Municipal Pension Reform October 15, 2012 DRAFT This information - - PowerPoint PPT Presentation

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Municipal Pension Reform October 15, 2012 DRAFT This information - - PowerPoint PPT Presentation

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Municipal Pension Reform October 15, 2012 DRAFT This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent There is a

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

DRAFT

Municipal Pension Reform

October 15, 2012

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

  • Total US state & municipal shortfall is $ 1

trillion

  • $3.5 trillion pension obligation
  • $2.5 trillion assets on hand
  • 7 5 % funded
  • Aggressive actuarial assumptions
  • Assumes 8 % average investment earnings

There is a $1 trillion shortfall

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

Many believe the shortfall is larger

Note: Moody’s shortfall estimated July 2012; State Budget Solutions is an Alexandria-based think tank

Other organizations estimate the shortfall in the $2-4 trillion range

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

  • In 2000, just over half the states had fully funded

pension program s

  • By 2006, that number had shrunk to six
  • By 2008, only four: Florida, New York, Washington, and

Wisconsin

  • By 2008, many states were struggling
  • In 8 states, total pension liability w as only tw o-thirds

funded: Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island, and West Virginia

  • 2 states, Illinois and Kansas, had less than 60 percent of the

necessary assets on hand

  • Other Post-Employment Benefits (OPEB)
  • 4 0 states need im provem ent
  • 2 0 states have no assets on hand to cover these obligations

Pew findings show mixed results on a state by state basis

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

  • Pension taskforces are top of mind
  • Google search for “pension taskforce”

yields over 6 million results

  • Even initiatives that seem to have

succeeded face legal challenges

  • Rhode Island (Nov 2011): led by State Treasurer Gina

Raimondo

  • San Diego and San Jose: approved by voters in June 2012,

litigation to follow

There are a lot of reform initiatives, but few have succeeded

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

City of Atlanta tackled pension reform in 2010-2011

"The stark reality is that one out of every five tax dollars is currently going to fund a pension system that is strangling our

  • city. We need to face this challenge head on,

being mindful of the responsibility to taxpayers who fund that pension system, without breaking the faith with the public servants who have dedicated their lives to Atlanta.“

Mayor Kasim Reed, Inaugural Address January 4, 2010

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

FUNDI NG FOR PENSI ON LI ABI LI TY DECLI NED ANNUAL REQUI RED CONTRI BUTI ON ( ARC) I NCREASED

Atlanta faced a worsening pension situation by 2009

Pension structure: defined pension, no social security

$3.5 billion liability 23% of city’s

  • perating

budget

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

Problems were in part due to changes in plan design

  • Growth in ARC due to m arket perform ance

and plan design

  • Market performance of assets accounted for two thirds of

the growth

  • Changes in plan design caused one third of the growth
  • Active litigation regarding 2001 plan design changes
  • As a result, S&P and Moody’s dow ngraded

Atlanta

  • Moody’s issued Negative Outlook due to lack of financial

capacity and political w ill

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

1 . W here are w e? Delineate the facts 2 . W hat could w e do? Identify our options 3 . How could w e get there? Describe the relative path forward

  • Audit and investigate the past
  • Recommend, endorse, or champion any single
  • ption

W HAT THE PANEL W I LL DO W HAT THE PANEL W I LL NOT DO

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Atlanta Pension Panel Charter tightly defined the initiative’s scope and taskforce’s role

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Chicago Pension Presentation ATL

  • Created an independent review panel
  • Included elected officials, employee representatives, business

leaders

  • Presented the facts, explain the complexity of the

matter, and initiated a comprehensive “deep dive”

  • Raised $1.5M for professional fees
  • Hired lawyers, actuaries, accountants, and communications

consultants

  • Conducted four panel meetings to create transparency
  • Open to the public, employees, and media
  • All reports available at www.Atlantaga.gov

Process design proved critical for success

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

  • End-to-end process took ~ 1 8 m onths
  • With union acceptance, Atlanta’s City Council

voted 1 5 -0 for pension reform

  • Existing employees keep defined benefit plan; new employees

switch to hybrid system

  • Existing employees increase cash contribution and share in

investment risk

  • Reform reduced pension liability by more than

$ 5 0 0 m illion and annual cost by $ 2 5 m illion

  • No litigation

Atlanta reduced pension liability by more than $500 million through reform efforts

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

Key insights from Atlanta Pension Reform

  • Get commitment from decision makers up front
  • Risk of becoming another “task force” or “study group”
  • Pension issues create political risk for elected/ appointed officials
  • Find the right Chairman
  • Must be neutral, independent and credible in the community
  • Able and willing to face the community and take criticism
  • Get the right stakeholders and experts to the table
  • Employees/ unions, academics, politicians, business people
  • Independent consultants, lawyers, accountants, actuaries
  • Clearly define scope and charter for the panel
  • Panel provides facts and options; decision makers own the solution
  • Forward looking; no evaluation of the past
  • Be open and transparent
  • Open records, open meetings, open data
  • Everyone working from the same fact base

I t’s all about process

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

Overview of legal issues encountered

  • Federal level
  • United States Constitution: Contract Clause, 5th Amendment,

and 14th Amendment

  • Statutory provisions: government plans and ERISA
  • State level
  • State constitutional issues
  • State or local legislative concerns
  • Litigation
  • As of July 2012, at least 2 5 states have had pension cases
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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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Chicago Pension Presentation ATL

Potential role of State Capital Group member firms

  • Historical involvement in government
  • Identification of opportunities
  • Critical role in advising on pension reform

efforts

  • Potential litigation