant and old data stored as well as decrease back-up times. ERM is fully searchable; it will make it much easier for our users to find documents. ERM will help with e-discovery for litigation because documentation is categorized and searchable. ERM will provide the process to handle the records retention rules. For example a document with oneyear retention will be removed from the system after a year based on the business and retention rules that OP&F defines. The rule could be anything from deletion of the document to archival to a special data storage area. Security in the ERM system will provide OP&F with more flexibility than we currently have with common and shared network drives. Carryover to 2014: V3 Browser co-development Request The request is to work with Vitech to create a Co- Development contract. Once the contract has been completed, we will train OP&F development resources in the new technology. Once training has been completed, OP&F development will be able to work on many of the requests that would normally be submitted to Vitech as change orders. IS spent the first half of 2012 researching V3 Co- Development, we talked to a couple of Co-Development customers and with Vitech. Based on what we learned, we believe Co-Development will be beneficial to OP&F. Here are some of the benefits discovered: Cost: OPF can control its overall expenses because our hourly cost for internal resources is a fraction of Vitech s cost per hour. Priority: OPF s first priority is not necessarily Vitech s top priority. With internal resources, we can control what is worked on and in what order. Urgency: Vitech s ability to react to emergency situations is not as flexible as ours. Critical items can still take weeks in the Vitech process. In emergencies, we will have the ability to assign OP&F resources to the task and make sure it is taken care of more promptly. Flexibility: Co-Development will improve our support capabilities via faster response times and direct end-user access to new tools and information. These enhancements will positively affect our Members experience and improve our internal processes. Result Co-development enhances OP&F s ability to deliver new capabilities to both our Members and employees in ways that we are not currently able to provide. We can be both inventive and creative in providing new solutions to our customers. V3 Browser Co-Development...$55,000 Electronic Records Management...$90,000 OP&F page 47

54 CAPITAL OUTLAY BUDGET Annual Budget for Fiscal Year 2014 Carryover to 2014: OCRA cash management software upgrade Request This initiative would provide Investment staff with the latest version of this software and additional training needed to create efficiencies through electronic integration between data sources (i.e. Huntington Bank, CODA, Excel, and OCRA). This will also include the establishment of reports for forecasting and historical analysis. This software was originally budgeted in 2009 for $120,000, and was purchased and implemented in 2010 for approximately $40,000. Result Through the upgrade of this tool, Investment staff will be able to continue to accurately forecast, track and verify cash flows as well as more efficiently and timely identify and invest short-term assets. OCRA upgrade...$12,000 Three-year planning cycle: V3 contingency for change orders Request To include a contingency plan for required programming of our pension administration system needs. Result This contingency is for legislative changes and change orders. Three-year planning cycle: New carpet for all OP&F floors Request To furnish the necessary labor and material to demolish and haul from the existing carpet area, prep and skim sub floor. Furnish and install, by direct installation, new commercial 30 oz., 12 wide carpet with new 4 vinyl base as required. The existing wood base will remain. Result This will allow for an improved appearance of worn out carpet over the next three years. New carpet for all OP&F floors... $350,000 Three-year planning cycle: Office Furniture Replacement Request To include a budget allocation for furniture replacement as departmental needs arise. There are no specified furniture purchases at this time. Result This will allow for improved function and appearance by replacing old and damaged furniture under a three-year cost replacement cycle. Office furniture replacement...$90,000 V3 change orderscontingency... $750,000 Three-year planning cycle: Computer hardware replacement cycle Request This recurring budget item represents Capital computer hardware related to PC, servers, scanners, network replacements, notebook computers and switch replacements. Result To include a contingency plan for computer hardware as replacements become necessary. Computer hardware replacement cycle... $875,400 OP&F page 48

55 Annual Budget for Fiscal Year 2014 ADMINISTRATIVE OPERATING BUDGET Administrative Operating Budget Annual Budget for Fiscal year East Town Street Columbus, Ohio f.org OP&F page 49

56 ADMINISTRATIVE OPERATING BUDGET Annual Budget for Fiscal Year 2014 OP&F Organizational Chart OP&F Members Board of Trustees M. Foley General Counsel M. Jordan Internal Auditor J. Gallagher Executive Director K. Byrd Deputy Executive Director Administration Department Communications Human Resources Legal Services Information Services Customer Service Building Services Mail Services Records Center Purchasing Memorial Park J. Harville Member Services Department T. Hall Investment Department S. Miller Finance Department Benefit Payments Computations Prior Service and Refunds Processing Compliance and Project Management Health Care Operations Asset Oversight Compliance Investment Accounting Investment Management Financial Reporting General Accounting Insurance Budgeting Tax Reporting Employer Services OP&F page 50

57 Annual Budget for Fiscal Year 2014 ADMINISTRATIVE OPERATING BUDGET 2014 Total Administrative Operating Budget (in thousands) Variance $ Variance % Budget Category Budget Forecast 2013 Forecast 2013 Forecast Budget Variance $ Variance % Actual Personnel Services Salaries $8,912 $8,512 $ % $8,796 $ % $8,530 Employee Benefits 2,684 2, % 2, % 2,017 Employer Payroll Expense 1,473 1, % 1, % 1,313 Sub-Total $13,070 $12,350 $ % $12,783 $ % $11,860 Work Environment Office Rent $1,242 $1,201 $41 3.4% $1,242 $- 0.0% $1,152 Maintenance and Repairs 1,041 1,176 (135) 11.5% % 827 Legislative Expenses Mailing Expense % % 238 Printing and Publications % 110 (1) 0.9% 69 Office Supplies % % 81 Office Equipment % 108 (14) 13.3% 84 Insurance Administrative % % 186 Recovery Plan and Contingency % % 46 OP&F Sponsored Seminars % % 9 Business Travel % % 46 Business Expense % 61 (3) 4.6% 48 Trustee Training % % 16 Employee Training % % 43 Telephone Services % % 72 Dues and Subscriptions % % 81 Miscellaneous Expenses % % 27 Sub-Total $3,741 $3,363 $ % $3,630 $ % $3,026 Outside Services Investment Services $42,206 $42,840 $(635) 1.5% $42,825 $(620) 1.4% $35,701 Bank Custody Fees 1,140 1,173 (33) 2.8% 1,173 (33) 2.8% 610 Actuarial Services % % 381 Audit Services % % 97 Legal Services % % 321 Disability Medical Service % 685 (2) 0.2% 539 Public Relation Consultants (1) 16.7% Bank Charges % % 81 Ohio Retirement Study Comm % % 41 Legislative Consultants % % 84 Personnel Recruitment (4) 18.9% 32 (16) 52.0% 19 Temporary Employees Contract Staffing 0 Health Care Consultants Other Professional Service % % 45 Sub-Total $45,664 $45,569 $95 0.2% $46,179 $(514) 1.1% $37,920 TOTAL OPERATING $62,474 $61,281 $1, % $62,592 $(118) 0.2% $52,806 *Figures may not add due to rounding dollars to the nearest thousand. OP&F page 51

58 ADMINISTRATIVE OPERATING BUDGET Annual Budget for Fiscal Year Total Administrative Operating Budget Review Total Administrative Operating Budget This review will outline the recommended administrative operating budget for This analysis will highlight the formulation of the budget and the variances between the 2014 budget against the 2013 actual forecast and 2013 approved budget. The 2013 Actual forecast column represents the anticipated actual expenditures for The 2014 Budget column includes new activities for 2014 and items that are anticipated or estimated to be spent in 2014, regardless of the spending level in Both comparisons must be shown to explain the entire set budget variances and changes. The actual forecast is calculated one of two ways; 1) by the department reviewing and calculating what is projected to be spent by the end of the year or 2) for routine operating categories the first seven months actual was divided by seven and multiplied by 12 to obtain an annualized calculation. There is a 0.2 percent budget decrease in the Administrative Operating Budget in 2014 to $62.5 million compared to $62.6 million in 2013 or $117,985 decrease. Operating costs are budgeted at a 2.8 percent increase or by $584,617 and investment management fees are budgeted to decrease 1.7 percent or by $702,602 million in By category the changes can be broken down as 2.2 percent increase in personnel services, 3.1 percent increase related to work environment, and 1.1 percent decrease in outside/ professional services. OP&F is anticipating a 1.9 percent increase in the overall operating costs compared to the 2013 actual forecast. Salaries Each year the Human Resources Manager calculates the salary and wage spending for the budget. This process begins in August by calculating the base wage spending level as of a pay date (Sept. 27, 2013 was used for 2014 budget) for all filled positions. This figure is then adjusted for vacant positions that are not going to be eliminated in the following budget cycle. An amount is then calculated for the wage spending levels for merit, on-call pay, promotions, overtime, attrition, vacation and sick termination payouts and an amount for equity adjustments based on the Executive Directors direction. These items are as follows for the 2014 budget: Employee Benefits An increase of 5.0 percent is anticipated from the 2013 year-end actual forecast related to the health care costs and increases in buyback program levels for existing staff. Benefit Description Estimate Health insurance $2,256,945 Group life insurance 43,800 Sick leave buyback program 231,469 Vacation buyback program 90,212 Parking/bus passes 7,140 Tuition reimbursement 40,000 Employee Activity Expense 14,319 Total Employee Benefits $2,683,885 Employer Payroll Expense There is a 9.1 percent increase from the year-end forecast reflected due to increases in OPERS and Medicare costs due to the merit budget and one additional position in This line also includes claims from workers compensation and unemployment. Office Rent Includes an allowance for common area maintenance, plus additional amounts expected for end-of-year true up of building work orders and an additional amount to ensure increases in operating expenses (based on tenant occupancy rate) and utilities costs are covered if needed. The budget is flat from Spending Estimate 2013 Base Wage Spending Level Wage Spending Level as of Sept. 14, 2013 (141 full-time) $8,511, Additional Adjustments to Wage Spending Level 3.0% Average Merit Budget 246,461 On call pay for Information Services support 2,600 Overtime estimate based on $1,000 or on actual 2012 forecast 9,151 Attrition savings for timing of open positions in 2013 and turnover (125,827) Longevity ($100 per year of OP&F service, per staff member) 174,817 High performer/proficiency promotion 83, Equity budget for compensation studies 10,000 Total 2014 Additional Adjustments to Wage Spending Level $401,087 GRAND TOTAL 2014 WAGE SPENDING LEVEL $8,912,266 The 2013 actual forecast salaries are reflecting a 5.8 percent increase, which reflects the wage spending level for open positions throughout the year being filled by OP&F page 52

59 Annual Budget for Fiscal Year 2014 ADMINISTRATIVE OPERATING BUDGET Maintenance and Repairs This category is budgeted to increase 8.5 percent compared to the 2013 budget. The additional budget is for maintenance and repairs that were under multi-year contracts that are now due in The goal is to pay for maintenance agreements and only pay for repairs as a last resort. In addition, the budget contains maintenance agreements for new capital purchases that will be covered for the first time. Legislative Expense No money is being budgeted for legislative receptions or mailings. Mailing Expense Mailing expenses are showing an 54.3 percent increase from the 2013 actual forecast. The budget represents a 6.7 percent change from the 2013 budget reflecting the overall efforts to reduce physical mailings and replace with electronic notifications whenever possible. Printing and Publications Printing fees are expected to increase by 29.9 percent from the actual forecast for There is a 0.9 percent decrease in the budget from Office Supplies An 33.7 percent increase over our 2013 actual forecast. This is due to actual spending/ordering levels in 2013 being better than expected. Office Equipment The 17.4 percent increase over our 2013 actual forecast variance reflects the fact that equipment is not purchased unless needed or broken. Areas will budget for various equipment need under their management, however, purchases are not incurred unless necessary. Insurance Administrative A 29.8 percent increase from the 2013 actual forecast. This is directly related to the insurance market conditions. Recovery Plan and Contingency The $100,000 contingency is being budgeted. OP&F Sponsored Seminars Seminars are estimated each year based upon expected training and site locations. Business Travel The amount of travel continues to be limited in 2014 and is expected to increase 7.2 percent over the 2014 budget. There is a thorough approval process before any travel commitments are made for staff. Business Expense Business expenses are estimated so that funds are available based upon needs for the upcoming year. There is a 6.6 percent projected decrease in the budget lines. Trustee Training Estimates are used to ensure that money is available when trips are approved. There is no change in the budget; however, the budget reflects a 43.8 percent increase over the actual costs for 2013 due to the actual trips that are taken. Employee Training Education, certification and conference travel were held to a minimum in the past several years. This account is expected to increase over 2013 actual forecast by 66.7 percent as training attendance was kept low in There is a 0.7 percent increase from the 2013 budget due to the planned activities for Telephone Services Telephone services are budgeted based upon averages for local, long-distance and dial-up services. This expense line is being increased by 44.2 percent based on the 2013 actual forecast being more accurate recent reflection of usage. Dues and Subscriptions Expected to be 19.6 percent higher than the 2013 actual forecast. Miscellaneous Expense Estimated based upon the number of member/retiree guest visits and other miscellaneous items as necessary. Investment Services The 1.4 percent decrease between the 2014 budget and the actual forecast is related to some fee arrangements going from direct pay which is considered on budget to indirect pay which is off budget. Each investment category was carefully reviewed to establish the 2014 budget. Bank Custody There is a 2.8 percent decrease in fees compared to the 2013 actual forecast due to the estimated banking activity in OP&F page 53

60 ADMINISTRATIVE OPERATING BUDGET Annual Budget for Fiscal Year 2014 Actuarial Services Services in this area are budgeted at 8.7 percent higher than the 2013 actual forecast due to the new GASB 67 and 68 requirements will mainly be done in Audit Services Audit services are expected to increase by 6.4 percent over the 2013 forecast due to the request for proposal process for replacement auditors for next year. Legal Services This category reflects a percent increase over the actual forecast due to the items that have timing differences and other items identified by the legal area that could occur in Disability Medical Services This item is based on the number of members sent for exams and the consulting done by outside doctors. Public Relations Consultants The budget for our outside consultant will drop by 16.7% from the 2013 budget due to the pension reform now being signed into law. Bank Charges Commercial banking services are estimated based upon the prior year s averages and changes predicted in banking transactions. OP&F is expecting a 10.9 percent increase from the 2013 actual forecast due to more ACH volumes due to the direct deposit initiative and lower earnings allowances paid on our account balances. Ohio Retirement Study Council ORSC fees based on the percentage of OP&F s plan assets compared to the total of the other Ohio Retirement Systems total plan assets. Legislative Consultants Retainer services are not expected to change over the 2013 level. Personnel Recruitment This account is used for advertising job vacancies in local newspapers and reference check services. We estimate each year the number of advertisements that may be needed based on historical turnover. Health Care Consultants Related to outside services required for health care data. There are no consultants planned in Other Professional Services An increase of 214 percent in the actual forecast in this area is being reflected due to anticipated one time projects in Other professional services also contain items for consulting, software consulting, records retention, and other outside service provider fees Budget Summary TOTAL OPERATING BUDGET $62,474, % DECREASE OVER 2013 Operating Costs $21,568, % increase over 2013 Investment Managment Fees $40,905, % decrease over 2013 TOTAL BUDGET $62,474, % DECREASE OVER Three Year Capital Budget Summary TOTAL BUDGET $3,405,810 3-YEAR CAPITAL BUDGET Office Building $350, % of overall capital budget Furniture and Equipment $90, % of overall capital budget V3 Costs Software $1,050, % of overall capital budget Computer Hardware $875, % of overall capital budget Computer Software $454, % of overall capital budget Total Budget $2,820, % of 3-Year Capital Budget OP&F page 54

61 Annual Budget for Fiscal Year 2014 ADMINISTRATIVE OPERATING BUDGET Operating Budget Highlights Investment Services Fees $42,205,521 represents a decrease of 1.4 percent from the 2013 budget. This decrease is due to a reduction in investment management fees paid directly or those fees considered on budget. While a general upturn in the capital markets over the past year increased our asset base by roughly 7.4 percent, the decrease in fees is attributable to a shift of assets to managers that deduct fees from their fund assets rather than OP&F paying the fees directly to the managers. Additionally, fees relating to consulting, research and data feeds will increase by $82,985. Some of the items behind this increase are: the addition of project consulting fees; the addition of economics research from Gluskin Sheff and Strategas Research; inflation adjustments to consulting fees; and an increase in service fees for our Bloomberg terminals and Iran/Sudan data feeds. Custodial Fees The $1,140,000 budgeted amount represents a decrease of 2.8 percent from the 2013 budget. These fees represent costs associated with the custody of our portfolio accounts and are generally based on the market value of the underlying securities and/or the level of account activity. The decrease is attributed mainly to lower international custody fees. The Treasurer of State, our statutory custodian, conducted an RFI for custodial services in Based on responses received, they awarded JPMorgan Chase Bank, N.A. the contract for our international custody services in For the 2013 budget year, we estimated fees based on contract language and JP Morgan Chase estimated costs since we had not yet incurred any actual expenses. The custody conversion took place in October 2012, which provided us with more accurate information to use when forecasting custody expenses for the coming year. We project international custody fees of $840,000 for JPMorgan Chase Bank, and domestic custody fees of $300,000 for Huntington National Bank. Actuarial Services $506,800 The budget for this service remained the same for 2014 which includes costs for Special Projects and GASB 67 and 68 - Accounting and Financial Reporting for Pensions. Disability Medical Services $683,100 - This total represents cost related to annual mandatory medical exams, mileage reimbursements for mandatory medical exams, additional tests for psychiatric evaluations and DEP physician fees. The 0.3 percent decrease from 2013 is due to last year s elimination of mileage reimbursements for some disability exams. Initiative Highlight Kofax Training and Implementation Services $18,000 The goal is to reduce downtime due to implementation issues and to train the Kofax users on how to better take advantage of the product. Outside Security Assessment $75,000 This assessment would assure OP&F that best practices are in place for network security, identify any possible issues or concerns that need to be addressed, and will enable to demonstrate that OP&F is complying with NIST Special Publication regulations. Additional CommVault Disk to Disk Licensing $6,000 Allow OP&F to continue business as usual. The reason OP&F can perform restores from the previous week without calling back offsite tapes is that the most recent backups are on DDO storage. As the amount of data at OP&F has grown, additional DDO licensing is required so that recent backups can still be kept online in DDO storage. Disability Benefit Anti-Fraud Hotline This initiative will establish a dedicated toll-free number for OP&F members and the general public to use to report suspected abuse of the OP&F disability benefits and the granting process. Software purchased will allow for a central data collection and processing point for allegations of disability benefit fraud. Funding for this initiative is included in the OP&F Capital budget. Establish OP&F Facebook page Communications, after discussions with the Executive Director and a presentation at the 2013 Board Retreat, requests permission to establish and maintain an OP&F Facebook page. As discussed with the Board, this page will be monitored and maintained by Communications, with strict posting limitations given to the Executive Director and Communications Manager. This is a no cost initiative. Member Education Representative This initiative would add one full-time Member Education Representative to the Member Education Group. The position would be responsible for conducting member pre-retirement interviews, assisting with member walkins, preparing pension estimates for interviews, mail out requests, and assist with OP&F pre-retirement seminars and special request meetings as needed. Estimated cost of this initiative would be $52,000. OP&F page 55

62 ADMINISTRATIVE OPERATING BUDGET Annual Budget for Fiscal Year 2014 Executive Summary of OP&F Budget, Personnel Changes Pensionomics Study In conjunction with Ohio s other public retirement systems, OP&F will participate in this comprehensive study that aims to measure the positive impact Ohio s pension funds have on the state s economy. OP&F estimates its share of the study to be $33,000. Overall Budget Personnel Highlights Personnel Services $13,068,795 is budgeted and represents an increase of 2.2 percent increase from Included in the increase is a proposed average 3 percent merit increase and a 1 percent proficiency performance budget for eligible staff and an increase in expected employee health care costs of 6.8 percent. Full time headcount is 142 up one from Budget Actual Revised Budget Budget Budget % Change % Overall Category Budget Personnel Services $11,859,845 $12,783,446 $13,068, % 20.9% Work Environment $3,025,670 $3,629,809 $3,740, % 6.0% Outside Services $37,920,431 $46,178,788 $45,664, % 73.1% TOTAL $52,805,946 $62,592,043 $62,474, % 100.0% Administrative Operating Summary Totals by Department 2014 Budget 2013 Budget $ Change % Change Operating Budget $62,474,058 $62,592,043 $(117,985) 0.2% Administration Department $7,216,495 $6,913,663 $302, % Finance Department $2,813,834 $2,792,414 $21, % Investment Department $4,116,799 $4,007,909 $108, % Investment Management Fees $40,905,530 $41,608,132 $(702,602) 1.7% Member Services Department $3,405,280 $3,619,415 $(214,135) 5.9% Information Services Department $3,920,961 $3,556,025 $364, % Trustees $95,159 $94,485 $ % Total Proposed Budget Including Management Fees $62,474,058 $62,592,043 $(117,985) 0.2% Total Proposed Operating Budget $21,568,528 $20,983,911 $584, % Total Proposed Capital Budget $2,820,320 $3,364,800 $(544,480) 16.2% Personnel Position Changes, (full time only) Year Department Budgeted Position # of Positions 2014 Information Services Network Administrator Administration Member Education Representative Member Services Contributions Manager Member Services Processing Supervisor Finance Accounting Specialist 1 Position changes in 2014: Investment Assistant Investment Officer Member Services Financial Compliance Supervisor Member Services Financial and Compliance Manager Member Services Processing Supervisor Member Services Processing Specialist Administration Records and Imaging Specialist Administration Paralegal 1 Position changes in 2013: No position changes 0 Position changes in 2012: 0 Position Summary by Department (full-time equivalents) OP&F page 56 Administration Finance Investment Information Services Member Services Total Full Time

63 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Departmental Review Annual Budget for Fiscal year 2014 Administration Department Finance Department Information Services Department Investment Department Member Services Department Board of Trustees 140 East Town Street Columbus, Ohio f.org OP&F page 57

64 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Administration Department J. Gallagher Executive Director Y. McElroy Executive Assistant K. Pointer Human Resources Manager D. Graham Communications Manager M. Foley General Counsel M. Jordan Internal Auditor/ Privacy and Ethics Officer S. Miller Financial Services Director T. Hall Chief Investment Officer J. Harville Member Services Director K. Byrd Deputy Executive Director C. Harden Administrative Assistant L. Herta Employee Benefits Counselor E.Eramo Communications Coordinator B. Holodnak Sr. Staff Attorney K. O Neal Administrative Assistant A. Hensley Design Specialist T. Rankin Staff Attorney, Associate M. Holtz Administrative Assistant C. Hershner Paralegal S. Grotsky Legal Secretary A. Golden Legal Secretary C. Kelly Document Processing Coord. J. Mayesky Purchasing Manager Y. Tubman Records, Imaging and Mail Manager T. Middleton Member Education Manager A. Gatling Purchasing Agent J. Dukes Purchasing Agent S.Schmitt Administrative Support Services Manager P. Rajkumar Records and Imaging Supervisor M. Nardi Customer Service Supervisor C. Hall Mail Services Specialist M. Moore Mail Services Specialist T. Lindsey Sr. Records and Imaging Spec. K. Gillespie Records and Imaging Spec. N. Motley Records and Imaging Spec. J. Edwards Sr. Records and Imaging Spec. R. Byrd Records and Imaging Spec. B. Bonner Records and Imaging Spec. J. Baggs Records and Imaging Spec. G. Kohler Records and Imaging Spec A. Bruce Records and Imaging Spec. H. Brum Records & Imaging Spec. P. Harris Receptionist D. Albrecht Member Education Rep. (open, new) Member Education Rep. J. Coles Sr. Customer Service Rep. D. Steele Customer Service Rep. C. DeYarmon Customer Service Rep. J. Edwards Customer Service Rep. L. Ballard Customer Service Rep. R. Maynard Customer Service Rep. Director Manager/ Supervisor Staff OP&F page 58

65 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Administration Department Budget (in thousands)* Variance $ Variance % 2013 Variance $ Variance % 2012 Budget Category Budget Forecast Budget Actual Personnel Services Salaries $2,869 $2,670 $ % $2,771 $99 3.6% $2,682 Employee Benefits % % 563 Employer Payroll Expense % % 427 Sub-Total $4,351 $3,924 $ % $4,102 $ % $3,672 Work Environment Office Rent $1,242 $1,201 $41 3.4% $1,242 $ 0.0% $1,152 Maintenance and Repairs % % 19 Legislative Expenses Mailing Expense % % 238 Printing and Publications % 110 (1) 0.9% 62 Office Supplies % % 81 Office Equipment 1 17 (16) 97.0% 14 (13) 96.4% 8 Insurance Administrative Recovery Plan and Contingency % % 39 OP&F Sponsored Seminars % % 9 Business Travel % 24 (6) 24.8% 16 Business Expense % 11 (3) 26.6% 9 Trustee Training Employee Training % 62 (12) 19.8% 30 Telephone Services 0 Dues and Subscriptions % % 38 Miscellaneous Expenses % 21 (1) 4.4% 21 Sub-Total $2,076 $1,753 $ % $2,076 $0 0.0% $1,723 Outside Services Investment Services $ $ $ $ $ $ Bank Custody Fees Actuarial Services Audit Services Legal Services % % 321 Disability Medical Service Public Relation Consultants (1) 16.7% Bank Charges Ohio Retirement Study Comm % % 41 Legislative Consultants % % 84 Personnel Recruitment (4) 18.9% 32 (16) 52.0% 19 Health Care Consultants Other Professional Service % % 29 Sub-Total $790 $353 $ % $736 $54 7.3% $495 TOTAL OPERATING $7,216 $6,030 $1, % $6,914 $ % $5,889 * Figures may not add due to rounding dollars to the nearest thousand. OP&F page 59

66 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Administration Budget OP&F s Administration Department provides a wide variety of services to the Board of Trustees and other OP&F departments in the areas of member education and customer service, human resources, legal, communications, internal audit, purchasing, building services, records, imaging and mail services. In addition to leading the entire organization, the Executive Director also oversees the Administration Department and coordinates external outreach with legislators and member organizations. He also serves as the direct line of contact between the Board of Trustees and OP&F staff. The specific responsibilities of each area within the department include: Customer Service and Member Education Customer Service and Member Education: Responsible for conducting member seminars and benefit counseling sessions and serves as the front line for the intake and resolution of member and employer calls coming into OP&F. Human Resources Responsible for all personnel matters and human resources functions, including staffing, payroll, employee compensation and benefits, employee relations, performance management, training, and the Employee Activity Committee. Communications The Communications Group is responsible for public relations and media relations efforts. In addition, Communications produces all OP&F publications, forms and also is responsible for the content and updates to the OP&F website. Communications ensures that a consistent message and image is conveyed throughout these materials. Purchasing The Purchasing Group is a centralized function for all fund wide purchases with a few exceptions (i.e., Executive Director and Board travel) and is staffed by the Purchasing Manager, one Purchasing Agent and one Purchasing Assistant. Memorial Park Responsible for the maintenance of the Ohio Police and Fire Memorial Park, established to honor the memory of Ohio s fallen police officers and firefighters. Records, Imaging and Mail (RIM) Center The RIM Center is responsible for handling all member, employer and business records, received in the mail via paper, fax, electronic mail and in person. The RIM Center provides OP&F with timely, accurate and best practice efficiencies associated to the OP&F s business information through creation, receipt, distribution, maintenance, use, protection, retention and preservation. General Counsel The General Counsel serves as legal counsel to the Board of Trustees, Executive Director and all divisions of OP&F. General Counsel drafts and/or reviews all contracts entered into by OP&F as well as documents for the investment of OP&F funds. Legal oversees all litigation brought by or against OP&F, drafts and reviews rules and legislation and processes all court orders, powers of attorney and domestic property orders. General Counsel serves as the liaison to the office of the Ohio Attorney General and coordinates all special counsel assigned to the Board of Trustees. Building Services Responsible for the management of building operations, leasing activity and building maintenance. Internal Audit Responsible for auditing department procedures and processes and recommending alternative solutions and practices to lower risk or to increase efficiency. OP&F page 60

67 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Goals and Objectives 1. Goal: Coordinate effective outreach efforts with legislators and member organization leaders. Objective: Provide OP&F information to all interested parties to keep them informed about OP&F activities. 2. Goal: Coordinate monthly meetings for full Board and Board committees. Objective: Coordinate the timely production and distribution of all Board materials. 3. Goal: Monitor status of pending legislation and legislation that has been enacted. Objective: Evaluate potential impact of pending legislation on OP&F operations and assist with the drafting or review of internal procedures or administrative rules to comply with all new legislation. 4. Goal: Maintain a work environment that supports teamwork and continued learning. Objective: Encourage participation in professional development activities that include in-house training, online learning, position specific seminars and workshops, and professional certifications as appropriate. 5. Goal: Provide legal oversight on all OP&F matters. Objective: Conduct legal reviews of all pending cases and make recommendations as needed to internal procedures and processes. 6. Goal: Preserve the assets of OP&F through risk management and internal controls. Objective: Conduct internal audits on OP&F processes and procedures, recommend improvements, and monitor implementation of recommendations. 9. Goal: Provide quality service in a courteous and responsive manner to our membership, retirees, beneficiaries and associations, as well as OP&F staff. Objective: Develop the resources, training, and work environment that enables and empowers OP&F staff to provide quality services in a courteous and responsive manner. 10. Goal: To provide proper protection and file integrity of all member and employer files, regardless of the medium created or stored paper or electronic. Objective: Preservation of member and employer related records through the vital records protection program. 11. Goal: To provide accessibility to reliable and accurate member and employer related information once records are collected, scanned and indexed with proper quality controls to the various OP&F departments. Objective: Retrieval of member and employer related records in a timely and accurate manner for service to other departments. 12. Goal: To provide prompt and efficient mail room services to all departments. Objective: Ensure all incoming and outgoing mail and lock box deliveries are processed in an efficient and timely manner to the proper department. 13. Goal: The Purchasing Area strives to obtain quality goods and services, at the lowest reasonable cost, while operating at the highest standards of ethical conduct. Objective: Utilize various bidding methods that foster a fair and open bidding process. 7. Goal: Provide a work environment that promotes a high performance workplace and the satisfaction of OP&F s staff with the work environment. Objective: Monitor building operations with the contracted building manager to maintain efficient building operations and a safe work environment. 8. Goal: Promote a consistent business image for OP&F based on member satisfaction and quality service. Objective: Develop communication materials that present a consistent image and message for all OP&F publications. OP&F page 61

68 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Performance Measurements Supports Goal #4 Actual 2012 Estimated 2013 Expected 2014 Type In a given year, performance evaluations and feedback will be conducted for all OP&F staff hired prior to 9/30 of that year 100% 100% 100% Output Online Learning Center available for all staff 100% 100% 100% Output Supports Goal #5 Actual 2012 Estimated 2013 Expected 2014 Type 80% of Division of Property Order Acknowledgements sent 100% 100% 100% Output within three days 95% of Division of Property Orders processed within 50 days. 100% 100% 100% Efficiency (10 days less than statutory deadline) Number of Division of Property Orders reviewed Efficiency 50% of Powers of Attorney entered within two days of approval 100% 100% 100% Efficiency 75% of special counsel information updated within two days of receipt 100% 100% 100% Efficiency 80% of contract information entered same day as the contract number is issued 100% 100% 100% Output. Supports Goal #6 Actual 2012 Estimated 2013 Expected 2014 Typee Number of Internal Audits and Projects Conducted Output Supports Goal #8 Actual 2012 Estimated 2013 Expected 2014 Type Number of publications revised and newly developed Output Supports Goal #9 Actual 2012 Estimated 2013 Expected 2014 Type Answer 90% of all calls received through Customer Service 85%* 75%* 94% Output in 30 seconds or less *Customer Service staff was reduced to 50 percent in 3rd quarter due to advancement opportunities Maintain average of 97% or better Quality Assurance measurements in Customer Service 99% 99% 99% Outcome Supports Goal #10 Actual 2012 Estimated 2013 Expected 2014 Type Processing of Member File requests (minutes/group) <2 <2 <1 Efficiency OP&F page 62

69 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Supports Goal #11 Actual 2012 Estimated 2013 Expected 2014 Type Number of Member Files out to departments at reconciliation time 200 <11 <8 Output Number of imaged documents available for viewing on Vitech system 3.56 million 3.66 million 3.75 million Output Amount of correspondence received, scanned and filed per two-week period 4,800 5,200 5,500 Output Supports Goal #12 Actual 2012 Estimated 2013 Expected 2014 Type Turnaround time for off site records 2 hours 24 hours 24 hours Output 24 hours on standard request Processing of Incoming mail (Letters/hour) Output Response time to outgoing mail pickup requests from Output departments (minutes) Supports Goal #13 Actual 2012 Estimated 2013 Expected 2014 Type Purchase Orders processed 1, ,000 Output Request for Information issued Output Request for Quotes issued Output Request for Proposals issued Output OP&F page 63

70 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Budget Category Summary Actual Revised Budget Budget % Change Budget Category Personnel Services $ 3,672,129 $4,101,672 $4,350, % Work Environment $1,722,530 $2,075,559 $2,075, % Outside Services $494,503 $ 736,432 $790, % TOTAL: $5,889,162 $6,913,663 $7,216, % Budget Category Explanations Personnel Services This category reflects the salaries, employee benefits, and employer payroll expense of all Administration Department employees. For 2014 there is a 6.1 percent increase from the 2013 budget. The increase can be attributed to the addition of one staff member to the department (member education position) and also a significant increase in health insurance budget (up 18.6 percent, or $124,246). Also included is an average 3.0 percent merit increase for eligible staff, along with a 1.0 percent proficiency promotion increase for high performing staff. Work Environment This category represents all expenses related to the Administration Department s work environment including; maintenance and repairs, equipment, supplies, training and travel, printing and publications and mailing costs. The category includes increases in the maintenance and repairs budget (27.9 percent, or $11,757); and the postage budget (7.2 percent, or $16,300). Significant decreases in Work Environment are expected in 2014, therefore reductions in the office equipment budget (-96.4 percent, or a decrease of $13,428) and the business expense budget (-26.6 percent, or $2,970). Outside Services This category reflects all external professional services for the Administration Department. The category will increase 7.3 percent in Factors relating to the increase include a 62.5 percent increase in other professional services ($53,627). A major decrease is in the personnel recruitment budget which drops 52.0 percent, or $16,400. Personnel Projections Category Exempt Salary Non exempt Salary TOTAL FULL-TIME OP&F page 64

71 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Administration 2014 Initiatives Initiative 1: Disability Benefit Anti-Fraud Hotline This initiative will establish a dedicated toll-free number for OP&F members and the general public to use to report suspected abuse of the OP&F disability benefits and the granting process. Software purchased will allow for a central data collection and processing point for allegations of disability benefit fraud. The funds to establish this initiative in included in OP&F s Capital budget. Initiative 2: Establish OP&F Facebook page Communications, after discussions with the Executive Director and a presentation at the 2013 Board Retreat, requests permission to establish and maintain an OP&F Facebook page beginning in As discussed with the Board, this page will be monitored and maintained by Communications, with strict posting limitations given to the Executive Director and Communications Manager. This is a no cost initiative. Initiative 3: Addition of Member Education Representative This initiative would add one full-time Member Education Representative to the Member Education Group. The position would be responsible for conducting member pre-retirement interviews, assisting with member walkins, preparing pension estimates for interviews, mail out requests, and assist with OP&F pre-retirement seminars and special request meetings as needed. The addition of a Member Education Representative will enhance service to OP&F membership by increasing interview appointments as needed. The addition will also improve efficiency within the department by decreasing turnaround time for preparation of mail out pension estimate requests. This position would be a Grade E, non-exempt employee. Estimated cost of this initiative would be $52,000. Initiative 4: Pensionomics study In conjunction with Ohio s other public retirement systems, OP&F will participate in this comprehensive study that aims to measure the positive impact Ohio s pension funds have on the state s economy. OP&F estimates its share of the study to be $33,000. Review Of Administration Department s 2013 Initiatives This section highlights the initiatives budgeted for the department in 2013 and explains how the department met the anticipated results of each. Paralegal This initiative was implemented as of Sept. 30, 2013 when the paralegal position was filled within the General Counsel s staff. The position was approved for the 2013 budget year in response to the ever increasing volume and complexity of both state and federal rules and regulations imposed on both the member service and investment side of OP&F s operations. More administrative and routine duties of the staff attorneys are now assigned to the paralegal, allowing the attorneys more time for advance planning and direct assistance to our OP&F clients. OP&F page 65

72 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Finance Department S. Miller Financial Services Director T. O Brien Accounting Manager A. Rhodes Controller J. Davis Employer Education Manager A. Duch Administrative Assistant L. Adkins Sr. Accountant M. Rothwell Financial Reporting Accountant A. Malone Employer Services Supervisor B. Harness Accountant M. Tessema Accountant F. Allman Sr. Accounting Specialist L. Gdula Accountant K. Highfield Accounting Specialist (open) Accounting Specialist N. Bowen Employer Services Auditor D. Adams Employer Services Specialist, Sr. H. Tran Employer Services Specialist, Sr. L. Perkins Employer Services Auditor K. Szlasa Employer Services Specialist, Sr. B. Mills Employer Services Specialist J. Gresh Employer Services Specialist Director Manager/ Supervisor Staff OP&F page 66

73 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Finance Department Budget (in thousands)* Variance $ Variance % 2013 Variance $ Variance % 2012 Budget Category Budget Forecast Budget Actual Personnel Services Salaries $1,267 $1,230 $37 3.0% $1,263 $4 0.3% $1,244 Employee Benefits % % 351 Employer Payroll Expense % % 188 Sub-Total $1,844 $1,786 $59 3.3% $1,835 $10 0.5% $1,784 Work Environment Office Rent $ $ $ $ $ $ Maintenance and Repairs Legislative Expenses Mailing Expense Printing and Publications Office Supplies 0 Office Equipment % 2 (1) 32.5% 2 Insurance Administrative % % 186 Recovery Plan and Contingency OP&F Sponsored Seminars Business Travel 4 5 (0) 9.0% 5 (1) 15.3% 2 Business Expense % 3 (0) 6.7% 1 Trustee Training Employee Training % 10 (1) 7.3% 2 Telephone Services Dues and Subscriptions % 9 (1) 16.8% 6 Miscellaneous Expenses 0 (0) 100.0% 0 (0) 100.0% (0) Sub-Total $265 $202 $ % $259 $6 2.3% $200 Outside Services Investment Services $ $ $ $ $ $ Bank Custody Fees Actuarial Services % % 381 Audit Services % % 97 Legal Services Disability Medical Service Public Relation Consultants Bank Charges % % 81 Ohio Retirement Study Council Legislative Consultants - Personnel Recruitment Health Care Consultants Other Professional Service SUB-TOTAL $704 $649 $56 8.6% $698 $6 0.8% $560 TOTAL OPERATING $2,814 $2,636 $ % $2,792 $21 0.8% $2,543 * Figures may not add due to rounding dollars to the nearest thousand. OP&F page 67

74 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Finance The Finance Department manages the accounting, budgeting, taxes, insurance, audit and financial reporting functions of OP&F. The strong financial stewardship of our member s money and the employer s contributions is our overriding concern as we are a service provider to our members, employers and employees of the Fund. These responsibilities encompass: Accounting Maintaining internal controls over plan assets Recording and reconciling financial transactions in the general ledger system and subsidiary systems Financial reporting (internal and external) Reporting pension distributions and tax withholdings Paying vendor invoices and pension distributions Maintaining proper insurance coverage Forecasting plan assets and liabilities Reviewing the annual actuarial report and supporting assumptions Overseeing external audits ensuring compliance with statutory funding requirements. Employer Services Group Maintains a high working knowledge of the Ohio Revised Code related to employer requirements Reviews, posts and releases monthly contributions to members participant accounts Reviews each payroll for any exceptions and works with the employer to correct any deficiencies Sends 30 day letters to employers regarding payroll deficiencies Calculates, audits and processes employer refunds and credits Updates employer information and corrects and maintains information in the agreement and import modules Calculates penalties on a monthly basis for late and/ or missing payroll and payment items Employer Education Provides training and outreach to the employer community on all OP&F reporting requirements. Serves as a point of contact for general employer inquiries Researches and administers special penalty provisions Identifies and corrects recurring employer reporting and payment deficiencies OP&F page 68 Goals and Objectives 1. Goal: Maintain an accurate and efficient general ledger system to ensure proper collection, reconciliation, and reporting of financial data. Objective: Record all financial data in the general ledger properly and ensure timely and accurate financial reporting. 2. Goal: Achieve the highest standards of financial and budgetary reporting. Objective: Attainment of the Government Finance Officers Association (GFOA) Certificate of Achievement for Excellence Award in Financial Reporting for our Comprehensive Annual Financial Report (CAFR) and Distinguished Budget Presentation Award for OP&F s annual budget. 3. Goal: Ensure full statutory and regulatory reporting compliance for pension and vendor distributions. Objective: Meet all reporting deadlines for tax deposits, annual forms reporting and avoid penalties for noncompliance from outside agencies. 4. Goal: Provide excellent customer service to our employers, members, and employees. Objective: Ensure we meet the needs of our primary customers (external and internal). 5. Goal: Create a partnership with our employers to help ensure an effective exchange of matters as required by the ORC. This includes improving processing times and avoiding penalty situations whenever possible.objective: Notify employers about upcoming due dates prior to penalties being assessed. 6. Goal: Processing employer payroll reports in a timely and accurate manner. Objective: Release member payroll details reported by the employers within 30 days of the date received or the due date of the payroll. 7. Goal: To provide training to employer community on all OP&F reporting requirements. Objective: Through targeted onsite and telephonic training, seminars and written material have employers acknowledge that they have received training on proper, accurate and timely reporting/payment, consistent with ORC/OAC requirements. 8. Goal: To create an increased awareness of the Employer Education function and thereby expedite timely and accurate reporting and eliminate or mitigate statutory penalties. Objective: Conduct multiple presentations statewide through membership in employer organizations. Improve OP&F rapport with the employer community through increased participation in public speaking opportunities.

75 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Performance Measurements Supports Goal #1 Actual 2012 Estimated 2013 Expected 2014 Type Accounting close of general ledger system by the 15th business day each month Efficiency Batch deposits are broken down and recorded to proper general ledger account within five business days of receipt 92% 99% 100% Output General ledger accounts are reconciled by the 20th business day Outcome Process general ledger coding corrections and inquiries within five business days of notification or request 100% 100% 100% Efficiency General ledger interfaces are completed within five busiess days Yes Yes Yes Efficiency including the employee payroll, pension and DROP Supports Goal #2 Actual 2012 Estimated 2013 Expected 2014 Type Submit and receive the Certificate of Achievement for Excellence in Financial Reporting from the Government Fincance Officers Association Yes Yes Yes Outcome Submit and receive annual Distinguished Budget Presentation Award Yes Yes Yes Outcome Supports Goal #3 Actual 2012 Estimated 2013 Expected 2014 Type Forward all member, retiree and survivor tax withholdings within Federal and State timetable Yes Yes Yes Efficiency Mail all eligible vendor Form 1099-Ms by Jan. 31 of each year Yes Yes Yes Output Mail all member, retiree, and survivor Form 1099 Rs by Jan. 31 of each year Yes Yes Yes Output Supports Goal #4 Actual 2012 Estimated 2013 Expected 2014 Type Process employer refunds within 10 business days of receipt 90% 90% 90% Output Mail employer penalty bills timely and accurately each quarter Yes Yes Yes Output Supports Goal #5 Actual 2012 Estimated 2013 Expected 2014 Type Provide courtesy calls on the monthly member contribution 9 months 12 months 12 months Efficiency reports and payments by the second to the last business day of each month, before penalties Provide courtesy calls to delinquent employers in an effort to Yes Yes Yes Efficiency avoid penalty escalation on billing related items OP&F page 69

76 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Supports Goal #6 Actual 2012 Estimated 2013 Expected 2014 Type Employer payroll reports processed and released within 94% 89% 93% Output 30 days of the date received Employer payroll reports processed and released within 30 days 97% 97% 97% Output of the payroll due date Complete the year-end close process for employer payroll reports by Yes Yes Yes Efficiency the end of following February for items in our control Supports Goal #7 Actual 2012 Estimated 2013 Expected 2014 Type Number of Employers that have undergone training on Output OP&F reporting and payment requirements Supports Goal #8 Actual 2012 Estimated 2013 Expected 2014 Type Update employer organizations on OP&F reporting issues Output through conference participation OP&F page 70

77 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Budget Category Summary Actual Revised Budget Budget % Change Budget Category Personnel Services $1,783,665 $1,834,644 $1,844, % Work Environment $200,059 $259,370 $265, % Outside Services $559,772 $698,400 $704, % TOTAL $2,543,496 $2,792,414 $2,813, % Budget Category Explanations Personnel Services This category reflects salaries, employee benefits, and employer payroll expenses for all Finance department employees. There is a proposed average merit increase of 3.0 percent with a 1.0 percent proficiency promotion budget. The number of personnel for the Finance Department in 2013 changed due to a reduction of one position; this number (21) will remain the same for Work Environment This category represents all expenses related to the Finance department work environment including equipment, training, travel, dues and subscriptions. For 2014, the overall Work Environment category increased 2.3 percent primarily due to the costs in the insurance market. In addition, dues and subscriptions and training fees slightly decreased due to the elimination of materials obtained in Outside Services This category reflects external professional services such as actuarial services, audit fees, legal fees, and bank charges. In 2014 the Actuarial Services, the Bank Service Charges and Warrant Fees have remained the same. Due to the change in Auditors for 2014, Audit fees have increased by 5.5 percent. Personnel Projections Category Exempt salary Non exempt salary TOTAL FULL-TIME OP&F page 71

78 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Information Services Department K. Byrd Deputy Executive Director P. Fick Business Systems Analyst J. Breeckner Systems and Network Manager S. Bucher Software Development Manager K. Tennant Administrative Assistant T. Green Business Analyst T. Edwards Business Analyst R. Lane Business Analyst J. Dawson Business Analyst R. Lady Business Analyst D. Ganjehsani Systems and Network Support Technician J. Chubak Systems and Network Support Technician M. Chadwell Systems and Network Support Technician S. Breech Systems and Network Support Technician (open, news) Lenix/Windows Administrator J. Miller Technical Support Coordinator A. Zedek Network Administrator D. Woods System Administrator D. James Database Administrator P. Gregg Software Development Supervisor D. Seward Software Developer B. Walum Software Developer M. Taffe Software Development Supervisor J. Hornberger Software Developer B. Aldridge Software Developer D. Daugherty Software Developer Director Manager/ Supervisor Staff OP&F page 72

79 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Information Services Department Budget (in thousands)* Variance $ Variance % 2013 Variance $ Variance % 2012 Budget Category Budget Forecast Budget Actual Personnel Services Salaries $1,852 $1,723 $ % $1,723 $ % $1,660 Employee Benefits % % 384 Employer Payroll Expense % % 253 Sub-Total $2,602 $2,400 $ % $2,411 $ % $2,297 Work Environment Office Rent $ $ $ $ $ $ Maintenance and Repairs 987 1,155 (167) 14.5% % 809 Legislative Expenses Mailing Expense Printing and Publications Office Supplies Office Equipment % % 71 Insurance Administrative Recovery Plan and Contingency % % 8 OP&F Sponsored Seminars Business Travel % % 3 Business Expense % 0 Trustee Training Employee Training % % 10 Telephone Services % % 72 Dues and Subscriptions % 4 (0) 2.2% 2 Miscellaneous Expenses Sub-Total $1,214 $1,302 $(88) 6.8% $1,138 $76 6.7% $974 Outside Services Investment Services Bank Custody Fees Actuarial Services Audit Services Legal Services Disability Medical Services Public Relation Consultants Bank Charges Ohio Retirement Study Council Legislative Consultants Personnel Recruitment Temporary Employees Contract Staffing 0 Health Care Consultants Other Professional Service % 5 SUB-TOTAL $105 $ $105 $7 $ % $5 TOTAL OPERATING $3,921 $3,702 $ % $3,556 $ % $3,276 * Figures may not add due to rounding dollars to the nearest thousand. OP&F page 73

80 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Information Services The Information Services (IS) department is divided into Business Systems, Systems and Network, and Development staff. IS is ultimately responsible for all of OP&F s computer and computer-related equipment and the programs running on them. Business Systems Responsible for collection and proper communication of OP&F staff needs to appropriate IS technical teams, including follow-through to ensure user satisfaction after completion of each request. This team serves as the first step in new software development. Responsible for training and documentation. Responsible for quality assurance testing and coordination of user acceptance testing of new software development as well as changes to existing software. Systems and Network Help Desk: responsible for inputting and tracking user requests, while assisting staff with computerrelated needs. The group ensures the proper and efficient operation of end-users personal computers, including hardware and software operations. Network and Security Administration: responsible for providing secure and reliable connectivity between all OP&F computer resources and the Internet; includes wiring, network devices and security appliances. System Administration: responsible for correct and efficient operation of all computer server resources and the programs running on them; includes installation and maintenance of hardware and operating system as well as virtual servers. Telecommunications: responsible for control and maintenance of the telephone system including connectivity of phones, and facsimile machines. Completes physical moves and changes of telecommunication devices. Troubleshoots all telephone wiring problems and administration and support for the phone system software and hardware. Development Development: responsible for the correct and efficient development of computer programs to meet stated user requirements. OP&F page 74 IS fundamentally serves as a resource to other OP&F departments to provide or assist in the use or creation of tools and systems designed to improve efficiency and productivity. It also serves as a resource for the evaluation and determination of fitness for use of purchased software for various projects and departmental needs. Goals and Objectives 1. Goal: Goal: Ensure timely and accurate monthly benefit payments. Objective: Adhere to monthly check run procedures to generate monthly benefit statements; monitor for efficiency and improvement; continually implement improvements to increase effectiveness and efficiency 2. Goal: Maintain a stable and available computing environment. Objective: Monitor network and operating environment; perform system maintenance as scheduled; monitor for efficiency, security and improvement; continually implement improvements to increase effectiveness, integrity and efficiency. 3. Goal: Properly assist users with computer related tasks. Objective: Provide Help Desk support as listed in the OP&F departmental service level agreements. 4. Goal: Create computer-based tools and systems to assist in pension processing to end-user satisfaction and on schedule. Objective: Ensure user approval of requirements and prototype documentation; conduct user acceptance testing as listed in the OP&F Service Development life cycle (SDLC); conduct follow-up of user satisfaction on all IS requests. 5. Goal: Effectively assist staff in evaluating third-party computer-based applications and systems. Objective: Ensure user approval of requirements for third-party computer-based applications and provide final recommendations to user; provide pros and cons of various recommendations of third-party computer-based tools. 6. Goal: Increase the number of cities reporting employer data electronically. Objective: All city employers capable of sending data electronically, either via self-service web or FTP, should submit using those methods. 7. Goal: Plan the number of server and PC replacements. Objective: Install server and PC hardware on schedule according to budget plan.

81 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Performance Measurements Supports Goal #1 Actual 2012 Estimated 2013 Expected 2014 Type Monthly benefit checks on time Output Supports Goal #2 Actual 2012 Estimated 2013 Expected 2014 Type Level 1 support request time to completion 1.77 days 2.36 days 2.06 days Outcome Level 2 support request time to completion 3.39 days 3.06 days 3.22 days Outcome Level 3 support request time to completion days days days Outcome Supports Goal #3 Actual 2012 Estimated 2013 Expected 2014 Type Number of requests opened within 15 minutes of receipt 5,649 5,633 5,641 Output Percent opened per Service Level Agreement (SLA) 100% 100% 100% Output Supports Goal #4 Actual 2012 Estimated 2013 Expected 2014 Type Number of development requests received Outcome Number of development requests completed Output Percent completed 93% 95% 94% Outcome Supports Goal #5 Actual 2012 Estimated 2013 Expected 2014 Type Products reviewed Efficiency Products acquired Efficiency Supports Goal #6 Actual 2012 Estimated 2013 Expected 2014 Type Number of cities reporting via electronic format (Self-Servide Web or FTP) Efficiency Supports Goal #7 Actual 2012 Estimated 2013 Expected 2014 Type Servers installed or replaced 7 physical, 8 physical 8 physical Output 3 virtual 12 virtual 8 virtual PCs installed or replaced Output OP&F page 75

82 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Budget Category Summary Actual Revised Budget Budget % Change Budget Category Personnel Services $2,336,315 $2,411,340 $2,602, % Work Environment $1,083,605 $1,137,685 $1,213, % Outside Services $7,000 $7,000 $105, % TOTAL $3,426,920 $3,556,025 $3,920, % Budget Category Explanations Personnel Services $2,602,317 The 7.9 percent increase is related to the addition of a full time Systems Administrator as well as a 3.0 percent merit, increases to employee health care costs, and employer share contributions to OPERS. Maintenance and Repairs $987,189 This is a 7.6 percent increase over the 2013 budget, this increase is due to multi-year renewals and 2013 capital items that now require maintenance. Also, a portion of the increase is attributed to maintenance fees that were requested to be held for the three previous budgeting years. Other Professional Services $105,000 This is a substantial increase due to the scheduled 2014 Outside Security Assessment with an estimated cost of $75,000 and an estimated cost of $18,000 for Kofax training and consulting. Business Travel $14,010 This is a 36.6 percent increase from The increase in budget is due to added dollars for travel and training for the Security and Network Administrator and Database Administrator. Personnel Projections Category Exempt salary Non exempt salary TOTAL FULL-TIME Information Services 2014 Initiatives All Information Services initiatives have been allocated to the Capital Budget. OP&F page 76

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84 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Investment Department T. Hall Chief Investment Officer R. Theller Senior Investment Officer B. Luke Senior Investment Officer J. Yeboah Investment Operations Officer E. Eichhorn Budget and Compliance Assistant H. Pothorski Administrative Assistant M. Abankwah Assistant Investment Officer J. Weston Assistant Investment Officer V. Thomas Senior Accountant J. Aufderhaar Senior Accountant M. Fenice Cash Manager A.Mahan-Howard Portfolio Specialist G. Pryor Portfolio Specialist D. Holcomb Investment Operations Auditor Director Manager/ Supervisor Staff OP&F page 78

85 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Investment Department Budget (in thousands)* Variance $ Variance % 2013 Variance $ Variance % 2012 Budget Category Budget Forecast Budget Actual Personnel Services Salaries $1,111 $1,004 $ % $1,056 $55 5.2% $1,035 Employee Benefits (0) 0.1% 292 (3) 1.0% 269 Employer Payroll Expense % % 162 Sub Total $1,582 $1,448 $ % $1,522 $60 3.9% $1,466 Work Environment Office Rent $ $ $ $ $ $ $ $ Maintenance and Repairs Legislative Expenses Mailing Expense Printing and Publications Office Supplies Office Equipment Insurance Administrative Recovery Plan and Contingency OP&F Sponsored Seminars Business Travel % % 6 Business Expense % Trustee Training Employee Training % 0 Telephone Services Dues and Subscriptions % % 31 Miscellaneous Expenses % 0 0.0% 0 Sub Total $66 $30 $ % $50 $ % $38 Outside Services Investment Services $42,206 $42,840 $(635) 1.5% $42,825 $(620) 1.4% $35,701 Bank Custody Fees 1,140 1,173 (33) 2.8% 1,173 (33) 2.8% 610 Actuarial Services Audit Services Legal Services 38 Disability Medical Services Public Relation Consultants Bank Charges Ohio Retirement Study Council Legislative Consultants Personnel Recruitment Health Care Consultants Other Professional Service (22) -43.6% 46 (17) 37.2% 5 SUB-TOTAL $43,374 $44,065 $(690) 1.6% $44,044 $(670) 1.5% $36,316 TOTAL OPERATING $45,022 $45,543 $(521) 1.1% $45,616 $(594) 1.3% $37,821 * Figures may not add due to rounding dollars to the nearest thousand. OP&F page 79

86 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Investment The Investment Department is comprised of several functional areas, including investment management, oversight and operations. The role of the Investment department is to effectively and prudently invest the assets of the Fund so as to maximize total return while staying within statutory and policy guidelines. This is accomplished by investing in a number of different asset classes utilizing both internal staff and multiple external managers. This responsibility encompasses: Maintaining the asset allocation decisions of the Board of Trustees by shifting assets among asset classes and among managers. Implement existing policy actions, and recommend new policies, new ideas and new managers, when appropriate. Manage cash equivalent assets for the Fund. Monitor our managers, their investment activity, their compliance with guidelines and their performance. Report to the Board on investment activity and costs, policy guideline compliance and performance. Record and authorize investment activity to maintain accurate Fund records and to facilitate settlement of investment transactions. Goals and Objectives The goals and objectives have been established in conjunction with a comprehensive review of the current and projected financial requirements. These goals and objectives are: 1. Goal: To have the ability to pay all benefit and expense obligations when due. Objective: We will maintain an investment portfolio structure consistent with guidelines and that also provides the necessary liquidity for near-term cash needs as well as the income and growth to meet future obligations. 2. Goal: To maintain the purchasing power of the current assets and all future contributions by efficiently maximizing the rate of return on Fund assets at a reasonable level of risk. Objective: We will maintain a diversified portfolio structure with a focus on asset class risk contributions to help minimize total portfolio risk while at the same time implementing a portfolio with the highest level of return consistent with the Board s risk tolerance. We will study and possibly implement new methods of reducing portfolio risk. 3. Goal: To ultimately achieve and then maintain a fully funded status with regard to the accumulated benefit obligation. Objective: We will work toward and then maintain Board approved asset allocation targets in an effort to earn over the long-term a rate of return in excess of actuarial requirements. 4. Goal: To control costs of administering the Fund and managing the investments. Objective: We will explore new investment ideas and trading approaches in an attempt to improve the efficiency of and reduce the cost of our operations. We will also monitor the costs of our investment operations through the use of industry surveys such as Cost Effectiveness Measurement. 5. Goal: Maintain efficient systems to ensure proper recording and reconciliation of investment data. Objective: We will maintain all investment data in the investment accounting system and ensure timely and accurate financial reporting. We will upgrade and enhance investment systems as necessary to help monitor investment information. The most important expectation is the achievement of results consistent with this policy statement and the analysis set forth in a prior asset liability study completed February 2010 and then the results to come out of a currently ongoing asset liability study. The investment performance goal for the total portfolio is to meet or exceed the return of the total portfolio policy benchmark over a full market cycle, generally measured over three to five years, without taking on additional risk as measured by standard deviation of returns. The total portfolio policy benchmark is a weighted average based on the allocation targets of each asset class benchmark. The Fund shall also strive to achieve a long-term rate of return, which is equal to or greater than OP&F s actuarial rate assumption of 8.25 percent. The Fund shall attempt to achieve these return goals without unnecessary risk to principal. The risk/return characteristics of the Fund shall be reviewed on a periodic basis (no less than every five years) through a comprehensive asset allocation and liability study. The goal of the study shall be to formulate an asset allocation policy that maximizes return while minimizing overall risk through the most efficient combination of acceptable asset classes under the prudent person standard. OP&F page 80

87 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW As a result of pension reform legislation that impacts OP&F s liabilities and the historically low level of interest rates that affects asset class expected returns, beginning in mid-year 2012, staff and consultant began providing education and initial asset liability data as part of a new asset liability study that was ultimately completed in December This new allocation continues to incorporate the total portfolio risk reduction concept known as risk parity that was initially adopted by the Board in early Based on the results of the study, staff and consultant have been working to implement the new asset allocation structure. Performance Measurements Supports Goal #1 Actual 2012 Estimated 2013 Expected 2014 Type Fund all benefit and expense obligations 100% 100% 100% Outcome Supports Goal #2 Actual 2012 Estimated 2013 Expected 2014 Type Outperform the Fund s policy benchmark No Yes Yes Outcome Supports Goal #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve and maintain fully funded status with regard to the accumulated benefit obligation No No No Outcome Meet or exceed the return of the Total Portfolio Policy Yes Yes Yes Outcome Benchmark over a full market cycle Supports Goal #4 Actual 2012 Estimated 2013 Expected 2014 Type Participate in the Cost Effectiveness Measurement survey each year Yes Yes Yes Efficiency Investment Operations Investment Operations is responsible for processing and accounting for the fund s investment related assets, liabilities, income, and expenses. This group accounts for the collection of income, as well as administering the fund s investment accounting system. Investment Operations also provides monthly journal entries to the General Ledger and creates numerous reports needed within the department, by other departments or outside sources for informational and decision making purposes. Supports Goal #5 Actual 2012 Estimated 2013 Expected 2014 Type Process standard purchase and sale transactions by T+1 98% 98% 98% Efficiency Complete month-end portfolio valuation within five business days 99% 99% 99% Efficiency Complete month-end reconciliations for all portfolios and provide journal entries to the G/L within 10 business days 81% 81% 95% Efficiency The drop in the estimated performance rates for 2012 and 2013 is due to being short staffed and unanticipated bottlenecks that arose from the custodial bank conversion from State Street Bank and Trust Co. to J.P. Morgan Chase as mandated by the Treasurer of the State of Ohio. OP&F page 81

88 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Alternative Investments Private Markets The private markets allocation is designed to provide an attractive risk-adjusted rate of return to the overall OP&F investment portfolio. The diversification of the private markets portfolio helps to achieve the performance objectives set forth in the Private Markets Investment Policy. Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns of the overall Private Markets portfolio to exceed No No Yes Outcome the Wilshire 5000 Index bps net of fees over a 10-year rolling basis Manage the Private Markets portfolio to be compliant with the investment Yes Yes Yes Outcome guidelines contained within the Private Markets Investment Policy Achieve the Private Markets target exposure set forth by the Asset Allocation Policy Yes Yes Yes Outcome Complete evaluation of Request for Proposals and present N/A Yes Yes Outcome recommendations to the Board for non-discretionary advisor/ consultant services for private markets investments Real Estate The real estate allocation is designed to provide (i) an inflation hedge, (ii) a total return that has a low or negative correlation with stock and bond returns, (iii) a total return that is competitive on a risk-adjusted basis with stocks and bonds; and (iv) a total return that is accretive to OP&F achieving its long-term target rate of return. The diversification of the real estate portfolio helps to achieve the performance objectives set forth in the Real Estate Strategic Plan. Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Generate a total return net of investment management fees equal to the NCREIF Fund Index Open End Diversified Core Equity (ODCE) net of fees over three-year and five year rolling periods No Yes Yes Outcome Generate a total return net of investment management fees in excess of the NCREIF ODCE net of fees plus 50 bps over a full market cycle Yes Yes Yes Outcome Achieve the real estate target exposure set forth by the Asset Allocation Policy Yes Yes Yes Outcome Timberland The timberland allocation is designed to preserve capital while generating an attractive risk-adjusted rate of return as a function of cash yield and capital appreciation as well as to provide diversification benefits, a hedge against inflation, and relative non-correlation to other asset classes. The diversification of the timberland portfolio helps to achieve the performance objectives set forth in the Timberland Investment Policy. Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns of the overall Timberland portfolio that exceed a real rate of return of 5% net of fees, over rolling 10-year periods N/A N/A N/A Outcome Manage the Timberland portfolio to be compliant with the investment Yes Yes Yes Outcome guidelines contained within the Timberland Investment Policy Conduct due diligence on potential timberland investment management organizations and present recommendations to the Board for consideration Yes Yes Yes Outcome in order to achieve Timberland target exposure set forth by the Asset Allocation Policy Achieve the Timber target exposure set forth by the Asset Allocation Policy Yes Yes No Outcome OP&F page 82

89 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Public Markets Investment Cash Management The Cash Management STIF portfolio is designed to provide effective cash management when investing cash balances, with an emphasis on the protection of principal through the purchase of high quality money market instruments, while at the same time attempting to achieve the highest available return. Supports Goals #1, #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns that should exceed the 91-day Treasury bill rate of return over rolling 12-month periods Yes Yes Yes Outcome Perform credit reviews of approved issuers of commercial paper on a regular basis, but no less than every six months for issuers rated A1/P1 and every three months for issuers rated A2/P2 or split rated Yes Yes Yes Outcome Maintain commercial paper exposure limits within the policy ranges of OP&F s Short Term Cash Management Policy Yes Yes Yes Outcome Domestic Equity The domestic equity allocation is focused on companies headquartered and/or domiciled in the United States. The structure of the domestic equity allocation will be divided between passive and active managers with further diversification across the capitalization spectrum. In addition, a portion of the domestic equity allocation will be implemented via a pool of alpha transfer strategies (i.e. Portable Alpha Program). Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns for the Domestic Equity Portfolio that exceed the return of the Wilshire 5000 Index over a three-year period on an annualized basis Yes Yes Yes Outcome Achieve excess returns on the Portable Alpha Program that exceed the return of the Standard & Poor s 500 Index annuallyy Yes Yes Yes Outcome Achieve the Domestic Equity target exposure set forth by the Asset Allocation Policy Yes Yes Yes Outcome Non-U.S. Equity The Non-US equity allocation is focused on companies headquartered or domiciled in the MSCI ACWI-ex-US countries. The Non-US equity allocation will be managed solely on an active basis in order to exploit the perceived inefficiencies in the Non-US equity markets. Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns of the Non-US Equity Portfolio that exceed the return of the Morgan Stanley Capital International All Country World Index ex-us Iran/Sudan over a three-year period on an annualized basis. Yes Yes Yes Outcome Achieve the Non-US Equity target exposure set forth by the Asset Allocation Policy Yes Yes Yes Outcome Fixed Income: Commercial Mortgages The Commercial Mortgage portfolio may include any commercial mortgage whole loans that provide for fixed income payments derived from underlying property cash flows. Risk shall be controlled through diversification strategies and the retention of qualified managers with acceptable loan underwriting and/or commercial mortgage acquisition experience. Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns in the Commercial Mortgage composite portfolio that exceed the return of the Barclays Mortgage Index Yes Yes Yes Outcome OP&F page 83

90 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Fixed Income: Investment Grade The Fixed Income Investment Grade allocation is focused on U.S. dollar denominated fixed income securities. Non-U.S. dollar denominated securities are prohibited. A new, unconstrained alternative fixed income allocation has yet to be implemented and requires further asset class structure work to ensure that OP&F is comfortable with the risk/return basis for the eventual asset mix. Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns in the investment grade fixed income composite portfolio which exceed the return of the Barclays Aggregate Index over a three-year period on an annualized basis. Yes Yes Yes Outcome Achieve the Fixed Income Investment Grade target exposure set forth by the Asset Allocation Policy Yes Yes Yes Outcome Fixed Income: Global Inflation Protected Securities (GIPS) The GIPS composite portfolio is intended to provide OP&F with a strategic allocation to an inflation hedged investment strategy and may include bonds from any country issuing Inflation Linked bonds with a sovereign local currency credit rating (S&P) of A- or better. The GIPS allocation will be levered in keeping with OP&F s risk parity asset allocation approach and will be managed on an active basis in order to exploit the perceived inefficiencies in Inflation Protected Securities markets and will have a long-term target of 12.9 percent of total fund assets. Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns in the GIPS composite portfolio which exceed the return of a custom weighted-average mix of the Barclays country indexes within the Global Inflation-Linked Bond Index over three-year period on an annualized basis. Yes Yes Yes Outcome Achieve the Global Inflation Protected Securities target exposure set forth by the Asset Allocation Policy Yes Yes Yes Outcome Fixed Income: High Yield The high yield fixed income composite allocation is focused on fixed income securities issued by U.S. corporations. Non-U.S. dollar denominated securities are prohibited. The high yield fixed income allocation will be managed solely on an active basis in order to exploit the perceived inefficiencies in the high yield markets and to minimize the probability of exposure to securities in default. Supports Goals #2 and #3 Actual 2012 Estimated 2013 Expected 2014 Type Achieve investment returns in the high yield fixed income composite portfolio which exceed the return of the CS First Boston High Yield Index, Developed Countries Only over a three-year period on an annualized basis. Yes Yes Yes Outcome Achieve the High Yield composite target exposure set forth by the Asset Allocation Policy No Yes Yes Outcome Securities Lending The Securities Lending program is focused on lending securities to facilitate market liquidity. The program provides domestic securities to borrowers through a third party lending agent, and international securities through a custodial agent. Securities are loaned in exchange for cash or in kind collateral of a sufficient percentage over the market value of the securities delivered. Supports Goals #4 Actual 2012 Estimated 2013 Expected 2014 Type Maintain a minimum of 102% collateral. Yes Yes Yes Outcome OP&F page 84

91 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Budget Category Summary Actual Revised Budget Budget % Change Budget Category Personnel Services $1,466,334 $1,522,000 $1,581, % Work Environment $37,846 $49,855 $66, % Outside Services $36,316,391 $44,044,186 $43,374, % TOTAL $37,820,571 $45,616,041 $45,022, % Budget Category Explanations Personnel Services This category represents the salaries, benefits, and employer payroll expense for all department employees. The 3.9 percent increase from our 2013 budget is mainly due to increased cost for wages and employer payroll expense. These increases are offset by declines in health care, life insurance, and sick leave/buyback programs. Work Environment This category represents all expenses related to the investment department work environment including: furniture, equipment, supplies, training and travel, and dues and subscriptions. The projected 32.5 percent increase in 2014 versus our 2013 budget is explained by an increase in Business Travel from additional due diligence trips to new and potential managers and employee training and registration fees. Additionally, increases in dues and subscriptions are a contributing factor due to certification program expenses, membership dues and subscription renewals. Outside Services This category represents all external professional services for the investment department. The 1.5 percent decrease versus our 2013 budget is primarily explained by a $702 thousand, or 1.7 percent, projected decrease in investment management fees. This decrease is driven by the shift of assets to managers that deduct fees from their fund assets as opposed to OP&F paying the fees directly to the managers. Therefore, those expenses are now considered off budget. In December 2012, OP&F completed an asset liability study and changes to the policy were approved by the Board. The new asset allocation calls for a continued reduction in domestic and international equities, a change from long duration fixed income to core fixed income, an increase to private markets and timber and the addition of MLPs. OP&F is starting with a higher asset base and is projecting a shift of assets from lower management fee strategies into more expensive ones. However, these expenses are offset by the cost savings of shifting some of our other manager fee expenses off budget. In addition, OP&F is conducting structure reviews to assess potential changes within each asset class. The Board of Trustees recently approved moving some of our core fixed income assets into a multi-product fixed income solution. This new optimized solution will meet the risk/return characteristics of a 2X levered core fixed income portfolio, which is a key part of our overall risk-balanced asset allocation. Aside from investment management fees, custody fees are projected to decrease by 2.8 percent due to lower international custody costs and the shift of domestic assets into pooled funds. This will result in reduced transaction fees. OP&F will experience increases in consulting, analytical, and research expenses, which is due to vendors adding contractually allowed inflation escalators as well as the addition of new research subscriptions and special project consulting fees. Personnel Projections Category Exempt salary Non exempt salary TOTAL FULL-TIME Review of 2013 Investment Dept. Initiatives Economic Research and Analysis Current Status Several Investment staff members received free trial subscriptions to four Capital Economics research services on and off over the last two years. After discussions with Capital Economics, we decided to subscribe to three of the four services we reviewed: the U.S Economics, European Economics and China Economics services. We have found these services to be insightful and timely and on many occasions they have provided a helpful, differing perspective than our existing research services. OP&F page 85

92 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Member Services Department J. Harville Member Services Director J. Jewell Member Account and Benefit Manager J. Bowlby Member Transactions Manager L. Fothergill Administrative Assistant K. Clark Benefit Payment Supervisor L. Doughty Budget and Compliance Support Specialist C. Buell Benefit Payment Support Specialist J. Breeckner Health Care Support Specialist V. Cupp Contract and Data Analyst K. Johnson Benefit Payment Coordinator (open) Benefit Payment Coordinator B. Gates Pension Contribution Supervisor R. Sheskey Payroll Contributions Supervisor P. Finn Processing Supervisor R. Ball Pension Contributions Auditor C. McNamara Sr. Pension Contributions Specialist A. Tran Pension Contributions Auditor D. Grandy Prior Service Specialist M. Brady Membership Transaction Auditor (open) Disability and Processing Support Specialist (open) Disability Case Manager G. Pleasant Survivor Support Specialist L. Rogers-Turner Pension Contributions Specialist T. May Pension Contributions Specialist R. Gochenour Pension Contributions Specialist L. Spencley Prior Service Specialist J. Price Quality Control Coordinator S. Johnson Disability Specialist H.Jordan Disability Case Manager V. Whyte Survivor Benefit Specialist L. Hagerman Sr. Pension Contributions Specialist Y. Kellam Transaction Specialist L. Foley Disability Case Manager K. Penn Membership Specialist Director Manager/ Supervisor Staff OP&F page 86

93 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Member Services Department Budget (in thousands)* Variance $ Variance % 2013 Variance $ Variance % 2012 Budget Category Budget Forecast Budget Actual Personnel Services Salaries $1,814 $1,885 $(71) 3.8% $1,983 $(169) 8.5% $1,909 Employee Benefits (27) 4.5% 617 (29) 4.7% 449 Employer Payroll Expense (4) 1.2% 314 (27) 8.5% 282 Sub Total $2,689 $2,792 $(102) 3.7% $2,914 $(224) 7.7% $2,641 Work Environment Office Rent $ $ $ $ $ $ Maintenance and Repairs Legislative Expenses Mailing Expense Printing and Publications Office Supplies Office Equipment % 4 (2) 37.5% 3 Insurance Administrative Recovery Plan and Contingency OP&F Sponsored Seminars Business Travel % 2 Business Expense % Trustee Training Employee Training % 0 Telephone Services Dues and Subscriptions % 1 (0) 13.3% 1 Miscellaneous Expenses % % 0 Sub Total $25 $2 $ % $13 $ % $13 Outside Services Investment Services $ $ $ $ $ $ Bank Custody Fees Actuarial Services Audit Services Legal Services Disability Medical Services % 685 (2) 0.2% 539 Public Relation Consultants Bank Charges Ohio Retirement Study Comm Legislative Consultants Personnel Recruitment Health Care Consultants 30 Other Professional Service 8 8 (1) 7.1% 8 (1) 6.7% 6 Sub Total $691 $503 $ % $693 $(2) 0.3% $545 TOTAL OPERATING $3,405 $3,296 $ % $3,619 $(214) 5.9% $3,198 * Figures may not add due to rounding dollars to the nearest thousand. OP&F page 87

94 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Member Services The Member Services Department serves OP&F members from date of hire and entry into OP&F through death, and includes benefits paid to survivors. This department includes the following teams: Benefit Payments and Compliance, Pension Calculations, Prior Service and Transactions. Goals and Objectives 1. Goal: Encourage open communication and education with members, OP&F employees, and other Ohio retirement systems. Objective: Employers measured by the reduction in employer fines for pre-employment physicals. Members measured by the success of the HOST program Members measured by the number of calls taken by the department Employees measured by the number of Supervisor Forums conducted Employees measured by the number of training sessions offered at the time of changes to the Ohio Revised Code (ORC) and the Ohio Administrative Code (OAC) 2. Goal: Provide quality service to members by establishing and maintaining acceptable turnaround times for core processes. Objective: Measured by percentage of interim checks processed within 14 days of receipt of necessary paperwork Measured by percentage of final checks processed within 90 days of receipt of EAMC Measured by percentage of service applications acknowledged within five days of application receipt Measured by percentage of disability applications acknowledged within five days of application receipt Measured by percentage of costs for purchases sent out within 45 days of receipt of purchase packet Measured by percentage of refund applications processed within 30 days of the last payroll or the request date, whichever is appropriate Measured by percentage of first checks mailed within 4 days of the receipt of the payment request Measured by the number of DROP calculations completed in 90 days Pay DROP disbursements within 30 days of request or verification of termination Monthly check run completed on time 3. Goal: Improve accuracy in all teams of production. Objective: Measured by the number of recalculations due to errors Measured by the number of Benefit Review Forms containing errors Measured by the number of corrections on the Calculation Review Forms Measured by the number of successful balances for check run Measured by the number of corrections on the Prior Service Review Forms Ensure all information and deductions are correct for checks 4. Goal: Timely and accurate payment of funds owed for delivery of administrative services. Objective: We will pay retiree health care vendors as of the invoice due date within 30 days. Review invoices for reasonableness, address issues promptly and reply to health care billing inquiries within a 24 hour period. 5. Goal: Validations/ changes, based on the UnitedHealth Care deduction file, made to the V3 system for the monthly check run three to five days during the normal check run monthly calendar. Objective: To ensure accurate and timely health care deductions from pension checks and minimize the number of suspended and pulled checks. 6. Goal: Filing Medicare Part D materials with CMS. Objective: Successfully obtain the Medicare Part D reimbursements quarterly. 7. Goal: Maintain health care coverage coverage and wellness incentives that meet the needs of our members with the best possible value. Objective: Account for all health care expenses properly and ensure full analysis of data, including benchmarking against other plan administrators. 8. Goal: Ensure that health care vendors meet contractual obligations through the analysis of rebates and performance guarantees. Objective: Account for all health care reimbursements and credits properly OP&F page 88

95 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Performance Measurements Transactions The Processing team is responsible for receipt of all incoming application transactions related to service and disability retirement, and survivor and death fund benefits. In addition to performing the initial system set-ups, the team works closely with members and their families to ensure swift initiation of benefit payments. Incoming disability documents are received as electronic workflows. Disability case files are compiled and distributed electronically to Trustees, physicians, and staff via CD, or accessed through OP&F s EmployeeNet. Advantages include a more manageable and controlled process; improved turn-around times and efficiencies; and a reduction in shipping costs and wasted materials. Supports Goal #2 Actual 2012 Estimated 2013 Expected 2014 Type Service applications acknowledged per month Output Disability applications acknowledged per month Output Survivor applications acknowledged per month Output DROP applications acknowledged per month Output Calculations The Pension Calculations team provides valuable service to internal and external customers by responsibly calculating service retirement pensions, disability benefits, DROP benefits and division of property orders. They also prepare recalculations and process annual cost of living adjustments for retirees. The Calculations team provides data for the annual actuarial process and they prepare reports and documents for distribution to the Board of Trustees each month. Prior Service Team The Prior Service team makes meaningful contributions by computing the cost of military and civilian service credit purchases. They work with the other Ohio Retirement Systems to calculate and verify amounts to be transferred among the funds and they handle the granting of military time. The Prior Service group is responsible for all new member enrollment and they work with employers to process the required Personal History Records and Pre-Employment Physicals. Supports Goals #1 and #2 Actual 2012 Estimated 2013 Expected 2014 Type DROP calculations in less than 90 days from payrolls being released 581 of of of 600 Output Service credit/contribution transfers to OP&F per month Output Withdrawals/rollovers processed per month Output Prior service costs processed per month Output Interim payments processed in 14 days 299 of of of 275 Output Service credit/contribution transfers out per month Output Pre-Employment Pysicals processed per month Output Benefit Payments and Compliance The Benefit Payments and Compliance team is involved with the check run process and provides assistance with analysis of benefit changes or enhancements. Initiates the monthly check run Initiates all ad hoc checks for member/survivor related payments and generates payments to employers Responsible for providing current health care vendor with updated contact information OP&F page 89

96 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Makes federal and/or state tax withholding changes Completes bank changes or additions Responsible for verification of income letters for retirees and survivors Initiates EFT callbacks Reissues voided or cancelled checks/eft Works with the Legal group to comply with court orders and levies Sets up liens in V3 Calculate/Recalculate Division of Property Orders Generates letters for overpayment of pensions and benefits Supports Goal #2 Actual 2012 Estimated 2013 Expected 2014 Type Ad hoc disbursements and EFT s Processed in 4 days 5,107 5,200 5,200 Output Correction of clearing house (EFT) returns in 4 days Output Verification of income within 3 days Output The Benefit Payments and Compliance team also oversees the retiree health care programs (medical, Rx, dental, vision), ensures compliance with the Administrative Services Agreement, Federal Regulations, Health Care Plan Document, OP&F funding policy and leads Member Services Financial and Actuarial issues. Some additional functions they perform include: Maintain trend, cost analysis, projections, and monitor the cost efficiency of retiree health care Work with actuary to develop future health care premiums and annual Medicare Part D Attestation Annual Ohio Retirement Study Council Health Care Report Reconcile the irrevocable waiver program with other Ohio Retirement Systems (ORS) Monitor and pay health care administrative services and claims invoices Manage the Medicare Part D and B Federal programs Manage the Early Retiree Reinsurance Program (ERRP) and preparation for potential audits relating to costs and use of EERP funds Monitor the annual Affordable Care Act/health care reform rules to determine effects on OP&F health care plan and grandfathering status Monitor health care rebates, overpayments, recoveries, performance guarantees and subrogation reporting Manages the deductions, subsidies, and re-coupments to the retirees pension check for health care premiums Manage health care communications with OP&F members (newsletter articles, member guides, Annual Change Period (ACP) meetings, ACP Forms, Annual Medical Plan Description Validate UHC enrollment file prior to each monthly deduction import Analyze the health care plan design including the Prescription Drug List (PDL) Analyze and recommend programs and plan designs to assist in providing viable health care options and healthier behavior patterns for our retirees while establishing and maintaining grandfathered status as stated by the Affordable Health Care Act Analyze options and system enhancements for compliancy of the SB340 enactment (internally/externally) Oversee the resolution of escalated health care issues, calls, letters and s from retirees Report and makes recommendations to the Health Care Committee Lead the annual budget process for the Member Services Department Determine financial impact of new health care benefit plan designs Manage the Member Services purchases and requisitions Assist with vendor contract renewals Supports Goal #4 Actual 2012 Estimated 2013 Expected 2014 Type Invoices reconciled and submitted for payment within contractual due dates Yes Yes Yes Efficiency upports Goal #5 Actual 2012 Estimated 2013 Expected 2014 Type Changes and validations made to the V3 system within 3 business days Yes Yes Yes Efficiency Supports Goal #5 Actual 2012 Estimated 2013 Expected 2014 Type Begin bi-annual eligibility validation file to ensure enrollment and eligibility accuracy between vendor and OP&F N/A Yes Yes Efficiency Supports Goal #6 Actual 2012 Estimated 2013 Expected 2014 Type Timely filing of Medicare D materials to ensure quarterly reimbursement Yes Yes Yes Outcome OP&F page 90

97 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Supports Goal #7 Actual 2012 Estimated 2013 Expected 2014 Type Analyze programs and options that provide measurable post savings, incentives for healthier behavior patterns and disease prevention N/A N/A Yes Outcome Supports Goal #8 Actual 2012 Estimated 2013 Expected 2014 Type Rebates and Performance Guarantees analyzed and compared to prior periods N/A N/A Yes Outcome Budget Category Summary Actual Revised Budget Budget % Change Budget Category Personnel Services $2,640,514 $2,913,790 $2,689, % Work Environment $13,209 $12,855 $25, % Outside Services $544,577 $692,770 $690, % TOTAL $3,198,300 $3,619,415 $3,405, % Budget Category Explanations Personnel Services This category reflects the employees salaries, benefit costs, and employer payroll expenses of the Member Services Department. The overall decrease of 7.7 percent is attributable to position changes in 2013 and employee health care costs allocated to this department being reduced by 4.5 percent. There is also a proposed average merit increase of 3.0 percent and a one percent proficiency promotion included for eligible staff. Work Environment This category reflects the amount needed for office equipment, training, conferences, business travel, dues and subscriptions and in house food expenses. The 95.7 percent increase is due to the anticipated reimbursement of HOST representative mileage, replacement of outdated office equipment and expected due diligence travel for Outside Services This category reflects expenses for the disability process, and other professional services. The disability process includes exam fees, consultant fees for doctors, and occasional fees for out of state physician locators. The 0.3 percent decrease from 2013 is due to last year s elimination of mileage reimbursements for some disability exams. Personnel Projections Member Services Proposed 2014 Initiatives Departmental Reorganization Effective Jan.1, 2014, the Contributions Manager position is eliminated due to retirement. The Processing Supervisor position is reestablished to lead the dayto-day management of that team and will report directly to the Member Transactions Manager whose role and responsibility will expand to also include the Pension Calculations and Prior Service teams. These changes result in no net change to employee head count since one management position is eliminated and one is reestablished. Additional movement among the department is made to streamline reporting lines, recognize a promotional opportunity and consolidate work routines within the department. Review Of Member Services 2013 Initiatives Elimination of four full-time positions Although no formal initiatives were identified in the 2013 Member Services budget, one full-time position was permanently eliminated when the Processing team moved to an all electronic handling of disability work. Three management team positions were also eliminated by consolidating two teams under a single supervisor and manager, thus eliminating the second supervisor and manager positions. The Processing Supervisor position was also eliminated. Category Exempt salary Non exempt salary TOTAL FULL-TIME OP&F page 91

98 DEPARTMENTAL REVIEW Annual Budget for Fiscal Year 2014 Board of Trustees Board of Trustees Budget (in thousands)* Variance $ Variance % 2013 Variance $ Variance % 2012 Budget Category Budget Forecast Budget Actual Personnel Services Salaries Employee Benefits Employer Payroll Expense Sub total Work Environment Office Rent Maintenance and Repairs Legislative Expenses Mailing Expense Printing and Publications Office Supplies Office Equipment 1 (1) 100% Insurance Administrative Recovery Plan and Contingency OP&F Sponsored Seminars Business Travel % % 16 Business Expense % % 38 Trustee Training % % 16 Employee Training Telephone Services Dues and Subscriptions % % 2 Miscellaneous Expenses % 8 0.0% 6 Sub Total $95 $74 $ % $94 $1 0.7% $78 Outside Services Investment Services Bank Custody Fees Actuarial Services Audit Services Legal Services Disability Medical Service Public Relation Consultants Bank Charges Ohio Retirement Study Council Legislative Consultants Personnel Recruitment Health Care Consultants Other Professional Service Sub total TOTAL OPERATING $95 $74 $ % $94 $1 0.7% $78 * Figures may not add due to rounding dollars to the nearest thousand. OP&F page 92

99 Annual Budget for Fiscal Year 2014 DEPARTMENTAL REVIEW Board of Trustees This department is used by OP&F to track the costs and activities of the Board of Trustees. Budget Category Summary Actual Revised Budget Budget % Change Budget Category Personnel Services $0 $0 $0 0.0% Work Environment $78,142 $94,485 $95, % Outside Services $0 $0 $0 0.0% TOTAL $78,142 $94,485 $95, % Budget Category Explanations Personnel Services The Trustees do not receive any compensation or employee benefits. Work Environment This category represents all expenses that are paid for by OP&F for the purpose of accommodating and training the Board of Trustees. The only increase in the Trustee s 2014 budget from a year ago is in Work Environment, where there is a 22.7 percent increase in Dues and Subscriptions ($674). Outside Services No outside services are related to this department. Capital Outlay No capital outlay is required for this department. Personnel Projections There are no personnel projections related to this department, as all Trustees are elected or appointed into non compensated positions. OP&F page 93

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101 Annual Budget for Fiscal Year 2014 SUPPLEMENTAL AND GLOSSARY OF TERMS Supplemental and Glossary of Terms Annual Budget for Fiscal year 2014 Supplemental Section Glossary 140 East Town Street Columbus, Ohio f.org OP&F page 95

102 SUPPLEMENTAL AND GLOSSARY OF TERMS Annual Budget for Fiscal Year 2014 Active and Retired Member Statistics Active Member Valuation Data Percentage of Annual Number of Number of Average Average Annual Payroll Employers Active Members* Annual Salary Salary Increases (Millions) Year Police Fire Police Fire Police Fire Police Fire ,745 12,699 $68,163 $69, % 1.0% $1, ,854 12,769 67,094 68, % 1.6% 1, ,293 12,929 65,649 67, % 2.0% 1, ,581 13,038 64,373 66, % 1.7% 1, ,889 13,173 63,480 65, % 3.3% 1, ,829 13,035 61,545 62, % 2.4% 1, ,646 12,963 60,638 61, % 1.3% 1, ,304 12,722 60,573 62, % 4.5% 1, ,270 12,609 58,744 59, % 3.9% 1, ,746 12,695 56,081 57, % 1.2% 1,644.4 * Includes rehired retirees Active Members Number of Percentage Total Annual Percentage Active Change in Payroll Change in Year Members * Membership (Thousands) Payroll , % $1,913, % , % 1,897, % , % 1,868, % , % 1,895, % , % 1,900, % , % 1,831, % , % 1,782, % , % 1,756, % , % 1,683, % , % 1,644, % * Includes rehired retirees Retirees and Beneficiaries added to and removed from rolls (dollars in thousands) Added to rolls Removed from rolls Rolls, end of year Percentage Average Percentage Valuation Annual Annual Annual Change in Annual Change in as of Jan. 1 Number Allowances Number Allowances Number Allowances Allowance Allowances Membership ,390 $48,249 1,225 $19,469 27,243 $852, % $ % ,783 65, ,397 27, , % % ,165 34, ,721 26, , % % ,128 30, ,566 25, , % % ,046 25, ,825 25, , % % ,128 27, ,586 24, , % % ,186 32, ,701 24, , % % , ,132 24, , % % , ,407 24, , % % , ,722 24, , % % OP&F page 96

103 Annual Budget for Fiscal Year 2014 SUPPLEMENTAL AND GLOSSARY OF TERMS Average Benefit Payments and Expenses Retired Membership By Type Of Benefit (Source: Actuarial Valuation) Service Disability Survivors Year Police Fire Police Fire Police Fire Total ,459 5,683 3,834 2,594 4,352 3,321 27, ,204 5,540 3,825 2,577 4,543 3,389 27, ,762 5,185 3,772 2,566 4,479 3,310 26, ,546 5,060 3,721 2,496 4,300 3,194 25, ,523 5,036 3,682 2,470 4,090 3,077 24, ,459 5,012 3,594 2,436 4,067 3,115 24, ,419 5,045 3,521 2,403 3,982 3,089 24, ,452 5,101 3,931 3,063 3,429 2,364 24, ,459 5,173 3,912 3,001 3,291 2,300 24, ,418 5,188 3,916 3,006 3,193 2,202 23,923 Average Monthly Benefit Payments* for Members Placed on Retirement Rolls Service Retirement Year Normal Service Commuted Age Commuted Age/Service 2012 $3,466 $1,241 $2, ,442 1,282 2, ,339 1,374 3, ,301 1,460 2, ,266 1,222 2, ,251 1,265 1, ,274 1,068 1, ,125 1,102 1, ,128 1,081 1, , ,569 Disability Retirement Year Permanent and Total P and T Presumptive Partial Partial Presumptive Off Duty 2012 $4,276 $3,717 $2,928 $3,338 $2, ,838 3,870 2,963 2,983 2, ,495 3,886 2,827 3,659 $, ,626 3,810 2,807 2,966 2, ,509 3,424 2,874 2,696 2, ,301 3,611 2,846 2,959 2, ,341 2,930 2,793 2,939 2, ,327 3,254 2,624 3,160 1, ,209 3,163 2,712 3,080 2, ,133 3,203 2,854 3,042 2,029 * Source: Numbers calculated by taking an average of final placements for retirees as listed in OP&F Board of Trustees monthly reports. Revenues by Source (dollars in millions) Employer Member Contributions as Investment and Contributions Employer a percentage of Securities Health Care Other Total... Year and purchases contributions Covered Payroll Lending Income Contributions Revenues Revenues 2012 $418.3 $ % $1,657.9 $65.1 $29.4 2, % % 1, , % 1, , % (3,833.0) (3,171.6) % 1, , % 1, , % , % 1, , % 1, ,285.3 OP&F page 97

104 SUPPLEMENTAL AND GLOSSARY OF TERMS Annual Budget for Fiscal Year 2014 Expenses By Type (dollars in millions) Benefit Refund of Member Total... Year Payments Administrative Expenses Contributions Other Expenses Expenses 2012 $1,236.4 $15.5 $26.4 $ $1, , , , , , , , , (0.4) Benefit Expenses by Type (dollars in millions) Year Service DROP** Disability Health Care Survivor Total Benefits 2012 $529.9 $212.1 $232.8 $187.4 $74.2 $1, , , , , ** Implementation date of Jan. 1, Number of Employer Units Municipalities Townships Villages Total Total. Year Police Fire Police Fire Police Fire Police Fire Both OP&F page 98

105 Annual Budget for Fiscal Year 2014 SUPPLEMENTAL AND GLOSSARY OF TERMS Short-Term Solvency Test A short-term solvency test is one means of checking a system s progress under its funding program. In a short-term solvency test, the plan s valuation assets are compared with: 1. Active member contributions on deposit; 2. The liabilities for future benefits to present retired lives; 3. The liabilities for service already rendered by active members. In a system that has been following the discipline of level percent of payroll financing, the liabilities for active member contributions on deposit (Liability 1) and the liabilities for future benefits to present retired lives (Liability 2) will be fully covered by present assets (except in rare circumstances). In addition, the liabilities for service already rendered by active members (Liability 3) will be partially covered by the remainder of present assets. Generally, if the system has been using level cost financing, the funding portion of liability 3 will increase over time. Liability 3 being fully funded is very rare. Accrued Liabilities ($ Amounts in Thousands) (1) (2) (3) Portion of Accrued Active Retirants Active Members Liabilities Covered Valuation Member and (Employer Financed Valuation by Reported Assets Year Contributions Beneficiaries Portion) Assets (1) (2) (3) Police 2013 $1,131,664 $5,166,808 $2,532,580 $5,670, % 88% 0% Fire 2013 $974,362 $3,751,279 $2,451,195 $4,607, % 97% 0% Police 2012 $1,100,146 $4,960,051 $2,969,900 $5,694, % 93% 0% Fire 2012 $965,598 $3,581,800 $2,769,204 $4,614, % 100% 2% Police 2011 $1,100,251 $4,368,659 $3,008,219 $5,885, % 100% 14% Fire 2011 $956,559 $3,132,521 $2,818,228 $4,795, % 100% 25% Police 2010 $1,067,209 $4,216,219 $2,832,235 $5,163, % 100% 24% Fire 2010 $916,033 $3,004,267 $2,700,815 $4,818, % 100% 33% Police 2009 $1,026,597 $4,077,113 $2,832,235 $5,163, % 100% 2% Fire 2009 $874,756 $2,895,243 $2,601,180 $4,145, % 100% 14% Police 2008 $985,169 $3,992,482 $2,671,816 $6,248, % 100% 48% Fire 2008 $830,439 $2,827,320 $2,420,526 $4,964, % 100% 54% Police 2007 $934,517 $3,850,347 $2,444,583 $5,654, % 100% 36% Fire 2007 $796,751 $2,757,853 $2,297,575 $4,503, % 100% 43% Police 2006 $894,963 $3,654,099 $2,297,575 $5,364, % 100% 35% Fire 2006 $747,714 $2,572,229 $2,023,823 $4,186, % 100% 43% Police 2005 $840,875 $3,510,610 $2,152,500 $5,260, % 100% 42% Fire 2005 $691,252 $2,497,311 $1,852,502 $4,077, % 100% 48% Police 2004 $792,449 $3,390,164 $1,911,501 $5,269, % 100% 57% Fire 2004 $639,074 $2,448,043 $2,448,043 $4,067, % 100% 61% Police 2003 $746,520 $3,299,989 $1,894,086 $4,905, % 100% 45% Fire 2003 $593,228 $2,401,021 $1,573,523 $3,776, % 100% 50% OP&F page 99

106 SUPPLEMENTAL AND GLOSSARY OF TERMS Annual Budget for Fiscal Year 2014 Contribution and Actuarial Interest Rate History Schedule of Contribution Rates Employer Rates Member Rates Time Frame of Rates Time Frame of Rates Employer Rates Police Fire Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Present Member Rates Jan. 1, 1967 to Dec. 31, Jan. 1, 1968 to Feb. 28, March. 1, 1980 to July 31, Aug. 1, 1986 to Sept. 8, Sept. 9, 1988 to July 1, July 2, 2013 to July 1, July 2, 2014 to July 1, July 2, 2015 thereafter Police Fire Schedule of Actuarial Interest Rates Time Frame of Rates Actuarial Interest Rates Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Dec. 31, Jan. 1, Present Health Care allocation from employer rates Time Frame of Rates Rate Jan. 1, Dec. 31,1991 Rate = to $ of benefits paid Jan. 1, Dec. 31, % Jan. 1, Dec. 31, % Jan. 1, Dec. 31, % Jan. 1, Dec. 31, % Jan. 1, Dec. 31, % Jan. 1, Dec. 31, % Jan. 1, May 31, % June 1, 2013-Dec. 31, % Jan. 1, Present 0.50% OP&F page 100

107 Annual Budget for Fiscal Year 2014 SUPPLEMENTAL AND GLOSSARY OF TERMS Demographics and Economic Impact Membership Residence Total Ohio Non- % of Type of Member Persons Residents Residents Non-Residents Active Members 23,456 23, % Retirees 20,399 17,117 3, % Survivors 6,704 5,448 1, % DROP Participants 3,747 3, % TOTAL 54,306 49,514 4, % Based on Dec. 31, 2013 data Economic Impact Early in 2006, OP&F commissioned an independent and comprehensive economic study to determine the impact of pension benefits, health care spending and other dollars spent effected Ohio s economy. While this study is now five years old, the results remain relevant and show the importance of OP&F s fiscal impact on the state. Two of the principle findings of the study show that in 2006: OP&F activity resulted in more than $1.1 billion in economic output across Ohio OP&F activity resulted in 11,059 jobs in Ohio When OP&F makes direct payments to retirees and survivors, this income is spent and re-spent on goods and services produced in the local and regional economy where the beneficiaries reside. This spending (often termed induced impact by economists) in turn creates additional jobs in the sectors where the beneficiaries spend their benefit payments. OP&F creates additional economic impact by providing health care and medical prescription insurance to retirees and survivors. Again, the consumption of health care by OP&F beneficiaries leads to ripple effects throughout the local and regional economy as a result of the increased demand for these services. Finally, OP&F contributes to Ohio s economy by paying salaries to OP&F employees and purchasing goods and services that are needed to carry out the day-to-day operations and management of the pension fund. These economic effects are often referred to as multiplier effects. In other words, any new dollar that is spent will have multiple economic effects throughout the local and regional economy as it leads to new jobs, which through typical economic inter-relationships then lead to other jobs. To provide a comprehensive estimate of the total economic impact of OP&F, both the direct and indirect effects of OP&F expenditures must be captured. Direct Impact on Ohio s Economy* Impact on Economic Output* Category Dollar Amount Category Dollar Amount Benefit Payments to Retirees and Survivors...$495,923,807 OP&F Health Insurance Expenditures ,162,338 DROP Withdrawals... 4,847,766 OP&F Administrative Expenditures...15,120,000 TOTAL DIRECT ECONOMIC IMPACT... $665,053,911 * Based on Dec. 31, 2006 data Benefit Payments to Retirees and Survivors...$738,628,918 OP&F Health Insurance Expenditures ,155,792 DROP Withdrawals... 7,220,263 OP&F Administrative Expenditures...32,343,192 TOTAL DIRECT ECONOMIC IMPACT... $1,108,348,165 * Based on Dec. 31, 2006 data OP&F page 101

108 SUPPLEMENTAL AND GLOSSARY OF TERMS Annual Budget for Fiscal Year 2014 Glossary of Terms Account A term used to identify an individual asset or record of the financial transactions relating to a specific asset, liability, income item, expense item, or net-worth item. Accrual Basis of Accounting A method of accounting that recognizes the financial effect of transactions and events when they occur, regardless of the timing of related cash flow. Accrue A process in which income and expenses are recorded on the financial statements without the actual exchange of money occurring. Actuarial Investment Rate of Return The rate of return used by the actuary to project future outcomes based on a longterm expectation. Actuarial Valuation An annual examination of a pension plan s financial solvency, including a determination of the actuarial liabilities, assets and employer contribution required to ensure sufficient assets will be available to pay benefits when due. Actuary A person whose work is to calculate statistical risks, premiums and life expectancies. Agency Fund Assets held in a fund under an agency relationship for another entity. Aggregate Considering the whole or sum of all referred activities. Amortization To account for expenses by prorating over a fixed period. Annual Membership Payroll The aggregate amount of payroll dollars earned by contributing members in one year used as a base for calculating member and employer contributions. This amount is also used for projecting future contribution levels for the membership body. Assets Refers to anything that has monetary value to a plan. Usually states the entire resources of an entity at any given pointin-time. Asset Allocation A process that determines the optimal distribution of funds among various types of assets that offer the highest probability of consistently achieving investment objectives within the confines of predetermined level of risk. The process often includes the use of a computer model program to assist in the process of a myriad of data. Benchmark A standard or point of reference in measuring or judging quality. Biennial An occurrence every two years. Board of Trustees A group of persons who manage or control a business. Budget A plan used to project or estimate the revenue and expense flows of an entity for any given period of time, normally one fiscal year. Primarily used as a management tool to forecast expectations and analyze actual results. Budget Message A general discussion of the proposed budget as presented in writing to budget making authorities. Budgetary Control The control or management of entity in accordance with an approved budget for the purpose of keeping expenditures within the limitations of available funds. Capital A term used to describe an asset purchased by an entity with a useful life of more than one year and cost above a predetermined dollar amount. These assets are then depreciated over that useful live and recorded as an expense to the entity. Category A classification of logical basic concepts or activities. Comprehensive Annual Financial Report (CAFR) A financial report that encompasses all funds of a governmental unit. Contingency A thing or event that depends on or is incidental to another event. Contribution A term used to describe the amount of money received by an entity for a specific purpose. Cost Effective Management Group (CEM) An entity providing cost effective comparison information to OP&F by measuring activities against other benchmark entities with similar interests. Deferred Retirement Option Plan (DROP) The Deferred Retirement Option Plan is a benefit option that allows eligible members to defer actual retirement for up to eight years, once they have achieved an eligible retirement status, and continue working. During this extended service their calculated pension is credited to a DROP accrual account, along with their current contributions and interest. These funds are then available to the member once a minimum of three years has passed or other criteria are met. OP&F page 102

109 Annual Budget for Fiscal Year 2014 SUPPLEMENTAL AND GLOSSARY OF TERMS Department A section of an entity housing specialized functions. Each section has budget allowances and specialized goals. Disability Evaluation Panel (DEP) This is a group of the Board of Trustees Disability Committee and four expert physicians and they meet once a month to review applications for disability benefits and to prepare written recommendations for action. From the date an application is filed with OP&F, it may take anywhere from three to five months before the application is heard by OP&F s Board of Trustees. Discretionary benefits Benefits offered at the discretion of the Board of Trustees. Authority is not fixed based on state statute. Encumbrances Obligations in the form of purchase orders, which are committed against a budget until they are received and paid in full. This may include products or services. Enterprise Risk Management A process designed to identify areas of organizational risk and how to approach those areas based on the level of risk. Environment All the conditions, circumstances and influences surrounding and affecting the development of an entity. Equity That portion of a company s net worth belonging to its owners and shareholders. Expenses Charges or costs for running a business or doing one s work. Usually results in a reduction of plan net assets, which may include cash, or non-cash reductions. Fiscal year A period of time including the beginning and ending of a business cycle and encompasses twelve-months of activities. Fixed Assets Assets of a long-term character in which the intent is to continue to be held or used, such as land, building, machinery, furniture and other equipment. Forecast An estimation and/or calculation in advance used to predict actual expense levels for the current year. Fund An independent fiscal and accounting entity with a self-balancing set of accounts, recording cash and/or other resources, together with all related liabilities, obligations, reserves and equities which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with any special regulations or restrictions. Fund Balance A sum of money set aside for a particular purpose as specified law. Goal A statement of broad direction, purpose or intent based on the needs of the stakeholders that are directly impacted. Governmental Accounting Standards Board (GASB) The ultimate authoritative accounting and financial reporting standard settings body for state and local governments. The GASB was established in June 1984 to replace the National Council on Governmental Accounting (NCGA). Governmental Accounting Standards Board - GASB Statement No. 14 The Financial Reporting Entity A statement issued by the Governmental Accounting Standards Board (GASB) that establishes standards for defining and reporting on the financial reporting entity. The concept underlying the definition of the financial reporting entity is that elected officials are accountable to their constituents for their actions. Fiscally independent governments have the ability to complete certain essential fiscal events without substantive approval by a primary government. This includes determining its annual budget without another government s having the authority to approve and modify that budget. Health Insurance Portability and Accountability Act (HIPAA) HIPAA is the Health Insurance Portability and Accountability Act of It may also be referred to as the Kennedy-Kassebaum Act. HIPAA was enacted by the federal government on August 21, 1996, with the intent to assure health insurance portability, reduce health care fraud and abuse, guarantee security and privacy of protected health information, and enforce standards for health information. Income The money or other gain received from an individual activity. These activities normally result in an increase of plan net assets, which may include cash, or noncash increases. Initiative The characteristic of originating new ideas or methods. Liability Debts or commitments of a person or business that are unpaid. Med B Abbreviation for the Social Security program, which requires recipients to make a monthly payment for Medicare coverage. OP&F then reimburses eligible members for this expense. A member with Medicare coverage reduces the overall OP&F medical costs. Net Plan Assets Assets remaining after a reduction for liabilities or outstanding obligations and accounts payable. Assets include cash, cash equivalents, receivables, investments at fair value and capital assets. Liabilities include payables, unpaid accured benefits and obligations to other entities. OP&F page 103

110 SUPPLEMENTAL AND GLOSSARY OF TERMS Annual Budget for Fiscal Year 2014 Ohio Retirement Study Council (O.R.S.C.) This council was created in 1968 to assist the state legislature, governor, and other public officials in the formation of sound public pension policy, and is one of the oldest public oversight councils in the country. The general purpose of the Council is to advise and inform the state legislature on all matters relating to the benefits, funding, investment, and administration of the five statewide retirement systems in Ohio. In addition, the council provides legislative oversight with respect to the Ohio Public Safety Officers Death Benefit Fund, a statefunded program providing death benefits to the survivors of law enforcement and public safety officers killed in the line of duty, and the Volunteer Fire Fighters Dependents Fund, a program providing benefits to disabled volunteer firefighters and their survivors. The Cincinnati Retirement System is the only municipal retirement system in Ohio, and falls outside the jurisdiction of the Council. Ohio Revised Code (O.R.C. or R.C.) Contains the laws of Ohio, which the legislature enacts. The Ohio Police & Fire Pension Fund can be found in Title [7] VII, Section 742 of the O.R.C. Operating budget The annual budget of an activity stated in terms of Budget Classification Code, functional/sub-functional categories and cost accounts. It contains estimates of the total value of resources required for the performance of the operation including reimbursable work or services for others. It also includes estimates of workload in terms of total work units identified by cost accounts. In the United States, businesses along with state and local governments divide their budgets into two types: the operating budget and capital budget. The operating budget is used to keep track of maintenance operations, salaries, and interest payments. OP&F page 104 Parameter A term used to identify a characteristic, a feature, a measurable factor that can help in defining a particular system. It is an important element to take into consideration for the evaluation or for the comprehension of an event, a project or any situation. Pension A non-wage payment made periodically to a person who has fulfilled certain conditions of service, reached a certain age or meets requirements set forth by other policy or law. Performance Measurements Measurements established to track the quality of business matters. Plan Refers to the entire structure of an entity encompassing all business activities into one body. Portable Alpha Portable alpha is an investment strategy that refers to separating the active manager s excess return from the base market return and transporting the alpha to some other market index for investment purposes. Portfolio All the securities held for investment as by an individual, bank, investment company, etc. Prudent To be capable of exercising sound judgment in practical matters as someone would for their own interest. Also, to be cautious and discreet in relation to business matters. Return on Investments (ROI) The ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage. Revenues The financial return from performing individual business activities. A source of income. Risk Parity An alternative approach to investment portfolio management which focuses on allocation of risk rather than allocation of capital. The risk parity approach asserts that when asset allocations are adjusted (leveraged or deleveraged) to the same risk level, the risk parity portfolio has the same expected rate of return as the portfolio with traditional asset allocations. Segregate To set aside from others or from the main mass or group. Statutory Benefits Benefits that are fixed, authorized or established by state statute. Trust Fund An arrangement to provide sustained benefits for a person or entity. Unfunded Liability When the actuarial determined financial liabilities of an entity exceed the amount of assets available. Unrealized Appreciation/Depreciation Overall gains or losses related to investment assets that remain held as assets in the investment portfolio. Gains and losses are not realized until they are sold or traded. Volatile Something that is likely to shift quickly and unpredictably. W-2 based formula A formula for determining pensionable earnings from member payroll that coincides closely with the Internal Revenue Code formula for determining taxation of wage/salary earnings. Member contributions toward pensions would be paid on the same figures as reported wage and tax statement in most circumstances.

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112 140 East Town Street Columbus, Ohio Customer Service: General Information: TTY: Facsimile: Prudence Integrity Empathy Securing the future for Ohio s police and fi refi ghters.