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Staff Briefing October 24, 2011 House Finance Committee Senate Finance Committee
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
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
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
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Current Expenditures
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$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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$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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82.10%
80% 70% 66.70% 60% 50% 40% 30% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2010R
48.40%
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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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Cannot be less than 0% or more than 4% Investment returns are averaged or smoothed" over 5 year period
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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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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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108% 75%
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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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PENSIONS: JUDGES
Current Plan
Eligibility Member Contribution Benefit Accrual 0% - Hired before 7/97 8.75% all others
New Plan
12.00%
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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Benefit Accrual
COLA Vesting
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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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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
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
34.9%
37.1%
11.8%
11.8%
10.0%
11.8%
11.8%
11.8% FY 2015
UAAL
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
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
15.0%
FY 2012 UAAL
-10%
FY 2013 Current*
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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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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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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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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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103% 70%
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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$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
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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.
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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
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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%
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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
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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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Warwick 10.0%
Cranston 11.7%
Cranston 13.0%
Warwick 17.3%
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