Webinar: State and Local Government Pension Reform Lessons from negotiated reforms and recent developments

June 21, 2012

Today’s Presenters • Keith Brainard, Research Director, National Association of State Retirement Administrators • Joshua Franzel, Vice President, Research, Center for State and Local Government Excellence • Alex Brown, Research & Policy Analyst, Center for State and Local Government Excellence

Bird’s-eye view of public pensions in the U.S. Defined benefit plans for employees of state and local government in the U.S. • $3.0 trillion in assets • 15 million active (working) participants (12 percent of the nation’s workforce) • 8.0 million retirees and their survivors receive $200 billion annually in benefits • 85%+ of state and local government workers participate in an employer-sponsored pension plan

Overarching Issues • Pension benefits for employees of state and local government are in the midst of unprecedented change • Public employee compensation, including retirement benefits, is the recipient of an unprecedented level of attention from the media, academics, and policymakers • An unprecedented number of lawsuits challenging changes to pension benefits are outstanding • State and local government employment is lower today by some 650,000 jobs, or 3.5%, from its August 2008 peak

Overarching Issues

• Pension accounting standards are on the verge of drastically changing the way public pension liabilities and costs are calculated • Interest rates are at their lowest levels in decades and are projected to remain low through at least 2014 • Longevity is improving

Historical and projected aggregate public pension funding levels 100%

90% Actual

Projected 80%

70% 90

92

94

96

98

00

02

Fiscal Year

Standard & Poor’s, Public Fund Survey

04

06

08

10

12

Distribution of public pension actuarial funding levels and relative size

Bubbles are roughly proportionate to size of plan liabilities

Changes to public pension plans in the U.S. • • • • • •

Higher required retirement ages Longer vesting periods Higher employee contributions Fewer/lower cost-of-living adjustments Greater use of hybrid retirement plans Increased emphasis on employee-employer cost-sharing • No shift to defined contribution plans as the primary retirement benefit

Retirement eligibility has become more stringent • More normal (unreduced) retirement age requirements of 60, 65, and even 67 • Elimination of retirement eligibility at any age based on designated years of service • Increased movement from five years as the predominant vesting period

Retirement benefits are being reduced • COLAs – applied to only a portion of the benefit – More COLAs delayed until attainment of designated retirement age – More COLAs tied to actuarial condition of plan or fund’s investment performance

• Movement of final average salary period from three years to five and longer

Higher employee contributions • Many states have approved higher employee pension contributions for existing plan participants • In some states, this is held or perceived to be illegal • Some higher rates are phased in over several years

Growing use of hybrid plans • Two main types of hybrid plan: – DB-DC plans feature a traditional, more modest pension, combined with a defined contribution plan – Cash balance plans feature pooled assets with notional accounts that pay a guaranteed minimum interest rate, with possibility of sharing “excess” investment earnings

2011 Report 5 Case Studies of Negotiated Public Pension Reforms:

Report Research Team: Christine Becker, Alex Brown, Joshua Franzel Ph.D., Elizabeth Kellar, and Danielle Miller Wagner of the Center for State and Local Government Excellence and Paula Sanford, PhD, of the University of Georgia

• Iowa Public Employees Retirement System • Oregon Public Employees Retirement System • Vermont State Teachers Retirement System • Houston Municipal Employees Retirement System • Gwinnett County, GA

2012 Reform Updates

2012 update fact sheets developed by Center Staff led by Danielle Miller Wagner

Pension Reform •Currently 35 States and 30 Local •New examples continue to be added

For more information see: slge.org -> research -> retirement

Iowa Public Employees Retirement System • 2009 Reforms

• Raised contribution rates • Increased the vesting period • Modified the benefit formula

SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

Oregon Public Employees Retirement System • Changed the method used to credit individual accounts •Created a hybrid defined benefit / defined contribution plan for new employees

SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

Vermont State Teachers Retirement System

• Increased contribution rates • Increased requirements for full retirement eligibility SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

Houston Municipal Employees Retirement System Passed a series of pension reforms from 2004-2007 which: • Increased employee contributions

• Disallowed conversion between tiers • Modified the benefit formula

SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

Gwinnett County, GA

• Need for more direct management of the county pension fund

• Realization that defined benefit costs were growing at a time of slow growth in the county SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

Recent Reforms to Public Pension Systems Major Pension Reforms 2011-2012 New Employees

Current Employees

Increased Contribution Rates

AL, HI, MD, NH, NY

AL, MD, ND, NH, NJ, VT, WI

Raised Retirement Age

AL, DE, FL, HI, MA, MD, ME NY, OK

Reduced, Froze, or Eliminated COLAs

HI, MD, MS

Modified the Benefit Formula

MA, MD, MS, NJ, NY, VA NH, RI

Restructured to a Hybrid Plan

VA

National Conference of State Legislatures (Labor & Employment / Pensions)

FL, MD, VA

RI

Current Retirees

ME, NJ, RI

Recent Reforms to Public Pension Systems • Rhode Island: Created a hybrid plan for all employees effective July 1, 2012; • Virginia: Created a hybrid plan for all employees hired on or after January 1, 2014;

• Kansas: Created a cash balance plan for all employees hired on or after January 1, 2014; • Louisiana: Created a cash balance plan for state employees and teachers hired on or after January 1, 2013

Lessons Learned 1. 2. 3. 4. 5. 6.

Use quality data Put reform in the HR context Consider implementation when changing policy Share information with all stakeholders Plan carefully and evaluate all options Recognize the importance of a strong governing body 7. Fully fund the ARC 8. Financial education is key

Questions?

Links to more information Center for State and Local Government Excellence: www.slge.org National Association of State Retirement Administrators: www.nasra.org