Le Legis gisla lative e Fin inan ance C e Com ommit ittee e - - PowerPoint PPT Presentation

Le Legis gisla lative e Fin inan ance C e Com

• mmit

ittee e

Pen ension S Solven ency cy an and I Inves estmen ent Per erforman ance

Rep epres esen entative P e Patricia A

• A. Lundstrom, Chair

Sena nator J John A hn Arthu hur Smith, Vi Vice ce-Ch Chair

August 23, 2018 James Maxon, MPA, Chair Wayne Propst, Executive Director

Slide 2

Today’s View

Fund Value – $15.6 Billion Funded Ratio – 73.1% (PE Fund) Projected 77.1% in 2043 Funded Period – Infinite (PE Fund) Unfunded Actuarial Accrued Liability – $5.5 Billion

Slide 3

Public Employees Plan Projected Funded Ratio

Previous and New Assumptions

74.9% 87.6% 73.1% 77.1%

60.0% 65.0% 70.0% 75.0% 80.0% 85.0% 90.0% 95.0% 100.0% 105.0%

20 2043 3 Ratio io Hig Highlig lighted

Previous Assumptions Future Assumptions

Slide 4

Where Are We? U Unfunded B Benefit t Enha nhanc ncements and nd Cha Changi nging ng Ma Markets

82% 90% 88% 91% 99% 106%105% 103% 97% 93% 93% 92% 93% 93% 79% 79% 71% 65% 73% 76% 75% 75% 75% 0% 20% 40% 60% 80% 100% 120%

PE PE FUND ND

Unfunded Benefit Enhancements – Grandfathering Past Service Credit

Dot.com Bubble Great Recession Pension Reform

Slide 5

75% F Fun unde ded R d Ratio 10 Y 0 Year ars 20 Y 0 Year ars 2043 43 (2 (25 Y Years) s)

Approximate Required Return to “Catch Up” to 100% Funding 10.9% 9.2% 8.8%

Probabilit ility of A Achi hieving ing “ “Catch h Up” Return n Current P Por

• rtfol
• lio
• 11.0%

14.8% 15.4%

2018 Y Year End d Por

• rtfol
• lio
• 11.2%

15.3% 15.8%

2019 Y Year End d Por

• rtfol
• lio
• 14.4%

22.0% 24.7%

2020 Y Year End d Por

• rtfol
• lio
• 18.6%

27.6% 30.1%

Diff fficu culty y of

• f Investi

sting t g to

• 100%

% Fundi nding ng

Source: Wilshire

Slide 6

Understanding Our Liabilities ($20.2 billion)

$13,554 67% $417 2% $6,224 31% Retirees Inactives Actives

Slide 7

Deconstructin ing R Retir iree L Lia iabili ility by Age

$5,370,823,271 40% $8,182,999,017 60%

Retiree Liability

Age 65+ Age <65

Age 65 65 + Age < < 65 To Total

Mem ember ers 22,594 15,417 38,011 Aver erag age A e Age 75.2 55.5 67.2 Be Benefit it Payme yments $ 514,235,279 $ 577,918,739 $ 1,092,154,018

Slide 8

As Asset Lia iabilit ility Model ( l (AL ALM)

• Used to assess the volatility of future investment returns on funding

measures

• Model used 500 random series of 30 years of investment returns from a

distribution with a 7.25% expected compound average return

• Output focuses on the 25th, 50th (Median) and 75th percentile results
• Useful to asses the range of future performance of alternative and determine

which has the lowest risk of failure or highest chance of success.

Baselin line of AL ALM

• No change to current plan or funding
• Does reflect the latest proposed assumptions
• Includes an estimated 7.10% return for the fiscal year ending 2018

Slide 9

Baseline ne ALM LM

9

Slide 10

Baseline ne ALM LM – Impac act on n Cas ash h Flow

Slide 11

Baseline ne ALM LM- UA UAAL

11

Slide 12

Normal Cost % UAAL ($bil) Funded Ratio% Funding Period (Yrs) Additional Cost of 25-year Funding Post-Experience Study Baseline 17.2% 5.560 73.1% Infinite 6.23% Decrease Tier 1 & 2 mulitpliers by 0.25% 16.7% 5.439 73.5% 79.1 5.42% …and Increase Employee Contributions by 2% 16.7% 5.440 73.5% 40.0 3.44% …and Suspend COLA for 3 years 16.7% 5.009 75.1% 32.7 2.13% …and Defer COLA to AGE 67 (General)/60 (Public Safety) 16.4% 4.856 75.7% 29.6 1.47% …and COLA is CPI based (0% Min to 2.5% Max) 16.3% 4.652 76.5% 26.8 0.77% B …or COLA is CPI based and paid every 3rd year 15.4% 3.100 83.0% 13.1

• 4.56%

C …or 5% annual 13th Check 15.6% 3.731 80.2% 17.2

• 2.59%

Impact of Plan Modifications - Valuation Basis

Progressive Changes Analyzed Package A

Pens nsion D n Des esign D ign Decision n Trees es

Examples of pension design decisions trees intended to stimulate discussion and direction from the Board by demonstrating the impact to the UAAL and future funding status of the major, available levers. The examples include a base package of changes, as well as alternative COLA models.

Slide 13

Example le P Pac ackage A A Cha Chang nges es to ALM LM

• Red

educe e Ben enef efit Multiplier ers for

• r Tier

ers 1 and 2 by y 0.25%

• Not les

ess than 2.0% for Gen ener eral Employee ee (G (GE) ) cover erage e plans

• Not

t less tha than n 2.5% for r Pu Publ blic Safety and nd Corr rrecti tion n (P (PS) ) Pl Plans ns

• Inc

ncrease me memb mber r contri tributi tions ns 2.0% 0% of salary ry across all divisions ns

• Suspend

nd the the curr rrent t COLA for r 3 years

• COLA el

eligibility y is age e 67 (G (GE) ) / / age e 60 (P (PS) ) instead of f curren ent 7 year def efer erral

• And COLA rate is based on actual annual CPI change minimum of 0% and

maximum of 2.5% (assumes annual COLA is 1.85%)

Items in shaded box are common to all packages except as noted

• Example modeled COLA changes do not include disability retirees with benefits of less than $20,000
• Example modeled 67 and 60 minimum age to receive a benefit applies to prospective members only.

Slide 14

Ex Example P Package A A Cha Chang nges t to AL ALM – Funded R ded Ratio

Slide 15

Ex Exampl ple Package A Changes to A ALM – Cash ash F Flo low

Slide 16

Ex Exampl ample P e Package e C Cha Chang nges es to A ALM LM

Items in shaded box are common to all packages except as noted

• Red

educe e Ben enef efit Multiplier ers for

• r Tier

ers 1 and 2 by y 0.25%

• Not les

ess than 2.0% for Gen ener eral Employee ee (G (GE) ) cover erage e plans

• Not

t less tha than n 2.5% for r Pu Publ blic Safety and nd Corr rrecti tion n (P (PS) ) Pl Plans ns

• Inc

ncrease me memb mber r contri tributi tions ns 2.0% 0% of salary ry across all divisions ns

• Suspend

nd the the curr rrent t COLA for r 3 years

• COLA el

eligibility y is age e 67 (G (GE) ) / / age e 60 (P (PS) ) instead of f curren ent 7 year def efer erral

• COLA is replaced with an annual 13th Check of 5% of 2018 benefit amount
• Example modeled COLA changes do not include disability retirees with benefits of less than $20,000
• Example modeled 67 and 60 minimum age to receive a benefit applies to prospective members only.

Slide 17

Exam ample ple P Pac ackage C Cha Chang nges t to AL ALM – Funded R ded Ratio

Slide 18

Ex Exampl ple P Package C Cha Chang nges to A ALM M – Cash ash F Flo low

Slide 19

Ex Exampl ample P e Package D e D-2 Cha Chang nges es to ALM LM

• Red

educe e Ben enef efit Multiplier ers for

• r Tier

ers 1 and 2 by y 0.25%

• Not les

ess than 2.0% for Gen ener eral Employee ee (G (GE) ) cover erage e plans

• Not

t less tha than n 2.5% for r Pu Publ blic Safety and nd Corr rrecti tion n (P (PS) ) Pl Plans ns

• Inc

ncrease me memb mber r contri tributi tions ns 2.0% 0% of salary ry across all divisions ns

• Suspend

nd the the curr rrent t COLA for r 3 years

• COLA elig

ligib ibilit ility after one-full yea ear of ret etirem emen ent

• **Post-Retirement Increases based on WRS design but limited
• **Post Retirement Increase % is limited between a minimum of 0% and

maximum of 2.5% until PERA is 100% funded then upper limit increases to 5%

Same as Package D except **

• Example modeled COLA changes do not include disability retirees with benefits of less than $20,000
• Example modeled 67 and 60 minimum age to receive a benefit applies to prospective members only.

Slide 20

Exam ample Pac ackage D D-2 Ch Chan anges t s to A ALM – Funde ded R d Ratio

Slide 21

Exam ample ple P Pac ackage D-2 Cha Chang nges to AL ALM – Cas ash F Flo low

Slide 22

Impact of Reduced Vacancy Levels on State General Division

2017 UA UAAL 2043 UA UAAL 2017 F Fund nded Rat atio 2043 F Fund nded Rat atio

Ba Baseline line $ 2,979,900,858 $ 7,252,605,398 66.18% 44.49% Increa ease Acti ctives 1% 1% $ 2,979,900,858 $ 7,126,247,664 66.18% 45.78% Incr crease Acti ctives 5% (1%/ (1%/Ye Year) $ 2,979,900,858 $ 6,689,555,881 66.18% 50.18%

Slide 23

State General goes from 35.1% to 39.4% in 2043 PE goes from 75.7% to 77.4% in 2043

$100 Million General Fund Infusion in FY19

Slide 24

Maj ajor T r Tak ake-Aw Away # #1: Incr Increase o

• ur Likeliho

hood d of f Success

• While possible plan design changes can take many shapes and forms the

e most effective pack ckage is tha hat whi hich ch inc ncreases our likeliho hood d

• f succe
• ccess. The most effective package as a whole, is the one with the

tightest distribution, or smallest difference between the best outcome and the worst outcome.

Wide de Di Distribut ution Tig ight ht D Distributio ion

Slide 25

What We Are Trying to Avoid

Slide 26

Final Thoughts

• The PERA Board recognized in January of 2017 that despite the

positive impact of SB 27, PERA was facing strong headwinds in staying within its goal of paying off our unfunded liability by 2043.

• Over a period of a year and a half, the Board spent significant time

and effort looking at how to address those headwinds through improved governance, investment strategies and benefit analysis.

• Recently adopted economic and demographic assumptions provide a

more realistic basis from which to assess the soundness and sustainability of the PERA benefit.

• Experts agree investments alone will not make up for the shortfall.
• The Board is continuing to review possible benefit and contribution

models and will consider a solvency Resolution at its August meeting setting direction for PERA to provide recommendations for the 2019 legislative session.

Slide 27

PERA RA Fun und P d Per erforman ance

• The PERA Fund balance was $15.4 billion on June 30, 2018
• During FY 2018, the Fund returned 6.93% (net of fees) and was up $1.01 billion

(net of fees)

• PERA Fund paid out benefits of $1.15 billion during FY 2018
• PERA Smart Save (457b) balance was $605 million on June 30, 2018 with 21,692

participants

As As of 6 6/3 /30/2 /2018 1 Ye Year (FY1 Y18) 8) 5 Ye Year 10 Ye Year 20 Ye Year 30 Ye Year Since ce In Incepti tion 6/30/1 /1985 PERA Total Fund Returns (Net of Fees)* 6.93% 7.31% 5.49% 6.27% 8.50% 8.98% Policy Benchmark* 5.27% 7.34% 5.86% 5.88% 8.40% 8.90% Value Add** 1.69%

• 0.03%
• 0.36%

0.39% 0.10% 0.08%

*Annualized returns. **May not sum due to rounding. Note: returns are preliminary , based on monthly data, and are subject to change