Report on the Current
Status of Pensions in State
Governments
Relmond P. Van Daniker, DBA, CPA
Executive Director
AGA
About the Public Fund Survey
• Online compendium of public retirement system data
accessible at www.publicfundsurvey.org
• Contains data on 101 systems and 126 plans that together
account for ~ 85 percent of all public retirement system assets
and participants in the U.S.
• Data set includes FY 01 through FY 09
• Sponsored by NASRA and NCTR
• Data is inputted into a database as it becomes available;
database is uploaded and feeds the website
• Most data comes from system CAFRs
• A key objective of the survey is to promote sound public
retirement system policies and administration by increasing
transparency and understanding of the public retirement system
community.
Figure A: Change in aggregate
actuarial value of assets, liabilities,
and funding levels, FY 01 to FY 09
Summary of Findings
Figure B: Change in aggregate
public pension funding level,
1990 to 2009
101.3
Aggregate
Funding
Level
97.1
91.3
87.9
86.3 85.3 86.1 85.0
79.8
Trillion
$3
101.3
AVA
AVL
96.0
97.1
91.3
$2
89.0
85.0
86.0
87.9
86.3 86.1
85.3 85.0
82.0
$1
79.8
79.0
90
01
02
03
04
05
06
07
08
09
92
94
96
98 00010203040506070809
Fiscal Year
Summary of Findings
Figure D: Distribution of actuarial funding levels for plans
in the Public Fund Survey, based on latest available data
120%
100%
80%
60%
41.3%
Size of bubbles is
roughly proportionate
to size of plan liabilities
Summary of Findings
Figure E: Comparison of
corporate and public pension
funding levels, FY 00 to FY 09
Figure F: Comparison of change from
prior year in corporate and public
pension contributions, 1989-2009
Funding
Level
80%
*
120%
60%
110%
Corporate
40%
Corporate
100%
20%
Public
Public
0%
90%
-20%
80%
00
01
02
Wilshire, Milliman, and
Public Fund Survey
03
04
05
06
07
08
09
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
US Dept of Labor,
*Estimate
US Census Bureau,
Milliman
Summary of Findings
Figure G: Median change from prior year
in actuarial value of assets and liabilities
8%
Median Change
in Liabilities
6%
4%
Median Change
in Actuarial Assets
2%
0%
02
03
04
05
06
Fiscal Year
07
08
09
Summary of Findings
Figure J: Average asset allocation, FY 02 to
FY 09, with FY 09 averages listed
Cash/Other
4.4%
Real Estate
5.9%
100
90
80
Fixed
Income
29.0%
70
60
Alts
8.7%
% 50
40
30
Equities
52.1%
20
10
0
02
03
04
05 06 07
Fiscal Year
08
09
Summary of Findings
Figure N: Median employee and employer
contribution rates as a percentage of pay, Social
Security-eligible workers, FY 02 to FY 09
12.7%
Employers
11.2%
non/Social Security
10.7% 10.7%
10.3% 10.3% 10.3%
Employees non
Social Security
8.0%
11.8%
Employers w/
Social Security 9.4%
8.7%
8.5% 8.5%
8.0%
7.1%
6.5%
6.0%
Reflects general employees
and teachers only;
does not include public
safety personnel
02
Employees
w/Social Security
5.0%
03
04
05
06
Fiscal Year
07
08
09
Summary of Findings
Figure O: Average annual required contribution
paid and percentage of plans receiving at least 90
percent of their ARC, FY 01 to 09
104%
98%
Average
ARC Paid
89% 90%
90%
89%
85%
84%
87% 87%
Percentage of
plans receiving
90%+ of their ARC
69%
65%
64%
61% 61% 61%
01
02
03
88%
04
05
06
Fiscal Year
07
61%
08
09
Summary of Findings
Figure Q: Distribution of inflation
assumptions, FY 09
Figure Q: Distribution of investment
return assumptions, FY 09
58
37
33
14
11
10
16
10
3
3
1
1
1
1
1
0 5 0 0 5 0 5 0 0 5 0 0 0
2.5 2.7 3.0 3.2 3.2 3.5 3.7 4.0 4.1 4.2 4.5 5.0 5.5
1
7.00
18
15
3
7.25
13
2
7.50
7.75
7.80
8.00
8.25
8.50
Median public fund
returns for
periods ended
12/31/09
19.9%
9.3%
8.1%
3.4%
3.9%
-1.1%
1
3
5
10
Years ended 12/31/09
Callan Associates
20
25
Investment return assumptions are being widely
challenged, and some are being changed
• Large funds that have reduced their assumed
investment return in recent months:
–
–
–
–
–
–
–
–
–
–
–
Colorado PERA, 8.5 percent to 8.0 percent
Pennsylvania PSRS, 8.5 to 8.0
Pennsylvania SERS, 8.5 to 8.0
Illinois SERS and SURS, 8.5 to 7.75
San Diego County, 8.25 to 8.0
San Francisco City & County, 8.0 to 7.75
NY Common, 8.0 to 7.5
Virginia RS, 7.5 to 7.0
District of Columbia Retirement Board, 7.5 to 7.0
Indiana TRF, 7.5 to 7.0
Indiana PERF, 7.25 to 7.0
• The CalSTRS board will consider a recommendation this week
to reduce theirs from 8.0 to 7.5
The breadth of changes made this year to
pension benefits was unprecedented
• At least one dozen states approved retirement benefit structures
with higher years of service, age, or both, needed to qualify for
normal retirement benefits
– Most affected new hires only
• Nine states reduced COLA provisions
– Three—CO, MN, SD—affected existing retired members
• Ten states raised employee contribution rates, affecting existing
employees in most cases
• Other popular changes:
– Longer final average salary periods, more restrictive return-to-work
policies, anti-spiking provisions
• See http://www.nasra.org/resources/changes.htm
Lawsuits filed against changes
affecting existing participants
• Lawsuits have been filed in
– Colorado, Minnesota, and South Dakota
challenging the authority of those states to reduce automatic
COLAs for existing retired members
• A lawsuit also has been filed in Rhode Island, challenging
reductions in pension benefits for existing plan participants
• A lawsuit has been filed in Michigan challenging the state’s
authority to charge active participants three percent for retiree
health care benefits, with no assurance of receipt of the benefit
Other notable changes
•
New hires in Utah will have a choice of a hybrid or
defined contribution plan
–
The state has capped its liability at 10 percent of pay
•
Illinois (SERS, TRS, and MRF) and Missouri (SERS)
raised normal retirement age for new hires to 67
•
Higher vesting periods in Iowa and Mississippi
Hybrid (combo) and cash balance plans
•
More states now offer hybrid or cash balance pension
plans
–
–
•
•
Recent additions: Georgia ERS, Utah RS, Michigan teachers
Other hybrids: Indiana, Texas municipal and county plans,
Nebraska state and counties, Ohio (optional), Oregon,
Washington (optional)
Latest DC plan enactment: Utah (optional)
See www.nasra.org/resources/hybriddc.pdf
Furloughs, layoffs, slow membership growth
• One-third of the federal stimulus package (~$260 billion)
targeted state and local government employees
– Most of these funds are scheduled to run out later this year
• According to the National Conference of State Legislatures,
some state employees have been laid off in 23 states and
furloughed in 25 states
• A survey conducted last summer found that cities and
counties could lay off nearly half a million employees in 2011 if
more federal help was not provided
• Bloomberg reports that states and cities have reduced payrolls
since August 2008 by some 400,000 workers
Notable studies and reports
•
An increase in the last 18 months of studies calculating
unfunded pension liabilities on the basis of a so-called riskfree return or using some another corporate-style method
– Timing of these studies may be intended to influence
GASB
•
Some studies project insolvency dates of state and local
pension plans
– Projected insolvency dates begin in 2015 and continue
through 2047
– Five states would not run out of money
– Conclusions are derived chiefly by understating projected
contributions and measuring future obligations using
current (low) interest rates
Public employee compensation
has become the focus of growing attention
•
•
Multiple, competing studies of pay and benefits
Often fail to distinguish between federal and state &
local government workers
Often fail to acknowledge key facts:
•
–
–
–
Public employees are twice as likely to have a college
degree than the private sector workforce
Many public employees work in positions involving
physical risk – police, fire, corrections
The public sector workforce stays on the job longer
Overwhelming number of policy recommendations
emerging with regard to State/local fiscal
restructuring; public pensions a major target
– Calls for Linking State Pension Reform to Federal Aid
– Dodd-Frank Requirements on Municipal Advisors, GASB
Funding, New SEC Office of Municipal Securities
– House Resolution (H. Res 23) citing state and local budget
issues, pension costs and opposing public pension bailout
– Legislation (HR 6484) to impose new federal reporting on
public pension costs, threat of removing federal tax
exemption for state and local bonds
– Discussions regarding Congressional action to permit States
to declare bankruptcy
Calls for linking Federal aid to
state pension reform
"The Federal government bailed out Illinois and other states with
stimulus money. They can't tell Congress it has no business
demanding reform of these unsustainable pension plans.”
– Congressman Mike Quigley (D-IL)
“[E]ligibility for [any further round of Federal assistance to the states]
should be conditioned on the states and municipalities putting in
place plans to address their long-term structural pension deficits…”
– New America Foundation
“And [$50 billion in new Federal aid to States, localities to avoid layoffs
of teachers, public safety employees] can be designed with
appropriate safeguards to ensure that they achieve their objective
of keeping people working, rather than rewarding states for poor
past policy choices.”
– President Barack Obama
Federal interest in municipal finance
and public pensions
– New enforcement division unit created on Municipal
Finance and Public Pensions
– New Office of Municipal Securities established within
the SEC
– MSRB reconstituted, so that a majority of members are
independent of the municipal securities industry,
expanded mission with regard to protecting state and
local governments and public pensions
– GASB Funding (FINRA fee; GAO study – including
feasibility of “Tower amendment repeal”)
SEC proposed regulations on
municipal advisors
• Employees of a municipal entity are excluded from
the definition of “municipal advisor” (subject to
registration with SEC and MSRB)
• However, in the recent proposal, SEC takes the
position that appointed members of a governing
body of a municipal entity who are not elected ex
officio members should be included in the definition
of a "municipal advisor."
Federal “Sustainability” Proposals
• FERS/CSRS Modifications
– COLAs, FAS, EE Contributions
• Social Security Computation Changes
– COLAs, AIME (#Years and Type of Index),
Taxable Earnings, NRA, Spousal Benefits,
Death Benefits, Children’s Benefits
Alarmist reports fueling Congressional
interest
• Many reports are unduly alarmist and use unrealistic
assumptions regarding investments, contributions
and ability to address issues at the State and local
level
• Many suggested “solutions” only exacerbate the
situation:
– Mandatory Social Security
– Closing the DB plan to new-hires and switching to
401(k)-type plan
– Pension obligation bonds
– Federal aid contingent on pension reforms
Facts do not support the hyperbole
• Public pension remain well-positioned to pay benefits to
retirees for the foreseeable future
• The recent market shift may require modifications to be
made at the State and local levels in order to secure
financing for the very long-term, but it is not an immediate
crisis
• Governments/Employees have the time to rebuild
reserves with a patient and proactive approach that retains
the key elements
– However, each will require diversified approaches to rebuilding
reserves and have a long time horizon that allows for a patient
and metered response
• Federal government has its own fiscal problems
Employer (taxpayer) spending on public
pensions as a percentage of total state and
local government spending, 2009
2.9%
97.1%
Spending on Public Pensions
All Other State and Local Government Spending
Proper perspective needed
• In reality, less than three percent of all state and local government
spending goes toward public pensions.
• Nearly 90 percent of public employees are required to contribute a
portion of their wages—typically five to eight percent—to their
state or local pension fund, and some share pension costs equally
with their employers.
• An estimated 30 percent of employees of state and local
government do not participate in Social Security, including
approximately one-half of all of the nation’s public school teachers,
and more than three-fourths of firefighters and police officers.
• In most of these cases, employers and employees are contributing
to the pension fund in lieu of contributions to Social Security,
reducing state and local taxpayer costs by an estimated $15 billion
annually.
Annualized changes in employment
State, Local and Private
January 2005 = 100%
Local
104%
State
102%
100%
Private
98%
96%
Jan-05
U.S. Bureau of Labor Statistics
Sep-07
Jun-10
Inflation for 12-month periods ended June,
1986 - 2010
4%
25-yr avg
= 2.87%
2%
0%
-2%
86
CPI-U, U.S. Bureau of Labor Statistics
96
06
10
Annualized change in employee compensation
Private Sector and State & Local Government
1Q 01 to 2Q 10
4%
State &
Local
Government
3%
Private
Sector
2%
1%
1Q01
1Q02
1Q03
1Q04
U.S. Bureau of Labor Statistics
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
State and local fiscal fortunes
are tied to the national economy
•
“The bulk of the recent deterioration in state and local
government finances is attributable to macroeconomic
cyclical forces.”
•
“If the economic recovery in the US were to stall, budget
woes at all levels of government would intensify.”
•
“[I]f the national economy continues to recover as we
anticipate, the near-term fiscal condition of the vast majority
of state and local governments should begin to improve.”
• David Greenlaw MorganStanley June 29, 2010
Daily close of Russell 3000,
6/1/95 to 7/31/10
3500
3000
2500
2000
1/1/00
7/31/10
Employee and
Employer
Contributions
1982 to 2008
Billions
$80
Employer Contributions
Employee Contributions
$70
$60
$50
$40
$30
$20
$10
$0
82 83 84 85 86 87 88 89 90 91 92 93 9495 96 97 98 99 00 01 02 03 04 05 06 07 08
US Census Bureau
Forecast
•
•
•
•
•
•
•
Funding levels will continue to decline
Higher contribution rates for employers and for
many employees
Continued focus on public employee compensation
and benefits
Increased consideration of hybrids and DB-DC
combos, cash balance plans, that shift more risk to
participants
Efforts to reduce future benefit accrual rates
Pressure to reduce investment return assumptions
Pressure to switch to DC plans
Key Takaways
• With no changes to benefit levels or financing arrangements,
most public pension plans have assets sufficient to continue to
pay benefits for decades
• Benefit levels and financing structures have been assessed for
virtually all plans in the wake of the market decline
• Due to asset smoothing methods and actuarial valuation dates,
the effects of the 2008-09 market decline are being phased in
• Long funding horizons and other practices provide time to
consider options and make modifications
36
Key Takeaways
• An unprecedented number of plans made changes in 2009 and
2010, chiefly in response to the effects of the 2008 market
decline
• Changes are likely to continue to be made in 2011 and beyond
• The unique nature of each plan and pension plan sponsors
requires a unique response
• Modifying plan designs and financing arrangements is not new
• Improving capital markets are helping to offset the effects of
the market decline: S&P 500 is higher today by 75 percent from
March 2009
37
Key Takeaways
• A plan’s actuarial funding level is a snapshot of a financial
condition that exists over decades
• For plans with a FY-end date of June 30, the market value of
assets was measured near the market low point
• The critical factor in assessing a pension plan’s condition is not
its funding level, but rather whether or not funding liabilities
causes fiscal stress for the plan sponsor
• For most plans, long-term investment returns, over 20-25 years,
meet and exceed expectations
• Core elements of a DB plan:
– Mandatory participation
– Pooled assets invested by professionals
– Benefits paid out incrementally – easier to finance, pooled mortality risk
38
Key Takeaways
– increase in market value of assets
– after losing more than $800 billion in 2008, public
pension funds gained $360 billion in 2009 and are
on track to gain $250-$300 billion in 2010
– these gains are occurring while the funds are
distributing ~$175 billion annually in benefits
– benefits act as extremely important economic
stabilizers - distributed to every town of every state
and provide an important source of economic
stimulus
39
Key Takeaways
– the long-term nature of plans, operating over decades
– the flexibility of DB plans to modify benefit levels and
financing arrangements in response to changing circumstances
– efficiencies of DB plans through pooling of assets and sharing
risks
– actuarial, not market funding measures
– shared responsibility of costs through employee contributions
– role of DB plans in promoting orderly turnover of workers
– extreme costs associated with closing plans to new hires – not
only lose above listed efficiencies, but it causes significant cost
increases in the closed plan.
40
What is AGA Doing?
• Financial Management Standards Board (FMSB) has commented on the
following GASB pronouncements:
- Pension Accounting and Financial Reporting by Employers
(09.21.2010)
- Pension Accounting and Financial Reporting
(07.31.2009)
- Pension Disclosures
(2.28.2007)
- Recognition of Pension and Other Postemployment Benefit
(OPEB) Expenditures/Expense and Liabilities
(11.11.2004)
• Eric Berman, MSA, CPA, Chair of the FMSB, testified at GASB on October
14, 2010 in San Francisco, CA on “Pension Accounting and Financial
Reporting by Employers”
Citizen-Centric Reporting
Advancing Government
Accountability and Transparency
Relmond P. Van Daniker, DBA, CPA
Executive Director
AGA
Public Attitudes Toward Government
Accountability and Transparency 2010
• Follow-up to 2008 poll on attitudes and opinions towards government
financial management and accountability to tax payers.
• Survey was conducted online within the United States by Harris
Interactive on behalf of the AGA between November 30 and December 7,
2009 among 1,024 adults aged 18 or over. Propensity score weighting was
used to adjust for respondents’ propensity to be online.
• “We commissioned the survey for a second time to shed some light on the
way the public perceives those issues relating to government financial
accountability and transparency that are important to our members.
Nobody is pretending that the figures are a shock, but we are encouraged to
have seen some improvements since 2008.”
- Relmond Van Daniker, DBA, CPA
Executive Director, AGA
2009 Survey Conclusions
• 75% of Americans believe that the availability of government
financial management information is very important
• The public is least satisfied with the financial management
information they’re receiving from the federal government
• After hearing a description of Recovery.gov, 76% indicated they would
be likely to either visit or return to the site
• Approximately 80-90% voted in the 2008 federal, state and local
elections. Roughly 75% of these people say that financial management
information was an important factor in their decisions
• Overspending and/or wasting money is a top concern about
government financial management across all levels
• Reflecting the past two years, the public generally considers state and
local government financial reporting to have stayed the same, and
federal to have gotten worse
Solid Findings, AGA Moves Forward
• “The survey results include some extremely stark, unambiguous
findings. Public levels of dissatisfaction and distrust of government
spending practices came through loud and clear, across every
geography, demographic group and political ideology. Worthy of
special note, perhaps, is a 67 percentage point gap between what
taxpayers expect from government and what they receive.”
- Jennifer Haskins, Harris Interactive
• “AGA members working in government at all levels are in the very
forefront of the fight to increase levels of government accountability
and transparency. We believe that the traditional methods of
communicating government financial information – through reams
of audited financial statements that have little relevance to the
taxpayer – must be supplemented by government financial reporting
that expresses complex financial details in an understandable form.
Our members are committed to taking these concepts forward.”
- Relmond Van Daniker, DBA, CPA
Executive Director, AGA
Improving Communication Between
Government and Taxpayers
AGA is committed to increasing the levels of
transparency and accountability and driving
understanding among the general public.
Citizens have a right to an understanding of how
governments are spending their money and if it is
being efficient and effective.
Not many governments are communicating this
information to their citizens and if they do, the
information is too technical for the average citizen.
Citizen Communications Effort
AGA believes that governments should communicate
information to their taxpayers in a way that is:
• Clear and understandable
• Updated regularly and often
• Delivered to all and easy to locate
• Honest in breadth and technically accurate in detail
AGA’s four-page Citizen-Centric Reporting model
provides practical assistance to help governments
achieve this.
CURRENT STATE OF GOVERNMENT
REPORTING
The Problem
Citizens Believe
AGA Survey (2010)
• Entitled to
• Dissatisfied citizens
transparent financial
• Reporting too
information
technical
• Distrust in
government
• Governments have an
obligation to provide
this information
CURRENT STATE OF GOVERNMENT
REPORTING
The Answer
• Citizen Centric
Reporting
• General Guidelines
• Short (four pages)
• Understandable
• Easy to read
• Informative
Easy to Construct A Report
The Important thing is to start!
Obtain citizen input
Review the AGA website for completed reports
Collect data from the government’s website and published reports
Sift through your data
Organize your data
Assemble your Document
Best Practices in Developing a Report
Cut and paste effort from government’s website and published reports
Use AGA’s Content and Design Guideline Templates
Assign each page to a different individual and/or team
Look at completed reports for ideas
Remember that the readers are average citizens – come at it from their
perspective
Constructing a Report – Page 1
What is the Government Chartered to do?
• Vision Statement
• Strategic Goals
• How the government is organized
• Demographics
• Table to Contents
Constructing a Report – Page 2
Performance Information on Key Missions
and Service
• Obtain input from citizens on what measures they would
like to see included
• Report on non-financial outcomes for 3 or 4 key missions
or services (public safety, public health, roads, parks and
recreation, schools)
Constructing a Report – Page 2
Performance Information on Key Missions
and Service (cont’d)
Constructing a Report – Page 3
Revenues and Expenditures
• Include revenue
and cost data
for major areas
• Use pie charts
• Reference audit
conducted
• Reference
website for
detailed
financial
information
Constructing a Report – Page 4
Future Challenges and Economic Outlook
• Include items specific to the community that will have
future effects (economic changes, tax cuts or increases,
major new employer, employer leaving, unemployment,
technological improvements, infrastructure improvements,
education, environmental aspects, being transparent, etc)
• Ask for feedback by including a contact name and contact
information
Constructing a Report – Page 4
Future Challenges and Economic Outlook
(cont’d)
Constructing A Report
Design Guidelines
•
Visual Appeal & Readability
•
Use of Pictures and
Graphics, Color
•
Ample White Space (not
text heavy
•
Free of technical jargon
•
Professional designer or
publishing software
Distribute the Report/Feedback
• Print in local newspaper
• Ask for feedback
• Post to website
• Web statistics
• Print bulk copies –
• Calls to office
libraries, grocery stores,
city hall
• Hold a press conference
• Governor’s office and
government officials
• Activist groups
• Mentions in the media
General paragraph
Nevada 2page ARRA
CCR
General paragraph
Nevada 2page ARRA
CCR
Completed Reports
AGA
The District of Columbia
Local Governments:
The Village of Los Lunas, NM
City of Bellevue, WA
Beavercreek Township Fire Dept, OH
City of Columbus, IN
Benton County Treasurer, WA
City and County of Denver
Blount County, TN
City of Jefferson, MO
Guilford County, NC
City of Lancaster, MA
King County, WA
City of Las Vegas, NM
Maricopa County, AZ
City of Palo Alto, CA
Metro Govt of Nashville/Davidson
County, TN
City of Portland, OR
City of Portsmouth, VA
City of Saco, ME
City of Stamford, CT
City of Tallahassee, FL
Palm Beach County Tax Collector, FL
Springfield-Greene County Health Dept,
MO
St Louis County, MN
Completed Reports (Cont’d)
State Governments:
Federal Government:
Idaho State Police
US Coast Guard
State of Idaho
Denali Commission
State of Maryland
General Services Administration
MA Developmental Disabilities Council
National Science Foundation
State of Nevada
The Architect of the Capitol
State of New York
Treasury Franchise Fund
State of Oregon
USAID
State of South Carolina
US Department of Defense
TN Comptroller of the Treasury
US Department of the Interior
State of Texas
Other:
State of Washington
FMI Canada
State of Washington Audit
The University of Guam
Guam Public School System
Incentives
 Certificate of Excellence in Citizen-Centric
Reporting (and Achievement Certificate)
Peer Reviewed
 Chapter Recognition Bonus Credits
 Make contact with a government, encourage them to
produce and publish a four-page Citizen Centric Report—100
credits per contact made
 Government that you contacted produces and publishes a
four-page Citizen Centric Report—500 credits per published
report
AGA Citizen-Centric Reporting Model
AGA believes that these reports will make governments
more accountable to their citizens, and will help
Americans become better educated and better able to
participate in government activities.
Citizen-centric reporting is an important practical step
that governments can take in raising their game in
accountability and transparency.
The program is an essential component of AGA’s
Advancing Government Accountability Mission.
SUMMARY
• The Problem
• The benefits
– Dissatisfied citizens
– Reliable source of information
– Distrust
– Improved relationship between
• The solution
– Citizen Centric Reporting
Model
– Increased transparency
citizen and government
– Increased accountability
– Increased civic involvement by
citizens
– Informed Citizenry
Tools and Guidance Online
Content Guidelines
Design Guidelines
Completed Reports
www.agacgfm.org/citizen
Susan Fritzlen – sfritzlen@agacgfm.org
1.800.242.7211