Can it be fixed?

Each year CSEA needs to make one payment which consists of two components.

What are they?◦ Normal Cost◦ Shortfall amortization

Normal cost◦ This is the amount needed each year to pay for

the additional benefits all CSEA employees have earned during the year.

Shortfall amortization◦ This is the “mortgage payment.” If the plan does

not have enough assets currently on hand to pay for benefits that have already been earned it must make an annual payment to reduce and eliminate the “shortfall.” Most plans have a shortfall.

Interest rates and investment earnings are everything!

Interest rates – the Rule of 72◦ An amount of money will double when the interest

earned per year multiplied by the number of years equals 72. Example: $1,000 in the bank today earning 6% per

year will be $2,000 in 12 years. Example: $1,000 in the bank today earning 12% will

be $2,000 in 6 years.

Interest Rates◦ The government issues rates each month that the

Plan will use for the year. The CSEA Plan year begins each June. It must use the government rates issued in June each year to determine how much assets it must have on hand in the pension to fund all earned benefits. Currently, interest rates are historically low. This subsequently created a larger “funding target.”

What if the pension plan does not have enough money on hand using the government rate?◦ There is a shortfall, the amortization shortfall

which must be paid off each year until it is gone. What if rates go up in a few years?

◦ The shortfall grows smaller or even disappears. Can a pension plan be “over funded?”

◦ Yes, if the assets on hand exceed the “funding target” using the government interest rates.

Does CSEA retirement plan have a shortfall?◦ Yes, of about $34,000,000.

How did this occur? Did CSEA mismanage the plan?

CSEA did not mismanage the plan. Three things happened that created the current funding problem.

So, what happened?◦ 1. CSEA membership is down from 221,000 to as low as

206,000. Currently it is about 209,000. It loses $1,100,000 for every 4,000 less members. This equates to a loss of $3,300,00 resulting from the loss of 12,000 members.

◦ 2. Interest rates dropped dramatically increasing the funding target.

◦ 3. The stock market crashed in 2008-09 so the plan earned much less than the 8% expected (in fact, lost a significant amount)

What does CSEA need to pay each year for the next five years assuming 1) interest rates stay the same and 2) investment earnings each year are 8%.

2011 - $13,660,000 2012 - $16,040,000 2013 - $14,987,000 2014 - $14,928,000 2015 - $12,529,000

What did CSEA usually pay (contribute to the plan)per year?◦ $8,000,000

What is CSEA’s revenue? Its budget?◦ Revenue has been about $65,000,000 (with

221,000 members) and expenses about $63,000,000, including $8,0000,000 for the pension contribution.

What else happened?◦ The Pension Protection Act (PPA)was enacted

in 2006 and became effective in 2008!! What does the PPA require?

It requires a plan to be funded much quicker than before. It also reduced the period over which the “shortfall” could be paid off. The range had been 20-30 years. The PPA lowered that to 7 (with some slight exceptions).

So where is CSEA now?◦ It needs to pay off the amortization shortfall

resulting in part from the market crash* but in larger part from the low interest rates. For every 1% rise in rates the “funding target” (amount needed to fully fund the plan) is reduced by 13%. If interest rates were to rise by 2% in June 2011 there would be no shortfall. As rates fall the opposite happens. The amount needed to fund the plan grows.

◦ *CSEA’s asset allocation is 70% stocks and 30% bonds. This hurt during the crash but has sped up the recovery now that the market has risen significantly.

Can CSEA wait until rates rise before funding?

◦ No. CSEA must make the payments described above. However, if rates go up during the next five years (and the retirement plan continues to earn at least 8% each year) the payments to cover the shortfall will be reduced or totally eliminated.

◦ The payments to cover “normal cost,” the amount needed each year to cover newly earned benefits, might also be reduced or eliminated depending on the interest rate and/or any earnings gain over 8%.

CSEA wanted to save $7,000,000 over each of the next five fiscal years to meet the pension contribution requirement. It has offered combinations of: ◦ 1) furlough (withdrawn)◦ 2) Unpaid holidays (withdrawn)◦ 3) 7% wage decrease to be put in pension (withdrawn)◦ 4) Health and welfare employee contributions of $100 per mo. to

$140 per mo. (reduced to $75 per month)◦ 5) Freezing longevity increases (withdrawn)◦ 6) modifying longevity increase eligibility (future hires)◦ 7) reducing pension accrual from 2.275% to 2.0% for future accruals

(current)◦ 8) adding new salary steps at the bottom of the scale (withdrawn)◦ 9) freezing benefit accruals (6 months)

Risk of five year contract:CSEA wants AEU to assume risk of membership loss, pension investment gain less than 8%, interest rate fluctuation.

Rewards of five year contract:AEU to be credited with membership gain over 210,00, investment returns over 8%, interest rates rising.

Currently AEU put forth a 28 month proposal and CSEA has agreed to negotiate using our proposed 28 month term.