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HomeMy WebLinkAboutPackets - Council Packets (1121)Council Meeting Study Session May 22, 2019 1 PSPRS/Oro Valley May 2019 2 2 PSPRS manages three public pensions Public safety, elected officials, corrections officers 60,000 active members and retirees 250+ employers across all three plans $10.3 billion of assets under management Distributed $1 billion in benefits last year PSPRS: What we do 3 3 Currently, there are two vacant seats on the board; the governor is working to make those appointees. PSPRS Board of Trustees 4 4 Normal Cost: The annual cost assigned to the current plan year, also known as “current service cost.” It’s the cost of one additional year of service for a member. Unfunded Actuarial Accrued Liability (UAAL): The difference between the present value of pension liabilities and the assets on hand to cover those liabilities. Actuarial Value of Assets (AVA):The plan assets recognized for valuation purposes. Investment returns are “smoothed” over a 7-year period, so the AVA is often higher or lower than the market value of assets shown in financial statements. Amortization Period: The period of time over which the UAAL payment is allocated. Actuarial Concepts 5 5 C + I = B + E Where: C = Contribution Income I = Investment Income B = Benefits Paid E = Expenses 6 Basic Retirement Funding Equation 6 Employer Contributions as of 6/30/18 Normal Cost 21.80% for Oro Valley Police (variable rate depending on liabilities) 7.65% offset by Tier 1 employee contribution Amortization of Unfunded Liability 24.11% 18 years remaining Member Cost 7.65% Tier 1, 11.65% Tier 2 Tier 3 50/50 split 7 Contributions (C) 7 8 Contributions (C) 8 Contributions (C) 9 9 Assumed Earnings Rate (AER): The projected average annual investment return over long periods of time. Accounts for excessive and reduced annual investment returns. Set by trustees. Investment strategy: The plan for investing that takes into account acceptable risk, existing liabilities, time horizons and other factors. Different plans have different strategies! Risk tolerance: The degree of investment return variability that an investor is able and willing to withstand. Increased returns require taking on additional risk of investment losses. Risk-adjusted return: The investment return per unit of risk taken. The “bang for the buck” measurement that separates skill from luck. Investment Concepts 10 10 PSPRS goal: Maximize returns while taking as little risk as possible Only 30 percent of is invested publicly traded equities - HALF the standard 60-70 percent allocation Diversify investments across asset classes Avoid domino effect of losses throughout portfolio The objective (and skill) is to maximize returns with an acceptable risk level Protect at-risk employers from further contribution rate increases Minimizing risk means sacrificing very high investment returns 11 Investment Strategy (I) 11 12 Investment Income (I) 12 Assumed Earnings Rate 7.3% as of 6/30/19 Actual Returns (gross of fees) as of 1/31/19: 1-year: 1.29% 3-year: 8.31% 5-year: 6.7% 10-year: 9.15% Exceeding or near benchmarks 1-year: -0.37% 3-year: 8.47% 5-year: 6.04% 10-year: 9.06% 13 Investment Performance (I) 13 Benefit costs are based on: Plan provisions in state law Plan experience studies using several assumptions, including: Withdrawal and retirement rates Mortality – how long retirees live Employer payroll growth Disability retirement rates Demographics 14 Benefits (B) 14 UAAL at start of year + Normal cost + Interest on unfunded liability Actual contributions received +/- Changes from plan provisions, methods, assumptions +/- Experience Loss/Gain = UAAL at end of year 15 Unfunded Actuarial Accrued Liability (UAAL) 15 Experience gains & losses come from several sources: Investment returns Mortality Salary increases Hiring/Retirement/DROP rates Separation from active membership Disability rates COLAs 16 Experience Gain/Loss Factors 16 2014-15 Fields lawsuit, increased costs related to future benefit increases 2016 Decreased assumed earnings rate to 7.5% from 7.85% ($1.9 million) Prop 124 - Replaced PBI with COLA 2017 Decreased assumed earnings rate to 7.4% from 7.5% Updated mortality tables and other actuarial assumptions 2018 Hall-Parker refunds ($1.1 million) Reasons for Change 17 17 Reasons for Change Every time the assumed earnings rate is reduced 10 bp (for instance, from 7.4% to 7.3%), the total pension liability increases by $860,000. 18 18 Section A – Intro Summary of ER Pension Rates 19 19 Section A - Introduction 20 20 Section B – Funding Results 21 21 Section B – Funding Results 22 22 Funding 23 23 Section D – Census Data 2014 2018 24 24 Section D – Census Data 25 25 Section D – Census Data 26 26 Dispatchers/CORP 27 27 Dispatchers 28 28 Dispatchers 29 29 Contact Us 30 Dave DeJonge, Deputy Administrator DDejonge@psprs.com Phil Coleman, Employer Relationship Manager PColeman@psprs.com 30 Trustee Qualifications Highest standards for trustees Non-PSPRS members: “… independent, qualified professionals who are responsible for… fiduciary duties… preserve and protect the fund and shall have at least ten years' substantial experience as any one or a combination of the following: A portfolio manager acting in a fiduciary capacity A securities analyst senior executive/principal of a trust institution, investment organization or endowment fund acting either in a management or an investment-related capacity A chartered financial analyst in good standing as determined by the chartered financial analyst institute professor or instructor at the college or university level in the field of economics, finance, actuarial science, accounting or pension-related subjects Economist Senior executive engaged in the field of public or private finances or with experience with public pension systems senior executive in insurance, banking, underwriting, auditing, human resources or risk management 31 31 Trustee Qualifications Who manages PSPRS? 9-member Board of Trustees Split between 4 PSPRS “members,” 4 public agency reps, 1 appointee 5 appointed by governor, 2 by Senate President, 2 by House Speaker – all nominated by direct stakeholders 2 law enforcement, 2 firefighters (each having at least one elected local board member) 3 members representing cities and towns… “shall represent taxpayers or employers and may not be members…” 1 member representing counties… “shall represent taxpayers or employers and may not be members…” 1 member appointed by governor, nominated by trustees 32 32 Meet the Trustees Chairman Will Buividas – Phoenix Police officer, rep for the local PSPRS board, member of the city Deferred Compensation Board, chairman of the Phoenix Healthcare Benefits Trust Board, also chairman PSPRS Defined Contribution Committee. Masters degree in finance. Appointed by Sen. Biggs. Jim Ameduri – CEO and Managing Partner of Alize Ventures and a global investment expert with three decades of business and investing experience. Director of ESalt Media Technologies; Chairman of the Board for Capax World, Director of the Arizona State University Foundation Investment Committee; Director of the Arizona Community Foundation, where he serves on the Investment and Special Assets Committees. Appointed by House Speaker Rusty Bowers. Scott McCarty - City of Queen Creek finance director and League of Arizona Cities and Towns Pension Task Force chairman. More than 30 years of government budgeting and financial management. Appointed by Senate President Steve Yarbrough. Harry A. Papp – Managing partner of L. Roy Papp & Associates with almost 40 years experience as a portfolio manager and securities analyst. Chartered Financial Analyst and former acquisition manager of G.D. Searle & Co. Also board member for State Board of Investment. Appointed by Governor Doug Ducey. 33 33 Meet the Trustees Vice Chairman Mike Scheidt –Tempe firefighter who has served on the Tempe local board, the city’s Deferred Compensation Board and the Arizona Firefighters Health Care Trust board. Appointed by House Speaker David Gowan. Dean Scheinert – Thirty-plus years of experience with investment management and capital markets, including terms as senior vice president for J.P. Morgan Chase Private Bank and U.S. Bank. Chartered Financial Analyst and currently Chief Advancement & External Affairs Officer with Western Spirit: Scottsdale’s Museum of the West. Appointed by Gov. Ducey. Don Smith - Former (15 year tenure) chief executive officer of Copperpoint Insurance and former deputy secretary of Pennsylvania Department of Labor and Industry. Appointed by Gov. Ducey. 34 34 Section C – Fund Assets 35 35 Section D – Census Data 36 36 Section D – Census Data 37 37 Section D – Census Data 38 38 Section D – Census Data 39 39 Section C – Fund Assets 40 40 Pension fund “studies” The “studies,” alternative assets and the “fees” Common narratives and conclusion Plans with alt assets do not outperform traditional portfolios Plans with alt assets are wasting money on fees What the studies miss or neglect “Outperformance” is not necessarily the goal Avoiding risk of investment loss is the goal In most cases, “fees” are actually an investor fronting operating costs for a fund manager Returned to the investor – with interest! “Carried interest” – fund manager compensation rewards performance; usually 20 percent of return above 8 percent 41 41 About fees Why does PSPRS invest in asset classes that generate fees when there are cheaper options? Because it’s worth it – pay for performance Diversity reduces risk and protects employers Highest performing assets Ex. Private equity generated 16-plus% return over last 5 years More than double the Assumed Earnings Rate of 7.4% “Fees” paid by PSPRS are often reimbursed – with interest CAFR reports have no way to report future reimbursements We’re haggling over price Arizona Auditor General 2015: PSPRS saved $40 million in fees by negotiating with fund managers 42 42 Correcting the Record Separating fact from fiction FICTION: PSPRS Investment and administrative expenses are exorbitant FACT: Each year, PSPRS pays 0.5 – 0.6 percent in investment fees – and many “fees” are returned in later years with interest FACT: Performance “fees” or carried interest are fund managers’ share of created value – not investor capital FACT: Research of U.S. public pension plans reveals .09 percent administrative/staff expenses are average FACT: Research of U.S. public pension PSPRS staff to membership ratio is average 43 43 Correcting the Record PSPRS industry recognition November 2018: Portfolio managers Shan Chen and Bill Thatcher named among “Top 30 Public Pension Institutional Investors” by Trusted Insight magazine 2017 and 2016: CIO Ryan Parham among “Top 30 CIOs” by Trusted Insight magazine May 2017: PSPRS named “Allocator of the Year” by Institutional Investor magazine June 2016: Nominated “Small Pension Plan of the Year” by Institutional Investor magazine April 2016: CIO Ryan Parham nominated “CIO of the Year” by Institutional Investor magazine 2016: In-house investment attorney Jennifer Eichholz nominated for Arizona Corporate Counsel Award by Arizona Business Magazine 44 44