PERS FOR DUMMIES. Presentation to the Oregon Community College Association November 5, Carol Samuels Managing Director

Transcription

1 PERS FOR DUMMIES Presentation to the Oregon Community College Association November 5, 2014 Carol Samuels Managing Director

2 Ground Rules! 2

3 PERS 101 Retirement benefits for most Oregon public employees administered through Oregon Public Employees Retirement System (or PERS ). PERS has 5 board members appointed by governor. PERS maintains three separate retirement programs: Tier 1: employees hired prior to 1996 Tier 2: employees hired between 1996 and 2003 OPSRP: employees hired after August 29,

4 Benefit Package Tier 1 Tier 1 employees are provided a hybrid of defined benefit and defined contribution pension plans. Employers pay a payroll rate set by PERS based upon amount projected to meet pension obligation. Employees are required to contribute 6% of salary (can be picked up by employers). Prior to 2003, employee share was contributed to PERS Fund. 4

5 Tier 1 (cont d) Since 2003, employee share goes to Individual Account Program ( IAP ), which is a 401(k) like account. T1 members are guaranteed assumed earnings rate (historically 8.00%, now 7.50%) on funds. Prior to 2003, actual rate paid was often substantially higher. 5

6 Tier 1 (cont d) Final benefit determined as highest payout under: 1. Full formula: Highest 3 years average salary x 1.67% x years of service. Benefit is designed to provide 50% of final average salary (FAS) for a 30 year employee. 2. Money match : Annuity calculated by matching amount in employee s account. Accounts guaranteed minimum of assumed rate (now 7.50%) annually. 6

7 Tier 2 and OPSRP Tier 2 Access to full formula and money match. Most are expected to retire under full formula. No 7.50% guarantee. OPSRP Full formula at lower percent (1.5%) of FAS, higher age for eligibility. Equates to 45% of pay at 30 years. 6% employee contribution deposited in IAP like 401(k). No money match. 7

8 Actuarial Process Employer amounts due are calculated as a percentage rate applied against covered payroll. PERS Actuary (Milliman) completes valuation annually: Odd year valuations setrates Even year valuations advisory only Valuations are released the year after the end of the valuation period. So, 2014 advisory valuation was released in September

9 Actuarial Process (cont d) Rate changes take effect 18 months after valuation date. Current rates began 7/1/15 based on 2013 valuation, and will run through June 30, Thus, by end of biennium, rates are based on data which is 3 1/2 years old System wide valuation was released in September This valuation is advisory only. Individual 2014 valuations expected to be released this month. 9

10 Actuarial Process (cont d) Payroll rates are divided into three components: Normal cost current, ongoing costs UAL shortfall Health care post retirement 10

11 Rate Collar PERS uses rate collar to smooth rate changes from one period to next. Rates are first calculated on uncollared basis, which is theoretical rate necessary to fully fund system. Collar is applied if uncollared rate would cause rates to increase (or decrease) more than a set amount. Collar math: Funded Level: > 70% 60% 70% < 60% Collar (x previous base rate) 20% ramped 40% Any rate increases not paid because of collar are deferred. 11

12 Actuarial Pools Employers within PERS are grouped in one of four ways: 1. School Pool K 12 is aggregated in single pool for actuarial modeling and payroll rate calculations. 2. State and Local Government Rate Pool (SLGRP) All state agencies, community colleges and most local governments are pooled. 3. Independent Some local governments are valued independently of all other jurisdictions. 4. Judiciary state judiciary. 12

13 COLAs Historically, employee benefits adjusted by CPI, with a maximum of 2% per year. When CPI exceeds 2%, excess banked to offset future sub 2% CPI years. Given past inflation, norm has been 2% annual increase. Constraining COLAs was main focus of recent legislative actions, which were largely overturned by Supreme Court. 13

14 PERS Bonding From 1999 to 2007, over 100 jurisdictions issued bonds to pay down their share of UAL. Total issuance amount exceeded $6b. Concept was to borrow at low interest rates and send to PERS; if returns exceeded borrowing rate, jurisdictions saved money. Bond funds deposited into Side Accounts and held to offset payroll rates with rate credit. Generally positive PERS returns since borrowings means most, but not all, have realized savings. Almost all CCs have issued bonds. 14

15 2003 In 2003, UAL had grown to $17 billion. Causes included: Money Match hot 1990s stock market caused most T1s to shift to money match, counter to assumptions. Antiquated mortality tables. Inadequate reserves. T1s paid more than 8% assumed rate (20% in 1999), causing underfunded reserves. Poor investment returns in 2000 (0.54%), 2001 ( 6.96%) and 2002 ( 8.93%). 15

16 2003 Legislative Changes 2003 Legislature approved changes to reduce UAL: Limited crediting for T1 to assumed rate. Shifted 6% employee contributions to IAP, significantly limiting money match. Modernized mortality tables. Created 5 member board with members allowed 1 seat. Created OPSRP: hybrid with DB and DC elements. Despite litigation, most provisions were upheld. 16

17 By 2007 Legislative changes and strong returns resulted in a system wide funded ratio (including bond funded Side Accounts) of 112%. Payroll rates averaged 12.4% of salary. 17

18 Then came 2008 Investments went into freefall, losing 27% of its value. Source: Oregon Public Employees Retirement System, Market Downturn Impacts on PERS: Frequently Asked Questions; August UAL grew back to $16 billion. Average payroll rates projected to exceed 20%. 18

19 Why Investment Income and COLAs are so Important Investment income accounts for nearly 75% of PERS revenues. Current retirees + inactives account for 70% of liability. Source: PERS: By The Numbers, October

20 2013 Legislation Magnitude of projected rate increases forced Legislature s hand. Two bills (SB 822 and SB 861) were approved: Limited COLAs to 1.25% on first $60,000 of benefit and 0.15% thereafter. Eliminated extra tax remedy payments for non Oregon residents. Legislation reduced liabilities by approximately $5 billion, resulting in a reduction of employer rates by 4.5%. 20

21 Historical Contribution Rates Average systemwide contribution rates, including impact of 2013 Legislation. Source: PERS: By The Numbers, October

22 Supreme Court Decision Everice Moro et al. v. State of Oregon et al. was decided April 30, 2015: Petitioners challenged bills on basis of unconstitutional impairment of contracts. Unanimous opinion: Upheld elimination of out of state income tax offset. Concluded that COLA changes were not constitutional, as COLA benefits are part of contract with employees. 22

23 2014 Valuation Valuation was released on a systemwide basis on September 25, Individual jurisdictional results will be available this month. Valuation is advisory only and provides projection of payroll rates. Actual rates will be set based on results of 2015 valuation, which will be released next summer. 23

24 How bad was it? In a word: BAD UAL (excluding side accounts) grew from $8.5b to $18b. Funded levels declined from 86% to 76%. Collared rates the ones most jurisdictions pay are going up: School Pool: Up an average of 4%, from 20% to 24%. SLGRP (including CCs): Up an average of 3.1%, from 16.3% to 19.4%. 24

25 How bad was it? (cont d) Rate projections do not include IAP, health care or side accounts. Cost increases for are projected to total $800m: $285m for State agencies; $290m for schools; and $285m for all others. And if returns in 2015 are less than 7.50%, payroll rates may rise even higher, particularly if you have asideaccount. 25

26 Sources of 2014 UAL Increase The largest source of UAL increase was the Moro decision, followed by updates to mortality tables and the decrease in the assumed rate. Sources of 2014 UAL Increase UA Increase Expected UAL increase/(decrease) during 2014 $0.2 B 2014 actual investment performance below assumption $0.2 B Moro adjustment to projected benefits $5.1 B Decrease in assumed return to 7.50% $1.7 B Updated to mortality assumption $1.8 B All other assumption changes and actual experience $0.5 B Total $9.5 B Source: Milliman December 31, 2014 Actuarial Valuation Oregon Public Employees Retirement System presentation, dated September 25,

27 Uncollared Rates for School Districts Theoretical average increase necessary to fully fund School Pool is 9.83%. These rates exclude impacts of health care premiums, IAP contributions, the rate collar and side accounts. Employer-specific rates vary widely from the average. Source: Milliman December 31, 2014 Actuarial Valuation Oregon Public Employees Retirement System presentation, dated September 25,

28 Uncollared Rates for SLGRP Theoretical average increase necessary to fully fund SLGRP pool is 8.17%. These rates exclude impacts of health care premiums, IAP contributions, the rate collar and side accounts. Employer-specific rates vary widely from the average. Source: Milliman December 31, 2014 Actuarial Valuation Oregon Public Employees Retirement System presentation, dated September 25,

29 Collared Pool Rates School Districts Collared average increase is 4.00%. Assumes pool s funded status is at least 70% in 2015; if untrue, increases may be higher. Source: Milliman December 31, 2014 Actuarial Valuation Oregon Public Employees Retirement System presentation, dated September 25,

30 Collared Pool Rates SLGRP Average Collared average increase is 3.05%. CCS are typically HIGHER than average. Assumes pool s funded status is at least 70% in 2015; if untrue, increases may be higher. Source: Milliman December 31, 2014 Actuarial Valuation Oregon Public Employees Retirement System presentation, dated September 25,

31 System Funded Status and UAL Funded Status (%) Calendar Year (as of December 31) * 2013* 2014** Including side accounts 112% 80% 86% 87% 82% 91% 96% 84% Excluding side accounts 97% 70% 76% 78% 73% 82% 86% 76% Unfunded Actuarial Liability (UAL) ($ billion) Including side accounts $(6.1)*** $11.0 $8.1 $7.7 $11.0 $5.6 $2.6 $12.1 Excluding side accounts $1.5 $16.1 $13.6 $13.3 $16.3 $11.1 $8.5 $18.0 * Includes liability reductions from Senate Bills 822 & 861 and Board adopted changes to actuarial methods and assumptions. ** Includes the Moro decision and new Board adopted actuarial assumptions and methods from the 2014 Experience Study. *** Surplus due to side accounts. Source: PERS: By The Numbers, October

32 The Other Shoe: Returns through 9/30/2015 The rate of return through September 2015 was 0.11%. 32

33 What if 2015 returns are less than 7.50%? The 2015 valuation determines rates for the biennium. The 2014 valuation assumes returns of 7.50% in If returns in 2015 are less than 7.50%: Uncollared rates would rise by approximately 0.40% for every 1% below 7.50%. So, if returns fall to 0%, the uncollared rate would rise by an additional 3.00%. 33

34 What if 2015 returns are less than 7.50% (cont d)? Collared rates will rise ONLY if funded status falls below 70%. However, Milliman indicated that if returns end year at 0%, funded status for pools will likely fall below 70%. Side accounts are NOT collared. Any investment underperformance causes side account rate credits to decline, possibly significantly. Payroll rates may rise more for those with side accounts than for those without. 34

35 What s next? Milliman will provide individual contribution rates and valuation reports for each jurisdiction this month. They will also provide projections of future rates beyond the biennium given different investment assumptions. PERS has scheduled meetings in 22 different cities over the next two months to go over valuation implications and other employer related issues. 35

36 Community College Current Payroll Rates ( ) Allocated Pooled Allocated pre SLGRP pooled 12/31/2013 Actuarial Valuation Report ( Rates) Net unfunded Allocated OPSRP UAL Side Account pension acturarial Combined Valuation Payroll UAL as a % of Payroll T1/T2 Net Employer Rate Rate Community College T1/T2 UAL liability/(surplus) CC Rate Credit Blue Mountain $7,356,572 $1,919,762 $686,032 $9,609,631 $352,735 $9,702,584 4% 20.29% 9.25% 11.04% Central Oregon 16,442,755 4,290,881 1,533,357 12,096,603 10,170,390 21,686,352 47% 20.29% 5.21% 15.08% Chemeketa 33,147,289 8,650,076 3,091,126 53,358,234 8,469,743 43,717,964 19% 20.29% 11.40% 8.89% Clackamas 18,691,075 4,877,600 1,743,023 26,736,438 1,424,740 24,651,662 6% 20.29% 10.13% 10.16% Clatsop 4,207,271 1,097, ,346 6,545, ,987 5,548,971 15% 20.29% 11.02% 9.27% Columbia Gorge 3,946,806 1,029, ,057 3,541,270 1,803,547 5,205,443 35% 20.29% 6.36% 13.93% Klamath 3,530, , , ,960 4,383,395 4,656,675 94% 20.29% 0.80% 19.49% Lane 39,476,370 10,301,706 3,681,340 59,154,138 5,694,722 52,065,390 11% 20.29% 10.62% 9.67% Linn Benton 19,059,275 4,973,685 1,777,359 26,723, ,415 25,137,281 4% 20.29% 9.93% 10.36% Mt. Hood 28,213,398 7,362,534 2,631,020 59,391,128 21,184,176 37,210,655 57% 20.29% 14.91% 5.38% Oregon Coast 1,664, , ,220 1,968, ,990 2,195,288 13% 20.29% 8.38% 11.91% Portland 94,496,484 24,659,688 8,812, ,871,544 7,096, ,631,427 6% 20.29% 9.06% 11.23% Rogue 14,405,887 3,759,343 1,343,410 18,229,883 1,278,757 18,999,927 7% 20.29% 8.96% 11.33% Southwestern 7,876,221 2,055, ,491 12,209,955 1,543,874 10,387,949 15% 20.29% 10.98% 9.31% Tillamook Bay 1,020, ,183 95,121 1,462,873 81,550 1,345,303 6% 20.29% 10.16% 10.13% Treasure Valley 7,395,187 1,929, ,633 12,421,403 2,406,744 9,753,513 25% 20.29% 11.90% 8.39% Umpqua 9,002,334 2,349, ,506 10,498,870 1,692,208 11,873,180 14% 20.29% 8.26% 12.03% 36

37 Questions? Carol Samuels, Managing Director Piper Jaffray Seattle Northwest Division Piper Jaffray Disclosure: In providing the information contained herein to a municipal entity or obligated person, Piper Jaffray is not recommending an action to any municipal entity or obligated person recipient, is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to any municipal entity or obligated person with respect to the information and material contained in this communication. Piper Jaffray is acting for its own interests, and any municipal entity or obligated person recipient of this information should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the municipal entity or obligated person deems appropriate before acting on this information or material. 37