Teachers’ Retirement System (TRS): Final Report · 15 But since 2000, performance has fallen considerably short of the assumed return. Actual vs. Assumed Investment Return, 2001-2014

Jean-Pierre Aubry and Anek Belbase

Center for Retirement Research at Boston College

Connecticut Pension Analysis

Oct 28th, 2015

Hartford, CT

An Analysis of Connecticut State

Teachers’ Retirement System (TRS):

Final Report

1

Overview

• Looking back

o TRS’ historical funded status

o Source of TRS’ unfunded liability (UAAL)

o Today’s funded status if TRS had been adequately funded

• Looking forward

o Funded levels and costs under current law and alternative

funding methods

o The impact of the TRS’ POB

2

Looking back….

Over the past two decades, TRS’ funding has

been below the national average.

3

Sources: Various actuarial valuations for Connecticut TRS; PENDAT (1990-2000); and Public Plans Database (2001-2014).

Funded Ratio, 1979-2014

0%

20%

40%

60%

80%

100%

120%

1979 1983 1987 1991 1995 1999 2003 2007 2011

Connecticut TRS

National average

POB issued

TRS provided benefits as far back as 1939,

but did not pre-fund until 1981.

4

Percentage of State and Local Plans Established or Significantly Restructured, by Date

Sources: Various actuarial valuations for Connecticut TRS; PENDAT (1990-2000); and Public Plans Database (2001-2014).

6.1%

3.0%1.8%

5.3% 5.0%

16.1%

29.6%

14.6%15.6%

5.8%

0%

10%

20%

30%

40%

TRS

5

Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.

Sources of Change to UAAL, 1983-2014

But TRS’ poor funded ratio also reflects

inadequate contributions and poor returns

2.1

-2.01.2

-0.7 0.6-1.0 0.2

2.6

8.5

-$4

$0

$4

$8

$12

$16

Bil

lions

ARC < UAAL growth, 4.0

Contributions < ARC, 1.5

Before 2000, the impact of inadequate

contributions was offset by high returns.

6



-3.5

0.0 0.0 -0.6 0.1

-1.4

0.0

2.0

-0.1

-$4

$0

$4

$8

$12

$16B

illi

ons



But after 2000, poor returns added to the

impact of inadequate contributions.

7



5.7

-2.01.2

-0.1 0.6 0.4 0.2

0.6

8.6

-$4

$0

$4

$8

$12

$16

Bil

lions



8

Two factors contributing to the UAAL

growth were controllable.

• Contributions

• The investment return assumption

Actual contributions fell short of TRS’

reduced funding schedule.

9

Percent of Annual Required Contributions Paid from 1983-2014


0%

20%

40%

60%

80%

100%

120%

1983 1988 1993 1998 2003 2008 2013

Original funding schedule

Actual contributions

TRS’ method for calculating the ARC did

not keep up with UAAL growth.

10

Contributions to CT TRS, 1983-2014, in Billions


$0.0

$0.3

$0.6

$0.9

$1.2

1983 1987 1991 1995 1999 2003 2007 2011

Bil

lions

Minimum contribution to Prevent UAAL Growth

Annual Required Contribution

Actual Contribution

Also, the assumed rate of return was, and

continues to be, unusually high.

11

Assumed Investment Return, 1990-2014

Sources: Actuarial valuations for Connecticut TRS; PENDAT (1990-2000); and Public Plans Database (2001-2014).

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

1990 1993 1996 1999 2002 2005 2008 2011 2014

Connecticut TRS

National average

12

Two of the factors contributing to the UAAL

growth were less controllable.

• Actual demographic experience

• Actual investment returns

13

Demographic experience seems to have had

only a minor role in UAAL growth.

Impact of Actuarial Experience as a Percent of the Overall Change in the UAAL since 2009

Sources: Authors’ calculations based on Connecticut TRS actuarial valuations (2009-2014).

6.2%

93.8%

Demographic experience Non-demographic factors

14

Up to 2000, TRS’ investment performance

was better than the assumed.

Actual vs. Assumed Investment Return, 1983-2000

Sources: Actuarial valuations for Connecticut TRS; Census of Governments (1983-2000); and PENDAT (1990-2000).

13.0%

8.5%

0.0%

5.0%

10.0%

15.0%

Average Return from 1983-2000

2000 Assumed Return

15

But since 2000, performance has fallen

considerably short of the assumed return.

Actual vs. Assumed Investment Return, 2001-2014

Sources: Actuarial valuations for Connecticut TRS; Census of Governments (2001-2014); and Public Plans Database (2001-2014).

5.4%

8.5%

0.0%

5.0%

10.0%

15.0%

Average Return from 2001-2014

2014 Assumed Return

16

Where would TRS be today if Connecticut

had contributed 100 percent of the ARC?

Funded Ratio, 1985-2014


National average = 74%

0%

20%

40%

60%

80%

100%

120%

1985 1989 1993 1997 2001 2005 2009 2013

Paying full ARC/Level-dollar

Paying full ARC

Actual Contributions (w/ POB)

Actual Contributions (w/o POB)

POB

17

Looking forward….

18

The key question for TRS is how to deal with

the existing UAAL.

2014 Actuarial Costs as a Percent of Payroll, by Element

Sources: Actuarial valuation for Connecticut TRS; and Public Plans Database (2014).

6.0% 5.6%

3.7%7.4%

19.9%11.3%

0%

10%

20%

30%

40%

Connecticut TRS National average

Employer UAAL payment

Employer normal cost

Employee contribution

19

Three factors determine the trajectory of

UAAL amortization payments.

1. Payment schedule:

• Level dollar: front-loaded payments

• Level percent of pay: back-loaded payments

2. Funding period

• Closed amortization period: fixed date for full funding

• Open amortization period: no fixed date

3. Length of amortization period

20

One way forward is to pay off the UAAL by

2032 (current law)...

TRS Funded Ratio under Alternative Funding Methods, 2014-2046

Source: Authors’ calculations based on various actuarial valuations for Connecticut. TRS

0%

20%

40%

60%

80%

100%

120%

2014 2019 2024 2029 2034 2039 2044

Current Law

Level-dollar

21

…but costs will remain high for next two

decades.

ARC under Alternative Funding Methods, 2014-2046


$0

$2

$4

$6

$8

2014 2019 2024 2029 2034 2039 2044

Bil

lions Current Law

Level-dollar

22

ARC under Alternative Funding Methods and Investment Returns, 2014-2046

Source: Authors’ calculations based on various actuarial valuations for Connecticut .

$0

$2

$4

$6

$8

2014 2019 2024 2029 2034 2039 2044

Bil

lions

Current Law, 5.5-percent return

Level-dollar, 5.5-percent return


Poor investment experience relative to the

assumed could make matters much worse.

23

Relaxing the requirement to pay off the

UAAL by 2032 will delay full funding...

CT TRS Funded Ratio under Alternative Funding Methods, 2014-2046


0%

20%

40%

60%

80%

100%

120%

2014 2019 2024 2029 2034 2039 2044

Level-dollar, 15-yr open, 8.5-percent return


24

…but reduces costs significantly over the

next 20 years.

ARC under Alternative Funding Methods, 2014-2046


$0

$2

$4

$6

$8

2014 2019 2024 2029 2034 2039 2044

Bil

lion

s

Level-dollar, 15-yr open, 8.5-percent return


25

If TRS also used a more conservative return

assumption, costs would stay about the same.

ARC under Alternative Funding Methods and Assumed Returns, 2014-2046


$0

$2

$4

$6

$8

2014 2019 2024 2029 2034 2039 2044

Bil

lions

Current Law, 8.5% Discount Rate

Level Dollar, 15-yr open, 8.5% Discount Rate

Level Dollar, 15-yr open, 7% Discount Rate

26

What about the less controllable factors?

• Investment risk can be shared among the plan stakeholders

through a predetermined pattern of contribution increases and

benefit cuts.

• Incremental increases to the normal cost due to revised

actuarial assumptions can be shared equally between

employees and employers.

27

And what about TRS’ POB?

Connecticut TRS issued a POB for $2 billion in 2008.

• Investment returns aside, the POB is simply a restructuring of

pension debt for the plan sponsor.

• Borrowed funds immediately improve the plan’s funded ratio

and lower annual pension costs. This is offset by the POB’s

annual interest payments and the repayment of principal.

• If the returns earned on the borrowed money are higher than

the interest paid, then the bond can also be a net gain to the

government’s finances. Otherwise, it can be loss.

28

Annualized Return on POB Proceeds, 2008 to 2014


How has the POB fared to-date?

6.4%5.8%

-0.3%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Annualized Investment

Return for TRS

Annualized POB Debt

Service

Annualized POB

Performance

29

Annualized Return on POB Proceeds at Various Assumptions of Investment Returns


What does the investment risk for TRS’

POB look like going forward?

2.7%

2.2%

1.6%

1.1%

0.5%

0.0%

-0.6%

-1.2%

-1.8%

-2.5%-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0%

30

State Costs with and without POB issuance, 2008-2032


How would contributions look if the POB

had not been issued?

$0

$1

$2

$3

$4

2008 2012 2016 2020 2024 2028 2032

Bil

lions

Existing Scenario: POB issued

Alternative Scenario: No POB issued

Conclusions

31

TRS’ current troubles are mainly the result of:

• Inadequate contributions

• Poor investment performance relative to the assumed

return.

• The key to the future is making full required contributions.

• But paying off the UAAL by 2032 comes at a significant cost

• Extending the payment horizon could spread out the pain over

a longer period.

• Lowering the assumed return and instituting procedures that

automatically respond to bad outcomes would mitigate risk.

32

• The Center for Retirement Research at Boston College

http://crr.bc.edu

• Public Plans Database (PPD)

http://publicplansdata.org

• State and Local Pension Research

http://crr.bc.edu/special-projects/state-local-pension-plans/

Jean-Pierre Aubry

Assistant Director of State and Local Research

[email protected]

Documents

Teachers’ Retirement System (TRS): Final Report · 15 But since 2000, performance has fallen considerably short of the assumed return. Actual vs. Assumed Investment Return, 2001-2014