Memorandum CITY OF DALLAS °"re November 25, 2015 ro The Honorable Mayor and Members of the City Council suS.Jecr Dallas Police and Fire Pension System Overview On Wednesday, December 2, 2015, the City Council will be briefed on the Dallas Police and Fire Pension System Overview. The briefing will be presented by Kelly Gottschalk, Executive Director of the Dallas Police and Fire Pension System. The briefing is attached for your review. Please let me know if you need additional information. ~~~ Chief Financial Officer Attachment c: A.C. Gonzalez, City Manager Warren M.S. Ernst, City Attorney Craig D. Kinton, City Auditor Rosa A. Rios, City Secretary Daniel F. Solis, Administrative Judge Ryan S. Evans, First Assistant City Manager Jill A. Jordan, P.E., Assistant City Manager Joey Zapata, Assistant City Manager Mark McDaniel, Assistant City Manager Eric D. Campbell, Assistant City Manager Sana Syed, Public Information Officer Elsa Cantu, Assistant to the City Manager ·o anas-Together, we do It better!" Dallas City Council Briefing December 2, 2015 Dallas Police and Fire Pension System Kelly Gottschalk, Executive Director Agenda • Dallas Police and Fire Pension Overview • Key Financial Data • Funding Levels • Actions to Address 2 Dallas Police & Fire Pension Overview Dallas Police and Fire Pension System Type Single employer defined benefit plan provides retirement, disability and death benefits to police officers and firefighters who are employed by the City of Dallas. Governance 12-member board. Four City Council Members. Six members elected by active members, three each from the Police Department and the Fire Department. Two members elected by the retirees, one each retired from the Police Department, the other retired from the Fire Department. Plan Combined Plan Supplemental Plan Membership Police and Firefighters above the civil service ranks All Police officers and firefighters (benefit is up to highest (benefit is supplemented to reflect additional civil service rank) compensation above civil service rank) History First Established by Ordinance 1916, Texas Statutes 1933 Established 1973 Amendments Plan can be amended by a 65% vote of the members (active & active DROP vote) or the legislature Plan can be amended by City Council City Contributions Set by Statute Set by Actuarial Valuation Social Security No No DROP Program Yes Yes The Supplemental Plan is .06% of the total. 161 total members 3 Combined Plan Membership • Total Membership is nearly 10,000. • In the past decade total membership has increased 23%. Active membership has increased 14%. 10,000 9,000 8,000 7,000 6,000 141 741 158 818 182 836 2,508 144 885 128 902 96 929 122 934 2,565 2,644 2,767 2,854 2,956 3,033 1,306 1,397 1,381 1,426 1,414 1,380 2,380 2,458 1,056 1,081 1,184 3,592 3,658 3,725 3,983 4,170 4,085 3,995 3,974 3,983 4,107 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2,380 5,000 4,000 151 867 157 1,036 135 891 1,252 3,000 2,000 1,000 0 Active (Excluding DROP) Active DROP Beneficiaries Terminated Vested Retirees 4 Average Salary & Pension Benefit: Combined Plan Only $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $- 2005 2006 2007 2008 2009 Average Salary Combined Plan 2010 2011 2012 2013 2014 Average Retirement Benefit 5 Monthly Pension Benefits Monthly Benefit Range 500 Number of Recipients 450 400 350 300 250 200 150 100 50 0 Payment Amount Service Retirements Active DROP Beneficiaries 6 Key Financial Data Growth of Contributions (in Millions) $160 $141 $140 $120 • Over the last 10-years Contributions have increased by 33% or $34.6 million. • City contributions increased $23 million or 26% • Member contributions increased $11.6 million or 65% $106 $100 $80 $60 $40 $20 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 City Members 8 Growth of Distributions (In Millions) $246 Distribution have increased by 119% over the last 10 years: • Retirements: $112 88% • Beneficiaries: 86% • Disabilities: • DROP: -5% 679% 9 Distributions vs. Contributions (In Millions) Distributions vs. Contributions $300 $250 $200 $150 $100 $50 $- Distributions 2005 2006 Distributions Excluding DROP 2007 2008 2009 2010 2011 Contributions 2012 2013 2014 10 Rate of Return Compared to Actuarial Assumed Rate of Return Assumed Rate of Return was 8.5% until 2014 when it was lowered to 7.25% 11 Value of Assets (In Millions) $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 12 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Actuarial Value of Assets $2,700 2,962 3,259 3,040 3,383 3,431 3,378 3,795 3,877 3,695 Market Value of Assets $2,736 3,131 3,353 2,529 2,873 3,113 3,015 3,265 3,335 3,074 12 DROP: Deferred Retirement Option Plan • DROP was added to the Plan in 1992 • The DROP plan has been amended many times • The is no limit on the amount of time a member can be in DROP prior to retirement • The DROP account balance can remain after a member retires • Retired members can continue to defer payments into DROP until the age 70.5 (IRS doesn’t allow deferral after 70.5) • Interest – changed over time, 2014 Plan amendment • Active DROP contributions – changed over time • Retired members can make unlimited weekly withdrawals from their accounts • DROP was intended to be actuarial neutral • The current loss related to DROP is $486 million • Loss primarily results from guaranteed interest rates being paid on the fund that have exceed the interest earned on the fund. 13 DROP Balance as a % of Total Assets (In Millions) $3,441 $3,350 $3,133 $3,190 $2,995 $2,992 14 Funding Levels Funding Ratio: Actuarial & Market 100% 90% 80% 93% 86% 84% 79% 88% 70% 73% 81% 81% 82% 84% 88% 93% 89% 78% 82% 74% 76% 74% 79% 60% 65% 69% 78% 76% 64% 72% 65% 66% 66% 61% 58% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 % Funded - Actuarial Value 2007 2008 2009 2010 2011 2012 2013 2014 % Funded - Market Value Note: Smoothing period changed from five to ten years in 2012 16 Billions DPFP: Assets, Liabilities & Funding Level $9 64% 70% $8 $8 53% 60% $6 50% $7 $6 $6 38% $5 $4 $3 $5 $4 $3 $3 40% 30% $3 20% $2 $2 10% $1 $- 0% Actuarial Value Market Value Difference due to smoothing Current Assets Liabilities GASB 67/68 Difference due to GASB required discount rate after the cross-over point Unfunded AAL (c-b) Funding Ratio 17 Actuarial Information (JulyZOlS) Impact of Revised Asset Assumption Current Plan Provisions 80.0% 70.0% ?8.50% Return 50.0% ?8.00% Return U1 F3 c: N. Return Return an F3 x. Funded Percentage N. for 2015? 2019, then 175% Return 7.00% Return buckconsultonts 13 xerox a) 18 Estimated Market Value of Assets Adjusted for Projected Lower Returns during the Portfolio Transition Period of 2015-2019. (October 2015 Estimate: -6.5%, 5%, 5%, 5%, 5%) Estimated Market Value of Assets $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 $(500,000) $(1,000,000) $(1,500,000) $(2,000,000) 19 Actions to Address Actions Being Taken Now - Investments • Asset/Liability Study Underway • Continue to improved investment reporting to the Board • Will be revising Investment policies and procedures • Transition Real Estate Asset Managers • Hired a Chief Investment Officer, • working with me there will be checks and balances on investment recommendations prior to the Board • Asset Allocation Changes • move the portfolio to a more typical pension portfolio • Investments appropriate for our plan with our liquidity requirements 21 Investments Goals • Goals of new asset allocation: • Ensure liquidity needs are met • Maximize the investment returns within an appropriate risk level established by the Board • It will take a significant amount of time to transition to portfolio to the desired end-state allocation. 22 Asset Allocation Timeline Board discusses risk tolerance, liquidity & investment options. Review asset allocation concepts/considerat ions. Provide direction for immediate use of available cash. Asset allocation with interim targets and draft investment policy. 11-2015 Q1-2016 On-going evaluation based on the changing dynamics of the funding status and liquidity needs of the Plan. Present structure studies by asset class. Provide Board education about new investment structures that may be recommended and other asset allocation concepts. Provide any additional direction that may be necessary on use of available cash. 12-2015 Q3 2016 ongoing Adopt longterm asset allocation and finalize investment policy. Q2-2016 23 Actions Being Taken Now – Financial • Hired a new Chief Financial Officer Two Years ago. • Implemented asset valuation methodology that is inline with accepted practices • Continuing to revise accounting/internal control policies and procedures • Improving Financial Reporting to the Board • Retained a new financial audit firm • Revised Annual Report, meets the reporting guidelines of GFOA 24 Additional Actions Being Taken Now • Actuarial experience study • Compares actual experience to the assumptions in the actuarial valuation report to ensure we are working with the best information • Rate of Return was reduced in July from 8.5% to 7.25% • Reviewing and evaluating all professional service providers • Open and honest communication with the members, the City and the media • Investigations • Plan amendment litigation • Long-term stability committee 25 Questions A A POLICE FIRE PENSION SYSTEM Kelly Executive Director kellvg@dpfp.org 214-382-4403 26 Appendix Additional Information on Asset Allocation DROP Members Account Balance Trend Current vs. Target Asset Allocation Asof 11/9/Global Public Global Private Global Natural Global Fixecl GAA Global Global Real Short Term Ea uit}:r Ea uity Resources Income Infra structure Estate Investments Max Range I Target Allocation I All?C?TlE-?m Allocation Range Min Range 28 Historical Asset Allocation Net Plan Position Asset Allocation Evolution Et Historic Net Plan Position 54,000 Real Estate . ?sources MI public International Equity EqUit?f $3,000 $2,500 Domestic Equity private 52,000 Equity 51,500 Global Public 't qUIy 51,000 ll Short-Term Domestic a Global Bonds Opportunistic 5500 Income SD 0. n. n. n. map and? high #99 ~53} 3' ?59,5 ?$63 {9 r155) r155) $59 ?55? We? ?Net Plan Position 29 DROP Members & Balances DROP MEMBER COUNT CONSOLIDATED PLANS* (DOLLARS IN MILLIONS) 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 1,434 1,446 1,409 1,425 1,333 1,278 1,207 1,104 1,079 995 107 155 190 176 208 168 191 203 139 166 -142 -167 -153 -192 -116 -113 -120 -100 -114 -82 End of year 1,399 1,434 1,446 1,409 1,425 1,333 1,278 1,207 1,104 1,079 DROP balance at Jan. 1 $461 $441 $434 $425 $406 $374 $339 $295 $262 $233 Active Beginning of year Entrants Withdrawals Retirees and Beneficiaries Beginning of year 1,912 1,772 1,603 1,449 1,302 1,173 1,060 921 787 668 New accounts 177 196 203 196 162 152 130 152 149 127 Closures -58 -56 -34 -42 -15 -23 -17 -13 -15 -8 End of year 2,031 1,912 1,772 1,603 1,449 1,302 1,173 1,060 921 787 DROP balance at Jan. 1 $962 $858 $738 $630 $531 $444 $368 $308 $250 $200 Total number of DROP accounts 3,430 3,346 3,218 3,012 2,874 2,635 2,451 2,267 2,025 1,866 30