Pennsylvania Pensions and Politics

8/9/2019 Pennsylvania Pensions and Politics

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Pensions & PoliticsPensions & PoliticsWhy Your Taxes Will SkyrocketWhy Your Taxes Will Skyrocket

Matthew J. BrouilletteMatthew J. BrouillettePresident & CEO


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Managing Pension LiabilitiesManaging Pension Liabilities

The Public Pension CrisisAugust 18, 2006; Page A14

the fundamental problem is that publicpensions are inherently political institutions.

the current public pension system simplyisn't sustainable in the long run.

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Sources of Pension ProblemsSources of Pension Problems

1. Poor Benchmarking

-Unmanaged Risks

3. Politics

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#1 Poor Benchmarking#1 Poor Benchmarking

Pennsylvania public pay and benefits are

typically benchmarked only against otherpublic plans rather than the entiremarketplace

This fosters financial relativity

Affordability and market trends in theprivate sector are directly relevant to thepublic sector

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#1 Poor Benchmarking#1 Poor Benchmarking Market trends suggest an annual net employer

cost of 5% to 7% of payroll is needed toachieve sustainable long-term affordability.

Thirty-One Pennsylvania Companies Participating in the

ew nnua a ar e ene urvey

Air Products

Allegheny Energy

Armstrong Wood Products

Armstrong World

Black Box Network ServicesCarpenter Technology

CertainTeed

CIGNA

Comcast

Delaware Investments

Duquesne Light

Federated Investors

Giant Eagle

GlaxoSmithKline

HeinzHershey Company

IKON Office Solutions

IMS Health

Knoll

Lincoln Financial Group

NOVA Chemicals

Penn National

PNC Financial Services

Rohm and Haas

Toll Brothers

UnisysUnited States Steel

UPMC

US Filter

Voith Siemens Hydro Power

Westinghouse Electric

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#1 Poor Benchmarking#1 Poor BenchmarkingSurvey Results

Only 11 of 31 companies (35%) sponsor Defined-Benefit (DB) plans for new hires Among the 765 companies nationally, the result is 37%

All 31 companies had Defined-Contribution (DC) planswith an average employer match of $.70 matching anaverage of 6.1% of payroll Nationally, the results are $.79 and 5.6%

Why the transition? The inability of companies to achieve pension costs that

are current, predictable and affordable

Unaffordable retiree medical liabilities 6


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#2 Non#2 Non--Existent Metrics & Unmanaged RisksExistent Metrics & Unmanaged Risks

No absolute metrics defining the affordability orreasonableness of costs given the perpetuallife of the government entity

Creates unreasonable risks to tax a ers

Actuarial assumptions do not create certainty

Little consistency in funding assumptions andfunding methods making comparisons mostdifficult

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#3 Politics#3 PoliticsPensions as political capital

Pension Fund Surplus = Benefit Improvements forParticipants

=

Maintaining or Improving Benefits = High Political Rateof Return

Fully and Properly Funding Plans = Low Political Rateof Return

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#3 Politics#3 PoliticsPensions are not well understood

Abundance of half-truths

Benefit commitments can be over 50 years

Funding is easily manipulated Easy to (re)defer costs to the next generation

Local and city pension shortfalls are becoming politicalproblems for the state Philadelphia, Pittsburgh, Allentown, etc.

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How Big is Our Pension Crisis?How Big is Our Pension Crisis?PSERS SERS TOTAL

FY 2009-10 $617M $226M $843M

FY 2012-13 $4.2B $1.9B $6.1B

FY 2015-16 $5.5B $2.3B $7.8B

NOTES: PSERS costs are allocated ~54% at the state level

and ~46% at the local level (school property taxes). PSERSprojects a funded ratio of 89% in FY 2020.

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How Big is Our Pension Crisis?How Big is Our Pension Crisis?

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How Did We Get Here?How Did We Get Here?Contributing Factors toCurrent Pension Crisis

According to the Public School Employees Retirement System (PSERS)

Act 9 of 2001 Benefit improvements for school employees,legislators, judges, state workers.

19% of the problem

Asset Experience Market meltdown. 43% of the problem

Act 38 of 2003 Cost of Living Adjustments for retirees. 2% of the problem

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How Did We Get Here?How Did We Get Here?Contributing Factors (continued)

Demographic and Salary Experience Changes inthe workforce. 2% of the problem

Assumption and Cost Method Changes Reductionof asset performance expectations.

13% of the problem

Negative Arbitrage due to Pension CodeFunding Requirements Underfunding of pension plancosts.

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What Should We Do?What Should We Do?Principles for Reform

1. Funding must be current. Benefits should be funded as they are earned and paid-up in

the aggregate at retirement

2. Costs must be predictable.

3. Costs must be affordable. 5-7% of payroll (net of employee contributions)

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Five Step Pension Reform PlanFive Step Pension Reform Plan1. Establish a unified DC plan for new members

Curtails open-ended liabilities Eliminates long-term commitments on behalf

of taxpayers SB 566 (2009)

2. Prohibit pension obligation bonds or other post-employment benefit (OPEB) bonds

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Five Step Pension Reform PlanFive Step Pension Reform Plan3. Mandate minimum funding reforms for any

newly created liabilities resulting in both

pension and OPEB plans

For actives maximum funding period is the averageremaining working career of recipients.

For retirees 1-year funding period (no remaining workingcareer).

Permit asset averaging of up to 3 years subject to a 90%

to 110% corridor test against the market value of assets.

No benefit improvements permitted if the result of suchimprovements causes the funded ratio to fall below 90%.

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Five Step Pension Reform PlanFive Step Pension Reform Plan4. Consider modifying unearned pension benefits

(if legal and feasible)

Reduced formula Redefinition of eligible earnings Increasing the normal retirement age Curtailin earl retirement subsidies

Eliminating COLAs and Deferred Retirement OptionPrograms (DROPs)

5. Consider funding reforms only after prior stepsare achieved

To omit steps 1,2,3,4 pension reform.

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How Do We Pay for It?How Do We Pay for It?Only Three Ways

1. Increase the funding of the System

2. Decrease/cut the costs/liabilities ofthe System

3. Defer the liabilities of the System

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Public School Employees' Retirement System of Pennsylvania

Market Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding

Market Returns Scenario 1

Alternative Funding Assumptions:

- Fresh-start accrued liability payments over 30 years.

- If applicable, the FYE 2011 rate is limited to the FYE 2010 pension rate + 1% and all succeeding years are limited to the prior FYE's pension rate + 3%.

Projection of Total Employer Contribution Rate

25%

30%

35%

40%

0%

5%

10%

15%

20%

2010

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

Current Law Alternative Funding

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Public School Employees' Retirement System of Pennsylvania

Market Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding

Market Returns Scenario 1

Alternative Funding Assumptions:

- Fresh-start accrued liability payments over 30 years.- If applicable, the FYE 2011 rate is limited to the FYE 2010 pension rate + 1% and all succeeding years are limited to the prior FYE's pension rate + 3%.

Projection of Employer Contribution Dollars (in Millions)

5,000

6,000

7,000

8,000

9,000

10,000

C:\Documents and Settings\jclay\Local Settings\Temporary Internet Files\OLK31\[Funding Proj - 2009 Val - Version 2 (Dec 22 09 Request).xls]Contribution Dollars

1/14/2010 9:51

0

1,000

2,000

3,000

4,000

2010

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

Current Law Alternative Funding

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Increasing & Compounding LiabilitiesIncreasing & Compounding Liabilities

Trend: Defer liabilities rather than

reforming plan design and funding policies

PSERS state & local im act

SERS state impact

State Retiree Medical state impact

Local & City Pension local impact

Local & City Retiree Healthcare local impact

School Retiree Healthcare local impact

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Ten Pension Policy QuestionsTen Pension Policy Questions

1. How does deferring pension liabilities make futureliabilities more affordable?

2. Why is contributing less into underfunded plansconsidered reform?

3. What is to prevent additional benefit improvements inpoorly-funded plans?

4. If 20-year amortization already defers significant coststo the next generation, why permit 30 years?

5. Why are unaffordable levels of private sector benefitcosts considered affordable in the public sector?

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Ten Pension Policy QuestionsTen Pension Policy Questions

6. Why not design plans based upon the next generationof taxpayers ability to pay?

7. When will underfunded pension plans achieve afunded ratio of 100%?

8. What is the status of retiree medical reforms and whenwill these plans achieve a funded ratio of 100%?

9. Given all this, what are the financial incentives to live,work, or invest in Pennsylvania cities?

10. Who will provide the leadership to champion truereform?

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Questions ?Questions ?

More information @More information @www.CommonwealthFoundation.orgwww.CommonwealthFoundation.org