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Federal and National Update:Public Pensions
Dana Bilyeu, Executive DirectorSeptember, 2014
National Task Forces/Blue Ribbon Panels
Retirement System Modifications: All States
Pension Changes, 2008-2014
Changes: 2009 to Present
• Types– Benefit reductions– Increased requirements for
retirement eligibility– Increased use of hybrid retirement
plans• Focus on Risk Distribution
– More risk shifted to workers– Adjusting actuarial assumptionsNo broad shift to defined contribution plans as
the primary vehicle for delivering retirement benefits
States Retain Distinguishing Elements of Public Plans
• Mandatory participation• Employee-employer cost (and risk)
sharing• Benefit adequacy
– Presence/absence of Social Security
– Survivor & Disability
• Assets that are pooled and professionally invested
• Required lifetime distribution (mandatory annuitization)
•California
• The California Legislature approved and the governor signed a bill establishing a path to full funding for CalSTRS, the second largest public pension plan in the nation
• Oklahoma
• Closed the DB plan for state employees; new hires will have only a defined contribution plan
Notable Legislative Outcomes in 2014
• Kentucky cash balance for newly-hired state and local employees as of January 1; not teachers
• Tennessee DB-DC plan, effective July 1 for newly-hired state employees, teachers, and employees of local government that elect to participate
• Virginia DB-DC plan, effective January 1 for most newly-hired employees in the state, excluding public safety personnel
Hybrid Plans Taking Effect in 2014
• Pensions are causing municipal bankruptcies
• Public plans are taking on too much risk and investment return assumptions are too high
• Few workers benefit from the current system
• Federal regulation is needed to prevent a bailout
Public Pensions:Current Misperceptions
A Quick Look: Public Pension Facts
Public Funds Survey*
• 126 statewide and large local government plans– 85% of the assets & the liabilities of
the entire public pension community– Information gathered from state and
local sources– Updated yearly
* Underwritten in part with funds from the National Council on Teacher Retirement
Distribution of current public pension funding levels
Size of bubbles isroughly proportionateto size of plan liabilities
40%
60%
80%
100%Median = 72.7%
Public Fund Survey July 2014
Median change in actuarial value of assets and
liabilities, FY 02 to FY 13
02 03 04 05 06 07 08 09 10 11 12 13
0%
2%
4%
6%
8%
Assets
Liabilities
Fiscal YearPublic Fund SurveyJuly 2014
Actuarial value of assets and
liabilities, and
funding levels, FY 01 to FY
16$0
$1
$2
$3
$4
Actuarial Value of Liabilities
Actuarial Value of Assets
01 02 03 04 05 06 07 08 09 10 11 12
100.9
96.9
91.488.4
86.785.486.385.1
79.877.075.8
73.372.775.8
78.580.6
Fiscal Year
Trillion
Aggregate Funding Ratio (%)
Public Fund SurveyJuly 2014
13 14 15 16
projected
Changesin Actives
and Annuitants,
and Active/Annuit
ant RatioFY 01 – FY 12
01 02 03 04 05 06 07 08 09 10 11 12
0%
2%
4%
Change in Actives
Change in Annuitants
Fiscal Year
2.432.36
2.272.18
2.122.102.04
2.001.93
1.83
1.741.65
Ratio ofActives toAnnuitants
Public Fund SurveyNovember 2013
Annualized Changein Wages and Salaries
BLS, compiled by NASRA
US Census Bureau, compiled by NASRA
Monthly relative change in employment
2003 to present
US Bureau of Labor Statistics
US Census Bureau, compiled by NASRA
Median annual change in covered payroll,FY 08 to FY 13
Public Fund Survey
08 09 10 11 12 13
0%
2%
4%
Fiscal Year
Median contribution rates, FY 02 to FY 12
ARC experience and dollars
contributed
Public Fund Survey, US Census Bureau
01 02 03 04 05 06 07 08 09 10 11 12 13$0
$40
$80
$120Contributions
Employer
Employee
103%
98%
94%
90%
87% 87%
89%91%
90%
87%86%
88%88%
Fiscal Year
**preliminary
AverageARCEffort
Billion
Distribution of ARC received by 86 plans, FY 13
Public Fund Survey, US Census Bureau
20%
60%
100%
Median = 99%
Average = 87%
Average asset allocation,FY 01 to FY 13
01 02 03 04 05 06 07 08 09 10 11 12 13
20
40
60
80
100
10
30
50
70
90
Equities51.2%
Fixed Income22.5%
RE 8.8%
Alternatives 14.5%
Cash/Other 2.9%
%
Fiscal Year
FY13 Average
Public Fund SurveyJuly 2014
*
*preliminary
FY 13 median investment returns
Callan Associates
1 3 5 10 20 25
12.0%
11.0%
5.3%
7.1%
7.9%8.6%
16.1%
9.6%
12.5%
7.0%
8.1%
9.0%
6/30/13
12/31/13
Years Ended
Median investment returns forperiods ended 6/30/14
Callan Associates
1 3 5 10 20 25
16.1%
9.7%
12.5%
7.3%
8.6% 8.8%
Years Ended
Pension Plan Assets Rebound Since the Great Recession
Federal Reserve Flow of Funds
Distribution of latest investment return assumptions
6.50 7.00 7.50 8.00 8.506.75 7.25 7.75 8.25
2 24
1
7
30
13
19
1
11
41
1 12
% %
Public Fund Survey
Pension Spending is not at an Historic High
Several New and Distinct Pension Calculations
Books – computing an annual position regarding pensions for financial statements (GASB)
Bonds – calculating how pension obligations affect a government’s creditworthiness (Ratings Agencies)
Budgets – determining the appropriate annual contribution to the retirement system for sound funding (Funding Policies-Sponsors and employee costs)
• The pace of pension reforms has slowed sharply
• Reform battles remain in some states (e.g. PA)
• Some legal challenges remain outstanding (e.g. CO, IL, OR)
• Pension costs are stabilizing for many plans
• Costs will need to rise for some plans, especially those that have not received their ARC
• Improving longevity may increase costs• Investment return assumptions will
remain under scrutiny and pressure• New GASB measures will reveal new
ways of looking at pension conditions
Other State Trends
Calls for a Federal Role
• Detroit is the tip of the iceberg
• Disclosure is opaque• There is too much risk and its
not understood• Regulation is needed to
prevent a bailout
Deluge of Reports
Pension Deferrals are a Costly Federal Tax Exclusion
Health care exclusion$3,360
Pension exclusion$1,999Reduced dividends/cap gains
$1,340Mortgage interest deduction$1,011State/Local Taxes$1,098EITC $661Child tax credit$549Capital gains exclusion at death
$644Health exchange subsidies
$920
(Joint Committee on Taxation estimates 2013-2023, in billions)
Tax Reform
• Senate and House tax committees conducted extensive reviews in 2013
• Ways & Means Chairman Camp released draft on February 26, 2014:– Changes income tax brackets and removes
many tax preferences from top bracket– A number of tweaks to DC plan provisions,
including application of 10% penalty for governmental 457 plans, in-service distributions allowed at 59½ for all plans
– No changes to tax treatment of governmental DB employer or employee contributions, but application UBIT
Tax Treatment of Public Employee Pension
Contributions• Unique to state and local government
retirement systems• Listed in 2005 Joint Committee on
Taxation report as “loophole”• Education needed on the importance of
this provision to pervasive/increasing shared-financing policies at state and local level
Mandatory Social Security
• Both deficit reduction commission reports included mandatory Social Security for newly-hired employees after 2020
• “Future bailout risk,” simplification of benefit coordination cited
• GPO/WEP repeal (S. 896 and HR 1795) could fuel interest
“No Bailout” Legislation
• Prohibit Federal funding to localities (and/or States) that have defaulted or are “at risk of defaulting”
• Federal auditing and assessments of the current and future financial stability of States and/or localities (will surely include pension valuations)– Graham (SC) amendment to FY 2014 Financial
Services appropriations– Johnson (WI) amendment to Transportation
and Housing and Urban Development (THUD) appropriations
– Cornyn (TX) amendment to THUD appropriations
– Vitter (LA) and Garland (KY) bills (S. 101/HR 3002)
Public Employee Pension Transparency Act (PEPTA, Nunes/Burr)• Would require
costly/conflicting federal reporting requirements
• 60-year projections using Treasury yield curve
• Plan sponsors that fail to follow correctly lose tax-exempt bond authority
– Introduced by Senate Ranking Minority Member Hatch (R-UT)• What it does
– Annuity accumulation “DB alternative” plan for state and local governments
– Optional (“Additional Tool in the Toolbox”)
• What it doesn’t do– Does not address existing unfunded liabilities– Does not include survivor/disability– Does not address workforce management
issues
Secure Annuities for Employee Retirement (SAFE) Act
The Bankruptcy Fairness and Employee Benefits Protection Act
• Adds benefit and health care protections to corporate bankruptcies
• Establishes similar rights for municipal employees under Chapter 9• H.R. 5305 (to treat Puerto Rico as a state for the purposes of Chapter 9)
Ongoing Regulatory Issues
• Qualification rules after United States v. Windsor
• Definition of Governmental Plan
• Normal Retirement Age Regulations
Treasury Interest
• Pensions under review by Financial Stability Oversight Council (FSOC)
• New Office of State and Local Finance– Monitoring municipal bond markets– Task forces on Detroit and Puerto Rico
(monitoring and identifying federal resources)
– Pension/OPEB pressures– Working across federal agencies– Infrastructure
Key Facts• Municipal
bankruptcy is rare– Only 12 states
specifically authorize Chapter 9 filings for their general-purpose local governments
• Chapter 9 is uniquely designed to ensure a municipality can continue to provide essential services while debts are reorganized
• Chapter 9 does not provide for a Federal bailout
Questions?