Report on the Current Status of Pensions in State Governments Relmond P. Van Daniker, DBA, CPA Executive Director AGA

About the Public Fund Survey Online compendium of public retirement system data accessible at Contains data on 101 systems and 126 plans that together account for ~ 85 percent of all public retirement system assets and participants in the U.S. Data set includes FY 01 through FY 09 Sponsored by NASRA and NCTR Data is inputted into a database as it becomes available; database is uploaded and feeds the website Most data comes from system CAFRs A key objective of the survey is to promote sound public retirement system policies and administration by increasing transparency and understanding of the public retirement system community.

Summary of Findings Figure A: Change in aggregate actuarial value of assets, liabilities, and funding levels, FY 01 to FY 09 Figure B: Change in aggregate public pension funding level, 1990 to 2009

Summary of Findings Figure D: Distribution of actuarial funding levels for plans in the Public Fund Survey, based on latest available data Size of bubbles is roughly proportionate to size of plan liabilities

Summary of Findings Figure E: Comparison of corporate and public pension funding levels, FY 00 to FY 09 Figure F: Comparison of change from prior year in corporate and public pension contributions,

Summary of Findings Figure G: Median change from prior year in actuarial value of assets and liabilities

Summary of Findings Figure J: Average asset allocation, FY 02 to FY 09, with FY 09 averages listed

Summary of Findings Figure N: Median employee and employer contribution rates as a percentage of pay, Social Security-eligible workers, FY 02 to FY 09 Reflects general employees and teachers only; does not include public safety personnel

Summary of Findings Figure O: Average annual required contribution paid and percentage of plans receiving at least 90 percent of their ARC, FY 01 to 09

Summary of Findings Figure Q: Distribution of inflation assumptions, FY 09 Figure Q: Distribution of investment return assumptions, FY 09

Median public fund returns for periods ended 12/31/09 Callan Associates

Investment return assumptions are being widely challenged, and some are being changed Large funds that have reduced their assumed investment return in recent months: –Colorado PERA, 8.5 percent to 8.0 percent –Pennsylvania PSRS, 8.5 to 8.0 –Pennsylvania SERS, 8.5 to 8.0 –Illinois SERS and SURS, 8.5 to 7.75 –San Diego County, 8.25 to 8.0 –San Francisco City & County, 8.0 to 7.75 –NY Common, 8.0 to 7.5 –Virginia RS, 7.5 to 7.0 –District of Columbia Retirement Board, 7.5 to 7.0 –Indiana TRF, 7.5 to 7.0 –Indiana PERF, 7.25 to 7.0 The CalSTRS board will consider a recommendation this week to reduce theirs from 8.0 to 7.5

At least one dozen states approved retirement benefit structures with higher years of service, age, or both, needed to qualify for normal retirement benefits –Most affected new hires only Nine states reduced COLA provisions –Three—CO, MN, SD—affected existing retired members Ten states raised employee contribution rates, affecting existing employees in most cases Other popular changes: –Longer final average salary periods, more restrictive return-to-work policies, anti-spiking provisions See The breadth of changes made this year to pension benefits was unprecedented

Lawsuits filed against changes affecting existing participants Lawsuits have been filed in –Colorado, Minnesota, and South Dakota challenging the authority of those states to reduce automatic COLAs for existing retired members A lawsuit also has been filed in Rhode Island, challenging reductions in pension benefits for existing plan participants A lawsuit has been filed in Michigan challenging the state’s authority to charge active participants three percent for retiree health care benefits, with no assurance of receipt of the benefit

New hires in Utah will have a choice of a hybrid or defined contribution plan –The state has capped its liability at 10 percent of pay Illinois (SERS, TRS, and MRF) and Missouri (SERS) raised normal retirement age for new hires to 67 Higher vesting periods in Iowa and Mississippi Other notable changes

More states now offer hybrid or cash balance pension plans –Recent additions: Georgia ERS, Utah RS, Michigan teachers –Other hybrids: Indiana, Texas municipal and county plans, Nebraska state and counties, Ohio (optional), Oregon, Washington (optional) Latest DC plan enactment: Utah (optional) See Hybrid (combo) and cash balance plans

One-third of the federal stimulus package (~$260 billion) targeted state and local government employees –Most of these funds are scheduled to run out later this year According to the National Conference of State Legislatures, some state employees have been laid off in 23 states and furloughed in 25 states A survey conducted last summer found that cities and counties could lay off nearly half a million employees in 2011 if more federal help was not provided Bloomberg reports that states and cities have reduced payrolls since August 2008 by some 400,000 workers Furloughs, layoffs, slow membership growth

An increase in the last 18 months of studies calculating unfunded pension liabilities on the basis of a so-called risk- free return or using some another corporate-style method –Timing of these studies may be intended to influence GASB Some studies project insolvency dates of state and local pension plans –Projected insolvency dates begin in 2015 and continue through 2047 –Five states would not run out of money –Conclusions are derived chiefly by understating projected contributions and measuring future obligations using current (low) interest rates Notable studies and reports

Multiple, competing studies of pay and benefits Often fail to distinguish between federal and state & local government workers Often fail to acknowledge key facts: –Public employees are twice as likely to have a college degree than the private sector workforce –Many public employees work in positions involving physical risk – police, fire, corrections –The public sector workforce stays on the job longer Public employee compensation has become the focus of growing attention

Overwhelming number of policy recommendations emerging with regard to State/local fiscal restructuring; public pensions a major target –Calls for Linking State Pension Reform to Federal Aid –Dodd-Frank Requirements on Municipal Advisors, GASB Funding, New SEC Office of Municipal Securities –House Resolution (H. Res 23) citing state and local budget issues, pension costs and opposing public pension bailout –Legislation (HR 6484) to impose new federal reporting on public pension costs, threat of removing federal tax exemption for state and local bonds –Discussions regarding Congressional action to permit States to declare bankruptcy

Calls for linking Federal aid to state pension reform "The Federal government bailed out Illinois and other states with stimulus money. They can't tell Congress it has no business demanding reform of these unsustainable pension plans.” – Congressman Mike Quigley (D-IL) “[E]ligibility for [any further round of Federal assistance to the states] should be conditioned on the states and municipalities putting in place plans to address their long-term structural pension deficits…” – New America Foundation “And [$50 billion in new Federal aid to States, localities to avoid layoffs of teachers, public safety employees] can be designed with appropriate safeguards to ensure that they achieve their objective of keeping people working, rather than rewarding states for poor past policy choices.” – President Barack Obama

Federal interest in municipal finance and public pensions –New enforcement division unit created on Municipal Finance and Public Pensions –New Office of Municipal Securities established within the SEC –MSRB reconstituted, so that a majority of members are independent of the municipal securities industry, expanded mission with regard to protecting state and local governments and public pensions –GASB Funding (FINRA fee; GAO study – including feasibility of “Tower amendment repeal”)

SEC proposed regulations on municipal advisors Employees of a municipal entity are excluded from the definition of “municipal advisor” (subject to registration with SEC and MSRB) However, in the recent proposal, SEC takes the position that appointed members of a governing body of a municipal entity who are not elected ex officio members should be included in the definition of a "municipal advisor."

Federal “Sustainability” Proposals FERS/CSRS Modifications –COLAs, FAS, EE Contributions Social Security Computation Changes –COLAs, AIME (#Years and Type of Index), Taxable Earnings, NRA, Spousal Benefits, Death Benefits, Children’s Benefits

Alarmist reports fueling Congressional interest Many reports are unduly alarmist and use unrealistic assumptions regarding investments, contributions and ability to address issues at the State and local level Many suggested “solutions” only exacerbate the situation: –Mandatory Social Security –Closing the DB plan to new-hires and switching to 401(k)-type plan –Pension obligation bonds –Federal aid contingent on pension reforms

Facts do not support the hyperbole Public pension remain well-positioned to pay benefits to retirees for the foreseeable future The recent market shift may require modifications to be made at the State and local levels in order to secure financing for the very long-term, but it is not an immediate crisis Governments/Employees have the time to rebuild reserves with a patient and proactive approach that retains the key elements –However, each will require diversified approaches to rebuilding reserves and have a long time horizon that allows for a patient and metered response Federal government has its own fiscal problems

Proper perspective needed In reality, less than three percent of all state and local government spending goes toward public pensions. Nearly 90 percent of public employees are required to contribute a portion of their wages—typically five to eight percent—to their state or local pension fund, and some share pension costs equally with their employers. An estimated 30 percent of employees of state and local government do not participate in Social Security, including approximately one-half of all of the nation’s public school teachers, and more than three-fourths of firefighters and police officers. In most of these cases, employers and employees are contributing to the pension fund in lieu of contributions to Social Security, reducing state and local taxpayer costs by an estimated $15 billion annually.

Annualized changes in employment State, Local and Private January 2005 = 100%

Inflation for 12-month periods ended June, CPI-U, U.S. Bureau of Labor Statistics

Annualized change in employee compensation Private Sector and State & Local Government 1Q 01 to 2Q 10 U.S. Bureau of Labor Statistics

“The bulk of the recent deterioration in state and local government finances is attributable to macroeconomic cyclical forces.” “If the economic recovery in the US were to stall, budget woes at all levels of government would intensify.” “[I]f the national economy continues to recover as we anticipate, the near-term fiscal condition of the vast majority of state and local governments should begin to improve.” David Greenlaw MorganStanley June 29, 2010 State and local fiscal fortunes are tied to the national economy

Daily close of Russell 3000, 6/1/95 to 7/31/10

Employee and Employer Contributions 1982 to 2008

Funding levels will continue to decline Higher contribution rates for employers and for many employees Continued focus on public employee compensation and benefits Increased consideration of hybrids and DB-DC combos, cash balance plans, that shift more risk to participants Efforts to reduce future benefit accrual rates Pressure to reduce investment return assumptions Pressure to switch to DC plans Forecast

Key Takaways With no changes to benefit levels or financing arrangements, most public pension plans have assets sufficient to continue to pay benefits for decades Benefit levels and financing structures have been assessed for virtually all plans in the wake of the market decline Due to asset smoothing methods and actuarial valuation dates, the effects of the market decline are being phased in Long funding horizons and other practices provide time to consider options and make modifications 36

Key Takeaways An unprecedented number of plans made changes in 2009 and 2010, chiefly in response to the effects of the 2008 market decline Changes are likely to continue to be made in 2011 and beyond The unique nature of each plan and pension plan sponsors requires a unique response Modifying plan designs and financing arrangements is not new Improving capital markets are helping to offset the effects of the market decline: S&P 500 is higher today by 75 percent from March

Key Takeaways A plan’s actuarial funding level is a snapshot of a financial condition that exists over decades For plans with a FY-end date of June 30, the market value of assets was measured near the market low point The critical factor in assessing a pension plan’s condition is not its funding level, but rather whether or not funding liabilities causes fiscal stress for the plan sponsor For most plans, long-term investment returns, over years, meet and exceed expectations Core elements of a DB plan: –Mandatory participation –Pooled assets invested by professionals –Benefits paid out incrementally – easier to finance, pooled mortality risk 38

Key Takeaways –increase in market value of assets –after losing more than $800 billion in 2008, public pension funds gained $360 billion in 2009 and are on track to gain $250-$300 billion in 2010 –these gains are occurring while the funds are distributing ~$175 billion annually in benefits –benefits act as extremely important economic stabilizers - distributed to every town of every state and provide an important source of economic stimulus 39

Key Takeaways –the long-term nature of plans, operating over decades –the flexibility of DB plans to modify benefit levels and financing arrangements in response to changing circumstances –efficiencies of DB plans through pooling of assets and sharing risks –actuarial, not market funding measures –shared responsibility of costs through employee contributions –role of DB plans in promoting orderly turnover of workers –extreme costs associated with closing plans to new hires – not only lose above listed efficiencies, but it causes significant cost increases in the closed plan. 40

What is AGA Doing? Financial Management Standards Board (FMSB) has commented on the following GASB pronouncements: - Pension Accounting and Financial Reporting by Employers ( ) - Pension Accounting and Financial Reporting ( ) - Pension Disclosures ( ) - Recognition of Pension and Other Postemployment Benefit (OPEB) Expenditures/Expense and Liabilities ( ) Eric Berman, MSA, CPA, Chair of the FMSB, testified at GASB on October 14, 2010 in San Francisco, CA on “Pension Accounting and Financial Reporting by Employers”

Citizen-Centric Reporting Advancing Government Accountability and Transparency Relmond P. Van Daniker, DBA, CPA Executive Director AGA

Public Attitudes Toward Government Accountability and Transparency 2010 Follow-up to 2008 poll on attitudes and opinions towards government financial management and accountability to tax payers. Survey was conducted online within the United States by Harris Interactive on behalf of the AGA between November 30 and December 7, 2009 among 1,024 adults aged 18 or over. Propensity score weighting was used to adjust for respondents’ propensity to be online. “We commissioned the survey for a second time to shed some light on the way the public perceives those issues relating to government financial accountability and transparency that are important to our members. Nobody is pretending that the figures are a shock, but we are encouraged to have seen some improvements since 2008.” - Relmond Van Daniker, DBA, CPA Executive Director, AGA

2009 Survey Conclusions 75% of Americans believe that the availability of government financial management information is very important The public is least satisfied with the financial management information they’re receiving from the federal government After hearing a description of Recovery.gov, 76% indicated they would be likely to either visit or return to the site Approximately 80-90% voted in the 2008 federal, state and local elections. Roughly 75% of these people say that financial management information was an important factor in their decisions Overspending and/or wasting money is a top concern about government financial management across all levels Reflecting the past two years, the public generally considers state and local government financial reporting to have stayed the same, and federal to have gotten worse

Solid Findings, AGA Moves Forward “The survey results include some extremely stark, unambiguous findings. Public levels of dissatisfaction and distrust of government spending practices came through loud and clear, across every geography, demographic group and political ideology. Worthy of special note, perhaps, is a 67 percentage point gap between what taxpayers expect from government and what they receive.” - Jennifer Haskins, Harris Interactive “AGA members working in government at all levels are in the very forefront of the fight to increase levels of government accountability and transparency. We believe that the traditional methods of communicating government financial information – through reams of audited financial statements that have little relevance to the taxpayer – must be supplemented by government financial reporting that expresses complex financial details in an understandable form. Our members are committed to taking these concepts forward.” - Relmond Van Daniker, DBA, CPA Executive Director, AGA

Improving Communication Between Government and Taxpayers AGA is committed to increasing the levels of transparency and accountability and driving understanding among the general public. Citizens have a right to an understanding of how governments are spending their money and if it is being efficient and effective. Not many governments are communicating this information to their citizens and if they do, the information is too technical for the average citizen.

Citizen Communications Effort AGA believes that governments should communicate information to their taxpayers in a way that is: Clear and understandable Updated regularly and often Delivered to all and easy to locate Honest in breadth and technically accurate in detail AGA’s four-page Citizen-Centric Reporting model provides practical assistance to help governments achieve this.

CURRENT STATE OF GOVERNMENT REPORTING AGA Survey (2010) Dissatisfied citizens Reporting too technical Distrust in government The Problem Entitled to transparent financial information Governments have an obligation to provide this information Citizens Believe

CURRENT STATE OF GOVERNMENT REPORTING The Answer

Easy to Construct A Report Assemble your Document Organize your data Sift through your data Collect data from the government’s website and published reports Review the AGA website for completed reports Obtain citizen input The Important thing is to start!

Best Practices in Developing a Report Remember that the readers are average citizens – come at it from their perspective Look at completed reports for ideas Assign each page to a different individual and/or team Use AGA’s Content and Design Guideline Templates Cut and paste effort from government’s website and published reports

Constructing a Report – Page 1 Vision Statement Strategic Goals How the government is organized Demographics Table to Contents What is the Government Chartered to do?

Constructing a Report – Page 2 Obtain input from citizens on what measures they would like to see included Report on non-financial outcomes for 3 or 4 key missions or services (public safety, public health, roads, parks and recreation, schools) Performance Information on Key Missions and Service

Constructing a Report – Page 2 Performance Information on Key Missions and Service (cont’d)

Constructing a Report – Page 3 Include revenue and cost data for major areas Use pie charts Reference audit conducted Reference website for detailed financial information Revenues and Expenditures

Constructing a Report – Page 4 Include items specific to the community that will have future effects (economic changes, tax cuts or increases, major new employer, employer leaving, unemployment, technological improvements, infrastructure improvements, education, environmental aspects, being transparent, etc) Ask for feedback by including a contact name and contact information Future Challenges and Economic Outlook

Constructing a Report – Page 4 Future Challenges and Economic Outlook (cont’d)

Constructing A Report Design Guidelines

Distribute the Report/Feedback

General paragraph Nevada 2- page ARRA CCR

General paragraph Nevada 2- page ARRA CCR

Completed Reports AGA Local Governments: City of Bellevue, WA City of Columbus, IN City and County of Denver City of Jefferson, MO City of Lancaster, MA City of Las Vegas, NM City of Palo Alto, CA City of Portland, OR City of Portsmouth, VA City of Saco, ME City of Stamford, CT City of Tallahassee, FL The District of Columbia The Village of Los Lunas, NM Beavercreek Township Fire Dept, OH Benton County Treasurer, WA Blount County, TN Guilford County, NC King County, WA Maricopa County, AZ Metro Govt of Nashville/Davidson County, TN Palm Beach County Tax Collector, FL Springfield-Greene County Health Dept, MO St Louis County, MN

Completed Reports (Cont’d) State Governments: Idaho State Police State of Idaho State of Maryland MA Developmental Disabilities Council State of Nevada State of New York State of Oregon State of South Carolina TN Comptroller of the Treasury State of Texas State of Washington State of Washington Audit Federal Government: US Coast Guard Denali Commission General Services Administration National Science Foundation The Architect of the Capitol Treasury Franchise Fund USAID US Department of Defense US Department of the Interior Other: FMI Canada The University of Guam Guam Public School System

Incentives

AGA Citizen-Centric Reporting Model AGA believes that these reports will make governments more accountable to their citizens, and will help Americans become better educated and better able to participate in government activities. Citizen-centric reporting is an important practical step that governments can take in raising their game in accountability and transparency. The program is an essential component of AGA’s Advancing Government Accountability Mission.

SUMMARY The Problem – Dissatisfied citizens – Distrust The solution – Citizen Centric Reporting Model – Increased transparency The benefits – Reliable source of information – Improved relationship between citizen and government – Increased accountability – Increased civic involvement by citizens – Informed Citizenry

Tools and Guidance Online