GASB Pension Changes CAJPA 201

Planning For Retirement In A
World Of Alternative Realities
Jeffrey C. Chang
What Are We Talking About?
• Potential for huge impact on public
agency financials – expect greater
balance sheet volatility
• New burdens on plans
• A reality disconnect between plan
liabilities and plan funding
In Plain English
• CalSTRS Fact Sheet: Under the proposed
standards…NPL placed on a medium
sized school's balance sheet more than
doubled their liability and showed a
negative fund balance
In Plain English
• Center for Retirement Research (CRR):
The funded ratio for a significant sample
of state and local plans will decline in
2010* from 77% to 53%
*(The latest year for which data was available)
Effects Vary Significantly
For Some It's Quite Scary
• CRR study: Based on proposed GASBrequired assumptions, approximately 30 of
the nation's largest public retirement
systems "could" run out of money to pay
benefits within 25 years
Implications Of New Liabilities
You need to examine potential impacts of
increased liabilities:
– All lending/credit arrangements
– Contractual covenants
– LOCs; current ratios
– Impairment of general assets used to
pool/share risk
– Impact on borrowing costs
Plans' Response
• Most observers say the new GASBproscribed discount rates will not be
widely adopted by plans' administrative
• But it is anticipated that a large number of
plans will eventually move toward the use
of shorter amortization periods
Anything We Learn From The
Private Sector's Experience?
• 1975 – 2006: Private sector DBPs
declined from over 100,000 plans to fewer
than 30,000
• 1975: 75% of workers in DBPS
• 2005: > 75% in DCPs instead
• Decline greatest in small plans
• Decline amongst collectively bargained
plans much slower
Why Public Sector Probably
Won't See The Same Trend
• Until the law is clarified, employer's right to
freeze or reduce benefits appears to be
severely limited
• CalPERS doesn't help matters – and
presents another obstacle
• Many public agencies must deal with wellorganized and litigious unions
Impairment Of Contract
• Federal and State Constitutions prohibit
"impairment of contract"
• California courts have said State
constitution creates a "vested right" of
public employees with respect to their
pension benefits
• This right arises at
the time of employment
Impairment Of Contract
The Billion $ Question
Do employee's rights under the constitution
prevent a public agency from reducing
future, unearned benefits?
Impairment Of Contract
• Current majority view: You cannot change
a formula for actives without at least
replacing it with something "comparable"
• The minority view: Future, unaccrued
benefits can be modified or eliminated
No Help From CalPERS
• CalPERS, an independent system with its
own rules and no clear oversight
• Even if there is no impairment, CalPERS
rules may not allow it
• In 2011, CalPERS tightened its contract
termination rules – much more
expensive to leave
Must Deal With Unions
• JPAs with unions must also deal with MMB
Act issues
• Often, unions negotiate benefit
concessions that can't be provided on the
tax basis they believe
Your Options
Depend on whether you:
1. Have union employees
2. Are in CalPERS (or a large multipleemployer plan)
3. Are willing to take on risk of litigation
4. Have a governing board with the political
will to make tough choices
The Principal Options?
1. Increase employees' contributions or
2. Create new benefits tiers
3. Seek re-amortization of employer
4. Terminate contract (subject to
new rules)
The Principal Options?
Not in CalPERS (e.g., single employer
1. Employer can negotiate with unions to
modify, freeze or terminate pension
2. Unions that won't agree to a
modification or reduction, may agree to
to increased employee contribution
Potential Wildcards?
1. Municipal bankruptcy – Although Vallejo
and Stockton declared, not clear whether
Chapter 9 trumps vested rights
– Interesting issue about funding of
CalPERS while in bankruptcy
2. Pension reform
Potential Wildcards?
3. Local pension reform initiatives
(San Diego and San Jose)
4. Positive clarification of case law