Mission Possible: An Update to the Pension Funding & Fairness Act
Overview of Public Pension Funding Issues › media.guidebook.com › ... · Overview of Public...
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Overview of Public Pension Funding Issues
Keith Brainard
NASRA Annual Conference August 7, 2016 Coeur d’Alene, Idaho
NASRA Research Director
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◀ Pay-as-you-go funding of pension plans had ended and actuarial funding was the norm
◀ In the wake of the inflation spike that began in late 60s, auto-COLAs were emerging
◀ Early stage of equity investing ◀ Dawn of retirement systems offering retirement
counseling ◀ Manual and general ledger accounting giving way to
reliance on mainframe computers Other interesting conditions: ◀ More emphasis on unfunded liabilities than on actual
assets ◀ 40-year amortization of unfunded liabilities was common
1974 was a transitional period in public pension plan history
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Accounting/data processing in 1974
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Retirement counseling in 1974
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Actuarial data in 1974
Terms not present: entry age, normal cost, actuarial value of assets, smoothing, level dollar, funded ratio, and others.
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Investments in 1974
Terms not present: hedge funds, real estate, infrastructure, private equities, options, tactical asset allocation, billion.
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◀ Data is culled and analyzed by NASRA staff from the Public Plans Database, CAFRs and other source documents
◀ PPD is an online compendium of public pension information maintained by the Center for Retirement Research at Boston College, in collaboration with NASRA and the Center for State & Local Government Excellence
◀ www.publicplansdata.org ◀ FY 15 information presented here is not yet complete
and is subject to change ◀ Complete analysis of FY 15 will be published this fall as
the Public Fund Survey Summary of Findings for FY 15
About the funding data
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◀ Stabilization of funding levels after more than a decade of decline
◀ Required costs are still rising for some plans due to higher unfunded pension liabilities and insufficient contributions
◀ Gradual movement from open amortization periods to closed and fixed periods, and toward shorter amortization periods
◀ Assumptions: lower inflation and nominal investment return
◀ Growing use of phased-in lower investment return assumptions
Notable funding trends
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Aggregate
Public Pension Funding Level,
FY 01 to FY 15
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Median Change in Actuarial Value of
Assets and Liabilities, FY 02 to
FY 15
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Size of bubbles is roughly proportionate to size of plan liabilities
Latest Public Pension Funding Levels
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Median change in membership, FY 01 to FY 15
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Median Contribution Rates, Social Security–eligible and –ineligible, FY 02 to FY 15
*
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Distribution of Employer Contribution Rates, Social Security-
eligible, FY 15, (general employees and teachers)
Public Fund Survey
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Distribution of Employer Contribution Rates, Social Security-ineligible, FY 15
(general employees and teachers)
Public Fund Survey
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Distribution of percentage of pension plan normal cost* paid by employees
Public Fund Survey *Normal cost is the cost of benefits accrued each year
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Median and aggregate net cash flow, FY 02 to FY 15
Jul 2013
Net cash flow equals contributions minus benefit payments and expenses, divided into assets
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Median and aggregate net cash flow and change in assets, FY 02 to FY 15
Jul 2013
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Distribution of net cash flow and size of benefits distributed, FY 15
Jul 2013
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Median annual change in payroll, FY 06 to FY 15
Public Fund Survey
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Median annual change in payroll, employment, and wages and salaries, FY 06 to FY 15
Public Fund Survey
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◀ The inflation assumption typically serves as the basis of actuarial assumptions for payroll growth and investment return
◀ Payroll growth is a major driver of liability growth
◀ The investment return assumption has a major effect on a pension plan’s cost and funding level
The role of inflation in public pension funding
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Annual change in CPI-U for periods ended in June, 1992-2016
Jul 2013 US Bureau of Labor Statistics
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10-Year Rolling Average Inflation (CPI-U)
Jul 2013 US Bureau of Labor Statistics
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Change in CPI-U compared to change in prices for eggs and unleaded gasoline, Jul-13 to Jun-16
Jul 2013
Bureau of Labor Statistics
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Expectations for inflation over the next 10 years
Jul 2013 Cleveland Fed
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Yields on 10-year notes: US, Germany and Japan, Jan-03 to Jul-16
Jul 2013
Wall Street Journal
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Change in distribution of investment return assumptions, FY 01 to present
Jul 2013
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Change in average assumption for inflation and real rate of return, FY 05 to FY 15
Jul 2013 Public Fund Survey
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Median annualized public pension fund investment returns for periods ended 6/30/15 and 12/31/15
Jul 2013
Callan Associates
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Median annualized public pension fund investment returns for periods ended 6/30/16
Jul 2013
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Average asset allocation, FY 01 to FY 15
Jul 2013
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◀ Funding levels are stabilizing, but funding experience and required costs vary widely
◀ Inflation remains very low, reducing wage growth rates and rates of liability growth
◀ Liability growth rates remain low due to slow hiring, low inflation and salary growth, and benefit reductions
◀ Liability growth rates would be lower still were it not for the headwind of lower investment return assumptions
◀ Assumed rates for inflation and nominal investment returns have decreased and may continue
◀ Required contribution rates will remain high for plans with large unfunded liabilities
◀ Pension challenges vary from state to state and plan to plan; every case is unique
Summary
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NASRA Research Overview
Alex Brown
NASRA Annual Conference August 7, 2016 Coeur d’Alene, Idaho
Research Manager
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◀ NASRA Issue Briefs & Papers ◀ NASRA.org
▲ Economic Indicators ▲ NASRA Member Surveys
Research Update
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◀ Policy discussion of elements pertaining to public pension plan design, cost, financing, etc.
◀ Comprehensive data set
▲ COLA formulas ▲ Employee contribution rates ▲ Hybrid plan characteristics ▲ Investment return assumptions
Issue Briefs
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Updated Issue Brief: State Hybrid Retirement Systems
◀ Cash balance and combination hybrid plans are optional or mandatory for groups of general, public safety, or educational employees
◀ Many hybrid plans retain all or most distinguishing elements of sound retirement plan design
◀ Many public plans already feature elements of hybrid plan design
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Updated Issue Brief: Public Pension Plan Investment Return Assumptions
◀ Of all actuarial assumptions, investment return assumption has the most significant impact on pension liabilities and costs
◀ Plans continue to reduce
investment return assumptions
◀ The median investment return
for the 25 year period ended 12/31/15 exceeds the current average return assumption
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Updated Issue Brief: State and Local Government Spending on Public Employee Retirement Systems
◀ Pensions accounted for approximately 4.1 percent of all state and local government general expenditures in FY 13.
◀ Spending by state varies
widely, from around 1.6 percent to nearly 8 percent.
◀ Spending on pensions is projected to increase in FY 14, but still below levels observed in prior years.
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Employer (taxpayer) spending on public pensions, 1985 to 2014
“State and Local Government Spending on Public Employee Retirement Systems,” NASRA 2016
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New Issue Brief: State and Local Government Contributions to Statewide Pension Plans: FY 14
◀ Receipt of full actuarially determined contributions are vital to pension plan funding and sustainability
◀ State and local government
funding discipline improved in FY 14
◀ Individual state contribution experiences vary widely
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Distribution of ARC/ADC received by 112 plans, FY 14
“State and Local Government Contributions to Statewide Pension Plans: FY 14,” NASRA 2016
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Median and average ARC/ADC received by 112 plans, FY 01 to FY 14
“State and Local Government Contributions to Statewide Pension Plans: FY 14,” NASRA 2016
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Significant Reforms to State Retirement Systems
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States that reformed pension plans by year, 2007-2015
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“Significant Reforms to State Retirement Systems,” NASRA 2016
States that increased employee contributions
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“Significant Reforms to State Retirement Systems,” NASRA 2016
States that reduced pension benefits
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“Significant Reforms to State Retirement Systems,” NASRA 2016
States that reduced automatic COLAs
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“Significant Reforms to State Retirement Systems,” NASRA 2016
States that established new hybrid plans
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◀ Most states retained plan features known to promote retirement plan sustainability and balance stakeholder objectives
◀ While most states retained their defined
benefit plan, a greater share of the risk of accumulating and funding benefits was shifted to employees
◀ Generally, reforms were calibrated to states’ specific conditions
Final Reform Thoughts
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Relative change in private and state and local government employment, Jan 06 to July 16
U.S. Bureau of Labor Statistics
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Annualized quarterly change in wage and salary costs for private and state and local government employees, 2006-2016
U.S. Bureau of Labor Statistics
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Annualized quarterly change in wage and salary costs for private and state and local government employees, 2006-2016
U.S. Bureau of Labor Statistics
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Annualized quarterly change in benefit costs for private and state and local government employees, 2006-2016
U.S. Bureau of Labor Statistics
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Total public pension assets at year-end, FY 03 to FY 15
Federal Reserve
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Nominal change in annual state and local tax revenue by source
U.S. Census Bureau
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◀ Delayed Employer Contributions ▲ Many retirement systems provide an extension to employers who
fail to make required contributions on time ▲ Most systems charge interest on late contributions; interest rates
range from 1 percent up to the plan’s full assumed rate of investment return
◀ Service Purchase Calculations ▲ Most retirement systems allow members to purchase credit for
service not covered by a participating employer of the system ▲ Some systems allow service to be purchased at a rate
approximating missed contributions plus interest; others charge the full actuarial cost.
◀ Source of Teacher Pension Contributions ▲ Primary responsibility for funding teacher pensions varies among
states ▲ In some states, teacher pensions are funded exclusively at the
state or local level; in other states, funding responsibility is shared
Survey Highlights
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Q u e s t i o n s / C o m m e n t s