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The State of Our Governmental Pension Plans. AGA - Fall Professional Development Seminar November 6, 2013. Presentation Outline:. Why is there so much talk about pension plans? What is being done to address pension plans? GASB – Changes in Pension Reporting Requirement.
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The State of Our Governmental Pension Plans AGA - Fall Professional Development Seminar November 6, 2013
Presentation Outline: • Why is there so much talk about pension plans? • What is being done to address pension plans? • GASB – Changes in Pension Reporting Requirement
Why should federal employee care about pension issues? • You pay taxes • Is your federal pension next?
The largest 100 U.S. public-employee pension funds as 6-30-13 • $2.9 trillion in assets • Highest level in more than 40 years • Surpassed the peak reached in 2007 before the Great Recession • Benefits and withdrawals reached records highs at $62.2 billion – 16.8% increase • Government contributions $22.8 billion – 2.3% increase • Employee contributions - $11.4 billion – 11.2% increase
Why are pension plans receiving so much attention? Government employee’s benefits versus private sector: • Salaries • Health care - % paid by Govt. • Retirement plans – DB vs. DC
Growing mistrust of the Government • Headlines in the media:
Governments that have filed bankruptcy since 2010: • Detroit, MI • San Bernardino, CA. • Stockton, CA. • Jefferson County, Ala. • Central Falls, R.I.
Underfunding of Defined Benefit plans • Bottom 5 state funded pension plans • Top 5 state funded pension plans • How does Kansas and Missouri compare?
5 Worst State Funded Pension Plans • New Hampshire 57.5% • Louisiana 56.0% • Connecticut 53.4% • Kentucky 50.5% • Illinois 43.4%
5 Best State Funded Pension Plans • Tennessee 92.1% • North Carolina 95.3% • South Dakota 96.3% • Washington 98.1% • Wisconsin 99.8%
What is being done to address the underfunding of pension plans? • Contributing more to the DB plans • Requiring employees to contribute more • Redesigning government pension plans • Creating hybrid pension plans • Switching to DC plans • Lowering benefits
What is KPERS doing? • Increase employer contributions • Increase current member contributions or decreases benefits • Creates a new tier 3 cash balance retirement plan beginning January 2015
What is MOSERS doing? • Created a new tier – MSEP 2011 • Longer vesting period • Higher normal retirement age
How are other countries addressing their pension plans? • Australia & Netherlands – mandatory 9% contribution from employers • Canada – two-part social security system replaces 70% of low-income and 50% for median-income • Prohibit borrowing against retirement assets or lump-sum withdrawals
Three-Legged Investment Stool • Social Security • Employee pension • Personal savings
Quote from President Franklin Roosevelt on Social Security: “The Social Security Act does not offer anyone, either individually or collectively, an easy life- nor was it ever intended so to do. None of the sums of money paid out to individuals in assistance or in insurance will spell anything approaching abundance. But they will furnish that minimum necessity to keep a foothold’ and that is the kind of protection Americans want.”
Objectives of New GASB Standards • Improve transparency • Increase value of assessing accountability • Enhance decision – usefulness of financial reports
Affected or unaffected? Affected: • Employers in any type of defined benefit plan • Single-employer plans • Agent multiple-employer plans • Assets pooled for investment purposes • Separate accounts for each employer • Cost-sharing multiple employer plans - KPERS • Assets and obligations pooled • Non-employer contributors • Other entities legally required to contribute Unaffected: • Employers in defined contribution plans
Key Changes • Employer liability • Employer expense • Discount rate • Actuarial method • Amortization • Timing
Employer Liability Current: Annual required contribution (ARC) Less: Actual contributions Net pension obligations (NPO) New: Total pension liability (TPL) Less: Fiduciary net position (FNP) Net pension liability (NPL)
Employer expense Current: Calculation tied to funding • ARC adjusted for the cumulative effect of prior differences between required contributions and actual contributions New: Calculation tied to cost • Changes in the net pension liability
Components of expense • Annual service cost • Interest on the net pension liability • Projected earnings on plan investments • The full effect of any changes in benefit terms
Discount rate Current: Estimate long-term investment yield for the plan, with consideration given to the nature and mix of current and expected plan investments New: Modification necessary if it is expected the FNP will not be sufficient to pay benefits to active employees and retirees. • Single blended rate
New discount rate – single blended rate Single rate equivalent to the combined effects of using the following rates: • For projected cash flows up to the point the FNP will be sufficient • Long-term expected rate of return on plan investments – 7.5% to 8.0% • For projected cash flows beyond that point • A yield or index rate on tax exempt 20 year, Aa or higher rated municipal bonds – 3.0%
Actuarial method Current: Whatever actuarial method is used for funding • Six acceptable methods • Must be applied within parameters defined by GASB New: Not tied to actuarial method used for funding • All employers will use the entry age method for accounting and financial reporting purposes
Amortization Background: Circumstances that could affect the net pension liability (NPL) • Changes in benefit terms • Changes in economic and demographic assumptions • Differences between economic and demographic assumptions and actual • Differences between expected and actual investment returns Current: • Effect amortized over a period not to exceed 30 years New: • Effect to be amortized over a much shorter period based on circumstances
Effect on amortization Changes in benefit terms • Immediate recognition Changes in economic and demographic assumptions • Differences in assumptions and actual experience – Immediate recognition • Differences between expected and actual investment returns – Amortized over 5 years.
Timing Current: • Timing of actuarial valuation • Within 24 months of start of valuation period New: • Measurement date for assets and TPL • No earlier than 1 year + 1 day prior to reporting date • Actuarial valuation date • Up to 30 months before employer reporting date • Update to “roll forward” to measurement date
Comparison of Overland Park’s Police & Fire Pension Plans Current: Net pension obligation $1,330,903 New: Net pension liability $22,247,173
Employers in cost-sharing plans - KPERS Key changes • Employer liability • Employer expense
Employer liability (cost-sharing) Current : • Liability only if employer contribution is less than the contractually required amount New: • Liability equal to the employer’s proportionate share of the total NPL of all participating employers
Employer expense (cost-sharing) Current: • Expense = contractually required contribution New: • Expense = employer’s proportionate share of total pension expense of all participating employers
Estimated Impact on New GASB Pension Standards on KPERS 2012 Current: 59.0% New: 46.1%
Impact of new GASB Standards on local governments Larger financial and organizational burden • Coordination with various people • Actuaries • Plan administrators • More time spent gathering additional information for financial reporting
Rating Agency Perspective • Supportive of this standard • Provides more information and transparency • Limited immediate impact on ratings • Want to see a long-term plan
Effective Date of new GASB Standards • GASB 67 – Financial Reporting for Pension Plans – 6-30-14 • GASB 68 – Accounting and Financial Reporting for Pensions for employers – 6-30-15
Questions? Contact Information: Dave Scott dave.scott@opkansas.org 913-895-6154