1. NCCCMA Winter Seminar Michael Williamson Director, North Carolina Retirement Systems

2. How Did We Get Here?

3. Benefit Enhancements?

5. 3 Funding Sources The Retirement Systems Assets come from 3 sources:  Working employees contribute 6 percent of each paycheck  Employers contribute annually based on recommendations from the Systems’ actuary  The State Treasurer invests funds in the System, which generates investment earnings

6. Local Governmental Employees’ Retirement System Year Ended December 31, 2007 Sources of Funds

7. 2008 Loss: $4.9 billion  How did we lose $4.9 billion?  12/31/2007 Assets = $17,891 million  2008 actual return = -20%  Average large public fund = -26%  S&P 500 = -37%  Expected return = 7.25%  Loss of about 27.25% of $17,891 or $4,875  Active LGERS payroll estimated at $5.3 billion.  The losses we experienced equals about 92% of all the local payrolls in NC

8. Contributions: Where are We?

9. Contribution History

10. FY 10-11 Contributions LGERS Estimated Salaries$5,321 FY10 Actual4.80% Base = $255 FY11 ARC6.35% Base = $338 Dollar amounts are in $ millions. Some employers contribute more due to accrued liability or death benefit. Base rate for law enforcement = 6.41% after court cost offset.

11. Projected Employer Contributions

12. What Can We Do?

13. Invest our Way Out? S&P 500 Index

14. Required Return to Get Back  Need return on fund of 34% in 2010 to get back to funding situation at 12/31/2007.  Only 50% invested in stock market, so market needs to return 61%.

15. Increase Contributions Reasons to Contribute the ARC (Annual Required Contribution):  Required by statute  Maintain bond ratings  68 year history of responsibility  ARC is less than needed to remain 100% funded  Avoid burden on future taxpayers  Avoid slippery slope

16. Contribution Benchmarks  Average public fund: 8.7% of pay (DB only, FY08 PFS, only Soc Sec systems)  Highest system in PFS: 31.5% of pay  Neighbors:  SC: 8.05%  TN: 9.36%  VA: Varies, up to 22%  GA: 10.39%

17. More Comparisons  Average large private-sector employer: 7.3% of pay (DB & DC, BLS, June 2009)  Cost of new benefits earned each year: around 6.3% of pay

18. Employer Contribution Context

19. Slippery Slope  New Jersey: cut contribution in 1992, again in 1994, again in 2009, mostly for short-term political gain  Some abandoned after 2000-03 market drop thinking situation was temporary (it wasn’t): Maryland, Kentucky, Colorado, Pennsylvania  Some have never had the discipline, but tried numerous times to establish it: Illinois, West Virginia, Oklahoma, Washington

20. Contribution Relief

21. Initial Contribution Relief  Losses occurred mostly in fall of 2008  Delay in effective date of valuation to July 1, 2010  5-year smoothing of assets, so phase into full contribution over 5 years beginning July 1, 2010  Roughly 14 year amortization period after phase in complete

22. Alternative Description of Contribution Relief  You borrow $10,000 at a 7% interest rate  Which of the following repayment approaches seems most prudent?  Pay off in one year by cutting expenses and selling possessions  Payment similar to minimum payment on credit card ($1,900 per year)

23. More Choices  Level payments over 15 years ($1,079 per year)  Pay interest only and pay off loan in the future ($700)  No payment for 2 years, then phase into full payment over 5 years. (produces payments of $0; $0; $170; $336; etc.)

24. Further Contribution Relief  ARC in FY09-10 = 4.24% of pay  Actual contribution in FY09-10 = 4.80% of pay  Proposed that Board allow local governments to use that 0.56% of pay credit balance in first year to offset 6.35% contribution  Net result would have been 6.35% - 0.55% = 5.80% (0.01% difference is adjustment for timing)

25. Assumptions  Contribution requirements depend on assumptions about the future  Examples:  How long retirees will live to collect benefits  How much investments will earn  How much salaries will increase (benefit based on final four years)

26. Salary Increase Assumption  Long-term assumption over next 20 to 30 years  Measures increase for an employee, not for a position  Two components:  Budget for salary increases: 3.75%  Promotions: varies by age, average about 1%  Total increase about 4.75%

27. Salary Increase Assumption  Experience study will update 3.75% using forecasts based on current economic environment  Promotion component based on current pay structure, for example how much more you pay 30 year veteran compared to new hire  Both components fully up-to-date, not based on past that may not be as relevant

28. Retirement Assumption  Also a long-term assumption based on actual experience  We expected people to delay retirements with the recession  We were wrong

29. Benefit Changes  Explicit employee contribution increase  Requires statutory change  May face legal obstacles  Implicit employee contribution increase  Limit pay increases and use funds to make contributions  Design changes through Future of Retirement Study Commission

30.  Commission to review and recommend system that:  Provides adequate retirement income at reasonable retirement ages after an acceptable period of employment  Effectively manages investments, longevity, inflation and other retirement-related risks