Pension Benefits Reform

1. Pension Benefits Reform Presentation to Memphis City Council Executive Session March 18, 2014 Quintin Robinson Director of Human Resources

2. Presentation Overview • City of Memphis Pension issues and why we need reforms • Administration’s recommendation of a separate pension plan for unvested employees/new hires • Impact of Administration’s proposed pension reforms • Present written Ordinance detailing proposed retirement plan for Council review/adoption at a later date • Questions?

3. Why Pension Reform? • Employees deserve a retirement plan that is fully funded • Current plan unsustainable - $709M in Unfunded Liability • One-sixth of City budget required to fund pensions • Pension obligations drain dollars needed for core services • A bill in the legislature requiring the city to pay its full Actuarially Determined Contribution, also commonly referred to as the ARC • Rising pension obligations threaten city’s credit rating

4. Retirement Plan Options Pension/Defined Benefit Plan (DB) • Employee pays percentage of salary into DB Plan each pay period • City pays pension benefit to employee from start of retirement through end of life, and to surviving qualified beneficiary (if any) • Benefit calculated based on set formula including age, years of service, return multiple Defined Contribution Plan (DC) • Employee pays percentage of salary into DC Plan each pay period • City pays percentage into employee DC Plan each pay period • Employee determines how to invest DC funds with assistance from professional money managers • Retiree receives benefits until DC funds depleted Hybrid Plan • Combination DB and DC

5. City Recommends DC Plan for Unvested Employees and New Hires • Employees with less than 10 years of pension credible service would move to 401(a) Defined Contribution Plan effective July 1, 2015 • Of the 6135 participants in the city’s pension plan, approximately 2,428 (40%) are unvested • All vested employees would remain in the legacy DB pension plan • Memphis would join Atlanta, Phoenix and Tucson, Az., and other local governments that have adopted DC Plans. The State of Tennessee also has a DC in its mix of retirement plans for state employees.

6. Advantages of Adopting DC Plan Advantages to employee • Starting balance (seed money) from DB Plan • 33% increase in city contributions • Contributions are portable • Automatic vesting in City’s match for current employees • Employee controls how assets are invested • Additional contributions can be made to 457 Plan up to IRS max, $17,500 • Ending balance can be taken as lump sum or annuity Advantages to City • DB Plan unfunded liability drops immediately upon adoption of DC • No unfunded liability associated with DC plans • Fixed contribution allows city to better plan and budget • Securing future retirement benefits for city workers and their families • Retirement Plan is comparable to most employers’ plan • Next generation would not be saddled with growing pension debt

7. Transition Plan • Once approved by council, the city would issue an RFP for a third-party plan administrator • Allow approximately 12 months for vendor selection process to start and implementation of new DC Plan • Unvested employees would continue accruing benefits and service time in the DB Plan until last day in that plan • Each unvested employee’s account balance in DB Plan would be calculated by PwC and become seed money for their DC Account

8. City of Memphis Retirement Highlights

9. Pension Reform Ordinances • Draft Ordinance closing the legacy DB Plan to new entrants (employees/elected officials), and transferring out all unvested employees. • Draft Ordinance that establishes account balances for unvested employees and allows for the transfer of those balances from the DB to new DC. • Draft Ordinance establishing the rules and plan design features for new DC Plan

10. Questions