1. State of the State Pension Systems August 24, 2006

2. Agenda Introduction/Overview  Actuarial Methodology  Budget Implications History Current Status Questions

3. The Nature of a Defined Benefit Plan Employer guarantees a specific monthly amount at retirement Employer makes contributions Employee required to make contributions Employee does not make investment decisions Employer and employee contributions grow over time Oversight of Plan assets and liabilities

4. Risks? Benefits guaranteed Benefits erode without protection from inflation Benefits not portable Asset growth not guaranteed  Requires steady contributions  Miracle of compound interest If assets cannot match promised benefits, pension payments have to be covered out of operating income through the budget

5. Tracking Assets & Liabilities Key to: Control Risk Proportion “Funded” Budget Stability

6. Experience Determines “Key Drivers for Funding” Life Expectancy Size of Workforce Career Service Salary Growth Inflation

7. “Key Drivers for Funding” Gains and losses are recognized, or smoothed, over 5 years to limit volatility Actuarial value of assets versus actuarial liabilities determines  funding status  need for employer contributions

8. Funding Requirements are Dynamic and Change over Time Normal Cost – present value of service earned for that year Accrued liability – present value of all past service If liabilities exceed assets, we have an accrued unfunded liability which is amortized over a number of years

9. Unfunded Liability is Growing

10. What Is The Challenge? Growth in cost of pension and other employee benefit programs Finding adequate funding to meet ever growing demand among competing interests

11. Asset/Liability Comparison All Systems Funded Ratio: 82.3%

12. Asset/Liability Comparison PERS State Funded Ratio: 79.1%

13. Asset/Liability Comparison TPAF Funded Ratio: 80.3%

14. Asset/Liability Comparison PERS Local Funded Ratio: 89.9%

15. Asset/Liability Comparison PFRS Funded Ratio: 80.1%

16. Asset/Liability Comparison SPRS Funded Ratio: 92.6%

17. Are We Alone? Public Fund Survey May 2006 SPRS PFRS

18. The “’97 Gimmicks” Issuance of Pension Obligation Bonds-$2.8 billion Authorized temporary change in actuarial method (Mark to Market) Authorized use of surplus assets to offset employer contributions-State and local employers get pension holiday Reduced employee contributions for PERS and TPAF Backloaded Debt Service

19. Debt Service On Pension Bonds

20. More of “How Did We Get Here?” Surpluses grow-  positive returns of late 90s  bond proceeds  Mark to Market Investment returns go south beginning in FY2001 Benefits enhanced for PERS & TPAF (FY 2002), & PFRS (FY 2000) adding over $5 billion in liabilities to the systems  Another Mark to Market (retroactive to 1999) Limited or no employer contributions for seven years By FY 2004 pension contribution holiday comes to an end  Budget problems make contributions difficult  All benefit costs affect budget - Pension and Health Phase-in adopted in FY 2004

21. New Jersey’s Liabilities are Growing Faster than our Assets Limited/No Employer Contributions Benefit Enhancements Benefit Payouts: $5B/yr. and growing Investment Returns meeting benchmark targets Retirees living/collecting benefits longer Actives with higher salaries & more service credit

22. What Needs To Be Done? Make/Increase the employer pension contribution Work to improve investment performance Better match growth in assets and liabilities

23. Current Budget Recommends Pension Contribution of $1.1B

24. Q & A

25. Benefits Review Task Force Recommendations

26. What is the Purpose of a Retirement Benefit To attract and retain a qualified and capable workforce To deliver a form of compensation on a deferred basis reducing immediate cost of employment To ensure an adequate “replacement” income to career employees

27. Areas of Concern Those recommendations that have a financial impact on the benefit systems Those recommendations that address the integrity of the systems

28. System Integrity Make full, actuarially sound pension payments Over $8 billion dollars in actuarially required contributions have been avoided Practice good fiscal stewardship and do not use unsound techniques Do not alter actuarial assumptions to meet budgetary constraints or to finance other initiatives

29. System Integrity Any proposed legislation must include the following elements for PHBRC consideration: A fiscal note in the body of the bill Description of revenue sources to cover costs Certification that costs and revenue projections are based on generally accepted actuarial principles

30. System Integrity End boosting, padding and tacking No pension for contractors/vendors No DB Participation for elected or appointed officials No tacking of several jobs Restrict end of career salary hikes End sick day manipulation

31. Division of Pensions Recommendations All employees and retirees should be required to contribute towards the cost of health insurance coverage Cost have risen by 150% over the past five years and will double by 2010 Majority of taxpaying public is required to make contributions towards their health care At 5%, State and Local Savings exceed $348M At 10%, savings exceed $489M

32. End Traditional Plan and Offer a PPO Indemnity plans not typically offered anymore PPOs far more prevalent that plans such as NJ PLUS and meet the diverse needs of broadly dispersed population (e.g. retirees) Annual savings if Traditional and NJ PLUS are replaced with a PPO State$40M Local$64M

33. Reduce Rx Costs Contract directly with a PBM Currently through health plans Estimated savings of $27M - $45M Encourage generic drug utilization Require mandatory mail-order At State and Local level, more than 55% of drug spend is for maintenance drugs; less than15% is mail order Generic & Mail-Order will save an estimated $35M

34. SHBP Program Apply State negotiated changes in health benefits to local employers; return SHBP to UNIFORMITY Local Savings/Medical $25M State PRM Savings $ 5M Local Savings/Rx $13M

35. Short-Term Gains End Pension Loans or Charge Market Rate Interest Current outstanding balance exceeds $1.1B At 4% interest and with State assuming an 8.25% rate of return, lost earnings potential exceeds $45M per year For “pension purchase”, determine a way to factor in the cost of health insurance Current purchase cost address pension benefits only

36. Short-Term Gains End Dual Health Coverage within SHBP Cannot implement State limits without imposing on a system wide basis Potential Savings Coordination of Benefits$15M Administrative Expenses$ 3M Declare a moratorium on ERIs Declare a Moratorium on Benefit Plan Changes

37. Longer-Term Solutions Adhere to “n/55” Retirement Calculation Not an unusual or overly generous formula; see NASRA data Anti “two tier” philosophy Think the Committee need to look at all options; actuary will present additional information next week Provide for Part-Timers Again, encourage this Committee to consider the originally stated intent of a retirement plan

38. Longer-Term Solutions Whether under the current system or a new design, early retirement age must be moved from 55 to 60 Estimated savings are very long term since it would only affect: employees not yet on the payroll or those with less than 5 years service

39. Longer-Term Solutions No pension credits for jobs paying less than $5,000 Recommend that hours worked would be a better indicator of need for retirement income Use of a recognized benchmark, such as 1000 hours, or limits based on “full-time” status may be more appropriate Those who do not meet the threshold could be covered under an alternative design such as a deferred compensation plan

40. Other Recommendations Standardize Life Insurance Fees and Benefits Basic benefit – Employer Paid PERS = 1.5x Base Salary TPAF = 2.0x Base Salary PFRS = 3.5x Salary Entire group life system needs overhaul Break linkage to pensions Standardize employer paid benefit Allow for employees to buy varying levels of optional coverage

41. Other Recommendations Amend dual pension and salary Too many cases of retirement and reemployment Inconsistencies in application (statute) across systems Complicated to administer and manage Difficult for participants to understand

42. Other Recommendations Revise Pension “pop Up” Increases Upon death of a beneficiary, participants can revert to their full unreduced benefit Limit the “pop up” to a period of up to 5 years from retirement COLA Eliminate COLA for those who vested in State system but who are not actively working at the time of retirement

43. Other Recommendations Change disability pensions to a disability insurance system No middle ground today between retirement and disability Guarantees salary replacement while disabled but allows time to determine if an employee can be returned to employment Estimated Annual Savings State $28.2M Local $53.5M

44. Division of Pensions View Pension laws and regulations are too complex; costly to administer and difficult for the members to understand Major overhaul should be a goal to: Reduce administrative expenses Eliminate disparities between systems Help participants better understand and appreciate their benefits