Federal and National Update: Public Pensions

1. Federal and National Update:Public Pensions Dana Bilyeu, Executive Director September, 2014

2. National Task Forces/Blue Ribbon Panels

3. Retirement System Modifications: All States

4. Pension Changes, 2008-2014

5. Changes: 2009 to Present • Types • Benefit reductions • Increased requirements for retirement eligibility • Increased use of hybrid retirement plans • Focus on Risk Distribution • More risk shifted to workers • Adjusting actuarial assumptions No broad shift to defined contribution plans as the primary vehicle for delivering retirement benefits

6. States Retain Distinguishing Elementsof Public Plans • Mandatory participation • Employee-employer cost (and risk) sharing • Benefit adequacy • Presence/absence of Social Security • Survivor & Disability • Assets that are pooled and professionally invested • Required lifetime distribution (mandatory annuitization)

7. California The California Legislature approved and the governor signed a bill establishing a path to full funding for CalSTRS, the second largest public pension plan in the nation Oklahoma Closed the DB plan for state employees; new hires will have only a defined contribution plan Notable Legislative Outcomes in 2014

8. Kentucky cash balance for newly-hired state and local employees as of January 1; not teachers Tennessee DB-DC plan, effective July 1 for newly-hired state employees, teachers, and employees of local government that elect to participate Virginia DB-DC plan, effective January 1 for most newly-hired employees in the state, excluding public safety personnel Hybrid Plans Taking Effect in 2014

9. Public Pensions:Current Misperceptions • Pensions are causing municipal bankruptcies • Public plans are taking on too much risk and investment return assumptions are too high • Few workers benefit from the current system • Federal regulation is needed to prevent a bailout

10. A Quick Look: Public Pension Facts

11. Public Funds Survey* • 126 statewide and large local government plans • 85% of the assets & the liabilities of the entire public pension community • Information gathered from state and local sources • Updated yearly * Underwritten in part with funds from the National Council on Teacher Retirement

12. Distribution of current public pension funding levels Size of bubbles is roughly proportionate to size of plan liabilities

13. Median change in actuarial value of assets and liabilities, FY 02 to FY 13

14. Actuarial value of assets and liabilities, and funding levels, FY 01 to FY 16

15. Changesin Actives and Annuitants, and Active/Annuitant RatioFY 01 – FY 12

16. Annualized Changein Wages and Salaries BLS, compiled by NASRA US Census Bureau, compiled by NASRA

17. Monthly relative change in employment2003 to present US Bureau of Labor Statistics US Census Bureau, compiled by NASRA

18. Median annual change in covered payroll,FY 08 to FY 13 Public Fund Survey

19. Median contribution rates, FY 02 to FY 12

20. ARC experience and dollars contributed Public Fund Survey, US Census Bureau

21. Distribution of ARC received by 86 plans, FY 13 Public Fund Survey, US Census Bureau

22. Average asset allocation,FY 01 to FY 13

23. FY 13 median investment returns Callan Associates

24. Median investment returns forperiods ended 6/30/14 Callan Associates

25. Pension Plan Assets Rebound Since the Great Recession Federal Reserve Flow of Funds

26. Distribution of latest investment return assumptions Public Fund Survey

27. Pension Spending is not at an Historic High

28. Several New and Distinct Pension Calculations Books– computing an annual position regarding pensions for financial statements (GASB) Bonds– calculating how pension obligations affect a government’s creditworthiness (Ratings Agencies) Budgets– determining the appropriate annual contribution to the retirement system for sound funding (Funding Policies-Sponsors and employee costs)

29. The pace of pension reforms has slowed sharply Reform battles remain in some states (e.g. PA) Some legal challenges remain outstanding (e.g. CO, IL, OR) Pension costs are stabilizing for many plans Costs will need to rise for some plans, especially those that have not received their ARC Improving longevity may increase costs Investment return assumptions will remain under scrutiny and pressure New GASB measures will reveal new ways of looking at pension conditions Other State Trends

30. Calls for a Federal Role • Detroit is the tip of the iceberg • Disclosure is opaque • There is too much risk and its not understood • Regulation is needed to prevent a bailout

31. Deluge of Reports

32. Pension Deferrals are a Costly Federal Tax Exclusion Health care exclusion $3,360 Pension exclusion$1,999 Reduced dividends/cap gains $1,340 Mortgage interest deduction $1,011 State/Local Taxes $1,098 EITC $661 Child tax credit $549 Capital gains exclusion at death $644 Health exchange subsidies $920 (Joint Committee on Taxation estimates 2013-2023, in billions)

33. Tax Reform • Senate and House tax committees conducted extensive reviews in 2013 • Ways & Means Chairman Camp released draft on February 26, 2014: • Changes income tax brackets and removes many tax preferences from top bracket • A number of tweaks to DC plan provisions, including application of 10% penalty for governmental 457 plans, in-service distributions allowed at 59½ for all plans • No changes to tax treatment of governmental DB employer or employee contributions, but application UBIT

34. Tax Treatment of Public Employee Pension Contributions • Unique to state and local government retirement systems • Listed in 2005 Joint Committee on Taxation report as “loophole” • Education needed on the importance of this provision to pervasive/increasing shared-financing policies at state and local level

35. Mandatory Social Security • Both deficit reduction commission reports included mandatory Social Security for newly-hired employees after 2020 • “Future bailout risk,” simplification of benefit coordination cited • GPO/WEP repeal (S. 896 and HR 1795)could fuel interest

36. “No Bailout” Legislation • Prohibit Federal funding to localities (and/or States) that have defaulted or are “at risk of defaulting” • Federal auditing and assessments of the current and future financial stability of States and/or localities (will surely include pension valuations) • Graham (SC) amendment to FY 2014 Financial Services appropriations • Johnson (WI) amendment to Transportation and Housing and Urban Development (THUD) appropriations • Cornyn (TX) amendment to THUD appropriations • Vitter (LA) and Garland (KY) bills (S. 101/HR 3002)

37. Public Employee Pension Transparency Act (PEPTA, Nunes/Burr) • Would require costly/conflicting federal reporting requirements • 60-year projections using Treasury yield curve • Plan sponsors that fail to follow correctly lose tax-exempt bond authority

38. Secure Annuities for Employee Retirement (SAFE) Act • Introduced by Senate Ranking Minority Member Hatch (R-UT) • What it does • Annuity accumulation “DB alternative” plan for state and local governments • Optional (“Additional Tool in the Toolbox”) • What it doesn’t do • Does not address existing unfunded liabilities • Does not include survivor/disability • Does not address workforce management issues

39. The Bankruptcy Fairness and Employee Benefits Protection Act • Adds benefit and health care protections to corporate bankruptcies • Establishes similar rights for municipal employees under Chapter 9 • H.R. 5305 (to treat Puerto Rico as a state for the purposes of Chapter 9)

40. Ongoing Regulatory Issues • Qualification rules after United States v. Windsor • Definition of Governmental Plan • Normal Retirement Age Regulations

41. Treasury Interest • Pensions under review by Financial Stability Oversight Council (FSOC) • New Office of State and Local Finance • Monitoring municipal bond markets • Task forces on Detroit and Puerto Rico (monitoring and identifying federal resources) • Pension/OPEB pressures • Working across federal agencies • Infrastructure

42. Key Facts • Municipal bankruptcy is rare • Only 12 states specifically authorize Chapter 9 filings for their general-purpose local governments • Chapter 9 is uniquely designed to ensure a municipality can continue to provide essential services while debts are reorganized • Chapter 9 does not provide for a Federal bailout

43. Questions?