Majority Whip August 9, 2014 Question What is an Actuary? Answer: - - PowerPoint PPT Presentation

Presented by:

State Senator Pat Browne Majority Whip August 9, 2014

Question – What is an Actuary? Answer: Someone who found Accounting too Exciting

2 8/11/2014 Council of State Governments

Pennsylvania State Employees Retirement System (SERS) Participants: All Individuals under state employment are allowed to participant Current Compliment: Active Members: 110,107 Annuitant Members: 109,639 Total MV of Assets (12/31/2013) - $ 32 million

Pennsylvania School Employees Retirement System (PSERS) Participants: All Individuals under school district employment are allowed to participant Current Compliment: Active Members: 279,701 Annuitant Members: 177,963 Total MV of Assets (12/31/2013) – $ 52 million

Number of Plans State & Local government pension plans in Pennsylvania estimated to comprise

• ver 25% of total number of public

employee pension plans in US With more than 3,200 plans, PA has more than 4 times as many plans as any

• ther state

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10.06% 8.50% 4.00% 4.00% 4.00% 4.00% 4.00% 3.00% 10.85% 4.73% 4.73% 4.74% 4.73% 7.13% 6.46% 4.69% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% FY 05/06 FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 SERS PSERS

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763,698 918,433 819,533 642,063 656,052 672,035 1,364,000

200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000

FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13

(In Thousands)

Estimates based on projected contribution rates and payroll data provided by PSERS consulting

• actuary. Future year employer contribution rates and the resulting contributions may increase
• r decrease depending on investment performance.

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122,161 61,451 4,851 387,000

200,000 400,000

FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13

SERS

(In Thousands)

Estimates based on projected contribution rates and payroll data provided by SERS. Future year employer contribution rates and the resulting contributions may increase or decrease depending on investment performance.

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(In Thousands)

Estimates based on projected contribution rates and payroll data provided by PSERS consulting

• actuary. Future year employer contribution rates and the resulting contributions may increase
• r decrease depending on investment performance.

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(In Thousands)

Estimates based on projected contribution rates and payroll data provided by SERS. Future year employer contribution rates and the resulting contributions may increase or decrease depending on investment performance.

Employer Contribution Rate Spike Standard for Reform

The projected sharp rise in PSERS’ and SERS employer contribution rate is primarily the result of: The unfunded liabilities created by

The FYs’ 2001-2003, 2008-2009 down investment markets (48%) Act 2001-9 multiplier increase (19%) Assumption and cost method changes (5%) The Act 2002-38 phased COLA (2%) Demographic and Salary Experience (5%) The changes made by Acts 2002-38 and 2003-40 to PSERS’ actuarial funding methodologies (21%)  Total due to market and DB management: 79%

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Element of Unfunded Balance:

• Act 2001-9 multiplier increase

(19%)

• The Act 2002-38 phased COLA

(2%) Reform Pension Reform of 2010: Reduces the Future Cost of State/School District Employee Pension from Average 9% of Payroll to Average 3.37% of Payroll: Very Competitive

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Defined Benefit Plan Design Reform

For New Employees on or after PSERS: July 1 2011 SERS: January 1, 2011

Benefit Accrual Rate – 1) Class 1: reduced from 2.5% to 2% of payroll (Pre 2001 benefit level) Employee Contribution – (Post 2001 Level) PSERS – 7.5% SERS – 6.25% 2) Class 2: maintain higher 2.5% accrual rate with higher employee contribution PSERS - 10.3% SERS – 9.3%

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Defined Benefit Plan Design Reform

Vesting Period – Increased from 5 to 10 years for both systems; Disability period same Retirement Age – Increased to age 65 or at any age with 35 years of service (Previous – 60/62 and 30 years of service) State Police/Capitol Police/Park Rangers – Increased to 55 years and 20 year from 50 years (Arbitration Award – 20/50% - 25/75% maintained) Withdrawal of Contributions (Option 4) - Eliminated

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Additional Cost Reductions:

Pension Cap: The benefit under the DB plan will be limited to not more than 100% of the member’s Final average

• salary. (Eliminate “spiking” as a means for retirement to

exceed salary) No Subsidy for Purchase of non-school/non-state service: Employee contributions for any purchase of non- school/non-state service (POS) will be at full actuarial cost . Exception: Military Service: under federal law (USERRA), we must allow members to purchase military service at the rate that they would have to pay if they were in active service.

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Superannuation: Adopt Rule of 92 for determining superannuation age, but keep age 65 superannuation with 3 years of service. Common Method: Rule of “a number” – number is sum of age and length of service (i.e. 55 year old + 35 years of service = Rule of 90) Higher Number – Stricter Standard Reform: Rule of 92 Effect: Individuals starting in state service between ages 18 and 22 will be required to work longer than 35 years to receive unreduced pension

• Approx. 1,500 state employers per year in this

category Highest rule in the country

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Pension Obligation Bonds (POB) Prohibited

In theory, POB can be used to reduce cost if cost of borrowing is less than investment rate of return on borrowed funds (positive arbitrage) Experience shows that: Positive arbitrage results are often not realized and presents excessive risk given current underfunded status Proceeds of POB, when deposited into plan, artificially inflates funding balance which encourages and often results in benefit enhancement, increasing underfunded status

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Element of Unfunded Balance

The FYs’ 2001-2003, 2008-2009 down investment markets (48%)

 Issue for Reform: Who Should Assume Risk of Investment Loss????

 Defined Benefit: Risk in Investment Loss Fully on Employer/Taxpayer  Defined Contribution: Risk of Investment Loss Fully on Employee  Alternative: Sharing of Investment Loss Between Employer/Taxpayer and Employee

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24 Senate Finance Committee

• Reform: “Shared Risk” Defined Benefit Plan

Establish new DB plan which guarantees benefit but requires shared responsibility by employees for unmet investment assumptions and/or unfunded balance

–

Elements:

• Base Rule: Commencing with the next 5-

year actuarial experience study, PSERS/SERS will compare the actual investment rate of return to the actuarial assumed rate of return for a 10-year period. (Ten year Rolling Average)

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Reform: “Shared Risk” Defined Benefit Plan

Contribution Adjustment: For every 1% that the actual rate is less than the assumed rate, the employee contribution rate to the Defined Benefit (DB) plan will increase by .5%. For every 1% that the actual rate is more than the assumed rate, the employee contribution rate to the DB plan will decrease by .5%. If the difference is less than 1%, then there will be no change in the employee rate. The changes will be made only for whole numbered differences, so that if there is a difference of 1.6%, then the employee rate will change by .5%. If there is a difference of 2.4%, then the employee rate will change by 1%.

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Reform: “Shared Risk” Defined Benefit Plan

Range of Contribution Adjustment The employee contribution rate: PSERS (T-E) shall not drop below 7.5% nor go above 9.5%. PSERS (T-F) members shall not drop below 10.3% nor go above 12.3%. SERS (Class 1) shall not drop below 6.25% nor go above 8.25%. (Class 2) not drop below 9.3% nor go above 11.3% New hires will contribute at the rate in effect when they are hired. Contribution Rates will be reset every three years. Rates will not be reset more than .5% in any one period

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Reform: “Shared Risk” Defined Benefit Plan

Phase In: First 10 years – Rate Comparison will be

made on three year increments (i.e.. First three years – 3 years; First 6 years – 6 years; First 9 years – 9 years; At 12th year, look back will be previous 10 years)

Debt Reduction: Employee contributions in excess of

7.5%/6.25% will be used to reduce the unfunded accrued liability (over a period of 30 years as a level percent of payroll

Employer Payment Incentive: In any year the

Commonwealth does not meet scheduled payment, employee shared risk is eliminated for that year

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• Element of Unfunded Balance

Assumption and cost method changes (5%)

Demographic and Salary Experience (5%)

Reform: Price Waterhouse Coopers Study 1) Valuation of System Assets: Reasonable 2) Actuarial Assumptions: Salary Experience: Reasonable Mortality Experience: Reasonable

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Kicking the Can Down the Road??”

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Kicking the Can Down the Road??”

• Element of Unfunded Balance

The changes made by Acts 2002-38 and 2003-40 to PSERS’ actuarial funding methodologies (21%)

• How Big is Our Debt???

2009 2014 (millions)

• PSERS: $15,200

$42,000

• SERS: 5,592 17,000

$20,792 $59,000 Reality Check: Given Commonwealth’s current financial condition, some kind of deferred payment schedule (current law) is required. Standard for performance: How close can we come to our current law payment schedule??

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Kicking the Can Down the Road??”

Short Term Budget Management:

COLLARS

1% increase for 2010-2011 3.0% increase for 2011-2012 3.5% increase for 2012-2013 4.5% increase for 2013-2014 and all years thereafter

• Amortization of Liabilities

– SERS: Fresh-Start Amortization over 30 years (Same as HB 2497) – PSERS: Fresh-Start Amortization over 24 years (HB 2497 – 30 years)

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“Kicking the Can Down the Road??”

• Cost Comparison

– Total Cost vs Current Law (in millions)

2010 Reform Current Law Savings

PSERS $168,946 $170,328 ($ 1,382) SERS 67,967 69,444 ( 1,477) $ 236,913 239,772 ($ 2,859)

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PLATFORM FOR REFORM

 RISK PROFILE: Current Risk Profile requires consideration of further plan design changes to mitigate future risk on Commonwealth  RATING AGENCIES: Rating agencies considering debt and risk exposure in evaluating credit ratings  ESCALATING CONTRIBUTIONS: Even with liability management from 2010 reforms, majority of assembly, Governor and school district

• fficials believe contribution requirements

unsustainable

PLATFORM FOR REFORM

 Private Sector Benchmarking: Plurality in General Assembly and Governor believe that Commonwealth’s pension plans should model those prevalent in private sector (Defined Contribution Plan Designs)  Debt to Revenue Ratio: With $76 billion in actuarial and general obligation debt, (65 billion actuarial) which exceeds PA constitutional limit (1.5 times general fund revenue) further pension reform needed to correct imbalance

5.64% 8.65% 12.36% 16.93% 21.31% 25.80% 28.30% 5.00% 8.00% 11.50% 16.00% 20.50% 25.00% 29.50%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16 FY 16-17 PSERS SERS

SERS projected Total Employer Contribution (all funds) is estimated at $971 million for FY 13-14 and will increase to $2.0 billion by FY 16- 17. PSERS projected Total Employer Contribution (State and School District shares) is $2.3 billion for FY 13- 14 and will increase to $4.2 billion by FY 16-17

Year-to-year growth is currently limited to 4.5% by the Act 120 collars. The collars remain at 4.5% until the increase in the contribution rate from year-to-year is less than 4.5%.

287,562 619,364 913,082 1,222,970 1,585,508 1,986,111 2,287,797 122,875 193,808 280,456 386,603 510,442 641,483 780,032

500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Amounts in Thousands

PSERS SERS

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335,264 537,103 777,528 1,022,030 1,320,331 1,640,577 1,849,874

• 200,000

400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000 FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16 FY 16-17

School Districts will see pension contributions increase by more than $1 billion by FY 16/17. School districts ability to increase taxes to address increased contributions is limited by the Act 1 index.

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Options

Decrease/cut the costs or liabilities of the System

New Employees: Conversion of PSERS /SERS to a Defined Contribution, Cash Balance or Hybrid plan

A Hybrid plan typically is a combination of both DC and DB components

Existing Employees: Maintain the existing Defined Benefit plan with additional prospective benefit modifications: Reduce multiplier Change terms of retirement Return to a 10-year vesting period Prohibit the withdrawal of a member’s contributions

Defined Benefit Modifications/DC Conversion

Existing Employees

2010 Reform provisions applied to prospective benefits of Pre 2010 employees Multiplier reduced from 2.5 to 2.0 5 year vesting to 10 year vesting Option 4 withdrawal eliminated prospectively New Employees All new employees eligible for Defined Contribution Plan Employee contributions match Defined Benefit Employer match – 3% Individual accounts with multiple investment options No loan provisions

Defined Benefit Modifications/DC Conversion

Projected Savings – 15 billion over 30 years

8 billion dedicated to adjust collars to provide for current budget relief

Pro:

Provides for parity of plan design for existing employees Provides for substantial reduction in risk profile for commonwealth going forward Higher normal cost to provide pre 2010 benefit (approx. 9% of payroll) allows for maximum range for savings

Con:

Application to existing employees raises constitutional question – contracts clause Defined Contribution – transition cost

Defined Contribution Conversion Plan Design Provisions Applies to new employees only Employee Contribution – same as existing DB Employer match – 3% (models DB normal cost) Individual accounts with multiple investment options No loan provisions Savings – 1.5 billion over 30 years

Defined Contribution Conversion

Pro: Maximize the reduction of risk profile to commonwealth Models prevalent private sector plan design Portability to match modern workforce

Con:

Significant reduction in employee benefit for older individuals entering compliment Transition Costs – Systems report $40+ billion (nominal dollars) transition cost for conversion Arguments – Liquidity and Relative Risk

“Stacked Hybrid” Plan

Provisions

Applies to new employees Defined Benefit provided for first $50k in payroll per employee 2.0 multiplier on years of service and final 5 year average salary 10 year vesting Superannuation – 35 years of service or age 65 Employee Contribution – matches existed DB Shared Risk Provision maintained Above 50K – Defined Contribution benefit applied Employee contribution same as existing DB Employer match – 3% ( matches normal cost of existing DB

Stacked Hybrid” Plan

Savings: $8 billion over 30 years Pro: Allows for gradual phase in of DC platform as salaries increase Risk profile reduced for Commonwealth as DC platform phases in and with lower cost DB No transition cost exposure Con: Favors higher salary lower age employee More complex to manage – continue to manage two systems

Cash Balance Plan

Provisions Applies to new employees Individual Accounts for employee 4% interest credit Employee Contribution – matches current DB Earnings above 4% interest credit – split between employee and plan – plan excess earnings applied to unfunded debt 10 year vesting of interest credit Superannuation – 35 years or age 65 Individual account – annuity or lump sum option apon retirement

Cash Balance Plan

Savings: $3 billion over 30 years Pro:

Individual accounts with portability No transition costs Lowers risk profile for Commonwealth – 7.5% interest assumption vs. 4% interest credit Shared risk and Shared Benefit

Con:

Not effective private sector benchmarking – limited penetration in PA private sector Maintains DB platform Future upper pressure on interest credit guarantee in periods of expanding markets Shared benefit reduced with future adjust of portfolio

Unfun… 0.00 5.00 10.00 15.00 20.00 25.00 30.00 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044

Contributions

Unfunded Balance Normal Cost

General Fund Taxes = Pension Obligation

Bonds =

Question: Other Alternatives???

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Lump Sum Options

Use Proceeds from Pension Obligation Bonds to provide Lump Sum Options to Current Plan Participants and Annuitants

Locks in arbitrage delta – Cost of borrowing less than 7.5% discount rate Shifts risk of benefit to employee

De-risking of Plan

Selling liability to third party Con – significant premium due to earnings assumption relative expected earnings by third party

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Number of Plans Local government pension plans in Pennsylvania estimated to comprise

• ver 25% of total number of public

employee pension plans in US With more than 3,100 plans, PA has more than 4 times as many plans as any

• ther state

55

Number of Local Government Pension Plans

Police Fire Non Uniformed Total County 72 72 City 58 45 4 167 Borough 485 20 558 1,063 Township (Class 1) 88 7 102 197 Township (Class II) 302 7 800 1,109 Authority 491 491 COG 32 29 1 Total 965 79 2,116 3,160 56

Pension Plan Size Per Member Administrative Cost 10 or Fewer Active Members $1,519.86 11 to 100 Active Members $1,002.99 More than 100 Active Members 362.76 More than 500 Active Members 302.74

 Expense per member

decreases with larger plans  When admin cost of larger plans ($302.74) is applied to all plans, potential savings of $14.6 million is realized (reduction of 40%)

General Characteristics Administrative Expense

57 8/11/2014 Council of State Governments

Nature of Plans

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Size of Plans

Philadelphia – 28, 354 Active Members 98% (3,016) of Plans are Small (Less than 100 members) Only 14% of Municipal Plans have more than 25 Active Members 59

Defined Benefit Plans and Active Membership by Funded Ratios

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Trends in Unfunded Actuarial Accrued Liabilities (In Billions)

2.8 2.9 3.3 3.4 3.6 3.8 3.7 3.6 3.8 5.5 6.7 6.8 7.8 2.8 2.9 3.3 3.4 3.6 3.8 3.7 1.9 2 3.8 5.1 5.2 6.2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Without Bond Issues With Bond Issues 61

Municipal Reforms

State Aid – Decrease “cap” to less than 100%

• f pension cost

Transfer “critical” plan (less than 50% funded) to PMRS to “lock in” current benefits Allow contribution levels above statutory

• maximums. Require new plans (defined

contributions) for new members Consolidation of Plans into state plan (PMRS) Give real enforcement to PERC for noncompliance Binding Arbitration Restrict benefit increased unless fully funded

But with respect to future debt; would it not be wise and just for that nation to declare in the constitution they are forming that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age, or within the term of 19 years.

Thomas Jefferson 63 Council of State Governments

Pat Browne

Majority Whip Senate of Pennsylvania

pbrowne@pasen.gov http://www.SenatorBrowne.com

Thank You