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AGLF: Pension Update
May 4, 2018
Todd Tauzer Director, Municipal Pensions State and Local Governments
S&P Global Local Ratings Pension Approach
2
Direct Assessment
• Funded Ratio and Assumptions
Large Obligation
• Contribution practice• ADC strength (consider amortization, payroll, etc.)
Potential for Accelerating Payments
• Pension/OPEB Cost as % of Total Gov Fund Expenses• Influence from assumptions and methods
Budget Stress
Further Implications
Management Budgetary Flexibility
Budgetary Performance
Institutional Framework
- 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
S&P Global State Ratings Pension Approach
3
Actuarial Funding History
Plan Funding Progress
Source: S&P Global Ratings U.S. State Pensions: Funded Ratios Declined Again in 2016, October 18, 2017
4
Pension Survey Funded Ratios
State Trends: Ranked Funded Status
5
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%
Source: S&P Global Ratings 50-state annual reports
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.
State Trends: Funded Status on the Move
6
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%
Source: S&P Global Ratings 50-state annual reports
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.
Combined Medicaid, Debt Service, And Pension And OPEB Contributions Share Of General Fund Expenditures
7
0%
10%
20%
30%
40%
50%
60%
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Colo
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Tenn
esse
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aska
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akot
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izona
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Texa
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Miss
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New
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Wyo
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GF-Medicaid Exp % of Operating Expenditures Actual OPEB Payment as a % of Operating Expenditures
Debt service as a % of Operating Expenditures Pension Contributions as a % of Operating ExpendituresSources: State budget information and
NASBO Expenditure reports
U.S. State Pension Plan Funding Progress
8
Source: S&P Global Ratings U.S. State Pensions: Funded Ratios Declined Again in 2016, October 18, 2017
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 levelsRed: Pension contributions do not have an actuarial basis or are not usually fully funded
Investment Risk in U.S. State Pension Plans
9
Risky InvestmentsProportion 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.
• Plans Increase Riskier Investment Allocation to Meet Return Targets
Source: S&P Global Ratings U.S. State Pensions: Weak Market Returns Will Contribute To Rise In Expense, September 12, 2016
Looking ahead
10
Despite improved
market returns in 2017,
continued changes to
plan assumptions
Pressure on required
contributions and budgets
Increase in reform efforts and creative
solutions
Testing legal boundaries for
change
Comparison: California and Illinois
Source: S&P Global Ratings For California, The Road To Fiscal Recovery; For Illinois, The Road Not Taken, April 19, 2018
General Fund Total Fund Balance Share of Expenditures
Comparison: California and Illinois
Source: S&P Global Ratings For California, The Road To Fiscal Recovery; For Illinois, The Road Not Taken, April 19, 2018
Pension Path
S&P Global: Select Pension/OPEB Publications
13
“Pension Pressures Will Weigh On 15 Largest U.S. Cities' Budgets” March 8, 2017
“Dallas And Houston Start To Address Pension Liabilities, But Substantial Work Remains” February 9, 2017
"Rising OPEB Liabilities For The 15 Largest U.S. Cities Could Strain Budgets And Pose Credit Risks" October 10, 2017
“Jacksonville Adopts Pension Reform, But The Ultimate Impact On Credit Quality Remains Uncertain” May 24, 2017“Dallas Pension Reforms Cemented via State Legislature
Vote” June 1, 2017
“Local Government Pension And Other Postemployment Benefits Analysis: A Closer Look” November 8, 2017
“U.S. State Retiree Medical and Other Postemployment Benefit Liabilities Keep Rising” October 18, 2017
“New GASB Statements 74 And 75 Provide Transparency For Assessing Budgetary Stress on U.S. State & Local Government OPEBs” March 14, 2018
As of April 2018
“U.S. State Pensions: Funded Ratios Declined Again in 2016” October 18, 2017
“For the Five Highest-Funded U.S. State Pension Plans Being Proactive Keeps Liabilities Manageable” Oct. 24, 2017“Pension Obligation Bonds Credit Impact On U.S. Local
Government Issuers” December 6, 2017“Recent U.S. State Pension Reform: Balancing Long-Term Strategy and Budget Reality” February 9, 2018
“U.S. Not-For-Profit Health Care Pensions: 2017 Funded Ratios Benefit From Robust Returns” March 28, 2018
“Pension Pressures Are Likely To Weigh On Illinois Municipal Credit Quality” February 22, 2018
“For California, The Road To Recovery: For Illinois, The Road Not Taken” April 19, 2018
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