Important information regarding your TSRS contribution rate

TSRS eligible employees hired after July 1, 2006 who are concerned over rising contribution rates for TSRS will find the following information helpful.

Background
TSRS was established in 1953 to provide a supplement to the Social Security retirement benefits and personal retirement savings of its members, financed by member and employer contributions and by the investment returns from the retirement system trust assets.  TSRS has operated under the principle of providing retirement benefits that are reasonable in amount and cost; with a funding objective that remains approximately level from year to year.  Maintaining level contribution rates from year to year has been difficult due to the unexpected losses realized during 2001 and 2002; and more recently again in 2007 when the sub prime mortgage crisis caused US policy makers to take a hard look at questionable assumptions underlying the U.S. financial and economic system that contributed to the crisis. 

Effect of financial market performance on TSRS contribution rates
During the years prior to June 30, 2000, TSRS experienced favorable investment returns, achieving 10 year annualized returns of 12.4%.  TSRS assumes that assets in the trust portfolio will produce an 7.75% annual return and the plans experience during that period was very positive, as the funded ratio of assets to liabilities stood at a very healthy 103.7%.  As a result, the required pension contributions determined by the TSRS actuary remained stable at 12.35% (employer 7.65% and 5% for employees).   

In March 2000, the financial markets collapsed, adversely affecting TSRS asset values with back to back investment losses of -8.1% for the two years ended June 30, 2001 and 2002.  By June 2003, the resulting effect on lower TSRS asset values could be seen; as the plans funded ratio declined to 76.3% and the required contributions rate had risen to 19.06% (employer 14.06% and 5% for employees).  

In the 7 years that followed, the financial markets recovered, the plan’s funded ratio improved to 83.7% and TSRS contribution rates stabilized at just over 19%.  However, in September 2008, the financial markets crashed again and TSRS asset values fell from investment losses posted at -4.6% for June 2008 and -21.0% for 2009.  The poor performance of the financial markets during the 10 year period ending June 30, 2009 took the TSRS 10 year annualized return down to only 2.0%, illustrating clearly that long term investment returns once thought to be achievable could not be sustained. 

Board actions undertaken
As the effects of the great recession that followed 2007 became known, the TSRS Board actively considered all aspects of plan design and investment assumptions to demonstrate its principal commitment to its members and retirees: to maintain the plan’s fiscal stability.  To that end, the Board has expended great effort investigating the avenues available to preserve an attractive, high-quality benefit program, but at a cost the City and its membership can sustain over the long-term. 

Efforts undertaken in this investigation:

·   The TSRS Board commissioned an independent actuary to conduct a parallel audit of our actuary’s valuation data and assumptions to make sure all of the data to be used for model plan design changes was accurate

·   The Board conducted a fiscal sustainability analysis with its investment consultant and its actuary considering the current plan design

·   The Board consulted legal counsel for an assessment of whether it would be possible to change the benefit plan design for incumbent employees and found no solutions that would not invite legal challenge.  Counsel advised the TSRS Board that pension benefits promised to retirees are irrevocable, as are the promised benefits that current workers have accrued since their employment began. The State of Arizona Constitution contains a 1998 provision which states: “membership in public retirement system is a contractual relationship, and benefits shall not be diminished or impaired.”

·   The Board asked its actuary to prepare 21 different models to consider the effect on contribution rates and the funded ratio for the plan.  These models considered various alternative plan design features, affecting the benefit amount and the eligibility requirements for future hires, including studies of hybrid plans that combine features of defined benefit and defined contribution plans.

Based on the Board’s evaluation of the various models provided by the Actuary, the board concluded the best approach for sustaining the plan for the future required a reduction to the plan’s costs by adding a new benefit structure for all employees hired after June 30, 2011.   A new benefit structure, called “Tier II” was designed to achieve long-term fiscal sustainability for the plan by offering a less costly retirement benefit to future members, which will reduce contribution requirements for both current and future members of the plan and for the plan sponsor.  However, contribution rates will not be impacted for several years due to the continued absorption of portfolio losses from 2008 that are still impacting the plan’s rates. Implementation of the new tier will not affect benefit payments to retirees or benefit formulas or eligibility rules applied to all employees that were hired on or before June 30, 2011.

Future employees hired by the City after June 30, 2011, will be provided the Tier II benefit program, that establishes age 60 as the minimum age required for retirement eligibility, requiring 85 points for eligibility (currently, this is 80 points); a normal retirement age of 65 (current code requires 62); and reducing the pension benefit formula to 2.00% per year of credited service (currently, this factor is 2.25% per year). In addition, the pension calculation for the new tier will exclude service credits and the effect on average final pay associated with the member’s accrued unused sick and vacation leave pay at retirement (these elements are included for employees hired on or before June 30, 2011). The contribution rate for the new tier will remain at 40% of the recommended rate for TSRS by the System’s actuary.

Forecasting future contribution requirements and the most likely cost trends indicate that; by adding the Tier II plan design changes, the forecasted rate of required contributions to TSRS made by employees and the City will be reduced, slowing to a maximum rate approximating 34% in 2014 and will continue to fall during the next 25 years to around 17% by the year 2039.

Future Contribution Rates
TSRS future contribution rates have been forecast by our actuary, Gabriel, Roeder, Smith & Company, based on projected earnings for the plan and from other information available from June 30, 2011 (contribution rates are applied as a percentage of regular pay):