Commissioner Bridget Gainer: Cook County Pension Committee Meeting - June 29, 2011

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Commissioner Bridget Gainer: Cook County Pension Committee Meeting - June 29, 2011

  1. 1. Finance Sub-CommitteeMeeting on Pensions Bridget Gainer, Chair Cook County Pension Sub-Committee June 29, 2011 Info@BridgetGainer.com 312-603-4210
  2. 2. Paths to Solvency Paths to Solvency Commissioner Gainer 2
  3. 3. Introduction The Cook County Pension Fund is currently funded at 60.7%. The funded status has dropped 30% in the last ten years and 15% in the last five. Cook County, as the employer, has made their full statutory required contributions to the Pension Fund every year and has repaid any loans from the fund. The statutory contribution is a multiple of the employee contribution and unrelated to the actuarial value of the liability being accrued by the fund. Paths to Solvency Commissioner Gainer 3
  4. 4. Benefits, Employer & Employee Contribution: No Change 80.00% • Projected funded status with 60.00% no changes to benefit formula 40.00% Funded or contribution levels 20.00% Status 0.00% 2010 2020 2030 2038 -20.00%Millions Billions $400 $28 $23 $300 $18 ER Cont. Assets $200 $13 EE Cont. $8 Liability $100 $3 $0 -$2 2010 2020 2030 2038 2010 2020 2030 2038 Table 1 Paths to Solvency Commissioner Gainer 4
  5. 5. Benefits: No Change Employee Contribution: No Change (8.5% of pay) Employer Contribution: Increase Employer contribution to reach 80% in 2040 • Employer Contributes 21.49% of payroll 85.00% 80.00% annually beginning in 2012 75.00% 70.00% • Employer currently contributes Funded 65.00% Status approximately 13% of payroll 60.00% 55.00% 50.00% 2010 2020 2030 2040Millions Billions$1,000 $25 $800 $20 $600 ER Cont. Assets $400 $15 EE Cont. Libaility $200 $10 $0 $5 2010 2020 2030 2040 2010 2020 2030 2040 Table 2 Paths to Solvency Commissioner Gainer 5
  6. 6. Benefits: Multiple 2.4 to 2.2; FAS = final 8 years; retirement age increased 5 years; COLA reduced to lesser of 3% or ½ CPI. Employee Contribution: an additional 1% of Salary to 9.5% Employer Contribution: No formula change, but increases with wage & contributions • Changes only apply to those under 5070.00% • Multiplier changed from 2.4% to 2.2%65.00% • Final Average Salary changed to average of last 860.00% yrs. Funded55.00% Status • COLA reduced to 3% or half of CPI50.00% • Retirement Age increased 5 years45.00% • Employees Contribute 9.5% of Salary40.00% 2010 2020 2030 2040 Millions Billions $400 $25 $300 ER Cont. $20 $200 Assets EE Cont. $15 $100 Liabilities $0 $10 2010 2020 2030 2040 $5 2010 2020 2030 2040 Table 12 Paths to Solvency Commissioner Gainer 6
  7. 7. Benefits: Multiple 2.4 to 2.2; FAS = final 8 years; retirement age increased 5 years; COLA reduced to lesser of 3% or ½ CPI. Employee Contribution: Additional 1% of Salary to 9.5% Employer Contribution: Ramp over 10 years until 80% funded in 2040. 85.00% 80.00% • After 10 years Employer Contribution 75.00% 70.00% Funded levels off at 16.42% 65.00% Status 60.00% 55.00% 50.00% 2010 2020 2030 2040Millions Billions $800 $25 $600 $20 ER. Cont. Assets $400 $15 EE Cont. Liabilities $200 $10 $0 $5 2010 2020 2030 2040 2010 2020 2030 2040 Table 13 Paths to Solvency Commissioner Gainer 7
  8. 8. Benefits: Basket of Changes only applies to Employees under age 50: Employee Contribution: Additional 1% of Salary to 9.5% Employer Contribution: No formula change, but increases with wage & contributions • Benefit changes apply only to 70.00% Employees under age 50 60.00% 50.00% • Employer contributes at current formula 40.00% Funded 30.00% Status 20.00% 10.00% 0.00% 2010 2020 2030 2040Millions Billions $400 $25 $300 $20 ER. Cont. $15 Assets $200 EE Cont. $10 Liabilities $100 $5 $0 $0 2010 2020 2030 2040 2010 2020 2030 2040 Table 15 Paths to Solvency Commissioner Gainer 8
  9. 9. Benefits: Basket of Changes only apply to those under age 50 Employee Contribution: Additional 1% of Salary Employer Contribution: Ramp over 10 years until 80% funded in 2040  Changes only apply to those under 85.00% 50 80.00% 75.00%  Multiplier changed from 2.4% to 70.00% Funded 2.2% 65.00% Status  FAS to average of last 8 years 60.00% 55.00%  COLA reduced to 3% or half of CPI 50.00%  Retirement Age increased 5 years 2010 2020 2030 2040  After 10 years Employer Contribution levels off at 16.42% .Millions $25$1,000 $20 $800 $15 Assets $600 ER Cont. Liabilities $400 EE Cont. $10 $200 $0 $5 2010 2020 2030 2040 2010 2020 2030 2040 Table 16 Paths to Solvency Commissioner Gainer 9
  10. 10. Employer Contribution $1,000,000,000 $900,000,000 $800,000,000 No Change $700,000,000 Basket $600,000,000 Basket only under 50 $500,000,000 80% Funded as Level Dollar $400,000,000 Amount Basket and 80% Funded $300,000,000 Goal Basket and 80% Funded $200,000,000 Goal only under age 50 $100,000,000 $0 2010 2020 2030 2040 Paths to Solvency Commissioner Gainer 10
  11. 11. Funded Status 90.00% 80.00% 70.00% No Change 60.00% Basket 50.00% Basket under 50 40.00% 80% Funded as Level Amount 30.00% Basket and 80% goal 20.00% Basket under 50 and 80% goal 10.00% 0.00% 2010 2020 2030 2040 -10.00% Paths to Solvency Commissioner Gainer 11
  12. 12. Results If no action is taken the Cook County Employee Annuity and Benefit Fund will have no assets and the County would have to enter a pay-as-you-go policy by 2038. Even if benefits are modified slightly by using the changes in the basket, that still will not bring the fund to an 80% solvency. In order to be 80% solvent by 2040 there will have to be increases by the Employer greater than the current statutory contribution limits, increase in Employee contributions and changes to the retiree benefit structure. Paths to Solvency Commissioner Gainer 12
  13. 13. 401(k)/Defined ContributionResearch Report 401(k) Report Commissioner Gainer 13
  14. 14. Defined Contribution Plans for a Public WorkforceSenate Bill 512, the pension bill debated in Springfield this year, contained aprovision for a self-managed plan for all State, City of Chicago and Cook Countyemployees. This was a new development, as 401(k) style plans are currentlylimited to the State University Retirement System (SURS) system. With fundedratio‟s for public plans dropping and calls for budget cuts, nationally, theconversation has grown around switching from Defined Benefit (DB) retirementplans to Defined Contribution (DC).These calls are countered by those uncomfortable with the increased risk for theemployees of market volatility and longevity risk. Arguments have been putforward in support of maintaining the DB status quo, amending DB plans andmoving toward DC. Recently, new 401(k) vehicles have been introduced thatfocus on maintaining the retirement income security within a DC plan.For a public sector population without the guaranteed income of Social Security,the stability of the future retirement income stream is paramount. As the demandfor 401(k) like vehicles grows for this population, plans with greater incomesecurity, investment decision support, employee education and annuity-likefeatures have increased.The following report details the results of national studies on the way employeesuse 401(k) plan assets, academic research or best practices and case studiesfrom other public plans. 401(k) Report Commissioner Gainer 14
  15. 15. “Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cash outs Are Eroding Retirement Income” Hewitt 2011Examined: The behavior of 1.8 million employees in 110 large 401(k) plansnationally to assess their ability to provide sufficient retirement income  28% of all active participants had a loan outstanding.  70% of Employees that had loans outstanding at termination defaulted on the repayment.  In 2010 over 6.9% of 401(k) participants took a withdrawal of funds.  401(k) members with lower salaries were more likely to take a withdrawal and more women were taking withdrawals than men.  The majority of employees that took a withdrawal did so due to eviction or foreclosure.  42% of the workers that lost their jobs in 2010 took a cash out of their 401(k)  Younger workers who change jobs are more likely to cash out their 401(k)  Cashing out a 401(k) reduces future retirement income between 11% and 67%Suggestions: Enact measures that reduce loans, withdrawals and cash outs  Restrict the number of loans allowed and the amount an employee can borrow or withdraw  Limit the reasons for hardship withdrawals  Simplify rollover process for those who are leaving employment for a new position 401(k) Report Commissioner Gainer 15
  16. 16. “Leakage of Participants’ DC Assets: How Loans, Withdrawals, andCash outs Are Eroding Retirement Income” Hewitt 201130.00%25.00%20.00%15.00% Percentage of 401(k) Participants with Loans10.00% 5.00% 0.00% 2005 2006 2007 2008 2009 2010 401(k) Report Commissioner Gainer 16
  17. 17. “Leakage of Participants’ DC Assets: How Loans, Withdrawals, andCash outs Are Eroding Retirement Income” Hewitt 2011 10.00 20.00 30.00 40.00 50.00 60.00 0.00% % % % % % % n tio ic Ev e/ n ur io s at lo uc c re Ed Fo al ic ed M Top Reported ll Reasons for Bi ue Hardship -D Withdrawals st se Pa ha rc Pu x e Ta om H er th O 401(k) Report Commissioner Gainer 17
  18. 18. “401(k) Plans in Living Color: A Study of 401(k) SavingsDisparities Across Racial and Ethnic Groups” Ariel Investments July 2009Examined: The results of an analysis of private sector 401k plans broken down by participant race.  African Americans are 167% more likely to take a hardship withdrawal than white participants.  Hispanics borrow from their 401(k) plans at a higher rate than whites, but a lower rate than African Americans.  Asian workers are the lease likely to borrow against their 401(k)Suggestions: Implement best practices to increase retirement income security  Encourage employers to collect and report their 401k data by race and ethnicity  Change loan features to facilitate retirement income stability 401(k) Report Commissioner Gainer 18
  19. 19. 401(k) Plans in Living Color: A Study of 401(k) Savings Disparities AcrossRacial and Ethnic Groups” Ariel Investments July 2009 401(k) Report Commissioner Gainer 19
  20. 20. “Defined Contribution Pension Plans in the Public Sector: A Benchmark Analysis” Wharton School, University of Pennsylvania 2008  The University of Pennsylvania Wharton School comprised a list of best practices for 401(k)/Defined Contribution Pension Plans that will help provide an adequate and secure retirement income.Eligibility and Participation Mandatory Enrollment/Opt Out Waiting period of a year or less for participationVesting 100% Vested after one year of employmentContributions (Employer and Employee) 12% of pay if covered by Social Security 18 to 20% of pay if not covered by Social SecurityInvestments Mandatory/default investment into lifecycle target-date funds Limited menu of options of major asset classesDistributions Pre-retirement: No lump sum distributions at job change No hardship withdrawals No plan loans Retirement: Level of mandatory annuitization with inflation-protected income Limited lump-sum distributionAdministrative Structure and Fees Single vendor recordkeeping structure Single point of contact for participants Larger plans standard: total administrative and investment costs not to exceed 100 basis pointsOther Participant Services Broad-based employee investment education Individual-specific investment advice Services delivered through multiple modes: call center, internet and in- person 401(k) Report Commissioner Gainer 20
  21. 21. “Look Before You Leap; The Unintended Consequences of Pension Freezes” National Institute on Retirement Security Oct. 2008West Virginia Case Study: In 1991, the West Virginia Teacher‟s Retirement System (TRS), a DB plan, was frozen, and all newly hired teachers were put into a new plan, the Teachers Defined Contribution Retirement System (TDC). In 2004 the State conducted a study of teacher‟s retirement 401(k) plans and determined that the average balance was $41,478 with only 6% of participants accumulating over $100,000. The State decided that allowing teachers to invest themselves was too risky and passed a law in 2005 that moved all new teachers into a DB plan. When given the opportunity to move from the DC plan back to the DB plan over 75% of West Virginia teachers under 40 switched into the DB. 401(k) Report Commissioner Gainer 21
  22. 22. Governance Governance Commissioner Gainer 22
  23. 23. Cook County Pension Fund Board Nine Member Board 22% 4 Elected by Current Employees  3 County Employees  1 Forest Preserve Employee 3 Elected by Retirees  2 County Retirees  1 Forest Preserve Retiree 78% 2 Appointed  1 by the Treasurer  1 by the Comptroller Ex Officio Elected Investment Committee Committee of the Whole Governance Commissioner Gainer 23
  24. 24. Types of Pension Fund Members Elected Members: Elected by active or retired members of the retirement system. Ex Officio: Members of the Board of Trustees by virtue of appointment or election to another public office. Example: County Treasurer. Appointed: Members appointed by the elected Chief Executive or Governing Body. Subject matter expertise can be required. i.e., investment, finance or actuarial. Also called “Public Appointments” based on duty to represent taxpayer interest in the performance of the pension fund, akin to independent directors on corporate boards. A study by the University of Michigan Found the Average Board was (Hess 2005):  36% Elected  15% Ex Officio  44% Appointed The Same study found that the optimal level of elected board membership was a maximum of 47% Governance Commissioner Gainer 24
  25. 25. Board Composition: Local and National Funds State of FL Retirement System:  Cook County Annuity & Benefit Fund: 100% Ex Officio 77% elected, 23% appointed Public Safety Retirement System AZ:  Municipal Employees and Benefit Fund 75% appointed, 25% Elected of Chicago: 60% Elected, 40% Ex Officio AZ State Retirement System:  Fireman’s Annuity and Benefit Fund of Chicago: 50% Elected. 50% Ex Officio: 100% Appointed Fire Commissioner, City Treasurer, Comptroller, Clerk LA County Board of Retirement: 45% Appointed, 45% Elected, 10% Ex Officio  Chicago Laborer’s Pension and Welfare Fund: 50% appointed by the CALPERS: 25% Appointed, 50% Elected, Mayor, 50% appointed by the Laborers 25% Ex Officio Union Iowa Public Employee Retirement  Policeman Annuity and Benefit Fund Board: 85% Appointed, 15% Ex Officio of Chicago: 50% Appointed, 50% Elected NJ Public Employee Retirement  IMRF: 50% Elected by members, 50% System: 35% Appointed, 65% Elected elected by participating governments TX County/District Retirement System:  IL State Employees: 45% Appointed, 100% Appointed 45% Elected, 10% Ex Officio  ISBI: 55% appointed, 45% ex-officio Governance Commissioner Gainer 25
  26. 26. Other Funds Publicly Appointed Member’s Qualifications AZ State Retirement System:  Iowa Public Employees Four of the members shall have at Retirement System: Three public least ten years substantial members, appointed by the experience as any one or a Governor, who are not members of combination of the following: IPERS and who each have  1. A portfolio manager acting in substantial institutional investment a fiduciary capacity. experience or substantial  2. A securities analyst. institutional financial experience.  3. An employee or principal of a trust institution, investment  Illinois Municipal Retirement organization or endowment Fund: A nominee for executive fund acting either in a trustee must be employed by an management or an investment IMRF employer as a chief executive related capacity. officer, chief finance officer, or other  4. A chartered financial analyst officer, executive or department in good standing as determined head. by the association for investment management and research.  5. A professor at the university level teaching economics or investment related subjects.  6. An economist.  7. Any other professional engaged in the field of public or private finances. Governance Commissioner Gainer 26
  27. 27. Results of Research Data The percentage of the board that is elected by members or serve ex-officio has a positive effect on funding level (or appearance of funding).  “asset allocation and the funding level decisions indicate member elected trustees are more focused on a stable, sustainable plan to provide future benefits as opposed to chasing higher returns through a riskier asset allocation.  The object of higher funding is strengthened by the presence of ex-officio trustees, who serve as part of their job responsibilities. (Harper 2008) „There are board characteristics that significantly correlated with investment manager outperformance……. The (greater the) length of the board term has a negative relationship with manager returns versus the benchmark.‟ (Harper 2008) In the University of Michigan Study, “once the board consists of 47% member- elected trustees, there are diminishing returns to placing an additional member- elected trustee on the board.” (Hess 2005) Any board that operates effectively includes members who have a mix of skills, competencies, and behaviors, Board composition should reflect the varied interests of those responsible for funding the plan and should include plan participants and retirees, citizens of the governmental unit, and officers of the plan sponsor, as well as independent directors. This assures balanced deliberations and decision making. (GFOA 2010) Governance Commissioner Gainer 27
  28. 28. Disability Benefits Disability Benefits Commissioner Gainer 28
  29. 29. Disability and Pension If an employee‟s disability continues after the maximum ordinary disability benefit, then the employee can withdraw before age 60 from service and receive their maximum benefit allowed. There will be no penalty for withdrawal from service before age 60. While on disability, pensionable years of service accumulate as if the employee were working and any time spent on disability counts to overall service credit. In determining the final average salary, any years spent on disability are credited with the salary the worker was receiving whey they were injured. Disability Benefits Commissioner Gainer 29
  30. 30. Annual Cash Outflow from the Pension Fund forDisability Payments Disability Benefits Commissioner Gainer 30
  31. 31. Pension Fund Disability Cost Breakdown$14,000,000$12,000,000$10,000,000 $8,000,000 Duty $6,000,000 Ordinary $4,000,000 $2,000,000 $0 2009 2010 Disability Benefits Commissioner Gainer 31
  32. 32. County + Pension Fund Disability Costs $35,000,000 $30,000,000 $25,000,000 $20,000,000 Pension Fund Disability Payments $15,000,000 Cook County Workers $10,000,000 Compensation $5,000,000 $0 2006 2007 2008 2009 2010 Disability Benefits Commissioner Gainer 32
  33. 33. Disability Annual Cost as % of Total FundExpenditures Disability Benefits Commissioner Gainer 33
  34. 34. Recent Changesand Comparisons toPension Funds Acrossthe Country Recent Changes and Comparisons Commissioner Gainer 34
  35. 35. Recent ChangesNew Jersey Pension Fund Retirement Age increased to 65 for all future employees. Current retirement age is either 60 or 62 depending on date of hire. EE Contribution: Increase 1% now and a 1% increase over the next 7 years. State Employees currently paying 5.5%. Benefit Formula  Current Employees: 65% of Final Average Salary, plus 1% for every year over 25 years of service up to 30 years of service.  Future Employees: 60% of Final Average Salary, plus 1% for every year over 25 years and up to 30 years of service. ER Contribution: 2018 begins a 30 year amortization plan. COLA: No additional COLA for current retirees, Eliminates COLA for all future retirees. Reported to save $300 Million next year and over $3 Billion in the next 10 years. Recent Changes and Comparisons Commissioner Gainer 35
  36. 36. Recent ChangesNew York Pension Fund Creates the 6th tier of pension benefits in the NYS system. Retirement Age: Increased to 65, currently 62 for most and 57 for teachers. Vesting: Increased to 12 years from 10. EE Contribution: Increases to 6% from 3% ER Contribution: Maintains the Current Actuarially Required Contribution. Reported to save $93 Billion over the next 30 years. Recent Changes and Comparisons Commissioner Gainer 36
  37. 37. Recent ChangesAtlanta Pension Fund Current Employees can remain in their current plan, but contributions will increase from 8% to 13% of Salary. New Employees now participate in a Hybrid Plan  1% Defined Benefit Multiplier for every year of service  Employees contribute 8% for their Defined Benefit Portion  Employees contribute a minimum of 3.75% to a Defined Contribution, 401(k) style plan. Employees can opt to contribute an additional 4.25%.  ER matches the Employee Defined Contribution 100%.  15 years to vest in Defined Benefit Portion, 5 years to vest in Defined Contribution Portion  Retirement age for police and fire is increased to 57 from 55  Retirement age for other employees is increased to 62 from 60. Reported to save the city $25 million over the first year and over $300 million over the next 30 years. Recent Changes and Comparisons Commissioner Gainer 37
  38. 38. Recent ChangesFlorida Pension Fund Current Employees  No COLA increase after July 1, 2011, was 3% annually.  Contribution increased to 3% from 0% Future Employees  Same changes as current Employees, plus  Vesting increased to 8 years, from 6 years  Final Average Salary determination is 8 highest fiscal years average, was the 5 highest average.  Normal Retirement age is 65 for most employees, 60 for special risk employees (police, fire, etc. ) All employees will continue to participate in the Social Security System Recent Changes and Comparisons Commissioner Gainer 38
  39. 39. County Comparison The following charts outline a Comparison between the Cook County Pension Fund and the following Counties:  Los Angeles County CA  Maricopa County AZ, A member of the Arizona Retirement System  Miami Dade County FL, A member of the Florida Retirement System  Harris County TX, A member of the Texas County and District Retirement System Cook County and Los Angeles County do not participate in Social Security, the other funds do participate in Social Security Recent Changes and Comparisons Commissioner Gainer 39
  40. 40. County ComparisonRetirement Age 70 60 50 40 30 Full Benefit 20 10 0 Cook County Los Angeles Maricopa Miami Dade Harris County County County County Recent Changes and Comparisons Commissioner Gainer 40
  41. 41. County ComparisonVesting 10 9 8 7 6 5 Years of Service 4 3 2 1 0 Cook County Los Angeles Miami Dade Maricopa Harris County County County County Recent Changes and Comparisons Commissioner Gainer 41
  42. 42. County ComparisonMultiplier and Final Average Salary (FAS) Multiplier Final Average Salary Cook County: 2.4%  Cook County: 48 Highest consecutive months in the last 10 years Los Angeles County: Between 11.82% of FAS and 100%  Los Angeles County: Highest depending on years of service Monthly average of any 12 when retired consecutive months Miami Dade County: 1.6%  Miami Dade County: Average of five highest years of creditable service Maricopa County: 2.1% to 2.3% depending on years of  Maricopa County: Highest 36 service months of last 10 years Harris County Texas: Not a DB  Harris County: Not a DB plan plan Recent Changes and Comparisons Commissioner Gainer 42

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