Minnesota Association of County Officers PERA Update Doug Anderson, Executive Director February 15, 2019.

Minnesota Association of County Officers PERA Update Doug Anderson, Executive Director February 15, 2019

PERA and the Retirement Big Picture
Agenda PERA Overview PERA and the Retirement Big Picture Other PERA Benefits (just the basics) A Brief History Lesson Benefits & Costs (follow the $$) 2018 Legislative Success Annual Recommended Contributions (ARC) GASB Reporting Whiplash 2

PERA Overview

General Employees Retirement Plan Local Government Correctional Plan
PERA Membership as of June 30, 2018 General Employees Retirement Plan Police & Fire Retirement Plan Local Government Correctional Plan Membership criteria Eligible employees of Cities, Counties, Townships, Schools, and other entities All full-time and certain part-time police officers and firefighters and certain paramedics Employees expected to respond to incidents and who are directly responsible for security, custody, and control of confined persons Receiving Benefits Deferred Payment Status Active Members Total Members 101,245 199,834 153,059 454,138 10,743 2,768 11,669 25,180 1,190 5,976 3,981 11,147 Active to Retiree Ratio 1.5 to 1 1.1 to 1 3.3 to 1 Make point that these are mature plans. Mature plans have negative cash flow. That is normal, but requires plans to be near full funding in order to rely on investment earnings to supplement contributions. PERA also administers a $88M lump-sum defined benefit plan for 4,100 volunteer firefighters and a $70M defined contribution plan for 7,700 current and former local elected officials. 4

General Employees Retirement Plan Local Government Correctional Plan
PERA Cash Flow as of June 30, 2018 General Employees Retirement Plan Police & Fire Retirement Plan Local Government Correctional Plan Total Contributions Total Benefit Payments Net Cash Flow $0.9B 1.5B ($0.6B) $285M 531M ($246M) $30M 15M $15M Actual FY18 Rate of Return Actual FY18 Earnings 10.3% $2.1B 10.3% $816M 10.3% $63M Total June 30, 2018 Expected FY19 Return (7.5%) $21.6B $1.4B $8.5B $550M $681M $43M Estimated Funding Ratio ~80% ~90% Make point that these are mature plans. Mature plans have negative cash flow. That is normal, but requires plans to be near full funding in order to rely on investment earnings to supplement contributions. 5

How PERA works for Minnesotans
Investments and Contributions 2/3 of revenue comes from professional investing over a long horizon. 6

Total annual benefit payments paid to benefit recipients in FY18
Good for you. Good for Minnesota. of benefit payments are made to Minnesota residents 89% Total annual benefit payments paid to benefit recipients in FY18 $2.012 Billion Pensions reduce public assistance costs The risk of poverty increases 50% for older Americans without pensions Pensions’ positive financial impact is particularly strong for more vulnerable subpopulations “The Pension Factor 2012: Assessing the Role of Defined Benefit Plans in Reducing Elder Economic Hardships.” National Institute on Retirement Security 7

- Elected local governmental officials Ambulance drivers City Managers
October 5, 2018 Benefits Contributions Administrative Costs Investment Earnings = + - Two types of plans Formula based, similar to Social Security. Age at retirement, Years of service, High-five salary Participation is mandatory for public employees who meet the eligibility threshold Performance based, similar to a 401k, 403b, IRA or deferred comp where a member pays into the account and the money is invested as directed by the member. Participation is optional for elected officials DC Plan=7,700+ members and ??? in assets Elected local governmental officials Ambulance drivers City Managers Physicians Defined Benefit Plan – Formula based lifetime benefit Mandatory for eligible employees Professional asset management Defined Contribution Plan – Market based variable benefit Optional for elected officials Individual investment discretion 8

Approximate % of Hybrid Participants by State
9

States with DC Plans as Mandatory or Optional Primary Plans
10

PERA and the Retirement Big Picture

Defined Benefit Pensions Social Security Defined Contribution Savings
Retirement Security SOCIAL SECURITY DB PENSION DC S AVINGS Defined Benefit Pensions Social Security Defined Contribution Savings Deferred Compensation Health Care Savings Plan Personal Savings 12

100% 80% Your retirement lifestyle depends on how you save today.
You may need % of your current income to maintain your post-employment lifestyle. $50,000 annual salary Your retirement lifestyle depends on how you save today. $40,000 For illustrative purposes only Figure represents 80% of $50,000 salary 13

Recommended Replacement Ratios
Gross Income After Retirement Gross Income Before Retirement The replacement ratio is a tool used to measure benefit adequacy and equals Results are for a single person age 65 with no spouse Source: AON Consulting’s Replacement Ratio Study 14

Age at Retirement Years of Service High-five Salary
PERA’s Retirement Benefit Components Age at Retirement Years of Service High-five Salary There are three factors that come into plan in the pension benefit formula. Age – there is some significance to the date 7/1/89. What happened? The Rule of 90 died. Anyone who began their public service prior to 7/1/89 has the potential of reaching the Rule of 90. And people make a really big deal out of Rule of 90, don’t they? You know a year ahead of time that someone is going to reach their Rule of 90. So what exactly is Rule of 90? It’s when age added to years of service equals 90 someone can retire early without a penalty for early retirement. So that begs the question… what is early retirement and what is full retirement? We have to go down the rabbit hole a bit here… Early retirement and full retirement are different from a Social Security standpoint and a PERA standpoint. For everyone here, from a Social Security standpoint your first eligibility to collect social security benefits is age 62 (there are some exceptions with disability but this is true for most). For everyone here your full Social Security benefit is somewhere between ages 66 and 67. No longer 65 for anyone. From a PERA pension perspective, your first eligible age to collect your pension depends on which plan you’re in . Age 55 for Coordinated and age 50 for Correctional and Police & Fire. From a PERA pension perspective your full eligible age to collect a pension depends on whether you began your public service before or after 7/1/89. Age 55 is full retirement age in the Police & Fire and Correctional plans – difficult to reach the Rule of 90 prior to age 55. In the Coordinated plan, however, your full unreduced pension is 65 if you first began employment in public service 7630/89 or earlier and 66 if you first began public service 7/1/89 or thereafter. So getting back to the Rule of 90… anyone who is Rule of 90 eligible began public service prior to 7/1/89 so their full unreduced pension age is 65. What Rule of 90 does for them is allows early retirement, prior to age 65, without a penalty for age. It doesn’t mean they have earned the same pension they would get if they worked until 65, however, and that’s often a misconception. It simply allows early retirement without a penalty. The second factor… years of service, also referred to as service credit. Every month you work at least one day in the month you earn service credit for that month. Therefore you can earn 12 credits in a year. And the final factor is high-five salary. High-five salary is the average of the highest 60 consecutive months of salary, wherever that falls. For most of us it will be our last 5 years as most of us are making more in our last years than earlier in our careers… but not necessarily. If we cut our hours to part time in our last few years, our high-five will likely be frozen of the period of time we were still working full time. In public safety there are often periods of time when a lot of overtime is offered… Super Bowl, bridge collapse, RNC, 9/11… therefore a high-five may be frozen over that period. Wherever the highest 60 consecutive months fall, that is what we will use in the calculation. So these factors get multiplied together along with a plan-specific percentage to come up with what is called the Single Life Benefit amount. 15

General Employee Example – Normal Retirement Age (66)
Assumptions: Hire Age 26 Retire Age 66 SS Commencement Age 66 Assumptions: Final Pay Before Retirement $50,000 Post Retirement Earnings None Post Retirement Inflation 2.5% Recommended Ratio 16

General Employee Example – Early Retirement Age (62)

General Employee Example – Early Retirement Age (55)

Police & Fire Example – Normal Retirement Age (55)
Assumptions: Hire Age 26 Retire Age 55 SS Commencement Age N.A. Assumptions: Final Pay Before Retirement $95,000 Post Retirement Earnings None Post Retirement Inflation 2.5% Recommended Ratio 19

Other PERA Benefits (just the basics)

Other PERA Benefits Disability Benefits Deferred Benefits
If you become disabled prior to retirement Deferred Benefits If you leave public service prior to retirement Survivor Benefits If you die prior to retirement or if you die after your retirement, but before your spouse Refunds If you leave public service prior to retirement and do not elect to collect a deferred benefit, or are not vested 21

Highest benefit amount Lifetime payment to member only
Optional Forms of Monthly Benefit Single Life Highest benefit amount Lifetime payment to member only Survivor option Member’s payment reduced Lifetime payment to survivor upon member’s death 25%, 50%, 75%, or 100% to survivor If survivor dies first, member ‘bounces back’ to single life benefit 22

Unable to work for at least one year
Disability Qualifications Unable to work for at least one year Must supply medical evidence of disability Active public employee when disabled (Must apply w/in 18 months of leaving) May not be collecting a retirement benefit Under full retirement age When discussing the second bullet point, I make it clear that all the documentation goes to a third-party organization of medical professionals and they are the body that determines approval or denial of the claim. I also explain the appeals process to our executive director and that the Board has the final determination. 23

47 Age at Termination Benefit Collection Benefit Amount 55 $279 62
Deferred Pension Benefits Age at Termination Benefit Collection Benefit Amount 47 55 $279 62 $443 66 $600 70 ½* * You may not defer past age 70½ per IRS regulations 24

Spouse Dependent Children Beneficiaries
Pre-retirement Survivor Benefits Survivor benefits may be payable should a member die before receiving a benefit. Depending on plan and marital status, benefits may be payable to the following: Spouse Dependent Children Beneficiaries Depending on which plan a member is in, there may be benefits payable to a surviving spouse first, and then depending children. If no surviving spouse or children (depending on plan) a lump sum of member contributions is payable to beneficiaries. 25

Both benefits calculated using PERA High-Five Salary
Combined Service Example Combined Service Example Plan Years of Service High-Five Salary PERA 20 $5,500 MSRS 3 $1,200 Benefits PERA: 20 year benefit Both benefits calculated using PERA High-Five Salary MSRS: 3 year benefit 26

Important to Note: Regarding Taxes PERA benefits are taxable
Benefit Taxation Regarding Taxes PERA benefits are taxable Tax-deferred contributions since January 1, 1983 Important to Note: 27

A Brief History Lesson

PERA’s First Newsletter
“The interest earnings upon our investments have dropped. The average annual rate of interest we earned in the beginning amounted to over 5%...and last year about 3.3%. 4% was the rate on which we based our estimate. So in this respect we were too liberal.” “That those who are receiving annuities from our fund are living longer than the American Table of Mortality says they would…16 of them should have died, but only 7 of them did die.” “The adoption by this Association of the ½ of 1% additional contribution…would have resulted in a growth of our surplus” 29

Year of Benefit Commencement
PERA General and P&F Employee Contribution Rate Trend The average contribution rate for a 30-year P&F member will increase from 7.5% in 2005 to 10.3% in 2035. The average contribution rate for a 40-year GERF member will increase from 4.0% in 2005 to 6.0% for those retiring in 2035. Year of Benefit Commencement 30

Expected Years in Payment Status after Normal Retirement
The average post NRA payment period is expected to increase by about 30% for females and 56% for males. Sources: Data prior to 2000 is from Social Security Website. Years 2000 and later are based on PERA GERP plan mortality assumptions in 2000 and 2015. 31

Year of Benefit Commencement
PERA Historical Purchasing Power Protection Members retired after 2000 have retained approximately all of their purchasing power. Year of Benefit Commencement 32

MN SBI Combined Fund Actual Returns for Periods Ending June 30, 2018
Historical Investment Returns as of June 30, 2018 Great FY17 return… MN SBI Combined Fund Actual Returns for Periods Ending June 30, 2018 33

Summary of Events Leading to 2018 Legislative Changes
Investment returns have been mixed depending on the lookback period. The plan structure prior to the year 2000 allowed for excess earnings to be used for postretirement increases that were in excess of inflation. Mortality improvements are expected to occur at a greater rate than ever before, increasing liability estimates. Retirement dates have been deferred, increasing retiree benefit starting payments. Inflation expectations are forecasted to be lower for many years. Investment return expectations have been lowered. Employee and employer contributions have been steadily increasing. 34

Benefits & Costs (follow the $$)

7.5% 6.5% General Employees Plan – Current Contribution Allocation
Contributions Employer 6.3% for full or fairly reduced early retirement benefits with 1% annual increases after age 66 0.6% for a 50% of CPI COLA, 1% Min, 1.5% Max 0.0% for 1% annual increases before age 66 0.0% for augmented early retirement benefits 1.1% for disability, death, refunds, and operating expenses 6.0% for improved future benefit security and progress towards full funding Here are the two pieces of the proposal… 36

17.7% 11.8% Police & Fire Plan – Current Contribution Allocation
Employee Contributions Employer 15.2% for normal or reduced early retirement benefits with 1% annual increases 0.0% for a future COLAs > 1% 3.4% for disability benefits 2.3% for survivor and termination benefits 0.1% for operating expenses 8.6% for improved future benefit security and progress towards full funding Here are the two pieces of the proposal… Additional contributions equal to 3.4% of payroll are received for merged plans and from State Aid. 37

8.75% 5.83% Correctional Plan – Current Contribution Allocation
Employee Contributions Employer 9.6% for normal or reduced early retirement benefits with 1% annual increases 1.0% for a future COLAs > 1% 2.7% for disability benefits 0.7% for survivor and termination benefits 0.1% for operating expenses 0.5% for improved future benefit security and progress towards full funding Here are the two pieces of the proposal… 38

PERA Governance

PERA is governed by Minnesota Statutes; especially chapters 11A, 353, 353A, 353D, 353E, 353F, 353G, 356 and 356A. Changes to PERA's plans, including benefit provisions and contribution rates, are made through the introduction and passage of legislation by the Minnesota Legislature. 40

Administration of Benefits
Administrative and Investment Responsibilities Administration of Benefits Investment of Assets PERA Board Agency Executive Director State Board of Investment Investment Managers Advisory Committee Governor, Lieutenant Governor, Attorney General, State Auditor, Secretary of State 10 Investment Professionals. 4 Ex Officio Members 3 Governor Appointees Executive Director 100 Employees - Call Center - Counselors - Greater MN Offices 41

Governance 11 Member Board of Trustees 5 Elected
PERA’s Board of Trustees Governance 11 Member Board of Trustees 5 Elected 5 Appointed by the Governor 1 Constitutional Officer—State Auditor Set policies and advise the executive director Consider disability and other benefit appeals Oversee administration of all retirement plans offered by the system 42

? ? ? ? Sustainability Equitability Structure
What Should be Prioritized for Each Plan? Sustainability ? ? ? Equitability Structure ? 43

House of Representatives
The Pension Legislation Environment Governor (1) (Executive Branch) Senate (67) House of Representatives (134) Employees Pension Fund Board Unions Taxpayers Employers Lobbyists 7 7 Retiree Organizations LCPR (14 members) 44

2018 Legislative Success

Governor Dayton signs 2018 Omnibus Retirement Bill
October 5, 2018 Governor Dayton signs 2018 Omnibus Retirement Bill 46

Investment Return Assumption Setting Process
SBI Provides the Asset Allocation Investment Consultants provide long-term capital market forecasts PERA’s actuary recommends a reasonable range PERA’s board recommends an assumption within the range Legislature sets the assumption The 2018 Omnibus Retirement Bill included a change to the investment return assumption from 8.0% to 7.5%. 47

Someone is Still Getting a Civil War Pension
Pension Plan Lifespan and Member Mortality Someone is Still Getting a Civil War Pension Present Age Men Women 55 82.9 84.9 65 84.2 86.2 75 86.6 88.6 48

Impact of 2018 Omnibus Retirement Bill on Funding Projections
The 2018 Omnibus Retirement Bill significantly improves the funding trajectory for each plan. All plans expect to be fully funded within 30 years. 49

General Employees Plan – 2018 Legislative Change
Summary Explanation No Additional Cost No employee, employer, or State aid contribution increases More Equitable Benefit Distribution Phase-out of early retirement augmentation. No COLA until age 66. Eliminate deferred retirement augmentation. Reduce interest on refunds from 4% to 3%. Postretirement adjustments changed from 1% for one generation and 2.5% for another generation to an inflation based approach (see below). Stakeholder Supported Supported by AFSCME 5, AFSCME 65, Teamsters 320, PEPSA, MMRA, LMC, AMC, and MICA If Social Security Inflation Index (CPI-W) is: PERA Postretirement Increase will be: CPI-W < 2.0% 1% 2.0% < CPI-W < 3.0% 50% of CPI-W CPI-W > 3% 1.5% 50

Stakeholder Supported
Police & Fire Plan – 2018 Legislative Change Summary Explanation Additional Funding 1% employee increase (phased-in) 1.5% employer increase (phased-in) Direct state aid of $4.5M in FY19, $4.5M in FY20, and $9M /year thereafter until the Plan is 100% funded Benefit Change Trigger eliminated Postretirement increases fixed at 1% Stakeholder Supported Supported by Minnesota Police and Peace Officers Association (MPPOA), Minnesota Professional Firefighters (MPFF), League of Minnesota Cities (LMC), Association of Minnesota Counties (AMC), and the Minnesota Inter-County Association (MICA) 51

Postretirement Benefit Increase Changes Stakeholder Supported
Correctional Plan – 2018 Legislative Change Summary Explanation No Additional Cost No employee, employer, or State aid contribution increases Postretirement Benefit Increase Changes Avoids reducing benefits unless it is necessary to do so Ensures that increases do not exceed inflation (unless CPI < 1%) Improves intergenerational equity Stakeholder Supported Supported by AFSCME 5, Teamsters 320, Law Enforcement Legal Services (LELS), MN Public Employees Association (MNPEA), AMC, and MICA Funding Status Current Plan PERA Proposed Increase From now until the funding ratio drops below 80% once or 85% twice 2.5% 100% of CPI, 1% floor, 2.5% cap If/when funding ratio drops below 80% once or 85% twice 1.0% 100% of CPI, 1% floor, 1.5% cap If/when plan regains 90% 52

Rating Agency Reaction

Moody’s Investors Services
Rating Agency Reaction Agency Reaction Moody’s Investors Services “Legislation will reduce pension liabilities, but changes are far from a cure-all” – June 26, 2018: The changes are credit positive for the state and its local governments because they will reduce unfunded pension liabilities and improve plan funding. However, local governments across Minnesota, particularly school districts, will continue to face high pension burdens. S&P Global Ratings “Minnesota’s New Pension Bill is a Positive Step Toward Sustainable Funding” – June 7, 2018: …but because contributions remained fixed in state statute, there could eventually be a regression in plan funded status. Plan actuarial assumptions are more conservative (moving to 7.5%) but… “we still view this as high, and many plans in other states are moving to assumptions that are even more conservative.” 54

Public Pension Fund Investment Return Assumption Trend
Forecast is more important. Need to change 55

Annual Recommended Contribution (ARC)

How Assumption is Determined
Key Demographic & Economic Assumptions High Current Mortality Rates Investment Return Withdrawal Rates Mortality Improvement Rates Liability Impact Salary Increases Disability Rates Retirement Rates % Married, Spouse Age, Election Rates Low High Objective Low Subjective High Subjective Low Objective How Assumption is Determined 59

Benefit Payments are Projected ($ millions)
Projected benefit payments for current members are determined using demographic assumptions. 60

Funding: Benefit Payments are Projected and Discounted
Effect of Discounting at 7.5% Funding valuations discount all projected benefit payments using the assumed investment return assumption. 61

General Employees Plan – 2018 Valuation Results
Participant Data Assumptions & Methods Plan Provisions Present Value of Benefits Actuarial Accrued Liability = $27.1B Present Value of Future Service Benefits 80% Market Value of Assets = $21.6B Unfunded Liability $5.5B 30-Year Amortization 5.1% Normal Cost & Expenses 8.0% + Statutory Contribution % Required Contribution % Funding Sufficiency/(Deficiency) 1.5% 62

Police & Fire Plan – 2018 Valuation Results
Participant Data Assumptions & Methods Plan Provisions Present Value of Benefits Actuarial Accrued Liability = $9.5B Present Value of Future Service Benefits 89% Market Value of Assets = $8.5B Unfunded Liability $1.0B 30-Year Amortization 6.2% Normal Cost & Expenses 21.0% + Statutory Contribution % Required Contribution % Funding Sufficiency/(Deficiency) 3.3% 63

Correctional Plan – 2018 Valuation Results
Participant Data Assumptions & Methods Plan Provisions Present Value of Benefits Actuarial Accrued Liability = $697M Present Value of Future Service Benefits 98% Market Value of Assets = $681M Unfunded Liability $16M 30-Year Amortization 0.4% Normal Cost & Expenses 14.1% + Statutory Contribution % Required Contribution % Funding Sufficiency/(Deficiency) 0.0% 64

GASB Reporting Whiplash

GASB Funding Ratios for Minnesota’s Largest Plans
66

Bloomberg News Reporting
67

GASB Variables – Actual Investment Returns & Discount Rates
68

FIDUCIARY NET POSITION (FNP) TOTAL PENSION LIABILITY (TPL)
Police & Fire FY16 GASB Results FIDUCIARY NET POSITION (FNP) ($ in millions) FNP as of July 1, 2015 $7,349 Contributions – Employee 95 Contributions – Employer 156 Other (State of MN) 9 Net investment income (9) Administrative expense (1) Benefit payments (501) Change in FNP $(251) FNP as of June 30, 2016 $7,098 TOTAL PENSION LIABILITY (TPL) ($ in millions) TPL as of July 1, 2015 $8,485 Service Cost 194 Interest 658 Difference between actual & expected experience (376) Assumption changes 2,651 Benefit payments (501) Net Change in TPL $2,626 TPL as of June 30, 2016 $11,111 The GASB funded ratio decreased from 87% to 64% and the GASB unfunded liability increased from $1.1B to $4.0B in FY16. Approximately $0.5B of this increase was due to an asset loss from a -0.1% investment return. What caused the other $2.4B unfunded liability increase? 69

FIDUCIARY NET POSITION (FNP) TOTAL PENSION LIABILITY (TPL)
Police & Fire FY17 GASB Results FIDUCIARY NET POSITION (FNP) ($ in millions) FNP as of July 1, 2016 $7,098 Contributions – Employee 102 Contributions – Employer 175 Other (State of MN) Net investment income 1,060 Administrative expense (1) Benefit payments (515) Change in FNP $821 FNP as of June 30, 2017 $7,919 TOTAL PENSION LIABILITY (TPL) ($ in millions) TPL as of July 1, 2016 $11,111 Service Cost 318 Interest 617 Difference between actual & expected experience 38 Assumption changes (2,300) Benefit payments (515) Net Change in TPL ($1,842) TPL as of June 30, 2017 $9,269 The GASB funded ratio increased from 64% to 85% and the GASB unfunded liability decreased from $4.0B to $1.3B in FY17. Approximately $1.1B of this decrease was due to an asset gain from a 15.1% investment return. What caused the other $2.3B unfunded liability decrease? 70

GASB: Benefit Payments are Projected and Discounted
Funded Benefits are discounted at 7.5% Unfunded benefits are discounted at 2.85% GASB valuations discount funded projected benefit payments using the assumed investment return assumption and unfunded benefits using a general obligation bond rate. 71

Impact of FY17 15.1% Investment Return
Effect of Discounting at 7.5% The FY17 Asset gain extended full funding to all years. All future benefit payments are now discounted at 7.5% The 15.1% FY17 investment return results in full funding of all future benefits. The use of a higher discount rate will reduce the liability associated with that period by about $2.3B. The liability loss from FY16 will be reversed. 72

October 5, 2018 Resources

Educational programs ask your employer to arrange a workplace presentation
PERA in 90 All stages of employment PERAPlus 3-5 years before retirement Individual meeting Disability, divorce, CSA 75

Thank You for Attending
October 5, 2018 For More Information Online By Phone or In Person St. Paul 60 Empire Drive Duluth Mankato Thank You for Attending 76

Minnesota Association of County Officers PERA Update Doug Anderson, Executive Director February 15, 2019.

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