1. Overview of Public Pension Issues and Trends
Keith Brainard
Research Director National Association of State Retirement Administrators
The Louisiana Public Retirement 2018 Seminar
September 2018

2. Presentation Overview
Public pension funding conditions
Trends and changes in public pension plan design
Groups affecting public pension policy discussions 2

3. Change in Aggregate Public Pension Funding Level, FY 01 to FY 17
Public Plans Data

4. Median Change From Prior Year in Actuarial Value of Assets and Liabilities

5. Distribution of Public Pension Funding Levels, FY 17

6. Headwinds Facing Public Pension Plans
Declining investment return assumptions
Slow payroll growth as a result of
Sluggish hiring
Tepid salary growth
Higher required costs
Updated mortality assumptions to reflect longer life expectations
Negative cash flow

7. Tailwinds Supporting Public Pension Plans
Stabilizing investment returns
Stronger employer efforts to pay contributions
More aggressive liability amortization strategies:
More closed periods
Shorter periods
Lower benefit levels = lower long-term costs
Improving economy
Slow improvement in hiring and salary growth

8. Public Pension Fund Sources of Revenue, 1988 to 2017
US Census Bureau
The typical public pension funding model is
highly reliant on investment earnings.

9. Median Investment Returns for Periods Ended 6/30/17 and 12/31/17

10. Investment Return Assumptions, FY 01 to latest

11. Inflation Assumptions and Expectations

12. Actuarial Assumptions: Inflation, Nominal, and Real
Public Plans Data
Assumptions for inflation have dropped more quickly than assumptions
for investment returns, causing the assumed real rate of return to rise.

13. Relative Change in Employment in Private and Public Sectors, 2007 to present
U.S. Bureau of Labor Statistics

14. Change in Actives and Annuitants FY 01 to FY 17

15. Annualized Quarterly Change in Wage and Salary Costs for Private and State & Local Government Employees, 01-18
U.S. Bureau of Labor Statistics

16. Median Annual Change in Public Pension Payrolls, FY 02 to FY 17

17. Where Will Public Pension Funding Conditions Go From Here?
Plans with relatively large unfunded liabilities face a long, uphill slog
Many plans will continue to struggle with key actuarial challenges:
downward pressure on investment return assumptions
improving mortality
demands for more aggressive amortization of unfunded liabilities

18. Where Will Public Pension Funding Conditions Go From Here?
Rates of public sector hiring and salary growth may not soon return to historic norms
Some employers are fiscally challenged to make required contributions
The size of the challenge varies widely
Some plans have relatively small UALs with costs that are affordable
Other plans have UALs that are quite large and burdensome
On a national level, a political consensus in support of resolving pension funding problems continues to strengthen

19. Number of Plans Reducing Their Investment Return Assumption Out of 128
Public Fund Survey

20. Median Public Pension Fund Investment Returns for Single Years Ended 6/30

21. Median Public Pension Fund Investment Returns for Single Years Ended 12/31

22. Trends in Plan Design

23. Overarching Trend: More Risk is Being Shifted to Employees
In a retirement plan, risk is the possibility that key factors, or areas of risk, will be worse than expected.
Key retirement plan risk areas include:
Return on investments
Inflation
How long plan participants will live, aka mortality 23

24. Who Bears Retirement Plan Risk?
Risk is distributed differently, depending on the plan and plan design
In traditional defined contribution plans, employees typically bear all of the risk
In traditional defined benefit plans, employers typically bear all of the risk
In modern public pension plans
The type and degree of risk-bearing varies
More risk is being shifted from employers (taxpayers) to employees 24

25. Conceptual Illustration of Typical Risk-Sharing Arrangements, by Plan Type

26. Selected Examples of Risk-Sharing Plan Designs
Contingent COLAs
Delayed onset COLAs
Variable employee contribution rates
Hybrid plans
Cash balance plans
Others

27. Statewide Hybrid Plans, 1995 (portion of public employees in each state participating)

28. Statewide Hybrid Plans, 2017 (portion of public employees in each state participating)
“State Hybrid Retirement Plans,” NASRA 2016

29. NASRA’s Position on Pension Plan Design
Core elements of public pension plan design:
Mandatory participation
Employee-employer cost sharing
Assets that are pooled and professionally managed
Targeted income replacement
Annuitized benefits
Survivor and disability benefits
Access to a supplemental retirement savings plan
A hybrid plan can fulfill these elements
NASRA Resolution 2016: Guiding Principles for
Public Retirement System Plan Design and Sustainability

30. Hybrid Plans: DB-DC
DB-DC plans combine a traditional pension plan with a defined contribution plan
The pension component typically has a lower retirement multiplier, such as 1.0% or 1.5%, rather than 1.75%+, which is more typical for public sector DB plans
Participation in the DC plan in most cases is required
Employees bear all risk in the DC plan component
Employer risk is reduced because the promised DB plan benefit is reduced

31. Examples of DB-DC Plans and Their DB Plan Multiplier
Georgia state employees: 1.0%
Indiana state employees: 1.1%
Newly-hired Illinois state, teachers and university employees: 1.25%
Michigan teachers: 1.5%
Tennessee state and teachers: 1.0%
Utah: 1.5%
Washington state: 1.0%
Social Security matters !
Employee contribution rates and other plan provisions vary
NASRA Issue Brief: Statewide Hybrid Retirement Plans

32. Hybrid Plans: Cash Balance
Cash balance plans combine features of traditional pension and defined contribution plans
Employees have “notional” accounts that are pooled and invested by professionals in diversified portfolios
Employers promise an annual minimum return on employee accounts
In the public sector, annual minimum returns typically are 4% to 7%, and employers may distribute investment gains to employee accounts
Employees may share in strong investment experience

33. Hybrid Plans: Cash Balance
Benefit is annuitized upon attainment of retirement eligibility: age and years of service
Value of benefit is based on age at retirement
Employer risk is lower because they pay a benefit based on a lower investment return

34. Examples of Cash Balance Plans and Their Guaranteed Annual Accrual Rate
Texas Municipal Retirement System 5.0%
Texas County & District Retirement System 7.0%
Nebraska State Employees Retirement Plan 5.0%
Kansas Public Employees’ Retirement System 4.0%
Kentucky Retirement System %* *plus 75% of investment returns above 4.0%
NASRA Issue Brief: Statewide Hybrid Retirement Plans

35. South Dakota Retirement System Variable Retirement Account
New hires since 2017 have a higher full retirement age
1.5% of the 6.0% employer contribution is directed to a variable retirement account (VRA)
VRA assets are invested along with other pension assets and are credited with actual fund returns
Assets are available to participants only upon retirement, disability, or death
Assets may be rolled over, taken as a lump sum, or blended with the pension benefit as an annuity
Reduces employer risk during employees’ active years by lowering promised pension benefit, and by shifting investment risk of VRA assets to active members

36. Utah Retirement System
New hires since 7/1/11 must choose between a DC and a DB plan
DB plan retirement multiplier is 1.5%
For both DB and DC plans, employer contribution is fixed at 10 percent of pay
The current cost of the DB plan is 8.85%; the difference of 1.15% goes to an employee DC plan
If the cost of the DB plan rises above 10%, the employee pays the difference
Employer risk is limited to 10% of pay, shifting other risks—investment, mortality, etc.—to active members
Employees bear all plan risks for costs above 10%
A defined benefit plan with a defined employer contribution

37. Cost-of-living adjustments
COLA plan designs vary widely
Examples of risk-sharing COLAs:
ad hoc
contingent
delayed onset
capped
required minimum age
Many changes made in recent years to retirement benefits for employees of state and local government have included COLA reductions

38. Variable Employee Contribution Rates
Required pension plan contribution rates for most public employees are fixed, typically at 4.0% to 8.0% of pay
Some plans have established contribution rates that vary from year to year based on the actuarial condition or total cost of the plan
Such a policy distributes plan risks to active members in the form of higher required contribution rates

39. Variable Employee Contribution Rates
Arizona State Retirement System participants are required to contribute roughly one-half of the actuarially determined contribution
Most Iowa PERS participants must contribute 40 percent of required contribution rates
Most employees hired in California since 2013 must contribute at least one-half of the normal cost of the plan
Pennsylvania added variable employee contribution rates for state workers and teachers hired since 2011
These employees are sharing in all of their plan’s risks

40. Variable Plan Designs
The City of Houston established a contribution rate corridor plan affecting all active and new members
If/when the plan cost rises above or falls below designated levels, prescribed adjustments are made to benefits and employee contribution rates
New Brunswick, Canada established a similar plan design several years ago with three key elements:
a new design that splits plan benefits into highly secure “base” benefits and moderately secure “ancillary” benefits
protocols that require pre-determined actions to change future benefits, contributions, and asset allocations in response to changes in the plan’s financial condition
a new risk management regulatory framework to keep these plans on track*
*Center for Retirement Research, “New Brunswick’s New Shared Pension Plan, 2013

41. Groups Participating in the Public Pension Plan Discussion

42. External Groups Group Modus Operandi Comments
American Legislative Exchange Council (ALEC)
State-focused reports; model DC plan legislation; annual conference and task force meetings
Members are state legislators and are predominantly Republican; some participate in ALEC in lieu of NCSL. Main revenue source appears to be corporate contributions. Advocates for switch to 401k plans. Reports public pension liabilities using a risk-free investment return. Maintains model legislation to switch from DB to DC.
Pew Center on the States
State-focused research and reports; media commentary; free assistance to legislatures
Seems supportive of cash balance plans. Has been providing assistance to NCSL for several years. Currently advocating for public pension stress-testing.

43. External Groups Group Modus Operandi Comments Reason Foundation
Provides free legislative assistance to advocate for certain retirement plan objectives, e.g., keeping promises, reducing risk, sound governance, etc.
Maintains a “Pension Reform Handbook,” intended to guide policymakers through the process of switching to a DC plan.
Bellwether
Advocates for public school reform; promotes use of charter schools.
Sponsors research and publications; is affiliated with teacherpensions.org, which believes public pensions for teachers produce bad educational outcomes

44. External Groups Group Modus Operandi Comments
National Council on Teacher Quality
Focuses on teacher effectiveness; publishes annual evaluations of state pension policies affecting teachers; touts the “pension crisis.”
Cites as funders many large foundations, including Gates, Arnold, and Joyce; overarching view is that public pension plans are unfair, especially to young and short-term teachers
Retirement Security Initiative
Advocacy, op-eds, offers of assistance
Led by pension reform advocates Chuck Reed, Dan Liljenquist, and Richard Ravitch

45. External Groups Group Modus Operandi Selected Grantees
Laura and John Arnold Foundation
Uses deep pockets to fund many organizations that conduct research into or advocate for changes to public pensions.
Bellwether: a primary funder of teacherpensions.org
Brookings Institution: reports that promote cash balance plans
George Mason University: to support symposia critical of public pensions
National Council on Teacher Quality
Pew Charitable Trusts
Reason Foundation
SUNY Research Foundation

46. Thank you for listening ! www.nasra.org keith@nasra.org 202-624-8464