BP Presentation Retirement Benefits Promises and Challenges North Shore, November 17 2015 20151111

Public Retirement Benefit Plans:
Promises and Challenges
North Shore Chapter, Illinois CPA Society, November 17, 2015
Barrett Peterson, C.P.A.
Sr. Manager, Accounting Standards, Procedures, & Analysis
TTX
Barrett.Peterson@ttx.com
312.606.2516 - Office
847.224.6569 - Mobile
Barrett Peterson, C.P.A. ICPAS North Shore Chapter November 17, 2015

Retirement Plans’ Objectives
Income - Pension
Health Insurance - OPEB
Life Insurance - OPEB

The Public Retirement Plan Environment
 Electoral Politics
 State Laws and State Constitutions
 GASB – Governmental Accounting Standards Board
 SEC for Municipal Bond Issuers
 Rating Agencies for Municipal Bond Issuers
 U.S. ERISA Law and Regulations do NOT apply
 Cash Basis Budgeting, Accounting, and Reporting

Pension Plan Design Issues
 Defined Benefit or Defined Contribution
 Targeted Benefit – usually % to pre-retirement income
 Time to Achieve Targeted Benefit
 Funding Sources, if funded
Employer/Taxpayer Contributions
Employee Contributions
Return on Assets
 Income Re-Distribution Impacts in some Governmental Plans
 PAYGO – Pay as You Go Plans
 Benefit and Pensionable Earnings Caps
 Retirement Age and Early Retirement Provisions

Some Fundamental Concepts/Terms
 Actuarial
 PBO – Projected Benefit
Obligation
 AAL – Accumulated Benefits
at Projected Pay
 ABO – Accumulated Benefit
Obligation
 Period Cost
 Mortality Estimates
 Salary Increase Assumption
 Demographics
Spouse Life
Marital Status
Quits before retirement
 Statistical/Financial
 NPV/Compounded Return
 Rule of 72
 Discount Rate
 Return Assumption
 Funded Status
 Funded Ratio
 Fair Value of Assets
 Plan Fiduciary Net Position

Pension Accounting Fundamentals
 Estimating Amounts Ultimately Payable
 Assigning Costs to Annual Accounting Periods
 The Impact of Funding Practice
 Plan “Financial Position” – Funded Status – at Year end
Reflecting the Present Value of the Estimated Liability, net of
Plan assets.

Estimating Amounts Ultimately Payable
 Benefit Formula
 Credit Per year of Service
 Pay Basis – Final, Average, Etc.
 Estimating Likely Service
 Terminations
 Re-Hires
 Estimating Pay Increases
 Consider Compensation Policy, Inflation, Etc.
 Consider Promotions; Replacement Hires, Etc.
 Mortality Assumptions
 Prior to Benefit eligibility
 Length of Benefit Payout Period
 Life Expectancy of Spouse/Partner

Assigning Costs to Annual Periods
 Basic Period Cost Formula
Normal/Service Cost Using Actuarial Method Selected, Plus
Interest on Present Value of Liability, Less
Interest Computed Using Discount Rate
Assumed Return on Plan Assets, Plus
Required to be “Reasonable”
Amortization of Actuarial Gains and Losses, Plus
Typically Over Remaining Estimated Service Lives
Settlement or Curtailment Costs, Which We Will Assume Will
Not Occur

The Impact of Funding Policies
 The source of Plan Assets for Funded Plans
 Funding Sources
Employee - Optional
Employer
ERISA Regulations for Corporate Sponsors, Typically Requiring
Attainment of a Certain Funded Ratio
Annual Required Contribution Calculated by Actuaries for Public
Plans, Which May be Over-Ridden by Law, as it is In Illinois. The
Sum of Normal Cost Plus Amortization of Any Unfunded Amount
 Funding Timing

Plan Financial Position – Funded Status
 Measuring the Estimated Present Value of the Estimated Liability
 PBO – Projected Benefit Obligations, which includes both future service and
future pay increases. Use required for companies.
 AAL – Actuarial Accrued Liability, which includes future pay increases, but NOT
future service. Used in Public Plans
 ABO – Accumulated Benefit Obligations, which reflects neither future service nor
future pay increases. A “freeze now” amount. Disclosure required for corporate
plans.
 Valuing Plan assets
 Market Value At Year end
 Actuarial Value
 Funded Status – The Difference Between the PV of Liability Estimate and
The Value of Plan Assets

U.S Retirement Plans Issues
 Social Security – a PAYGO Plan with an estimated unfunded
liability of about $69.0 trillion
 Medicare – a PAYGO Plan with an estimated unfunded liability
of about $55.3 trillion
 Military retirement
 Government Employees

Illinois Pension Plans - Summary

Illinois Pension Plans Summary
 State of Illinois – 5 Plans
TRS – Teacher’s
Retirement
State Universities
Employees
State Employees
Judges
General Assembly
 Municipal – Many Plans
Chicago Teachers
IMRF – Illinois Municipal
Retirement
Many Fire, Police, Park
District, and Other
Agencies

Illinois Pension Plans, June 30, 2014
Unfunded Present Value of Benefits
Plan Unfunded Liability PV Funded Ratio
Teacher’s Retirement $ 61.6 billion 40.6%
State Employees $ 26.2 billion 33.7%
State Universities $ 21.6 billion 42.3%
Judges $ 1.5 billion 31.6%
General Assembly $ 0.2 billion 16.0%
Total – All Plans $111.1 billion
Source: State of Illinois Comptroller, CAFR for Year Ended June 30, 2014

Illinois Pension Plans Financial Reporting
 GASB Statement No. 67, “Financial Reporting for Pension Plans”. Governs reporting
by the Plans themselves. This Statement is roughly analogous to FASB ASC 960 for
Reporting by Defined Benefit Plans.
 GASB Statement No. 68, “Accounting and Financial Reporting for Pensions”. This
Statement is roughly analogous to FASB ASC 715 governing accounting and
reporting by entities for their pension plans.
 GASB Statement No.75, “Accounting and Financial Reporting for Post Employment
Benefits Other than Pensions”, Effective for Fiscal Years starting after June 15, 2017.
Reports not likely before 2019.
 The FASB and GASB Standards are now closer together, but noticeable differences
remain.
 FASB ASC 960 also different in a number of important ways from ASC 715, as Plan
reporting only has to address ABO, and requires use of a differently calculated
discount rate.

Summary of Drivers of Low Funded Ratios
 High Benefit Accumulation Rates, Increased in 1998 [2.2]
 Retirement “Incentives” programs
 The COLA Benefit; introduction, increase, compounding
 Decades of Inadequate Funding by the State of Illinois
 High, and Unmet, Investment Return Assumptions
 Conceptual Design Flaw Requiring the State to Fund For All
Employers, Not Just State Employees. Revenues Go To Local
Districts, While “Employer” Costs are Borne by the State.
District Tax Rates Do NOT Contemplate Funding Pensions for
Their Employees.

Illinois Teachers’ Retirement Plan
A Detailed Review of TRS

History of TRS Funded Status: 2000-2014
Year Ended June 30 of: Unfunded Liability Funded Ratio
2000 $11.4 billion 68.2%
2001 $15.9 billion 59.5%
2002 $20.7 billion 52.0%
2003 $23.8 billion 49.3%
2004 $19.4 billion 61.9%
2005 $22.0 billion 60.8%
2006 $22.4 billion 62.0%
2007 $23.7 billion 63.8%
2008 $30.2 billion 56.0%
2009 $35.0 billion 52.1%
2010 $39.9 billion 48.4%
2011 $43.5 billion 46.5%
2012 $52.1 billion 42.1%
2013 $55.7 billion 40.6%
2014 $61.6 billion 40.6%

TRS’s Change in Unfunded Liability
$ Billions: 2000 - 2014
2000-2007 2008-2014 Total
Employer Costs in excess of contributions $10.4 $13.3 $23.7
Change in Actuarial assumptions and methods $ 3.1 $ 1.5 $ 4.6
Salary increases over or (below) assumption $ 0.5 $(3.0) $(2.5)
Return less than (more than)assumed return $(1.6) $23.6 $22.0
Pension Bond Proceeds $(4.3) $ 0.0 $(4.3)
Waiver of ERO Contributions for over 35 years $ 2.2 $ 0.0 $ 2.2
All Other $ 4.9
Total Increase (decrease) $50.6
Unfunded Liability, June 30, 1999 $11.0
Unfunded Liability, June 30, 2014 $61.6

State Underfunding – A Chronic Disaster

Funded Ratio Confusion
GASB 67 Actuarial Assets Fair Value of Assets
Pension Liability 106,682,654,886 103,740,377,000 103,740,377,000
Asset Value 45,824,382,514 42,150,785,000 45,824,382,514
Unfunded Liability 60,858,272,372 61,589,612,000 57,915,994,000
Funded Ratio 43.0% 40.6% 44.2%
Unfunded Liability
at Discount Rate of
6.5%
75,156,979,079 Likely Similar 75,156,979,079
Approximately

Major TRS Benefits Provided
 Initial Tier I benefits are 2.2 times years of service times final average salary, with a
maximum benefit of 75% of final average salary. No dollar limit. Tier II has a
creditable wage base tied to the 2010 Social Security Wage Base
 Benefits are increased 3% per year, compounded. Compounding began in 1990.
Original COLA [1969] was 1.5% per year simple, later 2%, then 3% simple, and
finally compounded.
 Retirement Age Requirements:
 Tier I Participants – Participating before January 1, 2011
 At age 55 with 20 years, which may be reduced if less that 60, if an Early Retirement Option
[ERO] is not available
 At age 55 or older with 35 years with no reduction
 At age 60 and 10 years with no reduction
 At age 62 and 5 years of service with no reduction
 Tier II Participants – Participating Subsequent to January 1, 2011
 At age 67 with 10 or more years with no reduction
 At age 62, with a reduction of benefit of 6% for every year under age 67
 No Early Retirement Option available

Compound Interest, and Rule of 72

Some Observations
 The rule of 72 suggests that a benefit will double at a 3% increase, compounded,
every 24 years. A teacher retiring at age 60 will double their benefit by age 84, a
fairly likely age attainment.
 Tier I participants can will reach their 75% limit after 34 years – about age 57 – after
which benefit increases are driven only by increased salary on which the benefit is
based. The system has an incentive to retire near 60, leaving retirement period of
up to 30 years or more.
 The compounding COLA has been estimated to account for about a third of the
total liability. Reduction by half would improve the funding ratio by about 15
percentage points.
 The Tier II limits on eligible salary and retirement age will make tier II benefits
substantially less costly, although still subject to the COLA.
 Employee contributions are 9.4% of their pay.
 Benefits paid in 2014 were $5.3 billion. Assets at year end can pay for about 9
years.
 Employer costs of $5.3 billion are about 60% of member payroll paid of $9.5 billion,
an extremely high ratio.

Observations, Continued
 As of June 30, 2014 the Plan has 272.2 thousand participants, of which 111.3
thousand are retirees or survivors, most [101.2 thousand or 36% of total
participants] retirees. Active participants are about 59% of total participants. A bit
fewer that 10 thousand active participants are over 60. About 0.7% of participants
are working past the 35 year limit.
 The tier II modifications are very positive, but were adopted far too late to solve the
Plan’s problems.
 The Illinois supreme Court has ruled that the Constitution prohibits any changes to
the Plan with an impact on current participants, active or retired.
 Benefit payments of $5.3 billion in fiscal 2014 exceed contributions in fiscal 2014 by
$0.8 billion, enabling existing assets to pay for up to 45 years as of June 30, 2014
values. The “spread” is likely to get worse as more participants retire.

Solution Options
 Reduce Benefit Costs, which will result in reduced benefits for
future [and current?] retirees.
Reduce COLA to 1.5% or 2% - Prohibited?
Establish Tier II rules for all Active Participants – Prohibited?
Allow School Districts to Provide Funded Supplemental Benefit
Plans, if they Choose.
Freeze TRS As it Now Exists, and Institute a Defined Contribution
Plan Of Some Sort for All New Hires
 Pay more taxes somewhere
State Income Taxes
Local Taxes to Assume the Funding Obligation
 Do Some of Both

Other Benefit Plans – A Few Words
 State Teachers Health Insurance Plan
 Chicago Teachers Plan
 IMRF – Illinois Municipal Retirement Fund
 Glenview Benefit Plans
 Police, Fire, and Park District, Generally

Illinois Teachers’ Health Insurance Security
Fund - OPEB
 This “fund” has a net asset deficit of $80 million as of
December 31, 2013
 The AAL as of December 31, 2013 was $19.5 billion.
 The TRS manages the Teachers’ Retirement Insurance
Program [TRIP]. OPEB disclosures not yet required – they are
coming from GASB – so data is very limited.

Chicago Teachers’ Pension Fund – Pension and
Health Insurance [OPEB]
$ Millions
Pension OPEB Total
AAL – Present Value of Liability 20,316.9 1,938.9 22.255.8
Assets 10,815.7 36.0 10,851.7
Unfunded Liability 9,501.2 1,902.9 11,404.1
Funded Status Ratio 53.23% 1.86%
Discount Rate/Return Assumption 7.75% 7.75%
2014 Under-funded Contribution 134.4 100.1 234.5
Plan Participants 63,194 63,143
Covered Payroll 2,233.3 2,233.3
Participant Contribution 9.0% 0.0%

IMRF Plan Summary
 Participants Benefits determined under Tier I if hired before
2011, and Tier II if hired on or after January, 2011, as in other
Illinois State Plans.
 Each participating municipal employer will have its own
funded status based on the employees in its Plan, and the
history of contributions.

IMRF – Illinois Municipal Retirement Fund
$ Billions – December 31, 2014
Pension OPEB Total
AAL – Present Value of Liability $37.4 $1.8 $39.2
Assets – GASB/Fair Value $29.7 $0.0 $29.7
Unfunded Liability $7.7 $1.8 $9.5
Funded Status Ratio – GASB 79.3% 0.0%
Funded Status - Actuarial 87.3% 0.0%
Funded Status – Fair Value of Assets 93.0% 0.0%
Discount Rate/Return Assumption 7.5% 7.5%
Plan Participants 405,170
Covered Payroll $6.7
Participant Contribution 4.5%, 7.5%

Glenview, Illinois Plans’ Summary
 Tier I Participants – hired before January 1, 2011:
 At age 50, with 20 years of service, benefit is 50% of salary
 Benefits accrue at 2.5% year from 20 to 30 years of service, and 1% thereafter to a maximum of
75%
 Benefits are computed on salary on the last day of service
 Benefits receive a 3% COLA annually, compounded
 Participants contribute 4.50% of pay for IMRF, 9.91% for Police, and 9.9455% for Firefighters
 Tier II Participants - hired on or after January 1, 2011:
 At age 55, with 10 or more years of service, benefit is 2.5% for each year of service, based on a
maximum salary for benefits of $106,800, increased annually thereafter.
 Participants with 10 years of service, but fewer than 20 years, can retire at age 60 with a reduced
benefit.
 Benefits receive an annual COLA adjustment of the lesser of 3% or one-half of the change in the
consumer price index, compounded.
 Participants contribute 4.50% of pay for IMRF, 9.91% for Police, and 9.9455% for Firefighters.

Glenview, Illinois Retirement Benefit Plans - $ Millions
December 31, 2014
IMRF Police Fire OPEB Total
January 1, 2014 Valuation:
Actuarial Liability [AAL] $50.1 $73.9 $77.0 $10.1 $211.1
Actuarial Asset Value $36.1 $60.6 $55.9 $0.0 $152.6
Funded Ratio 72.15% 82.02% 72.53% 0.0.%
Earnings/Discount Rate 7.00% 7.25% 5.00%
December 31, 2014 Valuation:
Total Pension Liability $90.8 $104.3 N.A. $195.1
Plan Fiduciary Net Position $64.2 $65.3 $129.5
Funded Ratio 70.72% 62.44%
Earnings/Discount Rate 6.44% 7.25%
Actual Return for 2014 4.58% 6.95%
Village Contribution % of Payroll 25.21% 29.36%

Comments on Other Plans
 Some Police and Fire Plans are well funded.
 Many Police and Fire Plans, particularly Chicago, are poorly
funded

BP Presentation Retirement Benefits Promises and Challenges North Shore, November 17 2015 20151111

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