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Overview of Public Pension Funding Issues
Keith Brainard
NASRA Annual Conference August 7, 2016 Coeur d’Alene, Idaho
NASRA Research Director
◀ Pay-as-you-go funding of pension plans had ended and actuarial funding was the norm
◀ In the wake of the inflation spike that began in late 60s, auto-COLAs were emerging
◀ Early stage of equity investing ◀ Dawn of retirement systems offering retirement
counseling ◀ Manual and general ledger accounting giving way to
reliance on mainframe computers Other interesting conditions: ◀ More emphasis on unfunded liabilities than on actual
assets ◀ 40-year amortization of unfunded liabilities was common
1974 was a transitional period in public pension plan history
Accounting/data processing in 1974
Retirement counseling in 1974
Actuarial data in 1974
Terms not present: entry age, normal cost, actuarial value of assets, smoothing, level dollar, funded ratio, and others.
Investments in 1974
Terms not present: hedge funds, real estate, infrastructure, private equities, options, tactical asset allocation, billion.
◀ Data is culled and analyzed by NASRA staff from the Public Plans Database, CAFRs and other source documents
◀ PPD is an online compendium of public pension information maintained by the Center for Retirement Research at Boston College, in collaboration with NASRA and the Center for State & Local Government Excellence
◀ www.publicplansdata.org ◀ FY 15 information presented here is not yet complete
and is subject to change ◀ Complete analysis of FY 15 will be published this fall as
the Public Fund Survey Summary of Findings for FY 15
About the funding data
◀ Stabilization of funding levels after more than a decade of decline
◀ Required costs are still rising for some plans due to higher unfunded pension liabilities and insufficient contributions
◀ Gradual movement from open amortization periods to closed and fixed periods, and toward shorter amortization periods
◀ Assumptions: lower inflation and nominal investment return
◀ Growing use of phased-in lower investment return assumptions
Notable funding trends
Aggregate
Public Pension Funding Level,
FY 01 to FY 15
Median Change in Actuarial Value of
Assets and Liabilities, FY 02 to
FY 15
Size of bubbles is roughly proportionate to size of plan liabilities
Latest Public Pension Funding Levels
Median change in membership, FY 01 to FY 15
Median Contribution Rates, Social Security–eligible and –ineligible, FY 02 to FY 15
*
Distribution of Employer Contribution Rates, Social Security-
eligible, FY 15, (general employees and teachers)
Public Fund Survey
Distribution of Employer Contribution Rates, Social Security-ineligible, FY 15
(general employees and teachers)
Public Fund Survey
Distribution of percentage of pension plan normal cost* paid by employees
Public Fund Survey *Normal cost is the cost of benefits accrued each year
Median and aggregate net cash flow, FY 02 to FY 15
Jul 2013
Net cash flow equals contributions minus benefit payments and expenses, divided into assets
Median and aggregate net cash flow and change in assets, FY 02 to FY 15
Jul 2013
Distribution of net cash flow and size of benefits distributed, FY 15
Jul 2013
Median annual change in payroll, FY 06 to FY 15
Public Fund Survey
Median annual change in payroll, employment, and wages and salaries, FY 06 to FY 15
Public Fund Survey
◀ The inflation assumption typically serves as the basis of actuarial assumptions for payroll growth and investment return
◀ Payroll growth is a major driver of liability growth
◀ The investment return assumption has a major effect on a pension plan’s cost and funding level
The role of inflation in public pension funding
Annual change in CPI-U for periods ended in June, 1992-2016
Jul 2013 US Bureau of Labor Statistics
10-Year Rolling Average Inflation (CPI-U)
Jul 2013 US Bureau of Labor Statistics
Change in CPI-U compared to change in prices for eggs and unleaded gasoline, Jul-13 to Jun-16
Jul 2013
Bureau of Labor Statistics
Expectations for inflation over the next 10 years
Jul 2013 Cleveland Fed
Yields on 10-year notes: US, Germany and Japan, Jan-03 to Jul-16
Jul 2013
Wall Street Journal
Change in distribution of investment return assumptions, FY 01 to present
Jul 2013
Change in average assumption for inflation and real rate of return, FY 05 to FY 15
Jul 2013 Public Fund Survey
Median annualized public pension fund investment returns for periods ended 6/30/15 and 12/31/15
Jul 2013
Callan Associates
Median annualized public pension fund investment returns for periods ended 6/30/16
Jul 2013
Average asset allocation, FY 01 to FY 15
Jul 2013
◀ Funding levels are stabilizing, but funding experience and required costs vary widely
◀ Inflation remains very low, reducing wage growth rates and rates of liability growth
◀ Liability growth rates remain low due to slow hiring, low inflation and salary growth, and benefit reductions
◀ Liability growth rates would be lower still were it not for the headwind of lower investment return assumptions
◀ Assumed rates for inflation and nominal investment returns have decreased and may continue
◀ Required contribution rates will remain high for plans with large unfunded liabilities
◀ Pension challenges vary from state to state and plan to plan; every case is unique
Summary
NASRA Research Overview
Alex Brown
NASRA Annual Conference August 7, 2016 Coeur d’Alene, Idaho
Research Manager
◀ NASRA Issue Briefs & Papers ◀ NASRA.org
▲ Economic Indicators ▲ NASRA Member Surveys
Research Update
◀ Policy discussion of elements pertaining to public pension plan design, cost, financing, etc.
◀ Comprehensive data set
▲ COLA formulas ▲ Employee contribution rates ▲ Hybrid plan characteristics ▲ Investment return assumptions
Issue Briefs
Updated Issue Brief: State Hybrid Retirement Systems
◀ Cash balance and combination hybrid plans are optional or mandatory for groups of general, public safety, or educational employees
◀ Many hybrid plans retain all or most distinguishing elements of sound retirement plan design
◀ Many public plans already feature elements of hybrid plan design
Updated Issue Brief: Public Pension Plan Investment Return Assumptions
◀ Of all actuarial assumptions, investment return assumption has the most significant impact on pension liabilities and costs
◀ Plans continue to reduce
investment return assumptions
◀ The median investment return
for the 25 year period ended 12/31/15 exceeds the current average return assumption
Updated Issue Brief: State and Local Government Spending on Public Employee Retirement Systems
◀ Pensions accounted for approximately 4.1 percent of all state and local government general expenditures in FY 13.
◀ Spending by state varies
widely, from around 1.6 percent to nearly 8 percent.
◀ Spending on pensions is projected to increase in FY 14, but still below levels observed in prior years.
Employer (taxpayer) spending on public pensions, 1985 to 2014
“State and Local Government Spending on Public Employee Retirement Systems,” NASRA 2016
New Issue Brief: State and Local Government Contributions to Statewide Pension Plans: FY 14
◀ Receipt of full actuarially determined contributions are vital to pension plan funding and sustainability
◀ State and local government
funding discipline improved in FY 14
◀ Individual state contribution experiences vary widely
Distribution of ARC/ADC received by 112 plans, FY 14
“State and Local Government Contributions to Statewide Pension Plans: FY 14,” NASRA 2016
Median and average ARC/ADC received by 112 plans, FY 01 to FY 14
“State and Local Government Contributions to Statewide Pension Plans: FY 14,” NASRA 2016
Significant Reforms to State Retirement Systems
States that reformed pension plans by year, 2007-2015
“Significant Reforms to State Retirement Systems,” NASRA 2016
States that increased employee contributions
“Significant Reforms to State Retirement Systems,” NASRA 2016
States that reduced pension benefits
“Significant Reforms to State Retirement Systems,” NASRA 2016
States that reduced automatic COLAs
“Significant Reforms to State Retirement Systems,” NASRA 2016
States that established new hybrid plans
◀ Most states retained plan features known to promote retirement plan sustainability and balance stakeholder objectives
◀ While most states retained their defined
benefit plan, a greater share of the risk of accumulating and funding benefits was shifted to employees
◀ Generally, reforms were calibrated to states’ specific conditions
Final Reform Thoughts
Relative change in private and state and local government employment, Jan 06 to July 16
U.S. Bureau of Labor Statistics
Annualized quarterly change in wage and salary costs for private and state and local government employees, 2006-2016
U.S. Bureau of Labor Statistics
Annualized quarterly change in wage and salary costs for private and state and local government employees, 2006-2016
U.S. Bureau of Labor Statistics
Annualized quarterly change in benefit costs for private and state and local government employees, 2006-2016
U.S. Bureau of Labor Statistics
Total public pension assets at year-end, FY 03 to FY 15
Federal Reserve
Nominal change in annual state and local tax revenue by source
U.S. Census Bureau
◀ Delayed Employer Contributions ▲ Many retirement systems provide an extension to employers who
fail to make required contributions on time ▲ Most systems charge interest on late contributions; interest rates
range from 1 percent up to the plan’s full assumed rate of investment return
◀ Service Purchase Calculations ▲ Most retirement systems allow members to purchase credit for
service not covered by a participating employer of the system ▲ Some systems allow service to be purchased at a rate
approximating missed contributions plus interest; others charge the full actuarial cost.
◀ Source of Teacher Pension Contributions ▲ Primary responsibility for funding teacher pensions varies among
states ▲ In some states, teacher pensions are funded exclusively at the
state or local level; in other states, funding responsibility is shared
Survey Highlights
Q u e s t i o n s / C o m m e n t s