Report on the Current Status of Pensions in State Governments Relmond P. Van Daniker, DBA, CPA Executive Director AGA

Report on the Current Status of Pensions in State Governments

Relmond P. Van Daniker, DBA, CPA

Executive DirectorAGA

About the Public Fund Survey• Online compendium of public retirement system

data accessible at www.publicfundsurvey.org• Contains data on 101 systems and 126 plans

that together account for ~ 85 percent of all public retirement system assets and participants in the U.S.

• Data set includes FY 01 through FY 09• Sponsored by NASRA and NCTR• Data is inputted into a database as it becomes

available; database is uploaded and feeds the website

• Most data comes from system CAFRs• A key objective of the survey is to promote

sound public retirement system policies and administration by increasing transparency and understanding of the public retirement system community.

Summary of Findings

Figure A: Change in aggregate actuarial value of assets, liabilities, and funding levels, FY 01 to FY 09

Figure B: Change in aggregate public pension funding level, 1990 to 2009

01 02 03 04 05 06 07 08 09

$1

$2

$3

101.397.1

91.387.9 86.3 85.3 86.1 85.0

79.8

AVAAVL

AggregateFunding

Level

Trillion

90 92 94 96 98 00 01 02 03 04 05 06 07 08 09

79.082.0

85.0 86.089.0

96.0

101.3

97.1

91.3

87.986.385.386.185.0

79.8

Fiscal Year

Summary of Findings

Figure D: Distribution of actuarial funding levels for plans in the Public Fund Survey, based on latest available data

60%

80%

100%

120%

41.3%

Size of bubbles isroughly proportionateto size of plan liabilities

Summary of Findings

Figure E: Comparison of corporate and public pension funding levels, FY 00 to FY 09

Figure F: Comparison of change from prior year in corporate and public pension contributions, 1989-2009

00 01 02 03 04 05 06 07 08 09

80%

90%

100%

110%

120%

FundingLevel

Corporate

Public

W ilsh ir e , M illim a n , a n dP u b lic F u n d S u rv ey

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

0%

40%

80%

-20%

20%

60% Corporate

Public

U S D ep t o f L ab o r, U S C en su s B u reau ,M illim an

*

*Estimate

Summary of Findings

Figure G: Median change from prior year in actuarial value of assets and liabilities

02 03 04 05 06 07 08 09

0%

2%

4%

6%

8%Median Change

in Liabilities

Median Changein Actuarial Assets

Fiscal Year

Summary of Findings

Figure J: Average asset allocation, FY 02 to FY 09, with FY 09 averages listed

02 03 04 05 06 07 08 090

20

40

60

80

100

10

30

50

70

90

Equities52.1%

FixedIncome29.0%

Real Estate5.9%

Alts8.7%

Cash/Other4.4%

%

Fiscal Year

Summary of Findings

Figure N: Median employee and employer contribution rates as a percentage of pay, Social Security-eligible workers, FY 02 to FY 09

02 03 04 05 06 07 08 09

6.0%6.5%

7.1%

8.0%8.5% 8.5% 8.7%

9.4%

10.3% 10.3% 10.3%10.7% 10.7%

11.2%

11.8%

12.7%

Employeesw/Social Security

5.0%

Employees nonSocial Security

8.0%

Employersnon/Social Security

Employers w/Social Security

Fiscal Year

Reflects general employeesand teachers only; does not include publicsafety personnel

Summary of Findings

Figure O: Average annual required contribution paid and percentage of plans receiving at least 90 percent of their ARC, FY 01 to 09

01 02 03 04 05 06 07 08 09

104%

98%

89% 90%

85%87% 87%

89% 88%90%

84%

69%

65%

61% 61% 61%64%

61%

AverageARC Paid

Percentage ofplans receiving

90%+ of their ARC

Fiscal Year

Summary of Findings

Figure Q: Distribution of inflation assumptions, FY 09 Figure Q: Distribution of investment

return assumptions, FY 09

31

37

1

11

33

14

10

1 1

10

31

7.00 7.25 7.50 7.75 7.80 8.00 8.25 8.50

13

16 15

2

58

18

13

Median public fund returns for

periods ended 12/31/09

1 3 5 1 0 2 0 2 5

1 9 . 9 %

- 1 . 1 %

3 . 4 % 3 . 9 %

8 . 1 %9 . 3 %

Y e a r s e n d e d 1 2 / 3 1 / 0 9

Callan Associates

Investment return assumptions are being widely challenged, and some are

being changed• Large funds that have reduced their assumed investment return in recent months:– Colorado PERA, 8.5 percent to 8.0 percent– Pennsylvania PSRS, 8.5 to 8.0– Pennsylvania SERS, 8.5 to 8.0– Illinois SERS and SURS, 8.5 to 7.75– San Diego County, 8.25 to 8.0– San Francisco City & County, 8.0 to 7.75– NY Common, 8.0 to 7.5– Virginia RS, 7.5 to 7.0– District of Columbia Retirement Board, 7.5 to 7.0– Indiana TRF, 7.5 to 7.0– Indiana PERF, 7.25 to 7.0

• The CalSTRS board will consider a recommendation this week to reduce theirs from 8.0 to 7.5

• At least one dozen states approved retirement benefit structures with higher years of service, age, or both, needed to qualify for normal retirement benefits– Most affected new hires only

• Nine states reduced COLA provisions– Three—CO, MN, SD—affected existing retired members

• Ten states raised employee contribution rates, affecting existing employees in most cases

• Other popular changes:– Longer final average salary periods, more restrictive

return-to-work policies, anti-spiking provisions• See http://www.nasra.org/resources/changes.htm

The breadth of changes made this year to pension benefits was

unprecedented

Lawsuits filed against changes affecting existing participants

• Lawsuits have been filed in– Colorado, Minnesota, and South Dakota

challenging the authority of those states to reduce automatic COLAs for existing retired members

• A lawsuit also has been filed in Rhode Island, challenging reductions in pension benefits for existing plan participants

• A lawsuit has been filed in Michigan challenging the state’s authority to charge active participants three percent for retiree health care benefits, with no assurance of receipt of the benefit

• New hires in Utah will have a choice of a hybrid or defined contribution plan

– The state has capped its liability at 10 percent of pay

• Illinois (SERS, TRS, and MRF) and Missouri (SERS) raised normal retirement age for new hires to 67

• Higher vesting periods in Iowa and Mississippi

Other notable changes

• More states now offer hybrid or cash balance pension plans

– Recent additions: Georgia ERS, Utah RS, Michigan teachers

– Other hybrids: Indiana, Texas municipal and county plans, Nebraska state and counties, Ohio (optional), Oregon, Washington (optional)

• Latest DC plan enactment: Utah (optional)

• See www.nasra.org/resources/hybriddc.pdf

Hybrid (combo) and cash balance plans

• One-third of the federal stimulus package (~$260 billion) targeted state and local government employees– Most of these funds are scheduled to run out

later this year• According to the National Conference of State

Legislatures, some state employees have been laid off in 23 states and furloughed in 25 states

• A survey conducted last summer found that cities and counties could lay off nearly half a million employees in 2011 if more federal help was not provided

• Bloomberg reports that states and cities have reduced payrolls since August 2008 by some 400,000 workers

Furloughs, layoffs, slow membership growth

• An increase in the last 18 months of studies calculating unfunded pension liabilities on the basis of a so-called risk-free return or using some another corporate-style method

– Timing of these studies may be intended to influence GASB

• Some studies project insolvency dates of state and local pension plans

– Projected insolvency dates begin in 2015 and continue through 2047

– Five states would not run out of money– Conclusions are derived chiefly by

understating projected contributions and measuring future obligations using current (low) interest rates

Notable studies and reports

• Multiple, competing studies of pay and benefits

• Often fail to distinguish between federal and state & local government workers

• Often fail to acknowledge key facts:– Public employees are twice as likely to have

a college degree than the private sector workforce

– Many public employees work in positions involving physical risk – police, fire, corrections

– The public sector workforce stays on the job longer

Public employee compensationhas become the focus of growing

attention

Overwhelming number of policy recommendations emerging with

regard to State/local fiscal restructuring; public pensions a major

target– Calls for Linking State Pension Reform to

Federal Aid– Dodd-Frank Requirements on Municipal

Advisors, GASB Funding, New SEC Office of Municipal Securities

– House Resolution (H. Res 23) citing state and local budget issues, pension costs and opposing public pension bailout

– Legislation (HR 6484) to impose new federal reporting on public pension costs, threat of removing federal tax exemption for state and local bonds

– Discussions regarding Congressional action to permit States to declare bankruptcy

Calls for linking Federal aid to state pension

reform"The Federal government bailed out Illinois and other states with stimulus money. They can't tell Congress it has no business demanding reform of these unsustainable pension plans.”

– Congressman Mike Quigley (D-IL)

“[E]ligibility for [any further round of Federal assistance to the states] should be conditioned on the states and municipalities putting in place plans to address their long-term structural pension deficits…”

– New America Foundation

“And [$50 billion in new Federal aid to States, localities to avoid layoffs of teachers, public safety employees] can be designed with appropriate safeguards to ensure that they achieve their objective of keeping people working, rather than rewarding states for poor past policy choices.” – President Barack Obama

Federal interest in municipal finance and

public pensions– New enforcement division unit created on

Municipal Finance and Public Pensions– New Office of Municipal Securities

established within the SEC– MSRB reconstituted, so that a majority of

members are independent of the municipal securities industry, expanded mission with regard to protecting state and local governments and public pensions

– GASB Funding (FINRA fee; GAO study – including feasibility of “Tower amendment repeal”)

SEC proposed regulations on municipal advisors

• Employees of a municipal entity are excluded from the definition of “municipal advisor” (subject to registration with SEC and MSRB)

• However, in the recent proposal, SEC takes the position that appointed members of a governing body of a municipal entity who are not elected ex officio members should be included in the definition of a "municipal advisor."

Federal “Sustainability” Proposals

• FERS/CSRS Modifications–COLAs, FAS, EE Contributions

• Social Security Computation Changes–COLAs, AIME (#Years and Type of

Index), Taxable Earnings, NRA, Spousal Benefits, Death Benefits, Children’s Benefits

Alarmist reports fueling Congressional interest

• Many reports are unduly alarmist and use unrealistic assumptions regarding investments, contributions and ability to address issues at the State and local level

• Many suggested “solutions” only exacerbate the situation:– Mandatory Social Security– Closing the DB plan to new-hires and

switching to 401(k)-type plan– Pension obligation bonds– Federal aid contingent on pension reforms

Facts do not support the hyperbole

• Public pension remain well-positioned to pay benefits to retirees for the foreseeable future

• The recent market shift may require modifications to be made at the State and local levels in order to secure financing for the very long-term, but it is not an immediate crisis

• Governments/Employees have the time to rebuild reserves with a patient and proactive approach that retains the key elements– However, each will require diversified

approaches to rebuilding reserves and have a long time horizon that allows for a patient and metered response

• Federal government has its own fiscal problems

2.9%

97.1%

Employer (taxpayer) spending on public pensions as a percentage of total state and local govern-

ment spending, 2009

Spending on Public PensionsAll Other State and Local Government Spending

Proper perspective needed• In reality, less than three percent of all state and

local government spending goes toward public pensions.

• Nearly 90 percent of public employees are required to contribute a portion of their wages—typically five to eight percent—to their state or local pension fund, and some share pension costs equally with their employers.

• An estimated 30 percent of employees of state and local government do not participate in Social Security, including approximately one-half of all of the nation’s public school teachers, and more than three-fourths of firefighters and police officers.

• In most of these cases, employers and employees are contributing to the pension fund in lieu of contributions to Social Security, reducing state and local taxpayer costs by an estimated $15 billion annually.

Annualized changes in employmentState, Local and Private

January 2005 = 100%

96%

98%

100%

102%

104%

State

Local

Private

Jan-05 Jun-10

U .S . B ureau of Labor S ta tis tics

Sep-07

Inflation for 12-month periods ended June, 1986 - 2010

-2%

0%

2%

4%

86 10

2 5-y r a vg = 2 .8 7%

96 06CPI-U, U.S. Bureau of Labor Statistics

Annualized change in employee compensation

Private Sector and State & Local Government1Q 01 to 2Q 10

U.S. Bureau of Labor Statistics 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10

1%

2%

3%

4%State &Local

Government

PrivateSector

• “The bulk of the recent deterioration in state and local government finances is attributable to macroeconomic cyclical forces.”

• “If the economic recovery in the US were to stall, budget woes at all levels of government would intensify.”

• “[I]f the national economy continues to recover as we anticipate, the near-term fiscal condition of the vast majority of state and local governments should begin to improve.”

• David Greenlaw MorganStanley June 29, 2010

State and local fiscal fortunesare tied to the national economy

Daily close of Russell 3000,6/1/95 to 7/31/10

2000

2500

3000

3500

1/1/00 7/31/10

Employee and

Employer Contributi

ons1982 to

2008

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08$0

$20

$40

$60

$80

$10

$30

$50

$70

Employer ContributionsEmployee Contributions

Billions

U S C en su s B u rea u

• Funding levels will continue to decline• Higher contribution rates for employers

and for many employees• Continued focus on public employee

compensation and benefits• Increased consideration of hybrids and

DB-DC combos, cash balance plans, that shift more risk to participants

• Efforts to reduce future benefit accrual rates

• Pressure to reduce investment return assumptions

• Pressure to switch to DC plans

Forecast

Key Takaways• With no changes to benefit levels or financing

arrangements, most public pension plans have assets sufficient to continue to pay benefits for decades

• Benefit levels and financing structures have been assessed for virtually all plans in the wake of the market decline

• Due to asset smoothing methods and actuarial valuation dates, the effects of the 2008-09 market decline are being phased in

• Long funding horizons and other practices provide time to consider options and make modifications

36

Key Takeaways• An unprecedented number of plans made

changes in 2009 and 2010, chiefly in response to the effects of the 2008 market decline

• Changes are likely to continue to be made in 2011 and beyond

• The unique nature of each plan and pension plan sponsors requires a unique response

• Modifying plan designs and financing arrangements is not new

• Improving capital markets are helping to offset the effects of the market decline: S&P 500 is higher today by 75 percent from March 2009

37

Key Takeaways• A plan’s actuarial funding level is a snapshot of a

financial condition that exists over decades• For plans with a FY-end date of June 30, the

market value of assets was measured near the market low point

• The critical factor in assessing a pension plan’s condition is not its funding level, but rather whether or not funding liabilities causes fiscal stress for the plan sponsor

• For most plans, long-term investment returns, over 20-25 years, meet and exceed expectations

• Core elements of a DB plan:– Mandatory participation– Pooled assets invested by professionals– Benefits paid out incrementally – easier to finance,

pooled mortality risk

38

Key Takeaways– increase in market value of assets– after losing more than $800 billion in

2008, public pension funds gained $360 billion in 2009 and are on track to gain $250-$300 billion in 2010

– these gains are occurring while the funds are distributing ~$175 billion annually in benefits

– benefits act as extremely important economic stabilizers - distributed to every town of every state and provide an important source of economic stimulus

39

Key Takeaways– the long-term nature of plans, operating over

decades– the flexibility of DB plans to modify benefit

levels and financing arrangements in response to changing circumstances

– efficiencies of DB plans through pooling of assets and sharing risks

– actuarial, not market funding measures– shared responsibility of costs through

employee contributions– role of DB plans in promoting orderly turnover

of workers– extreme costs associated with closing plans to

new hires – not only lose above listed efficiencies, but it causes significant cost increases in the closed plan.

40

What is AGA Doing?• Financial Management Standards Board (FMSB) has

commented on the following GASB pronouncements:- Pension Accounting and Financial Reporting by

Employers (09.21.2010)

- Pension Accounting and Financial Reporting (07.31.2009)

- Pension Disclosures (2.28.2007)- Recognition of Pension and Other Postemployment

Benefit (OPEB) Expenditures/Expense and Liabilities (11.11.2004)

• Eric Berman, MSA, CPA, Chair of the FMSB, testified at GASB on October 14, 2010 in San Francisco, CA on “Pension Accounting and Financial Reporting by Employers”

Citizen-Centric Reporting

Advancing Government Accountability and Transparency

Relmond P. Van Daniker, DBA, CPA

Executive DirectorAGA

Public Attitudes Toward Government Accountability and Transparency 2010

• Follow-up to 2008 poll on attitudes and opinions towards government financial management and accountability to tax payers.

• Survey was conducted online within the United States by Harris Interactive on behalf of the AGA between November 30 and December 7, 2009 among 1,024 adults aged 18 or over. Propensity score weighting was used to adjust for respondents’ propensity to be online.

• “We commissioned the survey for a second time to shed some light on the way the public perceives those issues relating to government financial accountability and transparency that are important to our members. Nobody is pretending that the figures are a shock, but we are encouraged to have seen some improvements since 2008.”

- Relmond Van Daniker, DBA, CPA Executive Director, AGA

2009 Survey Conclusions• 75% of Americans believe that the availability of

government financial management information is very important

• The public is least satisfied with the financial management information they’re receiving from the federal government

• After hearing a description of Recovery.gov, 76% indicated they would be likely to either visit or return to the site

• Approximately 80-90% voted in the 2008 federal, state and local elections. Roughly 75% of these people say that financial management information was an important factor in their decisions

• Overspending and/or wasting money is a top concern about government financial management across all levels

• Reflecting the past two years, the public generally considers state and local government financial reporting to have stayed the same, and federal to have gotten worse

Solid Findings, AGA Moves Forward

• “The survey results include some extremely stark, unambiguous findings. Public levels of dissatisfaction and distrust of government spending practices came through loud and clear, across every geography, demographic group and political ideology. Worthy of special note, perhaps, is a 67 percentage point gap between what taxpayers expect from government and what they receive.”

- Jennifer Haskins, Harris Interactive

• “AGA members working in government at all levels are in the very forefront of the fight to increase levels of government accountability and transparency. We believe that the traditional methods of communicating government financial information – through reams of audited financial statements that have little relevance to the taxpayer – must be supplemented by government financial reporting that expresses complex financial details in an understandable form. Our members are committed to taking these concepts forward.”

- Relmond Van Daniker, DBA, CPA Executive Director, AGA

Improving Communication Between Government and Taxpayers

AGA is committed to increasing the levels of transparency and accountability and driving understanding among the general public.

Citizens have a right to an understanding of how governments are spending their money and if it is being efficient and effective.

Not many governments are communicating this information to their citizens and if they do, the information is too technical for the average citizen.

Citizen Communications Effort

AGA believes that governments should communicate information to their taxpayers in a way that is:• Clear and understandable• Updated regularly and often• Delivered to all and easy to locate• Honest in breadth and technically accurate in

detailAGA’s four-page Citizen-Centric Reporting model provides practical assistance to help governments achieve this.

CURRENT STATE OF GOVERNMENT REPORTING

AGA Survey (2010)

• Dissatisfied citizens

• Reporting too technical

• Distrust in government

The Problem

48

• Entitled to transparent financial information

• Governments have an obligation to provide this information

Citizens Believe

CURRENT STATE OF GOVERNMENT REPORTING

• Citizen Centric Reporting

• General Guidelines• Short (four pages)

• Understandable

• Easy to read

• Informative

The Answer

49

Easy to Construct A Report

50

Assemble your Document

Organize your data

Sift through your data

Collect data from the government’s website and published reports

Review the AGA website for completed reports

Obtain citizen input

The Important thing is to start!

Best Practices in Developing a Report

51

Remember that the readers are average citizens – come at it from their perspective

Look at completed reports for ideas

Assign each page to a different individual and/or team

Use AGA’s Content and Design Guideline Templates

Cut and paste effort from government’s website and published reports

Constructing a Report – Page 1

• Vision Statement• Strategic Goals• How the government is organized• Demographics • Table to Contents

52

What is the Government Chartered to do?

Constructing a Report – Page 2

• Obtain input from citizens on what measures they would like to see included

• Report on non-financial outcomes for 3 or 4 key missions or services (public safety, public health, roads, parks and recreation, schools)

Performance Information on Key Missions and Service

53

Constructing a Report – Page 2Performance Information on Key Missions and Service (cont’d)

54

Constructing a Report – Page 3

• Include revenue and cost data for major areas

• Use pie charts

• Reference audit conducted

• Reference website for detailed financial information

Revenues and Expenditures

55

Constructing a Report – Page 4

• Include items specific to the community that will have future effects (economic changes, tax cuts or increases, major new employer, employer leaving, unemployment, technological improvements, infrastructure improvements, education, environmental aspects, being transparent, etc)

• Ask for feedback by including a contact name and contact information

Future Challenges and Economic Outlook

56

Constructing a Report – Page 4Future Challenges and Economic Outlook (cont’d)

57

Constructing A Report

• Visual Appeal & Readability

• Use of Pictures and Graphics, Color

• Ample White Space (not

text heavy

• Free of technical jargon

• Professional designer or publishing software

Design Guidelines

58

Distribute the Report/Feedback• Print in local

newspaper

• Post to website

• Print bulk copies – libraries, grocery stores, city hall

• Hold a press conference

• Governor’s office and government officials

• Activist groups

59

• Ask for feedback

• Web statistics

• Calls to office

• Mentions in the media

General paragraph

Nevada 2-page ARRA CCR

General paragraph

Nevada 2-page ARRA CCR

Completed Reports

62

AGA Local Governments:City of Bellevue, WACity of Columbus, INCity and County of DenverCity of Jefferson, MOCity of Lancaster, MACity of Las Vegas, NMCity of Palo Alto, CACity of Portland, ORCity of Portsmouth, VACity of Saco, MECity of Stamford, CTCity of Tallahassee, FL

The District of ColumbiaThe Village of Los Lunas, NMBeavercreek Township Fire Dept,

OHBenton County Treasurer, WABlount County, TNGuilford County, NCKing County, WAMaricopa County, AZMetro Govt of

Nashville/Davidson County, TN

Palm Beach County Tax Collector, FL

Springfield-Greene County Health Dept, MO

St Louis County, MN

Completed Reports (Cont’d)

63

State Governments:Idaho State PoliceState of IdahoState of MarylandMA Developmental Disabilities

CouncilState of NevadaState of New YorkState of OregonState of South CarolinaTN Comptroller of the

TreasuryState of TexasState of WashingtonState of Washington Audit

Federal Government:US Coast GuardDenali CommissionGeneral Services AdministrationNational Science FoundationThe Architect of the CapitolTreasury Franchise FundUSAIDUS Department of DefenseUS Department of the InteriorOther:FMI CanadaThe University of GuamGuam Public School System

Incentives

64

Certificate of Excellence in Citizen-Centric Reporting (and Achievement Certificate)

Peer Reviewed

Chapter Recognition Bonus Credits Make contact with a government, encourage them to produce and publish a four-page Citizen Centric Report—100 credits per contact made Government that you contacted produces and publishes a four-page Citizen Centric Report—500 credits per published report

AGA Citizen-Centric Reporting Model

AGA believes that these reports will make governments more accountable to their citizens, and will help Americans become better educated and better able to participate in government activities.

Citizen-centric reporting is an important practical step that governments can take in raising their game in accountability and transparency.

The program is an essential component of AGA’s Advancing Government Accountability Mission.

SUMMARY

• The Problem– Dissatisfied citizens

– Distrust

• The solution– Citizen Centric

Reporting Model

– Increased transparency

• The benefits – Reliable source of

information

– Improved relationship between citizen and government

– Increased accountability

– Increased civic involvement by citizens

– Informed Citizenry

66

Tools and Guidance Online

67

Content GuidelinesDesign GuidelinesCompleted Reports

www.agacgfm.org/citizen

Susan Fritzlen – [email protected]