Future of Public Pensions

State and Local Government Pensions and Retiree Health Care

Joshua Franzel, PhD Vice President of Research

Center for State and Local Government ExcellenceMay 20, 2014

National Press Foundation

This presentation has been created for general information purposes. It is not intended to give financial or professional advice.

The Center promotes excellence in local and state governments

to attract and retain talented public servants.

slge.org

About the Center for State and Local Government Excellence (SLGE)…

SLGE Areas of Focus

• Retirement benefits and security• Health care• Compensation• Human resource trends• Workforce demographics• Competitive employment practices• Financial planning

The State and Local GovernmentPension Plan Context

• Over 3,400 state and local government public employee retirement systems (2011)

• 14.6 million active members and 8.6 million retirees (2011)

• 83% of state and local workers have access to a defined benefit pension plan

• 32% of state and local workers have access to a defined contribution plan

• ~30% of state and local workers do not participate in Social Security

Sources: (1) http://www.bls.gov/ncs/ebs/benefits/2013/ownership/govt/table02a.pdf ; (2) http://www.census.gov/govs/retire/ ; (3) http://www.nasra.org/socialsecurity

Defined Benefit PlanDefined Contribution PlanChoice between plan typesHybrid Plan(DB/DC or Cash Balance)

U.S. State Pension Plan StructuresState Employees

PR

Source: National Conference of State Legislatures, Checklist of State Defined Benefit, Defined Contribution and Hybrid Plans for State Employees and Teachers (2012)Note: Some of the structures listed have changed since 2012 (National Association of State Retirement Administrators).

The portion salary and benefits make up of overall employer costs for employee compensation (BLS)

Chart: SLGE / Data : BLS Employer Costs for Employee Compensation (2013)

State and Local Pensions: Average Funded Ratio

Source: SLGE and BC-CRR Public Plans Database Note: preliminary data for 2013

Distribution of Funded Ratios for Public Plans (2012)

20%-39% 40%-59% 60%-79% 80%-99% 100%0%

10%

20%

30%

40%

50%

2%

21%

45%

27%

6%

funded ratio ranges

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Source: Munnell, Aubry, Hurwitz, Medenica ‘The Funding of State and Local Pensions: 2012–2016’ / SLGE and BC-CRR Public Plans Database Note: totals do not equal 100% due to rounding.

Why are some plans better funded than others?

• Consistent funding of the annual required contribution

• Appropriate full-retirement ages

• Realistic about assumptions

• Do not allow extraordinary income to be included in pension formulas

• Take a long-term view; no contribution “holidays” in good times; avoid retroactive benefit increases

SLGE ‘State and Local Pensions: An Overview of Funding Issues and Challenges’ and GFOA ‘Advisory: Responsible Management and Design Practices for Defined Benefit Pension Plans’

Chart: SLGE / Data : SLGE / IPMA-HR / (NASPE) ‘The Great Recession and the State and Local Government Workforce’

Retirement Plan ChangesOver the past year, has your government made any changes to the retirement benefits you offer to your employees?

Pension benefit reforms since 2008

Increa

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ution

rates

Increa

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Reduc

ed be

nefits

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0

5

10

15

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25

New employeesCurrent employeesRetirees

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Source: National Association of State Retirement Administrators , Center for State and Local Government Excellence, National Conference of State Legislatures

Retiree Health Care:OPEB Unfunded Actuarial Accrued

Liabilities (UAAL) by State (2011-2012)*

Source: NASRA & SLGE: ‘Retiree Health Care Benefits for State Employees in 2013’ (Franzel & Brown) Note: Years correspond to CAFR FY. For a couple of states this chart does not reflect 2011-2012 UAAL.

Percentage of State Government Units Offering Insurance to Retirees

Chart: SLGE / NASRA ‘Retiree Health Care Benefits for State Employees in 2013’ (Franzel & Brown) / Data: Medical Expenditure Panel Survey, Agency for Healthcare Research and Quality, U.S. Department of Health & Human Services

Changes States are Making to Retiree Health Care

Most common changes…• Increasing premiums or deductible amounts for state retirees

and/or their dependents• Increasing copayment amounts

Other changes…• Increasing the age of eligibility and/or years of service required

to vest in retiree health care• Increasing the cap on retirees’ out of pocket expenses

Also of note…• There has been an uptick in the number of states prefunding

retiree health care (at least partially prefunding)

SLGE / NASRA ‘Retiree Health Care Benefits for State Employees in 2013’ (Franzel & Brown)

Other Approaches Some States Have Implemented or are Considering

for Retiree Health Care• Wellness Programs

– Health Assessments and Preventative Care– Weight Management and Obesity Programs– Physical Fitness and Exercise Programs– Tobacco Cessation Programs– Educational Materials– Incentive Programs (monetary/non-monetary)– Others

• Chronic Care Management Programs

• Defined Contribution Retiree Health Care Models

SLGE ‘The Business Case for Wellness Programs in Public Employee Health Plans’ (Clark & Morrill) ; SLGE ‘At a Crossroads: The Financing and Future of Health Benefits for State and Local Government Retirees’ (Kearney, C., et al.); SLGE / IPMA-HR / (NASPE) Annual Workforce Surveys

Challenges and Opportunities: 2014 and Beyond…

• Public employer costs and contributions

• Retiree healthcare and assets

• Supplemental retirement plans

• Employee financial education

Joshua Franzel, PhD Vice President, Research

Center for State and Local Government Excellence Washington, DC

[email protected]

SLGE publications can be downloaded at: slge.org

This presentation has been created for general information purposes. It is not intended to give financial or professional advice.