Wha t I f We Are Wro ng ? NCPE RS 2016 Pub lic Sa fe ty E mplo - PowerPoint PPT Presentation

Wha t I f We Are Wro ng ? NCPE RS 2016 Pub lic Sa fe ty E mplo ye e s Pe nsio n & Be ne fits Co nfe re nc e , L a s Ve g a s, NV Oc to b e r 26, 2016

1. We Don’t Deser ve T hem 2. T hey Ar e T oo E xpensive 3. We Can’t Manage T hem Our selves

My Ba c kg ro und • 28 Ye a rs in Pub lic Se rvic e • Ve ste d Me mb e r o f T wo Pe nsio n Pla ns • T ruste e o n Pe nsio n Bo a rd fo r 8 ye a rs • F o rme r Unio n E -Bo a rd Me mb e r Ma ste rs De g re e in Pub lic • Administra tio n CPPT fro m F lo rida Pub lic • Pe nsio n T ruste e Asso c ia tio n CAPPP fro m I F E B • NCPE RS Ac c re dite d F iduc ia ry • Pro g ra m (NAF )

7 Me mb e r Bo a rd • • Po lic e And F ire • 2 Ac tive F ire fig hte rs E le c te d By Me mb e rs • 2 Ac tive Po lic e Offic e rs E le c te d By Me mb e rs 2 Appo inte d By T he Ma yo r • • 1 E le c te d By T he Bo a rd • Appro xima te ly 1500 Me mb e rs And $850 AUM • F unde d Ra tio I n T he Uppe r 90% • Assume d Ra te Of Re turn Of 7.5 % • Ado pte d NCPE Rs Co de Of Co nduc t

he m 1. We Do n’ t De se rve T

1. We Do n’ t De se rve T he m • We 100% De se rve Our Be ne fits • T he Ca lifo rnia Supre me Co urt Uphe ld this ( Ma rin Assn. o f Pub lic mplo ye e s’ Re tire me nt Assn. ) E mplo ye e s v. Ma rin Co unty E • “While a pub lic e mplo ye e do e s ha ve a ’ ve ste d rig ht’ to a pe nsio n, tha t rig ht is o nly to a ’ re a so na b le ’ pe nsio n—no t a n immuta b le e ntitle me nt to the mo st o ptima l fo rmula o f c a lc ula ting the pe nsio n,” • “Re a so na b le ” o r “F a ir” sho uld b e de te rmine d b y ma rke t fo rc e s • F a irne ss is unq ua lifia b le a nd disc o unts inta ng ib le s suc h a s PSM

Public Ser vic e Motivation (PSM) vic e Motivation (PSM) is a the o rize d a ttrib ute o f • Public Ser g o ve rnme nt e mplo yme nt tha t e xpla ins why individua ls ha ve a de sire to se rve the pub lic a nd link the ir pe rso na l a c tio ns with the o ve ra ll pub lic inte re st. Unde rsta nding the the o ry a nd pra c tic e o f PSM is impo rta nt in de te rmining the mo tiva tio ns o f individua ls who c ho o se c a re e rs in the g o ve rnme nt a nd no n- pro fit se c to rs de spite the po te ntia l fo r mo re fina nc ia lly luc ra tive c a re e rs in the priva te se c to r. • PSM Dividend is o ne o f the fa c to r why pub lic se c to r pe nsio n sho uld b e hig he r the n the priva te se c to r.

PSM NOT

OF F T I L T • We Ha ve F o c use d T o o Muc h Atte ntio n De fe nding Our Wo rth • We Are Sta rting T o Appe a r L ike We Ha ve “E ntitle me nt Diso rde r” • T he Othe r Side Ha s Mo ve d On And I s No w F o c using On T he Mo re Qua ntifia b le Arg ume nt Of “T o o E xpe nsive ”

xpe nsive o o E he y Are T 2. T

Moving fr om Paper Cr isis to R eal Cr isis As Pe nsio n F unding T a ke s Mo re And Mo re Re ve nue F ro m T he ir Ge ne ra l F unds, Mo re GO Bo nds Will Ha ve T o Be I ssue d F o r E sse ntia l Se rvic e s: • Sc ho o ls • Ro a ds • We lfa re • T he Ho me le ss, E tc .

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mb a la nc e s lo w I Ca sh F

Admitting T ha t Our Pe nsio ns Are E xpe nsive I s No t Admitting T ha t We Are T o Bla me F o r I t, Or T ha t We Do n’ t De se rve T he m I t I s Ha rd T o Me e t T he Assume d Ra te Of Re turn T a rg e ts I n T he • Ne w No rm L o we ring Assume d Ra te Of Re turn Only Wo rse ns T he I ssue • De mo g ra phic s Are Wo rking Ag a inst Us • Wo rking T hro ug h E xc e sse s T ha t We re Cre a te d “F a irly” Via • Co lle c tive Ba rg a ining

Ne w No rm One Side E ffe c t Of Ag g re ssive Mo ne ta ry Po lic y I s An I nc re a sing Stra in On Pub lic Pe nsio ns, Whic h Re ly Upo n Co nsiste nt I nve stme nt Re turns I n Orde r T o Me e t T he ir Ob lig a tio ns.

Ma c ro I mplic a tio ns F o r Ca pita l Allo c a to rs • One T he o ry Sug g e sts T ha t Due T o T he E ffo rt T o Be a t Our Assume d Ra te Of Re turn During T his L o w Re turn E nviro nme nt, T he F o rc e E xe rte d By T he Va st Amo unt Of Pub lic Pe nsio n F unds Co uld Ca use A Se rio us Disto rtio n T o F ina nc ia l Asse t Pric ing . • T his Ma ke s Our Pla ns No t Only E xpe nsive F o r Us, But F o r So c ie ty As A Who le .

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he m Ourse lve s 3 . We Ca n’ t Ma na g e T

I ssue s with Se lf-Ma na g e me nt • We Ha ve T o Re -E va lua te Our Bo a rd Go ve rna nc e • We Ha ve T o Re c o g nize Our Own I mplic it Bia s • We Ha ve T o Co ntro l Po litic a l Pre ssure On Sho rt- T e rmism • F o rma l And De F a c to Risk-sha ring

We Ha ve T o Re c o g nize Our Own I mplic it Bia s • Bo a rds T a ke T o o Muc h Risk • Bo a rds Ge t T o Se t T he ir Own Ra te s o f Re turns a nd Asse t Allo c a tio ns • Cre a te Artific ia l “Ca ll Optio n” • Re ly On T he Advic e Of Pro fe ssio na ls

Study Sho ws Bo a rds T a ke T o Muc h Risk • “Pub lic DB pe nsio n funds with a hig he r pe rc e nta g e o f sta te -po litic a l a nd pa rtic ipa nt-e le c te d truste e s inve st mo re in risky a sse ts a nd use hig he r lia b ility disc o unt ra te s.” iab ility Disc o unt Rate s, Ma rc h 2016, Ale ksa nda r Pe nsio n F und Asse t Allo c atio n and L Ando no v, E ra smus Unive rsity Ro tte rda m, Ro b Ba ue r Ma a stric ht Unive rsity a nd Ro tma n I CPM, Unive rsity o f T o ro nto , Ma rtijn Cre me rs, Unive rsity o f No tre Da me

Sho rt T e rm “Ca ll Optio n”  “pa rtic ipa nt-e le c te d truste e s re pre se nt the c urre ntly e mplo ye d a nd re tire d pla n me mb e rs a nd e ffe c tive ly ho ld a sho rt-te rm “c a ll o ptio n” o n the pe nsio n fund a sse ts tha t ma y inc e ntivize the m to inc re a se risk-ta king . I n the sho rt-te rm, pla n pa rtic ipa nts a re no t o b lig e d to pa y hig he r c o ntrib utio ns if inc re a se d risk-ta king re sults in lo w re turns a nd unde rfunde d lia b ilitie s, b ut the y c o uld b e ne fit fro m inc re a se d b e ne fits if risk-ta king yie lds g o o d re turns. I t is o nly a fte r re po rte d unde rfunding pe rsists fo r a pro lo ng e d pe rio d tha t pla n me mb e rs ma y b e e xpo se d to re duc tio ns o f future b e ne fits”

“I nve stme nt c o nsulta nts a dvise institutio na l inve sto rs o n the ir c ho ic e o f fund ma na g e r. F o c using o n U.S. a c tive ly ma na g e d e q uity funds, we a na lyze the fa c to rs tha t drive c o nsulta nts’ re c o mme nda tio ns, wha t impa c t the se re c o mme nda tio ns ha ve o n flo ws, a nd ho w we ll the re c o mme nde d funds pe rfo rm. We find tha t inve stme nt c o nsulta nts’ re c o mme nda tio ns o f funds a re drive n la rg e ly b y so ft fa c to rs, ra the r tha n the funds’ pa st pe rfo rma nc e , a nd tha t the ir re c o mme nda tio ns ha ve a ve ry sig nific a nt e ffe c t o n fund flo ws. Ho we ve r, we find no e vide nc e tha t the se re c o mme nda tio ns a dd va lue , sug g e sting tha t the se a rc h fo r winne rs, e nc o ura g e d a nd g uide d b y inve stme nt c o nsulta nts, is fruitle ss.” nve stme nt c o nsultants' re c o mme ndatio ns o f fund manag e rs T im Je nkinso n, Pic king winne rs? I Ho wa rd Jo ne s, a nd Jo se Vic e nte Ma rtine z, Se pte mb e r 26, 2014

Sho rt T e rmism • Pe nsio n Pla ns Are De sig ne d T o Ha ve Ve ry L o ng T e rm Ho rizo ns • We Me a sure Pe rfo rma nc e Qua rte rly • Pla n Spo nso rs Me a sure Annua lly • Sho rt T e rm Bia s I s Affe c ting Our I nve stme nt De c isio ns.

o rmal a nd de fac to risk-sharing F • F o rmal and de fac to risk-sharing plans in the c a se o f fo rmal risk-sharing fe a ture s, c ha ng e s to pla n b e ne fits a nd c o sts a re kno wn a nd unde rsto o d in a dva nc e , whe re a s de fac to risk-sharing is intro duc e d a fte r pa rtic ipa nts a lre a dy a re in the pla n. • De fac to risk-sharing b e ne fit re duc tio ns o r c o st inc re a se s a re impo se d upo n c urre nt e mplo ye e s, re tire e s, o r b o th.

Wha t Ca n We Do • Ge t Ove r Po int One • K e e p An Ope n Mind Ab o ut Po int T wo • E xa mine Yo ur Bo a rd Go ve rna nc e • K e e p Do ing Wha t Yo u’ re Do ing

Co nc lusio n T o de a l with this c ha lle ng e , po lic yma ke rs a nd unio n le a de rs ne e d to a dmit tha t the sta tus q uo is po ssib ly unsusta ina b le ; a nd a lso , tha t c ling ing to stric t a dhe re nc e to c urre nt pla n de sig ns tha t we re e na c te d fo r a wo rld tha t no lo ng e r e xists will o nly le a d to g ro wing pe nsio n inso lve nc y. I ro nic a lly, the unio ns a nd pla n spo nso rs fa iling to de a l with the se issue s a re ultima te ly je o pa rdizing the re tire me nt se c urity o f the ir o wn me mb e rs a nd fe llo w g o ve rnme nt wo rke rs.