Moving into the Future

60

Years of Retirement Security

A New Course for 2008

TMRS Mission Statement “To deliver secure and competitive retirement plans through a professionally managed organization that anticipates diverse needs; provides quality services; and openly and effectively communicates with members, retirees, and cities.” 4/26/2020 2

TMRS

   Retirement program of choice for over 820 Texas cities Provides flexibility and portability Each city controls the level of benefits it offers 4/26/2020 3

What has Changed?

  TMRS is diversifying its investments TMRS has changed its Actuarial Cost Method and Amortization Period and adopted new actuarial assumptions More changes ahead – interest allocation 4/26/2020 4

Investments

   Historically: TMRS has invested primarily in bonds 2008: TMRS will begin to diversify into stocks 2009 and beyond: Diversification will continue if legislation passes 4/26/2020 5

Why Change Investment Policy?    Potential returns from bond-based, income return strategy don’t match current markets or outlook for future Without higher investment earnings, interest credits and annuity discount rate are likely to fall below 5% in a few years Annuities for future retirees will be reduced 4/26/2020 6

Plan for Change - Investments

New Resources

 Investment Consultant: R.V. Kuhns & Associates   Passive Equity Manager: Northern Trust Fixed Income Advisor: Hillswick Asset Management 4/26/2020 7

Target for 2008 - Investments

    12% in indexed equities by year-end 6% domestic – Russell 3000 index 6% foreign – MSCI-EAFE index Approximately 1% moved to equities per month 4/26/2020 8

Investment Strategy

  Gradual pace minimizes risk of short-term market downturns Indexed investment reduces equity investment risk and investment costs 4/26/2020 9

Immediate Gains from Diversification     Supports 7% investment return assumption Reduces risk of bond portfolio declining in value due to rising interest rates Higher funded ratios and lower employer contribution rates Lower overall portfolio risk Long-term, stocks historically out-perform bonds 4/26/2020 10

Return Projections Under New Investment Policy 4/26/2020

Source: R.V.Kuhns & Associates, Inc.

11

Next Critical Step - Investments

 2009 - Legislation to allow TMRS to credit unrealized gains to member and city accounts, help employers pay rising contribution rates, and prevent future benefit cuts.

4/26/2020 12

Questions about Investments?

4/26/2020 13

Actuarial Changes

 Actuarial Cost Method – A technique that assigns the present value of expected pension benefits and expenses to past and future time periods.

4/26/2020 14

Actuarial Cost Method

  Historically: Traditional Unit Credit Effective for 2009 contribution rates: Projected Unit Credit (PUC) 4/26/2020 15

Why Change?

  “Committed benefits” must be advance funded over the working life of each employee PUC advance-funds annually repeating benefits (Updated Service Credit and COLAs) Cities with repeating benefits will see significant increases in contributions 4/26/2020 16

Actuarial Changes

 Amortization Period – The time period for fully funding any unfunded actuarial accrued liabilities.

4/26/2020 17

Amortization Period

  Historically: 25-year open period Beginning in 2009: Most cities will have a 30-year closed period 4/26/2020 18

Why Change?

 Closed period provides level contributions over a fixed period of time and reduces unfunded actuarial liability on a set schedule Cities that see a contribution increase of 0.5% or less will use a 25-year closed period 4/26/2020 19

Implementation

   For cities with a contribution increase greater than 0.5% ― 8-year phase-in Approximately 12.5% of the increase required each year The longer a city defers payment of the full Actuarially Required Rate, the higher the rate will be 4/26/2020 20

Flexibility

  Cities can increase contributions within the 8-year time frame at their own pace Full Actuarially Required Rate must be paid in 2016 4/26/2020 21

City Options

   Phase-in contributions Adjust plan design Turn off repeating benefits and grant COLAs or USC as ad hoc benefits Higher investment returns will mitigate employer contribution rate increases.

4/26/2020 22

City Options, cont.

Cities can adjust benefits by ordinance:  Reduce city matching ratio  2 to 1, 1.5 to 1, 1 to 1  Change level of USC  100%, 75%, 50%  Change Annuity Increase %  30%, 50%, 70% CPI   Turn off annually repeating benefits Adopt USC / COLA as ad hoc benefit 4/26/2020 23

City Options, cont.

  USC may be adopted without COLA, BUT COLA may

not

be adopted without USC   4/26/2020 If city stops USC, members do not lose USC already credited If city changes city match, the change affects service after the date of the change but not before 24

City Options, cont.

Should Cities Turn off Annually Repeating Benefits?

    Not a TMRS decision – cities make the choice If repeating benefits are turned off, they can still be adopted ad hoc Ultimate cost is the same if ad hocs are granted each year, but payment schedule differs Ad hoc benefits will be funded one year at a time, but actuarial liability will rise and funding ratios will decline if ad hoc benefits are granted every year 4/26/2020 25

What’s Ahead?

 January Letter   Sent to all cities in late January 2008 For cities with repeating benefits: several scenarios  Important: estimated rates will be based on 12/31/06 valuation data 4/26/2020 26

Plan Change Timing

  Pre-April 2008 city plan changes will be reflected in the Rate Letter sent in May City plan changes made in April through December 2008 will be reflected in 2009 employer contribution rates 4/26/2020 27

Rate Letter - Late April 2008

 Rates  Based on 12/31/07 valuation data and revised actuarial assumptions  Will recognize plan changes through early April 2008  Will show Actuarially Required Rate (due in full in 2016) and 2009 phase-in rate  Letter will contain GASB disclosure information 4/26/2020 28

GASB Liability Figures

  All liability recognized as of 12/31/07 valuation  Lower funded ratios for cities with repeating benefits In January 2008, TMRS will provide suggested footnote   General statement of changes ahead Explanation of transition  Liability figure will be provided in May 4/26/2020 29

Voluntary Contributions

     New for 2008 Cities may choose to pay above the 2008 actuarially required rate Deposited in city’s account in Municipal Accumulation Fund Reduces actuarial liability and improves funded ratio in subsequent valuations Reflected in 12/31/08 valuation and 2010 contribution rate 4/26/2020 30

Regional Funding Workshops

    Beginning in February Approximately 12 around the state Opportunities to model what-if scenarios E-mail [email protected]

for information on Funding Workshops in your region 4/26/2020 31

Ongoing Communications

 E-Bulletins   Website

TMRS Facts for City Officials

  4/26/2020 Newsletters Annual Seminars   September 2008 Seminar in Corpus Christi ― focused on training Early 2009 ― funding seminar, location to be announced 32

Timeline

       December 31, 2007: Actuarial Valuation – results in April January: Letter with scenarios January: Model disclosure footnote February - December: Regional Funding Workshops Late April - early May: Rate Letters Voluntary contributions may be made any time Plan change elections may be made all year 4/26/2020 33

Questions on Actuarial Changes?

4/26/2020 34

Legislation

  TMRS Legislation (2009) Key issues: 1.

Credit unrealized gains to member accounts 2.

3.

Guarantee member interest rate and annuity purchase rate Employers bear the investment risk and realize variable interest credits, with the expectation of lower contribution rates 4/26/2020 35

Critical Issue

 Interest rates   Guaranteed rate for members Variable rate for cities 4/26/2020 36

Why?

  Preserves members’ benefits Allocates investment risk to cities, but also gives them advantage when investments gain 4/26/2020 37

Competing Views

  Members want more interest Cities want relief from rising rates Members Cities  TMRS working with all parties 4/26/2020 38

What if Legislation Doesn’t Pass?

    Cities will be more likely to cut benefits Interest credits and annuity discount rates will fall below 5% Investment diversification will stop Contribution rates will rise further 4/26/2020 39

If Investments are not Diversified…

4/26/2020 40

Other Legislation

   TMRS Bill will remain focused on critical issues Members and cities may seek other amendments TMRS will assist members, cities, and associations to provide information, resource testimony, and assistance 4/26/2020 41

Bottom Line

 TMRS is committed to working with cities and members to provide a soundly funded retirement program that provides competitive benefits to Texas municipal employees 4/26/2020 42

How to Contact TMRS

   Toll-free: 800-924-8677 Web: www.TMRS.com

E-mail: [email protected]

4/26/2020 43