1/17/2018
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Public Employees Retirement Association of Minnesota
Public Employees Retirement Association (PERA) 2018 Overview
for MASBO
Doug Anderson Executive Director February 8, 2018
Public Employees Retirement Association of Minnesota
• Overview
• History
• Future
• GASB Whiplash – A Case Study
Agenda
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Public Employees Retirement Association of Minnesota
General Employees
Retirement Plan
Police & Fire
Retirement Plan
Local Government
Correctional Plan
Receiving Benefits
Deferred Payment Status
Active Members
Total Members
98,201
190,609
152,867
441,677
10,579
2,640
11,522
24,741
1,085
5,557
3,842
10,484
Active to Retiree Ratio 1.6 to 1 1.1 to 1 3.5 to 1
Active Average Age
Active Average Service
Active Average Pay
46
10
$40,600
40
12
$83,400
39
8
$54,300
Retiree Average Age
Retiree Average Benefit
73
$14,500
68
$53,700
66
$9,000
PERA also administers a $54M lump-sum defined benefit plan for 2,600 volunteer firefighters and
a $58M defined contribution plan for 7,700 current and former local elected officials.
PERA Membership as of June 30, 2017
3
Public Employees Retirement Association of Minnesota
General Employees
Retirement Plan
Police & Fire
Retirement Plan
Local Government
Correctional Plan
Employee Contribution Rate
Employer Contribution Rate
State Contribution Rate
Total Contribution Rate
6.5%
7.5%
0.6%
14.6%
10.8%
16.2%
2.5%
29.5%
5.8%
8.8%
0.0%
14.6%
Total Active Payroll $5.9B $913M $198M
Total Contributions
Total Benefit Payments
$0.9B
$1.5B
$277M
$514M
$29M
$13M
Total Assets $20.1B $7.9B $602M
Actual Investment Earnings
Investment Rate of Return
$2.7B
15.1%
$1.1B
15.2%
$78M
15.1%
Police & Fire Members do not participate in Social Security.
PERA Plans FY16 Cash Flow & Investment Returns
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Public Employees Retirement Association of Minnesota
Benefits Contributions Administrative
Costs
Investment
Earnings = + -
Traditional Defined Benefit plans provide a fixed monthly benefit. Contribution requirements will increase if
investment earnings are less than an assumed amount, and will decrease if earnings exceed an assumed
amount.
PERA’s plans could be viewed as not being true traditional defined benefit plans, because they are structured to
try to provide fixed benefits at fixed contribution rates. When assumptions are not met, or when assumptions
are changed, adjustments to benefits and/or contributions are handled through the legislative process, rather than
simply by adjusting contribution rates.
PERA plans are commonly considered to be defined benefit plans. However, they could be classified as a
hybrid plan.
5
Are These Truly Defined Benefit Plans?
Public Employees Retirement Association of Minnesota
Approximate % of Hybrid Participants by State
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Public Employees Retirement Association of Minnesota
States with DC Plans as Mandatory or Optional Primary Plans
7
Public Employees Retirement Association of Minnesota
History
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Public Employees Retirement Association of Minnesota
“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”
PERA’s First Newsletter
9
Public Employees Retirement Association of Minnesota
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
P&F EE Rates
P&F EE 30-Year Averages
General EE Rates
General EE 40-Year Averages
Year of Benefit Commencement
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.
PERA General and P&F Employee Contribution Rate Trend
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Public Employees Retirement Association of Minnesota
General Employees Retirement Plan Police & Fire Retirement Plan
Accrued Benefit 1.7% x Average Salary x Allowable
Service
3.0% x Average Salary x Allowable
Service
Normal Retirement Accrued Benefit at age 66 Accrued Benefit at age 55
Early Retirement Reduced Accrued Benefit at age 55 or later Reduced Accrued Benefit at age 50 or
later
Death
Accrued Benefit reduced for early
commencement and optional form
conversion
50% of average salary;
60% if in line-of-duty
Disability Accrued Benefit without reduction 45% of average salary;
60% if in line-of-duty
Termination Accrued Benefit deferred to early or
normal retirement; refund available
Accrued Benefit deferred to early or
normal retirement; refund available
Postretirement
Adjustments
1% per year until the Plan is 90% funded;
2.5% thereafter (Estimated Trigger Date is
2046)
1% per year until the Plan is 90% funded;
2.5% thereafter (Estimated Trigger Date is
2066)
Key Plan Benefit Provisions (applicable to most employees)
11
Public Employees Retirement Association of Minnesota
The replacement ratio is a tool used to measure benefit adequacy and equals Gross Income After Retirement
Gross Income Before Retirement
57%
64% 64% 64% 64% 64% 64%
71%
85% 85% 85% 85% 85% 85%
0%
20%
40%
60%
80%
100%
1990 2000 2010 2020 2030 2040 2050
GERF 40 Years of Service Replacement Ratio
P&F 30 Years of Service Replacement Ratio
Year of Benefit Commencement
PERA General and P&F Replacement Ratios at Normal Retirement
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Public Employees Retirement Association of Minnesota
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.
19.6
21.4
23.9
25.6
14.3
18.6
20.7
22.4
0
5
10
15
20
25
30
35
1990 2000 2015 2035
Female Male The average post NRA payment period
is expected to increase by about 30%
for females and 56% for males.
Expected Years in Payment Status after Normal Retirement
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Public Employees Retirement Association of Minnesota
40%
60%
80%
100%
120%
140%
160%
180%
200%
2015 2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981
A participant that retired in
1983 has doubled their
purchasing power.
Year of Benefit Commencement
Members retired after 2000 have
retained approximately all of their
purchasing power.
PERA Historical Purchasing Power Protection
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Public Employees Retirement Association of Minnesota
0
10
20
30
40
50
0%
50%
100%
150%
200%
250%
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Pu
rch
asin
g P
ow
er
Pro
tect
ion
% /
C
um
ula
tive
Co
ntr
ibu
tio
ns
%
# o
f P
ay in
Ye
ars
#
of
Pay
o
ut
Yera
s
Historical Retiree Contribution and Benefit Payment Metrics # of Pay in Years
# of Pay out Years
Cohort PPP% @ age 85
Cumulative Contribution %
Public Employees Retirement Association of Minnesota
Actual Returns for Periods Ending June 30, 2017 16
12.4%
5.3%
8.8%
5.4%
6.8%
8.2% 8.3%
15.1%
6.3%
10.2%
6.2%
7.2%
8.6% 8.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs 25 Yrs 30 Yrs
Mean Public Fund
MN SBI
Historical Investment Returns
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Public Employees Retirement Association of Minnesota
1. Investment returns have been less than assumed over the past 20 years, negatively
impacting asset growth.
2. Mortality improvements are expected to occur at a greater rate than ever before,
increasing liability estimates.
3. Members have been retiring at later ages.
4. Inflation expectations are forecasted to be lower for many years. This may result in
a lower investment return assumption, which would increase the liability estimate.
5. The plan structure prior to the year 2000 allowed for excess earnings to be used for
postretirement increases that were in excess of inflation.
6. Employee contributions have been steadily increasing.
7. Employer contribution rates have also increased. Also, in the past few years the
expected period needed to reach full funding has been extended.
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Summary of Historical Events
Public Employees Retirement Association of Minnesota
Future
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Public Employees Retirement Association of Minnesota
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
19
45%
15%
18%
20%
2%
SBI Long-Term Policy Target
Domestic
Stocks
International
Stocks
Bonds
Alternative
Assets
Cash
National Investment Assumption Trend
Investment Return Assumption Setting Process
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Public Employees Retirement Association of Minnesota
Public Pension Fund Investment Return Assumption Trend
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Public Employees Retirement Association of Minnesota
PERA 2018 Legislative Proposals
January 12, 2018
Public Employees Retirement Association of Minnesota
Investment Return and Other Economic Assumptions
2
2
• PERA’s Board reaffirmed its 2017 position to adopt the 7.5% investment
return, 2.5% inflation, and 3.5% total payroll growth assumptions.
• The fund’s actuary, Gabriel Roeder Smith & Co., believes the 8.0% statutory
rate is “outside of the reasonable range for PERA valuations as of July 1,
2017”.*
• PERA has used 7.5% for accounting purposes in its FY16 and FY17 CAFR.
• All results within this presentation are based on a 7.5% investment return.
* GRS letter to PERA dated September 11, 2017
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Public Employees Retirement Association of Minnesota
Police & Fire General Correctional
Full Funding Within 25 Years? Yes Yes Yes
Increased Funding Required? Yes No No
Broad Stakeholder Support? Yes Yes Yes
Member Groups MPPOA
MPFF
AFSCME 5
AFSCME 65
Teamsters 320
PEPSA
MMRA
SEIU*
AFSCME 5
Teamsters 320
LELS
MNPEA
Employer Groups
LMC
AMC
MICA
LMC
AMC
MICA
AMC
MICA
PERA 2018 Legislative Proposals
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*SEIU was supportive of most changes, including the COLA change, but was not ready to support the early
retirement augmentation change.
Public Employees Retirement Association of Minnesota
PERA 2018 General Employees Plan
Legislative Proposal
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Public Employees Retirement Association of Minnesota
General Employees Plan – Projected Funding Ratios
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
2016 2021 2026 2031 2036 2041 2046
Black line: PERA Proposal
Orange line: Projection based on 2017 Valuation – No Changes (2045 Trigger Date)
Red line: Projection based on 2016 Valuation – No Changes (2053 Trigger Date)
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96%
88% 76%
109%
Public Employees Retirement Association of Minnesota
7.5% 6.5%
Employee Contributions
Employer Contributions
6.2% for full or fairly reduced early retirement benefits with 1% annual increases after age 66
0.7% for a future 2.5% COLA
0.1% for 1% annual increases before age 66
0.4% for augmented early retirement benefits
1.0% for disability, death, refunds, and operating expenses
5.6% for improved future benefit security and progress towards full funding
General Employees Plan – Current Contribution Allocation
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Public Employees Retirement Association of Minnesota
Employee options with deferred augmentation:
Age
56
Age
66 Death
PERA Early Retirement Actuarial Equivalence With Deferred Augmentation
Summary of Employee Options
or
$460 / month, increased 1% per year
$1,000 / month, increased 1% per year
Employee options without deferred augmentation:
$332/ month, increased 1% per year
or
Death Age
66
$1,000 / month, increased 1% per year Age
56
Public Employees Retirement Association of Minnesota
Value of $1,000 at Age 66 Reduced for Early Retirement Benefit Commencement
Actuarial
Equivalent
Benefit
Current
Benefit
With New
Mortality
…if Veto
did not
Occur
…and if
Augmentation
is Eliminated
…and if Pre-
66 COLA is
Eliminated
…and if
COLA is
1.25%
Age
55 $332 $460 $485 $506 $365 $391 $397
62 $657 $740 $756 $767 $682 $704 $708
66 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
Ass
um
pti
on
s
Interest 8.0% 8.0% 8.0% 7.5% 7.5% 7.5% 7.5%
COLA % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.25%
COLA
Start Retirement Retirement Retirement Retirement Retirement Age 66 Age 66
Augment
-ation No
Yes
(3% or
2.5%)
Yes
(3% or
2.5%)
Yes
(3% or
2.5%)
No No No
Mortality RP-2000 RP-2000 RP-2014 RP-2014 RP-2014 RP-2014 RP-2014
General Employees Plan – Actuarial Equivalence Factor Impact
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Public Employees Retirement Association of Minnesota
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2008 - 2014 FY 2015 FY 2016 FY 2017
4.2%
2.1% 1.8% 1.7%
Average Annual Retirement Rates for 55 to 60 Year Olds
2
9
The above rates represent the percentage of eligible early retirees each year that retire with reduced
early retirement benefits. Actual retirement rates are slightly higher due to inclusion of members
retiring under Rule of 90 with unreduced benefits.
Public Employees Retirement Association of Minnesota
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75
Current Benefit @ 63
Current Benefit @ 62
Proposed Benefit @ 62
Current Benefit @ 57
Current Benefit @ 55
Proposed Benefit @ 55
General Employees Plan – Impact of Proposed Changes
30
The current and proposed early retirement benefit amounts are equivalent to a $1,000/month benefit payable at age 66. The results
showing the impact of a delayed retirement are based on a member with 30 years of service receiving raises of 2.5%/year.
The current actuarial equivalent
benefit at age 62 is $740. Under
the proposed changes the amount
is $708. Delaying retirement one
year from age 62 to 63 would
more than offset the difference.
The current actuarial equivalent
benefit at age 55 is $460. Under
the proposed changes the amount
is $397. Delaying retirement two
years to age 57 would more than
offset the difference.
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Public Employees Retirement Association of Minnesota
Change 1: Eliminate 2.5% trigger and replace with 50% of CPI increase with 1.0% floor and 1.5 cap (0.1% of pay net savings)
Change 2: Redirect 0.5% of contributions primarily used for augmented early retirement benefits and 1% pre-66 increases towards improved future benefit security and progress towards full funding
7.5% 6.5%
Employee Contributions
Employer Contributions
General Employees Plan – 2018 Legislative Proposal
31
Public Employees Retirement Association of Minnesota
Members
Affected
Current Plan
Provision
2017 Legislature
Proposal
2018 PERA
Proposal
Amortization Period None 2033 2047 2047
Early Retirement
Augmentation
Early
Retirees
3.0% if hired < 7/1/06;
2.5% if hired > 6/30/06 Eliminate Eliminate
Early Retirement
COLAs
Early
Retirees
1% with
2.5% trigger Eliminate Eliminate
Terminated Member
Deferred
Augmentation
Pre 2012
Terminated
Members
1% if termed < 2012;
0% if termed > 2011 Eliminate Eliminate
Interest Rate
on Refunds
Terminated
Members 4% 3% 3%
Postretirement
Increases All
1% with
2.5% trigger
1% with
no trigger
1% floor
50% of CPI
1.5% cap
MSRS Proposal 1% for 5 years,
1.5% thereafter
TRA Proposal
1% for 5 years,
then 5-year phase-in
up to 1.5%
General Employees Plan – 2018 Legislative Proposal
32
Neither the 2017 Legislative Proposal nor the
2018 PERA Proposal includes funding changes.
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Public Employees Retirement Association of Minnesota
GASB Whiplash – A Case Study
Public Employees Retirement Association of Minnesota
34
GASB Reporting for Pension Plans
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Public Employees Retirement Association of Minnesota
TOTAL PENSION LIABILITY (TPL) ($ 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 $11,111
FIDUCIARY NET POSITION (FNP) ($ 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
35
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 $2.4B unfunded
liability increase?
Police & Fire FY16 GASB Results
Public Employees Retirement Association of Minnesota
TOTAL PENSION LIABILITY (TPL) ($ 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 $9,269
FIDUCIARY NET POSITION (FNP) ($ in millions)
FNP as of July 1, 2016 $7,098
Contributions – Employee 102
Contributions – Employer 175
Other (State of MN) 0
Net investment income 1,060
Administrative expense (1)
Benefit payments (515)
Change in FNP $821
FNP as of June 30, 2017 $7,919
36
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?
Police & Fire FY17 GASB Results
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Public Employees Retirement Association of Minnesota
2015 2016 2017
Total Pension Liability $8,485 $11,111 $9,269
Fiduciary Net Position 7,349 7,098 7,919
Net Pension Liability $1,136 $4,013 $1,350
Proportionate Share 19.42% 19.84% 19.96%
City Net Pension Liability $221 $796 $269
37
GASB Results for City of Minneapolis (in $M, Police & Fire Only)
Moody’s Investor Services
Rating Action: Moody’s affirms Minneapolis, MN’s Aa1 rating: outlook revised to
negative.
“The negative outlook reflects Minneapolis’ elevated and growing unfunded pension
liabilities. Absent state legislative action that materially reduces accumulated unfunded
liabilities, the city’s pension costs and leverage will remain very high.”
Public Employees Retirement Association of Minnesota
$0
$500
$1,000
$1,500
Actual Benefit Payments
Actual Benefit Payments
Projected benefit payments for current members are determined using demographic assumptions.
Benefit Payments are Projected ($ millions)
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Public Employees Retirement Association of Minnesota
$0
$500
$1,000
$1,500
Discounted Benefit Payments
Actual Benefit Payments
Funding valuations discount all projected benefit payments using the assumed investment return assumption.
Funding: Benefit Payments are Projected and Discounted
39
Effect of
Discounting
at 7.5%
Public Employees Retirement Association of Minnesota
$0
$500
$1,000
$1,500
Funded Benefits
Unfunded Benefits
Actual Benefit Payments
The GASB crossover date is when current assets, future investment returns, all contributions for current
members and excess contributions for new members are assumed to be depleted. The crossover date is not the
date the plan is expected to run out of assets. New member benefits are presumed to be fully funded.
The GASB Crossover Date
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Public Employees Retirement Association of Minnesota
$0
$500
$1,000
$1,500
Discounted Funded Benefits
Discounted Unfunded Benefits
Actual Benefit Payments
GASB valuations discount funded projected benefit payments using the assumed investment return assumption
and unfunded benefits using a general obligation bond rate. 41
Funded
Benefits are
discounted at
7.5%
Unfunded
benefits are
discounted at
2.85%
GASB: Benefit Payments are Projected and Discounted
Public Employees Retirement Association of Minnesota
$0
$500
$1,000
$1,500
Discounted Funded Benefits
Discounted Unfunded Benefits
Actual Benefit Payments
42
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%
Impact of FY17 15.1% Investment Return
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.
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Public Employees Retirement Association of Minnesota
Questions
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