JANUARY 2016 PRINCE GEORGE S COUNTY LONG TERM FISCAL STABILITY

Transcription

1 JANUARY 2016 PRINCE GEORGE S COUNTY LONG TERM FISCAL STABILITY

2 Tony Saunders Tony Saunders specializes in providing turnaround and crisis management, in and out-of-court liquidations and negotiations with an emphasis on public sector entities including municipalities and school districts. Mr. Saunders currently serves as the Chief Financial Officer and Chief Restructuring Officer for Wayne County, MI. He led initiatives which eliminated the County s $82.8M accumulated deficit, $52M structural deficit, ratified 11 labor agreements, and reduced the County s OPEB liabilities by approximately $1B. Prior to joining Wayne County, he served as a Director at Conway MacKenzie, a national turnaround and restructuring firm. Prior to joining Conway MacKenzie, Mr. Saunders was appointed by Governor Rick Snyder to serve as Emergency Manager to the city of Benton Harbor, MI. During his tenure, he eliminated the city s accumulated deficit, reduced general fund spending approximately 30% and served as the city s lead negotiator with municipal unions. Before his appointment, he served as an Advisor to the Michigan Department of Treasury. Prior to his role with the Michigan Department of Treasury, Mr. Saunders served in advisory roles at the Detroit City Council. There he developed and lobbied the establishment of a pension reform ordinance to reduce city expenditures on annuity payments and prohibit the distribution of excess earnings. Mr. Saunders led the coordination of the Pension Reform Working Group and the selection of the group s actuarial advisor. This group uncovered approximately $1.9 billion in losses in Detroit s retirement system over the last 30 years. Mr. Saunders is a graduate of the University of Michigan and currently serves on the Detroit Financial Review Commission. He is also a recipient of Crain s Detroit Business 20 in their 20 s and 40 under 40 award. 2

3 Prince George s County Snapshot AAA Bond Rating The General Fund is the chief operating fund of the County. At June 30, 2014, total fund balance in the general fund was $301.1 million of which $31.0 million was unassigned PGC appropriated $4.1M use of fund balance for FY 15 The General Fund balance decreased by $58.3 million as a result of current fiscal year operations Public safety costs increased by $37 million mainly due to salary increases driven by cost of living raises Contribution to public safety retirement plans increased by approximately $16.9 million (17.6 percent) Total revenues decreased $16.3 million from fiscal year 2014 $35.4M general fund operating loss for FY 14 3

4 Prince George s County Snapshot Excellent balance sheet --- why focus on long term liabilities Classroom resources Public Safety Recent tax increases: Income tax, Property tax = Less competitive County Current fiscal stability of the County allows for proper and structured planning OPEB cost have exceeded recent projections globally $1.1B UAAL Pension Comprehensive plan ($1,098,876,400); covered payroll $208,401,500; UAAL as a % of covered payroll 527%(5 to 1 ratio) Comparatively, Detroit s ratio of unfunded actuarial accrued liabilities to annual payroll just prior to bankruptcy, was at 5 to 1. Eventually, eventually happens *Per Fiscal Year 13 CAFR 4

5 Actuarial Methods Actuarial Methods describe the funding policy for the Retirement System. Actuarial Methods generally are comprised of the three components below: Actuarial cost method the technique used to allocate the total present value of future benefits over an employees working career (normal cost/service cost). Asset smoothing method the technique used to recognize gains or losses in pension assets over some period of time so as to reduce the effects of market volatility and stabilize contributions. Amortization policy The length of time and the structure selected for increasing or decreasing contributions to systematically eliminate any unfunded actuarial accrued liability or surplus. Actuarial methods allow for a considerable amount of flexibility in paying of the costs of a Retirement System. The funding policy selected by the Retirement Board should strike a balance between contributions that are stable from year to year but satisfy the actuarial needs of the Retirement System. 5

6 Normal Cost The Normal Cost is the cost of benefits accruing during the year. Ideally the normal cost should be contributed every year at a minimum. Normal Cost is often shown as a % of payroll. From year to year, contributions will stay level as a percent of pay under the entry age method used by most Retirement Systems as long as there are no changes in plan provisions, assumptions, or large changes in the covered population. Member contributions are normally not determined as part of the valuation, but instead are part of the provisions of the plan or a negotiated item. Member contributions serve to lower the amount paid by the Employer. While the normal cost is typically developed to stay level as a percent of pay, as payroll increases/decreases, the normal cost as a dollar figure will increase/decrease. 6

7 Actuarial Accrued Liability (AAL) The Actuarial Accrued Liability (AAL) is the amount of money that should be in the Trust as of the valuation date to cover benefits accrued to date. The Present Value of Projected Benefits (PVFB) is calculated separately for Active, Inactive and Retiree members A majority of the Present Value of Projected Benefits Liability of Retirement System s is generally attributable to retirees. This is very common in Retirement Systems that have been in existence for long periods of time. The PVFB includes both past and future service of the members. To arrive at the AAL, the liability for future service, also known as the Present Value of Future Normal Costs, must be subtracted From year to year, the liabilities of a Retirement System that is open to new hires will typically increase. This is a function of benefits continuing to accrue and the reversal of the discounting that occurs as part of the actuarial valuation process. This growth in AAL is absolutely anticipated 7

8 Actuarial Value of Assets An Actuarial Value of Assets (AVA), or smoothed value of assets, is used to alleviate contribution volatility which would result from using market. An AVA is typically based on reflecting the difference between the assumed returns and the actual returns over a period of years as opposed to immediately; the actuary will sometime refer to this as averaging or smoothing the returns over 5 years. The difference between the AVA and the market value of assets can be an indicator of changes in future contributions. To the extent that the AVA is higher (lower) than market, contributions may increase (decrease) in the future absent returns in excess of the assumed rate of return. In this instance, we can anticipate that because market is higher than actuarial, future contributions may decrease in the future even if the 7% return is not achieved *PGC uses a 5 year smoothed market valuation. FY 15 returns, nationwide, have been less than stellar 8

9 Unfunded Actuarial Accrued Liability (UAAL) The Unfunded Actuarial Accrued Liability (UAAL) is the difference between the Actuarial Accrued Liability (AAL) and the Actuarial Value of Assets (AVA) of the retirement system. The Funded Ratio is the ratio of how much money you actually have in the fund to the amount that should be in the fund. The UAAL and the funded ratio will vary from year to year for many reasons which should be identified by the actuary, including: 1. Actuarial gains and losses 2. Changes in plan provisions 3. Changes In assumptions or methods 4. The impact of funding (or not) in an actuarial manner UAAL is a common occurrence, and in and of itself is not a sign of an actuarially unsound system, as long as the source of the UAAL is identified and the funding policy is designed to pay the UAAL off. 9

10 Unfunded Actuarial Accrued Liability (UAAL) The determination of the Employer Contribution is the primary purpose of the actuarial valuation report. The Employer Contribution is the sum of the Employer Normal Cost plus a payment to the Unfunded Actuarial Accrued Liability. 1. The employer contribution is typically provided as a % of pay as well as a dollar amount. A policy should be established for which contribution amount will be administered 2. The employer normal cost as a percent of pay tends to stay level from year to year in the absence of changes in assumptions or benefit provisions. 3. The vast majority of the employer contribution rate is attributable to the payment for unfunded liability. This is fairly common due to the large amount of liabilities compared to the employer normal cost of many Retirement Systems. 10

11 UAAL and Funded Ratio Trend The current funded ratio is an essential measure, however, the trend of the funded ratio is more important. Changes in the trend due to experience that differs from the assumptions is to be expected, but these deviations from trend need to be identified and explained. The funded ratio should generally be trending towards 100%, ensuring that there is enough assets to cover the liability for service accrued to date. 11

12 UAAL and Funded Ratio Trend - PGC 12

13 UAAL and Funded Ratio Trend - PGC UAAL as a percent of payroll is a metric that reveals two things: 1. The amount of payroll needed to pay down the UAAL the magnitude of budgetary pressure that the UAAL puts on the sponsor 2. By adjusting for salary, which can be a proxy for inflation, this metric is the real value of UAAL adjusted (somewhat) for inflation to allow for comparison over generations 13

14 Projections Under a properly designed funding policy, the funded ratio should reach 100% ideally over a period of 15 to 20 years, and not longer than 25 years. The 30 year policy seen in the past for many plans should be shortened. So the steady increase in funded ratio is expected. Currently, PGC uses a 30 year policy. Based on the current the current PGC funding policy the Retirement System is at risk of not achieving a funded ratio of 100%. This issue should be addressed with the Retirement Board. The open amortization period is concerning. Comparably, the open amortization is similar to annually refinancing your house over thirty years each year, never paying off your mortgage. A Retirement System using an open amortization period may not be projected to be 100% funded in the future. PGC should evaluate actuarially funding pensions by funding 100% of the actuarial accrued liability over a fixed(closed) period of years. 14

15 OPEB SUSTAINABILITY OPEB = Other Post-Employment Benefits (i.e. benefits other than pensions; typically OPEB refers to retiree healthcare; death benefits, life insurance, disability and long- term care, when provided outside a pension plan) Sustainability = meeting needs of the present without compromising the ability of future generations to meet their own needs Problem = Large unfunded burden + No measurable guidance Sustainability definition comes from GFOA Best Practice The Finance Officers Role in Sustainability which references the United Nations Bruntland Commission

16 OPEB SUSTAINABILITY Promises made by past generations to be paid by future generation Future cost of health care unknown Generally low commitment to prefunding; Protection questionable Types: Defined Benefit(DB) and Defined Contribution(DC)

17 BACKGROUND Long-term liabilities associated with defined benefit plan/implicit rate subsidy are estimated by an actuary The magnitude of this estimate is a function of many assumptions discount rate, anticipated trends in health care costs, inflation rate, actuarial methods, plan details, etc. Defined contribution: no accrued liability employer has no commitment to compensate future retirees Pre-funding establishes an asset base; no pre-funding values of assets is zero, AAL = UAAL

18 FUNDING OPTIONS Pay-as- you go: employer pays costs at the time service is rendered, typically make payments directly to a provider (don t have an established plan entity such as a trust) Prefunding: in addition to pay-as-you-go, employer sets aside funding in order to build an asset base which can potentially generate income in order to offset future liabilities and pay for the benefits as they come due Contributions from employers to the OPEB plan and earnings on those contributions are irrevocable OPEB plan assets are dedicated to providing OPEB to plan members in accordance with the benefit terms OPEB plan assets are legally protected from creditors of employers, the plan administrator and plan members

19 COMMON METRICS

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22 WAYNE COUNTY WHEN EVENTUALLY HAPPENS Wayne County is at a cross-roads. Nearly a decade of declines in population, employment rates, and property values, coupled with poor management decisions has placed the County on the precipice of a financial collapse. Prior decisions that flew in the face of readily apparent economic conditions left significant legacy costs to be absorbed in the future. We can no longer push the problem into the future. We must face up to what is a dire financial situation. The challenge is to remain solvent while continuing to deliver needed services. Clearly understanding the problems, honestly disclosing the size of the accumulated and on-going structural deficits and instituting a plan that eliminates those deficits was necessary. We reformed County finances to operate within a balanced budget. For years the County used pooled cash and short term borrowings to maintain liquidity and meet its financial obligations, in essence robbing Peter to pay Paul. Until the annual structural deficits were reduced, the pooled cash will continue to decline. Projections had cash dangerously low by August 2015, and negative liquidity by June

23 CURRENT FINANCIAL CONDITION OF THE COUNTY Wayne County began running deficits in the fiscal year and continued to run deficits until the fiscal year. These deficits were: of $18.7 million of $33.4 million of $34.1 million of $53.1 million of $13.4 million These fiscal years resulted in an accumulated deficit of $157,500,000. The detail is provided in the following chart: 23

24 CURRENT FINANCIAL CONDITION OF THE COUNTY SUMMARY OF LONG TERM OBLIGATIONS Over 70% of the County s long term obligations relate to health care and pension liabilities. This is depicted below: 24

25 OPEB LIABILITY PRE-RESTRUCTURING 25

26 CURRENT FINANCIAL CONDITION OF THE COUNTY UNDERFUNDED HEALTH CARE Below is a breakdown of total GASB 45 liabilities allocated to past, current, and future service as of October 1, 2013 compared to the prior year. 26

27 UNDERSTANDING YOUR CENSUS The health care coverage provided by the County to its employees and its retirees is grossly underfunded. According to the County s most recent Other Post Employment Benefits (OPEB) actuarial valuation, the County retiree health care underfunding is $1.3 billion and funded at 0.8% of liabilities. The County currently has over 5300 retirees and 3200 active employees. OPEB obligations represent 40% of the County s long term obligations. Currently, 81% of County retirees are Medicare eligible and by 2020, 93% of County retirees will be Medicare eligible. Categories Contracts Average Age Employees 3, Retirees 5, Pre-Mirror 4, Medicare 3, Pre-Medicare Mirror 1, Medicare Pre-Medicare

28 Medicare Advantage Stipend Impact Plan 2015 Monthly Premium County Provided Stipend Cost to Employee HAP HMO Option 2 $ $ $0 HAP PPO Option 1 $ $ $0 BCBSM PPO Signature $ $ $35.00 BCN HMO Option 8 $ $ $4.82

29 Current Plan vs. BCBSM Silver Plans (Exchange) Current $500 Plan* BCBSM Silver PPO Plan* BCBSM Metro Detroit HMO Deductible $500 per Individual (no more than 2 per family) $2,000 Individual or $4,000 Family $1,650 Individual or $3,300 Family Coinsurance 20% after deductible to $1,500 per 20% after deductible to Individual (no more than 2 per family) $3,500 for an Individual or $7,000 for a Family 30% after deductible to $4,700 for an Individual or $9,400 for a Family Office Visit Primary Doctor: $30 copay Specialist: $30 copay Primary Doctor: $20 copay Specialist: $50 copay Primary Doctor: $20 copay Specialist: $50 copay Emergency Room $100 copay $250 copay after deductible, then covered at 80% $250 copay after deductible, then covered at 70% Outpatient Lab and X-Covered 80% after deductible Covered 80% after deductible Covered 70% after deductible ray Pharmacy $10 Generic $35 Preferred brand $50 Non preferred brand $30 - Generic 25% after ded - Preferred brand 50% after ded - Non preferred brand Covered after deductible $4 copay Preferred generic $20 copay Non preferred generic 25% - Preferred brand 50% - Non preferred brand Estimated Monthly Cost to Retiree (net after Premium Tax Credit and Stipend) Age 59 (single) $99.58 $ $ Age 59 (family) $99.58 $ ($164.00); surplus Age 63 (single) $99.58 $ $ Age 63 (family) $99.58 $ ($162.47); surplus *Exhibit shows In-Network benefits. Not intended to be a complete comparison of plans. *Assume household income of $40,000, same age spouse, 16 year old child, non-smoker, residing in zip code. *Estimated Premium Tax Credit from Kaiser Family Foundation Calculator.

30 RETIREE LAWSUIT + SETTLEMENT NEGOTIATIONS Plaintiffs filed a class action Complaint, later amended, in December, 2009, seeking injunctive relief and damages. The Court denied Plaintiffs motion for preliminary injunction on January 21, On October 5, 2010, the Court certified a class of retired employees of Wayne County, who now and immediately prior to retirement, were members of collective bargaining groups, who received health insurance, and who experienced a unilateral change in their benefits in October, The Court subsequently entered orders regarding Summary Disposition on November 12, 2012, November 27, 2012, December 6, 2012, December 14, 2012, and February 28, 2013 siding with the County that retiree health benefits for this class were not vested. The County took the position that the Judge s decision as to pre-1990 retirees was correct, namely that their benefits were not vested. The Parties recognized that final resolution of this litigation, which was almost five years old, could take another four to five years until all trials and appeals are exhausted. 30

31 RETIREE HEALTH CARE POST RESTRUCTURING Adjusted Gross Income (from prior year s federal income tax return) Monthly Stipend Payment Retiree Less than $30,000 $100 $30,000 to $45,000 $200 $45,000 or more $400 Retiree and Spouse (or retiree and one dependent) Less than $35,000 $150 $35,000 to $65,000 $300 $65,000 or more $750 Medicare Eligible: A $130 per month/spouse stipend to obtain health care pursuant to Medicare Advantage Plans on the open market or as otherwise provided by the County in its discretion as group plans. 31

32 OPEB UAAL REDUCTION - POST RESTRUCTURING 32

33 UNDERFUNDED PENSIONS The FY 2013 actuarial report prepared by Gabriel Roeder Smith and Company for the Wayne County Employees Retirement System (WCERS) including the Wayne County Airport Authority (WCAA) is dated September 30, It covers the fiscal year ended September 30, This Report concludes that the WCERS is underfunded in the amount of $910,500,000 and the assets in the pension system cover only 45% of what is needed to insure the full payment of all future pensions. Comparatively, Detroit s pension plans were approximately 71% funded prebankruptcy. The County s ratio of unfunded actuarial accrued liabilities to annual payroll is 681%, or almost 7 to 1. That ratio in Detroit, just prior to bankruptcy, was only at 5 to 1. The WCERS is paying nearly as much in annual defined benefit pension payments, $123,700,000, as the County is paying in defined benefit plan salaries $125,500,000. There are 2,055 active county employees participating in the defined benefit plans and 5,308 county retirees or beneficiaries receiving annual pension payments. These numbers are ominous for WCERS ability to pay all future pension obligations. WCERS is grossly underfunded. 33

34 UNDERFUNDED PENSIONS The County paid in FY , 41.26% of payroll, or $60,851,819 into the pension system. Even with prior positive investment results, this significant contribution has had little effect on the Underfunded Accrued Actuarial Liability (UAAL). Despite actual returns of over 14% in 2012 and 2013, the UAAL increased. Whether there will be sufficient assets in the fund to support the accrued liabilities is of major concern. It is doubtful that this amortization period will be fast enough to insure that the County meets its obligation to pay its entire pension obligations as they arise. In an effort to address this concern, the Wayne County Retirement System Board of Commissioners adopted a new amortization policy. Starting in conjunction with the actuarial valuation dated September 30, 2014, which determines contribution for Fiscal Year 2016, the amortization period will be decreased by two years annually. Under this amortization schedule, annual pension contributions would reach approximately $268 million by fiscal year It was unrealistic to believe the County could afford such an accelerated contribution. 34

35 UNDERFUNDED PENSIONS County Airport Total Notes: Participants l This valuation results in the County's required pension contributions Active employees 2, ,421 to be very significant as a percentage of active wages. Retirees 5, ,494 Total 7, ,915 l County contribution is 48.6% of payroll, mostly driven by a high UAAL. Ratio Active/Retiree amortization (41.3%). Active payroll ($m) $ $ 26.4 $ l On average, for each active employee, the County has to contribute. Average pay/ee ($k) $ 61.1 $ 72.2 $ 62.7 $30k to the pension plan. Retiree benefits paid ($m) $ $ 7.7 $ l Average member contribution rate is approximately 4.63%. Average pay/retiree ($k) $ 23.3 $ 41.5 $ 23.9 Balance sheet Actuarial asset value ($m) $ $ 76.2 $ Actuarial accrued liab ($m) (1,512.8) (132.0) (1,644.8) UAAL ($m) $ (840.5) $ (55.8) $ (896.3) Percent Funded 44.4% 57.8% 45.5% FY 2014 Contribution Normal 11.6% 6.7% 10.8% UAAL 41.3% 18.8% 37.3% POAM Member Rate Adj. EE Contrib -4.3% -0.7% -3.6% Total % 48.6% 24.8% County contribution ($m) $ 61.7 $ 7.2 $ 68.9 County contribution/active ($k) $ 30.0 $ 19.8 $

36 PENSION OBLIGATIONS - POST RESTRUCTURING IMPLEMENTED PROVISIONS OF INTEREST: Pension Amount For service accruals after September 30, 2015, Average Final Compensation (AFC) multiplied by the lesser of 1.25% and the present benefit multiplier. Frozen benefits for service accrued prior to October 1, 2015 are based on current multipliers and the AFC as of September 30, The maximum benefit remains at 75% of AFC. Average Final Compensation (AFC) Monthly average of base wages for the last ten (10) years of credited service effective October 1, 2015, with no additional items included in AFC. Frozen benefits as of October 1, 2015 are based on AFC periods and pensionable wages (which include any special payments for overtime, etc.) currently in effect (see Comments). Member Contributions (Defined Benefit) With the exception of Plan 2 members, effective October 1, 2015, 6% of wages up to $52,155, plus 7% of wages over $52,155 (for Sheriffs, 7% of wages up to $52,155, plus 8% of wages over $52,155). Any groups currently contributing more than the new rate will instead contribute at the new rate (this means that their contributions to WCERS will be lowered). Plan 2 non-sheriffs and Local 3317 will continue to contribute 0%, and Plan 2 POAM will continue to contribute 5.1%. Normal Retirement Effective October 1, 2015, age 62 with 10 years of service. For members who are age 52 or older as of October 1, 2015, a graduated eligibility scale between ages will apply. Sheriffs may also retire at age 55 with 30 years of service. Early Retirement (new provision effective October 1, 2015) For non-sheriffs, age 55 with 30 years of service. Benefit actuarially reduced based on methods and assumptions to be determined (see Comments). Vested Termination (deferred vested retirement) Effective October 1, 2015, 10 years of service is required for vesting; deferred vested pension begins at age 65. Duty Disability Effective October 1, 2015, the maximum benefit is 60% of AFC. 36

37 PENSION OBLIGATIONS - POST RESTRUCTURING 37

38 Restructuring & Reorganizations Detroit Unfunded OPEB Obligations pre-bk: $5.6772B, pop. 684, ; $8,290 per capita PGC County Unfunded OPEB Obligations(2013): $1,726 per capita PGC County Unfunded Pension Obligations(2013): $1,235 per capita 38

39 PHASE I ASSESSMENT AND FORECAST Develop 5 to 10 year financial projections without remedial action Potential revised experience study (mortality rate, assumed rate of return at 8%) Evaluate closed vs. open amortization period Integrate optimal education & public safety investment and outcomes and other deferred investments into 5 to 10 year projections Understand potential risk areas and opportunities to mitigate risks Evaluate Long-Term Liabilities Develop OPEB and pension model to run scenarios under various actuarial assumptions 39

40 PHASE II SOLUTION DEVELOPMENT Determine impact of proposed scenarios Quantify economic impact Identify potential risk Present findings Evaluate Active & Future Employee Retiree Health Care Funding Vehicle Employee/Employer Defined Contributions Vesting schedule Leave conversion contribution analysis Employer/Employee investment options New hire modeling RHCFV active/future employee cliff, applied or graded strategy OPEB trust asset utilization strategy Asset/pay go modeler retirees, actives, future (actives, if applicable) Modeling variables 40

41 PHASE II SOLUTION DEVELOPMENT Evaluate Active & Future Employee Pension Benefits Non-vested Average Final Compensation analysis Retirement age & min. vesting requirement Member contribution analysis; national average: Source: National Conference of State Legislatures PGC 41