The following two chapters present statistical information on state and local government retirement

Transcription

1 Chapter 4 Analysis of Federal Government Data on Public Sector Retirement Systems The following two chapters present statistical information on state and local government retirement plans. The two primary sources of information are data collected by the U.S. Department of Commerce, Bureau of the Census in their annual survey of state and local government employee retirement systems (Chapter 4) and data collected by The Council of State Governments March 2004 survey forwarded to 192 state and local plans around the country (Chapter 5). The federal information is the most recent report prepared on the topic by the U.S. Department of Commerce (released December 14, 2003) and covers the period July 1, 2001 through June 30, The next report is expected to be released in December 2004 and will cover the period July 1, 2002 through June 30, Hence, there is a lag in the accumulation, preparation and release of this information of almost 18 months. At the outset, it is important to mention that the U.S. Department of Commerce, Bureau of the Census information cannot be equated to information found in the accounting statements of public employee retirement systems administered by state and local governments throughout the nation. 1 In particular, this federal data should not be used to reach any conclusions about the financial condition of specific government retirement systems or their parent governments. This is because the information in this federal survey data is gathered to measure the economic activity of state and local governments in general; the definitions used in these statistics can vary considerably from definitions applied in standard accounting reports. In fact, these definitional differences can include those of coverage (what constitutes a government entity), functional activity, financial transaction (revenue, expenditure, indebtedness and asset), or measurement (cash versus accrual accounting, or asset valuation procedures). 2 Furthermore, comparing revenue to expenditure for a particular government will not necessarily yield meaningful conclusions about a surplus or deficit condition for that government. State and Local Government Retirement Plan Trends The employee retirement systems of state and local governments remain a critical component of our nation s government sector. Not only do these retirement systems cover tens of thousands of public sector employees and provide current and future income for these retirees and employees, they contain significant investment holdings as well. As cited previously, cash and investment holdings of state and local government employee retirement systems reached approximately $2.2 trillion in 2002, a very slight increase of $362 million over the previous year (2001). Interestingly, more than $1.6 trillion of this total portfolio was invested in non-government securities, more than 76 percent, while $226 billion was invested in federal, state and local government securities (10.5 percent) and about $110 billion (5 percent) was in cash and other shortterm investments. Table 13 provides national data on state and local government employee retirement system finances for the three most recent years, 2000, 2001 and In this chapter, reference to 2002 involves the period July 1, 2001 to June 30, 2002; 2001 involves the period July 1, 2000 to June 30, 2001; and 2000 involves July 1, 1999 to June 30, Stresses in the System, page 33

2 Category Receipts Difference 2000 & Difference 2001 & 2002 Employee Contributions $24,994,468 $26,437,534 $1,443,066 $27,544,022 $1,106,488 State Government Contributions $17,546,723 $17,594,431 $47,708 $17,182,861 -$411,570 Local Government Contributions $22,608,391 $21,250,360 -$1,358,031 $21,609,170 $358,810 Earnings on Investments $231,900,075 $57,940,554 -$173,959,521 -$72,456,581 -$130,397,135 Payments National Summary of State and Local Government Employee Retirement System Finances 2000 to 2002 (Thousands of Dollars) Total $297,049,657 $123,222,879 -$173,826,778 -$6,120,528 -$129,343,407 Benefits $91,274,292 $100,936,411 $9,662,119 $110,128,411 $9,192,000 Withdrawals $4,431,876 $4,151,146 -$280,730 $4,079,492 -$71,654 Other Payments $4,751,715 $7,170,433 $2,418,718 $7,772,328 $601,895 Cash and Investment Holdings Total $100,457,883 $112,257,990 $11,800,107 $121,980,231 $9,722,241 Cash and Short -term Investments $121,142,060 $117,392,023 -$3,750,037 $109,762,677 -$7,629,346 Government Securities $271,551,952 $246,787,978 -$24,763,974 $225,584,917 -$21,203,061 Non-governmental Securities $1,602,291,271 $1,620,488,011 $18,196,740 $1,649,810,584 $29,322,573 table 13 Other Investments $173,657,750 $172,961,157 -$696,593 $172,832,778 -$128,379 Total $2,168,643,033 $2,157,629,168 -$11,013,865 $2,157,990,956 $361,788 Note: Totals may not add up due to rounding. As evident in Table 13, state and local government retirement systems experienced a decline of $11 billion between years 2000 and 2001 and a slight increase of $362 million between years 2001 and 2002 in total cash and investment holdings. The marked decline between the initial three years indicated represents the significant decline experienced in the stock market (and documented in the previous chapter) beginning in March 2000, a trend that continued through the next two years to about the end of calendar year A review of investment earnings also reflects this trend. For instance, in 2000, earnings on investments amounted to an impressive $232 billion. Given that the stock market s decline began in March 2000, the full impact of this decline was not reflected in 2000 investment earnings figures. However, the next two years saw the stock market plunging drastically and state and local government retirement systems investment earnings reflected the downward trajectory of this market trend as well. Specifically, between 2000 and 2001, the drop was $174 billion and between 2001 and 2002, the decline was $129 billion. A number of other trends also may be gleaned from Table 13. As an example, state government contributions to employee retirement systems actually declined by $412 million between 2001 and 2002; there was a slight increase of $48 million between the prior two years 2000 and Local government contributions to their retirement systems fell by $1.4 billion between 2000 and 2001; in the next year, contributions rose by $359 million. During this time period, as detailed in Chapter 3, state and local governments were experiencing serious budget shortfalls and often deferred making contributions to their retirement systems, a development that led to the serious underfunding of these pension plans. Several quick examples help reinforce this point. The city of San Diego currently faces a $1.1 billion unfunded liability in its pension system as a result of the mayor and the city council intentionally diverting cash meant for the pension system to balance the city s budget, a practice that has gone on since Similarly, in 2001 North America s Public Retirement Systems, page 34

3 Carolina Governor Easley was forced to seize $151 million the General Assembly had budgeted toward state pension fund contributions in order to balance a state budget shortfall that eventually surpassed $1 billion that year. 4 In Connecticut, the state treasurer noted that the General Assembly had appropriated less than the actuary s recommended contribution to the Teacher s Retirement Fund for decades and the annual state contribution for pension plans also remained below recommended actuarial levels. 5 In terms of employee contributions, there was a slight drop-off with an increase of $1.4 billion between 2000 and 2001 and the slightly smaller amount of $1.1 billion between 2001 and Even in terms of benefits payments, similar trends were evident with $9.7 billion disbursed between 2000 and 2001, and the slightly lesser amount of $9.2 billion dispensed between 2001 and Finally, analysis on the investment strategies of these state and local government retirement plans may be extracted from a review of the composition of their cash and investment holdings. Table 14 provides information on this data for the period 1993 through 2002, enabling broader trends to be gleaned given the longer time period. Table 14 demonstrates several striking changes in the investment composition of state and local government cash and investment holdings in the past decade, i.e., 1993 to The most important feature is the increasing proportion of these cash and investment holdings that have been allocated to non-governmental securities. For instance, in 1993, non-governmental securities amounted to only 62 percent of total cash and investment holdings; in less than 10 years, in 2002, this amount had increased significantly to 76 percent. Even within this category, the influence of corporate stock played an increasingly important role, rising from 33 percent of non-governmental securities in 1993, to 38 percent in While state and local government retirement systems did not have any exposure in foreign investments in 1993, in 1998 they had 11 percent of their non-governmental securities allocated to this new investment type. This foreign investment exposure increased to 13 percent in 2000 and 2001 before declining marginally to 12 percent in Other investments, such as real property and miscellaneous instruments, also increased nominally between 1993 and 2002, from 7 percent to 8 percent. State and Local Government Employee Retirement System Finances Composition of Cash and Investment Holdings by Percent 1993 to 2002 Category Cash and Short-term Investments 7.19% 5.3% 5.59% 5.44% 5.09% Government Securities» Federal Government» State and Local Governments Non-governmental Securities» Corporate Bonds» Corporate Stocks» Mortgages» Funds Held in Trust» Foreign Investments» Other Non-governmental Other Investments» Real Property» Miscellaneous Investments 22.1% 22.04% 0.06% 62.07% 18.95% 32.73% 2.11% 3.12% % 7.48% 2.57% 4.91% 16.2% 16.1% 0.1% 72.8% 15.0% 37.2% 1.3% % 8.0% 5.7% 1.9% 3.8% 12.52% 12.33% 0.19% 73.88% 15.8% 36.32% 0.98% % 7.58% 8.01% 2.18% 5.83% 11.44% 11.38% 0.05% 75.11% 17.67% 35.36% 1.06% % 8.24% 8.02% 2.02% 5.99% 10.45% 10.42% 0.04% 76.45% 16.32% 37.76% 0.96% 3.26% 11.8% 6.35% 8.01% 1.99% 6.02% table 14 Total 100% 100% 100% 100% 100% Note: Totals may not add up due to rounding. Stresses in the System, page 35

4 A graphical presentation of these marked differences in the cash and investment holdings of state and local government retirement systems between 1993 and 2002 further reinforces the enhanced importance of non-governmental securities in recent years. Figure 9 demonstrates the increased importance played by corporate stocks and foreign holdings at the expense of government securities such as federal government instruments. In particular, Figure 9 shows the jump in foreign investment holdings from zero to 12 percent over the course of the decade. As indicated earlier, some of the other investment types that played a role of lesser significance included cash and short-term investments and mortgages. declined even further by 2002 (0.04 percent). Also, cash and short-term instruments declined from about 7 percent of total cash and investment holdings in 1993, to about 5 percent in Selected Investment Types: State and Local Government Retirement Systems 1993 and 2002 Note: Totals do not add up to 100 percent due to rounding. figure 9 In terms of the investment categories that were of diminishing relevance during this decade, the most significant change involved governmental securities, such as federal (U.S. Treasury and other federal agency notes), state and local government instruments. The percentage allocation of governmental securities in state and local government cash and investment holdings slumped from 22 percent of the total in 1993, to 10 percent in 2002, a precipitous decline indeed. Interestingly, while these retirement systems had minimal exposure in state and local government instruments in 1993 (0.06 percent of total cash and investment holdings), the amount These trends in combination reflect the more aggressive investment approach adopted by state pension fund managers during the latter years of the decade. Undoubtedly, this decade-long trend a greater exposure in the equity markets as opposed to the lower returns and lower risk levels found in governmental securities reflected a major philosophical shift in the investment strategies of investment/portfolio managers controlling these public retirement funds from prior periods. In addition, it reflected their desire to take full advantage of the booming equity markets that held sway in the mid-to-late 1990s. Undoubtedly, this allocation decision certainly reaped dividends during this time period and state and local retirement funds soared to unprecedented heights in terms of their cash and investment holdings. Unfortunately, the collapse of the equity markets and severely depressed interest rates in the three-year period 2000 through 2002 brought its own unique blend of financial woes that pounded public retirement funds. While the recovery of the equity markets in 2003 helped assuage some of the steep losses experienced in America s Public Retirement Systems, page 36

5 their aforementioned three-year period, the nation s public retirement funds certainly did not improve to the towering heights reached at the end of the 1990s. Along with a review of the total cash and investment holdings, another level of analysis involves total receipts and payments by the state and local government retirement systems. In 2002, total receipts for these retirement plans amounted to -$6.1 billion, brought on primarily as a result of negative earnings on investments. (Net earnings are the sum of earnings on investments plus gains on investments minus any losses on investments). In contrast, total receipts in 1993 and 1998 were an impressive $125.9 billion and $263.4 billion, respectively. Similarly, total payments in 2002 were significantly higher than in any other year in the previous decade. Specifically, they totaled $122 billion, while in 1993 and 1998 they amounted to $52.6 billion and $84.3 billion, respectively. Table 15 documents the trends associated with total receipts and payments between 1993 and As demonstrated in Table 15, total receipts plunged sharply during the review period, while total payments more than doubled. Total receipts grew by 109 percent between 1993 and 1998 while tumbling by 102 percent between 1998 and In terms of the specifics, employee contributions grew by 35 percent between 1993 and 1998, and by 26 percent between 1998 and In contrast, government contributions, after expanding by 21 percent between 1993 and 1998, dropped by 8 percent between 1998 and Specifically, state government contributions fell by 9 percent and local government contributions by 8 percent during this latter period. In fact, as alluded to earlier, this development is corroborated by the fact that as state governments faced rising budget problems, they either cut contributions or made no contributions to their state retirement systems. Finally, earnings on investments dealt the most serious blow to total receipts between 1998 and 2002, dipping by as much as 136 percent. As noted earlier, the serious erosion of the equity markets during the latter three years of State and Local Government Employee Retirement System Finances Breakdown of Total Receipts and Payments by Amount 1993 to 2002 (Thousands of Dollars) Category Total Receipts» Employee Contributions» Government Contributions» State» Local» Earnings on Investment Total Payments» Benefits» Withdrawals» Other payments $125,942,566 $16,137,931 $34,991,684 $15,186,886 $19,804,798 $74,812,951 $52,598,701 $48,327,862 $2,477,142 $1,793,697 $263,396,183 $21,846,144 $42,366,937 $18,903,094 $23,463,840 $199,183,102 $84,339,681 $76,489,443 $3,974,963 -$6,120,528 $27,544,022 $38,792,031 $17,182,861 $21,609,170 -$72,456,581 $121,980,231 $110,128,411 $4,079,492 table 15 $3,875,275 $7,772,328 Note: Government contributions comprise state and local government contributions. Stresses in the System, page 37

6 this period was the major contributory factor here. Of course, between 1993 and 1998 the scenario was much healthier with the earnings on investment bounding ahead by 166 percent. In terms of total payments, between the first two periods there was an increase of 60 percent ($52.6 billion to $84.3 billion) and an increase of 45 percent ($84.3 billion to $122 billion) between the next two periods. A bulk of the payments involved benefits, which increased by 58 percent between 1993 and 1998, and then by 44 percent between 1998 and Figure 10 provides a graphical representation of some of these trends, particularly as they related to total receipts and total payments for 1993, 1998 and The comparisons between these three periods are instructive; in the first instance, they indicate an economy that was expanding while in the second instance, they reflect an economy that was facing serious problems. Another area of great interest in an analysis of state and local government retirement systems involves participant both active and inactive numbers and membership trends. Table 16 contains this information at the national level for 2002, the most recent year available. As indicated in Table 16, a majority of the participants in public retirement plans in 2002 belonged to state government plans (15.4 million participants) as opposed to local government plans (1.9 million). Specifically, local government plan participants amounted to about 11 percent of total (active and inactive) membership. As expected, there were more local government plans available Receipts and Payments 1993 to 1998 and 2002 percent figure 10 Source: U.S. Department of Commerce, Bureau of Economic Analysis (2,451) in contrast to the state government plans (219). Another statistic of interest involves the proportion of beneficiaries receiving payments to total membership. For the review period, this percentage stood at 36 percent. Within the local government plans, almost two-thirds of the membership belonged to plans established by municipalities. County plans ranked next, with school district plans ranking third in this classification system. An accurate profile of membership trends in the public retirement system may be gleaned by comparing 2002 data with data from a decade before (1993); Figure 11 carries out this task. Number and Membership in State and Local Government Employee Retirement Plans 2002 Type of Government Local Plans» County» Municipality» Township» Special District» School District Number of Systems 164 1, Membership Active Inactive Total 478,896 1,073,788 34,928 52,867 76,131 53,339 62,898 3,280 7,393 8, ,235 1,136,686 38,208 60,260 84,434 Beneficiaries Receiving Periodic Payments 225, ,304 20,330 26,572 40,136 Total Local Plans 2,451 1,716, ,213 1,851,823 1,018,007 table 16 State Plans ,407,222 2,987,492 15,394,714 5,180,415 Total U.S. (State & Local) 2,670 14,123,832 3,122,705 17,246,537 6,198,422 Source: U.S. Department of Commerce, Bureau of Economic Analysis America s Public Retirement Systems, page 38

7 Changes in Membership Profile: State and Local Government Retirement Plans 1993 and 2002 millions of participants As the figure indicates, there has been an explosion in the number of participants in state and local government retirement plans between 1993 and Specifically, total participants (active and inactive) expanded from 13.3 million participants to 17.2 million participants, almost a 30 percent hike in a nine-year period. Another interesting development in comparing data for the two years emerges when one assesses the relative importance of active, inactive and beneficiaries to total participants. In 1993, active members comprised 89 percent of total participants (11.8 million of 13.3 million); in 2002, the number had dropped to 82 percent (14.1 million of 17.2 million). Similarly, in 1993, inactive members added up to 11 percent of total participants; in 2002, this number had increased to 18 percent. Finally, the number of retirees receiving periodic benefit payments expanded slightly from 34 percent of total participants in 1993, to 36 percent in In sum, the most striking trend here is the fact that while the number of active participants has declined as a proportion of total participants, the number of inactive participants as a proportion of total participants has increased. In reviewing the membership patterns of public sector retirement plans across the country for the most recent year, 2002, several interesting features quickly surface. Table 17 depicts this information. figure 11 Source: U.S. Department of Commerce, Bureau of Economic Analysis Note: The category Beneficiaries refers to retirees currently receiving periodic payments. Stresses in the System, page 39

8 Number and Membership of State and Local Government Employee Retirement Systems 2002 State Number of systems Total Membership Active Members Inactive Members Number % of Total Number % of Total Beneficiaries United States 2,670 17,246,537 14,123,832 82% 3,122,705 18% 6,198,422 State ,394,714 12,407,222 81% 2,987,492 19% 5,180,415 Local 2,451 1,851,823 1,716,610 93% 135,213 7% 1,018,007 Alabama , ,913 88% 31,228 12% 87,321 Alaska 5 65,483 46,421 71% 19,062 29% 26,110 Arizona 6 333, ,637 69% 102,694 31% 73,716 Arkansas , ,373 87% 16,547 13% 40,438 California 60 2,040,239 1,709,652 84% 330,587 16% 835,775 Colorado , ,329 68% 99,159 32% 76,450 Connecticut , ,885 92% 11,976 8% 73,780 Delaware 6 41,047 39,977 97% 1,070 3% 19,992 D.C. 6 11,604 11, % 15 0% 1,060 Florida , ,824 92% 59,046 8% 226,134 Georgia , ,713 66% 183,983 34% 110,102 Hawaii 1 66,043 62,208 94% 3,835 6% 30,330 Idaho 4 69,770 62,431 89% 7,339 11% 24,143 Illinois , ,583 71% 258,883 29% 309,305 Indiana , ,460 89% 29,727 11% 95,911 Iowa , ,336 62% 98,639 38% 76,463 Kansas 7 187, ,486 83% 31,391 17% 59,339 Kentucky , ,409 80% 48,476 20% 93,479 Louisiana , ,213 80% 56,344 20% 115,451 Maine 1 55,443 52,480 95% 2,963 5% 30,122 Maryland , ,261 83% 46,550 17% 116,908 Massachusetts , ,579 94% 20,801 6% 159,294 Michigan , ,218 94% 32,019 6% 248,068 Minnesota , ,084 63% 177,827 37% 129,045 Mississippi 4 263, ,892 58% 110,833 42% 57,563 Missouri , ,006 85% 46,427 15% 112,669 Montana 9 78,350 53,131 68% 25,219 32% 26,052 Nebraska 14 84,856 66,348 78% 18,508 22% 19,100 Nevada 2 92,263 85,285 92% 6,978 8% 25,591 New Hampshire 2 54,149 46,365 86% 7,784 14% 16,740 New Jersey , ,620 88% 61,984 12% 199,670 New Mexico 5 140, ,300 84% 22,689 16% 42,110 New York 15 1,286,634 1,180,765 92% 105,869 8% 678,122 North Carolina , ,813 87% 69,886 13% 155,696 North Dakota 12 33,499 28,598 85% 4,901 15% 10,982 Ohio 6 954, ,728 74% 251,454 26% 326,156 Oklahoma , ,526 94% 9,587 6% 72,084 Oregon 4 217, ,687 78% 48,767 22% 92,735 Pennsylvania , ,826 88% 63,717 12% 300,992 Rhode Island 13 43,597 39,581 91% 4,016 9% 22,835 South Carolina 6 365, ,910 62% 138,129 38% 86,866 South Dakota 4 47,502 36,016 76% 11,486 24% 16,338 Tennessee , ,199 92% 19,938 8% 99,615 Texas 49 1,364,092 1,231,517 90% 132,575 10% 327,631 Utah 6 115,366 93,743 81% 21,623 19% 30,776 Vermont 5 31,531 23,841 76% 7,690 24% 9,134 Virginia , ,239 79% 99,933 21% 130,506 Washington , ,793 89% 28,406 11% 114,484 West Virginia 41 80,416 65,955 82% 14,461 18% 29,885 table 17 Wisconsin 3 386, ,361 70% 114,048 30% 119,764 Wyoming 8 41,362 35,726 86% 5,636 14% 15,590 Note: The category Beneficiaries refers to retirees currently receiving periodic payments. America s Public Retirement Systems, page 40

9 Table 17 demonstrates that in 2002, retirement system participants in state plans across the country amounted to about 89 percent of the total number of participants in public employee retirement plans. Several additional facts may be culled from Table 17. For instance, California (2 million) remains the state with the largest number of participants, with Texas (1.4 million), New York (1.3 million) and Ohio (954,182) following in descending order. At the other end of the spectrum, Vermont (31,531) has the fewest members; 7 North Dakota (33,499), Delaware (41,047) and Wyoming (41,362) also ranked low with respect to the number of retirement system participants. However, the marked differences in state population levels should be considered in assessing state retirement participants. Inevitably, states with a large population could be expected to have a large number of retirement system participants. Similarly, states that are a haven for retirees, such as Florida in the South and Arizona in the West, also could have a greater number of retirement system beneficiaries. California with just over 35 million people, the highest among all the states, had a little over 2 million retirement system participants; Wyoming, on the other hand, with a population of 498,830 people, the lowest in the country, and approximately 41,362 retirement system participants. (Importantly, Wyoming was not the state with the lowest number of participants). Hence, the state s population numbers remain an important variable in determining participant numbers. 8 In terms of the distribution of plans, a majority of states (25) had between 10 and 98 state and local retirement systems; 20 states and the District of Columbia had between one and nine state and local retirement systems; and five states had between 142 and 931 state and local government retirement systems. Pennsylvania (931) was the state with the most number of retirement system plans followed by Illinois (371) and Florida (158). At the other end of the spectrum, Hawaii and Maine (both with 1 each) were the states with the least number of plans followed by Nevada and New Hampshire (both with 2 each); and Wisconsin (3). employee to total participants ratio remains lower in other states such as Mississippi (the lowest in the country with only 58 percent of total participants belonging to the ranks of active employees); South Carolina and Iowa (both at 62 percent); and Minnesota (63 percent). Finally, another useful statistic that may be extracted from Table 17 deals with the ratio of beneficiaries receiving periodic payments to active members in these state and local government retirement systems. Based on this analysis, while the percentage for the United States as a whole was 44 percent (state government plans stood at 42 percent and local government plans came in at 59 percent), Texas (27 percent) was the state with the lowest percentage of beneficiaries to active members. 9 Nebraska (29 percent), Nevada (30 percent) and Georgia (31 percent) were the next three states with the lowest percentage of beneficiaries to active members. At the other end of the spectrum, states with a high percentage of beneficiaries to active members, Pennsylvania was the highest at 64 percent, followed by Rhode Island (58 percent), New York and Maine (both at 57 percent). Table 18 documents the cash and investment holdings of state and local government retirement plans broken down by state in 1993 and Table 18 also includes information for the United States as a whole and the District of Columbia. (Appendix B of the report provides this information splitting the contributions of state and local government plans, where applicable.) It should be noted that the cash and deposits category includes cash, demand, time and savings deposits, and nonfederal short-term investments; government securities includes United States Treasury, other federal agency, and state and local government financial instruments; non-government securities includes corporate bonds, corporate stocks, mortgages, funds held in trust and other instruments, foreign and international securities, real property; and miscellaneous investments. Alongside the total for each state and the District of Columbia, Table 18 also provides a breakdown between the plans maintained by state government and local government entities. Another factor that deserves attention is the proportion of active members to total members in the state and local government retirement systems. In this connection, Delaware ranks first in the country having 97 percent of its total membership as active members. In addition, Maine, with 95 percent, and Hawaii, Oklahoma, Massachusetts and Michigan, all with 94 percent, rank high in this category among the states. In contrast, the active Stresses in the System, page 41

10 Cash and Investment Holdings of State and Local Government Employee Retirement Systems 1993 and 2002 (Thousands of Dollars) Cash and deposits Securities Other Investments Total United States $66,192,708 $109,762,677 $774,314,992 $1,875,395,501 $68,813,123 $172,832,778 $920,571,814 $2,157,990,956 Alabama $1,664,539 $1,370,209 $10,092,708 $19,477,032 $66,381 $1,335,253 $11,823,629 $22,182,494 Alaska $199,340 $354,961 $5,703,277 $7,091,368 $193,289 $1,501,385 $6,095,907 $8,947,714 Arizona $1,168,972 $973,285 $11,743,094 $24,464,405 $62,502 $248,824 $12,974,566 $25,686,514 Arkansas $606,918 $692,093 $4,790,227 $11,083,327 $2,302 $1,273,523 $5,412,022 $13,048,943 California $10,251,915 $12,039,122 $135,413,948 $342,571,350 $11,406,672 $32,922,681 $168,062,846 $387,533,153 Colorado $758,183 $916,858 $12,687,175 $27,698,427 $1,039,975 $6,070,456 $14,515,067 $34,685,741 Connecticut $800,008 $576,927 $9,879,452 $19,390,018 $392,042 $2,686,252 $11,089,818 $22,653,197 D.C. $0 $394,470 $0 $1,726,493 $2,136,629 $3,970 $2,136,629 $2,124,933 Delaware $173,435 $109,013 $1,759,312 $4,785,456 $290,520 $482,298 $2,236,158 $5,376,767 Florida $2,733,507 $5,072,053 $30,290,278 $90,800,518 $1,411,330 $6,850,209 $34,442,622 $102,722,780 Georgia $790,951 $1,439,891 $18,282,826 $53,623,832 $27,850 $28,297 $19,101,627 $55,092,020 Hawaii $458,877 $309,892 $4,054,650 $7,207,364 $522,629 $619,734 $5,036,156 $8,136,990 Idaho $133,657 $187,186 $1,878,661 $6,099,679 $178,241 $33,450 $2,190,558 $6,320,315 Illinois $5,080,522 $3,766,504 $33,517,828 $84,080,738 $4,279,810 $7,407,808 $42,889,924 $95,255,050 Indiana $297,329 $2,782,365 $7,611,912 $14,808,082 $403 $6,738 $7,909,641 $17,597,185 Iowa $137,040 $118,145 $5,380,027 $15,847,490 $967,080 $1,020,606 $6,484,147 $16,986,241 Kansas $86,530 $519,058 $3,711,372 $8,376,193 $448,126 $1,187,191 $4,246,029 $10,082,442 Kentucky $1,165,182 $1,609,583 $7,942,299 $21,269,619 $392,213 $359,830 $9,499,690 $23,239,032 Louisiana $1,210,310 $1,018,005 $9,928,854 $21,406,011 $124,946 $2,356,699 $11,265,735 $24,780,715 Maine $180,077 $136,041 $2,069,227 $6,518,800 $56,722 $0 $2,306,026 $6,654,841 Maryland $366,982 $1,554,923 $2,238,913 $33,109,503 $14,968,504 $1,992,567 $17,749,193 $36,656,993 Massachusetts $669,437 $1,441,138 $9,013,805 $36,321,026 $4,168,700 $2,685,053 $13,853,875 $40,447,217 Michigan $5,137,517 $2,243,077 $24,156,839 $48,179,965 $2,304,054 $10,256,133 $31,616,109 $60,679,175 Minnesota $560,571 $427,647 $14,876,873 $32,587,116 $3,263,532 $10,779,897 $18,702,864 $43,794,660 Mississippi $19,446 $1,793,510 $96,898 $14,550,673 $59 $0 $117,497 $16,344,183 Missouri $890,033 $2,047,949 $14,050,509 $29,229,715 $211,943 $7,217,049 $15,157,591 $38,494,713 Montana $52,956 $131,996 $2,010,188 $3,426,379 $118,386 $1,522,589 $2,181,531 $5,080,964 Nebraska $152,750 $46,129 $2,362,315 $7,014,615 $1,191,278 $93,754 $3,593,718 $7,154,498 Nevada $276,253 $359,746 $4,243,691 $12,196,672 $389,236 $1,177,947 $4,909,179 $13,734,365 New Hampshire $456 $229,021 $6,666 $3,016,105 $0 $689,859 $7,122 $3,934,985 New Jersey $22,151 $8,004 $26,473,979 $54,790,928 $785,990 $904,566 $27,282,124 $55,703,498 New Mexico $391,510 $1,199,746 $5,208,931 $14,403,043 $0 $15,500 $5,600,442 $15,618,289 New York $5,125,285 $7,081,133 $112,468,861 $243,434,869 $4,910,191 $16,132,328 $122,504,335 $266,648,330 North Carolina $6,087,501 $30,782,061 $14,962,927 $23,928,303 $266,555 $1,673,182 $21,316,986 $56,383,546 North Dakota $45,572 $48,120 $1,171,977 $2,171,537 $14,679 $164,227 $1,232,231 $2,383,884 Ohio $5,268,967 $1,929,392 $49,846,025 $106,017,986 $2,569,914 $13,345,987 $57,686,802 $121,293,365 Oregon $900,884 $2,295,890 $6,092,055 $28,963,723 $1,660,377 $5,258,178 $8,653,315 $36,517,791 Pennsylvania $1,977,225 $3,543,279 $35,374,256 $69,407,948 $2,336,082 $10,159,644 $39,689,227 $83,110,871 Rhode Island $18,497 $198,346 $486,744 $4,680,325 $10,725 $1,695,022 $515,963 $6,573,693 South Carolina $2,981,866 $2,932,440 $11,133,997 $17,912,932 $11,038 $0 $14,126,901 $20,845,372 South Dakota $291,452 $306,152 $1,573,804 $4,079,557 $32,656 $475,660 $1,901,500 $4,861,369 Tennessee $258,921 $2,179,875 $11,163,182 $25,712,835 $32,461 $908,998 $11,454,862 $28,801,708 Texas $2,514,205 $5,553,120 $42,567,460 $112,760,155 $872,505 $2,020,961 $45,964,742 $120,334,236 Utah $206,639 $603,072 $3,842,892 $10,534,626 $544,459 $1,754,069 $4,593,987 $12,891,767 Virginia $1,927,699 $1,499,850 $14,498,634 $36,921,223 $1,052,811 $3,560,589 $17,509,170 $41,981,662 Washington $1,001,063 $3,287,805 $13,554,331 $31,680,065 $2,639,038 $8,248,631 $17,195,454 $43,216,501 West Virginia $11,334 $273,683 $84,303 $4,084,998 $8,892 $0 $103,500 $4,358,681 Wisconsin $256,115 $431,112 $26,066,062 $55,157,782 $285,731 $3,252,878 $26,635,774 $58,841,772 table 18 Wyoming $11,320 $250,186 $1,939,293 $4,891,993 $0 $0 $1,950,611 $5,142,179 Note: Totals may not add up due to rounding. America s Public Retirement Systems, page 42

11 While the cumulative amounts in the public retirement systems in 1993 and 2002 remain useful, the more relevant analysis involves reviewing the compositional changes in the investment choices made by the plan administrators. For instance, was there a different role played by cash and deposits versus securities in the two review periods? Similarly, which investment instrument played a more dominant role in the calculations of plan administrators between the two review periods? Also, what were the growth rates in the different retirement systems between 1993 and 2002? In terms of the cumulative amounts, not unexpectedly, the state and local government retirement plans in the larger states had significant cash and investment holdings with California ($387.5 billion) leading the country followed by New York ($266.6 billion), Ohio ($121.3 billion), Texas ($120.3 billion) and Florida ($102.7 billion). At the other end, the five states with the lowest cash and investment holdings balances in 2002 were Montana ($5 billion), South Dakota ($4.9 billion), West Virginia ($4.4 billion), New Hampshire ($3.9 billion) and North Dakota ($2.4 billion). The District of Columbia maintained a balance of $2.1 billion in this year. In terms of growth rates in aggregate balances, for the United States as a whole, there was a 134 percent increase in the cash and investment holdings of these state and local retirement systems, from $921 billion in 1993, to $2.2 trillion in (See Table 19, which describes securities as a percentage of total holdings, for the percentage changes). Similarly, cash and investment holdings surged ahead in every state with two states experiencing five-digit growth rates (New Hampshire and Mississippi), two states experiencing four-digit growth rates (Rhode Island and West Virginia) and six states experiencing double-digit growth rates (Alabama, Alaska, Arizona, Hawaii, Michigan, Nebraska and North Dakota). A majority of the states, 38 to be precise, experienced triple-digit growth rates between the review periods. four-fifths of the states were more the norm, and even in this category, 37 of the 38 states had growth rates between 100 percent and 199 percent. In terms of changes in the composition of investment instruments, Table 18 indicates that there were three major types: cash and deposits; securities; and other investments. Between the two review periods, for the United States as a whole, cash and deposits as a percentage of total holdings declined from 7 percent in 1993 to 5 percent in The proportion of cash and deposits in total cash and investment holdings declined in 35 states between 1993 and 2002; they increased in 11 states; and remained unchanged in four states. Among the states with the highest proportion of cash and deposits in 1993, North Carolina (29 percent), South Carolina (21 percent) and Mississippi (17 percent) ranked in the top three; in 2002, this type of investment instrument in these three states had shifted to 55 percent of the total in North Carolina, 14 percent of the total in South Carolina and 11 percent of the total in Mississippi. At the other end of the spectrum, for the three states with the lowest proportion of cash and deposits in 1993, New Jersey (close to zero percent),wyoming and Wisconsin (both at 1 percent), the proportion remained unchanged by 2002 in both New Jersey and Wisconsin and increased to 5 percent in Wyoming. Another layer of analysis involves reviewing the percentage of securities in total cash and investment holdings in these retirement systems between 1993 and Securities comprised government and non-government securities. Specifically, government securities included United States Treasury, other federal agency and state and local government financial instruments. Non-governmental securities included corporate bonds, corporate stocks, mortgages, funds held in trust, foreign and international securities and other instruments. Table 19 captures the percentage breakdown of securities as a percentage of total holdings in 1993 and It should be noted that the states that experienced inordinately large increases in their cash and investment holdings had relatively low levels of holdings in New Hampshire, for instance, had only $7.1 million in cash and investment holdings in 1993; in 2002, this amount had ballooned to $3.9 billion, accounting for the staggering 55,151 percent increase. Similarly, Mississippi had only $117.5 million in 1993; an amount that leapt to $16.3 billion in This amounted to an overwhelming 13,810 percent increase. As previously mentioned, the triple-digit growth rates displayed in almost Stresses in the System, page 43

12 United States 774,314,992 84% 1,875,395,501 87% 920,571,814 2,157,990, % Alabama 10,092,708 85% 19,477,032 88% 11,823,629 22,182,494 88% Alaska 5,703,277 94% 7,091,368 79% 6,095,907 8,947,714 47% Arizona 11,743,094 91% 24,464,405 95% 12,974,566 25,686,514 98% Arkansas 4,790,227 89% 11,083,327 85% 5,412,022 13,048, % California 135,413,948 81% 342,571,350 88% 168,062, ,533, % Colorado 12,687,175 87% 27,698,427 80% 14,515,067 34,685, % Connecticut 9,879,452 89% 19,390,018 86% 11,089,818 22,653, % Delaware 1,759,312 79% 4,785,456 89% 2,236,158 5,376, % D.C. 0 0% 1,726,493 81% 2,136,629 2,124,933-1% Florida 30,290,278 88% % 34,442, ,722, % Georgia 18,282,826 96% 53,623,832 97% 19,101,627 55,092, % Hawaii 4,054,650 81% 7,207,364 89% 5,036,156 8,136,990 62% Idaho 1,878,661 86% % 2,190,558 6,320, % Illinois 33,517,828 78% 84,080,738 88% 42,889,924 95,255, % Indiana 7,611,912 96% 14,808,082 84% 7,909,641 17,597, % Iowa 5,380,027 83% 15,847,490 93% 6,484,147 16,986, % Kansas 3,711,372 87% % 4,246,029 10,082, % Kentucky 7,942,299 84% 21,269,619 92% 9,499,690 23,239, % Louisiana 9,928,854 88% 21,406,011 86% 11,265,735 24,780, % Maine 2,069,227 90% 6,518,800 98% 2,306,026 6,654, % Maryland 2,238,913 13% % 17,749,193 36,656, % Massachusetts 9,013,805 65% 36,321,026 90% 13,853,875 40,447, % Michigan 24,156,839 76% 48,179,965 79% 31,616,109 60,679,175 92% Minnesota 14,876,873 80% 32,587,116 74% 18,702,864 43,794, % Mississippi 96,898 82% 14,550,673 89% 117,497 16,344,183 13,810% Missouri 14,050,509 93% % 15,157,591 38,494, % Montana 2,010,188 92% 3,426,379 67% 2,181,531 5,080, % Nebraska 2,362,315 66% % 3,593,718 7,154,498 99% Nevada 4,243,691 86% 12,196,672 89% 4,909,179 13,734, % New Hampshire 6,666 94% 3,016,105 77% 7,122 3,934,985 55,151% New Jersey 26,473,979 97% 54,790,928 98% 27,282,124 55,703, % New Mexico 5,208,931 93% 14,403,043 92% 5,600,442 15,618, % New York 112,468,861 92% % 122,504, ,648, % North Carolina 14,962,927 70% 23,928,303 42% 21,316,986 56,383, % North Dakota 1,171,977 95% 2,171,537 91% 1,232,231 2,383,884 93% Ohio 49,846,025 86% 106,017,986 87% 57,686, ,293, % Oklahoma 5,219,814 85% 13,962,917 94% 6,137,798 14,836, % Oregon 6,092,055 70% 28,963,723 79% 8,653,315 36,517, % Pennsylvania 35,374,256 89% % 39,689,227 83,110, % Rhode Island 486,744 94% 4,680,325 71% 515,963 6,573,693 1,174% South Carolina 11,133,997 79% 17,912,932 86% 14,126,901 20,845,372 48% South Dakota 1,573,804 83% 4,079,557 84% 1,901,500 4,861, % Tennessee 11,163,182 97% 25,712,835 89% 11,454,862 28,801, % Texas 42,567,460 93% 112,760,155 94% 45,964, ,334, % Utah 3,842,892 84% 10,534,626 82% 4,593,987 12,891, % Vermont 791,641 87% % 908,614 2,216, % Virginia 14,498,634 83% 36,921,223 88% 17,509,170 41,981, % Washington 13,554,331 79% 31,680,065 73% 17,195,454 43,216, % West Virginia 84,303 81% 4,084,998 94% 103,500 4,358,681 4,111% table 19 Wisconsin 26,066,062 98% 55,157,782 94% 26,635,774 58,841, % America s Public Retirement Systems, page 44 Securities as a Percent of Total Cash & Investment Holdings 1993 and 2002 (Thousands of Dollars) Securities Total Percent Amount Percent Amount Percent Amount Amount Increase Wyoming 1,939,293 99% 4,891,993 95% 1,950,611 5,142, % Note: Totals may not add up due to rounding.

13 As indicated in Table 19, 27 states increased the proportion of securities in their overall holdings, led by Maryland, from 13 percent in 1993 to 90 percent in 2002; Massachusetts, from 65 percent to 90 percent; and Nebraska, from 66 percent to 98 percent. There were 22 states that lowered the proportion of securities in their overall portfolio, with some of the more dramatic reductions occurring in North Carolina, 70 percent in 1993 to 42 percent in 2002; Montana, 92 percent to 67 percent; Missouri, 93 percent to 76 percent; Alaska, 94 percent to 79 percent; New Hampshire, 94 percent to 77 percent; and Rhode Island, 94 percent to 71 percent. Finally, one state, Florida, maintained the proportion of securities in its overall portfolio at the same rate (88 percent) in both years. A possible explanation for the high number of states that decreased the proportion of securities in their cash and investment holdings between 1993 and 2002 might involve the collapse of the equity market by the end of As previously described, March 2000 signaled the end of the roaring stock market of the 1990s when the equity markets reached a nadir. Hence, administrators of these retirement plans might have altered the investment mix of their plans to minimize future investment losses. Table 20 provides a breakdown of government and non-government securities, as a percent of total cash and investment holdings, in the two years under review. As previously indicated, government securities include United States Treasury, other federal agency, and state and local government financial instruments; non-government securities include corporate bonds, corporate stocks, mortgages, funds held in trust and other instruments, foreign and international securities, real property; and miscellaneous investments. As indicated in Table 20, for the United States in general, the percentage of government securities as a proportion of total cash and investment in public sector retirement systems declined from 22 percent in 1993 to 10 percent In contrast, the proportion of non-government securities increased from 62 percent in 1993 to 76 percent in Probing further, Table 20 documents that 45 of the 50 states decreased their exposure to government securities between the two years. Four of the remaining five states (New Jersey, Tennessee, Maryland and Hawaii) actually increased their government securities exposure while one state (Alabama) did not make a change. Of the aforementioned 45 states, New Hampshire (from 56 percent to 4 percent), Indiana (from 61 percent to 10 percent) and South Carolina (from 61 percent to 18 percent) ranked among the top states in terms of moving away from government securities. Percentage Breakdown of Government Securities vs. Non-government Securities 1993 and 2002 Government Securities Non-government Securities United States 22% 10% 62% 76% Alabama 4% 4% 81% 84% Alaska 28% 7% 66% 73% Arizona 33% 18% 58% 77% Arkansas 25% 8% 63% 77% California 20% 9% 60% 79% Colorado 13% 4% 75% 76% Connecticut 10% 2% 79% 83% Delaware 13% 2% 66% 87% DC 0 1% 0 80% Florida 13% 7% 75% 82% Georgia 35% 24% 61% 73% Hawaii 8% 18% 73% 71% Idaho 27% 11% 59% 86% Illinois 17% 11% 62% 78% Indiana 61% 10% 35% 74% Iowa 3% 1% 80% 92% Kansas 16% 13% 72% 70% Kentucky 23% 7% 61% 85% Louisiana 29% 8% 59% 78% Maine 6% 0 84% 98% Maryland 2% 11% 12% 79% Massachusetts 7% 3% 59% 87% Michigan 17% 11% 60% 69% Minnesota 4% 3% 75% 72% Mississippi 40% 14% 43% 75% Missouri 18% 13% 75% 63% Montana 4% 0 88% 67% Nebraska 20% 14% 46% 84% Nevada 29% 21% 58% 68% New Hampshire 56% 4% 38% 73% New Jersey 0% 4% 97% 95% New Mexico 36% 22% 57% 70% New York 21% 16% 71% 76% North Carolina 28% 0 42% 42% North Dakota 14% 1% 81% 90% Ohio 46% 7% 40% 80% Oklahoma 28% 15% 57% 79% Oregon 18% 10% 53% 69% Pennsylvania 27% 4% 62% 79% Rhode Island 46% 11% 49% 60% South Carolina 61% 18% 18% 68% South Dakota 21% 20% 62% 64% Tennessee 27% 31% 70% 59% Texas 36% 17% 57% 77% Utah 23% 12% 61% 70% Vermont 9% 1% 78% 87% Virginia 12% 7% 71% 81% Washington 27% 3% 52% 71% West Virginia 31% 15% 51% 79% table 20 Wisconsin 16% 14% 81% 79% Wyoming 19% 18% 81% 77% Stresses in the System, page 45

14 On the other hand, 42 states (and the District of Columbia) enlarged the proportion of nongovernment securities in their cash and investment holdings between the two periods. Of these 42 states, among the top states were Maryland (from 12 percent to 79 percent), South Carolina (from 18 percent to 68 percent) and Ohio (from 40 percent to 80 percent). The District of Columbia increased its non-government security exposure from zero to 80 percent. Interestingly, seven states diminished their non-government securities exposure during these two review periods with Montana (from 88 percent to 67 percent), Missouri (from 75 percent to 63 percent) and Tennessee (from 70 percent to 59 percent) ranking high in this category. One state (North Carolina) did not change its non-government securities proportion between the two years. It should be noted that given that the nation s equity markets began their downward trajectory path in March 2000, it is possible that these seven states were responding to this trend by lowering their exposure to this type of investment instrument. Revenues of State and Local Government Employee Retirement Systems A discussion of state and local government retirement systems has to include reference to the revenues and expenditures of these plans. In terms of revenues, these retirement systems operate on three sources: contributions from employees, contributions from governments (employers), and earnings on investments. 10 Employee contributions to state government systems include funds from state employees and local government employees, if applicable. (If the local government collects and transmits an amount for its employees to a state system, the local government is considered an agent of the state government, and these funds are treated as direct receipts of the state retirement system.) Government contributions include amounts, as applicable, from the administering government for its own or other governments employees and from other governments. State-administered systems totals might include state contributions for state employees or local employees, and local government contributions for local employees. The local systems have the potential to include amounts from the administering government, other local governments, and the state government. The investment earnings category for each retirement system reflects the gain and loss on investments during the year. The total of net earnings is a calculated statistic and thus could be positive or negative, depending on the detailed measures (dividends, gain on sale of investments, losses on sales of investments and so forth). The revenues for state and local government retirement systems in 2002 are included in Table 21. (Appendix C provides this information splitting revenues between state government and local government entities, where applicable.) America s Public Retirement Systems, page 46

15 Revenues for State and Local Government Retirement Systems in 2002 (Thousands of Dollars) State and Level of Government Total Receipts Employee Contributions Government Contributions From State From Local Total Government Government Earnings on Investments United States -6,120,528 27,544,022 38,792,031 17,182,861 21,609,170-72,456,581 Alabama -1,011, , , ,580 98,206-1,866,066 Arizona 876, , ,308 51, , ,367 Arkansas -328,612 82, , , , ,283 California -4,771,180 5,367,697 4,938,283 1,724,542 3,213,741-15,077,160 Colorado -2,189, , , , ,295-3,265,614 Connecticut 1,650, , , ,956 96, ,024 Delaware 204,212 41, ,645 90,554 11,091 61,529 Georgia -857, ,794 1,087, , ,704-2,449,940 Hawaii -260,142 55, ,459 54, , ,052 Idaho -135, , ,737 71, , ,761 Illinois 2,744,231 2,022,313 2,659,475 1,553,960 1,105,515-1,937,557 Indiana 627, , , , , ,838 Iowa -210, , ,104 75, , ,500 Kansas 425, , , ,911 67,698-11,786 Kentucky 262, , , ,838 28, ,300 Louisiana 948, , , , , ,355 Maine 34, , , , ,700 Maryland 507, , , , , ,782 Massachusetts 714,382 1,260,284 1,454, , ,058-2,000,169 Michigan 2,070, ,481 1,036, , , ,066 Minnesota 34, , , , ,346-1,169,739 Mississippi -170, , , , , ,621 Montana 116, , ,075 46,507 88, ,805 Nebraska -152, , ,110 51, , ,471 Nevada 432,809 53, , , , ,577 New Hampshire -106, ,842 84,147 37,068 47, ,513 New Jersey -3,989, , ,542 20, ,448-5,184,513 New Mexico 336, , , , , ,955 New York 2,823,189 1,519,301 1,941,653 92,819 1,848, ,765 North Carolina 1,273, , , , ,408-14,730 North Dakota ,099 60,683 13,696 46,987-97,573 Ohio 2,591,422 2,156,400 2,889, ,786 1,903,746-2,454,510 Oklahoma 247, , , , , ,696 Oregon -695, ,864 1,090, , ,092-2,211,723 Pennsylvania -3,147,915 1,109, , , ,538-4,671,297 Rhode Island -119, , ,881 71, , ,230 South Carolina 1,283, , , , , ,354 South Dakota -108,220 68,226 62,969 21,787 41, ,415 Tennessee 234, , , , , ,969 Texas -1,952,484 2,372,759 2,642,686 1,534,215 1,108,471-6,967,929 Utah -252,308 31, , ,677 54, ,364 Vermont -24,951 34,810 52,194 49,175 3, ,955 Virginia -1,701, ,191 1,068, , ,427-2,955,196 Washington -2,046, , , , ,286-2,700,799 West Virginia 453, , ,583 91, , ,332 table 21 Wisconsin -2,429,082 23, , , ,289-3,428,572 Wyoming -93,634 56,644 61,529 12,922 48, ,807 Note: Totals may not add up due to rounding. Stresses in the System, page 47