What Does it Take to Get an A? A Look at the Best Funded Pension Plans David S. T. Matkin, PhD Assistant Professor of Public Administration Florida State University Research Fellow, LeRoy Collins Institute LeRoy Collins Institute Board Meeting February 19 th, 2013

Recent Activity September 2012 – Years in the Making Invited Testimony – Senate Committee on Governmental Oversight and Accountability – House Government Operations Subcommittee 2013 Legislative Session – SB 458 – Ring Premium tax dollars Overtime – SB 534 – Brandes State liability Reporting Standards

“Best Practices” Report First Version – Six “exemplary” cities – Questionable findings Current Version – All cities in DMS – Only most common actuarial method – Total 317 plans (of 496 total)

Method Literature Review for “Best Practices” Analyze whether plans that are the best funded may tend to better follow the “Best Practices”

Best Funded Plans

Best Managed Plans

“Best Practices” 1.Pay the entire required contribution – 100% of annual required contribution 2.Employees share in the costs – More employee contribution 3.Limit cost-of-living adjustments for retirees – At the very least, should not exceed inflation 4.Limit ability to spike final compensation – Limit overtime, sick & holiday leave etc. – Calculate retirement based on the average of more years of work 5.Maintain realistic and transparent actuarial assumptions – Up-to-date and err on side of conservative

#1 Pay the Entire Contribution Florida plans pay their entire contribution So, why so many underfunded plans? – Retroactive benefits New plans or new benefits – Missed assumptions – Budget/Accounting games

#2 Employees Pay Their Share FOR – Skin in the game => Better Funded Plan – Equity with private sector – Equity with tax payers – Still receiving very attractive benefit AGAINST – Targeted tax – Harms recruitment and retention

General Employees

Police Employees

Fire Fighters

#3 Limit Cost-of-Living Adjustments FOR – Unfair during low inflationary times – Guaranteed raise with employees don’t have one – Especially generous to high-wage earners AGAINST – Included in actuarial assumptions – Necessary to keep up with inflation

Automatic COLAs

#4 Limit Spiking FOR – Wide-spread source of inaccurate actuarial reporting – Creates incentives to manage workloads in a way that benefits specific workers and may harm service provision – Gaming the system AGAINST – Minor financial impact by the relative few

Average Final Compensation

Lower Benefits?

#5 More Conservative Assumptions? FOR – More accurate representation of liabilities – Should be conservative with fiduciary responsibilities and taxpayer dollars AGAINST – Implies too optimistic during bad economic times but those times are smoothed over good times

ASSUMPTIONS

Summary Better funded: – Are no more likely to pay full contribution – Require employees to contribute less – Are slightly less likely to have an automatic COLA – Are more likely to average compensation over 5 years – Are more likely to provide a lower multiplier – Tend to have the same assumptions but are better at achieving those assumptions (or were better in recent years)

What We Don’t/Can’t See Mortality Tables Amortization Activity Effects of Recent Changes