Public Employees Retirement Association (PERA) 2018 Overview for MASBO

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1 Public Employees Retirement Association (PERA) 2018 Overview for MASBO Doug Anderson Executive Director February 8, 2018 Agenda Overview History Future GASB Whiplash A Case Study 2 1

2 PERA Membership as of June 30, 2017 General Employees Retirement Plan Police & Fire Retirement Plan Local Government Correctional Plan Receiving Benefits Deferred Payment Status Active Members Total Members 98, , , ,677 10,579 2,640 11,522 24,741 1,085 5,557 3,842 10,484 Active to Retiree Ratio 1.6 to to to 1 Active Average Age Active Average Service Active Average Pay $40, $83, $54,300 Retiree Average Age Retiree Average Benefit 73 $14, $53, $9,000 PERA also administers a $54M lump-sum defined benefit plan for 2,600 volunteer firefighters and a $58M defined contribution plan for 7,700 current and former local elected officials. 3 PERA Plans FY16 Cash Flow & Investment Returns General Employees Retirement Plan Police & Fire Retirement Plan Local Government Correctional Plan Employee Contribution Rate Employer Contribution Rate State Contribution Rate Total Contribution Rate 6.5% 7.5% 0.6% 14.6% 10.8% 16.2% 2.5% 29.5% 5.8% 8.8% 0.0% 14.6% Total Active Payroll $5.9B $913M $198M Total Contributions Total Benefit Payments $0.9B $1.5B $277M $514M $29M $13M Total Assets $20.1B $7.9B $602M Actual Investment Earnings Investment Rate of Return $2.7B 15.1% $1.1B 15.2% $78M 15.1% Police & Fire Members do not participate in Social Security. 4 2

Are These Truly Defined Benefit Plans? Benefits Investment = Contributions + Earnings - Administrative Costs Traditional Defined Benefit plans provide a fixed monthly benefit.

3 Are These Truly Defined Benefit Plans? Benefits Investment = Contributions + Earnings - Administrative Costs Traditional Defined Benefit plans provide a fixed monthly benefit. Contribution requirements will increase if investment earnings are less than an assumed amount, and will decrease if earnings exceed an assumed amount. PERA s plans could be viewed as not being true traditional defined benefit plans, because they are structured to try to provide fixed benefits at fixed contribution rates. When assumptions are not met, or when assumptions are changed, adjustments to benefits and/or contributions are handled through the legislative process, rather than simply by adjusting contribution rates. PERA plans are commonly considered to be defined benefit plans. However, they could be classified as a hybrid plan. 5 Approximate % of Hybrid Participants by State 6 3

4 States with DC Plans as Mandatory or Optional Primary Plans 7 History 4

That those who are receiving annuities from our fund are living longer than the American Table of Mortality says they would 16 of them should have died, but only 7 of them did die.

5 PERA s First Newsletter The interest earnings upon our investments have dropped. The average annual rate of interest we earned in the beginning amounted to over 5%...and last year about 3.3%. 4% was the rate on which we based our estimate. So in this respect we were too liberal. That those who are receiving annuities from our fund are living longer than the American Table of Mortality says they would 16 of them should have died, but only 7 of them did die. The adoption by this Association of the ½ of 1% additional contribution would have resulted in a growth of our surplus 9 PERA General and P&F Employee Contribution Rate Trend 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% P&F EE Rates P&F EE 30-Year Averages General EE Rates General EE 40-Year Averages The average contribution rate for a 30- year P&F member will increase from 7.5% in 2005 to 10.3% in The average contribution rate for a 40- year GERF member will increase from 4.0% in 2005 to 6.0% for those retiring in % Year of Benefit Commencement 10 5

6 Key Plan Benefit Provisions (applicable to most employees) Accrued Benefit General Employees Retirement Plan 1.7% x Average Salary x Allowable Service Police & Fire Retirement Plan 3.0% x Average Salary x Allowable Service Normal Retirement Accrued Benefit at age 66 Accrued Benefit at age 55 Early Retirement Death Reduced Accrued Benefit at age 55 or later Accrued Benefit reduced for early commencement and optional form conversion Reduced Accrued Benefit at age 50 or later 50% of average salary; 60% if in line-of-duty Disability Termination Postretirement Adjustments Accrued Benefit without reduction Accrued Benefit deferred to early or normal retirement; refund available 1% per year until the Plan is 90% funded; 2.5% thereafter (Estimated Trigger Date is 2046) 45% of average salary; 60% if in line-of-duty Accrued Benefit deferred to early or normal retirement; refund available 1% per year until the Plan is 90% funded; 2.5% thereafter (Estimated Trigger Date is 2066) 11 PERA General and P&F Replacement Ratios at Normal Retirement The replacement ratio is a tool used to measure benefit adequacy and equals Gross Income After Retirement Gross Income Before Retirement 100% GERF 40 Years of Service Replacement Ratio P&F 30 Years of Service Replacement Ratio 80% 85% 85% 85% 85% 85% 85% 60% 57% 71% 64% 64% 64% 64% 64% 64% 40% 20% 0% Year of Benefit Commencement 12 6

7 Expected Years in Payment Status after Normal Retirement Female Male The average post NRA payment period is expected to increase by about 30% for females and 56% for males Sources: Data prior to 2000 is from Social Security Website. Years 2000 and later are based on PERA GERP plan mortality assumptions in 2000 and PERA Historical Purchasing Power Protection 200% 180% 160% 140% 120% A participant that retired in 1983 has doubled their purchasing power. 100% 80% 60% Members retired after 2000 have retained approximately all of their purchasing power. 40% Year of Benefit Commencement 14 7

8 Purchasing Power Protection % / Cumulative Contributions % # of Pay in Years # of Pay out Yeras /17/ % 200% Historical Retiree Contribution and Benefit Payment Metrics # of Pay in Years # of Pay out Years Cohort age 85 Cumulative Contribution % % % 20 50% 10 0% 0 Historical Investment Returns 16% 14% 15.1% Mean Public Fund MN SBI 12% 12.4% 10% 8% 6% 5.3% 6.3% 8.8% 10.2% 6.2% 5.4% 7.2% 6.8% 8.6% 8.7% 8.2% 8.3% 4% 2% 0% 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs 25 Yrs 30 Yrs Actual Returns for Periods Ending June 30,

9 Summary of Historical Events 1. Investment returns have been less than assumed over the past 20 years, negatively impacting asset growth. 2. Mortality improvements are expected to occur at a greater rate than ever before, increasing liability estimates. 3. Members have been retiring at later ages. 4. Inflation expectations are forecasted to be lower for many years. This may result in a lower investment return assumption, which would increase the liability estimate. 5. The plan structure prior to the year 2000 allowed for excess earnings to be used for postretirement increases that were in excess of inflation. 6. Employee contributions have been steadily increasing. 7. Employer contribution rates have also increased. Also, in the past few years the expected period needed to reach full funding has been extended. 17 Future 9

range Legislature sets the assumption SBI Long-Term Policy Target National Investment Assumption Trend 20% 2% 45% Domestic

10 19 Investment Return Assumption Setting Process SBI Provides the Asset Allocation Investment Consultants provide long-term capital market forecasts PERA s actuary recommends a reasonable range PERA s board recommends an assumption within the range Legislature sets the assumption SBI Long-Term Policy Target National Investment Assumption Trend 20% 2% 45% Domestic Stocks International Stocks Bonds 18% 15% Alternative Assets Cash 19 Public Pension Fund Investment Return Assumption Trend 20 10

11 PERA 2018 Legislative Proposals January 12, 2018 Investment Return and Other Economic Assumptions PERA s Board reaffirmed its 2017 position to adopt the 7.5% investment return, 2.5% inflation, and 3.5% total payroll growth assumptions. The fund s actuary, Gabriel Roeder Smith & Co., believes the 8.0% statutory rate is outside of the reasonable range for PERA valuations as of July 1, 2017.* PERA has used 7.5% for accounting purposes in its FY16 and FY17 CAFR. All results within this presentation are based on a 7.5% investment return. * GRS letter to PERA dated September 11,

12 PERA 2018 Legislative Proposals Police & Fire General Correctional Full Funding Within 25 Years? Yes Yes Yes Increased Funding Required? Yes No No Broad Stakeholder Support? Yes Yes Yes Member Groups Employer Groups MPPOA MPFF LMC AMC MICA AFSCME 5 AFSCME 65 Teamsters 320 PEPSA MMRA SEIU* LMC AMC MICA AFSCME 5 Teamsters 320 LELS MNPEA AMC MICA *SEIU was supportive of most changes, including the COLA change, but was not ready to support the early retirement augmentation change. 23 PERA 2018 General Employees Plan Legislative Proposal 12

General Employees Plan Projected Funding Ratios 2016 2021 2026 2031 2036 2041 2046 120% 110% 100% 90% 76% 80% 70% 60% 50% 40% 30% 20% 10% 0% 109% 96% 88% Black line: PERA Proposal Orange line:

13 General Employees Plan Projected Funding Ratios % 110% 100% 90% 76% 80% 70% 60% 50% 40% 30% 20% 10% 0% 109% 96% 88% Black line: PERA Proposal Orange line: Projection based on 2017 Valuation No Changes (2045 Trigger Date) Red line: Projection based on 2016 Valuation No Changes (2053 Trigger Date) 25 General Employees Plan Current Contribution Allocation 6.5% Employee Contributions 7.5% Employer Contributions 6.2% for full or fairly reduced early retirement benefits with 1% annual increases after age % for a future 2.5% COLA 0.1% for 1% annual increases before age % for augmented early retirement benefits 1.0% for disability, death, refunds, and operating expenses 5.6% for improved future benefit security and progress towards full funding 26 13

14 Assumptions 1/17/2018 PERA Early Retirement Actuarial Equivalence With Deferred Augmentation Summary of Employee Options Employee options with deferred augmentation: $460 / month, increased 1% per year Age 56 or $1,000 / month, increased 1% per year Age 66 Death Employee options without deferred augmentation: Age 56 $332/ month, increased 1% per year or $1,000 / month, increased 1% per year Age 66 Death General Employees Plan Actuarial Equivalence Factor Impact Value of $1,000 at Age 66 Reduced for Early Retirement Benefit Commencement Age Actuarial Equivalent Benefit Current Benefit With New Mortality if Veto did not Occur and if Augmentation is Eliminated and if Pre- 66 COLA is Eliminated and if COLA is 1.25% 55 $332 $460 $485 $506 $365 $391 $ $657 $740 $756 $767 $682 $704 $ $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 Interest 8.0% 8.0% 8.0% 7.5% 7.5% 7.5% 7.5% COLA % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.25% COLA Start Retirement Retirement Retirement Retirement Retirement Age 66 Age 66 Augment -ation No Yes (3% or 2.5%) Yes (3% or 2.5%) Yes (3% or 2.5%) No No No Mortality RP-2000 RP-2000 RP-2014 RP-2014 RP-2014 RP-2014 RP

Actual retirement rates are slightly higher due to inclusion of members retiring under Rule of 90 with unreduced benefits.

15 Average Annual Retirement Rates for 55 to 60 Year Olds 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4.2% 2.1% 1.8% 1.7% FY 2015 FY 2016 FY 2017 The above rates represent the percentage of eligible early retirees each year that retire with reduced early retirement benefits. Actual retirement rates are slightly higher due to inclusion of members retiring under Rule of 90 with unreduced benefits. 2 9 General Employees Plan Impact of Proposed Changes $1,000 $900 $800 $700 The current actuarial equivalent benefit at age 62 is $740. Under the proposed changes the amount is $708. Delaying retirement one year from age 62 to 63 would more than offset the difference. $600 $500 $400 $300 $200 $100 $0 The current actuarial equivalent benefit at age 55 is $460. Under the proposed changes the amount is $397. Delaying retirement two years to age 57 would more than offset the difference. Current 63 Current 62 Proposed 62 Current 57 Current 55 Proposed The current and proposed early retirement benefit amounts are equivalent to a $1,000/month benefit payable at age 66. The results showing the impact of a delayed retirement are based on a member with 30 years of service receiving raises of 2.5%/year

General Employees Plan 2018 Legislative Proposal 6.5% Employee Contributions 7.5% Employer Contributions Change 1: Eliminate 2.5% trigger and replace with 50% of CPI increase with 1.0% floor and 1.

16 General Employees Plan 2018 Legislative Proposal 6.5% Employee Contributions 7.5% Employer Contributions Change 1: Eliminate 2.5% trigger and replace with 50% of CPI increase with 1.0% floor and 1.5 cap (0.1% of pay net savings) Change 2: Redirect 0.5% of contributions primarily used for augmented early retirement benefits and 1% pre-66 increases towards improved future benefit security and progress towards full funding 31 General Employees Plan 2018 Legislative Proposal Members Affected Current Plan Provision 2017 Legislature Proposal 2018 PERA Proposal Amortization Period None Early Retirement Augmentation Early Retirement COLAs Terminated Member Deferred Augmentation Interest Rate on Refunds Postretirement Increases Early Retirees Early Retirees Pre 2012 Terminated Members Terminated Members All 3.0% if hired < 7/1/06; 2.5% if hired > 6/30/06 1% with 2.5% trigger 1% if termed < 2012; 0% if termed > 2011 Eliminate Eliminate Eliminate Eliminate Eliminate Eliminate 4% 3% 3% 1% with 2.5% trigger 1% with no trigger 1% floor 50% of CPI 1.5% cap MSRS Proposal 1% for 5 years, 1.5% thereafter Neither the 2017 Legislative Proposal nor the 2018 PERA Proposal includes funding changes. TRA Proposal 1% for 5 years, then 5-year phase-in up to 1.5% 32 16

17 GASB Whiplash A Case Study GASB Reporting for Pension Plans 34 17

18 Police & Fire FY16 GASB Results FIDUCIARY NET POSITION (FNP) ($ in millions) FNP as of July 1, 2015 $7,349 Contributions Employee 95 Contributions Employer 156 Other (State of MN) 9 Net investment income (9) Administrative expense (1) Benefit payments (501) Change in FNP $(251) FNP as of June 30, 2016 $7,098 TOTAL PENSION LIABILITY (TPL) ($ in millions) TPL as of July 1, 2015 $8,485 Service Cost 194 Interest 658 Difference between actual & expected experience (376) Assumption changes 2,651 Benefit payments (501) Net Change in TPL $2,626 TPL as of June 30, 2016 $11,111 The GASB funded ratio decreased from 87% to 64% and the GASB unfunded liability increased from $1.1B to $4.0B in FY16. Approximately $0.5B of this increase was due to an asset loss from a -0.1% investment return. What caused the other $2.4B unfunded liability increase? 35 Police & Fire FY17 GASB Results FIDUCIARY NET POSITION (FNP) ($ in millions) FNP as of July 1, 2016 $7,098 Contributions Employee 102 Contributions Employer 175 Other (State of MN) 0 Net investment income 1,060 Administrative expense (1) Benefit payments (515) Change in FNP $821 FNP as of June 30, 2017 $7,919 TOTAL PENSION LIABILITY (TPL) ($ in millions) TPL as of July 1, 2016 $11,111 Service Cost 318 Interest 617 Difference between actual & expected experience 38 Assumption changes (2,300) Benefit payments (515) Net Change in TPL ($1,842) TPL as of June 30, 2017 $9,269 The GASB funded ratio increased from 64% to 85% and the GASB unfunded liability decreased from $4.0B to $1.3B in FY17. Approximately $1.1B of this decrease was due to an asset gain from a 15.1% investment return. What caused the other $2.3B unfunded liability decrease? 36 18

19 GASB Results for City of Minneapolis (in $M, Police & Fire Only) Total Pension Liability $8,485 $11,111 $9,269 Fiduciary Net Position 7,349 7,098 7,919 Net Pension Liability $1,136 $4,013 $1,350 Proportionate Share 19.42% 19.84% 19.96% City Net Pension Liability $221 $796 $269 Moody s Investor Services Rating Action: Moody s affirms Minneapolis, MN s Aa1 rating: outlook revised to negative. The negative outlook reflects Minneapolis elevated and growing unfunded pension liabilities. Absent state legislative action that materially reduces accumulated unfunded liabilities, the city s pension costs and leverage will remain very high. 37 $1,500 Benefit Payments are Projected ($ millions) Actual Benefit Payments Actual Benefit Payments $1,000 $500 $0 Projected benefit payments for current members are determined using demographic assumptions

20 Funding: Benefit Payments are Projected and Discounted $1,500 Discounted Benefit Payments Actual Benefit Payments $1,000 $500 Effect of Discounting at 7.5% $0 Funding valuations discount all projected benefit payments using the assumed investment return assumption. 39 The GASB Crossover Date $1,500 Funded Benefits Unfunded Benefits Actual Benefit Payments $1,000 $500 $0 The GASB crossover date is when current assets, future investment returns, all contributions for current members and excess contributions for new members are assumed to be depleted. The crossover date is not the date the plan is expected to run out of assets. New member benefits are presumed to be fully funded

21 GASB: Benefit Payments are Projected and Discounted $1,500 Discounted Funded Benefits Discounted Unfunded Benefits Actual Benefit Payments $1,000 $500 Funded Benefits are discounted at 7.5% Unfunded benefits are discounted at 2.85% $0 GASB valuations discount funded projected benefit payments using the assumed investment return assumption and unfunded benefits using a general obligation bond rate. 41 Impact of FY % Investment Return $1,500 Discounted Funded Benefits Discounted Unfunded Benefits Actual Benefit Payments $1,000 $500 Effect of Discounting at 7.5% The FY17 Asset gain extended full funding to all years. All future benefit payments are now discounted at 7.5% $0 The 15.1% FY17 investment return results in full funding of all future benefits. The use of a higher discount rate will reduce the liability associated with that period by about $2.3B. The liability loss from FY16 will be reversed

22 Questions 22

PERA 2018 Legislative Proposals January 12, 2018

PERA 2018 Legislative Proposals January 12, 2018 PERA 2018 Legislative Proposals Police & Fire General Correctional Full Funding Within 25 Years? Yes Yes Yes Increased Funding Required? Yes No No Broad