Unions: Unfunded Liability - Tom Holsman, Sean O'Donoghue, Rocky Miller - May 2011

Unions: Unfunded LiabilityPresented by: Tom Holsman, CEO Sean O’Donoghue, DIR Rocky Miller

Topics for Discussion• PPA Refresher• FASB• Actuarial Projections• Liability By Trade-Where Do We Go From Here• Q&A

The Problem• Economic woes put defined benefit plans into trouble.• Typical 2008 & 2009 investment returns were in the range of -20% to –30%.• Compared to expected returns, this means most funds lost one- fourth to one-third of their expected value.• For most plans, the value of the 2008 investment loss exceeds the value of all future benefit accruals. – Benefit accruals could be frozen and these plans would still cost more to fund in 2009 (and later) than before the crisis.

PPA Refresher

Pension Protection Act (PPA) - Certification Criteria “Yellow Zone” “Orange Zone” “Red Zone” Endangered Seriously Endangered Critical• Not in critical status, and • Not in critical status, and • AFD in the current plan year or projected in the next 3 years (4• Funded percentage < 80% • Funded percentage < 80% years if < 65% funded), without regard to PPA amortization OR AND extensions OR• Accumulated Funding • AFD in current plan year or • Funded percentage < 65% and Deficiency (AFD) in current projected in the next 6 years, fails 7-year solvency test plan year or projected in next taking into account PPA 6 years (taking into account amortization extensions OR PPA amortization extensions) • Expected contributions for Note: An “Accumulated current plan year do not cover Funding Deficiency” means normal cost plus interest on the Credit Balance is unfunded liability, PV of inactive negative liability exceeds PV of active liability, and projected AFD in current or next 4 years OR • Fails 5-year solvency test Status is “Green”, if none of “Yellow”, “Orange”, or “Red” tests applies

Yellow Zone (Endangered Status) Requirements Yellow Zone vs. Red Zone Yellow Zone Red Zone (Funding Improvement Plan) (Rehabilitation Plan) • By the end of the period, pass all • By the end of the period, reduceRequirements for 10-year critical status tests. underfunding by one-third.“funding improvement” or • By the end of the period, no“rehabilitation” period: • During the period, avoid funding projected funding deficiencies for deficiencies (reflect amort ext). next 10 years (reflect amort ext). YES, until a CBA consistent with theDo surcharges apply on rehabilitation plan is adopted.employer contributions? NO (On $1.30 hourly rate, 5% or 6.5¢ for first year, 10% or 13.0¢ for future years) YES, including early retirement subsidies,Can reduce or remove NO disability benefits, and other ancillaryadjustable benefits? benefits. • One schedule showing only reduced • A “default” schedule (e.g., for non- benefits, conforming employers).Schedules to bargaining • One schedule showing only increased • Additional schedules are optionalparties: contributions, and (e.g., a “preferred” schedule for • Possible alternate schedules showing conforming employers). a combination. Copyright © Horizon Actuarial Services, LLC. All Rights Reserved.

“Yellow Zone” (Endangered Status) Requirements • Plan must notify interested parties 30 days after actuary certifies as endangered • Funding Improvement Plan (FIP) – Must be adopted by Trustees within 240 days after certification – Include options or range of options to improve plan funding – Goal is to reduce underfunding by one-third over 10 years • Reduce underfunding by one-fifth over 15 years for seriously- endangered plans 70% or less funded (or over 10 years if at least 70% funded) – Also, avoid accumulated funding deficiencies • Schedules to bargaining parties – Provided by Plan within 30 days after adoption of FIP – At least one schedule for increased contributions, one for reduced benefits • Funding improvement period – Begins after expiration of contracts covering 75% of active participants (or 2 years after adoption of FIP) Copyright © Horizon Actuarial Services, LLC. All Rights Reserved.

Red Zone (Critical Status) Requirements• Plan must notify interested parties 30 days after actuary certifies as critical• Rehabilitation plan – Must be adopted by Trustees within 240 days after certification – Include options to exit critical status in 10 years (or longer if needed)• Schedules to bargaining parties – Provided by Plan within 30 days after adoption of rehab plan – Preferred schedule (or schedules) and default schedule – Default schedule is to reduce benefits (minimum of 1% of contributions)• Plan may reduce or eliminate “adjustable” benefits – Includes early retirement subsidies, special death benefits, etc.• Surcharges apply to employer contributions – 5% for first year, 10% thereafter – Surcharges apply 30 days after notice given and terminates upon effective date of contract consistent with rehab plan• Rehabilitation period – Begins after expiration of contracts covering 75% of active participants (or 2 years after adoption of RP) Copyright © Horizon Actuarial Services, LLC. All Rights Reserved.

Red Zone: Adjustable Benefits• Benefits, rights, and features other than accrued benefit payable at normal retirement age may be reduced or eliminated. – Qualified joint and survivor annuity is protected, but subsidy is not. – Benefits in pay status before notice of certification are protected. – Adjustable benefits for active and inactive vested participants are not protected.• Adjustable benefits include: – Early retirement subsidies – Social Security level income option – Subsidized disability benefits – Subsidized pre-retirement survivor annuities• Cannot reduce adjustable benefits until 30 days after notice has been sent to participants and beneficiaries, contributing employers, unions. Copyright © Horizon Actuarial Services, LLC. All Rights Reserved.

Red Zone: Employer Surcharges• Mandatory surcharges apply to employer contributions – 5% of contributions in initial critical year – 10% of contributions in subsequent critical years – Terminates upon adoption of CBA consistent with rehab plan• Surcharge shall not apply until 30 days after employer receives notice. – Notice that the plan is in critical status and surcharges are in effect. – PPA does not specify when surcharge notice must be sent. – However, model critical status notice includes surcharge notification.• Surcharge shall not generate benefit accruals. Copyright © Horizon Actuarial Services, LLC. All Rights Reserved.

2008 vs. 2010• IFEBP zone status survey: 2008: 75% Green 14% Yellow 11% Red 2010: 24% Green 36% Yellow 40% Red

Stock market has come back nicely fromMarch 2009 lows….. …but still a long way to go.

Withdrawal Liability• Estimated growth in percentage of plans with withdrawal liability 1999: less than 5% 2009: more than 85%

Financial Accounting Standard Board FASB ObjectiveBackground Information:At the March 17, 2010 FASB Board meeting, the FASB chairmanannounced the addition of a new project aimed at expandingdisclosures about employer’s participation in a multiemployer plansThe project would require employers to disclose any potentialunfunded liability on financial statements.FASB is currently conducting “Outreach” to interested parties todetermine impact on employers

California Perspective / Where Do We Go From Here Q&A

CALIFORNIA PENSION PLANS Specific Funding Status Southern & Northern California Pension Plans • Operating Engineers • Carpenters • Laborers • Teamsters • Cement Masons • Iron Workers

OVERVIEW • Plans “Color”• Plans Withdrawal Liability • Projections

OPERATING ENGINEERS• Southern California – Currently Certified in “Red Zone” – Current Liability =Approx $• Northern California – Currently certified in the “Orange Zone”. – As of January 1, 2010, Liability = Approx. $1.45 billion – FIP required – CBA Increases All to Fringes

CARPENTERS• Southern California Carpenter – Currently in the “Green Zone” with no Unfunded Liability• Northern California Carpenters – Currently Certified in “Red Zone” – 13 Year “Recovery Improvement Plan” – Current liability in Plan= Approx $2 Billion

LABORERS• Southern California Laborers – Currently Certified in “Yellow Zone” – 2009-2012 Agreement -$0.25 allocated to pension – Expected to be in “Green Zone” by 2013• Northern California Laborers – Currently Certified in “Yellow Zone” – As of May 31, 2010 Liability= $900 million

CEMENT MASONS• Southern California – Currently Certified in “Yellow Zone” – Effective January 1, 2010 Liability= Approx $60 Million – FIP Required – $1.45 allocated to Fringes on July 1, 2010• Northern California – Currently in “Green Zone” – Effective August 31, 2010 Liability-Approx $143 Million – FIP not required

IRON WORKERS• Multi Statewide Agreement – Currently Certified in “Yellow Zone” – Unfunded Liability is Approx. $200 Million – FIP will need to be negotiated this year

TEAMSTERS• Multi Statewide Agreement: – Western Conference of Teamsters – Currently Certified in “Green Zone” – No Liability in Plan

Unions: Unfunded Liability - Tom Holsman, Sean O'Donoghue, Rocky Miller - May 2011

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Unions: Unfunded Liability - Tom Holsman, Sean O’Donoghue, Rocky Miller - May 2011 Presentation Transcript