Federal/National Update by Dana Bilyeu

Federal and National Update:
Public Pensions
Dana Bilyeu, Executive Director
September, 2014
National Task Forces/Blue Ribbon
Retirement System Modifications:
All States
Pension Changes, 2008-2014
Changes: 2009 to Present
• Types
– Benefit reductions
– Increased requirements for retirement eligibility
– Increased use of hybrid retirement plans
• Focus on Risk Distribution
– More risk shifted to workers
– Adjusting actuarial assumptions
No broad shift to defined contribution plans as the
primary vehicle for delivering retirement benefits
States Retain Distinguishing Elements of
Public Plans
• Mandatory participation
• Employee-employer cost (and risk) sharing
• Benefit adequacy
– Presence/absence of Social Security
– Survivor & Disability
• Assets that are pooled and professionally invested
• Required lifetime distribution (mandatory
Notable Legislative Outcomes in 2014
• California
• The California Legislature approved and the
governor signed a bill establishing a path to full
funding for CalSTRS, the second largest public
pension plan in the nation
• Oklahoma
• Closed the DB plan for state employees; new hires
will have only a defined contribution plan
Hybrid Plans Taking Effect in 2014
• Kentucky cash balance for newly-hired state and local
employees as of January 1; not teachers
• Tennessee DB-DC plan, effective July 1 for newlyhired state employees, teachers, and employees of local
government that elect to participate
• Virginia DB-DC plan, effective January 1 for most
newly-hired employees in the state, excluding public
safety personnel
Public Pensions:
Current Misperceptions
• Pensions are causing municipal bankruptcies
• Public plans are taking on too much risk and
investment return assumptions are too high
• Few workers benefit from the current
• Federal regulation is needed to prevent a
A Quick Look: Public Pension
Public Funds Survey*
• 126 statewide and large local government
– 85% of the assets & the liabilities of the entire
public pension community
– Information gathered from state and local
– Updated yearly
* Underwritten in part with funds from the National Council on Teacher Retirement
Distribution of current
public pension funding levels
Size of bubbles is
roughly proportionate
to size of plan liabilities
Median change in actuarial value of
assets and liabilities, FY 02 to FY 13
value of
assets and
and funding
levels, FY 01
to FY 16
in Actives and
Annuitants, and
FY 01 – FY 12
Annualized Change
in Wages and Salaries
BLS, compiled by NASRA
US Census Bureau, compiled by NASRA
Monthly relative change in employment
2003 to present
US Bureau of Labor Statistics
US Census Bureau, compiled by NASRA
Median annual change in covered payroll,
FY 08 to FY 13
Public Fund Survey
Median contribution rates, FY 02 to FY 12
and dollars
Public Fund Survey, US Census Bureau
Distribution of ARC received by 86 plans, FY 13
Public Fund Survey, US Census Bureau
Average asset allocation,
FY 01 to FY 13
FY 13 median investment returns
Callan Associates
Median investment returns for
periods ended 6/30/14
Callan Associates
Pension Plan Assets Rebound Since the Great
Federal Reserve Flow of Funds
Distribution of latest
investment return assumptions
Public Fund Survey
Pension Spending is not at an Historic
Several New and Distinct Pension Calculations
 Books – computing an annual position regarding
pensions for financial statements (GASB)
 Bonds – calculating how pension obligations affect a
government’s creditworthiness (Ratings Agencies)
 Budgets – determining the appropriate annual contribution
to the retirement system for sound funding (Funding
Policies-Sponsors and employee costs)
Other State Trends
• The pace of pension reforms has slowed sharply
• Reform battles remain in some states (e.g. PA)
• Some legal challenges remain outstanding (e.g. CO,
• Pension costs are stabilizing for many plans
• Costs will need to rise for some plans, especially
those that have not received their ARC
• Improving longevity may increase costs
• Investment return assumptions will remain under
scrutiny and pressure
• New GASB measures will reveal new ways of looking
at pension conditions
Calls for a Federal Role
• Detroit is the tip of the iceberg
• Disclosure is opaque
• There is too much risk and its not
• Regulation is needed to prevent a
Deluge of Reports
Pension Deferrals are a Costly Federal Tax
Health care exclusion
Pension exclusion
Reduced dividends/cap gains
Mortgage interest deduction
State/Local Taxes
Child tax credit
Capital gains exclusion at death
Health exchange subsidies
(Joint Committee on Taxation estimates 2013-2023, in billions)
Tax Reform
• Senate and House tax committees conducted
extensive reviews in 2013
• Ways & Means Chairman Camp released draft on
February 26, 2014:
– Changes income tax brackets and removes many tax
preferences from top bracket
– A number of tweaks to DC plan provisions, including
application of 10% penalty for governmental 457 plans, inservice distributions allowed at 59½ for all plans
– No changes to tax treatment of governmental DB
employer or employee contributions, but application UBIT
Tax Treatment of Public Employee
Pension Contributions
• Unique to state and local government retirement
• Listed in 2005 Joint Committee on Taxation report
as “loophole”
• Education needed on the importance of this
provision to pervasive/increasing shared-financing
policies at state and local level
Social Security
• Both deficit reduction commission reports
included mandatory Social Security for newlyhired employees after 2020
• “Future bailout risk,” simplification of benefit
coordination cited
• GPO/WEP repeal (S. 896 and HR 1795)
could fuel interest
“No Bailout” Legislation
• Prohibit Federal funding to localities (and/or
States) that have defaulted or are “at risk of
• Federal auditing and assessments of the current
and future financial stability of States and/or
localities (will surely include pension valuations)
– Graham (SC) amendment to FY 2014 Financial Services
– Johnson (WI) amendment to Transportation and Housing
and Urban Development (THUD) appropriations
– Cornyn (TX) amendment to THUD appropriations
– Vitter (LA) and Garland (KY) bills (S. 101/HR 3002)
Public Employee Pension
Transparency Act (PEPTA,
• Would require costly/conflicting
federal reporting requirements
• 60-year projections using Treasury
yield curve
• Plan sponsors that fail to follow
correctly lose tax-exempt bond
Secure Annuities for Employee
Retirement (SAFE) Act
– Introduced by Senate Ranking
Minority Member Hatch (R-UT)
• What it does
– Annuity accumulation “DB alternative” plan for state and
local governments
– Optional (“Additional Tool in the Toolbox”)
• What it doesn’t do
– Does not address existing unfunded liabilities
– Does not include survivor/disability
– Does not address workforce management issues
The Bankruptcy Fairness
and Employee Benefits
Protection Act
• Adds benefit and health care
protections to corporate
• Establishes similar rights for
municipal employees under
Chapter 9
• H.R. 5305 (to treat Puerto Rico as a state for
the purposes of Chapter 9)
Ongoing Regulatory Issues
• Qualification rules after United States v.
• Definition of Governmental Plan
• Normal Retirement Age Regulations
Treasury Interest
• Pensions under review by Financial Stability
Oversight Council (FSOC)
Office of State and Local Finance
– Monitoring municipal bond markets
– Task forces on Detroit and Puerto Rico (monitoring and
identifying federal resources)
– Pension/OPEB pressures
– Working across federal agencies
– Infrastructure
Key Facts
• Municipal bankruptcy is
– Only 12 states specifically
authorize Chapter 9 filings for
their general-purpose local
• Chapter 9 is uniquely
designed to ensure a
municipality can continue to
provide essential services
while debts are reorganized
• Chapter 9 does not provide
for a Federal bailout

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