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?