In this issue:Public Pension Membership Group Publishes GASB 67/68 Guidance ... p. 1-2GASB Says Benefits of New OPEB Standards Outweigh Their Costs ... p. 2Social Security Advisory Board Recommends Revisions to Windfall Elimination Provision ... p. 3Mass Retirement of Public Workers Is on the Horizon ... p. 4Public Pension Funding Ratios Still Below Pre-Recession Levels ... p. 4Federal Action Could Help States – and Public Pensions – Expand Private-Sector ... p. 5Mandatory Social Security Coverage for Public Workers Examined in New Research Paper ... p. 6NCPERS Seeks Widespread Adoption of Its Code of Conduct ... p. 7Study Finds Colorado’s Hybrid Pension Plan Compares Favorably with Other Plan Types ... p. 7State Tax Revenues Show Solid Growth ... p. 8Drawn Out Battle for Back Pay Tilts in Favor of New Orleans Firefighters ... p.8State Pension Funding Levels in U.S. Improve for a Second Year ... p. 9

November 2015

TEXPERS OUTLOOKPublic Pension Membership Group Publishes GASB 67/68 Guidance

The Public Pension Financial Forum (P2F2), an advocacy association for public pension plans, recently released a comprehensive “toolkit” to help its members comply with the Governmental Accounting Standards Board’s (GASB) new accounting and financial reporting standards for state and local government pension plans and participating employers. The toolkit provides various resources related to GASB Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68, Accounting and Financial Reporting for Pensions. Specifically, the toolkit includes:• Pronouncements and implementation guides for GASB Statements 67 and 68;• GASB’s official implementation toolkit for governments;• Implementation examples for six governmental retirement systems; and• Selected videos and webinars, as well as other resources. The provisions of GASB 67 became effective for pension plans in fiscal years beginning after June 15, 2013,and the provisions of GASB 68 became effective for sponsoring employers (and non-employer contributing entities) in fiscal years beginning after June 15, 2014. On the Web at: http://www.p2f2.org/professional_resources/GASB-Toolkit.shtml. Meanwhile, GASB has issued a proposal to amend the scope and applicability of Statement No. 68 to exclude pensions provided to employees of state or local governmental employers through a cost-sharing multiple-employer defined benefit (DB) pension plan that 1) is not a state or local governmental pension plan, 2) is used to provide DB pensions to employees of employers that are not state or local governmental employers, and 3) has no predominant state or local governmental employer (either individually or collectively with

Continued on page 2

Te x a s A s s o c i a t i o n o f P u b l i c E m p l o y e e R e t i r e m e n t S y s t e m s

Issues ImpactIng publIc pensIon Funds

1225 North Loop West, Ste. 909Houston, Texas 77008Phone: (713) 622-8018Fax: (713) 622-7022texpers@texpers.orgwww.texpers.org

BOARD OF DIRECTORS

PresidentPAUL R. BROWNBig Spring Firemen’s Relief & Retirement Fund

First Vice PresidentSHERRY MOSEHouston Municipal Employees Pension System

Second Vice PresidentTYLER C. GROSSMANEl Paso Fire & Police Pension Fund

SecretaryJOHN D. JENKINSDallas Employees’ Retirement Fund

TreasurerEYNA CANALES-ZARATECity of Austin Employees’ Retirement System

Board Member ANDY BARBOZACorpus Christi Firefighters’ Retirement System

Board Member JOSE CAVAZOSDallas Area Rapid Transit Retirement Plan and Trust

Board Member DENISE CRANDONDallas Area Rapid Transit Retirement Plan and Trust

Board Member PETE MORINAustin Police Retirement System

Board Member LARRY A. REEDSan Antonio Fire & Police Pension Fund

Board Member JIM SMITHSan Antonio Fire & Police Pension Fund

ASSOCIATE ADVISORS

LEON RICHARDSONABNICHOLAS STANOJEVBNY Mellon DELIA M. ROGESInvescoLINDA J. JORDANMesirow FinancialED GRANTMFS Institutional AdvisorsJASON WIDENEROFI Institutional Asset ManagementDAVID M. SCHILLERState Street Global AdvisorsKEVIN FETZERWilliam Blair & CompanyRICHARD C. BADGERWunderlichSTAFF

Executive DirectorMAX PATTERSONContributing EditorMATT AUKOFER

other state or local governmental employers that provide pensions through the pension plan). This proposed statement would establish requirements for recognition and measurement of pension expense/expenditures and liabilities, note disclosures, and required supplementary information for pensions that have these characteristics. The requirements of this proposed statement would be effective for reporting periods beginning after December 15, 2015. On the Web at: http://www.gasb.org/jsp/GASB/Document_C/GASBDocumentPage?cid=1176166907619&acceptedDisclaimer=true.

GASB 67/68 continued from page 1

Page 2 TEXPERS Outlook November 2015

GASB Says Benefits of New OPEB Standards Outweigh Their Costs The Governmental Accounting Standards Board (GASB) recently released a paper summarizing how GASB assessed the expected costs and benefits of its new other post-employment benefits (OPEB) standards. GASB recently issued two new Statements related to OPEB (primarily, health insurance for retired government employees): Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. GASB’s assessment of the expected benefits and perceived costs of issuing new standards is “unavoidably more qualitative than quantitative because no reliable and objective method has been identified for quantifying the value of improved information in financial statements,” GASB said. Furthermore, GASB said it is difficult to accurately measure the costs of implementing new standards until implementation has actually taken place. Nonetheless, GASB undertook the assessment based on the available evidence regarding expected benefits and anticipated costs, with the objective of achieving an appropriate balance between increasing benefits and minimizing costs. Overall, GASB concluded that the benefits of the new OPEB standards – in terms of the improved usefulness of the information that will be provided by governments for decision-making and assessing

accountability – justify the costs of implementing the standards. GASB pointed out several provisions in the new standards that may help to lower costs, including: 1) the OPEB liability may be measured as early as one year prior to a government’s fiscal year-end; and 2) the disclosures of changes in the discount rate and health care cost trend rate were reduced to fewer measures than proposed in the initial draft. Additionally, the GASB noted that “allowing a measurement date to be offset from the employer’s fiscal year-end – rather than requiring that the measurement be as of the employer’s fiscal year-end – will reduce costs for both employers and OPEB plans.” On the Web at: http://www.gasb.org/cs/ContentServer?c=Document_C&pagename=GASB%2FDocument_C%2FGASBDocumentPage&cid=1176166439958.

Not at this year’s Summer Forum?

Check out these online resources to see what you

missed:

For the session handouts and power points:

http://www.texpers.org/priorconferences

For videos of the DB/DC Battle panel & Bob Klausner’s

presentation:www.youtube.com and search

for “TEXPERS”

November 2015 TEXPERS Outlook Page 3

Social Security Advisory Board Recommends Revisions to Windfall Elimination Provision The Social Security Advisory Board in October released a position paper recommending that Congress replace the three-decade-old Windfall Elimination Provision (WEP) with a new formula. The WEP affects Social Security benefits paid to individuals who earn Social Security benefits from Social Security covered employment, but who also earn pension benefits from state or local government employment not covered by Social Security. In these cases, Social Security benefits are reduced by the WEP. Social Security benefits are designed to replace a larger percent of pre-retirement income for lower-paid workers than for higher-paid workers, according to the paper, “The Windfall Elimination Provision: It’s Time to Correct the Math.” Before the WEP was established in 1983, for those who split their careers between employment covered by Social Security and employment not covered by Social Security, the formula used to calculate benefits resulted in what some perceived as a “windfall” for the employees. In 1983, Congress passed the WEP to eliminate this perceived advantage. Unfortunately, this approach has been inexact, overvaluing benefits in some cases and undervaluing them in others. Beginning in 2017, the Social Security Administration (SSA) will have 35 years of earnings data from both covered and non-covered employment. Consequently, the SSA will have more accurate information for calculating the replacement rate on covered earnings. As a result, the Social Security Advisory Board is recommending that Congress considers changing the current WEP formula to a proportional formula that uses actual earnings data in applying the WEP beginning in 2017. To attempt to codify changes to the WEP, U.S. Rep. Kevin Brady (R-Texas 8th) in February introduced the Equal Treatment of Public Servants Act of 2015 (H.R. 711) in the U.S. House of Representatives. The bill would: 1) maintain the current-law WEP formula for beneficiaries attaining age 62 before 2017 with additional reporting requirements; and 2) introduce a “proportional formula” that would apply to new beneficiaries who attain age 62 beginning in 2017 and who would otherwise have been subject to the WEP adjustment. Under the new formula, a replacement rate would be calculated using both covered and non-

covered earnings, then the replacement rate would be multiplied by the amount of covered earnings to compute the Social Security benefit. “It’s time to repeal the WEP and restore hard-earned Social Security benefits to teachers, police and firefighters,” Brady said. “Like other workers who pay into Social Security and earn a retirement at work, they deserve equal treatment based on their real-life contributions. This bill provides fairness to our local public servants and strengthens the solvency of Social Security in the long term. Now it’s time to move this bipartisan proposal forward.” The bill had 43 cosponsors as of press time, but Govtrack gave it only a 1% chance of passing the House. On theWeb at: http://www.ssab.gov/Portals/0/Reports/WEP_Position_Paper_2015.pdf, http://kevinbrady.house.gov/news/documentsingle.aspx?DocumentID=399310, http://www.yourhoustonnews.com/kingwood/opinion/social-security-advisory-board-calls-for-wep-repeal/article_6cd650d4-a562-59d4-b79b-326d0d570c08.html, and https://www.govtrack.us/congress/bills/114/hr711.

Are you on track to meet the PRB Minimum Training

Requirements by 12/31/16?

Ensure your plan is in compliance. Visit http://www.prb.state.tx.us/resource-

center/trustees-administrators/educational-training-program/ to learn more. Watch

for an announcement from the PRB about online classes coming soon.

Contact TEXPERS at texpers@texpers.org with questions.

TEXPERS Basic Trustee Training (BTT) meets the PRB rules

Three BTTs are scheduled before the deadline (more may be added)Login at www.texpers.org.

Monday, November 16, 2015 (prior to the NSIIP 2015 Summit at the Dallas Marriott Las Colinas)

Saturday, April 2, 2016 (prior to Annual Conference in Dallas)

Saturday, August 13, 2016 (prior to the Summer Forum in San Antonio)

November 2015TEXPERS OutlookPage 4

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Mass Retirement of Public Workers Is on the Horizon The exodus of Baby Boomers reaching retirement age is expected to deplete staffing levels in jobs across the nation, including the public employees of cities and counties, according to a report by American City & County magazine. All public-sector employers are expected to be impacted by the wave of retirements, the magazine found, quoting studies by the Pew Research Center, IPMA-HR and others. The local government workforce is especially vulnerable, with the percentage of workers at least 50 years of age (37%) significantly greater than the private-sector (28%), the article said, quoting the U.S. Bureau of Labor Statistics. A recent study by the Center for State and Local Government Excellence (SLGE) reached similar conclusions as the IPMA-HR study, in terms of the number of public employees planning to retire. In addition, it found that the two most important issues facing human resources managers today are recruiting and retaining qualified personnel and workforce succession planning. “Experts in the field forecast that the quality of service in the public sector will be jeopardized unless leaders prepare for the broad shift,” the article’s author, Robert Barkin, wrote. “Without action today, the loss of leadership from senior- down to mid-level management because of retirements will cripple government operations as management skills and critical expertise are found lacking.” On the Web at: http://americancityandcounty.com/human-resources/retirement-tsunami.

Public Pension Funding Ratios Still Below Pre-Recession Levels The median funded ratio for major state pension systems was 71.5% at the end of the 2014 fiscal year, almost unchanged for the second straight year, according to a report by Fitch Ratings. Several years of strong market gains have offset steadily rising liabilities. However, the recovery of public pension systems’ investment portfolios has not necessarily meant a recovery in their funded ratios, according to Senior Director Douglas Offerman. “Unlike asset portfolios that are prone to year-to-year cyclicality, pension liabilities have risen steadily for all but a handful of closed systems because active employees continue to accrue benefits as they work,” Offerman said. “Additionally, few pension systems have implemented benefit reforms that immediately reduce liabilities.” As a result, funded ratios have not returned to their pre-recession peaks. However, states’ contribution practices are improving. Actual pension contributions relative to governments’ actuarially calculated levels are at their highest point since fiscal 2009, the report found. Unfortunately, in nearly half of systems reviewed by Fitch, the contributions are inadequate relative to the levels calculated by actuaries. In fiscal 2014, 53% of major statewide systems received at least 100% of the actuarially calculated contribution, up from 42% in fiscal 2011. Demographics are also increasingly weighing on state pension liabilities, the report said, with longer retirements and consequent higher benefit payment obligations largely to blame. On the Web at: https://www.fitchratings.com/site/fitch-home/pressrelease?id=992325.

November 2015 TEXPERS Outlook Page 5

Federal Action Could Help States – and Public Pensions – Expand Private-Sector Retirement Coverage

Federal law was not designed to help states provide retirement coverage to private-sector workers, and uncertainties about the application of federal law have made it even harder for states seeking to boost retirement coverage for their citizens, according to the Government Accountability Office (GAO). The GAO released a report in September examining proposals to expand coverage in private-sector workplace retirement savings programs in six states – California, Illinois, Maryland, Massachusetts, Washington and West Virginia – and three foreign countries that have voluntary workplace retirement savings programs – Canada, New Zealand, and the United Kingdom. GAO found that the challenges stem from the fact that the there is uncertainty created by the Employee Retirement Income Security Act of 1974 (ERISA) and agency regulations, which could “delay or deter state efforts to expand coverage.” The issue is important to public-sector pension plans because they have been trying to help expand retirement coverage for private-sector workers through programs such as Secure Choice, the brainchild of the National Conference on Public Employee Retirement Systems (NCPERS) that would allow private-sector employees to participate in public-sector pension plans. The Obama Administration in July added critical support to such innovative retirement plans, instructing the U.S. Department of Labor (DOL) to publish a proposed rule by the end of the year to make it easier for states to set up retirement programs like Secure Choice for residents without employer-based plans. However, states have run into complications related to the federal ERISA law, which governs private plans. ERISA contains broad preemption provisions that have been a roadblock to the creation of multiple-employer plans in the states, and states have been concerned about a lack of clarity regarding this federal law. These are among the issues that the DOL’s proposed rules will attempt to address. In its report, “Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage,” GAO largely confirms this. GAO found that the existing framework of federal law and regulation “was not designed to foster a state role in providing coverage to private-sector workers,” and the uncertainties about the application of that framework that result “raise questions about the future and success of such efforts.” GAO recommended that Congress consider providing states “limited flexibility” regarding ERISA preemption to expand private-sector coverage, and that federal agencies could also take action to address uncertainty created by existing regulations. The initiatives are coming to the fore because numerous studies show that millions of American workers have little or no retirement savings. GAO said that this is exacerbated by the lack of access to workplace retirement savings programs. Furthermore, GAO said that lower-income workers and those employed by smaller firms are particularly at risk, as they are much less likely to have access to retirement programs. Despite several major changes to federal law over the last several decades to stimulate retirement coverage, nothing has been successful, GAO said. As a result, some states have taken their own actions to expand access to workplace retirement savings programs. In conducting case studies of six states and three countries, GAO concluded that these governments need fewer obstacles to be able to encourage or require workplace access to a state-run retirement program. GAO found that combining workplace access with automatic enrollment and financial incentives, such as tax preferences or employer contributions, has helped increase participation in foreign countries. Moreover, these states and countries have tried to simplify program designs to limit the responsibility and cost for employers and reduce complexity, cost and risk for workers. GAO concluded that congressional action combined with updated regulations and guidance could help address these uncertainties. However, GAO also warned that any such action would require “difficult policy choices and involve weighing the benefits of uniformity and consistency provided by ERISA preemption against the potential value of state efforts to adopt innovative approaches to address the lack of sufficient retirement savings by their citizens.” On the Web at: http://gao.gov/assets/680/672419.pdf.

November 2015TEXPERS OutlookPage 6

http://texpers.blogspot.com/

Mandatory Social Security Coverage for Public Workers Examined in New Research Paper New research by the Brookings Institution examines whether state and local government workers should face mandatory coverage in Social Security. Under current law, state and local governments that do not offer their own retirement plan must enroll their employees in Social Security. But if they do offer a retirement plan, state or local governments can choose whether or not to enroll their workers in Social Security. The paper, which focuses on whether newly hired public employees should be brought into Social Security by mandate, claims that bringing more workers into the program would allow Social Security to reach the goal of providing retirement security for all workers; would help shore up Social Security finances over the next few decades; and would push the date of trust fund insolvency back by one year. However, after that time, the costs of the increased benefit payments would offset these improvements. Mandatory coverage would be more fair to all workers, the paper argues, because some beneficiaries historically have received more than they have paid into the system, while others have paid more into the system than they have received. The paper tries to link state government pension funding status with Social Security coverage of state and local government workers. First, it shows that states with governmental pension plans that have greater levels of underfunding tend to also have a smaller proportion of public workers that are covered by Social Security. “While one can debate whether future public pension commitments or future Social Security promises are more risky, a solution resulting in less of both is the worst possible outcome for the workers in question,” the paper states. Secondly, the paper shows that state pension benefit levels for career workers are “somewhat compensatory,” meaning that states with lower rates of Social Security coverage for state and local government workers tend to have somewhat higher pension benefit levels. The extent to which promised but underfunded benefits actually compensate for the higher risk to individual workers of non-Social Security coverage is an open question, though, the paper states.

Mandatory coverage of newly hired public workers “could improve the security of their retirement benefits (by diversifying the sources of their retirement income), raise average benefit levels in many cases (even assuming significant changes in state and local government pensions in response to mandatory coverage), and would improve the quality of benefits received, including provisions for full inflation indexation, and dependent, survivor and disability benefits in Social Security that are superior to those in most state pension plans,” the paper finds. On the Web at: http://www.brookings.edu/research/papers/2015/08/11-social-security-coverage-state-local-government-workers. Meanwhile, the Social Security Administration’s (SSA) Office of Policy has published “Fast Facts & Figures about Social Security, 2015,” which answers frequently asked questions (FAQs) about the programs administered by the SSA and focuses on data related to Social Security retirement, survivors, and disability benefits, as well as Supplemental Security Income (SSI). The publication also provides a table showing the gradual extended ages for full Social Security retirement benefits based on year of birth. Most of the data was derived from the SSA’s Annual Statistical Supplement to the Social Security Bulletin and the 2015 Social Security Trustees Report. Some of the highlights include:• Overall, about 64.2 million people received

SSA benefits or assistance in 2014, with benefits averaging $1,329 per month for retired workers, $1,165 per month for disabled workers, and $1,276 per month for non-disabled widows and widowers;

• In 2013, SSA paid benefits to about 85% of the population over age 65;

• About 64% of the population over age 65 received at least 50% of their income through SSA payments and 35% received almost all of their income through SSA payments; and

• About 55% of the adult SSA beneficiaries were women.

The report is available at: http://www.socialsecurity.gov/policy/docs/chartbooks/fast_facts/2015/fast_facts15.pdf.

November 2015 TEXPERS Outlook Page 7

NCPERS Seeks Widespread Adoption of Its Code of Conduct The National Conference on Public Employee Retirement Systems (NCPERS) has released a code of conduct for public pension service providers and recommends that all public pensions and their service providers adopt the voluntary guidelines. Part of the justification for the code of conduct stems from NCPERS initiative to ensure that service providers are acting in the best interest of public pension plans. NCPERS has identified 24 research and policy organizations that have taken stances that are contrary to the interests of public pension plan participants, and is asking its members to obtain disclosures from service providers that contribute to these organizations. The list of policy and research organizations, known as Schedule A, has been incorporated into the NCPERS Code of Conduct for Public Pension Service Providers. The code of conduct was designed to help pension plan fiduciaries and managers articulate strong, consistent ethical expectations for service providers. The code of conduct, which NCPERS aired over the summer, asks service providers to:1. Act in a professional and ethical manner at all

times in dealings with public plan clients.2. Act for the benefit of public plan clients.3. Act with independence and objectivity.4. Fully disclose to public plan clients conflicts of

interest that arise that may impair their ability to act independently or objectively.

5. Act with reasonable care, skill, competence and diligence when engaging in professional activities.

6. Communicate with public plan clients in a timely and accurate manner.

7. Uphold the applicable law, rules and regulations governing their sector and profession.

8. Fully disclose to public plan clients all fees charged for the products or services provided to said client.

9. Not advocate for the diminishment of public defined benefit plans.

10. Fully disclose all contributions made to entities enumerated in a schedule that advocate for the diminishment of public defined benefit plans.

“Pension plan fiduciaries are obligated to make prudent, informed decisions about plan services, with an eye at all times on discouraging conflicts of interest,” the trade association said in a statement. “NCPERS created this code of conduct to help fiduciaries and managers articulate strong, consistent ethical expectations for service providers across the board.” On the Web at: http://www.ncpers.org/codeofconduct.

Study Finds Colorado’s Hybrid Pension Plan Compares Favorably with Other Plan Types An in-depth study of the Colorado Public Employees’ Retirement Association’s (PERA) Hybrid Defined Benefit Plan found that the plan “is more efficient and uses dollars more effectively than the other types of plans in use today.” The study, conducted by the consulting and actuarial firm Gabriel Roeder Smith & Co. for the Colorado state auditor, found that PERA is within norms for benefits when compared to its non-Social Security state peer group members. PERA benefits are also comparable to the private sector. PERA is considered a hybrid plan, containing the plan design features of both a defined benefit (DB) plan and a defined contribution (DC) plan. Retiring members receive an annuity for life; terminating members may receive an account balance comprised of an employer “match” as well as guaranteed investment earnings. If the state legislature were to consider switching away from the PERA Hybrid Plan to another type of plan, it should be done only because of a change in the state’s compensation policy, not because the same benefits could be achieved at a lower cost, the study found. “Social Security is less efficient than other defined benefit plans. This is because all Social Security contributions go to pay for all benefits; there is very little investment income available to reduce the contribution requirement,” the report said. DC plans do not offer the same replacement income as DB plans for every contribution dollar spent. This is due, in large part, to the fact the investment income of a professionally managed long-term portfolio will far exceed the earnings of an individual investor. On the web at: http://www.gabrielroeder.com/wp-content/uploads/2015/10/ColoradoPERAStudyFINAL.pdf.

TEXPERS OutlookPage 8 November 2015

State Tax Revenues Show Solid Growth in the First Quarter State tax revenues grew by 5.8% in the first quarter of 2015, a period in which all major sources of tax revenues showed solid growth, the Nelson A. Rockefeller Institute of Government found. On a year-over-year basis, state personal income tax revenues increased 7.1%, corporate tax revenues increased 3.3%, sales tax revenues increased 5.2%, and motor fuel sales tax revenues increased 4.4%, according to report, the group’s 100th State Revenue Report. In addition, 43 states reported gains in overall tax collections, with 10 of those states reporting double-digit growth, the report found. Preliminary figures for the second quarter of 2015 indicate growth in total state tax collections of 7.6% and strong growth in personal income tax collections of 14.3%. However, state revenue forecasts indicate a slowdown in total personal income tax growth to 2.7% in fiscal year 2016, down from 5.1% estimated by states for fiscal year 2015. “Overall, the state revenue outlook for fiscal year 2016 appears positive for most states,” the report said. “With the economy now growing steadily and the gyrations related to the fiscal cliff largely in the past, this suggests that states are likely to see continued growth in fiscal year 2016.” At the same time, the report warned that some states may need to revise their forecasts due to the recent stock market declines, which could affect income tax in fiscal year 2016. On the Web at: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2015-09-17-SRR_100.pdf. Meanwhile, the Urban Institute released a report that takes a longer look at the issue of state finances. State general revenues increased from 8% of national gross domestic product (GDP) in 1977 to over 10% in 2013, according to the report, “Governing with Tight Budgets: Long-Term Trends in State Finances.” Throughout the period, state tax revenues have remained stable at 5% of GDP, but fell below 5% in the recessions in 2001 and 2007-09. In addition, state general expenditures also increased from 8% of GDP in 1977 to 10% in 2013. Other key findings include:• State general revenues have become more reliant

on federal grants and nontax revenues (i.e., charges and miscellaneous revenue) over the past

30 years. The portion of state revenue from taxes declined from 61% in 1977 to 51% in 2013 and the portion from federal grants rose from 28% to 31%.

• State revenues from individual income taxes increased from 25% of state tax revenues in 1977 to 37% in 2013. Individual income taxes experienced two periods of tax revenue volatility after both recessions, which resulted from volatile investment income and the recent slow growth in wages and salaries.

State general sales taxes have remained stable at about 30% of state tax revenue since 1977. While general sales taxes were the largest source of state tax revenues up until 1998, individual income tax revenues are now the largest source. Of the 45 states with a general sales tax, 38 have increased their tax rates to mitigate the erosion of the general sales tax base between 1984 and 2014. On the Web at: http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000376-Long-Term-Trends-in-State-Finances.pdf.

Drawn Out Battle for Back Pay Tilts in Favor of New Orleans Firefighters New Orleans Mayor Mitch Landrieu announced on Oct. 16 that the city had agreed to pay $75 million to settle a dispute with firefighters over back wages, ending a disagreement in which he was threatened with house arrest for failing to pay earlier court judgments that went against the city. In the settlement, the city agreed to pay firefighters the money over more than 12 years to resolve the dispute, which dates back to the 1980s. Completing the complex agreement, which also involves pension changes that will make the firefighters’ pension plan less generous for new hires, will require action by the State Legislature and City Council, Landrieu said. In addition, voters will be asked to approve a tax increase to help pay for it. The deal will guarantee money to those owed back pay and also guarantee sustainability for the pension fund, Landrieu said. Two unrelated cases are at the heart of the settlement. One deals with back pay owed to firefighters for raises that were required by state law but never paid by the city for 35 years. The other case deals with the Landrieu administration’s refusal to make required payments into the pension system until changes were made to put it on a more sustainable financial path.

New Orleans continued on p. 9

November 2015 TEXPERS Outlook Page 9

Poor investment decisions have nearly bankrupted the fund, although firefighters point out that the administration’s refusal to pay into the fund also has hurt its financial state. Combined, administration officials have said, those judgments against the city could total about $400 million, though they also have argued the courts cannot force the city to pay up. The deal will result in firefighters receiving the full $75 million they are owed in back pay and will require the money to be paid more quickly than previously proposed by the city. On the other hand, it requires firefighters to give up claims to judicial interest and other payments that they have argued should be part of the settlement. Instead of requiring an actual payment of the money owed into the pension fund, the agreement allows the administration to make up for that with its annual payments, which will be calculated to ensure the money is there for firefighters when they retire. The plan also calls for changes to the firefighters pension system for new hires that will mean benefits will accrue more slowly and firefighters will not be able to retire until they are within 10 years of the Social Security retirement age. All New Orleans firefighters can now retire at 50. Another concession won by the administration will essentially do away with a policy that allowed firefighters to retire with a full pension and collect an additional supplemental disability payment of up to $30,000 a year on top of that for 10 years. Under the agreement, a firefighter’s pension will be reduced by the amount he or she is receiving in those payments. That is similar to how the state firefighters pension system handles such payments. Those revisions, as well as changes in how the pension fund makes investment decisions, have been sought by the Landrieu administration as ways of putting the system back on track after years of poor investment decisions essentially wiped out its assets. The changes are expected to save the city about $275 million in pension contributions over the next 30 years, Landrieu said. Thomas Meager, a firefighter and secretary-treasurer of the pension fund, said the deal is good for firefighters. “The firefighters do believe in a sustainable pension fund,” he said. On the Web at: http://www.reuters.com/article/2015/10/16/us-usa-louisiana-mayor-idUSKCN0SA2NV20151016 and http://www.nola.com/politics/index.ssf/2015/10/firefighters_back_pay_1.html.

State Pension Funding Levels in U.S. Improve for a Second Year A Bloomberg study concludes that the finances of more than two-thirds of U.S. state pension plans improved in fiscal year 2014. The median state pension had 70% of the assets needed to meet promised benefits in 2014, up from 69.2% in 2013, according to data compiled by Bloomberg. Texas beat the median with about 80% of the assets needed to pay its obligations, and ranked in the top-third of all states. Wisconsin and South Dakota were the healthiest, with 100% of the assets needed to pay promised benefits, and North Carolina was a close third with about 95% of the assets needed. Illinois was the worst funded, at 39.3%, followed by Kentucky (45%) and Connecticut (50.4%). Boomberg attributed the overall gains to a soaring stock market, which boosted returns, and the fact that many states stopped incorporating losses from the recession into their pension calculations. It was the second straight yearly increase in pension funding. Public pensions had median investment gains of 16.9% for the 12 months ended June 30, 2014 according to Wilshire Associates. While some states were able to improve their funded status, others were not. Bloomberg attributed the lower funded ratios in some states to the new GASB accounting standards for public pensions and to the fact that some states simply have more retirees than others. New Governmental Accounting Standards Board (GASB) rules require public pensions to use a lower discount rate to value liabilities for plans with projected asset depletion dates and market value rather than the actuarial value of assets, among other things. As a result of this accounting change, New Jersey’s pensions are now projected to run out of assets to pay liabilities between 2021 and 2032, according to Moody’s Investors Service. These changes also have hit public pensions in Puerto Rico and Illinois hard. Michigan’s pension funding ratio declined the most over the past six years to 59.9% from 83.6%. Michigan is one of three states, including Alaska and Ohio, that have more retired public employees than active members, Bloomberg reported, quoting a report by Loop Capital Markets. On the Web at: http://www.bloomberg.com/news/articles/2015-10-13/state-pension-funding-levels-in-u-s-improve-for-a-second-year.

New Orleans continued from page 8