1. LAPERS: National Facts, Trends, and Federal Update Dana Bilyeu, Executive Director NASRA

2. National Facts State Activity Federal Focus

3. Comparison of Retirement Benefits in the U.S. Private Sector ◀ 65% of full-time private sector workers participate in an employer-sponsored retirement plan ◀ When part-time workers are counted, less than half of the private sector workforce participates in an employer- sponsored retirement plan ◀ Fewer than one in five have a traditional pension (DB) plan ◀ Social Security coverage is universal Public Sector ◀ Nearly all full-time workers have access to an employer- sponsored retirement benefit ◀ 85%+ participate in a traditional pension (DB plan) ◀ Three-fourths participate in Social Security

4. Retirement Policies and Stakeholder Objectives ◀ Employers – need a tool to retain qualified workers to perform essential public services, limit turnover and training costs, and provide for orderly workforce attrition ◀ Taxpayers – need a tool to provide better delivery of public services at a cost that is reasonable, predictable, and stable; and reduce reliance on taxpayer-supported public assistance. ◀ Public employees – need a competitive total compensation package, including the provision of income security in retirement.

5. Distinguishing Elements of Public Pension Plans ◀ Work force management tool ◀ Mandatory participation ◀ Employee-employer cost sharing ◀ Targeted income replacement ◀ Assets that are pooled and professionally invested ◀ A benefit that cannot be outlived

6. Overview of public pensions in the U.S. ◀ ~$3.7 trillion in assets ◀ ~14 million active participants ▲ 13% of the nation’s workforce ◀ 9 million retirees and their survivors receive ~$240 billion annually in benefits ◀ Of 4,000 public retirement systems, the largest 75 account for 80+ percent of assets and members ◀ Aggregate funding level = ~72% US Census Bureau, Public Fund Survey

7. Key Trends 2009 to 2014 ◀ Reductions in benefit levels ◀ Increases to employee contribution rates ◀ Legal challenges to pension changes ◀ Reduction in public employment ◀ New accounting standards changed the way pensions are calculated and reported ◀ Investment return assumptions under scrutiny, and being reduced ◀ Public pension funding levels improving in most places ◀ Some states have yet to resolve their pension shortfalls

8. Key Themes--2015 ◀ The pace of pension reform slowed considerably after 2009-2014 spike ◀ Legal outcomes impact states where reforms challenged ◀ In many states pension costs stabilized; in some states, costs may rise ◀ For the most part, states met the funding challenges of the past decade

9. ◀ Public Plans Data ▲ NASRA ▲ Center for State and Local Government Excellence ▲ Center for Retirement Research at Boston College ▲ www.publicplansdata.org www.publicplansdata.org ◀ Fiscal 2014 data subject to change ▲ Complete analysis of FY 14 will be published this fall as the Public Fund Survey Summary of Findings for FY 14 About the Data

10. Size of bubbles is roughly proportionate to size of plan liabilities Latest Public Pension Funding Levels

11. Historical Public Pension Funding Levels, FY 90 to FY 14 Standard & Poor’s, Public Fund Survey

12. Comparison of Funding Levels, FY 02 to latest Public Fund Survey

13. ◀ Contribution adequacy ◀ Actuarial assumptions vs. experience ▲ Economic assumptions ▲ Investment return ▲ Payroll growth/ salary growth ▲ Demographic Assumptions ▲ Mortality ▲ Turnover ◀ Funding (amortization) period ◀ Legal rulings—regarding current benefits Factors affecting funding level

14. Relative change in private and state & local government employment Bureau of Labor Statistics, compiled by NASRA

15. Median change in membership, FY 01 to FY 14

16. Median annual change in payroll, FY 08 to FY 14 Public Fund Survey

17. Median Contribution Rates, Social Security–eligible and –ineligible * * * preliminary

18. Distribution of Contribution Rates, Social Security–eligible and –ineligible, FY 14 Social Security-eligible Social Security-ineligible Public Fund Survey

19. ◀ Inflation assumption is the basis of actuarial assumptions for ▲ payroll growth and ▲ investment return ◀ Payroll growth-- significant driver of liability growth ◀ Investment return-- major effect on cost and funding level Inflation in public pension funding

20. Average and median inflation assumptions, FY 01, 07 and 13 Jul 20 13

21. Annual inflation rate for years ended in June, 1991 to 2015 Jul 20 13

22. Change in median assumption for nominal investment return, inflation, and real return, FY 01 to FY 13 Jul 20 13 Public Fund Survey

23. Average asset allocation, FY 01 to FY 14 Jul 20 13

24. FY 14 median public pension fund investment returns

25. Median annualized public pension fund investment returns for selected periods ended 6/30/15 Jul 20 13 Callan Associates

26. ◀ Funding levels improving ▲ Experience varies among plans ◀ Liability growth rates remain low ▲ Due to tepid hiring and salary growth ◀ Inflation projected to remain low ▲ In part due to Fed manipulation ◀ Assumptions for inflation and investment returns trending down ▲ Likely will continue to do so ◀ Costs trending up ▲ Will remain high for some plans ◀ Plans in IL, NJ, and PA remain in search of solutions Survey conclusions

27. Aggregate Public Pension Funding Level, with projections Jul 20 13 A projection…

28. ◀ One of the vexing things about funding a pension plan is that so much of it relies on events that have yet to take place ◀ “Predictions are hard, especially about the future.” Yogi Berra Projections

29. Retirement Systems Affected by Pension Modifications, 2009-2014

30. Modifications Affecting New Hires, Current Employees, Retirees

31. Recent Changes—Cost Sharing ◀ California ▲ CalSTRS 2014 funding legislation ▲ shared, gradual contribution rate increases for school districts, the state, and participating employees. ▲ New plan restores full funding within 32 years ◀ Colorado ▲ Members voted to increase their contributions from 8% to 12% by 2022 ◀ Texas ▲ Increased employee contribution rates for service between 8/31/15 and 9/1/17 ▲ Employee contribution rates after that date tied to employer rates and decreased if employer rates fall below those recommended by the plan’s actuary

32. Recent Changes: New Plan Designs ◀ Combination Hybrid ▲ Tennessee DB-DC plan, effective 7/1/14 for newly-hired state employees, teachers, and employees of local governments that elect to participate. ▲ Virginia DB-DC plan, effective 1/1/14 for most newly-hired employees in the state, excluding public safety personnel ◀ Cash Balance ▲ Kansas cash balance plan, effective 1/1/15 for most newly- hired employees in the state ▲ Kentucky cash balance plan for newly-hired state and local employees as of 1/1/14 ◀ Defined Contribution ▲ Oklahoma defined contribution plan for newly hired state employees as of 11/1/15

33. Recent Changes: Tier Modification ◀ Nevada ▲ Reduced COLA and base benefit; pensionable compensation capped ▲ Retirement eligibility increased ▲ Purchased service credit excluded from eligibility for benefits ◀ West Virginia ▲ Reduced benefits and modified eligibility requirements ▲ Law provides an additional opportunity for employees participating in the Teachers Defined Contribution plan to transfer to the Teachers Retirement System

34. Pensions Remain an Issue in Some States ◀ Pennsylvania ▲ Legislature passed bill to close the State Employees’ and Public School Employees’ DB plans and replace with a DC plan for newly hired workers. ▲ Vetoed by the Governor ◀ New Jersey ▲ Pension & Health Benefits Review Commission recommended freezing existing state and local pensions and moving workers to a cash balance plan for future service ▲ Plan calls for a Constitutional amendment to permit modifications to current employee’s benefits and to create a permanent pension funding obligation

35. Notable 2015 Legal Outcomes ◀ Illinois ▲ 2013 pension reform law ◀ Montana ▲ District Ct.: law reducing retiree COLA ◀ New Jersey ▲ NJ Supreme Court reversed lower ct. ruling ordering full payment of employer contributions ◀ Oregon ▲ A portion of 2013 COLA reduction that applied to retired members ◀ Michigan ▲ 2011 and 2012 pension changes ◀ Rhode Island ▲ Superior Court accepted settlement between the State and most public employee unions Struck DownUpheld

36. State & Local Pension contributions, in dollars, as a percentage of state and local direct general expenditures, 1984- 2013 % of spending total spending ($)

37. The ARC Experience of State Retirement Plans, FY 01 to FY 13

38. Pension changes tailored to need ◀ Nearly every state addressed the sustainability of their pension plans after the 2008 market downturn ◀ Pace of pension reform has slowed for many states; other states confront current issues ◀ Well crafted pension reforms preserve or restore plan sustainability, but must be designed in a manner which meets multiple stakeholder objectives ◀ Comprehensive pension reform should include maintenance or restoration of the pension funding stream

39. Federal Focus

40. ◀ State and local pension issues are not systemic and there is no one-size-fits-all solution. ◀ Most public plan sponsors acted to meet their unique needs; none required federal intervention. ◀ On average, spending on pensions is under 4% of state and local budgets. ◀ Federal policies should not interfere with state and local government plan design, investments, financing and risk management. Key Themes Relayed at the Federal Level

42. ◀ Legislation would prohibit federal funding to states and localities that have defaulted, are at risk of defaulting are likely to default ◀ Sense of the U.S. House of Representatives regarding no bailouts of state/local pensions (urges replacing DBs with DCs) ◀ Senate budget resolution would prohibit federal funds to state/local governments to prevent receivership or prevent default on obligations “No Bailout” Bills and Resolutions

43. ◀ Chapter 9 – some seek greater protections; others would seek to discharge pension obligations ◀ Would treat Puerto Rico as a State under Chapter 9 (may authorize subdivisions and public corporations to file) Bankruptcy

44. ◀ Student Success Act (HR 5) ▲ Initial language in Senate requires Secretary of Education to report on costs associated with teacher pension obligations ▲ House-passed bill includes amendment to restrict states from requiring local educational agencies to use Title 1 funds to make contributions to a teacher pension system in excess of the normal cost Education Spending and Pensions

45. ◀ Introduced last Congress by Senate Finance Committee Chairman Orrin Hatch (R-UT) ◀ Includes many retirement proposals, including a new optional annuity accumulation “DB alternative” plan for state and local governments ◀ Not yet reintroduced; changes under consideration Secure Annuities for Employee (SAFE) Retirement Act

46. ◀ 414(h)(2) unique to state and local governments ◀ Listed in 2005 Joint Committee on Taxation report as a “loophole” ◀ Revenue Ruling 2006-43 questions individual options/elections that change employee contributions (CODA) Tax Treatment of Public Employee DB Contributions

47. ◀ Private retirement savings: ▲ Access ▲ Participation ▲ Leakage ◀ Many provisions of Hatch’s SAFE Act, but NOT annuity accumulation plan for public sector ◀ PEPTA also excluded Consensus

48. ◀ U.S. Chamber of Commerce ◀ Bipartisan Policy Center ◀ White House Infrastructure Initiative ◀ Infrastructure Investment Summit ◀ Qualified Public Infrastructure Bonds (QPIBs) ◀ Senate Tax Reform Working Group on Community Development & Infrastructure Infrastructure Investments

49. ◀ Sponsors: Brady (R-TX), Neal (D- MA) ▲ Replace WEP with new formula ◀ Repeal bill also introduced in House GPO/WEP

50. ◀ Securities and Exchange Commission enforcement unit on Municipal Finance and Public Pensions ◀ Speeches by SEC Commissioners Gallagher (R) and Aguilar (D) ◀ Municipal Securities Rulemaking Board expanded jurisdiction under Dodd-Frank Act ◀ Financial Stability Oversight Council (FSOC) monitoring of markets and state/local economies Heightened Interest by Market Regulators

51. ◀ Treasury established new Office on State and Local Finance that includes review of pensions ◀ Pending regulations: ▲ Definition of “governmental plan” ▲ Application of federal normal retirement age rules ▲ Determination letter cycles ending Treasury Interest

52. Questions/Comments