1. National and State Update
Alex Brown
Research Manager National Association of State Retirement Administrators
LAPERS Annual Conference
September 18, 2017
New Orleans

2. Public Pensions in the U.S.
~$3.96 trillion in assets
~14.5 million active (working) participants
13 percent of the nation’s workforce
10 million retirees and their survivors receive $280+ billion annually in benefits
Annual contributions = $190 billion
$140 billion from employers
$50 billion from employees
Approximately 5.0 percent of all state and local government spending goes to pensions
Of 6,000+ public retirement systems, the largest 75 account for 80+ percent of assets and members
Aggregate funding level = ~74%
U.S. Census Bureau, Public Fund Survey

3. Public Pensions in Louisiana
~45 billion in assets
~200,000 active (working) participants
~189,000 retirees and their survivors receive $4.2 billion annually in benefits
Annual contributions = $3.5 billion
$2.7 billion from employers
$764 million from employees
21 retirement systems
State and statewide systems for state employees, teachers, school employees, parochial employees, municipal police, and others
Locally administered systems in New Orleans, Baton Rouge, Alexandria, and others
U.S. Census Bureau

4. Notable public pension trends
Wide disparity in funding levels and costs
Decline in aggregate funding levels due to tepid market performance, reduction of assumed rates of return and mortality improvements
Improvement in employers’ effort to fund their pension plans
Movement from open to closed amortization periods, and toward shorter amortization periods
An unprecedented number of pension reforms occurred from 2009 to 2014, and reform continues, at a slower rate
Investment return assumptions are under increasing scrutiny and challenge, and are being reduced

5. Change in Aggregate Actuarial Funding Level and Actuarial Values of Assets and Liabilities FY01-FY16

6. Median Change in Actuarial Value of Assets and Liabilities, FY 02 to FY 16

7. Distribution of Public Pension Funding Levels, FY 16

8. The meaning and implications of an actuarial funding ratio
An actuarial funding ratio is the most popular and recognized metric of a pension plan’s condition
By itself, this ratio is not a reliable indicator of the condition of a pension plan
Other key considerations in evaluating a pension plan’s condition:
The fiscal condition of the pension plan’s sponsoring government
The commitment of the sponsoring government to pay required plan costs
The current and required cost of the plan
The reasonableness of the plan’s actuarial assumptions and methods
The trend, or direction of the plan’s funding condition
The plan’s demographics

9. Median annualized public pension fund returns for periods ended 6/30/16 and 12/31/16
Callan Associates

10. Change in employment, private sector and state and local government, FY07 – FY17
US Bureau of Labor Statistics

11. Median change in membership, FY 01 to FY 16

12. Change in wages and salaries, private sector and state and local government, FY01 – FY17
US Bureau of Labor Statistics

13. Annual median change in public pension payrolls, FY 02 to FY 16
Public Fund Survey

14. Median contribution rates, Social Security eligible and ineligible

15. ARC/ADC Experience, FY 01 to FY 15
NASRA Issue Brief: State and Local Government
Contributions to Statewide Pension Plans: FY 15

16. ADC Experience, FY 15 LASERS 103.5% TRS LA 107.3%
NASRA Issue Brief: State and Local Government
Contributions to Statewide Pension Plans: FY 15

17. Weighted Average Required Contribution Paid, by State, FY 01 to FY 15
LA: 91%
NASRA Issue Brief: State and Local Government
Contributions to Statewide Pension Plans: FY 15

18. Methods states are using to amortize unfunded pension liabilities
Pay the actuarially determined contribution
Commit a portion of the budget surplus to the unfunded liability, either ad hoc or in statute (AK, HI, RI)
Issue pension obligation bonds
Establish a dedicated funding stream, such as revenue from tobacco, liquor, gambling, or severance taxes (LA, KS, MT, OK)
Close the amortization period
Reduce the funding amortization period

19. Change in use of amortization methods
Public Plan Database, Public Fund Survey

20. Change in average amortization period and plans using closed amortization
Public Plans Data, Public Fund Survey

21. Trend: Shifting risk from employers to employees
Key forms of risk: investment, inflation, mortality
Shifting risk can occur by modifying an existing plan design, like a DB plan, or by switching from a DB to a hybrid or defined contribution plan
Investment risk: risk that investment returns will be less than expected. Sharing investment risk can take one or more forms within the plan:
Higher employee contributions
Lower benefits level
Lower or eliminated cost-of-living adjustments

22. Trend: Shifting risk from employers to employees
Inflation risk occurs when a benefit is not protected against inflation:
Pre-retirement benefit accrual that does not keep up with inflation
No cost-of-living adjustment
Mortality risk: the risk of outliving one’s retirement assets
This is a major threat in defined contribution plans and is alleviated when assets are annuitized

23. Shared Risk Continuum
NASRA Issue Brief: Shared Risk in Public Retirement Plans, 2014

24. States that increased employee contributions
“Significant Reforms to State Retirement Systems,” NASRA 2016

25. States that reduced pension benefits
“Significant Reforms to State Retirement Systems,” NASRA 2016

26. States that reduced COLAs
“Significant Reforms to State Retirement Systems,” NASRA 2016

27. States that established new hybrid plans
“Significant Reforms to State Retirement Systems,” NASRA 2016

28. Approximate percentage of hybrid plan participants, by state
“State Hybrid Retirement Plans,” NASRA 2016 (as of August 2017)

29. Changing the default plan
Some states offer workers a choice between retirement plan types: DB, DC, or hybrid
Because many workers do not make a decision regarding their retirement plan choice, the default plan can be consequential
Traditionally, among state and local government workers given a choice, the DB plan has been the default plan
This year, two states—Florida and Michigan—established defined contribution plans as the primary retirement benefit for new hires

30. Governance Changes
More states are giving retirement boards limited authority over contribution rates, benefit levels, or both
This authority can produce more timely decisions and can reduce or remove politics from the process
The Arkansas TRS board was recently given authority to increase contribution rates, reduce the benefit multiplier, and reverse the compound COLA, as needed to maintain actuarial soundness
The Ohio STRS board recently suspended the automatic COLA for at least five years, in order to keep the plan in compliance with statutes governing the maximum amortization period

31. Governance Changes
Growing media and policymaker attention to investment fees and increased scrutiny of hedge funds and active asset management
Most of the biggest public pension funds manage at least a portion of their assets internally
Increasing consideration of environmental, social, and governance criteria in investment objectives
Ex: Defund Iran, BDS movement against Israel, Anti-BDS restrictions on investing in companies that boycott Israel
Louisiana: HB 685 would remove the anti-BDS provision for investment of Deferred Compensation Plan funds
NASRA “Opposes any attempt, either implicitly or explicitly, to direct or influence state and local government retirement systems to make investments that circumvent the trustees' fiduciary responsibility.”*
*RESOLUTION Retirement System Fiduciary Investment Standards

32. The role of inflation in public pension funding
The inflation assumption typically serves as the basis of actuarial assumptions for payroll growth and investment return
Payroll growth is a major driver of liability growth
The investment return assumption has a major effect on a pension plan’s cost and funding level

33. Three year rolling average inflation (CPI-U) 1977-2017
Federal Reserve Bank of Minneapolis

34. Changes to the investment return assumption
Retirement systems typically change their investment return assumption in response to a study of their assets and liabilities (aka experience study or asset liability modeling study)
These studies contain capital market assumptions, which are consensus outlooks of returns for individual asset classes and the total portfolio
The average real rate of return (the return net of inflation) among public pensions has actually risen in recent years, meaning that all or most of the change in return assumptions is due to reductions in projected inflation
See NASRA Issue Brief, Public Pension Plan Investment Return Assumptions

35. Changes to the investment return assumption
Increased use of phased reductions:
CalPERS: Reducing from 7.5 to 7.0 over three years; beginning , further reductions called for in years when the fund achieves a specified level of investment return
CalSTRS: Reducing from 7.5 to 7.0 over two years
Louisiana: LASERS & TRS reducing in 0.05 percent increments, from 7.75 to 7.5 percent by 2021
Washington: In the middle of a decade-long movement from 8.0 to percent
See NASRA Issue Brief, Public Pension Plan Investment Return Assumptions

36. Distribution of Public Pension Investment Return Assumptions, FY 01 to FY 18

37. Pension challenges facing state and local government
For some states and cities, adequately funding their pension will be a challenge, especially for those with large unfunded liabilities and/or high employer costs
Funding challenges are exacerbated by
Low interest rates
Declining projected returns, and
Improving mortality
Providing a retirement benefit that aligns with key stakeholder objectives

38. Contact Info