Pension Debt Clock Press Briefing 2/24/16 State Capitol

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1 Pension Debt Clock Press Briefing 2/24/16 State Capil Comments I would like take 15 minutes share my perspectives as a retired HR executive & actuary (>35 years) & member of the Society of Actuaries. I am currently a self-employed consulting resource several public policy organizations. I appreciate Barry (Shutt s) friendship as I acknowledge and appreciate his steadfast commitment this critical issue as measured both by his countless hours and his personal expenditures. Of note, Barry is a SERS retiree at a time where some of his contemporaries are emotional regarding enactment of an ad-hoc pension COLA which would further increase the amount shown on this debt clock by perhaps $3B. I would also acknowledge Rep. John McGinnis s leadership in HB 900 dealing with long-overdue funding reforms a key element missing in most public pension reform proposals. So exactly what are we witnessing in this debt clock? In layman s terms it is the accumulated shortfall in PSERS & SERS combined. In general, we are dealing overstated assets & understated liabilities coupled with poor funding practices. Sadly, this is a national problem forcing actuaries study the question of when and not if insolvency is likely occur in the future. In fact Barry could easily have another debt clock for PA s municipal pension plans $ 8B & $16B Retiree Medical liabilities for state employees (OPEB). Such a trend is not sustainable. Page 1 of 5

2 In theory, pension funding is extremely straightforward. That is, pension systems should be accumulating assets such that benefits are funded as they are earned. This suggests that any deficits (unfunded liabilities) should be eliminated by the time any group retires. This is pension funding 101, With the age of the current PSERS workforce averaging 46, eliminating any current deficits over a horizon of years should be the state requirement as this equates roughly the remaining careers of this same workforce. This is the fundamental concept of intergenerational equity. So how are we doing? This question is analyzed annually. In PSERS alone, members have earned approximately $95B in liabilities versus accumulated assets of about $52B. This difference of $43B is termed an unfunded liability. This can also be expressed as a funded ratio, in this example we are 55% of where we should be. Of note these plans are also experiencing negative cash flow so it is especially hard grow an asset base faced with such realities. This growing debt is effectively a transfer cost the next generation and such a practice has disturbing parallels a legalized Ponzi scheme. This debt is the sum of several facrs including chronic underfunding, subpar investment results (versus an annual 7.5% expectation), retroactive benefit improvements and finally changes in actuarial assumptions (8% 7.5%). Page 2 of 5

3 In fact, this 7.5% annual investment return expectation remains a vulnerability taxpayers given many view this as less than 50% achievable in the long-run. This debt management issue is mired in politics which is particularly heightened in an election year. The familiar saying is there is a low political rate-of-return in properly funding publicsecr pension plans. I would also make the following eight observations: 1. Some continue incorrectly believe that the unfunded liability is based upon the assumption of all plan members retiring day. Rather this figure is based upon expected future retirement dates with average longevity. 2. There is no expectation of new members in these numbers - just benefit earned--date by current members. In fact, new members enter the plan with no unfunded liability. 3. Too often policymakers use the amorphous term pension reform prefaced by citing the most recent unfunded liability. However, these most recent reform proposals unnecessarily complicate plan changes for yet be hired members and which will do little nothing reduce ever-increasing UL. Somehow this tactic supposedly justifies not properly funding benefits for existing members. Some actually have proposed permanent tax increases in exchange for such plan design changes. Such a proposition defies logic especially as any new revenues are unlikely find their way better funding these pension systems. Page 3 of 5

4 4. We have been downgraded on successive occasions by credit rating agencies (S&P, Moody s & Fitch) due our singular inability manage this debt number down. We continue contribute 100% of a deficient state create rate masquerading as a state law. In short we have legalized underfunding in this state. 5. Any doubt just read the comments from S&P, & Fitch & Moody s as part of our successive debt downgrades Moody s Publication of February 4, 2016 Exhibit #4. Limited Options for Pennsylvania Avoid Accelerating Pension Costs. 6. You may hear the term will are making the Actuarially Recommended Contribution or ARC. Unfortunately, the term ARC is an obsolete and misleading term since individual states determine their own particular funding standards. There should be no joy in debt reduction periods exceeding 20 years in PA we even consider our 30 year funding statutes be unaffordable and as a result have legislation in place which has resulted in overrides collaring. 7. Some have suggested that we need take the steps necessary rein in cost-drivers especially in the area of pensions. The inconvenient actuarial reality is sustainable pension reform must involve increasing contributions wellabove the scheduled amounts (Moody s treading water). Page 4 of 5

5 FY FY Proper Standard PSERS % PSERS $ SERS% SERS $ Total 25.84% $3.5B 25% $1.5B $5B 30.03% $4.0B 29.5% $1.8B $5.8B 38% 43% $5.2B $5.8B 33% 38% $2.0B $2.2B $7.2B $8.1B 8. It is actuarially impossible design our way solvency with yet--be-hired employees unless you believe future insolvency is someone else s problem solve. The proposed design changes current employees are $1.7B relatively modest and are not likely be sustained in an inevitable court challenge. Pension reform means increasing contributions by $1.4 $2.3B above scheduled amounts for FY Given all this what is the incentive live, work & invest in PA?? Thank you again Barry for your good work. Footnote: Fitch Ratings-New York-13 August 2015: Pension obligation bonds (POBs) will not correct unsustainable benefit and contribution practices and is not a form of pension reform, Fitch Ratings says. Issuing POBs is neutral for some governments' credit quality and negative for others. In our view, credit quality is tied whether governments implement reforms make their underlying pension obligations sustainable over time. Page 5 of 5