2005 MARKET STREET SUITE 1700 PHILADELPHIA PA T F E STREET NW 10 TH FLOOR WASHINGTON DC T

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1 2005 MARKET STREET SUITE 1700 PHILADELPHIA PA T F E STREET NW 10 TH FLOOR WASHINGTON DC T F

2 Public sector retirement benefits: First ever 50 state analysis of public pension and OPEB systems 1

3 Source: Pew Center on the States, 2007 In 2006, states had a $2.73 trillion bill coming due. 2

4 The Mid-Atlantic Region: What Pew s study found Pensions, FY 2006 State Assets Liability Unfunded Liability % Funded Delaware $6,208,640 $6,416,275 $207, % Maryland $35,903, $43,537,681 $7,634, % New Jersey $86,469,381 $109,610,983 $23,141, % New York $140,150,000 $140,150,000 $ % North Carolina $64,782,000 $61,827,530 $2,954,470$ % Pennsylvania $79,271,100 $91,494,400 $12,223, % Virginia $41,749,000 $51,683,000 $9,934, % West Virginia $6,444,123 $11,774,772 $5,330, % Dollar amounts in thousands U.S. Average Funding Level 85.04% Source: Pew Center on the States,

5 The Western Region: What Pew s study found Pensions, FY 2006 State Assets Liability Unfunded Liability % Funded Arizona $29,079,480 $34,353,623 $5,274, % California $334,506,491 $382,906,253 $48,399, % Colorado $36,687,042 $49,490,604 $12,803, % Idaho $9,425,900 $9,951,100 $525, % Montana $6,908,951 $8,584,710 $1,675, % Nevada $19,312,191 $25,794,628 $6,482, % New Mexico $18,468,597 $22,544,984 $4,076, % Oregon $56,616,000 $51,254,000 ($5,362,000) % Texas $116,947,334 $132,087,713 $15,140, % Utah $18,093,491 $18,881,142 $787, % Washington $47,914,514 $48,118,299 $203, % Wyoming $5,899,371 $6,215,540 $316, % U.S. Average Funding Level 85.04% Dollar amounts in thousands Source: Pew Center on the States,

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7 Mid-Atlantic States: Pension plan investments, actuarial assumptions State Rate of Return Smoothing Delaware 8.00% 5 Year Maryland 7.75% 5 Year New Jersey 8.25% 5 Year New York 8.00% 5 Year North Carolina 7.25% 5-Year Pennsylvania 8.50% 5-Year Virginia 7.50% 5 Year West Virginia 7.50% Market Source: Pew Center on the States,

8 Western States: Pension plan investments, actuarial assumptions State Rate of Return Smoothing Arizona 8.00% 10 Year California 7.75% 15 Year Colorado 8.50% 4 year Idaho 7.75% None Montana 8.00% 4 Year Nevada 8.00% 5 Year New Mexico 8.00% 4 Year Oregon 8.00% None Texas 8.00% 5 Year Utah 7.75% 5 year Washington 8.00% 8 year graded smoothing Wyoming 8.00% 5 Year Source: Pew Center on the States,

9 Pension plan investments The Federal Reserve Board indicates that 70 percent of state and local pension plans investments are invested in equities, broadly defined, up from 38 percent in After the Dot-Com bust in 2001, many more state plans began investing in alternative investments. 38% How Pension Funds are Investing Equities as share of total investments 62% 70% Source: Pew Center on the States, 2007 based on Federal Reserve Board data. 8

10 Mid-Atlantic States: Pension plan investments Declines in Pension Assests, Select Plans FY % Maryland SRPS New Jersey Div. of Pensions and Benefits New York State Common RF* North Carolina RS -5% -10% -15% -14% -20% -20% -19% -25% -30% -26% Source: Pew Center on the States, 2009 * Fiscal Year is April to March 30,

11 Western States: Pension plan investments Declines in Pension Assests, Select Plans FY % -5% CalPERS CalSTRS Colorado PERA Oregon PERS Texas ERS* Texas TRS* -4.6% -4.5% Washington Co-Mingled Trust Fund -1.2% -10% -15% -20% -25% -30% -23% -25% -26% -27% Source: Pew Center on the States, 2009 * Fiscal Year is September 1, 2007 to August 31,

12 Pensions A Look Ahead Between end of FY 2006 and end of FY 2008, we are also seeing an increase in unfunded d liabilities for states, t generally. Investment losses in 2008 were severe nearly a 25% decline in value for all pension plans. Also, a number of states have continued to fail to adequately contribute to their pension funds. o In 2006 states t fell over $8 billion short of meeting their annual required contribution. Given the fiscal stress states are under, we expect to see a continuation of this pattern and it may even grow. We also expect that unfunded liabilities for all states will soon exceed the current payroll for state and local employees covered under state pension plans. In order for states to cover their unfunded liabilities, it would cost more than they ypay in a year for salaries. 11

13 What Pew s study found Other Post-Employment Benefits. Based on our first ever 2006 analysis of OPEB, West Virginia* $133,000 $824,000 liabilities were calculated at $381 billion. About 97 $150,000 Virginia $311,500 percent of states obligation to OPEB were Pennsylvania $519,000 $1,125,000 unfunded. At the time of our study only six states were fully on track to fund their OPEB liabilities, North Carolina* New York $230,000 $934,000 while another three states had started the process. New Jersey $313,000 $1,881,000 $2,390,000 $3,810,000 Actual Payment (thousands) Annual Required Contribution (thousands) Source: Pew Center on the States, 2007 Maryland Delaware $236,000 $1,114,000 $136,000 $475,000 September 25,

14 What Pew s study found Other Post-Employment Benefits. Arizona $93,000 California $3,593,000 Colorado Idaho Montana Nevada New Mexico Oregon Utah Washington Wyoming $71,000 $38,000 $51,000 $273,000 $467,000 $75,000 $47,000 $314,000 $6,000 Source: Pew Center on the States, 2007 Texas is not included because the state did not calculate the Annual Required Contribution for FY 2006 Annual Required Contribution ti Actual Payment 13

15 Source: Pew Center on the States,

16 Mid-Atlantic States: How are OPEB faring today? Bills Unnoticed The Long Term Costs States Actuarial Liability (thousands) Unfunded Liability (thousands) Percent Funded (thousands) Delaware $4,435, $4,410, % Maryland $14,543,000 $14,543, % New Jersey $21,587,000 $21,587, % New York $49,663,000 $49,663, % North Carolina* $23,925,000 $23,786, % Pennsylvania $13,778,000 $13,501, % Virginia $3,001,500 $2,320, % West Virginia* $7,761,000 $7,761, % * Combined state and local system where isolating the state component of OPEB, pension and covered payroll may not be possible Source: Pew Center on the States,

17 Western States: How are OPEB faring today? Bills Unnoticed The Long Term Costs States Actuarial Liability (thousands) Unfunded Liability (thousands) Percent Funded (thousands) Arizona $421,300 $94, % California $47,878,000 $47,878, % Colorado $1,248,000 $1,033, % Idaho $486,000 $486, % Montana $525,000 $525, % Nevada $4,100,000 $4,100, % New Mexico $4,990, $4,990, % 00% Oregon $832,000 $645, % Texas $26,817,000 $26,817, % Utah $749,000 $749, % Washington $3,800,000 $3,800, % Wyoming $72,000 $72, % Source: Pew Center on the States,

18 OPEB A Look Ahead Our initial current analysis estimates that OPEB liabilities will have increased between June 2006 and June Unfunded d liabilities will continue to grow. 17

19 There are few options in the short run to cut pension costs; however, in the long run, benefits can be modified/reduced for new employees: Georgia, Louisiana, Nevada, New Mexico, Rhode Island and Texas Cost sharing: Nebraska*, New Mexico*, New Hampshire and Texas Funding Issues: Illinois floated a $3.5 billion bond to cover state contributions Colorado suspended contributions New Jersey allowed local governments to suspend contributions (*new and existing employees) How are states coping? 18

20 Overall, the goal of the state should be to fully fund the ARC every year for whatever level of benefits they choose to give to employees. Prudent investment governance and conservative actuarial assumptions can reduce sudden spikes in the ARC and make surprises more likely l to be pleasant. How are states coping? 19

21 States have more flexibility in reducing OPEB costs. Unlike pension benefits, there are usually less guarantees around retiree health benefits, allowing them to be changed quickly. States like West Virginia have also found ways to reduce costs while preserving existing levels of benefits by using outside partners and dleveraging Federal lbenefits (i.e., Medicare). Pre-funding OPEBs is good financial practice as it evens out costs by preventing spikes from demographic shifts and forces states to pay for employee benefits while the employee is working. While the economic crisis might justify a brief reprise from full ARC payments, in general the state should provide the ARC for OPEBs. How are states coping? 20

22 Pew Center on the States, Trends to Watch: px?trendid=11 U.S. Census Bureau: National Association of State Retirement Administrators, Public Fund Survey: National Association of State Auditors, Comptrollers and Treasurers: Resources 21

23 Kil Huh Project Director, Research