State Unfunded Pension

8/13/2019 State Unfunded Pension

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US State* and Territory Unfunded PensionLiabilities

Jim Evans, CFA

Director, Tax Advantaged Bond Strategies

MainStreet Advisors 2012 Conference

* Excludes the following states whose pension allocations were not provided by Fitch: Arizona, Arkansas, Colorado, Nebraska, New Mexico, North Dakota and Wyoming.


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Eaton Vance

1. Eaton Vance believes that the condition of public pensions will become an even moreimportant factor in determining creditworthiness in the municipal marketplace.

2. Why is this important to bond holders?

Pension benefits are almost always constitutionally protected at the State level.

Increased pension funding could pressure municipal cash flows and result inmeaningful downgrades of municipal bonds.

3. While estimates vary as to the level of underfunding, a consensus exists that manypublic pensions are underfunded.

4. On July 2, 2012, Moodys proposed adjustments to its methodology regardingpension assumptions:

These changes included discounting actuarial accrued liabilities using a high-gradelong-term corporate index (5.5% in 2010 and 2011) rather than using issuer

discount rates (which range between 7.5% and 8.25%). The proposed adjustments increase Moodys unfunded actuarial accrued pension

liabilities (UAAL) for state and local governments to $2.2 tri llion from $766 billion.

Source: Moodys Adjustments to US State and Local Government Reported Pension Data, July 2, 2012.


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Eaton Vance

The following data may help evaluate the magnitude of the states unfunded liabilities:

Page 3 - Debt as a percentage of State GDP

Page 4 - Debt + Unfunded Pension as a percentage of state GDP using the states'

assumed discount rates of 7.25% to 8.50%

Page 5 - Debt + Unfunded Pension as a percentage of state GDP using a 5.5% discountrate for pensions. To arrive at the new unfunded liabilities, Eaton Vance used Moodysproposed adjustment methodology, whereby for each 1% difference between 5.5% anda plans discount rate, the actuarial accrued liability increased by roughly 13%.

Page 6 - Same as page 5 but includes Puerto Rico

Page 7 - State and Local tax burden as a percentage of per capita income

Importantly, certain major pension reforms are being enacted. Since 2009, 43 states haveenacted pension reforms, and the savings achieved from the 2010 and 2011 reforms arenot reflected in the above estimated numbers. Examples of reform include, RhodeIsland, which reduced its unfunded liability by an estimated $1.7 billion (39%) throughbenefit cuts enacted in 2011*, and in New York recently enacted reforms could save thestate $80 billion over 30 years**.

*Source:Rhode Island Enacts Pension Reform Legislation, a Credit Positive, Moodys 11/21/11.** New York State Pension Reform Provides Long-Term Credit Benefits to the State and Local Governments, Moodys 3/22/12.


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State Debt as % of State GDP

Source: Debt is net tax supported debt from Moodys May 2012, GDP from the US Bureau of Economic Analysis June 2012.

Debt burden seems quite tolerable

* Data unavailable for AR, AZ, CO, ND, NE, NM and WY


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Debt and Unfunded Pension Liability as % of State GDP

Discounting pension liabilities at 5.5% consistent with Moodys new proposed methodology.

Source: Debt is net tax supported debt from Moodys May 2012. Pension liabilities from The Widening Gap Update Pew Center on the StatesJune 2012. States estimated pension liabilities are based upon the States share of the total State and Local liabilities as per Fitch Ratings -Improving Comparability of State Liabilities (March 2012). States pension plan discount rates from Enhancing the Analysis of US State andLocal Government Pension Obligations Fitch February 2011. Eaton Vance then applied a 5.5% discount rate to pension liabilities, based onMoodys Adjustments to US State and Local Government Reported Pension Data, July 2, 2012, where for each 1% difference between 5.5%and a plans discount rate, the actuarial accrued liability increased by roughly 13%. GDP from the US Bureau of Economic Analysis June 2012.

Even with Moodys more conservative assumptions,most states have manageable burdens



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Debt, Unfunded Pension Liability as % of State/Territory GDP

Source: Debt is net tax supported debt from Moodys May 2012. Pension liabilities from The Widening Gap Update Pew Center on the States

June 2012, PRs pension liability from PRs 2011 Comprehensive Annual Financial Report. States estimated pension liabilities are based uponthe States share of the total State and Local liabilities as per Fitch Ratings - Improving Comparability of State Liabilities (March 2012), PRsshare from Moodys June 8, 2012 rating report. States pension plan discount rates from Enhancing the Analysis of US State and LocalGovernment Pension Obligations Fitch February 2011. Eaton Vance then applied a 5.5% discount rate to pension liabilities, based on Moodys

Adjustments to US State and Local Government Reported Pension Data, July 2, 2012, for each 1% difference between 5.5% and a plansdiscount rate, the actuarial accrued liability increased by roughly 13%. State GDP from the US Bureau of Economic Analysis June 2012. PRGDP from the CIA World Factbook.

However, the Commonwealth of Puerto Rico stands out

Discounting pension liabilities at 5.5% consistent with Moodys new proposed methodology.



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State and Local Tax Burden as a % of Per Capita Income

Source: The Tax Foundation, Special Report, February 2011, No. 189. State and Local Tax Burdens by Rank Fiscal Year 2009.

Some states have more room to raise taxes than others


9/18For Investment Professional Use Only.

Tax-Advantaged Bond Strategies (TABS) FundSecond Quarter 2012

Not FDIC Insured Not Bank Guaranteed May Lose Value


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*Ratings are based on Moodys, S&P or Fitch, as applicable. Credit ratings are based largely on the rating agencys investment analysis at the time of rating and the rating assigned

to any particular security is not necessarily a reflection of the issuers current financial condition. The rating assigned to a security by a rating agency does not necessarily reflect its

assessment of the volatility of a securitys market value or of the liquidity of an investment in the security. If securities are rated differently by the rating agencies, the higher rating is

applied. Ratings of BBB or higher by Standard and Poors or Fitch (Baa or higher by Moodys) are considered to be investment grade quality.

Why TABS?

Funds offer a variety ofDuration Targets

Short | Intermediate | Long

Crossover

because munis arent always best

Relative Value Muni Tradingmake bid/offer spread work for

shareholders

Robust Credit analysis

A* and higher quality


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1

The Fund normally invests in Municipal securities and Taxable Municipal securities rated AA or higher, but may also invest up to 30% of its net assets in securities rated A. Ratings are basedon Moodys, S&P or Fitch, as applicable. Credit ratings are based largely on the rating agencys investment analysis at the time of rating and the rating assigned to any particular security is not

necessarily a reflection of the issuers current financial condition. The rating assigned to a security by a rating agency does not necessarily reflect its assessment of the volatility of a securitys

market value or of the liquidity of an investment in the security. If securities are rated differently by the rating agencies, the higher rating is applied. Ratings of BBB or higher by Standard and

Poors or Fitch (Baa or higher by Moodys) are considered to be investment grade quality.

Credit: Avoiding Landmines

Dedicated

Muni CreditAnalysts

Strained

Budgets

Unfunded PensionLiabilities

Downgrades /

Defaults

Credit Agency

Rates as AA1

But is i t really AA1?


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2011 Calendar Year Issuance

Supply and Demand Imbalances Cause Price Inefficiencies

Source: Bloomberg Finance LP. For illustrative purposes only. Data includes new issue volumes of all maturities. Not intended to reflect the holdings of any Eaton Vance product.


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Make the Bid/Offer Spread Work for Shareholders

1 Source: Report on Transactions in Municipal Securities, Securities and Exchange Commission, July 2004. Retail size trades are less 25K transactions size.

2 Source: investinginbonds.com. For illustrative purposes only. The hypothetical example was chosen as a fair representation and does not represent the experience of individual

investors. Please refer to the back of this presentation for important information and disclosure.

Small block sold tocustomer at 2.2% mark-up

Hypothetical Example

SEC Study1 - median spread for retail sized trades was 2.23%

A dealer buys 1mm+bonds at 110.032

How much of a mark-up have buyers paid?

To find out go to www.InvestingInBonds.com2


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.

Source: Agency Yields Bloomberg Finance LP. Muni Yields Thomson Reuters. After Tax Agency yields are calculated by multiplying the pretax yield by the highest marginalfederal tax rate at that time. (39.6% from 1992-1999 ; 35% 2000 to present). After Tax Muni yields are calculated by multiplying the pretax yield by an assumed 4% effective state taxrate. US Treasuries and FHLB Agencies are exempt from State tax. This is for informational purposes only and not intended to reflect the trading activity of any Eaton Vance product.

Munis Always the Right Play?


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TABS Does it work?

Source: Morningstar. Rankings are based on total returns for all funds within a respective category over the stated period. Past performance is no guarantee of future results. Rankings

for other share classes offered by the funds are different. Absent expense waivers for Tax-Advantaged Bond Strategies Intermediate Term Fund and Tax-Advantaged Bond Strategies

Long Term Fund, total return would be less.


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Summary Why TABS?

*Ratings are based on Moodys, S&P or Fitch, as applicable. Credit ratings are based largely on the rating agencys investment analysis at the time of rating and the rating assigned to any

particular security is not necessarily a reflection of the issuers current financial condition. The rating assigned to a security by a rating agency does not necessarily reflect its assessment of

the volatility of a securitys market value or of the liquidity of an investment in the security. If securities are rated differently by the rating agencies, the higher rating is applied. Ratings of

BBB or higher by Standard and Poors or Fitch (Baa or higher by Moodys) are considered to be investment grade quality.

2. Value Added

- relative value muni trading

- crossover: because munis arent always best

1. High Quality

-A* and higher

- robust credit analysis

For more information about Eaton Vance Municipals, visit: www.eatonvance.com/muni


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About Risk: An imbalance in supply and demand in themunicipal market may result in valuation uncertainties andgreater volatility, less liquidity, widening credit spreads and alack of price transparency in the market. There generally islimited public information about municipal issuers. As interestrates rise, the value of certain income investments is likely todecline. Investments in income securities may be affected by

changes in the creditworthiness of the issuer and are subject tothe risk of nonpayment of principal and interest. The value ofincome securities also may decline because of real orperceived concerns about the issuers ability to make principaland interest payments. While certain U.S. government-sponsored agencies may be chartered or sponsored by acts ofCongress, their securities are neither issued nor guaranteed bythe U.S. Treasury. No Fund is a complete investment programand you may lose money investing in a Fund. The Fund mayengage in other investment practices that may involveadditional risks and you should review the Fund prospectus fora complete description.

Before investing, investors should consider carefully theinvestment objectives, risks, charges and expenses of amutual fund. This and other important information iscontained in the prospectus and summary prospectus,which can be obtained from a financial advisor .Prospective investors should read the prospectuscarefully before investing.

Not FDIC Insured Not Bank Guaranteed May Lose ValueInvestment Professional Use Only. Not To Be Used With the

Public.


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For Investment Professional Use Only.

Thank You.

For more information please contact us at:Eaton Vance Distributors, Inc.Two International PlaceBoston, MA 02110

800.225.6265www.eatonvance.comMember FINRA/SIPC

TABSDLPPT5818-7/12

Documents

State Unfunded Pension