Pension Reform Presentation by Gregg at US Conference of Mayors 82nd Annual Meeting

Gregg was a speaker on Pension Reform at the 82nd Annual  Meeting of the United States Conference of Mayors in Dallas on June 23, 2014.  Co-presenters for the workshop on Pension Reform were:

  • Stephanie Rawlings-Blake, Mayor of Baltimore
  • Chuck  Reed, Mayor of San Jose
  • Theresa Cruz Myers, VP, Great-West Financial

The following topics were discussed during Gregg’s portion of the  presentation.

Public Pension Reform:

Consider Your Many Options…..Before You Have Few of Them

 Why All The Turmoil in the Public DB World?

 Three Major Pressure Points on Public DB Plans:

  • GASB 68 Reporting Standards
  •  “Net Pension Liability” or NPL
  • Funding Status
  • Unfunded Liabilities & Low Funding Ratios for Current Benefit Accruals
  • Cost
  • Many Plans More Expensive Than Anticipated or Employer Can No Longer Afford
  • Costs Rising Dramatically, Even for “Healthy” Plans

The Other Shoe……….

The Elephant in the Room is the Assumed Rate of Return:

  •  Most Public Plans use 7%-8.5% Assumed Rate of Return (ARR)
  •  Average Among 126 Larger Plans is 7.72%*
  •  Average Discount Rate for Corporate Plans is 4.56% (mandated to use Aa corporate bond rates)
  • Many Experts Believe Future Returns Will Be Much Lower than Historic Yields
  •  Investment Return Is About 60% of the Revenue for Public Plans
  •  Investment Returns Below the ARR Can Dramatically Increase the Cost of the Plan

Most Public Plan Sponsors Considering Their Options

  •  Responses to GASB 68 Depends Upon Your Plan Status:
  • “Healthy” Plans That Are Well Funded:
  • Tweak Benefit Formulas to Bring Long Term Costs Down
  • Plans With Funding Issues:
  1.          Hybrid Plan (combination DB & DC)
  2.          Cash Balance Plan
  3.          Defined Contribution Plan
  •  Most (but not all) Would Apply to New Employees Only

“Healthy” Plans:

  •  Increase retirement age for new employees
  •  Reduce COLA formulas
  • Eliminate “Spiking” and/or change definition of compensation
  • Change or eliminate DROP Plans
  • Review plan funding assumptions, in particular the Assumed Rate of Return.

For Cities That Determine the DB Plan is not Sustainable: 

  • Create a “Hybrid” Plan:
  • Combination DB & DC
  • Employer funds a smaller DB benefit (i.e; 1% of pay times years of service)
  • Employee funds a DC account (5%-10% of payroll)

Cash Balance Plan

  • A DB Plan funded like a DC Plan

DC Only Plan

  • 401(k) style plan like those used in private sector

Summary

  •  ”Pension Reform” of some type is affecting all cities
  • The Steps You Must Take Depends on a Variety of Factors:
  • Funding status of your plan
  • Affordability
  • Political climate back home
  • Stakeholders (employees, unions, taxpayers) interests

The Important Thing is to Take Action While You Have Many Options Available – Waiting Too Long Reduces Your Options 

*Source: NASRA, April 2014

The above presentation is for information and education purposes only.  It is not legal or investment advice.  The presentation solely reflects the views of the presenter and not the United States Conference of Mayors or any of the co-presenters. 

For more discussion and topics on public pension policy, find us at:

www.gregoryseller.com