State and Local Government Pensions in the United States

November 7, 2013

Joshua Franzel, PhD Vice President, Research

Center for State and Local Government Excellence Washington, DC

jfranzel@slge.org

This presentation has been created for general information purposes. It is not intended to give financial or professional advice.

The U.S. State and Local Government Pension Plan Context

! Over 3,400 state and local government public employee retirement systems (2011)

! 14.6 million active members and 8.6 million retirees (2011)

! 83% of state and local workers have access to a defined benefit pension plan

! 32% of state and local workers have access to a defined contribution plan

! ~30% of state and local workers do not participate in Social Security Sources: (1) http://www.bls.gov/ncs/ebs/benefits/2013/ownership/govt/table02a.pdf ; (2) http://www.census.gov/govs/retire/ ; (3) http://www.nasra.org/socialsecurity

Defined Benefit Plan Defined Contribution Plan Choice between plan types Hybrid Plan (DB/DC or Cash Balance)

U.S. State Pension Plan Structures State Employees

PR

Source: National Conference of State Legislatures, Checklist of State Defined Benefit, Defined Contribution and Hybrid Plans for State Employees and Teachers (2012) Note: Some of the structures listed have changed since 2012 (National Association of State Retirement Administrators).

U.S. State and Local Pensions: Assets, trillions

Source: Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release, Financial Accounts of the United States (25/09/13)

U.S. State and Local Pensions: Average Funded Ratio

Source: SLGE and BC-CRR Public Plans Database Note: *preliminary data

U.S. State and Local Pensions: Plan Revenues

Sources: (1) http://www.census.gov/govs/retire/ ; (2) http://www.nasra.org/content.asp?contentid=120 Note: * most recent US Census data available

U.S. State and Local Pensions: Average Asset Allocation

Source: SLGE and BC-CRR Public Plans Database Note: *preliminary data / ** percentages do not total 100% due to rounding

2001** 2011 Alternatives / Other 5% 17% Cash / Short Term 3% 2% Real Estate 5% 7% Fixed Income 32% 24% Equities 55% 50%

U.S. State and Local Pensions: Plan Assets

! 2001-2011: Domestic Equity allocations dropped by 36%; International Equity allocations grew by 32%

! 2001-2011: Domestic Fixed Income allocations decreased by 39% and International Fixed Income allocations decreased by 4%

! 2013: examples of Alternatives / Other - Private Equity; Absolute Return; Commodities; Private Infrastructure; Energy; Timber Strategies; Farmland

Sources: (1) SLGE and BC-CRR Public Plans Database ; (2) National Association of State Retirement Administrators, 2013 Roll Call

Other state funds in the US --- examples

! Ohio Public Employees Retirement System Health Care Plan (established in 1974)

! Alaska Permanent Fund (established in 1976)

! Texas Permanent School Fund (established in 1856)

Ohio Public Employees Retirement System Health Care Plan

! “The primary objective# to secure health care coverage (a discretionary benefit) for eligible Traditional Pension and Combined Plan retirees.” (OPERS website)

! “Largest health care trust fund in the U.S.” with $12.8 billion in assets, as of 31/12/2012 (2012 Summary Annual Financial Report, pg. 2)

! 31/12/2012 Asset Allocation: 52% equities (25% US / 27% Int.); 36% Fixed Income (19% core fixed; 5% emerging market debt; 3.5% TIPS; etc.); 12% Alternatives (6% REIT; 4% Hedge Funds ; etc.)

Sources: (1) https://www.opers.org/investments/health-care/index.shtml ; (2) https://www.opers.org/pubs-archive/investments/inv-plan/2013_Investment_Plan.pdf ; (3) https://www.opers.org/pubs-archive/investments/cafr/2012-PAFR.pdf

Alaska Permanent Fund ! At least a quarter of income from oil and gas royalties is

deposited to fund. Realized income is used for Alaskans’ dividend checks ($900 in 2013), inflation proofing, and other uses determined by the AK Legislature.

! Value: $48.5 billion, as of 28/10/2013 ! Equities ! 28/10/2013 Asset Allocation (from apfc.org): 48% Equities

(13% US; 22% Non US; 13% Global); 17% Bonds (15% US Bonds; 2% Non US Bonds); 17% Alternatives; 10% Real Estate; 7% Real Return/External CIO; 1% Cash

! Assets managed by Alaska Permanent Fund Corporation (quasi-independent state entity)

Sources: (1) http://www.apfc.org/home/Media/publications/2009AlaskansGuide.pdf ; (2) http://www.apfc.org

Texas Permanent School Fund ! “created with a $2,000,000 appropriation by the Texas

Legislature in 1854 expressly for the benefit of the public schools of Texas.” Additional funds have come from the sale [and rental (minerals)] of state lands. (Texas PSF website)

! Value: $25.5 billion, as of 31/08/2013

! 31/08/2013 Asset Allocation: 54% Equities (37% US; 17% Non US); 21% Domestic Fixed Income; 10% Absolute Return; 7% Risk Parity; 3% Real Return; 2% Real Estate; 2% Private Equity; .05% Cash

! Assets managed by The State Board of Education

Sources: (1) http://www.tea.state.tx.us/index4.aspx?id=2147485578 ; (2) http://www.tea.state.tx.us/index4.aspx?id=2147489178&menu_id=2147483695

Challenges and Opportunities: 2013 and Beyond)

! Increasing importance of supplemental, defined contribution, retirement plans and assets

! Public employer costs and contributions ! State and local government retiree

healthcare trusts and assets ! New state and local funds in the U.S.?

For More Information On U.S. State and Local Government Pensions

! Center for State and Local Government Excellence (SLGE)

! National Association of State Retirement Administrators (NASRA)

! National Conference of State Legislatures (NCSL)

! U.S. Census Bureau {Annual Survey of Public Pensions: State and Local Data}

Joshua Franzel, PhD

Vice President, Research Center for State and Local Government Excellence

Washington, DC

jfranzel@slge.org

This presentation has been created for general information purposes. It is not intended to give financial or professional advice.