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Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Public Retirement Benefit Plans: Promises and Challenges
North Shore Chapter, Illinois CPA Society, November 17, 2015
Barrett Peterson, C.P.A.Sr. Manager, Accounting Standards, Procedures, & AnalysisTTX
[email protected] - Office847.224.6569 - Mobile
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Retirement Plans’ Objectives
Income - Pension Health Insurance - OPEB Life Insurance - OPEB
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
The Public Retirement Plan Environment
Electoral Politics State Laws and State Constitutions GASB – Governmental Accounting Standards Board SEC for Municipal Bond Issuers Rating Agencies for Municipal Bond Issuers U.S. ERISA Law and Regulations do NOT apply Cash Basis Budgeting, Accounting, and Reporting
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Pension Plan Design Issues Defined Benefit or Defined Contribution Targeted Benefit – usually % to pre-retirement income Time to Achieve Targeted Benefit Funding Sources, if funded
Employer/Taxpayer Contributions Employee Contributions Return on Assets
Income Re-Distribution Impacts in some Governmental Plans
PAYGO – Pay as You Go Plans Benefit and Pensionable Earnings Caps Retirement Age and Early Retirement Provisions
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Some Fundamental Concepts/Terms Actuarial
PBO – Projected Benefit Obligation
AAL – Accumulated Benefits at Projected Pay
ABO – Accumulated Benefit Obligation
Period Cost Mortality Estimates Salary Increase Assumption Demographics
Spouse Life Marital Status Quits before retirement
Statistical/Financial NPV/Compounded Return Rule of 72 Discount Rate Return Assumption Funded Status Funded Ratio Fair Value of Assets Plan Fiduciary Net Position
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Pension Accounting Fundamentals
Estimating Amounts Ultimately Payable Assigning Costs to Annual Accounting Periods The Impact of Funding Practice Plan “Financial Position” – Funded Status – at Year end
Reflecting the Present Value of the Estimated Liability, net of Plan assets.
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Pension Accounting FundamentalsEstimating Amounts Ultimately Payable Benefit Formula
Credit Per year of Service Pay Basis – Final, Average, Etc.
Estimating Likely Service Terminations Re-Hires
Estimating Pay Increases Consider Compensation Policy, Inflation, Etc. Consider Promotions; Replacement Hires, Etc.
Mortality Assumptions Prior to Benefit eligibility Length of Benefit Payout Period Life Expectancy of Spouse/Partner
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Pension Accounting FundamentalsAssigning Costs to Annual Periods Basic Period Cost Formula
Normal/Service Cost Using Actuarial Method Selected, Plus
Interest on Present Value of Liability, Less Interest Computed Using Discount Rate
Assumed Return on Plan Assets, Plus Required to be “Reasonable”
Amortization of Actuarial Gains and Losses, Plus Typically Over Remaining Estimated Service Lives
Settlement or Curtailment Costs, Which We Will Assume Will Not Occur
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Pension Accounting FundamentalsThe Impact of Funding Policies The source of Plan Assets for Funded Plans Funding Sources
Employee - Optional Employer
ERISA Regulations for Corporate Sponsors, Typically Requiring Attainment of a Certain Funded Ratio
Annual Required Contribution Calculated by Actuaries for Public Plans, Which May be Over-Ridden by Law, as it is In Illinois. The Sum of Normal Cost Plus Amortization of Any Unfunded Amount
Funding Timing
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Pension Accounting FundamentalsPlan Financial Position – Funded Status
Measuring the Estimated Present Value of the Estimated Liability PBO – Projected Benefit Obligations, which includes both future service
and future pay increases. Use required for companies. AAL – Actuarial Accrued Liability, which includes future pay increases, but
NOT future service. Used in Public Plans ABO – Accumulated Benefit Obligations, which reflects neither future
service nor future pay increases. A “freeze now” amount. Disclosure required for corporate plans.
Valuing Plan assets Market Value At Year end Actuarial Value
Funded Status – The Difference Between the PV of Liability Estimate and The Value of Plan Assets
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
U.S Retirement Plans Issues
Social Security – a PAYGO Plan with an estimated unfunded liability of about $69.0 trillion
Medicare – a PAYGO Plan with an estimated unfunded liability of about $55.3 trillion
Military retirement Government Employees
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Illinois Pension Plans - Summary
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Illinois Pension Plans Summary
State of Illinois – 5 Plans TRS – Teacher’s
Retirement State Universities
Employees State Employees Judges General Assembly
Municipal – Many Plans Chicago Teachers IMRF – Illinois
Municipal Retirement Many Fire, Police,
Park District, and Other Agencies
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Illinois Pension Plans, June 30, 2014Unfunded Present Value of BenefitsPlan Unfunded Liability
PVFunded Ratio
Teacher’s Retirement $ 61.6 billion 40.6%State Employees $ 26.2 billion 33.7%State Universities $ 21.6 billion 42.3%Judges $ 1.5 billion 31.6%General Assembly $ 0.2 billion 16.0% Total – All Plans $111.1 billion
Source: State of Illinois Comptroller, CAFR for Year Ended June 30, 2014
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Illinois Pension Plans Financial Reporting GASB Statement No. 67, “Financial Reporting for Pension Plans”.
Governs reporting by the Plans themselves. This Statement is roughly analogous to FASB ASC 960 for Reporting by Defined Benefit Plans.
GASB Statement No. 68, “Accounting and Financial Reporting for Pensions”. This Statement is roughly analogous to FASB ASC 715 governing accounting and reporting by entities for their pension plans.
GASB Statement No.75, “Accounting and Financial Reporting for Post Employment Benefits Other than Pensions”, Effective for Fiscal Years starting after June 15, 2017. Reports not likely before 2019.
The FASB and GASB Standards are now closer together, but noticeable differences remain.
FASB ASC 960 also different in a number of important ways from ASC 715, as Plan reporting only has to address ABO, and requires use of a differently calculated discount rate.
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Summary of Drivers of Low Funded Ratios
High Benefit Accumulation Rates, Increased in 1998 [2.2]
Retirement “Incentives” programs The COLA Benefit; introduction, increase, compounding Decades of Inadequate Funding by the State of Illinois High, and Unmet, Investment Return Assumptions Conceptual Design Flaw Requiring the State to Fund For
All Employers, Not Just State Employees. Revenues Go To Local Districts, While “Employer” Costs are Borne by the State. District Tax Rates Do NOT Contemplate Funding Pensions for Their Employees.
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Illinois Teachers’ Retirement PlanA Detailed Review of TRS
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
History of TRS Funded Status: 2000-2014Year Ended June 30 of:
Unfunded Liability Funded Ratio
2000 $11.4 billion 68.2%2001 $15.9 billion 59.5%2002 $20.7 billion 52.0%2003 $23.8 billion 49.3%2004 $19.4 billion 61.9%2005 $22.0 billion 60.8%2006 $22.4 billion 62.0%
2007 $23.7 billion 63.8%2008 $30.2 billion 56.0%2009 $35.0 billion 52.1%
2010 $39.9 billion 48.4%
2011 $43.5 billion 46.5%
2012 $52.1 billion 42.1%
2013 $55.7 billion 40.6%
2014 $61.6 billion 40.6%
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
TRS’s Change in Unfunded Liability$ Billions: 2000 - 2014
2000-2007
2008-2014
Total
Employer Costs in excess of contributions $10.4 $13.3 $23.7Change in Actuarial assumptions and methods $ 3.1 $ 1.5 $ 4.6Salary increases over or (below) assumption $ 0.5 $(3.0) $(2.5)Return less than (more than)assumed return $(1.6) $23.6 $22.0Pension Bond Proceeds $(4.3) $ 0.0 $(4.3)Waiver of ERO Contributions for over 35 years $ 2.2 $ 0.0 $ 2.2All Other $ 4.9Total Increase (decrease) $50.6Unfunded Liability, June 30, 1999 $11.0Unfunded Liability, June 30, 2014 $61.6
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
State Underfunding – A Chronic Disaster
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Funded Ratio Confusion
GASB 67 Actuarial Assets
Fair Value of Assets
Pension Liability 106,682,654,886
103,740,377,000 103,740,377,000
Asset Value 45,824,382,514
42,150,785,000 45,824,382,514
Unfunded Liability
60,858,272,372
61,589,612,000 57,915,994,000
Funded Ratio 43.0% 40.6% 44.2%Unfunded Liability at Discount Rate of 6.5%
75,156,979,079 Likely Similar 75,156,979,079Approximately
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Major TRS Benefits Provided Initial Tier I benefits are 2.2 times years of service times final average salary,
with a maximum benefit of 75% of final average salary. No dollar limit. Tier II has a creditable wage base tied to the 2010 Social Security Wage Base
Benefits are increased 3% per year, compounded. Compounding began in 1990. Original COLA [1969] was 1.5% per year simple, later 2%, then 3% simple, and finally compounded.
Retirement Age Requirements: Tier I Participants – Participating before January 1, 2011
At age 55 with 20 years, which may be reduced if less that 60, if an Early Retirement Option [ERO] is not available
At age 55 or older with 35 years with no reduction At age 60 and 10 years with no reduction At age 62 and 5 years of service with no reduction
Tier II Participants – Participating Subsequent to January 1, 2011 At age 67 with 10 or more years with no reduction At age 62, with a reduction of benefit of 6% for every year under age 67 No Early Retirement Option available
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Compound Interest, and Rule of 72
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Some Observations The rule of 72 suggests that a benefit will double at a 3% increase,
compounded, every 24 years. A teacher retiring at age 60 will double their benefit by age 84, a fairly likely age attainment.
Tier I participants can will reach their 75% limit after 34 years – about age 57 – after which benefit increases are driven only by increased salary on which the benefit is based. The system has an incentive to retire near 60, leaving retirement period of up to 30 years or more.
The compounding COLA has been estimated to account for about a third of the total liability. Reduction by half would improve the funding ratio by about 15 percentage points.
The Tier II limits on eligible salary and retirement age will make tier II benefits substantially less costly, although still subject to the COLA.
Employee contributions are 9.4% of their pay. Benefits paid in 2014 were $5.3 billion. Assets at year end can pay for
about 9 years. Employer costs of $5.3 billion are about 60% of member payroll paid of
$9.5 billion, an extremely high ratio.
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Observations, Continued As of June 30, 2014 the Plan has 272.2 thousand participants, of which
111.3 thousand are retirees or survivors, most [101.2 thousand or 36% of total participants] retirees. Active participants are about 59% of total participants. A bit fewer that 10 thousand active participants are over 60. About 0.7% of participants are working past the 35 year limit.
The tier II modifications are very positive, but were adopted far too late to solve the Plan’s problems.
The Illinois supreme Court has ruled that the Constitution prohibits any changes to the Plan with an impact on current participants, active or retired.
Benefit payments of $5.3 billion in fiscal 2014 exceed contributions in fiscal 2014 by $0.8 billion, enabling existing assets to pay for up to 45 years as of June 30, 2014 values. The “spread” is likely to get worse as more participants retire.
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Solution Options Reduce Benefit Costs, which will result in reduced
benefits for future [and current?] retirees. Reduce COLA to 1.5% or 2% - Prohibited? Establish Tier II rules for all Active Participants –
Prohibited? Allow School Districts to Provide Funded Supplemental Benefit Plans, if they Choose.
Freeze TRS As it Now Exists, and Institute a Defined Contribution Plan Of Some Sort for All New Hires
Pay more taxes somewhere State Income Taxes Local Taxes to Assume the Funding Obligation
Do Some of Both
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Other Benefit Plans – A Few Words
State Teachers Health Insurance Plan Chicago Teachers Plan IMRF – Illinois Municipal Retirement Fund Glenview Benefit Plans Police, Fire, and Park District, Generally
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Illinois Teachers’ Health Insurance Security Fund - OPEB This “fund” has a net asset deficit of $80 million as of
December 31, 2013 The AAL as of December 31, 2013 was $19.5 billion. The TRS manages the Teachers’ Retirement Insurance
Program [TRIP]. OPEB disclosures not yet required – they are coming from GASB – so data is very limited.
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Chicago Teachers’ Pension Fund – Pension and Health Insurance [OPEB]
$ Millions
Pension
OPEB Total
AAL – Present Value of Liability 20,316.9 1,938.9 22.255.8
Assets 10,815.7 36.0 10,851.7
Unfunded Liability 9,501.2 1,902.9 11,404.1
Funded Status Ratio 53.23% 1.86%Discount Rate/Return Assumption 7.75% 7.75%2014 Under-funded Contribution 134.4 100.1
234.5Plan Participants 63,194 63,143Covered Payroll 2,233.3 2,233.3Participant Contribution 9.0% 0.0%
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
IMRF Plan Summary
Participants Benefits determined under Tier I if hired before 2011, and Tier II if hired on or after January, 2011, as in other Illinois State Plans.
Each participating municipal employer will have its own funded status based on the employees in its Plan, and the history of contributions.
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
IMRF – Illinois Municipal Retirement Fund
$ Billions – December 31, 2014Pension OPEB TotalAAL – Present Value of Liability $37.4 $1.8 $39.2Assets – GASB/Fair Value $29.7 $0.0 $29.7Unfunded Liability $7.7 $1.8 $9.5Funded Status Ratio – GASB 79.3% 0.0%Funded Status - Actuarial 87.3% 0.0%Funded Status – Fair Value of Assets 93.0% 0.0%Discount Rate/Return Assumption 7.5% 7.5%Plan Participants 405,170Covered Payroll $6.7Participant Contribution 4.5%, 7.5%
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Glenview, Illinois Plans’ Summary Tier I Participants – hired before January 1, 2011:
At age 50, with 20 years of service, benefit is 50% of salary Benefits accrue at 2.5% year from 20 to 30 years of service, and 1% thereafter to a
maximum of 75% Benefits are computed on salary on the last day of service Benefits receive a 3% COLA annually, compounded Participants contribute 4.50% of pay for IMRF, 9.91% for Police, and 9.9455% for Firefighters
Tier II Participants - hired on or after January 1, 2011: At age 55, with 10 or more years of service, benefit is 2.5% for each year of service, based
on a maximum salary for benefits of $106,800, increased annually thereafter. Participants with 10 years of service, but fewer than 20 years, can retire at age 60 with a
reduced benefit. Benefits receive an annual COLA adjustment of the lesser of 3% or one-half of the change in
the consumer price index, compounded. Participants contribute 4.50% of pay for IMRF, 9.91% for Police, and 9.9455% for Firefighters.
Glenview, Illinois Retirement Benefit Plans - $ MillionsDecember 31, 2014
IMRF Police Fire OPEB TotalJanuary 1, 2014 Valuation: Actuarial Liability [AAL] $50.1 $73.9 $77.0 $10.1 $211.1 Actuarial Asset Value $36.1 $60.6 $55.9 $0.0 $152.6 Funded Ratio
72.15%
82.02%
72.53%
0.0.% Earnings/Discount Rate 7.00% 7.25%
5.00%December 31, 2014 Valuation: Total Pension Liability $90.8 $104.3 N.A. $195.1 Plan Fiduciary Net Position $64.2 $65.3 $129.5 Funded Ratio 70.72% 62.44% Earnings/Discount Rate 6.44%
7.25% Actual Return for 2014 4.58%
6.95% Village Contribution % of Payroll
25.21%
29.36%
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015
Comments on Other Plans
Some Police and Fire Plans are well funded. Many Police and Fire Plans, particularly Chicago, are
poorly funded