TMRS for City Managers and City Officials

1. TMRS for City Managers and City Officials 2007 Annual Training Seminar 2007, Texas Municipal Retirement System.

2. City Officials Need Specific Information • Technical information about the plan • Financial information; scenarios showing impact of proposed changes • Information for decision-making

3. What Is TMRS? • An agency created by the Texas State Legislature in 1947 that is administered in accordance with the Texas Municipal Retirement System Act, Subtitle G, Title 8, Government Code. • A public trust fund that bears a fiduciary obligation to the State of Texas, the TMRS member cities, and the public employees and retirees who are its beneficiaries.

4. What Is TMRS? (cont.) • A voluntary system that requires full participation by a city if it is a member. • 829 participating municipalities • All employees must participate in TMRS • A “non-traditional” plan – has some elements of both defined benefit (DB) and defined contribution (DC) plans

5. City’s Role • Voluntarily elects to participate in TMRS • Plan decisions and modifications remain in the city’s hands • Cities can change their plan provisions by ordinance • An exhibit in TMRS FACTS for City Officials details what plan design options a city has and when action can be taken (see handout)

6. City’s Role (cont.) • City Correspondents – At least one individual responsible for the city’s administration of TMRS; handles the day-to-day administrative work and serves as the primary contact and educator • City Decision-makers – Elected and appointed officials and those in management and finance who make decisions involving plan costs and employee benefits • Payroll Reporting – usually performed by Finance or Accounting personnel

7. How Does the Plan Work? • TMRS is one of the nation’s oldest “hybrid” pension plans. • The System is joint contributory, meaning both the employee and employees fund the benefit. • The retirement benefit is cash balance in nature, meaning a member’s total reserves are turned into a lifetime benefit at retirement. • TMRS does not receive state money; it is funded by TMRS members and municipalities, plus earnings from investment income.

8. How Are TMRS Retirement Benefits Funded? • Deposits made by employees • Monthly contributions made by employers • Investment earnings • Contribution rate is set to pay your city’s Normal Cost and a part of your amortized liability

9. Pension Trust Fund Accounts • Employees Savings Fund (ESF) • Municipality Accumulation Fund (MAF) • Current Service Annuity Reserve Fund (CSARF) • Endowment Fund • Expense Fund • Supplemental Death Benefits Fund Changes in the Municipality Accumulation Fund and Employee Savings Fund balances are shown in the Comprehensive Annual Financial Report (CAFR), issued annually.

10. How Are Retirements Calculated? Retirement benefits are calculated based on: • Total member deposits and interest • City matching funds and other credits granted • Member’s remaining life expectancy at retirement • Beneficiary’s life expectancy (if member selects a plan that pays a lifetime benefit to a survivor) • Future interest rate assumption (as set by law) • Monthly payment chosen

11. Interest on Accounts • Credited once each year, on December 31 • Calculated on the amount in the account as of January 1 of that calendar year • Annual rate is based on investment income and determined by the Board

12. How Do I Know My City’s Cost? • Contribution rate for each city is established every year • Process starts with an annual actuarial valuation • TMRS notifies each city of its plan cost for the next year with a City Rate Letter

13. City’s Costs (cont.) • City Rate = Annual cost of providing benefits for your employees • Based on the benefits you have chosen for your city • Expressed as a percentage of payroll

14. Current Service and Prior Service Costs • Retirement Portion • Normal Cost contribution rate (current service) • Prior Service contribution rate • Amortizes a city’s unfunded actuarial accrued liability (UAAL) over a rolling 25-year period • An unfunded actuarial liability is simply the difference between the benefits promised under the plan and the assets held in the plan

15. Why Rates Fluctuate • Significant sources of annual rate changes for TMRS cities are: • Withdrawals • Updated Service Credits (USC) and Annuity Increases (COLAs) • Payroll growth • Full information for each city is contained in the city’s annual Rate Letter

16. NOTE! Maximum Contribution Rate Limit • If your city reaches this limit (Stat Max), we will let you know in the Annual Rate Letter, which spells out some possible solutions: • Remove the limit (by ordinance) • Increase the limit (by ordinance) • Pay the Actuarially Determined Calculated Rate (by ordinance; this is a one-year-at-a-time fix) • Pay the Maximum Contribution Rate Limit If a city does not act to remove or increase the Stat Max, annually repeating benefits (USC and Annuity Increases) will be "turned off" until the rate drops back below the limit. If the city does not pay the actuarially determined rate, it will have to note this in its financial statements, which could raise red flags.

17. Why Do Rates Increase? • Any time a city adopts benefit improvements, it costs more to pay for those improvements • Expected withdrawal and payroll growth are different from actuarial projection • Workforce stagnates, or workforce declines • Ratio of active employees to retired employees drops. • The growing number of retirees increases the cost of COLAs.

18. What Role Does the Actuary Play? Actuarial Funding Method • TMRS currently uses Unit Credit actuarial cost method • May change to Projected Unit Credit method to better account for the liabilities associated with annually repeating benefit increases

19. What Role Does the Actuary Play? (cont.) Amortization Period • Current amortization period is a 25-year open period • May change to a 25-year “closed” amortization policy to accelerate the rate at which liabilities are funded Actuarial Experience Investigation • Every four or five years, TMRS’ actuary examines each city’s actuarial assumptions • The study looks at whether projections were met • As demographic and economic changes occur, they are included in the study

20. Accounting for TMRS Benefits • TMRS follows the accounting guidelines and disclosure requirements established by the Governmental Accounting Standards Board (GASB). • A funding progress disclosure, referred to as the GASB disclosure letter, is sent to each city annually at the same time as the Rate Letter and reflects information for the previous calendar year.

21. Accounting (cont.) • Accounting rules that apply to TMRS and cities: • GASB Statement No. 25 - Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans (November 1994) • GASB Statement No. 27 - Accounting for Pensions by State and Local Governmental Employers (November 1994) • GASB Statement No. 43 – Financial Reporting for Postemployment Benefit Plans Other than Pension Plans (April 2004) • GASB Statement No. 45 – Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions (June 2004) (not a direct TMRS issue but may affect individual member cities) • GASB Statement No. 50 – Pension Disclosures – An Amendment of GASB Statements 25 and 27 (May 2007)

22. How Does a City Change its Plan Options? • Contact TMRS directly and ask to speak to the Deputy Executive Director or a member of the “Travel Team” • We run an actuarial study for proposed plan changes,* to determine the effect the proposed changes will have on your city rate * See the handout Plan Changes Table fordetails

23. What Plan Modifications Are Allowed? • Employee contribution rate • City matching ratio • Updated Service Credit (USC) • Annuity Increases (COLAs) • Vesting (5-year) • Retirement Eligibility (20-year, any age) • Military service credit • Probationary prior service credit • Restricted prior service credit • Buyback of forfeited TMRS credit • Supplemental Death Benefit

24. Changes on the Horizon • We have followed a traditional investment strategy that has served us well and kept the System strong. We are examining investment policy so that we continue to provide a reasonable benefit at a reasonable cost to employers. • Potential change from Unit Credit to Projected Unit Credit method would provide a better method of pre-funding future liabilities.

25. Changes on the Horizon (cont.) • Potential change to a 25-year closed amortization period would fund a larger share of liabilities each year and improve the System’s and cities’ funded ratios over time. • Both the actuarial and amortization changes would result in higher contributions for many cities, but would also create a faster annual improvement in funded ratios.

26. Exhibits in TMRS FACTS for City Officials • Glossary (see handout) • Timeline of when benefit options added • Sample GASB disclosure information • Investment overview • Explanation of municipal contribution rate reconciliation data • List of plan options • Plan changes table (see handout)

27. For More Information • Call our toll-free number: 800.924.8677 Ask for the Deputy Executive Director or a member of the Travel Team • Send an e-mail to communications@tmrs.com

28. Questions & Answers