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Attachment A City of Tempe Public Safety Personnel Retirement System Pension Funding Policy The intent of this policy is to clearly communicate the Council’s pension funding objectives and its commitment to our employees and the sound financial management of the City of Tempe (City), and to comply with Arizona Revised Statutes, section 38-863.01. Introduction The City is a participating employer in the Public Safety Personnel Retirement System (PSPRS). In accordance with state statutes, annual actuarial valuations determine employer contribution requirements for pension and health insurance premium benefits through PSPRS. The City’s police and fire employees who are regularly assigned hazardous duty participate in the Public Safety Personnel Retirement System. The pension contribution requirements for active PSPRS employees are established by State statutes. Several terms are used throughout this policy: Unfunded Actuarial Accrued Liability (UAAL) – is the difference between trust assets and the estimated future cost of pensions earned by employees. This UAAL results from actual results (interest earnings, member mortality, disability rates, etc.) being different from the assumptions used in previous actuarial valuations. Annual Required Contribution (ARC) – Is the annual amount required to pay into the pension funds, as determined through annual actuarial valuations. It is comprised of two primary components: normal pension cost – which is the estimated cost of pension benefits earned by employees in the current year; and amortization of UAAL – which is the cost needed to cover the unfunded portion of pensions earned by employees in previous years. The UAAL is collected over a period referred to as the amortization period. The ARC is a percentage of the current payroll. Funded Ratio – Is a ratio of fund assets to actuarial accrued liability. The higher the ratio the better funded the pension is with 100% being fully funded. Intergenerational equity – Ensures that no generation is burdened by substantially more or less pension costs than past or future generations. Public Safety Personnel Retirement System (PSPRS) PSPRS is administered as an agent multiple-employer pension plan. An agent multiple- employer plan has two main functions: 1) to comingle assets of all plans under its administration, thus achieving economy of scale for more cost-efficient investments and Attachment A invest those assets for the benefit of all members under its administration and 2) serve as the statewide uniform administrator for the distribution of benefits. Under an agent multiple-employer plan, each agency participating in the plan has an individual trust fund reflecting that agencies’ assets and liabilities. Under this plan, all contributions are deposited into and distributions are made from that fund’s assets, each fund has its own funded ratio and contribution rate, and each fund has a unique annual actuarial valuation. The City of Tempe has two trust funds, one for police employees and one for fire employees. Council formally accepts the assets, liabilities, and current funding ratio of the City’s PSPRS trust funds for Tier 1 and Tier 2 members from the June 30, 2025 actuarial valuation, which are detailed below. Trust Fund Assets Accrued Liability Unfunded Actuarial Accrued Liability Funded Ratio Tempe Police $427,804,544 $476,941,439 $49,136,895 89.7% Tempe Fire 246,727,651 279,360,172 32,632,521 88.3% City of Tempe Totals $674,532,195 $756,301,611 $81,769,416 89.2% In July 2021, the City completed a $343 million financing transaction that resulted in the issuance of Certificates of Participation (COP) obligations to pay a significant portion of the City’s unfunded accrued liability in the City’s Police and Fire PSPRS plans. The annual debt service on the COPs averages approximately $28.6 million through July of 2037. The payment of a significant portion of the unfunded actuarial accrued liability allows for investment of the COPS proceeds into the Police and Fire pension plans, which should yield an earnings rate that exceeds the COPS borrowing rate and thus result in savings to the City. PSPRS Funding Objectives Pensions that are less than fully funded place the cost of service provided in earlier periods (amortization of UAAL) on the current taxpayers. Fully funded pension plans are the best way to achieve taxpayer and member intergenerational equity. Most funds in PSPRS are significantly underfunded and falling well short of the goal of intergenerational equity. This Pension Funding Policy provides for the following PSPRS funding objectives: 1. Maintain Stability of City’s Contributions to PSPRS As part of the COPs issuance, the City agreed to assign $14 million by June 30, 2022, and has identified an additional $11 million to assign by June 30, 2023 from the City’s General Fund unassigned fund balance for payments toward any UAAL, if any, identified in future PSPRS annual actuarial reports. As of June 30, 2025, the City has assigned $25 million of General Fund fund balance for future payments toward UAAL as necessary. Attachment A The PSPRS assigned reserve amount may be increased or decreased annually, as part of the fiscal year-end process, to ensure sufficient reserves are available to meet future anticipated UAAL. 2. Meeting Funding Requirements As part of the City’s annual operating budget, the City will budget the minimum Annual Required Contribution (ARC) for the City’s Police and Fire PSPRS plans. These amounts will be paid from the City’s operating funds without diminishing City services. Additional payments above the ARC will be made to PSPRS to cover the UAAL identified in the annual PSPRS actuarial report for the Police and Fire plans. The source of funds for these payments will be the PSPRS assigned funds in the City’s General Fund. Estimated City contributions to PRPRS for the Police and Fire plans are included in the City’s multi-year forecast models. Estimating PSPRS pension liabilities will ensure that sufficient resources are available to meet the current and future year obligations as part of the City’s long-term planning efforts. 3. Funding Ratio Target and Timeline The City’s funding ratio target for the PSPRS Police and Fire plans is 100%. Based on the updated June 30, 2025, actuarial reports from PSPRS, the City’s PSPRS Police plan has a funding ratio of 89.7%, up slightly from the 2024 funding ratio of 88.7%, and the Fire plan has a funding ratio of 88.3%, down slightly from the 2024 funding ratio of 89.5%. The combined Police and Fire plans are funded at 89.2%, up slightly from the 2024 funding ratio of 89.0%. As noted above, the city seeks to make additional payments above the ARC, if funding is available, to achieve the 100% funding ratio target. Based on these actions of the Council, the City’s PSPRS Police and Fire plans are expected to be 100% funded by June 30, 2037.