Pension Litigation Settlement Proposal

1 Pension Litigation Settlement Proposal Presentation by Lynette Labinger, Esq. Mark Dingley, Esq., Governor s Office Jeff Padwa, Esq., Treasurer s Office John Tarantino, Esq. April 29, 2015

2 Overview I. 2011 Pension Changes II. Legal Process & Moving Forward III. Terms of Settlement Proposal IV. Costs of the Settlement Proposal

3 I. 2011 PENSION CHANGES Goal: Comprehensive One- Time Solution

Pension Funding Crisis in 2011 - One of country s worst funded systems 4 Plan Assets($B) Liabilities($B) Funded Status Teachers 3.87 8.01 48% State Employees 2.53 5.23 48% MERS 1.20 1.62 74% State Police.07.1 70% Judges.04.05 79%

5 Costs Rising Dramatically (Projected Contributions Based on 2010 Valuation) 2012 2013 2015 2020 2028 $377M $689M $765M $951M $1.3B Costs increasing from 23% of salary to 45% of salary

6 Implications to Investor Confidence Credit rating agencies lowered RI s rating outlook from stable to negative. The financial condition of pensions are an important factor considered by rating agencies. The unfunded pension liabilities were also a serious issue at the municipal level. 2011 bankruptcy of Central Falls created unwanted focus on state and local pension funding in Rhode Island. Weaknesses in RI economy could not support increased pension funding.

7 RIRSA Changes All benefits accrued prior to July 1, 2012 protected under RIRSA Plan Structure (state employees, teachers and municipal general): Before: Defined benefit (DB) pension plan providing monthly income at retirement; Maximum benefit: 75%-80% highest average salary. After: Combined DB plan providing monthly income at retirement, and defined contribution (DC) plan providing 401k-type retirement savings. Participation: Before: Immediate After: Immediate

8 RIRSA Changes Employee Contributions Before: State Employees: 8.75%; Teachers: 9.5%; Municipal Employees: 6% or 7% (with COLA) After: To Pension: State Employees: 3.75%; Teachers: 3.75%; Municipal Employees: 1% or 2% (with COLA) To DC Plan: All contribute 5% Employer Contributions Before: approximately 35% of salary (growing to 45%) to Pension After: approximately 23% of salary to Pension; 1% to DC Plan Note: For employees without Social Security, employees make 2% DC contribution matched by employer 2% DC contribution

9 RIRSA Changes Vesting: Before: 10 years After: DB plan: 5 years; DC plan: 3 years Retirement Age: Schedule A: 28 years, any age; or age 60 w/10 years Schedule B: age 59 w/ 29 years; or age 65 w/10 years Article 7: age 62 with proportionality, or age 65 w/10 years RIRSA: Social Security retirement age with proportionality; minimum age 59 Early retirement: 5 years early with actuarial reduction

10 Average Compensation RIRSA Changes Before: State employees and teachers: highest 5-year average (as of 2009). Municipal employees: highest 3-year average After: All at highest 5-year average Cost of Living Adjustments Before: State employees and teachers: annual 3% compounded ($35,000 cap added 2010). Municipal employees: annual 3% simple After: For all, COLA based on investment returns, limited to first $25,000 of benefits. COLA Formula: 5-year average investment return minus 5.5%. Targeted COLA = 2%; Max: 4%; Min: 0%. Compounded. Suspension: until 80% funded, payable once every 5 years during suspension.

RIRSA Changes (Municipal Public Safety) Plan Structure: DB pension plan retained Benefit Structure: Before: 2.5% X years of service (most plans) After 2% X years of service (for post RIRSA years) Retirement Age: Before: 20 years of service at any age (some plans 25 years) After: age 55 with 25 years of service (with transition rules) Average Compensation: Before: highest 3-year average After: highest 5-year average 11 Note: Employees without Social Security make 3% DC contribution matched by employer 3% DC contribution

12 Impact of Changes Before RIRSA After RIRSA Difference Unfunded Liability $7,302 $4,286 ($3,017) Contributions $689 $414 ($274) Estimated 2013 contributions based on 2010 Valuation

13 II. LEGAL PROCESS & MOVING FORWARD Goal: Fairness and Finality

14 What is the Settlement Agreement? The Settlement Agreement contains proposed legislation for consideration by the General Assembly for the purpose of settling litigation challenging the constitutionality of recent pension legislation. The Settlement resolves claims of 98% of retirement system participants in ERS and MERS litigation. The Settlement is subject to a determination by the Court that the Settlement is fair, adequate and reasonable, and subject to passage by the General Assembly of the legislation which is a part of the settlement.

15 Timeline 2009 General Assembly enacts first round of pension changes ( 2009 Act ) 2010 General Assembly enacts second round of pension changes ( 2010 Act ) 2010 Complaints filed by State Employee and Teacher Unions challenging 2009 and 2010 Acts November 2011 General Assembly enacts RIRSA (Rhode Island Retirement Security Act)

16 Timeline (2) June 2012 Complaints filed by Public Sector Unions and Retiree Coalition challenging RIRSA July 1, 2012 RIRSA becomes effective 2013 2014 Parties engage in mediation (ultimately unsuccessful) and trial preparation March 2015 Court appoints Special Master April 2015 Settlement Agreement signed by parties

17 Plaintiffs impacted by Settlement Included in Settlement Agreement: State Employees in service on or before July 1, 2015 and future employees Teachers in service on or before July 1, 2015 and future employees MERS general employees in service on or before July 1, 2015 and future employees MERS firefighters in service on or before July 1, 2015 and future firefighters (excluding Cranston firefighters) Retired members of ERS and MERS retired before 7/1/15 Not Included in Settlement: All Municipal Police (in MERS) and Cranston Fire not retired as of 7/1/15

18 Class Action Settling plaintiffs have filed a class action for settlement purposes. The Court has preliminarily approved the Class (and subclasses). Notice has been provided to Class members. The Court has set aside May 20-22, 2015 for the conduct of a Fairness hearing to determine if the Settlement is fair, adequate and reasonable.

19 General Assembly Action The Court and the parties have always understood, recognized and respected the fact that the General Assembly is the only body that can decide whether the settlement can and will be effected by a change in the law. The General Assembly can take any action it deems appropriate including any one of the following three actions:

20 General Assembly Action (2) 1) Enact the Legislation The settlement becomes a final agreement and all members and retirees covered by the class action proceedings will be foreclosed from challenging the Legislation and earlier 2009, 2010 and 2011 pension legislation. 2) Take No Action The settlement will be of no further force and effect and the original litigation continues.

21 General Assembly Action (3) 3) Amend the Legislation If the General Assembly enacts legislation that is different than what is included in the Settlement Agreement, the original litigation continues. The Settlement, the Fairness Hearing and Notices mailed to all Class members, are based on the exact terms of the Settlement and enactment of the Legislation reflecting those terms. If the Legislation is changed by the General Assembly, the terms of the Settlement are not fulfilled.

22 Exceptions: General Assembly Action (4) General Assembly may make changes that solely address funding by the state; and/or General Assembly may include non-settling MERS public safety (all municipal Police and Cranston Fire) on same terms as provided to settling public safety.

23 Commitment of the Parties All parties will support the Settlement throughout the process All parties will advocate for passage of the Legislation. During this legislative session the parties will not advocate for any legislative action relating to retirement benefits other than adoption of the Legislation.

24 III. TERMS OF THE SETTLEMENT PROPOSAL Goal: Balanced Resolution

Changes for State Employees, Teachers, and MERS General With 20+ Years of Service as of June 30, 2012 RIRSA remains effective through June 30, 2015. DC Plan Beginning July 1, 2015, members will no longer participate in the DC Plan. Members will keep their accumulated DC assets. DB Plan For service on and after July 1, 2015, members will participate in the DB Plan only and accrue 2% per year. Benefit Accruals: 20+ Years of Service Pre-RIRSA RIRSA Settlement Schedule A 3.00% Schedule B and A/B Years 21-25 2.00% Years 26-30 2.25% Years 31-37 2.50% Year 38 2.25% 1% 2% 25

Proposed Changes for State Employees, Teachers, and MERS General With 20+ Years of Service as of June 30, 2012 (2) EMPLOYEE CONTRIBUTION RATES: Beginning July 1, 2015: State employees and teachers will contribute 11%. MERS general employees will contribute 8.25% (9.25% with COLA). 26

Proposed Changes for State Employees, Teachers, and MERS General With Less Than 20 Years of Service as of June 30, 2012 RIRSA DB/DC hybrid system remains in place. DB Plan Accrual rate remains at 1%. DC Plan For service on and after July 1, 2015: Annual DC Plan Employer Contributions 27 Years of Service as of June 30, 2012 Pre-RIRSA RIRSA* Settlement* 15 < 20 N/A 1.00% 1.50% 10 < 15 N/A 1.00% 1.25% < 10 N/A 1.00% 1.00% * For each member who does not participate in Social Security, the employer contributes an additional 2%.

28 Cost of Living Adjustments (COLA) Pre-Litigation RIRSA Settlement COLA Base Unlimited $25,000 indexed by RIRSA COLA formula $25,000 (for those retired before 7/1/15, $30,000 indexed by settlement COLA formula during periods of suspension) Amount / Formula 3% Five-Year Average Investment Return minus 5.5% Hybrid: 50% of Five-Year Average Investment Return minus 5.5%; plus 50% of CPI-U (capped at 3%) Maximum 3% 4% Max COLA of 3.5% (2% max on investment and 1.5% max on CPI-U) Minimum 3% 0% 0%

29 COLA Timing Pre-RIRSA RIRSA Settlement When Every Year When funded ratio is 80% or greater When funded ratio is 80% or greater Interim COLA until 80% funded Every 5 years Every 4 years One time COLA upon enactment 2% on first $25,000 of retirement allowance for retirees as of June 30, 2012 2 Stipends (not COLAs) $500 payable this year and next year to all retirees as of 6/30/15

30 Retirement Age Retirement Age remains the same as RIRSA with an additional rule: Settlement All members will be eligible to retire at the earlier of (i) their RIRSA retirement age or (ii) age 65 with 30 years of service, age 64 with 31 years of service, age 63 with 32 years of service or age 62 with 33 years of service.

31 Additional Changes Effective July 1, 2014, early retirement actuarial reduction rates will be as follows*: Year 1: 9% Year 2: 8%; cumulative 17% Year 3: 7%; cumulative 24% Year 4: 7%; cumulative 31% Year 5: 7%; cumulative 38% *Under RIRSA 9% each year, cumulative 45% reduction Members earning less than $35,000 annually (indexed using new COLA formula) will not be charged for DC plan administrative fees (currently $40 per year).

32 Additional Changes to RIRSA For members who fall under the provisions of RIRSA s parttime anti-spiking rule : If a member s highest five consecutive year average salary is less than $35,000, his or her average compensation shall be the greater of his/her (i) highest 10 year average earnings or (ii) highest 5 year average earnings with a $35,000 cap (indexed using new COLA formula). For MERS employers and the local employer portion of Teacher contributions, the UAAL will be re-amortized back 4 additional years to 25 years.

33 Correctional Officers Accrual Rates for Years 31-35 Year of Service Pre-RIRSA RIRSA* Settlement* 31 st 6% 2% 3% 32 nd 5% 2% 3% 33 rd 4% 2% 3% 34 th 3% 2% 3% 35 th 2% 2% 3% *Correctional Officers with less than 25 years of service as of June 30, 2012

34 MERS Fire Contribution Rate Pre-RIRSA RIRSA Settlement 7% or 8% (COLA) 7% or 8% (COLA) 9% or 10% (COLA) Retirement Age No age requirement: either 20 or 25 years of service Age 55 with 25 years of service Age 50 with 25 years of service or any age with 27 years of service; Accrual for those at least age 57 with at least 30 years of service Either 2% or 2.5% 2% 2.25% (unless higher earlier accruals)

35 IV. COSTS OF THE SETTLEMENT PROPOSAL Goal: Predictable and Affordable

FY 17 Cost: Municipal Teacher Portion and MERS General and P&F reamortized to 25 years Estimated Employer Contribution Amounts, DB and DC combined ARC ($ in millions based on 6/30/14 valuation). Group Pre-RIRSA RIRSA Proposed Settlement 36 Increase from Settlement ERSRI State Employees Teachers (State Portion) Teachers (Local Portion) 310.1 178.4 188.6 10.2 191.3 102.7 109.7 7 287 149.8 146.4 (3.4) MERS General Employees 57.9 32 32.9 0.9 MERS Public Safety* 39.3 16.4 16 (0.4) Total 885.6 479.3 493.6 14.3 * Reflects only changes to MERS fire (excluding Cranston) and retired public safety

37 Unfunded Liability ($ in millions) * Group Pre-RIRSA RIRSA Settlement Settlement Increase ERSRI State Employees 3,272 1,817 1,920 103 ERSRI Teachers 5,004 2,534 2,682 148 MERS General Employees 410 160 179 19 MERS Public Safety* 227 92 104 11 Total 8,913 4,604 4,885 281 * Reflects only changes to MERS fire (excluding Cranston) and retired public safety * Based on 6/30/14 valuations

38 Funded Ratio* Group ERSRI State Employees Current Provisions Settlement 57.4% 56.1% -1.3% Difference ERSRI Teachers 59.6% 58.2% -1.4% MERS General Average 85.0% 83.6% -1.4% MERS Police & Fire Average 82.3% 80.6% -1.7% * Based on 6/30/14 valuations

39 Thank You Questions?