RETIREMENT SECURITY ACT

2011-H 6319 2011-S 1111

Staff Briefing October 24, 2011 House Finance Committee Senate Finance Committee

RETIREMENT SECURITY PROPOSAL H 6319 AND S 1111

Introduction Legislation
Overview Budgetary Impact Plan Design Changes Other Issues Independent Plans

INTRODUCTION
State is facing growing pension bill General Treasurer focused on the problem, its magnitude and implications Legislative leadership committed to special fall session to consideration pension legislation Governor and General Treasurer have offered legislation for the Assembly to consider

INTRODUCTION
Why Does it matter?
Current projections have pension costs consuming larger proportion of resources State struggling to emerge from most recent economic downturn Still facing structural deficits in five-year forecast No near term projection to grow our way out of the problem

INTRODUCTION
Recap of recent actions
Sept 6th event for all members Briefings for both chambers from the Treasurer 3 Joint Finance Committee Meetings in Sept. Pension Costs and Key Drivers Municipal Pension Plans Pension Advisory Group Activities

RETIREMENT SECURITY PROPOSAL H 6319 AND S 1111

Legislation
Overview Budgetary Impact Plan Design Changes Other Issues Independent Plans

LEGISLATION: OVERVIEW
Suspends increases (COLAs) to retirees benefits until the system is better funded Moves all but public safety employees to hybrid pension plans Increases minimum retirement age for most employees not already eligible to retire Preserves accrued benefits Addresses independent local plan solvency issues
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Budgetary Impact

PENSIONS UNFUNDED LIABILITY

Failure to meet earnings assumptions Benefits granted for which there were not adequate contributions (Pre -1990)

In millions State Employees Teachers Judges State Police Total

FY 2012

FY 2013 FY 2013 Current Proposed $1,836.2 $2,700.5 $1,644.5 2,892.0 4.9 15.2 4,133.2 10.9 28.5 2,284.2 8.9 (0.9) $3,936.7
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$ 4,748.3 $6,873.1

PENSIONS UNFUNDED LIABILITY

In millions MERS General MERS Public Safety Total MERS FY 2013 FY 2012 Current $110.6 $286.6 48.7 143.4 $159.3 $430.0 FY 2013 Proposed $113.0 66.0 $179.0

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BUDGET AND OUT YEARS

Revenues vs. Expenditures - Current Estimates
$4,200 $4,000 $3,800 $3,600 $3,400 $3,200 $3,000 $2,800
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Current Useable Revenues

Current Expenditures

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FISCAL IMPACT: STATE EMPLOYEES

Valuation Results *(in millions) FY 2013 Contribution Rate Normal Cost Percentage Unfunded Liability* Funded Ratio Long Term Normal Cost FY 2013 Contribution* Out-years FY 2014 Contribution Rate FY 2015 Contribution Rate FY 2016 Contribution Rate 38.92% 41.23% 42.35% 22.69% 24.25% 24.85% -16.23% -16.98% -17.50%
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Baseline (Current) 36.34% 11.39% $2,700.4 48.4% 11.39% $243.0

Proposed (incl. 1% DC) 21.35% 9.19% $1,644.5 60.6% 6.24% $142.8

Change -14.99% -2.20% ($1,055.9) 12.20% -5.15% ($100.2)

EMPLOYER CONTRIBUTIONS: CURRENT LAW

$900 $800 $700 $600 $500 $400 $300 $200 $100
Employer Total

$407 $254 $176 $305

$522 $393

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 State Total Gen Rev Total

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EMPLOYER CONTRIBUTIONS: PROPOSED

$900 $800 $700 $600 $500 $400 $300 $200 $100
Employer Total

$254 $176

$236 $177

$276 $208

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 State Total Gen Rev Total

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CURRENT PENSION COSTS COMPARED TO TOTAL GENERAL REVENUE BUDGET

$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 FY FY FY FY FY FY FY FY FY FY 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 All GR Spending State Pension Costs $149 $176 $393 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0

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PROPOSED PENSION COSTS COMPARED TO TOTAL GENERAL REVENUE BUDGET

$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 FY FY FY FY FY FY FY FY FY FY 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 All GR Spending State Pension Costs $149 $176 $208 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0

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PENSIONS FUNDING RATIOS

Funding Ratios: Value of actuarial assets vs. liability Plan design and earnings assumptions 80% funding is considered healthy
FY 2011 State Employees Teachers Judges State Police MERS 62.3% 61.0% 91.0% 79.6% 92.8% FY 2012 FY 2013 FY 2013 Current Proposed 59.0% 58.1% 88.3% 79.8% 88.3% 48.4% 48.4% 77.8% 69.7% 73.6% 60.6% 62.9% 81.0% 101.5% 87.0%
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PENSIONS FUNDED RATIO 1993-2010 VALUATIONS (STATE EMPLOYEES)

90%

82.10%
80% 70% 66.70% 60% 50% 40% 30% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2010R

60.60% 59.30% 52.70%

48.40%

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SOURCES OF CHANGE: STATE EMPLOYEE & TEACHER UAAL

Eligibil ity 13% Other 10%

Of the $2.9 billion in savings in the unfunded liability from state employee and teacher pensions, nearly threefourths was derived from the COLA changes Changes in retirement age and other changes resulted in the savings balance

COLA 77%

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Plan Design Changes

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CURRENT VALUATION RESULTS: STATE EMPLOYEES

Nearly 90% of FY 2013 employer cost is attributable to amortization costs, and the balance for normal costs Approximately 78% of the amortized costs are associated with current retirees and those eligible to retire Nearly 80% of the normal costs are associated with current active employees
$200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Actives Amortization Cost Retirees or Eligible Normal cost

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PLAN DESIGN CHANGES

Current and Future Retirees
Post Retirement Benefits linked to health of system Size of Adjustment linked to investment performance and limited to first $35,000 of benefit

Current and Future Employees

Changes to eligibility, accruals, earning period and COLA Most move to hybrid plan, combining old defined benefit with new defined contribution

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PLAN DESIGN CHANGES

Cost of Living Adjustments Specific Employee Groups
State Employees and Teachers State Police Judges MERS General MERS Police and Fire

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COST OF LIVING ADJUSTMENTS: CURRENT

Group Retirees State Emp. & Teachers Active State Emp. & Teachers Start 3rd Jan. after retire CPI up Compound Later of 3rd to 3% anniv. or age 65 Judges 3% Simple ex. 3rd Jan. for Traffic after retire & W. Comp State Police $1,500 Flat 3rd January MERS (Optional) 3% Simple 1st anniv. Rate 3% Type Compound Application Full Benefit
First $35k indexed to CPI Full benefit ex. for non-eligible limited to $35k n/a Full Benefit
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COST OF LIVING ADJUSTMENTS: PROPOSED

All Groups move to same COLA Risk Based Limited Granted only if system is well funded

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COST OF LIVING ADJUSTMENTS: PROPOSED

Risk Based
COLA calculated as difference between investment performance and 5.5%
Actuarial assumption is 7.5% which produces 2% COLA

Cannot be less than 0% or more than 4% Investment returns are averaged or smoothed" over 5 year period

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PENSIONS RATE OF RETURN

Board increased assumed rate of return in 1997 to 8.25% from 8.0% Average return from 1984 1997 was 14.7% Average return from 1993 1997 was 12.85% Board voted in 2011 to lower rate to 7.5%

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INVESTMENT RETURNS
25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Assumption Market Return Actuarial
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COST OF LIVING ADJUSTMENTS

Limited
New COLA would only apply to first $35,000 of the benefit $35,000 would be indexed to grow at the same rate the COLA does each year under risk adjustment Indexing occurs annually even if no COLA granted

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COST OF LIVING ADJUSTMENTS

Granted only if system is well funded
COLA calculated annually but only granted if system is 80% funded Interim COLA for lower benefits starts at 70% funding
Applied to benefits that are less than $20,000 Further limited to $500 of value for each year of service 10 YOS = COLA on $5,000; 28 YOS = COLA on $14,000

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COST OF LIVING ADJUSTMENT

Limited COLA once the plan reaches 70% funded Only apply to pensions of $20,000 or less; applied to years of service multiplied by $500 with a maximum of 35 years Example: person with a $19,500 pension who retired with 28 years of service
28 yrs. * $500= $14,000 * 2% target COLA = $280 COLA

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COST OF LIVING ADJUSTMENTS

Each system has separate determination of its funding status and COLAs paid from each system are subject to the respective funding status Each of the 110 MERS units will have separate calculation of funded status and eligibility for COLA payments Projected average funding level for MERS will be 87%; however, more than 24 are projected to have a funded ratio below 80% trigger
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COST OF LIVING ADJUSTMENT SUSPENSION

Employee Group State Employees Teachers Judges State Police MERS (avg.) FY 2013 Proposed Funding 60.6% 62.9% 81.0% 101.5% 87.0% Projected to Reach 80% Date Yrs. FY 2032 FY 2030 19 17 N/A Projected to Reach 70% Date Yrs. FY 2028 FY 2026 15 13

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PLAN DESIGN CHANGES

Cost of Living Adjustments Specific Employee Groups
State Employees and Teachers MERS General State Police Judges MERS Police and Fire

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RETIREMENT SYSTEM DEMOGRAPHICS

Members Total Active Vested Average Age Average Service Average Salary Applies to those hired State Employees 11,122 6,471 48.6 13.8 Yrs. $53,936 all Teachers 13,530 8,260 44.9 12.9 Yrs. $69,235 all Judges 49 10 58.8 10.2 Yrs. $152,268 State Police 211 5 39.5 11.5 Yrs. $93,436

Post Post 1/1/ 1990 7/1/1987

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RETIREMENT SYSTEM DEMOGRAPHICS

Retirees Service Avg. Benefit Disabled Avg. Benefit Beneficiaries Avg. Benefit Total Pensioners State Employees 9,500 $25,887 753 $19,265 1,168 $16,393 11,421 Teachers 9,448 $41,735 286 $27,643 479 $22,837 10,213 Judges 6 0 State Police 1

$133,831 $79,779 3 NA $58,075 4 0 $59,914 NA 10 4

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CURRENT PLAN: TEACHERS AND STATE EMPLOYEES

Age 62 minimum Salary basis is five highest consecutive years COLA on first $35,000 of a pension, indexed to inflation but capped at 3% beginning on later of 3rd anniversary of retirement or age 65 Most retirees and many current employees qualify for greater benefits that had been in place before recent changes
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BENEFIT DESIGN: STATE EMPLOYEES & TEACHERS

Pre-2005 Plan A
Eligibility Reduced Avg. Salary Max Accrual

Pre-2009 Plan B

Current

Any age w/28 Age 59 w/29 yrs. Age 62 w/29 yrs. 60 w/10 yrs. 65 w/10 yrs. yrs. 65 w/10 yrs. none 3 years 80% at 35 yrs. Age 55 w/20 yrs. 5 years 75% at 38 yrs.

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PROPOSED PLAN: STATE EMPLOYEES & TEACHERS

Increased minimum retirement age Lower defined benefit accrual New defined contribution component to replace lower accrual Risk adjusted limited COLA Total employee contribution of 8.75% Additional 2% each for non Soc. Sec teachers
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BENEFIT DESIGN: STATE EMPLOYEES & TEACHERS HYBRID PROPOSAL

Provision Member Contribution Rate Benefit Accrual at 40 Yrs. Benefit Accrual at 26 Yrs. Unreduced Retirement Eligibility Reduced Eligibility COLA all members, including current retirees Average Salary Period Vesting DC Member Contribution Current Plan 8.75% (S) 9.5% (T) 75% capped at 38 yrs. 46% Age 65 w/ 10 yrs. or Age 62 w/29 yrs. Age 62 w/ 20 yrs. CPI capped at 3% on first $35,000 5 years 10 years n/a New Plan 3.75% 40% + DC balance 26% +DC balance SS NRA = 67 for those born after 1960 SS NRA -5 w/ 20 yrs. Risk adjusted: 2% w/ 7.5% return on first $35K 5 years 5 years 5.00%
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EMPLOYEE CONTRIBUTION RATES: STATE EMPLOYEES & TEACHERS

Group State Employee Teacher w/Soc. Sec. Teacher w/o Soc. Sec. Current 8.75% 9.5% 9.5% DB 3.75% 3.75% 3.75% Proposal DC Suppl. 5% n/a 5% 5% n/a 2%

Total 8.75% 8.75% 10.75%

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INCOME REPLACEMENT RATE FOR STATE EMPLOYEES AND TEACHERS

Years of Service 10 20 25 30 35 40 Schedule A 17% 36% 51% 66% 80% 80% Schedule B 16% 34% 44% 55% 68% 75% Proposal 10% + DC 20% + DC 25% + DC 30% + DC 35% + DC 40% + DC

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REPLACEMENT VALUE COMPARISON

STATE EMPLOYEES/TEACHERS - NEW HIRE AT AGE 27, CONTINUOUS EMPLOYMENT UNTIL RETIREMENT AGE OF 67
120% 100% 80% 60% 40% 20% 0% Current DB Alternate DB/DC: Alternate DB/DC: Assumes DC earns 7.5% Assumes DC earns 6.5% With Soc. Sec. No Soc. Sec.
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108% 75%

111% 103% 78% 70%

REPLACEMENT VALUE COMPARISON

HIRED AT AGE 27, CONTINUOUS EMPLOYMENT UNTIL RETIREMENT AGE OF 67
110% 108% 106% 104% 102% 100% 98% 96% Current Plan Converts at Converts at Converts at Converts at Converts at 5 years 10 years 15 years 20 years 25 years Replacement Income 102% 100% 100% 100% 102% 108%

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PROPOSED PLAN: STATE EMPLOYEES & TEACHERS TRANSITION RULES

Previous retirement age change was applied proportionally to active employees based on progress toward prior retirement age Current proposal allows for 2 options for a lower retirement age for current employees who are not yet eligible to retire but who would have become eligible to retire before age 62

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PROPOSED PLAN: STATE EMPLOYEES & TEACHERS TRANSITION RULES

Transition Rule 1: Members age 52 w/ at least 10 years of service currently eligible to retire before age 62 may retire at age 62 Transition Rule 2: Members may retire at their current retirement age but benefit is based on benefit as of June 30, 2012

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PROPOSED PLAN: STATE EMPLOYEES & TEACHERS TRANSITION EXAMPLE

1) Bill is 58 with 26 years of service on 6/30/12 He is currently eligible to retire at age 61 Transition rule #1 allows him to retire at age 62 with benefits accrued before 7/1/12 (54%) and those accrued in the 4 years (4%) after plus DC for 4 years 2) Tom is 50 with 26 years of service on 6/30/12 He is currently eligible to retire at age 54; He cannot use rule #1 - his retirement age is now 67 or he can use rule #2
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PROPOSED PLAN: STATE EMPLOYEES & TEACHERS TRANSITION EXAMPLE

2) Tom is 50 with 26 years of service on 6/30/12 He is currently eligible to retire at age 54; He has accrued a 51% percent benefit as of 6/30/12. Rule # 2 allows him to keep his original retirement age of 54 but without accruing any additional benefit for the next 4 years

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PROPOSED PLAN: STATE EMPLOYEES NURSES & CORRECTIONAL OFFICERS

Two subgroups within the state employee plan with different benefit structure Nurses (BHDDH) are same rules as state employees except for retirement age
Pre-2009, allowed to retire at age 50 w/25 years of service. 2009 changes made that 55 w/ proportional application to actives Proposal keeps age 55 but eliminates transition for those not eligible to retire

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PROPOSED PLAN: STATE EMPLOYEES NURSES & CORRECTIONAL OFFICERS

Two subgroups within the state employee plan with different benefit structure Correctional Officers have different retirement age an accrual structure
Pre-2009, allowed to retire at age 50 w/25 years of service. 2009 changes made that 55 w/ proportional application to actives Proposal keeps age 55 but eliminates transition for those not eligible to retire

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CORRECTIONAL OFFICERS
Preserves the 2.0% accrual rate, but eliminates the increasing accrual rate to 6.0%, 5.0%, 4.0%, and 3.0% for service years 31 through 34 except for those with 25 years or more of service Reduces the maximum benefit from 80% to 75% Preserves age 55 with 25 years of service, but if Officer does not reach 25 years, must wait until social security age for distribution No defined contribution plan participation

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CORRECTIONAL OFFICERS ACCRUAL SCHEDULE

Years of Service 1 through 30 31 32 33 34 35 Maximum Current Law 2.0% 6.0% 5.0% 4.0% 3.0% 2.0% 80.0% Proposal 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 75.0%

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PENSIONS: JUDGES
Current Plan
Eligibility Member Contribution Benefit Accrual 0% - Hired before 7/97 8.75% all others

New Plan
12.00%

Age 65 & 20 yrs.; 70 & 15 yrs.

Hired after July 1, 2009 80% full; 65% reduced 5 highest year Earlier hires have benefit as high as 100% of final salary 3% simple on first $35,000 on 3rd anniversary or age 65 Traffic and WC get compounded 10 years Risk adjusted: 2% w/ 7.5% return on first $35K 5 years

COLA Vesting

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PENSIONS: STATE POLICE

Current Plan Member Contribution Eligibility New Plan 8.75% into DB plan, no DC component Hired before 7/1/07: 20 yrs. & must retire at 62; hired after, 25 yrs. & must retire at 30 yrs. 50% of final salary + 3% per year over 25 not to exceed 65% pre-7/1/07 hires get 3% per year over 20 $1,500 annually 10 years Age 55/25 yrs.; may work up to 33 years but benefits are capped at 65% 2% per service year not to exceed 65% Risk adjusted: 2% w/ 7.5% return on first $35K 5 years
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Benefit Accrual

COLA Vesting

PENSIONS ACTUARIAL COST

Actuarial Cost includes Normal Cost Amortization of unfunded liability Varies by plan

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PENSIONS UNFUNDED LIABILITY

Liability amortized over 30 years beginning FY 2002
Reset as part of multi part plan submitted with Governor Almonds FY 2002 budget to the 2001 Assembly which approved the measures

Actuaries annually calculate rate needed to reach that goal Rate increases because of liability changes and payroll size Amortization payments = majority of system costs
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PENSIONS ACTUARIAL COST: STATE EMPLOYEES: CURRENT

60% 50% 40% 30% 20% 10%
10.4% 10.4% 19.5% 19.1% 20.3% 22.4% 33.7% 36.3% 38.6%

0%
FY 2009 FY 2010 FY 2011* FY 2012 FY 2013* FY 2014 Normal *Benefit or assumption change
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9.3%

9.3%

11.4%

11.4%

11.4% FY 2015

UAAL

PENSIONS ACTUARIAL COST: STATE EMPLOYEES: PROPOSED

50% 40% 30% 20% 10%
10.4% 10.4% FY 2010 9.3% FY 2011* Normal *Benefit or assumption change
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33.7% 19.5% 19.1% 20.3% 22.4% 14.9% 9.3% FY 2012 UAAL 11.4% FY 2013 Current* 9.2% FY 2013 Proposed

0%
FY 2009

PENSIONS ACTUARIAL COST: TEACHERS: CURRENT

60% 50% 40% 30% 20% 10% 0%
FY 2009 FY 2010 FY 2011* FY 2012 FY 2013* FY 2014 Normal *Benefit or assumption change
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32.9% 22.7% 21.6% 18.5% 10.0% 21.8%

34.9%

37.1%

11.8%

11.8%

10.0%

11.8%

11.8%

11.8% FY 2015

UAAL

PENSIONS ACTUARIAL COST: TEACHERS: PROPOSED

50% 40% 30% 20% 10%
11.8% 11.8% FY 2010 10.0% FY 2011* Normal *Benefit or assumption change
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32.9% 22.7% 21.6% 18.5% 21.8% 13.3% 10.0% FY 2012 UAAL 11.8% FY 2013 Current* 8.6% FY 2013 Proposed

0%
FY 2009

PENSIONS ACTUARIAL COST: JUDGES: CURRENT & PROPOSED

50% 40% 30% 20% 10% 0%
FY 2009 FY 2010* FY 2011* Normal *Benefit or assumption change
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3.4% 5.4% 2.8% 37.7% 30.5% 22.1% 5.2% 22.2% 25.3% 11.6% 7.26%

25.10%

FY 2012 UAAL

FY 2013* Current

FY 2013* Proposed

PENSIONS ACTUARIAL COST: STATE POLICE: CURRENT & PROPOSED

50% 40% 30% 20% 10% 0%
FY 2009 FY 2010* FY 2011 Normal *Benefit or assumption change
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3.4% 7.8% 35.4% 27.0% 25.9% 25.9% 7.4% 8.3%

15.0%

29.9% 21.8% -2.0% FY 2013 Proposed

FY 2012 UAAL

-10%

FY 2013 Current*

Municipal Employees Retirement System (MERS)

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MUNICIPAL EMPLOYEES RETIREMENT SYSTEM (MERS)

Covers various local employees general municipal, police and fire - Become members at date of employment
Can include some school employees, elected officials

Total assets of $1.2 billion as of June 30, 2010 Unfunded Actuarial Accrued Liability of $430.2 million as of June 30, 2010 Funded ratio of 73.6% as of June 30, 2010

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MUNICIPAL EMPLOYEES RETIREMENT SYSTEM (MERS)

State is administrative agent, but has no funding responsibility Separate actuarial valuations are performed for each participating plan Require local employers to make 100% of annually required contribution (ARC) Aid could be withheld if not fully funded
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MERS DEMOGRAPHICS
General Municipal Actives - Number - Average Age - Average Service - Average Salary Retirees - Number - Average Age - Average Benefit 6,383 50.6 11.6 $35,900 3,977 73.2 $13,224 Police & Fire 1,376 39.2 11.5 $55,715 547 58.6 $27,948
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MERS STANDARD PLAN BENEFITS GENERAL EMPLOYEES CURRENT

Provision Age Final Ave Compensation (FAC) Service Credit COLA Employee Contribution Basic Plan Optional Plan 30 Years of Service or 58 w/ 10 Years 3 Year Average 2.0% Annually with 75.0% maximum None 3.0% simple 1st anniversary 6.0% 7.0%

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BENEFIT DESIGN: MERS GENERAL HYBRID PROPOSAL

Provision Member Contribution Rate Benefit Accrual at 40 Yrs. Benefit Accrual at 26 Yrs. Unreduced Retirement Eligibility Reduced Eligibility COLA all members, including current retirees Average Salary Period Vesting DC Member Contribution Current Plan 6% ~ 7.0% (w/COLA) 75% capped at 37.5yrs. 52% Age 58 w/ 10 yrs. or Any age w/30 yrs. Age 62 w/ 20 yrs. Optional: simple 3% on 1st Anniversary 3 years 10 years n/a New Plan 1% ~ 2.0% (w/COLA) 40% + DC balance 26% +DC balance SS NRA = 67 for those born after 1960 SS NRA -5 w/ 20 yrs. Risk adjusted: 2% w/ 7.5% return on first $35K 5 years 5 years 5.00%
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MERS PUBLIC SAFETY EMPLOYEES

Standard plan benefits for police and fire include options for a 25 year plan and a 20 year plan However, most of the 43 public safety plans have the 20 year plan

EMPLOYEE CONTRIBUTION RATES: MERS EMPLOYEES

Group General Public Safety w/Soc. Sec. Public Safety w/o Soc. Sec. Basic Optional 6.0% 7-8% 7-8% 7.0% 8-9% 8-9% DB 1-2% 7-8% 7-8% Proposal DC Suppl. 5% n/a n/a n/a n/a 3% Total 6-7% 7-8% 10-11%

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MERS STANDARD PLAN BENEFITS PUBLIC SAFETY- 20 YEARS

Provision Age Final Ave Compensation (FAC) Service Credit COLA Employee Contribution Basic Plan Optional Plan

20 Years of Service Any age 3 Year Average 2.5% Annually with 75.0% maximum None 3.0% simple 8.0% 9.0%

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MERS STANDARD PLAN BENEFITS PUBLIC SAFETY- 25 YEARS

Provision Age Final Ave Compensation (FAC) Service Credit COLA Employee Contribution Basic Plan Optional Plan

25 Years of Service or 55 with 10 Years 3 Year Average 2.0% Annually with 75.0% maximum None 3.0% simple 7.0% 8.0%

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REPLACEMENT VALUE COMPARISON

MERS POLICE & FIRE- NEW HIRE AT AGE 27, CONTINUOUS EMPLOYMENT UNTIL RETIREMENT AGE 55
120% 100% 80% 60% 40% 20% 0% Current DB Alternate DB Alternate DB/DC: Alternate DB/DC: Assumes DC earns Assumes DC earns 7.5% 6.5% No Soc. Sec.
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103% 70%

89% 71% 69%

With Soc. Sec.

FINANCIAL STATUS OF MUNICIPAL PENSION PLANS: MERS

Overall funded ratio of 73.6% 29 of 67 municipal employee plans are more than 80.0% funded 2 municipal employee plans are less than 50.0% funded 12 of 43 police and fire plans are more than 80.0% funded No police or fire plans are less than 50.0% funded
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MERS - CONTRIBUTIONS
Employee share delineated in statute - employee share ranges from 6.0% to 9.0%, depending on plan Employer pays difference between actuarially required contribution and employee share Differs for each plan given separate valuations done for each plan

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MERS - EMPLOYER CONTRIBUTION RATES MUNICIPAL EMPLOYEES

FY 2013 employer contribution rates for general municipal employees nearly doubled from FY 2012, increasing from an average of 9.59% to 18.35% Nearly 80% of the increase in the employer contribution rate is due to assumption changes

76

MERS - EMPLOYER CONTRIBUTION RATES PUBLIC SAFETY EMPLOYEES

FY 2013 employer contribution rates for public safety employees also nearly doubled from FY 2012, increasing from an average of 17.27% to 31.91% Nearly 85% of the increase in the employer contribution rate is due to assumption changes

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ESTIMATED IMPACT ON MUNICIPALITIES

Contributions (millions) MERS Municipal MERS Police & Fire MERS Subtotal Teachers Total MERS/Teachers Current Law FY 2012 FY 2013 $20.37 $12.77 $33.14 FY 2013 Proposed DB DC $2.18 $0.99 $3.17 Total $26.77 $11.67 $38.44

$40.93 $24.59 $24.81 $10.68 $65.74 $35.27

$142.82 $220.95 $112.49 $16.17 $128.66 $175.95 $286.69 $147.76 $19.34 $167.10

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Other Issues

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RE-AMORTIZATION
Re-amortization = Extends the schedule to fully fund the pension system for a longer period of time. Amortization payments reflect the majority of the costs of the system approximately 90% of the state employee pension costs in FY 2013 are associated with the amortization costs

80

RE-AMORTIZATION
Act proposes to re-amortize the remaining unfunded liability over a 25-year period. Provides for laddered re-amortization designed to smooth out the cliff effect and reduce volatility over a long period of time. Laddered re-amortization amortizes future net changes due to asset losses, gains or assumption impacts over individual 20 year closed periods.

81

RE-AMORTIZATION
Re-amortization increases the costs to the taxpayer over a period of time. Estimated $1.8 billion in additional costs to taxpayers due to re-amortization over the next 25-years as compared to not re-amortizing

82

SOCIAL SECURITY
Social security can replace 30% or more of a retirees income However, nearly 50% of teachers in the state do not participate in social security (6,800 of nearly 14,000 teachers) Many public safety employees also do not participate in social security Raises the issue of how these employees will arrive at an income replacement target of 65-80%

83

SOCIAL SECURITY PROVISIONS

Establishes mandatory supplemental contributions for those not participating in social security (about half the teachers and some MERS public safety employees)
Contribution Employee Employer Total Teachers 2% 2% 4% MERS Police and Fire 3% 3% 6%

84

SELF CORRECTING PROPOSAL

Creates a trigger to indicate pension plans need course correction. Trigger is if plan under 50% funded and 5 years of decline in funded ratio If this trigger is met, there is a default plan which cannot include further benefit reductions, only increased contribution rates. Requires all state and MERS plans that are less than 80% funded to adopt a funding improvement plan that will provide a realistic, actuarially determined path to reach 80% funding status over a reasonable period (10 years)

85

SELF CORRECTING CONCEPT

Risk Adjusted COLA Mechanisms to effectuate shared risk if pension systems fail to meet pre-determined benchmarks Triggers to move the system to a reform schedule if system fails to meet benchmarks Potential to design triggers for a shared benefit should pension systems exceed pre-determined benchmarks

86

DISABILITY
Proposal requires those that apply and receive accidental disability after July 1, 2012 not totally disabled to have their tax-free disability benefit convert to a taxable service retirement benefit in the same amount upon their attainment of retirement age Reduces the floor for disability from 66.6% to 50.0% for all pension systems

87

PART TIME EMPLOYEES

For those hired on or after July 1, 2012, those working less than 35 hours would not receive service credit. Current employees would have average final salary based on 10 highest years For teachers hired on or after July 1, 2012, only those working 180 days or more (full school year) will be eligible members. Current rules permitting teacher participation working at least half-time, including job share programs, are retained.

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OPTIONAL SERVICE CREDITS

Optional service credits purchased after July 1, 2012, (except military purchases) will be calculated at full actuarial value based on the plans assumed rate of return, minus 1% Optional service credits must be made within 3 years of the date of initial eligibility for the purchase (or by July 1, 2015, whichever is later).

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Independent Local Plans

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LOCAL PENSION PLANS

36 plans provided through 24 municipalities, of which half cover public safety employees
Not governed by state law Municipality is entirely responsible for administration and funding the plans May be included in collective bargaining agreements Some municipal employees are covered by plans administered by employee union

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MUNICIPAL PENSIONS - ISSUES

Participation in Social Security Differences in who administers plans and benefits Variance in plan design among communities Disability pension provisions Second careers after retiring Variance in local fiscal capacity Size and severity of unfunded liabilities

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WHY DOES IT MATTER?

Many communities struggling with deficits and limited capacity in property tax base Size and severity of unfunded pension and OPEB liabilities range among communities No near term projection to grow out of the problem

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LOCAL PENSION PLANS

Covers general municipal, police and fire Combined total assets of $1.4 billion as of June 30, 2010 Combined Unfunded Actuarial Accrued Liability of $2.1 billion as of June 30, 2010 Overall funded ratio of 40.3% as of June 30, 2010

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LOCAL PENSION PLANS

Locally Administered Plans Active Retired Disabled Beneficiaries Terminated, Other Total Members 6,916 5,276 897 899 606 14,594

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LOCAL PENSION PLANS

Division of Municipal Finance has recently developed detailed report of local pension plans Approximately 1/3 of locally administered plans are closed no longer available to current employees About 1,500 employees are covered in these closed plans and more than 300 actives are included

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LOCAL PENSION PLANS

Nearly 2/3 of the communities with local plans have only one local plan rest of employees are in MERS Plans among and within communities vary on plan design, vesting periods, COLA provisions, employee contribution rates

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FINANCIAL STATUS OF MUNICIPAL PENSION PLANS: LOCAL PLANS

Overall funded ratio of 40.3% 31 of 36 plans are less than 80.0% funded 24 plans are identified as at risk by Auditor General 18 plans are less than 50.0% funded 5 are less than 20.0% funded

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ANNUAL REQUIRED CONTRIBUTION

The ARC for all municipal pensions was $196.7 million in FY 2010
Communities using locallyadministered plans paid 81% of the $170.3 million ARC Communities participating in MERS paid 100% of their $26.4 million ARC
Annual Required Contribution ($196.7 Million)

Local Plans, $170.3 MERS, $26.4

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LOCAL PENSION PLANS

36 pension plans are locally-administered in 24 communities 24 out of the 36 locally-administered pension plans are considered at risk by the Auditor General Locally-administered plans do not have the level of available assets to meet benefit obligations
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LOCAL PENSION PLANS AT RISK

Category I plan is insolvent and sponsoring municipality is in bankruptcy Category II = plan is significantly underfunded (less than 60%) and annual contributions are significantly less than ARC (less than 80%)

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LOCAL PENSION PLANS AT RISK

Category III = plan is significantly underfunded (less than 60%) but annual contributions are at or near 100% of ARC Category IV = plan is more than 60% funded but annual contributions are significantly less than ARC (less than 80%) and are continuing to decline

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LOCAL PENSION PLANS AT RISK

Type Category I Category II Category III Category IV July 2007 7 plans 10 plans 4 plans March 2010 7 plans 12 plans 4 plans September 2011 2 plans 12 plans 6 plans 4 plans

Total at Risk 21 plans 23 plans 24 plans Total Plans 36 Plans 36 Plans 36 Plans Note: Data from 2007 and 2010 reports have been recategorized to be consistent with 2011 report.

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DISTRIBUTION OF MUNICIPAL UNFUNDED PENSION LIABILITY

Share of Total Municipal Unfunded Pension Liability ($2.5 Billion)
MERS, $430

Category II, $768

Share of At Risk Unfunded Pension Liability ($2.0 Billion)

Category IV, $67

Local Plans, $2,096

Category I, $47 Category III, $1,110

LOCAL PENSION PLANS - UNFUNDED PENSION LIABILITY AND ARC

Share of Unfunded Pension Liability ($2.1 Billion)
Rest of State 38.8% Prov. 39.5%

Share of Annual Required Contribution ($170.3 Million)

Rest of State 39.5% Prov. 30.1%

Warwick 10.0%

Cranston 11.7%

Cranston 13.0%

Warwick 17.3%

LOCAL PENSION PLANS CATEGORY II

Category II Plans Coventry School Coventry - Police Coventry - Municipal Cranston Police and Fire Cumberland Town Plan East Providence Police and Fire Johnston - Police Scituate - Police Tiverton - Police Warwick Police I and Fire West Warwick Town Plan Westerly - Police Funded Ratio 36.9% 16.5% 29.3% 15.8% 38.9% 47.8% 27.6% 23.4% 38.8% 26.6% 26.3% 55.2% % of ARC Paid 34.0% 73.7% 68.2% 87.3% 16.1% 20.4% 87.3% 66.9% 0.0% 66.8% 43.1% 87.4% Unfunded Liability (millions) $18.3 $39.8 $9.5 $244.8 $15.4 $65.0 $37.2 $7.5 $8.9 $210.4 $98.0 $13.1
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LOCAL PENSION PLANS ARC AS % OF LOCAL LEVY

Category II Plans Coventry Cranston Cumberland East Providence Johnston Scituate Tiverton Warwick West Warwick Westerly State Average 2009 19.3% 25.2% 16.7% 14.6% 46.8% 11.3% 18.0% 31.9% 33.1% 9.8% 24.6% 2010 18.9% 25.4% 17.3% 24.4% 47.4% 11.3% 17.3% 30.9% 34.5% 8.7% 26.7%
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LOCAL PENSION PLANS - DEBT SERVICE AND PENSION LIABILITIES

Category II Plans Coventry - highest of three Cranston Cumberland East Providence Johnston Scituate Tiverton Warwick West Warwick Westerly Funded Ratio 36.9% 15.8% 38.9% 47.8% 27.6% 23.4% 38.8% 26.6% 26.3% 55.2% Tax Levy (millions) $59.0 $160.4 $52.1 $84.8 $63.7 $24.6 $32.2 $204.2 $51.7 $59.2 % for Debt Service 5.2% 6.3% 12.2% 4.5% 7.8% 9.3% 11.0% 4.5% 5.7% 13.4% % for Local ARC 9.9% 13.8% 2.5% 8.1% 11.5% 2.8% 3.2% 14.4% 11.2% 2.5%
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LOCAL PENSION PLANS SOLVENCY PROGRAM

Recommends actions intended to: Ensure there is an independent review of the locally administered plans Establish solvency plans to return the pension plans to stronger financial footing Create mechanisms to ensure municipalities take the necessary steps to get on the path to solvency.

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LOCAL PENSION PLANS SOLVENCY PROGRAM

Requires all non-MERS plans to immediately conduct and complete actuarial reviews by April 1, 2012 and annually thereafter State will share in the cost of actuarial studies (50%) Municipalities responsible for 100% of costs to complete experience studies every three years

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LOCAL PENSION PLANS SOLVENCY PROGRAM

Creates Solvency Review Team (Treasurer, Auditor General and Department of Revenue)
Sets standards for actuarial reviews Creates list of certified actuaries from which municipalities may choose Evaluates the solvency plans submitted by municipalities

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LOCAL PENSION PLANS SOLVENCY PROGRAM

Maintenance of Effort provision - Communities cannot contribute less than 95% of their contribution in the previous year Non-MERs plans funded below 60% must develop and submit a solvency plan (no more than 10 year horizon) to the State Solvency Review Team no later than December 1, 2012 Municipality must enact plan in the form of a local ordinance

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LOCAL PENSION PLANS SOLVENCY PROGRAM

Plan must show how the municipality will increase its funded ratio over a ten year horizon equal to 50% of the difference between the current funded level and 80% Plan must improve funding ratio by at least 1.0% each year until funded ratio equals or exceeds 60% Penalties for non-compliance include withholding of State aid and suspending non-MERS COLAs effective at the termination of existing collective bargaining agreements

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RETIREMENT SECURITY PROPOSAL H 6319 AND S 1111

Next Steps.. 3 Public Hearings Scheduled
Wednesday Oct 26 State Employees, Teachers, MERS Thursday October 27th State Police, DOC, Judges, MERS Police and Fire Tuesday November 1 Independent (Non- MERS) Plans

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