Pension Reform

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					Pension Reform
      Ken Parker
    City Manager
 City of Port Orange
                           Pension Reform
► 20 million Americans working in the Public
  Sector are covered by Defined Pension
► Another 9 million retired Public Sector
  Employees are covered by Defined Pension

Source: U.S. Government Accounting Office Report to the United States Senate, August 15, 2010
                       Pension Reform
► 79%  of Public Sector Employees are
  covered by a Defined Benefit Program.
► 21% of Public Sector Employees are
  covered by another type of Pension

Source: U.S. Government Accounting Office Report to the United States Senate, August 15, 2010
               Pension Reform
► Discussion  on Public Pensions is not limited
  to the State of Florida. It is a national
► Some States and Local Governments are not
  covered by Social Security. In those States
  benefits tend to be higher than States and
  Local Governments covered under the Social
  Security System.
                Pension Reform
► Essentially   there are three types of Pension
   Defined Benefit
   Defined Contribution
   Combination
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► Funding   comes from three sources
   Employer
   Employee
   Investment Income
                           Pension Reform
► 42%  of the contributions to a Defined
  Benefit Program come from
  Employers/Employees with the Employer
  Contribution being the largest portion.
► 58% of the contributions to a Defined
  Benefit Program come from Investment
Source: U.S. Government Accounting Office Report to the United States Senate, August 15, 2010 entitled:
    State and Local Government Pension Plans: Governance Practices and Long Term Investment
    Strategies Have Evolved Gradually as Plans Take on Increased Investment Risk.
            Pension Reform
► DefinedBenefit Programs-Employer is the
 guarantor. The employer assumes the risk.
 This means that the employer in additional
 to normal retirement contributions is
 responsible for any shortfalls.
            Defined Pension
► Defined Contribution- Employer makes a
 specific contribution to an account for the
 benefit of an employee. Employee assumes
 the risk of investment. The employer does
 not guarantee benefit. The employee may
 or may not be required to contribute to the
                   Pension Reform
►   In 1972, ICMA developed the first portable Defined
    Contribution Program for Public Employees.
     City/County Managers identified a need for a program that would
      allow Public Employees who changed jobs frequently to save
      money for their retirements.
     Initial program was a deferred income program. It was created
      under Section 457 of the IRS Code. All public employees are now
      able to participate in a 457 Deferred Income Program. This
      allowed the employee to set aside a portion of salary free from
      taxes. When employee retired, then the employee would pay taxes
      on that income.
     Today, Public Employers are able to participate in 401 Plans, which
      qualifies as Qualified Plans as well as 457 Plans.
              Pension Reform
► Issues   facing Local Governments
   Whether you are in the State Plan or have your
    own local plan, you can expect to see continued
    increases in your required contributions.
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       more discussions about the
► Expect
 Unfunded Actuarial Accrued Liability (UAAL)
   Two components of your Pension Payment
    ►Normal   Cost- This is what the benefit cost on an
     annual basis.
    ►Unfunded Liability- This can be caused by several
     factors, including plan benefit changes, not meeting
     the actuarial assumptions, not meeting the rate of
     return as established by the Plan.
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► As the private sector moves away from
 Defined Compensation Programs, there will
 be increased pressure for the Public Sector
 to follow suit and adopt Defined
 Contribution Programs.
   Note: the only way a governmental entity can
    truly fix its cost related to retirement is to
    change from a Defined Benefit Plan and adopt a
    Defined Contribution Plan.
          Pension Reform
► Forthose local governments that retain a
 Defined Compensation Pension Program,
 there will be increased discussion on how
 the Unfunded Actuarial Accrued Liability
 should be reflected on the City’s balance
   Governmental Accounting Standards Board has
    circulated a proposed rule that would change
    how Pension liabilities are shown on you
    balance sheets.
                                Pension Reform
► For    those who decided to retain Defined
    Benefit Pension Plans for their employees,
    expect a debate to ensue about the proper
    rate of return on investments. There are
    two models being discussed in the
    literature, the actuarial model and the
    economist model.

►   Source: Issue Briefing: Valuing Liabilities in State and Local Plans. Center for State and Local Government Excellence,
    Washington, D.C. June, 2010.
                                     Pension Reform
► Economist      Model insist that the rate of return
    assumptions are too high. They argue that
    because of the guaranteed nature of public
    pensions, the rate needs to be based on a blended
    rate. Immediate impact would be to increase the
    unfunded liability of the plan. However, because
    of the assumed rate of return is lower, then in
    those years that the Plan earns more than the
    “riskless” rate of return, then it will quickly reduce
    the liability.
►   Source: Issue Briefing: Valuing Liabilities in State and Local Plans. Center for State and Local Government Excellence, Washington, D.C. June,
                                Pension Reform
► Advocates   for Economist model state that if
  it were in place, many of the benefit
  changes that were approved in the late
  1990’s would not have been approved.
► An example: In 1997, the California Pension
  Plan would have been funded 77%if the
  “Riskless Rate of Return” had been used
  rather than the reported 111%.
►   Source: Issue Briefing: Valuing Liabilities in State and Local Plans. Center for State and Local Government Excellence,
    Washington, D.C. June, 2010.
             Pension Reform
► What  percentage of your budget is allocated to
 Pension? In a recent report that I sent to the City
 Council, I noted that the City’s contribution to the
 Police Pension Plan was now consuming 8% of the
 total City General Fund budget and 22% of the
 total Police Dept. budget. Because of the
 guaranteed nature of Pension benefits and the
 requirement to keep Plans actuarially sound, the
 increase contributions are reducing funds that
 would normally be available and used for tax
 reductions, services, and infra-structure.
                                Pension Reform
► Advocates    of the “Riskless Rate of Return”
    state the following advantages:
      It would accurately reflect the guaranteed
       nature of public sector benefits.
      It would increase the credibility of public sector
       accounting with private sector analysis.
      It could well forestall unwise benefit increases
       when the stock market soars.
      The literature indicates in today’s market it
       would be around 5%.
►   Source: Issue Briefing: Valuing Liabilities in State and Local Plans. Center for State and Local Government Excellence,
    Washington, D.C. June, 2010.
               Pension Reform

► Over  the next several months, we can expect
  increased debate on the GASB Rules. Actuaries
  will attempt to demonstrate that their
  methodology produces near the same results.
► Advocates for a lower return on investment
  assumption will continue to present their case that
  the current rates of return are not accurate.
► State of Florida has already questioned rates of
  return on some pension plans.
                    Pension Reform
►   Let me pose few questions:
     Are employees willing to accept more of the risk in order to
      maintain a Define Compensation Program? I am aware of
      discussions that have occurred related to the concept of variable
      rate employee contributions. I’m not aware of any being
      implemented. Under this concept employees/employers share the
      risk. The employer is the backstop and guarantees the retirement
      plan regardless of the cost.
     Is the Public in your City aware of the cost of Pension and Benefits?
      Do they know the cost of your program?
     Are employees willing to accept less retirement benefits as well as
      increased employee contributions?
     Are Unions willing to negotiate freezing existing plans and
      prospectively implementing benefit changes to existing plan
      members. Are they willing to change the benefit structure for new
               Pension Reform
► Questions   Continued:
   Is the State of Florida willing to provide flexibility to
    local governments in order to address Pension issues?
   Will the State make changes to the State Plan? Will
    those same changes apply to 175/185 Plans?
   Will the State allow local governments who have
    175/185 Plans adopt Defined Contribution Programs
    without sacrificing Insurance Premium Tax Dollars?
           Pension Reform
► Questions   Continued
   Should the Pension Board composition be
    changed in 175/185 Plans? Should there be a
    prohibition for a member of the Plan serving as
    the fifth member?
                 Pension Reform
►   Port Orange resolved Pension issues at Impasse. City filed
    an Unfair Labor Practice when the Union failed to present
    the contract to member ratification vote. Union filed an
    Unfair Labor Practice. Parties are currently awaiting a
    ruling on an Unfair Labor Practice related to whether the
    City can impose reduction in Pension Benefits and impose
    a salary reduction for firefighters.
►   Palm Bay has resolved at Impasse Pension with major
    changes to Pension Articles.
►   City of Miami has declared Financial Urgency and is in the
    process of making changes to their Pension articles.
            Pension Reform
► Volusia County is preparing a white paper to
  be presented to the Volusia County
  Legislative Delegation on Pension Reform.
► Coral Gables has made changes in their
  General Employee Pension Plan.
► Port Orange for new hires not covered by a
  bargaining unit will be covered by a Defined
  Contribution program.
             Pension Reform
► CityCouncil’s should require at least
  annually the Board Chair and Actuary to
  appear before the Governing Body to
  present an annual report on the health of
  the Plan.
   Funded to Unfunded Ratios should be
   Unfunded Actuarial Accrued Liability should be
    presented and a report on whether it is
    increasing or declining.
             Pension Reform

 Contribution Assumptions and Unfunded Liability
  Projections based upon the trend analysis.
 Investment Rate of Return should always be reported.
  The Pension Board and City Council should know the
  rate of return for 1 yr., 5 yr., 10 yr. and from inception
 Annual Required Contributions should be presented by
  the Pension Board to the City Council in an open
             Pension Reform
 Trend Analysis based upon 1, 5, 10, 20 and 30 years.
 What assumptions were met and which assumptions
  were not met.
 City Councils should require Pension Boards to report
  how their investment managers are performing against
  benchmarks and against the assumed rate of return. If
  the City has more than one Pension Plan, the City
  should compare Plan Managers of all of its Plans to each
  other. “It is easy to do good in an up market. The real
  challenge is to perform well in a down market against
  the benchmarks.”
                  Pension Reform
►   Pension Boards are Fiduciaries and have a responsibility to
    make sure that the Pension Plan can meet obligations to
    the participants. To a large extent Pension Boards have
    become Cheerleaders for Plan Participants. In their
    Fiduciary role, Plan Trustees are required to act in the best
    interest of the Plan. That may place them in conflict with
    both the Plan sponsor and/or the Plan participants. In my
    opinion, the Plan Board has a duty to make
    recommendations on how to strengthen the Plans and
    what benefit changes are needed in order to keep the Plan
    Actuarially Sound.
             Pension Reform
► City Councils should require Pension Boards
  to provide an investment risk analysis on an
  annual basis.
   As Pension Boards and their Plan Investment
    Managers attempt to increase yields, what is
    the level of risk? Since the City Council is
    required to fund losses, the City Council should
    understand the investment risk.
           Pension Reform
► Before making benefit improvements, local
 government should require Plan Actuaries to
 look at Plan Performance and make long
 term projections using both the Plan
 assumptions and Rate of Return as well as
 looking at the trend analysis of actual
 performance of the Plan. Don’t accept the
 one year performance estimate.
           Pension Reform
► City Council Members should determine
  what competencies are needed for Pension
  Board Members and then make those types
  of appointments. Pensions are technical
  and Councils need members on the Board
  who can advise them properly on Pension
                  Pension Reform
►   Education is important. That includes Pension Board
    Members, City Council Members and staff members who
    are advising City Council.
►   City Councils may want to consider employing its own
    actuary to review and advise the City on Pension issues.
    The same can be said about Pension attorneys.
    Remember: the Pension Board’s Attorney works for the
    Pension Board. Also, the Plan Actuary works for the
    Pension Board. Although the Board’s interest and the
    City’s interest should be the same, they may not be. It is
    good for the City to have its own set of eyes.
                     Pension Reform
►   Expect delays when making changes to Pension Plans. It is not in the
    Union’s best interest to make changes. You must be patient.
►   It is far easier to change for new hires than it is freezing existing plans
    and implementing changes for existing employees.
►   Political Will. Is there the political will to make changes?
►   Develop a Plan to address the Plan unfunded liabilities. This may
    include increases in employer contributions, lowering benefits,
    changing benefits, increasing employee contributions. It probably will
    include all or a combination of the items.
►   Educate the Public. They need to understand the issue and why the
    discussion is important to them.
►   Educate the Employees. They need to understand the issue as well.
    Spend time with them explaining the issues and why it is important to
►   Educate and Keep Elected Officials Informed. They need to
    understand that Pension Reform is more than just reducing cost.

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