Pension Workshop January 24 th 2012

Transcription

1 Pension Workshop January 24 th 2012 Panel Members: Kristine Ridge, Human Resources Director City of Anaheim Kerry Worgan, FSA, FCIA, MAAA CalPERs - Senior Pension Actuary Catherine MacLeod, FSA, EA, MAAA Bickmore Risk Services - Manager

2 Agenda Understanding City of Anaheim s Pension Plans Background Valuation Results Independent Analysis 2

3 City of Anaheim Pension Plans A LOOK AT HISTORY Contracting Agency of the California Public Employees Retirement System (CalPERs) since 1950 City does not participate in Social Security Three separate contracts for pension plans: Miscellaneous Fire Safety Police Safety 3

4 Three Pension Plans Miscellaneous Fire Safety Police Safety Plan Specifics Benefit Formula Employee Contribution Rate Employer Contribution Rate Average Pension Benefit 8.0% 9.0% 9.0% % % % $25,358 1,594 Retirees $40, Retirees $57, Retirees 2010 $86, Retirees $51, Retirees $85, Retirees 4

5 Pension Costs in Dollars Citywide Millions Fire Police Misc 10-5

6 Pension Costs as a % of Operating Expenses 12% 10% 8% 6% 4% 2% 0% ESTIMATED

7 Miscellaneous Plan Funded Position Valuation Date Accrued Liability Actuarial Value of Assets Market Value of Assets Funded Ratio 6/30/2005 $609.3 $558.1 $ % 6/30/2006 $685.0 $605.0 $ % 6/30/2007 $763.0 $665.1 $ % 6/30/2008 $820.1 $713.2 $ % 6/30/2009* $918.5 $747.0 $ % 6/30/2010 $968.5 $783.2 $ % projected Quarter North America Asia Europe Australia Q Q Q Q Q Q Q Q /30/2011 $ $828.7 $ % ** updated actuarial assumptions 7

8 Miscellaneous Plan Employer Rates Fiscal Year Normal Cost Unfunded Accrued Liability Total Employer Rate % 4.613% % % 5.537% % % 5.982% % % 6.251% % * % % % % % % % % % % % % % % % Quarter North America Asia Europe Australia Q Q Q Q Q Q Q Q % % % % % % ** updated actuarial assumptions 8

9 Safety Police Plan Funded Position Valuation Date Accrued Liability Actuarial Value of Assets Market Value of Assets Funded Ratio 6/30/2005 $370.6 $313.7 $ % 6/30/2006 $392.4 $337.0 $ % 6/30/2007 $425.1 $366.7 $ % 6/30/2008 $457.6 $392.2 $ % 6/30/2009* $496.4 $411.1 $ % 6/30/2010 $519.1 $432.3 $ % projected Quarter North America Asia Europe Australia Q Q Q Q Q Q Q Q /30/2011 $550.7 $456.9 $ % ** updated actuarial assumptions 9

10 Safety Police Plan Employer Rates Fiscal Year Normal Cost Unfunded Accrued Liability Total Employer Rate % 8.736% % % 8.735% % % 8.416% % % 8.472% % * % % % % % % % % % % % % % % % Quarter North America Asia Europe Australia Q Q Q Q Q Q Q Q % % % % % % ** updated actuarial assumptions 10

11 Safety Fire Plan Funded Position Valuation Date Accrued Liability Actuarial Value of Assets Market Value of Assets Funded Ratio 6/30/2005 $229.6 $200.6 $ % 6/30/2006 $250.2 $213.7 $ % 6/30/2007 $265.0 $229.7 $ % 6/30/2008 $278.2 $242.7 $ % 6/30/2009* $308.0 $252.9 $ % 6/30/2010 $317.7 $263.3 $ % projected Quarter North America Asia Europe Australia Q Q Q Q Q Q Q Q /30/2011 $334.9 $276.0 $ % ** updated actuarial assumptions 11

12 Safety Fire Plan Employer Rates Fiscal Year Normal Cost Unfunded Accrued Liability Total Employer Rate % 7.821% % % % % % 8.918% % % 8.329% % * % % % % % % % % % % % % % % % Quarter North America Asia Europe Australia Q Q Q Q Q Q Q Q % % % % % % ** updated actuarial assumptions 12

13 Independent Analysis 1 Definitions and General Background 2 3 CalPERS Retirement Plan Issues General Plan Design Options 4 Options Available to the City 13

14 Independent Analysis 1 Definitions and General Background 14

15 The Basics... Common Retirement Plans Defined Benefit (DB) A plan that defines the benefits to be paid. Whatever it costs to provide that benefit is the variable. Requires a definite benefit formula for calculating benefit amounts. For example; a flat amount or percentage of salary times years of service. Defined Contribution (DC) A plan which defines the contributions going in, so the cost is generally known and rarely unfunded. The accumulated value is the unknown. 401(k), 403(b), and 457 plans. Example: The employee makes contributions to the plan. The employer matches 100% on the first 3% that the employee contributes. Hybrid Plan - used to describe separate DB and DC plans, but also refers to single plans which combine elements of DB and DC into it (e.g., cash balance plan) 15

16 DB vs DC Pros and Cons Pros Defined Benefit Income Replacement Lifetime benefits Experts invest assets Good investment returns lower employers cost Pooling reduces risks Can improve past benefits Cons Pros Defined Contribution Costs basically known Benefits are portable No actuarial valuation needed Employee has investment control before & after retirement Employee bears risks: longevity, demographic and investment Cons Unpredictable costs Volatile costs Salary manipulation - "spiking" Assets at retirement are unknown No lifetime guarantee Investment returns generally less Employer retains these risks: Benefits can decrease if asset - Demographic returns are poor - Investment Increased administrative costs - Longevity Fewer incentive options 16

17 Breakdown of Pension Obligations: Future Asset Earnings Present Value of Future Benefits (PVFB) Today s discounted value of all future benefit payments expected to be paid to current members What the City contributes Future Costs: PV Future Normal Costs Present: Normal Cost Prior Costs: Actuarial Accrued Liability (AAL) Actuarial Accrued Liability (AAL) The cost of future benefits that has been allocated to service already worked by current members - both active and retired (i.e., liability assigned to prior years) Normal Cost (NC) Cost of future benefits for current members assigned to the current service year. Only active employees have a normal cost. Discount Rate should be based on the expected long-term yield of investments used to finance the benefits. 17

18 Assets Definitions: Market Value of Assets (MVA) The value of the pension fund based on the value of the assets as they would trade on an open market. (i.e. true current value) Actuarial Value of Assets (AVA) The MVA a percentage of the difference between what the assets were expected to be and current market value. (i.e. the smoothing effect) This smoothing is the same concept as when your electric company offers to adjust your payments to be constant ($$) over the year rather than feeling the effects of running your heat all winter ($$$) and then turning it off in the summer($). Expected Assets The prior year s assets increased by expected earnings instead of actual earnings. 18

19 Unfunded Actuarial Accrued Liability & Funded Ratio Unfunded Actuarial Accrued Liability (UAAL) The Actuarial Accrued Liability minus the Actuarial Value of Assets (i.e., the portion of prior costs that have not been funded) Prior Costs: Actuarial Accrued Liability (AAL) Unfunded AAL Current Assets (72-74% of AAL) Funded Ratio The Actuarial Value of Assets divided by the total Actuarial Accrued Liability 19

20 The ARC Annual Required Contribution (ARC) amount the employer should contribute for a given year. It is the sum of the normal cost and some amortization of the unfunded actuarial accrued liability (not more than 30 years) (i.e., the current year s theoretical cost + a portion of the prior cost that hasn t been funded yet) 20

21 Total Benefit Commitments Costs Assigned Current Funding Situation A More Desirable Situation Total Benefit Commitments Future Asset Earnings Future Asset Earnings Future Costs: PV Future Normal Costs Present: Normal Cost Amount Amount to contribute to contribute Pay Normal Cost + $0 required (but fund something) Putting all the cost and funding pieces together Pmt on Unfunded Present Value of Future Benefits = Sum of Prior and All Future Contributions Prior Costs: Actuarial Accrued Liability (AAL) Unfunded AAL Current Assets (72-74% of AAL) Current Assets (No unfunded; $$ is More than AAL) 21

22 Factors Affecting Pension Liabilities: Age Gender Years of benefit service Benefit formula Pay used in formula Eligible retirement age Early retirement benefits Spouse benefits Retirement Years (longevity) COLAs Investment risk Discount rates California contract laws 22

23 Independent Analysis 2 CalPERS Retirement Plan Issues 23

24 Target Funding Results Ideal World (In the context of the plans as they exist today and reflecting CalPERS/CA requirements) Target 1: Target 2: Target 3: Funded status % (or higher) 80% minimum funded ratio AVA is reasonably close to MVA Target 4: Annual contributions (ARC) equal the normal cost (This means that assets = AAL and prior costs are fully funded) Target 5: Stability in contributions % change year to year is small should equal normal cost on average 24

25 CalPERS Plans Recent Results Targets 1 & 2: Funded ratio % (or higher) 80% minimum funded ratio Recent results (MV basis) : roughly 88% - 100% for all 3 plans 2009: low mark of roughly 60% for all 3 plans 2011 estimate : 72% - 74% funded ratios If the plans have been around for over 50 years, in theory the unfunded AAL would have been fully amortized. So why are the funded ratios so much lower than 100%? 25

26 26 CalPERS Plans Recent Results Targets 1 & 2: Funded ratio % (or higher); 80% minimum Reasons the funded ratios have been under 100% 2009 Market Value shock Retroactive benefit improvements 2005 miscellaneous; 2001 fire; 2001 & 2006 police Benefit costs higher than expected Compensation higher than expected; spiking Retirees living longer than originally projected Employees retiring earlier than expected Probably led to assumption changes in 2009 Decrease in total covered payroll? Cost increases affect: Only the unfunded AAL for retirees/former ees Unfunded AAL and future normal costs for actives Misc Rate Increase 2005 Formula Change Normal Cost Rate Increase 2.29% Amortization Rate Increase 4.15% Total City Rate Increase 6.44% Change used up all excess assets.

27 Discussion of Assumptions Used (Cont d) Final average pay One year average pay can be very volatile, easily manipulated Is Retiree Married? No Yes No Yes Discount Rate 7.75% 7.75% 7.00% 7.00% Expected Final Pay $ 70,000 $ 70,000 $ 70,000 $ 70,000 Actual Final Pay $ 77,000 $ 77,000 $ 77,000 $ 77,000 Expected Value at Retirement $ 505,000 $ 544,000 $ 545,000 $ 591,000 Actual Value at Retirement $ 556,000 $ 599,000 $ 600,000 $ 650,000 Percent Increase 10% 10% 19% 19% Dollar Increase $ 51,000 $ 55,000 $ 95,000 $ 106,000 5 Year Final Aerage Pay $ 71,400 $ 71,400 $ 71,400 $ 71,400 Actual Value at Retirement $ 515,100 $ 554,880 $ 555,900 $ 602,820 Percent Increase 2% 2% 10% 11% What steps have been taken to control this? Have components of includible pay been restricted? 27

28 CalPERS Plans Recent Results Targets 1 & 2: Funded ratio % (or higher); 80% minimum What can the City do? Contribute more than the ARC - increase amortization payments to accelerate payoff when funded ratio falls below 90%. Implement policy to restrict retroactive benefit increases unless fully and immediately funded with excess assets remaining; use pessimistic assumptions in calculations. No contribution holidays for City or employees Anticipate that bad years will follow good years. When assets exceed the accrued liability, continue to contribute all or part of the normal cost. 28

29 CalPERS Plans Recent Results Target 3: AVA reasonably close to MVA Recent results: 2005 AVA about = MVA for all 3 plans AVA ranged from 14% below MVA to 37% above MVA (in 2009) 2011 estimate is AVA 12.5% over MVA How to maintain a narrower gap: Decrease the % difference allowed (now 20%) Shorten the smoothing period (now 15 years) Invest in more stable assets (less MV change) None of these things are under the City s control What can the City do? Contribute more than the ARC when the MVA is lower than the AVA to build a cushion. 29

30 Simple example of AVA Year 1 Year 2 Year 3 Expected earnings % (prior 12 months) 7.75% 7.75% Actual earnings % (prior 12 months) 18.00% % Expected AVA $ 500,000 $ 538,750 $ 584,185 MVA (actual assets) 500, , ,000 Excess or (Shortfall) - 51,250 (112,185) New amount recognized this year - 3,417 (7,479) Minimum allowed AVA 400, , ,600 Maximum allowed AVA 600, , ,400 Final AVA $ 500,000 $ 542,167 $ 566,400 So, in Year 2, AVA = $538,750 + $3,417 In Year 3, AVA = $542,167 +$3,417 +($7,479),but not more than $566,400. Assumptions: - Dollars shown are in $000 s - Contributions = benefit payments plus expenses, (net income before earnings = $0) - Difference between actual and expected is recognized over 15 years 30

31 CalPERS Plans Recent Results Target 4: Annual contributions (ARC) equal the normal cost This means maintaining assets = AAL. Target 5: Stability in contributions Recent results: Probably stable pre Normal cost has been stable, except for 2.5% (misc) and 5% (safety) from 2001 /2005 benefit formula increases (and 2007 cost sharing for police). The amortization rate has gone from 0% 9 years ago to 6.3% (misc) and about 8.5% (safety). Expected to increase dramatically in the next 7 years; see chart. Fiscal Year Normal Cost Unfunded Accrued Liability Total Employer Rate Miscellaneous % 6.3% 16.6% % 13.1% 23.3% Difference 0.0% 6.8% 6.8% Police % 8.5% 26.5% % 13.0% 32.6% Difference 1.5% 4.6% 6.1% Fire % 8.3% 24.0% % 15.1% 31.7% Difference 0.9% 6.7% 7.7% 31

32 CalPERS Plans Recent Results Target 4: Annual contributions (ARC) equal the normal cost Target 5: Stability in contributions What can the City do? Contribute more than the ARC; make accelerated amortization payments. No contribution holidays for City or employees Anticipate negative results in the future and leave margins. Avoid retroactive benefit changes; if allowed, consider cautiously and leave excess asset corridor to anticipate future increases in the actual cost of these benefits. 32

33 Shocks to the System What if future yields continue to be below target? Look back at the benefit pie opens a gap in the blue section Reduced assets => reduced future earnings => higher contributions Review results shown in CalPERS reports, Appendix D (page 13) If asset returns over the next 3-4 years average 3% instead of 7.75%, contributions are projected to increase by: 3% of pay for miscellaneous 4% of pay for police 5% of pay for fire If returns over the next 3-4 years average -3.6% instead of 7.75% (pretty low probability), contributions are projected to increase by: 11.6% of pay for miscellaneous 15.8% of pay for police 17.8% of pay for fire 33

34 Shocks to the System Discount rate Recognizing asset losses is only part of the picture. What if the discount rate is overstated? ¼% decrease in discount rate (7.75% reduced to 7.5%) => % increase in contributions to misc plans - 3-5% increase in contributions to safety plans ½% decrease in discount rate (7.75% reduced to 7.25%): Fiscal Year Misc Police Fire Discount Total Employer Contribution Rate at 7.75% 21.6% 30.9% 29.7% at 7.25% 27.3% 38.2% 37.2% Increase 5.7% 7.3% 7.5% Results are sensitive to the discount rate 34

35 Shocks to the System Aggregate Payroll Changes Normal cost and amortization rates are developed as a % of payroll. Retiree benefits are based on each member s payroll. What if aggregate payroll decreases, but pay per active employee does not decline? The active employee benefits are unchanged; the normal cost rate may only change slightly as a % of aggregate payroll. But the unfunded AAL is still there and still has to be paid off. But now the UAAL is allocated over a smaller total payroll amount. Result: contribution rate goes up as a % of pay An example is on the next slide 35

36 Shocks to the System Example: 15% decrease in aggregate payroll Fiscal Year Misc Police Fire Est Aggregate payroll $ 133,900,000 $ 50,500,000 $ 28,800,000 NC Pmt 13,500,000 9,800,000 4,700,000 Normal Cost Rate 10.17% 19.43% 16.49% Amort Pmt 13,600,000 5,700,000 3,700,000 Amortization Rate 10.22% 11.19% 12.74% Total Contrib Rate 20.39% 30.62% 29.23% Now, assume total payroll decreases by 15% New Aggregate payroll $ 116,435,000 $ 43,913,000 $ 25,043,000 New Normal Cost Pmt 11,840,275 8,532,296 4,129,090 New Normal Cost Rate same same same New Amortization Pmt same same same New Amortization Rate 11.68% 12.98% 14.77% New Total Contrib Rate 21.85% 32.41% 31.26% Increase in Contrib Rate 1.46% 1.79% 2.03% 36

37 Forecasting City Contributions If there are no changes to the plans, the City contributes the ARC and all future assumptions are met: Contributions are expected to increase over the next 7 years: Misc: up by 6.7% from 16.6% (FY 11) to 23.3% (FY 18) Police: up by 6.1% from 26.5% (FY 11) to 32.6% (FY 18) Fire: up by 7.7% from 24.0% (FY 11) to 31.7% (FY 18) Time to fully amortize the unfunded AAL on this basis For all but the 2008 loss, the unfunded AAL would be fully funded in 30 years. The 2008 loss would be indefinitely longer unless eliminated by other gains. 37

38 Forecasting City Contributions If the City contributed based on a 7.25% discount rate, Contributions would increase over the next 7 years. These are rough estimates of how much: Misc: up by 2.2% from 27.3% (FY 12) to 29.5% (FY 18) Police: up by 2.1% from 38.2% (FY 12) to 40.3% (FY 18) Fire: up by 2.5% from 37.2% (FY 12) to 39.7% (FY 18) Time to fully amortize the unfunded AAL at 7.25% discount rate is the same as on the current basis: - For all but the 2008 loss, the unfunded AAL would be fully funded in 30 years. - The 2008 loss would be indefinitely longer unless eliminated by other gains. - The City could choose a single fixed period and contribute enough to pay off the unfunded amount at the end of that period. 38

39 Impact of Upcoming GASB 27 Changes: Reported liability more prominent (on balance sheet) May require lower discount rate to value the liability for reporting purposes Amortization periods and asset smoothing periods will be shorter => higher expense if unfunded AAL exists. Disconnect between funding and reporting Liability reported and amount expensed will not (necessarily) equal the funding AAL and the amount to be contributed Bark will be worse than bite Still, may create pressure to increase funding 39

40 Other Areas of Concern CA statutes which seemingly require (CalPERS interprets as requiring) benefit change be retroactive for all service The California contract clause which restricts (prohibits?) decreases in benefit formulas to be applied to past or future service for current employees 40

41 Overall Sense of Plan Funding & Status: Tough road ahead Contribution rates inevitably increasing The cost of a pension for some may be their job Requires cooperation from all stakeholders to manage Inflexible without taking on legal issues 41

42 Independent Analysis 3 General Plan Design Options 42

43 General Concepts for Sustainable Results What s Ideal: clean slate context Set target benefits: The stakeholders would collectively define reasonable benefits relative to pay and service provided. Common Target : 65-75% of usual pre-retirement income for a career service employee The target benefit should be funded by both the City and employees Set reasonable costs: The City would define a level of affordable and sustainable benefit costs. Design program to successfully blend target replacement ratios and benefit costs. Retroactive benefit changes optional, not required; if used, they should not be required to be applied to all future service. Require contributions if retroactive accruals. 43

44 General Concepts for Sustainable Results What s Ideal: clean slate context - continued Benefits which can be changed in the future to reflect changing employee and City needs and budgets. For future employees For future service to be provided by current employees Differentiate between accrual and vesting Costs and risks shared by employer and employees Cost of all benefit improvements analyzed prior to adoption 44

45 How to Affect Factors Affecting Pension Liabilities: Age --- Gender --- Years of service Limit years of service for benefits Benefit formula Reduce % per year of service Pay used in formula Increase years used in average; limit allowable pay Age at retirement Increase age for normal retirement Early retirement benefits Change (reduce) early factors Spouse benefits Reduce employer cost sharing Retirement years (longevity) Increase age for normal retirement COLAs Reduce % Investment risk Put some benefits in a DC plan Discount rates --- California contract laws??? 45

46 Putting it all together just one example...in an ideal world, consider a program that provides: A minimum defined benefit formula for all employees No less than current accrued benefits (from service to date) Reduced regular benefit formula (leaving high enough to remain out of Social Security), based on 5 year final average pay In periodic bargaining, negotiate for temporary additional accruals for the period of the bargaining agreement Maximum % of pay benefits Plus x% of pay City contribution to a DC plan Amount increased for employees with maximum DB benefits Example: basic benefit formula 2% at 60 additional accrual per year of service from = 1% per year of service; automatically expires at end of bargaining period City also matches up to 3% of employee contributions to a 403(b) plan. 46

47 Social Security Program Should the City consider joining now? General replacement is 25-40%, but as a social insurance program, benefits are leveraged toward lower income workers. Funding is pay-go, unsustainable and unstable. Contributions should be expected to increase to maintain program viability. Unfortunately, there may be renewed pressure from the Feds to compel public agencies to participate. If forced to join, how would current retirement plan formulas integrate with SS Benefits? If CalPERS formulas could not be lowered or meaningfully offset, then the City could be put in a more difficult situation. Should contact CalPERS and SSA to learn more. 47

48 Independent Analysis 4 What Can Be Done Now? 48

49 Steps to take now Reduce future benefits. 49

50 Steps to take now Current liabilities Miscellaneous Plan Current Retirees & Beneficiares Terminated Transferred Current Actives Prior Service Current Actives Future Service $532 MM $437 MM $158 MM unknown (Misc) (Misc) (Misc) 10.25% payroll (May be lower) (May be higher) Future Actives 50

51 Steps to take now Liabilities Which Can Be Changed Current Retirees & Beneficiares Current Actives Prior Service Current Actives Future Service Future Actives??? unknown 10.25% payroll 51

52 Steps to take now New benefit tier for future City employees Lower benefit per year of service; higher retirement age With current CA statutes affecting PERS requirements and contract clause, reducing pension benefits for new hires is one important step in reducing potential future retirement plan costs. Might current employees optionally elect the new reduced formula for future service in order to reduce their required employee contributions? 52

53 Steps to take now if possible Future service benefits for current active employees This is the only benefit category where the City is currently funding benefits that have not yet been earned. The maximum cost savings => no future accruals and normal cost rate decreased from 10.25% => 0% (misc plan). Should not reduce below the level of benefits required to stay out of Social Security. California contract laws and statutes affecting the CalPERS retirement program challenge the City s ability to reduce these benefits. 53

54 Steps to take now Other benefit cost controls - Ideally for all employees, but in the current environment, for new employees 5 year final average pay; Restrict compensation components to limit spiking Maximum % of pay benefit; once reached, only provide contributions to DC plan Limit COLAs 54

55 Steps to take now Reduce future benefits. Increase City contributions. 55

56 Steps to take now Contribute more than the ARC Both City and employees; additional costs must be shared to value the benefit and its cost Not only will it improve the funded ratio and benefit security, assets are likely to return a higher yield than local agency fund investments. Adopt policy to restrict retroactive benefit increases without additional funding Fully fund retroactive changes Require sufficient funding to leave a corridor of excess assets (i.e., assets at least 115% of AAL) before retroactive improvements can be adopted. 56

57 Steps to take now Reduce future benefits. Increase City contributions. Research legal issues. 57

58 Steps to take now investigations Investigate legal options for negotiating reduced future accruals for current employees Is this truly a legal dead-end? Voluntary elections by current employees to lower formula, lower contributions? (see prior slide) If possible, still might require the City to leave CalPERS. What would that help or hurt? Investigate potential Social Security Mandate Reduce workforce? Undesirable While possible long term advantage, short term would mean more pain 58

59 Steps to take now Reduce future benefits. Increase City contributions. Research legal issues. Develop target benefits and costs. 59

60 60 Public Q & A