National Press Foundation, Aging and Retirement:

Understanding Generational Changes

The Future of Public Pensions
June 15, 2016
Greg Mennis
Director, Public Sector Retirement Systems Project
The Pew Charitable Trusts

The Pew Charitable Trusts

More than 40 active, evidence-based research projects

Projects include public safety, immigration, elections, transportation, pensions, and

state tax incentives

All follow a common approach: data-driven, inclusive, and transparent

Pews Public Sector Retirement Systems Project

Research since 2007 includes 50-state trends on public pensions and retiree benefits
relating to funding, investments, governance, and employee preferences

Technical assistance for states and cities since 2011; PA since 2012

Overview

Pension Funding and Fiscal Metrics

Example of Challenges in Pennsylvania

Investments - Key Trends

Reform Update

Key Takeaways

Pension Funding and

Fiscal Metrics

State Pension Funding Gap (Aggregate of 50 States)

$4.0

10%

$3.5

9%
8%

$3.0

7%

$2.5

6%

$2.0

8%

5%
4%

$1.5

3%

4%

$1.0

2%

$0.5

1%

$0.0
97

98

Assets

99

00

01

02

Liabilities

03

04

05

06

07

08

09

10

11

12

0%
13

Column1

The 2014 funding gap is estimated at $937 billion and 2015 is estimated at
over $1 trillion.
Sources: State and pension plan CAFRs and pension plan actuarial
valuations
5

Pension Costs as Share of Revenue

Dollars in Trillions

Growing Unfunded Liabilities Lead to Budget Crowd Out

State and Local Pension Debt as a Share of Gross

Domestic Product

Sources: The Federal Reserve and U.S. Department of Commerce Bureau of Economic Analysis

INCREASING FISCAL HEALTH

Five States Are Below 50% on Funding and Paying Bills

INCREASING FISCAL DISCIPLINE

Sources: State and pension plan CAFRs and pension plan actuarial
valuations

Pennsylvania: A $77B Swing in 14 years Largest in US

Investment Return Shortfalls, Underfunding, Unfunded Benefit Increases

$20
B

2000

2014
$57
B

Sources: SERS and PSERS actuarial valuations and CAFRs

Pennsylvania Pensions Costs up $5B over 5 Years

$12,000

State and Teacher Pension Contributions

$10,000

$8,000
Billions
$6,000

$4,000

$2,000

$0
2010

2011

Act 120 Collar Reduction

2012

2013

2014 2015* 2016

2017

Payment for Unfunded Liability (Expected)

2018

2019

2020

2021

2022

Normal Cost of Benefits (Expected)

Actual Contribution Paid

* The FY2015 PSERS employer contribution was $2,596,731,000 (69% of full ARC); SERS actuarial data is not yet available for
FY2015.
Sources: Analysis by The Pew Charitable Trusts and The Terry Group based on data from SERS and PSERS actuarial valuations
and CAFRs

New Reporting Requirements under GASB

Pension debt now reported on balance sheet

Annual Required Contribution (ARC) no longer a required disclosure

Additional data requirements improves comparability, allow for new metrics

Pew is introducing a Net Amortization metric as a supplement to the ARC

Net Amortization compares government contributions to the pension plan to the amount required to pay
down pension debt

10

Net Amortization Poorly Funded States Continue to Lose Ground

Net Amortization as a Share of Covered Payroll
15.0%

The top 10
states are 84%
8.50452711187556%
8.36643443832210%
funded

10.0%

4.71161046231794%
4.59123940977552%
4.26197083199505%
4.08548172858648%
3.96986848299634%
2.82824950878605%
2.75844513249936%
2.43524814817018%

5.0%
0.0%

-11.64637211586540%
-7.86175054121789%
CT

-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
-30.0%
-35.0%

-5.80437648658821%
-5.98708994336466%
-6.57055656785422%
-8.51668981741945%

The
bottom
NJ
10 states
are 62%
KY The net amortization measure compares how much states are contributing to their pension plans
comparedfunded
to how much pension debt is expected to grow. A positive number indicates
PA*

IL

contribution policies are sufficient to pay down pension debt while a negative number indicates
unfunded liabilities are expected to grow.

*Pennsylvania is projected to achieve positive amortization in ~ 3 years as a result of a 2010 reform to

increase funding.

11

Investments - Key Trends

12

Shift from Bonds to Stocks and Alternatives

Public Pension Investments, 1954-2014
Allocations to equities and alternative investments have increased,
while those to
fixed-income
investments have declined
100%
80%

Investment allocation
25%:

60%

Alternatives

40%
50%:

20%

Equities

0%
1954

1964

1974

Equity and alternatives

1984

1994

2004

2014

Fixed income and cash

Source: U.S. Board Of Governors of the Federal Reserve System, Financial Accounts of the United States, 1954 to 2014; Pew
Analysis of State Financial Reports
2014 The Pew Charitable Trusts

13

Volatility in Returns S&P 500 and TUCS Pension State Median

FY 2005-2015
40

30

20

10
Performance %
0
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-10

-20

-30
TUCS Federal/State DB Plan Median Performance (%)

S&P 500

14

Increased Use of Alternatives

Public Pensions Include More Alternative
Investments
Use of alternatives has more than doubled with 30% increase in
US Average
US Average
fees
FY 2006 Asset Allocation

FY 2014 Asset Allocation

11%
25%
28%

51%

61%; 61%

24%

Equity

Fixed Income

Alternatives

Source: Analysis by the Pew Charitable Trusts of State Comprehensive Annual Financial Reports, Public 100, and the
Federal Reserve Financial Accounts of the United States
2014 The Pew Charitable Trusts

15

Reporting Practices for Performance Varies Across States

16

Pews Recommendations on Investment Transparency

Based on Review of Funds Managing Over 95% of State Pension Assets

Make investment policy statements transparent and accessible.

Adopt comprehensive fee-reporting standards, including disclosure of carried interest

on $4B+ in private equity fees.

Disclose bottom-line net of fees performance.

Expand reporting to include 20-year results most funds disclose 10 given longterm nature of pension liabilities.

Include performance by asset class (stocks, bonds, private equity, hedge funds).

17

Reform Update

18

Summary of Recent Reforms in States

48 states have implemented some kind of reform between 2009 and 2015.

Many reforms changed plan provisions for new workers, but kept the basic structure
of the plan.

A number of states passed reforms that affected current workers or retirees

between 2009 and 2015:

15 states reduced COLAs for retired employees.

8 reduced COLAs for active employees only.
36 states increased employee contributions for either current or new members (at least 24
increased contributions for current members).

Between 2009 and 2015, 9 states passed reforms that changed the mandatory
benefit design for new employees. Overall, 20 states have a mandatory or optional
alternative benefit design.

Sources: National Council of State Legislatures, NASRA, The Pew Charitable Trusts

19

Wide Variety of Approaches in States

14 states currently have plans with alternative designs that are mandatory or default for at least
some state workers.

RI

DC Mandatory/default
Hybrid Mandatory/default
CB Mandatory/default
CB Local workers only
Notes:
In addition, more detailed versions of this table from NASRA and NCSL make note of optional alternative states plans in the following states:
Colorado (DC), Florida (DC), Montana (DC), North Dakota (DC), Ohio (DC and hybrid), and South Carolina (DC).
In cases where a state has more than one alternative plan, the plan type with the greater number of participants is marked on the map. This
includes Indiana, where workers choose between a hybrid and DC plan; Michigan, where state workers are in a DC plan and teachers are in a
hybrid plan; and Utah, where workers choose between a hybrid and DC plan.
Texas provides a cash balance plan to over 400,000 local workers through the states Texas Municipal Retirement System and Texas County
and District Retirement System.
Sources: NCSL, NASRA
20

Principles
There is no one-size-fits-all solution, but key principles can guide any reform process
Fiscal sustainability principles
Commit to fully funding and paying for pension promises
Manage investment risk and cost uncertainty
Follow sound investment governance and reporting practices
Retirement security principles
Target sufficient contributions and savings to help put employees on a path to a
secure retirement
Invest assets in professionally managed, pooled investments with low fees and
appropriate asset allocations
Provide access to lifetime income in retirement

21

Pensions in the News

Illinois and
Chicago:
Legal challenges

Detroit,
MI:
Study of
plan of
adjustment

Oregon:
Fiscal concerns
due to reversal of
COLA changes

Pennsylvan
ia:
State and
municipal
reforms

Connecticut:

Debate on fund
pension system

New Jersey:

Supreme Court ruled

on COLA changes;
fiscal challenges
remain
Maryland:
Fiscal challenges
and management
fees
Virginia:
Legislative
committee
evaluating
Kentucky:reforms to date
Reforms for
teacher
retirement system

California:
Changes to
investment
strategy and fee
Arizona:
disclosure
Constitutional
amendment on
ballot

Kansas:
Fiscal challenges

Alabama:
Governance and
in-state
investments

Jacksonville,
FL:
Proposed sales tax
for pensions

Key Takeaways

23

Key Takeaways

Pension Funding challenges remain 5 years after Great Recession

Increased attention to investments strategies and managing risk

Reform discussions continue nationwide

24