Current Developments in U.S. Public Pensions Charles E.F. Millard Managing Director Global Head of Pension Solutions Citigroup

Major Challenges Facing U.S. Public Pensions GASB accounting change Changing pension structure Shift from DB DC, Hybrid, Cash Value Reducing benefits, changing retirement age Reduce, or eliminate COLAs Lawsuits Chronic underfunding Aggressive estimated return / discount rate Funded status probably worse than it appears 1

Pension underfunding is a very big problem “Reforms” will not Solve the Problem Source: pensiontsunami.com/Tom Meyer 2

A lot of Money no matter how you look at it US public plan funded status based on different discount rates Aggregate State and Local Unfunded Pension Liability under Alternative Discount Rate Assumptions, 2012, in Trillions Source: DCIIA: Boston College Center for Retirement Research 3

The Real Problem: States Are Failing To Make the Necessary Contributions… Percent of Annual Required Contribution Paid, 2001-2013 Source: DCIIA: Boston College Center for Retirement Research 4

…and That is only Getting Harder Annual Required Contribution as a Percent of Payroll, 2001-2013 Source: DCIIA: Boston College Center for Retirement Research 5

Currently reported vs. GASB proposed funded ratios Aggregate funded ratios for state and local plans: Currently reported vs. GASB proposals, 2009-2012 But Will It Work? Source: DCIIA: Boston College Center for Retirement Research 6

GASM Decision-Making and Reporting … Complex Employers, Actuaries, Auditors will have to make projections Based on Stated policies, statutes if none, then last five years Past patterns Professional judgment Responsible entity is issuer of the financial statements Can be pension, state/municipality, or both 7

How will Actuaries respond to Pressure?

From Politicians? 9

“From Now on We Will Make Our Full Pension Contributions” Source: by Medi Belortaja 10

From Peers? Source: electriciantalk.com 11

From Public Employees? Source: theguardian.com 12

Pension Underfunding appears not to hurt Municipal Bond Pricing… “Yet, we find no evidence that municipal bond markets are pricing the risks to states’ fiscal health arising from these large obligations.” Source: DCIIA: Boston College Center for Retirement Research 13

… but maybe it should Source: truthdig.com 14

… and Perhaps it Soon Will. Moody’s Adjustments to Pension Data We calculate the Adjusted Net Pension Liability (ANPL) for local governments as the difference between the actuarial value of a pension plan’s assets and its adjusted liabilities. We adjust reported pension liabilities of US state and local governments by applying a bond index rate to future liabilities in order to discount the present value of these obligations. We also distribute the liabilities of multiple-employer cost-sharing plans to participating governments based on their pro rata share of contributions. We expect to utilize the market value of assets for local governments in accordance with expected disclosure improvements by the Governmental Accounting Standards Board (GASB). To assess pension burden we compare the ANPL to issuers’ operating revenues and to the size of their tax base, measured by full value of taxable property. For greater detail on our adjustments and their application in our ratings methodology, please refer to our reports “Adjustments to US State and Local Reported Pension Data,” released in April 2013 and “Request for Comment: US Local Government General Obligation Bond Methodology” released in August 2013. 15

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