Teachers’ Retirement System (TRS): Final Report · 15 But since 2000, performance has fallen...
Transcript of Teachers’ Retirement System (TRS): Final Report · 15 But since 2000, performance has fallen...
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Jean-Pierre Aubry and Anek Belbase
Center for Retirement Research at Boston College
Connecticut Pension Analysis
Oct 28th, 2015
Hartford, CT
An Analysis of Connecticut State
Teachers’ Retirement System (TRS):
Final Report
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1
Overview
• Looking back
o TRS’ historical funded status
o Source of TRS’ unfunded liability (UAAL)
o Today’s funded status if TRS had been adequately funded
• Looking forward
o Funded levels and costs under current law and alternative
funding methods
o The impact of the TRS’ POB
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2
Looking back….
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Over the past two decades, TRS’ funding has
been below the national average.
3
Sources: Various actuarial valuations for Connecticut TRS; PENDAT (1990-2000); and Public Plans Database (2001-2014).
Funded Ratio, 1979-2014
0%
20%
40%
60%
80%
100%
120%
1979 1983 1987 1991 1995 1999 2003 2007 2011
Connecticut TRS
National average
POB issued
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TRS provided benefits as far back as 1939,
but did not pre-fund until 1981.
4
Percentage of State and Local Plans Established or Significantly Restructured, by Date
Sources: Various actuarial valuations for Connecticut TRS; PENDAT (1990-2000); and Public Plans Database (2001-2014).
6.1%
3.0%1.8%
5.3% 5.0%
16.1%
29.6%
14.6%15.6%
5.8%
0%
10%
20%
30%
40%
TRS
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Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
Sources of Change to UAAL, 1983-2014
But TRS’ poor funded ratio also reflects
inadequate contributions and poor returns
2.1
-2.01.2
-0.7 0.6-1.0 0.2
2.6
8.5
-$4
$0
$4
$8
$12
$16
Bil
lions
ARC < UAAL growth, 4.0
Contributions < ARC, 1.5
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Before 2000, the impact of inadequate
contributions was offset by high returns.
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Sources of Change to UAAL, 1983-1999
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
-3.5
0.0 0.0 -0.6 0.1
-1.4
0.0
2.0
-0.1
-$4
$0
$4
$8
$12
$16B
illi
ons
ARC < UAAL growth, 1.8
Contributions < ARC, 1.5
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But after 2000, poor returns added to the
impact of inadequate contributions.
7
Sources of Change to UAAL, 2000-2014
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
5.7
-2.01.2
-0.1 0.6 0.4 0.2
0.6
8.6
-$4
$0
$4
$8
$12
$16
Bil
lions
Contributions < ARC, 0.1
ARC < UAAL growth, 2.2
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Two factors contributing to the UAAL
growth were controllable.
• Contributions
• The investment return assumption
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Actual contributions fell short of TRS’
reduced funding schedule.
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Percent of Annual Required Contributions Paid from 1983-2014
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
0%
20%
40%
60%
80%
100%
120%
1983 1988 1993 1998 2003 2008 2013
Original funding schedule
Actual contributions
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TRS’ method for calculating the ARC did
not keep up with UAAL growth.
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Contributions to CT TRS, 1983-2014, in Billions
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
$0.0
$0.3
$0.6
$0.9
$1.2
1983 1987 1991 1995 1999 2003 2007 2011
Bil
lions
Minimum contribution to Prevent UAAL Growth
Annual Required Contribution
Actual Contribution
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Also, the assumed rate of return was, and
continues to be, unusually high.
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Assumed Investment Return, 1990-2014
Sources: Actuarial valuations for Connecticut TRS; PENDAT (1990-2000); and Public Plans Database (2001-2014).
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
1990 1993 1996 1999 2002 2005 2008 2011 2014
Connecticut TRS
National average
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Two of the factors contributing to the UAAL
growth were less controllable.
• Actual demographic experience
• Actual investment returns
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Demographic experience seems to have had
only a minor role in UAAL growth.
Impact of Actuarial Experience as a Percent of the Overall Change in the UAAL since 2009
Sources: Authors’ calculations based on Connecticut TRS actuarial valuations (2009-2014).
6.2%
93.8%
Demographic experience Non-demographic factors
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Up to 2000, TRS’ investment performance
was better than the assumed.
Actual vs. Assumed Investment Return, 1983-2000
Sources: Actuarial valuations for Connecticut TRS; Census of Governments (1983-2000); and PENDAT (1990-2000).
13.0%
8.5%
0.0%
5.0%
10.0%
15.0%
Average Return from 1983-2000
2000 Assumed Return
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But since 2000, performance has fallen
considerably short of the assumed return.
Actual vs. Assumed Investment Return, 2001-2014
Sources: Actuarial valuations for Connecticut TRS; Census of Governments (2001-2014); and Public Plans Database (2001-2014).
5.4%
8.5%
0.0%
5.0%
10.0%
15.0%
Average Return from 2001-2014
2014 Assumed Return
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Where would TRS be today if Connecticut
had contributed 100 percent of the ARC?
Funded Ratio, 1985-2014
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
National average = 74%
0%
20%
40%
60%
80%
100%
120%
1985 1989 1993 1997 2001 2005 2009 2013
Paying full ARC/Level-dollar
Paying full ARC
Actual Contributions (w/ POB)
Actual Contributions (w/o POB)
POB
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Looking forward….
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The key question for TRS is how to deal with
the existing UAAL.
2014 Actuarial Costs as a Percent of Payroll, by Element
Sources: Actuarial valuation for Connecticut TRS; and Public Plans Database (2014).
6.0% 5.6%
3.7%7.4%
19.9%11.3%
0%
10%
20%
30%
40%
Connecticut TRS National average
Employer UAAL payment
Employer normal cost
Employee contribution
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Three factors determine the trajectory of
UAAL amortization payments.
1. Payment schedule:
• Level dollar: front-loaded payments
• Level percent of pay: back-loaded payments
2. Funding period
• Closed amortization period: fixed date for full funding
• Open amortization period: no fixed date
3. Length of amortization period
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One way forward is to pay off the UAAL by
2032 (current law)...
TRS Funded Ratio under Alternative Funding Methods, 2014-2046
Source: Authors’ calculations based on various actuarial valuations for Connecticut. TRS
0%
20%
40%
60%
80%
100%
120%
2014 2019 2024 2029 2034 2039 2044
Current Law
Level-dollar
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…but costs will remain high for next two
decades.
ARC under Alternative Funding Methods, 2014-2046
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
$0
$2
$4
$6
$8
2014 2019 2024 2029 2034 2039 2044
Bil
lions Current Law
Level-dollar
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ARC under Alternative Funding Methods and Investment Returns, 2014-2046
Source: Authors’ calculations based on various actuarial valuations for Connecticut .
$0
$2
$4
$6
$8
2014 2019 2024 2029 2034 2039 2044
Bil
lions
Current Law, 5.5-percent return
Level-dollar, 5.5-percent return
Current Law, 8.5-percent return
Poor investment experience relative to the
assumed could make matters much worse.
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Relaxing the requirement to pay off the
UAAL by 2032 will delay full funding...
CT TRS Funded Ratio under Alternative Funding Methods, 2014-2046
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
0%
20%
40%
60%
80%
100%
120%
2014 2019 2024 2029 2034 2039 2044
Level-dollar, 15-yr open, 8.5-percent return
Current Law, 8.5-percent return
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…but reduces costs significantly over the
next 20 years.
ARC under Alternative Funding Methods, 2014-2046
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
$0
$2
$4
$6
$8
2014 2019 2024 2029 2034 2039 2044
Bil
lion
s
Level-dollar, 15-yr open, 8.5-percent return
Current Law, 8.5-percent return
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If TRS also used a more conservative return
assumption, costs would stay about the same.
ARC under Alternative Funding Methods and Assumed Returns, 2014-2046
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
$0
$2
$4
$6
$8
2014 2019 2024 2029 2034 2039 2044
Bil
lions
Current Law, 8.5% Discount Rate
Level Dollar, 15-yr open, 8.5% Discount Rate
Level Dollar, 15-yr open, 7% Discount Rate
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What about the less controllable factors?
• Investment risk can be shared among the plan stakeholders
through a predetermined pattern of contribution increases and
benefit cuts.
• Incremental increases to the normal cost due to revised
actuarial assumptions can be shared equally between
employees and employers.
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And what about TRS’ POB?
Connecticut TRS issued a POB for $2 billion in 2008.
• Investment returns aside, the POB is simply a restructuring of
pension debt for the plan sponsor.
• Borrowed funds immediately improve the plan’s funded ratio
and lower annual pension costs. This is offset by the POB’s
annual interest payments and the repayment of principal.
• If the returns earned on the borrowed money are higher than
the interest paid, then the bond can also be a net gain to the
government’s finances. Otherwise, it can be loss.
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Annualized Return on POB Proceeds, 2008 to 2014
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
How has the POB fared to-date?
6.4%5.8%
-0.3%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Annualized Investment
Return for TRS
Annualized POB Debt
Service
Annualized POB
Performance
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Annualized Return on POB Proceeds at Various Assumptions of Investment Returns
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
What does the investment risk for TRS’
POB look like going forward?
2.7%
2.2%
1.6%
1.1%
0.5%
0.0%
-0.6%
-1.2%
-1.8%
-2.5%-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0%
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State Costs with and without POB issuance, 2008-2032
Source: Authors’ calculations based on various actuarial valuations for Connecticut TRS.
How would contributions look if the POB
had not been issued?
$0
$1
$2
$3
$4
2008 2012 2016 2020 2024 2028 2032
Bil
lions
Existing Scenario: POB issued
Alternative Scenario: No POB issued
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Conclusions
31
TRS’ current troubles are mainly the result of:
• Inadequate contributions
• Poor investment performance relative to the assumed
return.
• The key to the future is making full required contributions.
• But paying off the UAAL by 2032 comes at a significant cost
• Extending the payment horizon could spread out the pain over
a longer period.
• Lowering the assumed return and instituting procedures that
automatically respond to bad outcomes would mitigate risk.
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• The Center for Retirement Research at Boston College
http://crr.bc.edu
• Public Plans Database (PPD)
http://publicplansdata.org
• State and Local Pension Research
http://crr.bc.edu/special-projects/state-local-pension-plans/
Jean-Pierre Aubry
Assistant Director of State and Local Research