A Path to a Sustainable Retirement System

December 16, 2011

Cincinnati Retirement System Board of Trustees Presentation To

Cincinnati Budget & Finance Committee

Introduction to CRS

Established in 1931, before Ohio PERS Governed by a Board of Trustees CRS not subject to same requirements as

employers covered by OPERS City Council determines benefit and

contribution levels, not the State of Ohio This provides flexibility for the City, but carries

a greater level of responsibility and stewardship

Includes a Pension Trust & Health Care Trust2

Introduction to CRS (Cont.)

Ratio of 1:00 active to 1.35 retirees CRS Membership as of 12/1/11

3290 active employees 4450 pensioners (members receiving pension

checks) 6800 retirees, spouses & children enrolled in

health care City employees do not contribute to Social Security Many career employees & retirees are not eligible for

a Social Security pension benefit

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CRS Board of Trustees

In October 2010, City Council changed the governance structure of the Cincinnati Retirement System (CRS) Board of Trustees to include member elected trustees and appointed professional trustees.

The new Board’s first assignment – Determine a solution to stabilize and sustain the Retirement System for current and future generations.

The Board’s recommendations recognized and built upon the efforts of Task I and Task Force II.

The Board held three Community Meetings in December 2010 to present ideas and gather input from various stakeholders.

Final recommendations were adjusted based on input from stakeholders.

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CRS Board of Trustees (Cont.)

Appointed Madelynn Matlock, Sr. VP Huntington Asset Advisors – CRS Board Chair William Partridge, Retired Sr. Consultant & Pension Actuary, Watson Wyatt Worldwide –

CRS Vice Chair Mark Berliant, Senior Partner, Strauss & Troy, a Legal Professional Association Christopher Meyer, CFA, Managing Principal Fund Evaluation Group LLC Roger Sims, Retired Corp. Dir., Compensation, Benefits & Employee Health Svcs.,

Health Alliance Vacant position

Elected Karen Alder, Risk Manager, City of Cincinnati Don Beets, Retired Supervisor of Field Services, Greater Cincinnati Water Works Mike Fehn, Building Inspector II , Dept. of Community Development, City of Cincinnati Brian Pickering, Retired Principal Engineer, Greater Cincinnati Water Works Mike Rachford, Retired Automotive Crew Chief, City of Cincinnati

CRS Board of Trustees (Cont.)

Committees Investment Committee Benefits Committee Governance Committee Elections Committee

The full Board held 14 meetings since Oct. 2010 to address the System’s challenges

CRS Board made recommendations to Council that were approved in March 2011 making significant progress toward system stabilization

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Authorities of CRS Board & City Council

CRS Board Makes recommendations to Council regarding

benefit and contribution levels Manages investments and determines the

investment and discount rates of return & other actuarial assumptions

Oversees the management of the Cincinnati Retirement System

City Council approves benefit levels and employer & employee contribution levels

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Management of CRS Investments

Presented by

Brett Christenson,

Marquette Associates

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Recent Board Actions

Conducted Actuarial Experience Study (employee turnover, mortality, salary scales, etc.) and modified actuarial assumptions to better reflect actual and expected experience Result: $57M reduction in Pension liabilities Result: $33M reduction in Health Care liabilities

Performed Asset Allocation Study that resulted in revision of long term asset return assumption from 8% to 7.5% per annum. Result: $102M increase in Pension liabilities Result: $ 33M increase in Health Care liabilities

Net Result: $45M increase in Pension liabilities, $0M increase in Health Care liabilities

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Projected CRS 2011 Cash Flow

Category Dollars

Outflows: Expenses and Benefits $207,500,000

Inflows: Employer Contributions, Employee Contributions and Medicare Reimbursements

$48,400,000

Trust earnings if assets earn 7.5% $150,000,000

Projected Trust earnings to 12/31/2011 (@ 1%)

$20,000,000

Projected net outflows as of 12/31/2011 $139,100,000

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State of Affairs Before CRS Plan Changes Adopted in February, 2011

The status quo approach (same benefits and employer contributions of 17%) will fully drain the pension trust in 21 years and the healthcare trust in 15 years.

In 2010, CRS’ expenses (pension, healthcare and operating costs) exceeded revenues (employer and employee contributions, and Medicare Rx reimbursements) by $145 million.

City employees currently contribute 8% of salary for 2011, and will contribute 8.5% in 2012, capping at 9.0% in 2013.

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Downward Spiral Threatened CRS

Generous Benefit Enhancements Implemented

Poor Asset Performance

Higher Contribution Requirements

Insufficient City Contributions

Generous Early Retirement Window Implemented

Terrible Asset Performance

$125,571,000 Contribution Requirement (Pension and Health Care)

Insolvency

20102010

20082008

20072007

2002-20102002-2010

2006 - 20092006 - 2009

20012001

8819991999

Accelerating Health Care Costs

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CRS Was Not Stable, Sustainable or Affordable

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What’s Within the City’s Control?

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What’s Within the City’s Control?

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Financial Impact of Plan Changes

Plan Decrease in Accrued Liabilities

Decrease in Annual Required (Employer) Contributions

Pension $111,000,000 $16,700,000

Health Care $231,000,000 $20,700,000

Total $342,000,000 $37,400,000

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Financial Impact of Actuarial Assumption Changes

Pension PlanBefore Assumption Changes

After Assumption Changes

Accrued Liability $2,086,000,000 $2,131,000,000

Actuarial Value of Assets $1,566,000,000 $1,566,000,000

Unfunded Accured Liability

$520,000,000 $565,000,000

Funded Percentage 75.1% 73.5%

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Financial Impact of Actuarial Assumption Changes

Health Care PlanBefore Assumption Changes

After Assumption Changes

Accrued Liability $657,000,000 $657,000,000

Actuarial Value of Assets $726,000,000 $726,000,000

Unfunded Accrued Liability

$(69,000,000) $(69,000,000)

Funded Percentage 110.6% 100.6%

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Pension Changes

The pension changes include a comprehensive set of grandfather and transition rules.

The impact of these changes on individual employees depends on their proximity to their Normal Retirement age.

For all employees hired prior to 1/1/2011, their earned pension benefit is protected up to the effective date of the change, 7/1/2011.

These employees will also be able to retire under the current age and service rules with adjustments to benefits earned after the change, if applicable.

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Pension Changes (Cont.)

2020

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Cost of Living Adjustment (COLA) for future retirees will be based on simple interest, not compound.

COLA will no longer be guaranteed at 3% but will be indexed to the CPI-U to a maximum of 2% per year.

The salary used for benefit calculations will be changed from the highest consecutive 3 year average to the highest consecutive 5 year average.

Pension Changes (Cont.)

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Rate of pension accruals will be reduced from 2.50% (and 2.22% for a closed group) to 2.20% of base pay for all employees for future years of service.

First 30 years of service will accrue at 2.20% rate of pay. Years beyond 30 will accrue at 2.00% rate of pay.

Pension Changes (Cont.)

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Normal Retirement (Hired before 7/1/2011)

30 years of service, age 60 5 years of service, age 65

Normal Retirement (Hired on or after 7/1/2011)

30 years of service, age 62 5 years of service, age 67

Normal Retirement Age and Service Rules

Prior Rules Normal Retirement (Hired before 1/1/2010)

30 years of service, any age 5 years of service, age 60

Normal Retirement (Hired on or after 1/1/2010)

30 years of service, age 55 5 years of service, age 65

New Rules

2323

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Early Retirement 15 years of service, age 57

Actuarial reduction applies

Early Retirement Age and Service Rules

Prior Rules Early Retirement (Hired before 1/1/2010)

25 years of service, age 55

Early Retirement (Hired on or after 1/1/2010)

25 years of service, age 60

Actuarial reduction applies

New Rules

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$7,500 death benefit for current retirees is reduced to $5,000. It is eliminated for future retirees.

Pre-retirement lump sum death benefit equal to 50% of salary is eliminated. This type of death benefit is uncommon in DB plans. Usually provided through employer or individual life

insurance. Social Security and OPERS do not provide a similar benefit.

Pre & Post Retirement Death Benefit Changes

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Solvency Projections (Pension)

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Solvency Projections (Pension)

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Contribution Projections (Pension)

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Contribution Projections (Pension)

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Solvency Projections (Pension)

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Retiree Health Care Changes

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Move all retirees and other recipients to 80/20 PPO medical plan and pay same percent of “retiree plan” premium as actives.

Eliminate Medicare Part B subsidy for retirees.

Eliminate Medicare Part B subsidy for spouses, and other recipients of CRS retiree health care coverage.

Require retirees to pay 100% of premiums for dental and vision benefits if they choose to continue coverage.  

Retiree Health Care Changes (Cont.)

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Solvency Projections (Health Care)

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Transition Approach

Pension benefits earned to the effective date of the change are protected: All components of the prior formula apply, The earliest normal retirement age available under

the prior plan continues to be available, At that same date, benefits earned under the new

benefit formula are also payable – in an actuarially reduced amount if applicable, and,

Retiree health benefits are available at the same date.

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APPENDIX

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Plan

Plan TypeAccess In Network Out of Network In Network Out of Network

Annual Deductible $0 $0 Single: $300 Family: $600

Single: $600 Family: $1,200

Annual Out-of Pocket Maximum

Single: $500 Family: $1,000

(includes copays)

Single: $1,000 Family: $2,000

(includes copays)

Single: $1,500 Family: $3,000

(includes copays)

Single: $3,000 Family: $6,000

(includes copays)

Lifetime Maximum

Copay/Coinsurance - Physician

20% 50% 20% 50%

Coinsurance - Hospital 20% 50% 20% 50%

Emergency Room 20% 50% 20% 50%

Urgent Care 20% 50% 20% 50%

Medicare Coordination of Benefits

Monthly Premium for 2011

Rx - Retail Copay/Coinsurance

Rx - Mail Order Copay/Coinsurance

90 day Generic:$10.00 90 day Brand: $30.00 90

day NF Brand: $60.00 $500 Out-of-Pocket

Maximum

Not Covered

90 day Generic:$20.00 90 day Brand: $40.00

90 day NF Brand: $60.00

No Limit

Not Covered

Generic: $5.00 Brand: $15.00 NF Brand: $30.00

$500 Out-of-Pocket Maximum

Generic: $10.00 Brand: $20.00 NF Brand: $30.00

No Limit

$0Single: $20.90 Single + Spouse: $41.80

Single + Child(ren): $57.90 Family: $57.90

Unlimited

Standard Coordination of Benefits

CRS Retiree Medical Plan Designs for 2012

Standard Coordination of Benefits

Unlimited

PPO

Blue Modified Carve-Out

PPO

Blue Access 80/20

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Plan

Plan TypeAccess In Network Out of Network In Network Out of Network In Network Out of Network

Annual Deductible $0 $0 Single: $100 Family: $200

Single: $200 Family: $400

Single: $300 Family: $600

Single: $600 Family: $1,200

Annual Out-of Pocket Maximum

Single: $500 Family: $1,000

(includes copays)

Single: $1,000 Family: $2,000

(includes copays)

Single: $1,000 Family: $2,000

(includes copays)

Single: $2,000 Family: $4,000

(includes copays)

Single: $1,500 Family: $3,000

(includes copays)

Single: $3,000 Family: $6,000

(includes copays)

Lifetime MaximumCopay/Coinsurance - Physician

20% 50% 20% 50% 20% 50%

Coinsurance - Hospital

20% 50% 20% 50% 20% 50%

Emergency Room 20% 50% 20% 50% 20% 50%

Urgent Care 20% 50% 20% 50% 20% 50%

Medicare Coordination of Benefits

Monthly Premium for 2011

Rx - Retail Copay/Coinsurance

Rx - Mail Order Copay/Coinsurance

90 day Generic:$10.00 90 day Brand: $30.00

90 day NF Brand: $60.00

$500 Out-of-Pocket Maximum

Not Covered

90 day Generic:$10.00 90 day Brand: $30.00

90 day NF Brand: $60.00

$1,000 Out-of-Pocket Maximum

Not Covered

90 day Generic:$20.00 90 day Brand: $40.00

90 day NF Brand: $60.00

No Limit

Not Covered

Generic: $5.00 Brand: $15.00 NF Brand: $30.00

$500 Out-of-Pocket Maximum

Generic: $5.00 Brand: $15.00 NF Brand: $30.00

$1,000 Out-of-Pocket Maximum

Generic: $10.00 Brand: $20.00 NF Brand: $30.00

No Limit

$0 $0Single: $20.90 Single + Spouse: $41.80

Single + Child(ren): $57.90 Family: $57.90

Unlimited

Carve-Out

CRS Retiree Medical Plan Designs for 2011

Carve-Out Carve-Out

Unlimited Unlimited

PPO PPO

Blue Modified Carve-Out

PPO

Blue Modified Blue Access 80/20

Allocation of 2010 employer contributions at 17% contribution rate

DollarsPercent

General Fund $12.7 MM 40% Metropolitan Sewer District $6.0 MM

19% Cincinnati Water Works $5.2 MM 16% Other Funds $7.7 MM 25%

TOTAL $31.4 MM 100%

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Allocation of Contributions by City Groups

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Comparison of CRS , OPERS and STRS

Cincinnati Retirement SystemAssumed Rate of Return vs Actual

2000 through 2010

8.0%

8.0%8.0%

8.0%

8.75

%

8.75

%

8.75

%

8.75

%

8.75

%

8.75

%

8.75

%

13.0%

8.0%

20.4%22.0%

9.9%

6.5%

13.6%

-27.8%

-12.1%

-4.6%

-0.1%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Assumed Rate of Return

Actual Rate of Return

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