OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377)

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1 OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377) MEMORANDUM DATE: April 6, 2006 TO: FROM: OPERS Retirement Board Members Karen Carraher, Director - Finance RE: V. Discussion Items: A. Public Safety Rate Purpose To provide the Board with background information regarding the public safety contribution rate and to provide the Board with alternatives for increasing the public safety member contribution rate. The Board is scheduled to approve local employer rates in May 2006 for the period January 1, 2007 through December 31, All employers of public safety members, except one, are in the local employer group, therefore decisions regarding public safety rate changes should occur at the May 2006 Board meeting. Background In September 2004, the Board approved the proposed schedule increasing the member and employer contribution rates for employers in the state, local and law enforcement divisions up to their respective statutory maximums as the respective certifications come due. These increases were scheduled to be phased in pro-rata over a three- or six-year period beginning January 1, 2006, depending on the magnitude of the increase. A brief summary of those approved increases is included in Table A below.

2 Table A Ohio Public Employees Retirement System Contribution Rate Phase-In Schedule 01/01/05 01/01/06 01/01/07 01/01/08 01/01/09 01/01/10 01/01/11 Rate Through Through Through Through Through Through Statutory (Pre-Increase) 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 Maximum Employer Rate Local 13.55% 13.70% 13.85% 14.00% 14.00% 14.00% 14.00% 14.00% State 13.31% 13.54% 13.77% 14.00% 14.00% 14.00% 14.00% 14.00% Public Safety 16.70% 16.93% 17.17% 17.40% 17.63% 17.87% 18.10% 18.10% Law Enforcement 16.70% 16.93% 17.17% 17.40% 17.63% 17.87% 18.10% 18.10% Employee Rate Local 8.50% 9.00% 9.50% 10.00% 10.00% 10.00% 10.00% 10.00% State 8.50% 9.00% 9.50% 10.00% 10.00% 10.00% 10.00% 10.00% Public Safety 9.00% 9.00% 9.50% 10.00% ** Law Enforcement 10.10% 10.10% * 10.10% Projected Health Care Funding 4.00% 4.50% 5.00% 5.50% 5.50% 5.50% 5.50% * Proposed legislation may modify these rates ** Board has authority to establish rates Prior to the January 1, 2006 implementation of the contribution rate increase, the member contribution rate for public safety was 0.5% higher than the member contribution rate for state and local and the law enforcement member contribution rate was 1.1% above the public safety member contribution rate. However, the contribution rate increases approved in conjunction with the HCPP did not separately specify an increase in member contribution rates for members with public safety service and thus, the public safety member contribution rate is now at the same level as state and local member contribution rates. The law enforcement division is comprised of two components law enforcement members and public safety members. A brief review of the background of these two components helps provide an understanding of the evolution of the issues. In 1975, legislation was passed that established the law enforcement division with retirement eligibility criteria of age 52 and 25 years of service (compared to age 60 with 5 years of service or any age with 30 years of service for non-law members). In 2000, legislation was passed that provided an improved benefit with retirement eligibility at age 48 with at least 25 years of service. At the time this new benefit was proposed, not all members of the original law enforcement group were eligible to participate in the new benefit. 2

3 As of today, members eligible to retire at age 48 with 25 years of service are referred to as law enforcement members. Law enforcement members are defined as members with primary duties of preserving the peace, protecting life and property and enforcing laws in a member s jurisdiction. Members eligible to retire at age 52 with 25 years of service are referred to as public safety members. Public safety members are defined as members with primary duties other than described above Members with public safety service are eligible to retire at age 52 with 25 years of service or at age 62 with 15 years of service, while members in the state and local division must be 60 years of age with 5 years of service or any age with 30 years of service. Members in the law enforcement division are eligible to retire with unreduced benefits at age 48 with 25 years of service or age 62 with 15 years of service. The retirement benefit for members with public safety or law enforcement service is based on 2.5% of the final average salary multiplied by the years of service (up to 25 years) as compared with 2.2% of final average salary for members of the state and local divisions. Members in the public safety and law enforcement divisions are receiving a better benefit than members in the state and local divisions with both the earlier retirement option and the increased formula multiplier. For this added benefit, public safety members were paying an additional 0.5% member contribution. Unless the Board acts to increase the member contribution rate, public safety members will pay the same member rate as state and local members. (Note that the employer contribution rate for public safety is higher than the employer rate for state and local.) Unlike the state and local member rates, which are capped at 10%, ORC authorizes the Board to calculate the member contribution rates separately for those employees contributing under the public safety division. Thus, these rates are not capped and can be increased beyond the 10% limit applicable to state and local members. However, the statute currently limits the member contribution rate for law enforcement to 10.1% of salary. However, H. B. 272 includes a proposed revision to the member law enforcement contribution rate to change the rate from a fixed percentage (currently 10.1%) to a formula equal to 1.1% over public safety, as was intended in the original legislation. If H.B. 272 is adopted, any increase in the public safety rate will automatically result in increases to the law enforcement member contribution rate. Issue 1 OPERS staff requested GRS complete a study identifying the cost associated with the enhanced benefit of the public safety benefit and recommend a member contribution rate differential between the public safety rate and the state and local rates. A complete copy of the study is included as Attachment 1. 3

4 Overall, GRS has indicated that they would prefer, at a minimum, to re-establish the 0.5% differential that previously existed, however they also recognized the cost of the enhanced benefit supported an increase in the differential above the previous 0.5% level. GRS has proposed four alternatives for the Board s consideration. These alternatives are summarized below. Alternative 1 Re-establish the 0.5% differential between public safety and state and local rates. After the contribution rate phase-in, the public safety member contribution rate would be 10.5%. Alternative 2 Increase the differential to 1.5%. After the contribution rate phase-in, the public safety member contribution rate would be 11.5%. Alternative 3 Increase the differential to 1.0%. After the contribution rate phase-in, the public safety member contribution rate would be 11.0%. Alternative 4 Increase the differential to 2.9%. After the contribution rate phase-in, the public safety member contribution rate would be 12.9%. All of the above alternatives share the disadvantage that the member contribution rates for OPERS public safety members would be higher than the member rates in the Ohio Police and Fire Pension Fund and the Ohio Highway Patrol Retirement System. However, a comparison of total contribution rates (both member and employer) for each of these same retirement systems shows the total contribution rate for the other two systems is substantially higher than OPERS for a comparable benefit. Table B below summarizes the member and employer contribution rates for each of the three systems. Table B Rate Comparison with Ohio Retirement Systems Rates as of 1/1/06 and Based on 12/31/04 CAFR 12/31/04 valuation OPERS Ohio Police & Fire Public Law Safety Enforcement Police Fire Based on 12/31/04 CAFR Highway Patrol HPRS Member Contribution Rate 9.00% 10.10% 10.00% 10.00% 10.00% Employer Contribution Rate 16.93% 16.93% 19.50% 24.00% 25.50% (effective 7/1/05) Total Contribution Rate 25.93% 27.03% 29.50% 34.00% 35.50% Health Care Funding 4.50% 4.50% 7.75% 7.75% 3.50% Pension Funding (includes UAAL) 21.43% 22.53% 21.75% 26.25% 32.00% (21% Pension) UAAL (blended law and public safety) Amortization Period (blended law and public safety) Division specific amortization period (blended law and public safety) $7,152,000 $1,461,275,000 $156,817, Infinite (Based on 12/31/03 valuation. Expect less than 30 with 12/31/04 valuation.) 4

5 Table C below summarizes the key aspects of retirement benefit with respect to normal retirement eligibility and normal retirement benefit formula. Table C Benefit Comparison with Ohio Retirement Systems OPERS Ohio Police & Fire Highway Patrol Public Law Safety Enforcement Police Fire HPRS Benefits: Normal Retirement Age Years of Service Benefit Formula 2.5% * yos * FAS (1-25) 2.5% * years 1-20 *FAS 2.5% * yrs 20+ and 2.25% for next 5 years 2.1% * yos * FAS (over 25) 2.0% * years % * years % * yrs (if at least 15 but less than 20 years) As noted in Table B above, both the Ohio Police and Fire Pension Fund (OP&F) and the Ohio Highway Patrol Retirement System s (HPRS) amortization periods exceed 30 years. OP&F is scheduled to present a plan to the Ohio Retirement Study Council in April that outlines their approach to reduce the amortization period to 30 years. It is expected that the proposed plan is likely to include increases in contribution rates and/or reductions in benefits (likely by increasing the retirement age). Both GRS and staff recommend Alternative 3 from the GRS proposals. This rate reflects a more reasonable relationship between the cost of the enhanced benefit and the amount charged to the member and employer. This rate would compare favorably to both OP&F and HPRS after full phase in by establishing a combined member/employee contribution rate of 29.1% for OPERS compared to 29.5% for police in OP&F and 35.5% for HPRS. Issue 2 Once the Board determines a rate differential for the public safety rate, the Board will need to consider an implementation or phase-in schedule. GRS has proposed four alternatives for consideration, although other options are available. Staff can present other options should the Board desire. It is important to remember that in May 2006, the Board will need to approve the one-year contribution rates for local employers (including public safety and law enforcement members employed in the local division) for the period January 1, 2007 through December 31, In September 2006, the Board will need to approve the two-year contribution rates for state employers (including public safety and law enforcement members employed in the state division) for the period July 1, 2007 through June 30, The rates recommended to the Board for approval in September will be in accordance with the Board preferred implementation schedule with the one possible exception relative to the status of H.B. 272 discussed later in this memo. 5

6 Phase-in Option A simply adds any proposed increase in public safety member contribution rates to the end of the existing phase-in schedule, thereby extending the member contribution rate phase-in from the current estimated completion of In Option A, the phase-in is continued at the current rate of 0.5% increase per year. As an example, if the Board selects Alternative 3, the full member rate increase up to 11% would be phased in by It is important to note that in all phase-in alternatives, members of the public safety division did not experience an increase in 2006 as did members in the state and local divisions. Phase in Option B attempts to implement the contribution rate increase at a slightly faster pace than in Option A, by increasing the maximum yearly increase in public safety members to 0.75% as compared to 0.5% for state and local. This alternative recognizes the public safety members did not experience an increase in 2006 and thus applies a higher rate in the subsequent years. In this option, the Alternative 3 rate increase is completely phased in by 2009 which is only one year later than the state and local rate phase-in is completed. Phase-in Option C phases in the increase differential at a much quicker rate by increasing the yearly public safety member rate increase to 1% or the fraction thereof until the entire rate increase is phased in. In this example, Alternative 3 is completely phased in by 2008, which coincides with the completion of the state and local rate phase-in. Option D presented in the GRS study is the same as Option C, however differs for law enforcement. Since the phase-in of any impact on law enforcement is dependent on the passage of H.B. 272, staff is not asking the Board to address this at this time. Tables D-F below reflect phase-in Options A-C. Alternative 3 is highlighted in each option, since this is the recommended alternative. Table D Option A - Member Rates 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 Alternative % 9.00% 9.50% 10.00% 10.50% Re-establish 0.5% differential Top PS rate 10.5% Alternative % 9.00% 9.50% 10.00% 10.50% 11.00% 11.50% Increase rate differential to 1.5% Top PS rate 11.5% Alternative % 9.00% 9.50% 10.00% 10.50% 11.00% Increase rate differential to 1.0% Top PS rate 11.0% Alternative % 9.00% 9.78% 10.56% 11.34% 12.12% 12.90% Increase rate differential to 2.9% Top PS rate 12.9% State Rate 8.50% 9.00% 9.50% 10.00% Local Rate 8.50% 9.00% 9.50% 10.00% Law Enforcement 10.10% 6

7 Table E Option B - Member Rates 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 Alternative % 9.00% 9.75% 10.50% Re-establish 0.5% differential Top PS rate 10.5% Alternative % 9.00% 9.75% 10.50% 11.25% 11.50% Increase rate differential to 1.5% Top PS rate 11.5% Alternative % 9.00% 9.75% 10.50% 11.00% Increase rate differential to 1.0% Top PS rate 11.0% Alternative % 9.00% 9.75% 10.75% 11.75% 12.90% Increase rate differential to 2.9% Top PS rate 12.9% State Rate 8.50% 9.00% 9.50% 10.00% Local Rate 8.50% 9.00% 9.50% 10.00% Law Enforcement 10.10% Table F Option C - Member Rates 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 Alternative % 9.00% 10.00% 10.50% Re-establish 0.5% differential Top PS rate 10.5% Alternative % 9.00% 10.00% 11.00% 11.50% Increase rate differential to 1.5% Top PS rate 11.5% Alternative % 9.00% 10.00% 11.00% Increase rate differential to 1.0% Top PS rate 11.0% Alternative % 9.00% 10.00% 11.00% 12.00% 12.90% Increase rate differential to 2.9% Top PS rate 12.9% State Rate 8.50% 9.00% 9.50% 10.00% Local Rate 8.50% 9.00% 9.50% 10.00% Law Enforcement 10.10% 7

8 Staff recommends either phase-in Option A or B. Both of these options delay the ultimate phase-in until such time as the impact of H.B. 272 is known. Both of these options also minimize the yearly impact of a rate increase to members. Regardless of which phase-in option is approved, the May 2006 Board certification of local rates still retains an appropriate relationship between local, law and public safety rates. However, with respect to the September 2006 certification of state rates, staff is exploring options in the event the outcome of H.B. 272 is unknown. If H.B. 272 were not adopted, OPERS staff would bring the issue back to the Board for consideration of future rate certifications in order to ensure the public safety/law contribution rate relationship is appropriate. If H.B. 272 is adopted, OPERS will need to address the law enforcement member contribution rate phase-in at the September 2006 rate certification. Next Steps -- This information is presented to the Board in preparation for next month s action on the certification of the rates for the local division. Staff would like Board feedback on the preference of a public safety rate differential as identified in Issue 1 above. GRS has provided four alternatives for the Board, and both GRS and staff is recommending alternative 3. Staff would also like feedback on the Board s preference as to a phase-in methodology as identified in Issue 2 above. Staff is recommending phase-in Option A or B. Based on the Board feedback, staff will present local rates for certification next month. Staff will update the Board as to new developments prior to the Board s September 2006 certification of state rates. 8

9 Date: April 10, 2006 To: From: cc: Subject: OPERS Actuarial Steering Committee Brian Murphy, F.S.A. and Norm Jones, F.S.A. Mita Drazilov, A.S.A. and Randall Dziubek, A.S.A. Member Contribution Rate Differentials Background: In connection with the HCPP, State and Local Government member contribution rates are being raised in equal steps from the 8.5% level to 10% over a period of three years beginning in 2006 and ending in Employer rates are being raised to 14% in State and Local and to 18.1% in Public Safety/Law Enforcement. These changes caused a need for a reexamination of the rate differentials that currently exist among OPERS participants. This memorandum is an update of our April 1, 2005 draft memorandum on the same subject. It discusses the differences in member contribution rates that exist among State, Local, Public Safety, and Law Enforcement Groups and presents alternatives for consideration going forward. The basic data on OPERS participant groups is shown below. Traditional and Combined Plans 12/31/2004 Data Public Law State Local Safety Enforcement Total Number 110, , , ,287 Average Age Service Pay $37,794 $29,110 $42,185 $48,127 $32,239 Member Rate % 8.50% 9.00% 10.10% Member Rate-Present 9.00% 9.00% 9.00% 10.10% Member Rate-Post Increase Phase-In 10.00% 10.00% 9.00% 10.10% Unreduced Retirement Eligibility Age 65 Same 52&25 48&25 or 30 years Same 62&15 62&15 Benefit Formula - Traditional Plan First Tier 2.20% Same 2.50% Same Second Tier 2.50% Same 2.10% Same Tier Level 30 years Same 25 years Same

10 Actuarial Steering Committee Member Contribution Rate Differentials April 10, 2006 Page 2 The statutory member contribution rate is 8%. ORC Section permits the board to raise the State and Local Government member rates to 10%. A brief history of those rates is shown below. Member Contribution Rate Changes by Year State Local Pub Safety/Law Law(48/25) % 8.5% 8.5% % 8.5% 9.5% % 8.5% 9.0% % 8.5% 9.0% 10.1% % 9.0% 9.0% 10.1% The chart above shows that, in conjunction with HCPP changes in member contribution rates, the gap between State and Local contribution rates on the one hand, Public Safety rates on the other hand has disappeared, while the gap between State/Local rates and Law Enforcement rates has narrowed. This memorandum reviews that issue and presents alternatives for Public Safety and Law Enforcement member rates going forward. In 1975, legislation was passed that established the Law Enforcement division with retirement eligibility criteria of age 52 and 25 years of service (compared to age 60 with 5 years of service or any age with 30 years of service for non-law members). In 2000, legislation was passed that provided an improved benefit with retirement eligibility at age 48 with at least 25 years of service. At the time this new benefit was proposed, not all members of the original Law Enforcement group were eligible to participate in the new benefit. While the initial group that moved into the 48/25 benefit was small, eventually others were added to this group and defined criteria was established. As of today, members eligible to retire at age 48 with 25 years of service are referred to as Law Enforcement members. Law Enforcement members are defined as members with primary duties of preserving the peace, protecting life and property and enforcing laws in a member s jurisdiction. Members eligible to retire at age 52 with 25 years of service are referred to as Public Safety members. Public Safety members are defined as members with primary duties other than described above. Our report dated 10/15/1999 on the legislation indicated that the stand alone cost of the 48&25 benefit was 2.18% of payroll. On the surface, it appears that the 1.1% Public Safety/Law Enforcement differential (10.1%-9.0%=1.1%) was designed to be half of the stand alone cost of the 48&25 benefit. In fact, that seems to be at least partly a coincidence. Based on a letter from Katherine Dill of Milliman, it appears that the 1.1% member rate increase was selected in order to achieve a 30 year amortization period at that time.

11 Actuarial Steering Committee Member Contribution Rate Differentials April 10, 2006 Page 3 The chart below shows the entry age normal cost of pension and health benefits by group. Entry Age Normal Costs as of 12/31/2004 for 2006 Fiscal Year Public Law State Local Safety Enf. Pension 14.67% 14.57% 18.04% 18.73% Health 7.60% 9.41% 10.60% 10.45% Total 22.27% 23.98% 28.64% 29.18% Member Rates 9.00% 9.00% 9.00% 10.10% Net Employer 13.27% 14.98% 19.64% 19.08% The pension figures indicate that, in round terms, Public Safety members receive a benefit that is 3.4% (18.04%-14.6%=3.44%) of pay more valuable that State and Local members receive. Since they contribute the same 9% of pay, they are paying for none of the extra value. Law Enforcement receives a benefit that is 4.1% (18.7%-14.6%=4.1%) more valuable than State and Local, and they pay an additional 1.1% of pay to receive it or 27% of the value (1.1%/4.1%=0.2683). This data supports the general reasonability of a gap in member contribution rates between Public Safety and Law Enforcement. However, the present Public Safety and Law Enforcement member rates, compared with the State and Local Member rates cannot be justified on the basis of the benefit differential alone. The figures shown for the health plan are based on the intermediate health inflation assumptions. Differences in the health costs between State and Local relate largely to the fact that the average pay in Local is 25% lower than in State. Differences between State and Local on the one hand, and Law Enforcement and Public Safety on the other, relate largely to the fact that individuals in the latter category retire at younger ages with service credit usually sufficient to produce a 100% allocation. Differences are also affected, because the Public Safety and Law Enforcement average pays are higher than the average pays in State and Local Government. If, for example, the average pay in Local Government were the same as in Law Enforcement, the Health normal cost in Local Government would be in the 5%-6% of payroll area, and the difference in Health normal cost would be close to 5% of payroll. Some considerations involved in setting a member contribution rate differential going forward are described below. 1. A policy decision has been made that State, Local, Public Safety, and Law Enforcement employers would all contribute at the same rate to the Retiree Health Plan. 2. State and Local Government members are eligible for all of the same benefits under all of the same conditions. The pension normal cost is virtually identical between the two groups. Pension benefits are greater for people in the Law Enforcement and Public Safety classification, which results in higher pension normal costs for these groups.

12 Actuarial Steering Committee Member Contribution Rate Differentials April 10, 2006 Page 4 3. Most, if not all of the difference in the health normal cost between the State and Local Government groups can be explained by differences in pay levels. Health benefits for Public Safety and Law Enforcement are identical, but health benefits for these groups will tend to commence at younger ages with higher allocations. This results in higher health normal costs. 4. There has been a series of reclassifications over the years of people into the Law Enforcement group from other groups. The number of people in Law Enforcement/Public Safety has gone up by 400% since 1975, while the number of people in the State and Local Government Divisions has only gone up by 50%. There is a natural tendency to seek higher benefits. The tendency to do so may be increased if the higher benefits do not result in noticeably higher costs for the individual. 5. In connection with the HCPP, the employer contributions to the Retiree Health Plan are scheduled to rise from the current level of 4.0% of pay to 5.5% of pay in This requires either an increase in the member rate or in the employer rate (or both) for the Public Safety/Law Enforcement groups. Since the employer rate for these groups is already scheduled to increase to the statutory maximum, further employer rate increases may not be possible. Alternatives: We would prefer a policy that at least restores the gap between State and Local member rates on the one hand and Public Safety/Law Enforcement member rates on the other hand to the 0.5%/1.6% level that existed in Based on the data we have observed, we think it is reasonable to preserve the 1.1% spread between Public Safety and Law Enforcement, but we think the spread between those two rates, and those applicable to State and Local could reasonably be increased over the 2005 level. (We recognize that doing so may be difficult.) Indeed, a very simple analysis based on the multiplier differential suggests that Public Safety member contribution rates should be 1% to 1.5% higher than those of Local Government, compared with the 0.5% difference (9.0%-8.5%=0.5%) that existed in The Public Safety multiplier is 14% higher than the Local Government multiplier. (2.5% divided by 2.2% = 1.14). Therefore it could be argued that when the Local Government contribution rate is 10%, the Public Safety rate should be 11.5% (10% times 1.14=11.4% or 11.5% rounded up because the early retirement available to Public Safety is more valuable than the retirement eligibility provided to State and Local members), and then the Law Enforcement rate should be yet another 1.1% higher because of the additional 48&25 eligibility provided to that group. The results of this analysis are presented as Alternative 2 in the table shown on the next page. In viewing all of the alternatives, it is important to keep in mind that the Public Safety/Law Enforcement employer rate is scheduled to rise from the present 16.93% to 18.10% in However the standalone amortization period for that group is currently 41 years (consisting of a mix of infinite for Public Safety and 30 years for Law Enforcement) and an increase of 0.7% in the employer rate would be needed to bring the standalone amortization period to 30 years. Thus at least some increase in member rate may be needed in order for the retiree health contribution rate on behalf of Public Safety/Law Enforcement members to be increased to 5.50% from the current 4% level, while maintaining pension amortization within 30 years. For purposes of the discussion below, we have assumed that an additional 0.8% contribution is needed in order to meet the 5.5% HCPP contribution, and to provide 30 year funding for Law Enforcement. The chart below summarizes alternatives for the ultimate Public Safety and Law Enforcement rates. It compares each alternative with the present rate and shows the gap between the ultimate Public Safety/Law Enforcement rates and then ultimate State/Local rate.

13 Actuarial Steering Committee Member Contribution Rate Differentials April 10, 2006 Page 5 Member Rate Alternatives Extra Benefit Gap as % of Amort Rate Increase Gap as % of Pay Extra Benefit Years Present Public Safety 9.00% -1.00% 3.44% -29.1% Infinite Law Enforcement 10.10% 0.10% 4.10% 2.4% 30 Total Law Division 41 Alt. 1 Public Safety 10.50% 1.50% 0.50% 3.44% 14.5% Infinite Law Enforcement 11.60% 1.50% 1.60% 4.10% 39.0% 20 Total Law Division 25 Alt. 2 Public Safety 11.50% 2.50% 1.50% 3.44% 43.6% Infinite Law Enforcement 12.60% 2.50% 2.60% 4.10% 63.4% 17 Total Law Division 21 Alt. 3 * Public Safety 11.00% 2.00% 1.00% 3.44% 29.1% Infinite Law Enforcement 12.10% 2.00% 2.10% 4.10% 51.2% 18 Total Law Division 22 Alt. 4 Public Safety 12.90% 3.90% 2.90% 3.44% 84.3% Infinite Law Enforcement 14.00% 3.90% 4.00% 4.10% 97.6% 14 Total Law Division 17 * Based upon phase-in approach B on page 7. Alternative 1 is the simplest alternative. It merely increases the Public Safety and Law Enforcement rates by the same amounts that the State and Local Government rates increase. It is somewhat likely that a number of people already expect such a change to occur, and it would probably eventually find acceptability among the membership. Since the ultimate member rate increase is exactly the same as it is in State and Local Government, it is compatible with the HCPP. Since the total rate increase is 1.5% and only 0.8% is needed for 30 year funding, approximately a 0.7% contribution is available to apply to the health plan or to further improve pension funding. It has the disadvantage that the ultimate rate is higher than the rate currently being charged to members of Ohio HPRS and Ohio Police & Fire. It provides the least amount of extra funding to OPERS among all the alternatives being considered. Alternative 2 follows the line of reasoning described in the introductory paragraph under Alternatives that bases the relationship among the various member rates mostly on the pension multiplier. Alternative 2 shares with Alternative 1 the advantage of being easily explainable, as well as equitable, at least in some sense. Since the total rate increase is 2.5% and only 0.8% is needed for 30 year funding, approximately a 1.7% contribution is available to apply to the health plan or to further improve pension funding.

14 Actuarial Steering Committee Member Contribution Rate Differentials April 10, 2006 Page 6 Alternative 3 is essentially a compromise between Alternatives 1 and 2. It returns to the member rate gap that existed prior to Immediately prior to 1991, the State/Local member rate was 8.5% and the Public Safety/Law Enforcement rate was 9.5%, producing a rate gap of 1%. The rate gap under Alternative 3 is 1% for Public Safety and 2.1% for Law Enforcement (11%-10%=1% and 12.1%- 10%=2.1%). The higher rate gap for Law Enforcement is justified by the 48 & 25 retirement eligibility condition. This Alternative provides a more reasonable relationship between member contribution rates and benefits among the groups than does Alternative 1, and is less drastic than Alternative 2. It shares with Alternative 1 the disadvantage that the rates are higher than plans for similar groups in Ohio. Since the total rate increase is 2.0% and only 0.8% is needed for 30 year funding, approximately a 1.2% contribution is available to apply to the health plan or to further improve pension funding. Alternative 4 increases the ultimate gap between State/Local rates and Public Safety/Law Enforcement rates to 2.9% for Public Safety and 4.0% for Law Enforcement (12.9%-10%=2.9% and 14%-10%=4%). These differences, while greater than the differences in the other alternatives, are less than the total difference in the combined health and pension normal cost. (29.18% minus either 22.27% or 22.98% is about 5-7%, not accounting for differences in pay levels, which would widen the difference.) The ultimate member rate would be 14% for Law Enforcement members with Alternative 4. For Public Safety, the ultimate rate would be 1.1% lower at 12.9%. Alternative 4 provides an equitable sharing of the proportionate costs. Since the total rate increase is 3.9% and only 0.8% is needed for 30 year funding, approximately a 3.1% additional contribution is available to apply to the health plan or to further improve pension funding. Its principle disadvantage is that the ultimate rate is very high, to a point that the member contribution rate itself might be a driving factor in retirement decisions, and actually lead to a cost spiral. (Members retire sooner because of the high member contributions, producing a need for yet higher contributions.) A secondary disadvantage is that the derivation of the 5-7% cost differential is not very scientific; it is based upon actuarial assumptions, and, therefore, subject to challenge. Recommendations: GRS believes that an increase in member rates for individuals in the Public Safety/Law Enforcement classification is appropriate. Alternative 4 seems too extreme. Alternative 1, when combined with the scheduled increase in employer rates permits the HCPP increases to work well. We see Alternatives 2 and 3 both as being very reasonable, however, when combined with the increase in employer rates, either one might produce the impression, at least in the short term, of generating too much in additional contributions. We are somewhat concerned about increased member rates producing a tendency toward earlier retirement, and consequently, we prefer Alternative 3 over Alternative 2, because Alternative 3 has slightly lower member rates. We like Alternative 1 because of its simplicity and because of its likely ease of acceptance. However we believe Alternatives 3 and 2 accomplish actuarial objectives better (more funding, better relationship between extra benefits and amount paid). Our preferences from an actuarial perspective would be Alternative 3, followed by Alternative 2. We see Alternate 1 as a viable alternative (but less desirable actuarially than Alternates 3 and 2) depending upon the weight the Board gives to simplicity and acceptability. We think Alternate 4 is too extreme.

15 Actuarial Steering Committee Member Contribution Rate Differentials April 10, 2006 Page 7 Phase-In of Rate Changes: Several alternate phase-in schedules are possible depending upon the contribution rate alternative selected by the Board. The table below shows three possibilities, assuming that Alternate 3 is selected. Phase-in Alternatives Based on Member Rate Alternative 3 Amort. Years Public Safety A 9.00% 9.50% 10.00% 10.50% 11.00% Infinite B 9.00% 9.75% 10.50% 11.00% 11.00% Infinite C 9.00% 10.00% 11.00% 11.00% 11.00% Infinite D 9.00% 11.00% 11.00% 11.00% 11.00% Infinite Law Enf. A 10.10% 10.60% 11.10% 11.60% 12.10% 18.4 B 10.10% 10.85% 11.60% 12.10% 12.10% 18.1 C 10.10% 11.10% 12.10% 12.10% 12.10% 17.8 D 10.10% 12.10% 12.10% 12.10% 12.10% 17.5 Phase-in Alternative C reaches the ultimate level 2008, in the same year that State and Local rates reach the ultimate level.