Society of American Business Editors & Writers Lynn Turner
Society of American Business Editors &
Writers
Lynn Turner
Formerly SEC Chief Accountant
Managing Director
LitiNomics
Partner In International Accounting Firm
VP and Chief Financial Officer
SEC Chief Accountant
Professor
Director of Research
Investigator, Forensic Accountant
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Led investigation of San Diego Pension
Board Member; Public Companies, Mutual
Fund, Independent Trustee Public Pension
Fund
Views today are my own and do not necessarily reflect the views of COPERA or members of the COPERA board.
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Governor appointee
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$100 per board meeting
Type of compensation
Amount Percent
Cash salary
Benefits and perks
Equity
Total
$60
30
10
$90
60%
30%
10%
100%
Considerations include level of education, experience, job requirements, importance of job to overall company performance, etc.
Not all public pension funds and not all states have the same financial balance sheets nor do they all have the same. financial issues.
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Often differing year ends.
Different maturity.
Governed by state laws which vary dramatically.
Level of benefits, who sets the benefits, level of contributions and who pays, and whether one also gets social security varies
GREATLY.
Pensions today often include a defined benefit plan and a defined contribution plan.
Defined benefit plan
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Benefit is set – defined - & employee and employer contribution calculated to be enough to pay benefit.
Defined contribution plan
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Employee contribution is defined or set and benefit varies based on what contributions and earnings come up to.
401-k’s.
Average 401-k balance as of March 31, 2011 according to
Fidelity - $74,900.
Average balance for 55 and older - $233,800
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Divided by average life expectancy after retirement at 65 – 13 years = $17,985 per year.
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What happens when the money runs out?
CNBC – March 25 th reported ¼ of Americans say they have burned thru their savings and ½ believe they don’t have enough set aside for retirement.
22.1% had borrowed from their plan as of March 31, 2011
(Fidelity)
High fees.
Non professional management.
Employers do not contribute in down years. Employees not required to contribute.
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Working career – Service life – “earn” benefits
Make contributions, receive interest, dividends, cap gains
Liability for benefit payments grows
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62
56 years – Almost twice the life of home mortgage
Continue to receive earnings
Paid benefits & liability reduced
78
Death
Colorado PERA - School Division
30-Year Projection of Population Breakdown
Based on December 31, 2009 Valuation Results
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
Retirees
Deferred Vesteds
Active New Entrants
0
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
47,758 50,010 51,997 54,053 56,128 58,203 60,247 62,130 63,997 65,751 67,576 69,321 71,028 72,676 74,235 75,811 77,314 78,758 80,094 81,368 82,602 83,724 84,732 85,631 86,479 87,318 88,072 88,721 89,262 89,812 90,343
91,416 93,181 94,983 96,822 98,681 100,529 102,276 104,071 105,904 107,769 109,653 111,561 113,490 115,442 117,421 119,415 121,424 123,447 125,490 127,536 129,592 131,662 133,742 135,832 137,934 140,040 142,154 144,271 146,392 148,511 150,625
0 19,460 31,954 42,375 51,564 59,987 67,835 75,068 82,025 88,643 94,981 101,055 106,931 112,616 118,124 123,438 128,588 133,597 138,447 143,130 147,634 151,977 156,133 160,125 163,994 167,749 171,417 174,949 178,343 181,660 184,913
Active Existing Employees 119,390 101,721 91,045 82,469 75,152 68,630 62,711 57,436 52,467 47,866 43,576 39,580 35,814 32,270 28,935 25,827 22,916 20,180 17,636 15,295 13,167 11,236 9,528 8,021 6,674 5,479 4,410 3,515 2,798 2,198 1,703
Year Beginning
Retirees Deferred Vesteds Active New Entrants Active Existing Employees
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Colorado PERA - School Division
30-Year Projection of Population Breakdown
Based on December 31, 2009 Valuation Results
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Retirees
0%
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
19% 19% 19% 20% 20% 20% 21% 21% 21% 21% 21% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 21% 21% 21%
Deferred Vesteds 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%
Active New Entrants 0% 7% 12% 15% 18% 21% 23% 25% 27% 29% 30% 31% 33% 34% 35% 36% 37% 38% 38% 39% 40% 40% 41% 41% 42% 42% 42% 43% 43% 43% 43%
Active Existing Employees 46% 39% 34% 30% 27% 24% 21% 19% 17% 15% 14% 12% 11% 10% 9% 8% 7% 6% 5% 4% 4% 3% 3% 2% 2% 1% 1% 1% 1% 1% 0%
Year Beginning
Retirees Deferred Vesteds Active New Entrants Active Existing Employees
10
2+2=4
C+I=B+E
Formula
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C: Contributions, employee & employer
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I: Income from Investments; dividends, interest, capital appreciation - ~ 60%+ of inflows
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B: Benefits paid to plan participants
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E: Expenses to run plan
Benefits are fixed often by legislation or rule based on;
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Service life
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Pay level
Actuaries calculate amount of annual required contribution (ARC) required to fund benefit payments.
Life expectancy and mortality.
Salary including future wage increases.
Assumed rates of return on investments in the future until mortality.
Plan expenses.
Benefit amounts and cost of living adjustments.
Discount rate to discount benefit back to today’s liability.
Volatility and amortization period for investment and actuarial gains/losses.
Amortization period for plan changes.
HIGHLY dependent on asset allocation between bonds, equities, real estate, etc.
Equities have higher returns, higher risks.
Returns can vary widely between US and non
US equities.
According to Hewitt EnnisKnupp, US equity excess returns over bonds was 4.4% per year from 1926 through 2009 but only 1.1% from
1995 to 2009.
US equity (Dow Jones Total Stock Market
Index) earned 10.1% return from 1971-2010.
S&P 500 lost money in last decade.
A LONG TERM – e.g., 30 year forecast.
IT IS
NOT
a forecast for next year, next five years or even next ten years. But what will be earned on contributions invested over the long run.
For equities is based on:
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Inflation.
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Price growth (GDP).
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Income (dividend yield).
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Change in valuation (P/E ratio).
Infla%on
GDP growth
Income (dividend)
Change in PE
Expected return
3.0% 4.0%
2.8
3.5
2.0
2.5
0.0
1.0
7.8% 11.0%
For bonds based on:
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Inflation.
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Interest income (real).
Source Return Return
Inflation
Interest income (real)
2.5%
2.9
4.0%
3.5
Expected change in yield -0.3
0.0
Expected US Bond Return 5.1% 7.5%
Corporate pension plans aggregate allocation included 43.9% to equity securities, 34.2% to debt securities, 4.9% to private equity, 2.7% to hedge funds, and 4.8% to real estate. This allocation and the assumed rates of return would imply a 10% plus return on equities.
The median assumed rate of return was 8% in
2010. (Accounting Analyst Observer)
8.0% represents the current median actuarial interest rate assumption employed by state pension plans.
Annualized Public Pension Plan Returns
Annualized Returns
10 Years March 11, 2011
Real Estate
Hedge funds
Private Equity
Fixed income
Equity
Public funds with a total market value greater than $5 billion.
Source: WSJ, Wilshire Consul%ng
8.4%
6.8%
6.7%
6.1%
5.7%
What is your prognosis for America?
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Is the glass half full or half empty?
The country has gone through dire times in the past and EACH time has recovered – will it do it again?
How does the debt of individuals, companies, and the countries affect your outlook?
How does the impact of the emerging countries affect your outlook?
How does the changes in technology, education and manufacturing affect your outlook?
Can China drive its consumption higher alleviating the need to sale to the US?
% %
Change Change
Value Value Value Value
12/31/89 12/31/99 12/31/09 5/24/201 1
DJIA 2753.20
316.86% 11477.12
(9.14%) 10428.05 12,356.21
On March 9, 2009, the DJIA hit a low of 6440.08
closing at 6547.05.
It had closed on October 9, 2007 at 14,164.53.
That represents a fall during the financial crisis of 7839.88 points or 54.9%.
Nasdaq 454.80
794.75% 4069.31
(44.23%) 2269.15
2,746.16
The Nasdaq closed at 1268.64 on October 9, 2007.
It traded as high as 5132.52 on March 10, 2000 during the height of the internet craze only to close at 1114.11 on October 9, 2002.
This drop of 4022..88 points or 78.4% hurt the
Nasdaq as it is heavy in technology stocks.
S&P 500 353.4
315.86% 1469.25
(24.1%) 1115.1 1,316.28
The S&P 500 closed on October 9, 2007 at 1565.15
and would not close that high again albeit it traded as high as
1576.09 two days later.
On March 9, 2009, it would close at 676.53.
This represents a fall of 898.36 points or 57.4%.
Those who want to do away with defined benefit plans and want to replace them with defined contribution plans typically:
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Argue for lower assumed rates of return AND lower, risk free discount rates as it increases the net liability and ARC and puts “pressure” on budgets and increases call for change.
Not even public companies use these.
Those who want to keep defined benefit plans typically:
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Argue for higher assumed rates of return And discount rates (the same rate) as it reduces the net liability and amount of contributions required, relieving
“pressure” for change.
Higher rates typically used by pension funds with higher levels of underfunding.
PV of $100 that will be received in five years.
Or equivalently, which amount of money today will grow to $100 in five years when subject to a constant discount rate?
Assuming a 12% per year interest rate it follows:
What rate to use is key:
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Rate you assume you will earn on assets?
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Rate you would have to borrow at to finance the obligation (incremental borrowing rate)?
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Settlement rate (used by public companies) reflects rates inherent in dedicated bond portfolio to defease or settle the debt ~ AA bond rate?
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“Risk Free” rate ~ 10 year US Treasuries?
Employees often required to contribute at significant levels.
Comes out of their paycheck just as would a
401-K contribution.
Most often – but not always - legislators set contribution and benefit levels, not the trustees on the pension board. It was legislators who often gave the benefits and lowered the contributions around the beginning of the last decade, not the pension board trustees. Question – Are your legislators covered by the plan?
COPERA was 103% funded as of 12/31/1999
Changes due to:
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2000/01 market downturn (dot.com).
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2008/09 market decline (subprime).
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Failure of state to make BILLIONS in payments due.
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Decision to offer purchase service credits.
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Legislature decision to enrich benefits and reduce contributions.
UNFUNDED ACTUARIAL ACCRUED LIABILITY
(Billions)
6.5% 8.0% 9.5%
Based on Actuarial
Valuation $29.1 $18.4 $10.4
Based on Market
Valuation $34.1 $23.4 $15.2
Colorado Population 5 million
(MILLIONS)
2003 2004 2005 2006 2007 2008 2009
$236.2 $698.8 $1,277.6 $1,689.4 $2,181.4 $2,607.1 $2,984.3
Valua&on Year
State & local division
State division
School division
Local government division
Judicial division
Total
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
$219.9 $437.7 -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐
-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ $221.4
-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 312.1
14.8 14.7 18,7
1.8
$236.2
1.5
453.9
1.0
$553.2
$151.9
201.8
10.5
0.7
$364.9
$180.8
247.5
12.6
1.3
$442.2
$156.7
203.0
0.8
1.1
$361.1
$131.5
173.9
(5.6)
0.6
$300.4
PURCHASED
YEAR EMPLOYER EMPLOYEE SERVICE
1999
2005
$456,132 $353,949 $ 73,526
$609,989 $476,215 $307,982
2006
2007
2008
2009
$674,476 $495,893 $106,561
$749,918 $526,561 $ 24,117
$857,729 $557,481 $ 32,547
$941,801 $569,338 $ 23,439
Purchased Service of $772 million in 2003
Year
1999
2009
SCHOOLS
EMPLOYER
11.4%
STATE 11.4
STATE PATROL 13.1
EMPLOYEE
8%
8
10
CITY 10.0
JUDGES 15.0
8
8
SCHOOLS
STATE
11.93% 8%
11.93
8
STATE PATROL 14.63
10
CITY 11.78
8
JUDGES 15.44
8
EMPLOYER
SCHOOLS
STATE
STATE PATROL
CITY
7.2%
7.2
13.1
0.9
JUDGES 0.9
# of Annual Average
Year Members Payroll Salary
(billions)
1990 106,898 $2.91
$27,248
2000 162,106 $4.98 $30,736
2009 190,206 $7.05
$37,060
Original Benefit Benefit
Year @Retirement Increases Total
1970 269 $1,240 $1,509
1975 334
1980 616
1,019 1,353
1,010 1,626
1985 1,002
1990 1,429
1995 1,771
2000 2,461
2005 2,990
1,054
404
2,056
1,118 2,547
931 2,702
857 3,318
3,394
2009 3,100 0 3,100
Average monthly benefit of $2,885 in 2009. COLA has significant impact. COPERA members do not receive
Social Security.
# of
Year Retirees
# of Total Retirement
Members Benefits Paid
1940 93 3,715 $ 72,588
1960 1,775 3,068 2,055,139
1980 17,301 96,473 1,289,456
1990 32,955 115,350 350,398,094
2000 53,015 248,104 1,093,779,068
2009 81,717 357,604 $ 2,800,086,839
Cut “COLA” cap from 3-1/2% to 2%. Can go lower in negative return year. Impact of
$167,000 per retiree.
Increased FUTURE contributions.
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“Shared Sacrifice” if contributions made.
State also required state employees to increase their contributions while state lowered its contribution.
Legal challenges in South Dakota, Minnesota and
Colorado.
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For Colorado, issue of actuarial necessity.
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Is the pension an asset of the retiree which the government has seized?
Pension funds are underfunded because they were severely mismanaged in last decade.
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Pension funds typically have low cost.
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Wall Street and Banks brought us dot com bubble and sub prime financial crisis and not the pension funds.
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401-Ks suffered greatly as well – in worse shape than pension funds and greatly underfunded.
Pension fund board members simply
“protect” their own pensions.
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Legislatures and not trustees often set the benefits.
“Interested” board members have a self interest in seeing a well run, low cost, financially stable fund.
Research has found funds without political appointees have higher returns than those with.
“Fixes” to underfunding resulting from Wall
Street and non paying governments falling on backs of the school teachers, firemen, judges, etc.
Pensions should use “Risk Free” rates of return and discount rates.
Pension funds will run out of money in next few years.
Pensions are “rich.” Question – Are YOU paying the fireman or policeman enough to go into the burning building or step in front of a bullet next time, or for a teacher to educate the next generation of Americans?
Just how big is the number – when do we hit the wall?
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$1-3 trillion?
2025-2030
Legislative/legal issues.
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DB vs. DC.
Cost of plan termination.
Impact on education.
Dividing the pie – who gets what?
Balancing budgets.
Abuses – purchase service credits, HAS spiking, retirement age.
OPEBS.
Securities Exchange Act of 1934
Section 15B -- Municipal Securities
•
Issuance of municipal securities a.
Neither the Commission nor the Board is authorized under this title, by rule or regulation , to require any issuer of municipal securities, directly or indirectly through a purchaser or prospective purchaser of securities from the issuer, to file with the Commission or the Board prior to the sale of such securities by the issuer any application, report, or document in connection with the issuance, sale, or distribution of such securities. b.
The Board is not authorized under this title to require any issuer of municipal securities, directly or indirectly through a municipal securities broker or municipal securities dealer or otherwise, to furnish to the Board or to a purchaser or a prospective purchaser of such securities any application, report, document, or information with respect to such issuer: Provided, however, That the Board may require municipal securities brokers and municipal securities dealers to furnish to the Board or purchasers or prospective purchasers of municipal securities applications, reports, documents, and information with respect to the issuer thereof which is generally available from a source other than such issuer . Nothing in this paragraph shall be construed to impair or limit the power of the
Commission under any provision of this title.
Created in April 1984 due to fight between FASB and State and
Local Governments over pension accounting.
Robert H. Attmore, Chairman Served as NY deputy state comptroller and state auditor from 1986 until 2003.
Michael D. Belsky Since 2007 mayor of Highland Park, Illinois.
Michael H. Granof is Professor of the McCombs School of Business at the University of Texas at Austin.
David E. Sundstrom Previously Orange county director of internal audit, elected county auditor-controller, university auditor
California State University System and was campus audit manager for the University of California-Davis.
Jan I. Sylvis Chief of accounts for the state of Tennessee since
1995, serves as the state’s controller and manages its centralized accounting system.
Marcia L. Taylor Assistant municipal manager of Mt. Lebanon,
Pennsylvania.
James M. Williams Previously Ernst & Young LLP partner.
Assumed rate of return.
Discount rate for liability.
Amortization period for actuarial gains/ losses.
Use of market values of assets.
Actuarial valuation date.
Multiple Actuarial methods – e.g., projected unit credit, entry age.
Debt off balance sheet!!!
Disclosures.
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Market values.
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Sensitivity analysis.
Lack of transparency.
Board conflicts.
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Play for pay.
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Political appointees.
Actuaries.
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Tend not to rock the boat for fear of losing business.
Pensions Institute at the Cass Business School
University of London: http://www.pensionsinstitute.org/
David H. Webber: http://www.bu.edu/law/ faculty/profiles/#w
Josh Rauh: http;// www.kellogg.northwestern.edu/faculty/ rauh/
Boston College Center for Retirement
Research: http://crr.bc.edu/
GASB: http://gasb.org/
International Foundation of Employee Benefit
Plans: http://www.ifebp.org
PEW State Policy Center: http:// www.pewtrusts.org/our_work_detail.aspx?id=542
Employee Benefit Research Institute: http;// www.ebri.org
National Association of State Retirement
Administrators: http://www.nasra.org/
National Institute on Retirement Security: http://www.nirsonline.org/index.php
GRS:http://www.gabrielroeder.com/
Pension Research Council: http:// www.pensionresearchcouncil.org/
Find on most but not all web sites.
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Florida does not.
Due within 6 months of fiscal year end.
Can find by going to website of government entity or pension fund and googling: “Annual
Report” – “Comprehensive Annual Financial
Report” – “CAFR”
COPERA: http://www.copera.org/pera/ formspubs/reports.htm
Letter from CEO.
Management’s Discussion & Analysis.
Financial statements.
Actuarial valuation report.
Statistical Section – important to read.
NO ONE WILL READ THIS FOR YOU AND IT IS
IMPORTANT TO STUDY TO UNDERSTAND FULLY
THE STATUS OF A PENSION PLAN AND
FINANCIAL STABILITY OF A GOVERNMENT!!!
