NCCCMA Winter Seminar

Michael WilliamsonDirector, North Carolina Retirement

Systems

How Did We

Get Here?

Benefit Enhancements?Purchasing Power of Retirement Benefits by Year of Retirement

Adjusted for Inflation, COLAs, and Formula Increases

80%

85%

90%

95%

100%

105%

110%

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Year of Retirement

Purc

hasi

ng P

ower

Now

Com

pare

d to

in Y

ear

of

Reti

rem

ent

Benefit Enhancements?LGERS Multiplier

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

Year

3 Funding SourcesThe Retirement Systems Assets come

from 3 sources: Working employees contribute 6

percent of each paycheck Employers contribute annually based

on recommendations from the Systems’ actuary

The State Treasurer invests funds in the System, which generates investment earnings

Local Governmental Employees’ Retirement System

Year Ended December 31, 2007

Sources of Funds

Investment

Income

$1,386,248,218

71.5%

Employee

Contributions

$301,094,054

15.5%

Employer

Contributions

$252,165,044

13.0%

Other

Income

$99,880

0%

2008 Loss: $4.9 billion How did we lose $4.9 billion? 12/31/2007 Assets = $17,891 million 2008 actual return = -20%

Average large public fund = -26% S&P 500 = -37%

Expected return = 7.25% Loss of about 27.25% of $17,891 or

$4,875 Active LGERS payroll estimated at $5.3

billion. The losses we experienced equals about

92% of all the local payrolls in NC

Contributions:

Where are We?

Contribution History

LGERS Contribution History

0

1

2

3

4

5

6

7

1975 1980 1985 1990 1995 2000 2005 2010

Year Beginning July 1,

Ba

se

Co

ntr

ibu

tio

n a

s %

of

Pa

y

Employer Employee

FY 10-11 Contributions

LGERS

Estimated Salaries $5,321

FY10 Actual 4.80% Base = $255

FY11 ARC 6.35% Base = $338

Dollar amounts are in $ millions.

Some employers contribute more due to accrued liability or death benefit. Base rate for law enforcement = 6.41% after court cost offset.

Projected Employer Contributions

What Can We Do?

Invest our Way Out?

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

10/1/2007 1/9/2008 4/18/2008 7/27/2008 11/4/2008 2/12/2009 5/23/2009 8/31/2009 12/9/2009

S&P 500 Index

Required Return to Get Back

Need return on fund of 34% in 2010 to get back to funding situation at 12/31/2007.

Only 50% invested in stock market, so market needs to return 61%.

Increase ContributionsReasons to Contribute the ARC (Annual

Required Contribution): Required by statute Maintain bond ratings 68 year history of responsibility ARC is less than needed to remain 100%

funded Avoid burden on future taxpayers Avoid slippery slope

Contribution Benchmarks

Average public fund: 8.7% of pay (DB only, FY08 PFS, only Soc Sec systems)

Highest system in PFS: 31.5% of pay Neighbors:

SC: 8.05%TN: 9.36%VA: Varies, up to 22%GA: 10.39%

More Comparisons

Average large private-sector employer: 7.3% of pay (DB & DC, BLS, June 2009)

Cost of new benefits earned each year: around 6.3% of pay

Employer Contribution Context

LGERS Asset/Compensation/Contribution Values

-

1,000

2,000

3,000

4,000

5,000

6,000

Asset Loss ReportedCompensation

EmployerContributions

FY10

EmployerContributions

FY11

Increase inContributions

$ m

illio

ns

Slippery Slope

New Jersey: cut contribution in 1992, again in 1994, again in 2009, mostly for short-term political gain

Some abandoned after 2000-03 market drop thinking situation was temporary (it wasn’t): Maryland, Kentucky, Colorado, Pennsylvania

Some have never had the discipline, but tried numerous times to establish it: Illinois, West Virginia, Oklahoma, Washington

Contribution

Relief

Initial Contribution Relief

Losses occurred mostly in fall of 2008

Delay in effective date of valuation to July 1, 2010

5-year smoothing of assets, so phase into full contribution over 5 years beginning July 1, 2010

Roughly 14 year amortization period after phase in complete

Alternative Description of Contribution Relief

You borrow $10,000 at a 7% interest rate

Which of the following repayment approaches seems most prudent? Pay off in one year by cutting

expenses and selling possessions Payment similar to minimum

payment on credit card ($1,900 per year)

More Choices

Level payments over 15 years ($1,079 per year)

Pay interest only and pay off loan in the future ($700)

No payment for 2 years, then phase into full payment over 5 years. (produces payments of $0; $0; $170; $336; etc.)

Further Contribution Relief ARC in FY09-10 = 4.24% of pay

Actual contribution in FY09-10 = 4.80% of pay

Proposed that Board allow local governments to use that 0.56% of pay credit balance in first year to offset 6.35% contribution

Net result would have been 6.35% - 0.55% = 5.80% (0.01% difference is adjustment for timing)

Assumptions Contribution requirements depend

on assumptions about the future Examples:

How long retirees will live to collect benefits

How much investments will earnHow much salaries will increase (benefit based on final four years)

Salary Increase Assumption

Long-term assumption over next 20 to 30 years

Measures increase for an employee, not for a position

Two components: Budget for salary increases: 3.75% Promotions: varies by age, average about

1% Total increase about 4.75%

Salary Increase Assumption

Experience study will update 3.75% using forecasts based on current economic environment

Promotion component based on current pay structure, for example how much more you pay 30 year veteran compared to new hire

Both components fully up-to-date, not based on past that may not be as relevant

Retirement Assumption

Also a long-term assumption based on actual experience

We expected people to delay retirements with the recession

We were wrong

Benefit Changes

Explicit employee contribution increase Requires statutory change May face legal obstacles

Implicit employee contribution increase Limit pay increases and use funds to make

contributions

Design changes through Future of Retirement Study Commission

Commission to review and recommend system that: Provides adequate retirement income at

reasonable retirement ages after an acceptable period of employment

Effectively manages investments, longevity, inflation and other retirement-related risks