Greg Mennis & David Draine The Pew Charitable Trusts 08/04/2014 GRA Research Group Greg Mennis & David Draine The Pew Charitable Trusts 08/04/2014 v

AGENDA Overview Funding Investments Benefits Technical Assistance September 22, 2018

Overview – States’ Public Sector Retirement Systems Project Research on pensions and retiree health benefits (OPEB) since 2007 (Promises with a Price, Trillion Dollar Gap, The Widening Gap) Current research agenda – funding, investments, benefits, governance practices, and employee preferences Technical assistance to states and cities (Kentucky, Jacksonville, Pennsylvania) Partnership with Laura and John Arnold Foundation Focus today on select 50 state research highlights September 22, 2018

FUNDING – Research Highlights Pension funding gap over $1 trillion for state and local governments as of 2012 $914B pension debt for states, 71% funded State Unfunded OPEB liabilities > $500B State pension funding levels have declined since 2000 (98% funded) Investment return shortfalls, funding practices and change in plan assumptions are largest contributing factors Challenge and funding policies vary by state 15 states made full payments between 2010 and 2012 Two states made approximately 1/3 (New Jersey, Pennsylvania) Three states are < 50% funded (Connecticut, Kentucky, Illinois) September 22, 2018

Funding September 22, 2018

FUNDING – State Average Funded Ratio 2000 - 2012 September 22, 2018

Funding – Diversity in Funding Practices Across States September 22, 2018

Funding – Key Facts on Other Postemployment Benefits $576B Gap between $613B+ in OPEB Liabilities and $37B+ in Assets (Preliminary estimate as of 2012) Average Funded Ratio of 10.2% Most states PAYGO (Hawaii passed legislation to begin actuarially funding) OPEB Liability Cost Drivers: Eligibility Age Years of Service Medicare Enrollment Requirement Pro-Rating Formulae Employer Group Waiver Plan September 22, 2018

INVESTMENTS – Research Headlines States invested 73% in stocks and alternatives as of 2012 Strong investment returns during 1990’s (S&P 500 up 18%) Volatility and investment return shortfalls in the first decade of the 2000’s Up 12%-15% in 2012 and 2013 Median assumed rate of return of 7.75% vs. 8.00% in 2002 Alternatives doubled from 11% to 23% since 2006. Estimated 30% increase in fees during that time. September 22, 2018

Investments – Key Trends More in Stocks and Less in Bonds September 22, 2018

Investments – Key Trends Increased Risk Premium September 22, 2018

Investments – Key Trends Increased Use of Alternatives and Fees September 22, 2018

Investments – Governance and Reporting Preliminary/Partial Checklist for Transparency and Accountability: Investment Policy Statement publicly available Comprehensive Disclosure on Fees Long Term Performance Net of Fees by strategy / asset class Sensitivity Analysis (CalPERS, Washington State) September 22, 2018

Benefits – State of Reform 48 of 50 states made changes to their state retirement benefits between 2008 and 2013. Modifications for new employees in many states including: Raising retirement ages Reducing the benefit formula Reducing cost of living adjustments (COLAs) Increasing employee contributions Changes impact current employees and retirees involved: Reducing COLAs (six states reduced COLAs for some active employees and 15 states reduced COLAs for active employees and retirees between 2009 and 2013) Increasing employee contributions (over 20 states) Ten states have an optional or mandatory hybrid pension plan design and three have a cash balance plan for some state employees (as of 2013). September 22, 2018

BENEFITS - Employee Preferences Survey We worked with a nationally-recognized market research firm to conduct a survey of more than 2,000 state and local employees. The questions were designed around four areas of interest: How well do public employees understand their own retirement benefits? Do public employees believe they will have retirement security at the end of their careers? How do public employees view the importance of their retirement benefits as a whole and of particular aspects of their benefit design? What are public employees’ preferences around retirement benefits? September 22, 2018

BENEFITS - Employee Preferences Survey Key Findings Over a third of young workers couldn’t identify what type of retirement plan they participated in. 69 percent of public employees felt confident that they would have enough money to live comfortably in retirement. 45 percent of public employees ranked retirement and pension benefits as extremely or very important—more important than salary but less than health benefits. The majority of state and local workers reported that retirement benefits shaped some public employees’ decisions about how long to stay with their jobs. September 22, 2018

Technical Assistance – Analytic Framework Key Questions: What is the current fiscal status of the state or city’s retirement system? What factors led to unfunded liabilities? (investments, funding policy, benefits, etc.) What is the long-term outlook for plan fiscal health over 30 years? What are the potential risks to plan health in the future? How does the current plan provide retirement benefits to different representative workers? What is the expected impact of past reforms? What is the potential impact of any additional proposed reforms to workers and the budget? Are investment policies and practices effective? Charts & Figures (examples): September 22, 2018

Technical Assistance – Task Force Support Pew’s Role: Analyze options, answer questions, provide 50-state view on trends/best practices Task Force’s Role: Make recommendations to policymaking body based on local preferences/conditions Key Components: Authority/Mandate: Established with broad support of policymakers, ideally both legislative and executive branches Composition: Bi-partisan or non-partisan, representing relevant leadership and professional entities Inclusivity: Stakeholders at the table, including employees and the public Transparent Process: Public meetings and documentation Objective Analysis: Data-driven analysis based on Analytic Framework Reporting: Mandate to report to policymaking body that acts on recommendations September 22, 2018

States’ Public Sector Retirement Systems Greg Mennis Director gmennis@pewtrusts.org (202) 569-4302 David Draine Officer DDraine@pewtrusts.org (202)552-2012 Closing Slide