Pensions Sherato aton Statio ation Square Pittsburgh, urgh, - - PowerPoint PPT Presentation

Public Employee Pensions

Sherato aton Statio ation Square Pittsburgh, urgh, Penns nsylvania nia July 13, 2015

PUBLIC PENSION OVERVIEW

Part I

1

The “Grand Bargain”

• In theory, public employees accepted lower pay in

exchange for richer benefits.

• Much of this has come about as municipalities and state

governments have invoked wage freezes.

• Today, even with benefits included in the calculations,

public employees make approximately 7% less than their private sector counterparts.

2

Source: Center for Economic and Policy Research; U.S. Bureau of Labor Statistics

Public Employee Wage Growth Less than Overall Economy

• Over the last thirty years, public

employees’ wage growth, has been less than the growth in overall personal

• income. Wage growth has not scaled with

the growing economy.

3

Source: Government Accounting Office, http://www.gao.gov/new.items/d10899.pdf

Public Pension Coverage

• Approximately 16% of the US workforces

is employed by a public entity. Most receive some sort of retirement benefit.

4

Differences between Public and Private Pensions

• ERISA:

– No PBGC coverage – private employers generally free to establish as they see fit, within legal constraints. – Public entities’ pensions usually governed by legislative statutes

• FASB vs. GASB

5

• So, what happened?
• The traditional DB plan

declined rapidly.

• Workers now tend to

have defined contribution plans (401k, 403b, etc.). The workers choose the investment, and bear the consequences.

The Pension Story

• You’ve probably heard this

before –

• Initially, pensions were

promised to employees. After a series of disasters, eventually, various laws were enacted to protect pensions (ERISA). These laws required minimum funding for pensions, and various protections for workers’ retirement money.

• But ERISA alone didn’t force

companies out of pension plans. During the Reagan Administration, accounting rule makers finally decided to require employers to disclose the cost of their pensions – and the cost of meeting required funding. 6

• However, this has led to issues.
• During the 2007-09 recession, more

Americans than ever before had a direct stake in the stock market (usually through their 401ks and 403bs.) And now, those folks couldn’t retire – the number of people over 60 with jobs is up 10% -- on the flip side, the percentage of jobs held by those under 60 has fallen 7%.

7

• Since then, the stock market regained

most of its ground – but 401(k)/403(b) plans have not. Why? During the recession, many workers took their money out of mutual funds investing in stocks ($90 billion).

• Experts indicate that this behavior

prolonged the 2007-09 recession.

8

• But, Public Pension Plans have a different

story.

• Why?

– Different accounting rules – GASB vs. FASB. – GASB has done much less to require the disclosures that we see in private companies – that’s why we still see many more public pensions than private. So, many public employees retain pensions whereas those in the private sector do not.

9

10

Defined Benefit Remains Much more Common for Public Employees

Type of Retirement Benefit Private State and Local Defined Benefit 24% 92% Defined Contribution 68% 33%

Source: U.S. Bureau of Labor Statistics.

Our position Pensions within the USW:

• For private employers,

workers covered by DB Plans has declined from 50% in 1997 to 29% in 2011.

• However, most in the

USW still have DB plans: 71-87% in 2009.

2011 USW Convention Resolution: “Protecting Our Pensions:” “Both single employer and multiemployer defined benefit pension plans offer the greatest income security by providing a lifetime benefit which is insured by the Pension Benefit Guaranty Corporation and supported by the assets of the sponsoring or participating employers, and provide retirement benefits more efficiently than any other plans available.” 11

How Severe were 2008 – 09 Losses?

• “Total state government revenues across

the nation plummeted by a record- breaking 30.8 percent in 2009.”

• “$477 billion decline…” in state tax

income.

12 Source: New York Times, January 6, 2011, at A14.

The Status Quo

• And, public pensions

funds are now largely recovering from losses sustained during the 2007—09 crisis:

• “Like all investors, pension funds experienced investment losses

during the market downturn. A careful examination of the data also tells us that most states have funded their promised benefits in a fiscally responsible manner. An average of 88% of the annual required contribution was paid by the largest state and local retirement systems in the country in 2008. As the market recovers, we find that pension funds are recovering losses and that filling the gap will be manageable. [...] Because funding of public pensions typically is a shared responsibility, just a one percent increase in contributions from employers and employees would fill the gap.” Source: National Institute on Retirement Security.

Post recession, there are rising concerns about the cost of public pensions – most of this fueled by two things: 1. GASB Rules allow governments to be less clear than corporations about their pension liabilities, this has caused fear that the costs might be astronomical, and 2. The growth of the Tea Party and similar platforms which frequently target Public Pensions – keeping the issue in the private eye. 13

Is the Austerity Position Warranted?

14

By 2018, it is expected that, with no other legislative changes, that the funded ratio for public plans will be 81% -- comparable to the “safe” or “green zone” funded ratio required under ERISA for private plans.

Source: Center for Retirement Research at Boston College, State and Local Pension Plans, The Funding of State and Local Pensions: 2014 – 2018, June 2015, Number 45, available at: http://crr.bc.edu/briefs/the-funding-of-state- and-local-pensions-2014-2018/

What are State & Local Governments Doing in Response?

15

Source: The 2010 Arvid Anderson Paper: Public Sector Collective Bargaining at the Crossroads, July 2011, available at: http://www.americanbar.org/content/dam/aba/administrative/labor_law/meetings/2011/annualmeeting/016.authchec kdam.pdf.

• Limiting Collective Bargaining Rights –

– New Jersey, – Wisconsin, – Ohio, – Idaho, – Michigan, – Indiana, – Tennessee.

• Pension “Reform”…

What are State & Local Governments Doing in Response?

16

• Pension “Reform:”

– Between 2001 and 2010:

• 20 states both reduced pension benefits and increased employee contributions;
• 13 states reduced pension benefits;
• 4 states only increased employee contributions.

Source: Pew Center, Road to Reform, at 2.

What are State & Local Governments Doing in Response?

17

• Pension “Reform:”

– 2005 – Alaska – all new employees in DC plan. – 2008 – Georgia – hybrid retirement system, new employees can choose either. – 2010 – Utah – Hybrid. – Pennsylvania – Two tier program for PSERS. – Missouri – Required employee contributions of 4% for new hires. – Illinois – Two tier, significant reduction for new hires.

Source: The 2010 Arvid Anderson Paper: Public Sector Collective Bargaining at the Crossroads, July 2011, available at: http://www.americanbar.org/content/dam/aba/administrative/labor_law/meetings/2011/annualmeeting/016.authchec kdam.pdf.

What are State & Local Governments Doing in Response?

18

• Pension “Reform:”

– COLA Reductions:

• Colorado – limited to 2%.
• Minnesota – eliminated, unless plans are over 90% funded.
• South Dakota – reduced COLA adjustment from 2.1% to 3.1%.
• Utah capped pension COLA adjustment at 2.5% max – but there is a rolling

application provision, allowing to carry over from year to year if CPI is over 2.5%.

• Wisconsin – which has one of the best funded pension plans in the country,

replaced its standard COLA increase with a dividend payable to retirees if investment returns are positive.

– Colorado, Minnesota, and South Dakota – pending lawsuits.

Source: The 2010 Arvid Anderson Paper: Public Sector Collective Bargaining at the Crossroads, July 2011, available at: http://www.americanbar.org/content/dam/aba/administrative/labor_law/meetings/2011/annualmeeting/016.authchec kdam.pdf.

What are State & Local Governments Doing in Response?

19

• Increased Employee Contributions:

– Colorado: 8 to 10.5%, – Minnesota: increased 3%, – Mississippi: increased from 7.25% to 9%, – Missouri: New hires make 4% contribution, – Vermont: 3.45% to 5% (teachers), – Virginia – from 5.57% to 7%.

Source: The 2010 Arvid Anderson Paper: Public Sector Collective Bargaining at the Crossroads, July 2011, available at: http://www.americanbar.org/content/dam/aba/administrative/labor_law/meetings/2011/annualmeeting/016.authchec kdam.pdf.

The Status Quo

Public Pensions Plans are the latest scapegoat for governmental budgeting woes. The headline above is from 7/10/2015. 20

Is the Austerity Position Warranted?

• MYTH: Taxpayers

pay for the lavish public pensions.

• FACT: Most

distributions are earned via investment returns earned off public workers’ own contributions – public workers contribute ~ 6-40%.

21

Is the Austerity Position Warranted?

22 Source: Employee Benefit Research Institute, “Source of Public Pension Plans,” #127, June 17,

• 2009. Available at: http://www.ebri.org/pdf/FFE127.17June09.Final.pdf.
• Pensions generally make up a negligible

portion of municipal/state budgets – about 4%. Due to the 2008-09 crash, this will increase – but is only projected to increase to a manageable 5%.

Is the Austerity Position Warranted?

23 Source: Employee Benefit Research Institute, “Source of Public Pension Plans,” #127, June 17,

• 2009. Available at: http://www.ebri.org/pdf/FFE127.17June09.Final.pdf.
• Don’t take heed to “risk-free” pension funding

scenarios – these are unrealistic and meant to show that public pensions are unsustainable. Future streams of payments should be discounted at a rate which reflects risk.

Is the Austerity Position Warranted?

Investment Earnings Worker Contributions Government Contributions Total 2007 82% 6% 13% 100% 2006 75% 8% 16% 100% 2005 74% 9% 17% 100% 2004 78% 8% 15% 100% 2003 49% 20% 31% 100% 2002 0% 42% 59% 100% 2001 47% 22% 32% 100% 2000 78% 8% 14% 100% 1999 75% 9% 16% 100% 1998 76% 8% 16% 100% 1997 71% 9% 20% 100% Public Pension Benefit Funding Sources, 1997-2007

24 Source: Employee Benefit Research Institute, “Source of Public Pension Plans,” #127, June 17,

• 2009. Available at: http://www.ebri.org/pdf/FFE127.17June09.Final.pdf.

Is the Austerity Position Warranted?

25 Source: Employee Benefit Research Institute, “Source of Public Pension Plans,” #127, June 17,

• 2009. Available at: http://www.ebri.org/pdf/FFE127.17June09.Final.pdf.

Is the Austerity Position Warranted?

26 Source: Employee Benefit Research Institute, “Source of Public Pension Plans,” #127, June 17,

• 2009. Available at: http://www.ebri.org/pdf/FFE127.17June09.Final.pdf.

Is the Austerity Position Warranted?

• MYTH: Public

Pensions are not Financially Viable.

• FACT: The vast

majority of plans have been financially viable – except for the 2007-09 market crash. However, most have now recovered and the vast majority are making the required contributions.

27

Is the Austerity Position Warranted?

28

Source: Center for Retirement Research at Boston College, State and Local Pension Plans, The Funding of State and Local Pensions: 2014 – 2018, June 2015, Number 45, available at: http://crr.bc.edu/briefs/the-funding-of-state- and-local-pensions-2014-2018/

Percentage of Required Contribution, Paid State & Local Pension Funding Ratios, 1990 - 2014

Is the Austerity Position Warranted?

29 Source: Yahoo Finance, S&P 500.

Is the Austerity Position Warranted?

• MYTH: Public

Employees retire with a lavish lifestyle!

• FACT: Wrong. Seven
• ut of 10 public

employees receive less than $30,000 per year in retirement.

• Many are not eligible

for Social Security – so, pension is all they have available.

30

Is the Austerity Position Warranted?

• MYTH: The damned unions

cause perennial pension underfunding.

• FACT: Wrong. There is no

correlation between public employee unionization and pension funding.

31

Is the Austerity Position Warranted?

• MYTH: Public

Pensions hurt the Economy

• FACT: Wrong.

Public pensions pump $358 billion into the economy and impact 2.5 million American Jobs.

• Why?

32 Source: National Institute on Retirement Security, A Better Bang for the Buck: The Economic Efficiencies of Pensions, available at: http://www.nirsonline.org/index.php?option=com_content&task=view&id=121&Itemid=48.

Is the Austerity Position Warranted?

• MYTH: a

401(k) style “Defined Contribution Plan” would be cheaper for tax payers.

• FACT: No.

Defined Benefit Pension Plans Can Deliver the same benefit as a 401(k) style investment for 46% less.

• Why is that?

33 Source: National Institute on Retirement Security, A Better Bang for the Buck: The Economic Efficiencies of Pensions, available at: http://www.nirsonline.org/index.php?option=com_content&task=view&id=121&Itemid=48.

Why?

34

• Superior Risk Pooling (over 15%),

– That is, avoid risk of “overspending” since risk is pooled over a larger group.

• Balanced Portfolio Management (5%),

– Since the plan itself does not “age,” like the participant, the plan is able to take advantage of the smoother long-term investment returns.

• Overall, superior investment returns (26%.)

– We are not investment managers.

Source: National Institute on Retirement Security, A Better Bang for the Buck: The Economic Efficiencies of Pensions, available at: http://www.nirsonline.org/index.php?option=com_content&task=view&id=121&Itemid=48.

Is the Austerity Position Warranted?

35 Source: National Institute on Retirement Security, A Better Bang for the Buck: The Economic Efficiencies of Pensions, available at: http://www.nirsonline.org/index.php?option=com_content&task=view&id=121&Itemid=48.

PENSION ACCOUNTING/FUNDING BASICS

Part II

36

Pension Valuation Forms

• Usually available online – the employer

should also be able to provide.

• Why review these?

– Gauge likely resistance to benefit improvements, – Estimate pension cost, – Verify employer claims, – Determine benchmark cost of “cost-neutral” replacement plan, if necessary.

37

GASB Changes

• 2014 – major year for funded status of

public pension plans – under GASB 25, stock market crash of 2009 rotates out of smoothing calculations…

• And, first year that plan sponsors reported

under GASB new standards.

38

GASB Changes

• Major changes in GASB 67:

– Assets reported at market value, rather than actuarially smoothed, – If assets are projected to fall short of projected future benefits liabilities, the liabilities are valued using blended discount rate.

39

40

What is “Normal Cost:” the cost of the portion of the projected benefits accrued to the current plan year. What is “Minimum Amortization Payment:” the smallest amount the employer can pay to meet funding guidelines. What is “Actuarially Recommended Amortization Payment:” the amortization payment recommended by the actuary.

41

This page indicates the total projected cost of various retirement benefits.

Finance Concepts

• Future and Present Value

– The present value is what something is worth NOW, the future value is what that asset/liability would cost at some point in the future. – Imagine a 1952 Mickey Mantle

• Card. At that time, you could

probably buy that for…well, not

• much. In 1952, the cost of the

card is the “Present Value.” – I just looked on EBAY – it’s going for $20,200. In 1952, $20,200 would be the “Future Value.”

42

Note: This is only a “mid-grade” card. The Percentage Change from the “Present Value” to the “Future Value” is the Discount Rate.

43

What is “Unfunded Actuarial Accrued Liability:” the costs that are projected by the actuary to not be fully funded, yet. What is “APV:” the present value of the future costs. What is “Funded Ratio:” How well funded the plan is to pay the expected liabilities.