AGLF: Pension Update Todd Tauzer Director, Municipal Pensions - PowerPoint PPT Presentation

AGLF: Pension Update Todd Tauzer Director, Municipal Pensions State and Local Governments May 4, 2018

S&P Global Local Ratings Pension Approach Direct Assessment Large Obligation • Funded Ratio and Assumptions Potential for Accelerating Payments • Contribution practice • ADC strength (consider amortization, payroll, etc.) Budget Stress • Pension/OPEB Cost as % of Total Gov Fund Expenses • Influence from assumptions and methods Further Implications Budgetary Budgetary Institutional Management Flexibility Performance Framework 2

S&P Global State Ratings Pension Approach Actuarial Funding Plan Funding Progress History - Assumed rate of return vs. actual performance - Amortization method - Ratio of actives to beneficiaries - Frequency of updates to experience studies - Cash flow assumptions underlying GASB plan asset depletion projections 3

Pension Survey Funded Ratios Source: S&P Global Ratings U.S. State Pensions: Funded Ratios Declined Again in 2016, October 18, 2017 4

State Trends: Ranked Funded Status Fiscal 2016 2015 2014 2013 2012 Wisconsin 98.2% 102.7% 104.6% 99.9% 99.9% South Dakota 96.9% 104.1% 107.3% 99.9% 92.6% New York 93.6% 98.1% 102.3% 88.3% 88.2% Tennessee 88.0% 91.3% 95.1% 93.6% 91.5% North Carolina 87.2% 94.6% 98.2% 96.0% 95.4% … … … … … … Hawaii 51.3% 62.4% 63.9% 60.0% 59.2% Connecticut 41.4% 49.4% 50.5% 49.1% 49.1% Illinois 35.6% 40.2% 41.4% 39.3% 40.4% Kentucky 31.4% 37.7% 40.7% 47.7% 49.9% New Jersey 30.9% 37.8% 42.5% 63.5% 64.5% Fiscal years 2014-2016: reflects aggregate funded ratio across plans as of state fiscal year using GASB 67 plan reporting. 2012-2013 reflects aggregate funded ratios as of plan valuation date under GASB 25 reporting. Source: S&P Global Ratings 50-state annual reports 5

State Trends: Funded Status on the Move Fiscal 2016 2015 2014 2013 2012 West Virginia 71.9% 76.9% 77.6% 67.2% 63.2% Ohio 73.5% 78.8% 74.7% 73.3% 65.1% Kansas 65.1% 65.2% 66.8% 59.9% 56.4% Oklahoma 72.6% 80.3% 82.5% 66.5% 64.9% Montana 71.2% 74.5% 76.0% 73.3% 63.9% … … … … … … Pennsylvania 52.8% 57.6% 60.2% 62.3% 63.9% Missouri 60.0% 66.9% 72.1% 76.6% 78.0% Kentucky 31.4% 37.7% 40.7% 47.7% 49.9% Minnesota 52.1% 78.4% 80.7% 74.7% 75.0% New Jersey 30.9% 37.8% 42.5% 63.5% 64.5% Fiscal years 2014-2016: reflects aggregate funded ratio across plans as of state fiscal year using GASB 67 plan reporting. 2012-2013 reflects aggregate funded ratios as of plan valuation date under GASB 25 reporting. Source: S&P Global Ratings 50-state annual reports 6

Combined Medicaid, Debt Service, And Pension And OPEB Contributions Share Of General Fund Expenditures 60% 50% 40% 30% 20% 10% 0% Oklahoma Pennsylvania Rhode Island Illinois Connecticut Maryland Vermont Virginia New Hampshire Hawaii Delaware Missouri Kentucky Arkansas Kansas Georgia New Jersey Maine North Carolina South Dakota Louisiana Florida Idaho Alabama California South Carolina Massachusetts Colorado Iowa Wisconsin Minnesota West Virginia Montana Tennessee Alaska North Dakota Washington Indiana Arizona Nevada Ohio New York Texas Michigan Mississippi Nebraska New Mexico Wyoming Oregon Utah GF-Medicaid Exp % of Operating Expenditures Actual OPEB Payment as a % of Operating Expenditures Sources: State budget information and Debt service as a % of Operating Expenditures Pension Contributions as a % of Operating Expenditures NASBO Expenditure reports 7

U.S. State Pension Plan Funding Progress In our view, states that consistently fund full required contributions on an actuarial basis and use conservative assumptions and methods are more likely to effectively manage their pension liabilities and the associated long-term budgetary costs than states that do not. Blue: Pension contributions are actuarially based and usually meet or exceed required levels Red: Pension contributions do not have an actuarial basis or are not usually fully funded Source: S&P Global Ratings U.S. State Pensions: Funded Ratios Declined Again in 2016, October 18, 2017 8

Investment Risk in U.S. State Pension Plans • Plans Increase Riskier Investment Allocation to Meet Return Targets Risky Investments Proportion of portfolio allocation among equity and alternative investments - averaged 68% as of 2015 - grew by more than 8% compared to five years earlier Data from reported plan investment allocations between 2010 and 2015 found on the Public Plans Data website maintained by the Center for Retirement Research at Boston College or from plan reports. Source: S&P Global Ratings U.S. State Pensions: Weak Market Returns Will Contribute To Rise In Expense, September 12, 2016 9

Looking ahead Despite improved market returns Pressure on Increase in Testing legal in 2017, required reform efforts boundaries for continued contributions and creative change changes to and budgets solutions plan assumptions 10

Comparison: California and Illinois General Fund Total Fund Balance Share of Expenditures Source: S&P Global Ratings For California, The Road To Fiscal Recovery; For Illinois, The Road Not Taken, April 19, 2018

Comparison: California and Illinois Pension Path Source: S&P Global Ratings For California, The Road To Fiscal Recovery; For Illinois, The Road Not Taken, April 19, 2018

S&P Global: Select Pension/OPEB Publications “Dallas And Houston Start To Address Pension Liabilities, But “Pension Pressures Will Weigh On 15 Largest U.S. Cities' Substantial Work Remains” February 9, 2017 Budgets” March 8, 2017 “Jacksonville Adopts Pension Reform, But The Ultimate “Dallas Pension Reforms Cemented via State Legislature Impact On Credit Quality Remains Uncertain” May 24, 2017 Vote” June 1, 2017 "Rising OPEB Liabilities For The 15 Largest U.S. Cities Could “Local Government Pension And Other Postemployment Strain Budgets And Pose Credit Risks" October 10, 2017 Benefits Analysis: A Closer Look” November 8, 2017 “U.S. State Retiree Medical and Other Postemployment “U.S. State Pensions: Funded Ratios Declined Again in Benefit Liabilities Keep Rising” October 18, 2017 2016” October 18, 2017 “For the Five Highest-Funded U.S. State Pension Plans Being “Pension Obligation Bonds Credit Impact On U.S. Local Proactive Keeps Liabilities Manageable” Oct. 24, 2017 Government Issuers” December 6, 2017 “Recent U.S. State Pension Reform: Balancing Long-Term “Pension Pressures Are Likely To Weigh On Illinois Strategy and Budget Reality” February 9, 2018 Municipal Credit Quality” February 22, 2018 “New GASB Statements 74 And 75 Provide Transparency For Assessing Budgetary Stress on U.S. State & Local Government “U.S. Not-For-Profit Health Care Pensions: 2017 Funded OPEBs” March 14, 2018 Ratios Benefit From Robust Returns” March 28, 2018 “For California, The Road To Recovery: For Illinois, The Road Not Taken” April 19, 2018 As of April 2018 13