Pension Matters
State Employees Retirement Fund
Most Recent Market Value | Archived Monthly Profiles
June 2012
Governor increases funds for film grants
A recent article in the LSJ indicates that the Governor is “doubling the money spent on film grants”. What impact will this really have on the movie industry in Michigan? Remember our pension fund backed the bonds for the Raleigh Studies in Pontiac who have been unable to make their bond payments recently due to lack of film activity in Michigan when the film incentives were cut. Is this enough to help both Michigan and the pension fund?
Michigan’s Accountability Grades
Michigan received an overall grade of “F” and ranked 43rd among the states in an investigation by the Center for Public Integrity (www.stateintegrity.org/michigan) . No state received an A and half the states got Ds and Fs. Sounds like time for an “emergency manager”. The LSJ will be running a series of articles covering the findings, but the full report can be found at the URL above. Michigan legislators cited the state's 'F' grade on the Corruption Risk Report Card in pushing a broad package of ethics and transparency reforms, which includes 16 proposed bills and one constitutional amendment. We will see how far they get. http://tinyurl.com/c4oha74
Actuarial Findings
Actuarial consultants to the State Employees Retirement System presented their 2012 findings to the Retirement Board at its most recent meeting. A copy of this presentation as well as one on health and investment can be found on the ORS website at www.michigan.gov/orsstatedb/0,4654,7-208-47025_47119---,00.html.
Highlights of the presented findings are: $767 million loss in investments last FY and $950 million loss expected in FY12; not fully funded for current retirees; Actuarial Value of Assets is at 66% and Market Value of Assets is 56%; the average annual pension for 2011 was $20,018.
Unless the market improves dramatically or the state contributes more funds, there may not be sufficient funds to support full payment of current pensions. The AG representative on the Board asked for a report on the investment and inflation assumptions over time. The current 8% return assumption may be overly optimistic these days.
(Note: The typical public pension plan assumes its investments will earn average annual returns of 8 percent over the long term, according to the Center for Retirement Research at Boston College. Actual experience since 2000 has been much less, 5.7 percent over the last 10 years, according to the National Association of State Retirement Administrators.)
ORS Benchmarking Report
The following is a summary of the CEM Benchmarking report I mentioned in the last newsletter. ORS was gracious enough to put this synopsis together for us.
Defined Benefit Administration Benchmarking Analysis 2012
The Office of Retirement Services (ORS) contracts with CEM Benchmarking, Inc., a global leader in pension administration benchmarking, to independently evaluate its defined benefit administration. This evaluation compares costs and services with those of similarly-sized pension systems, including those in Arizona, California, Colorado, Illinois, New York, North Carolina, Ohio, Oregon, Virginia, Washington, and Wisconsin.
CEM has a long history of helping public and private systems analyze and quantify their administrative costs and service levels. Understanding the value of service relative to cost, with comparisons to relevant peers helps ORS make decisions that provide the greatest value to its customers and stakeholders.
CEM’s analysis shows ORS to be a low-cost provider of benefit services compared to other public employee retirement systems and that it continues to improve the level of service offered.
Highlights from the CEM report:
- ORS’s cost of administration is $57 per member. This compares to a peer average of $87 per member and a peer median of $78.
- The primary reasons for being $30 below the peer average:
- ORS has higher transactions per full-time employee (productivity).
- ORS has lower expenses related to major projects and back office actuarial, legal, audit, and other support services.
- There are 2.87 FTE (full-time employees) per 10,000 members. ORS has one full-time-equivalent staff member for every 3,484 members. Similar systems average one full-time-equivalent staff member for every 1,422 members.
- The cost per active member and annuitant increased $9. Two factors contributing to this increase are:
- The workload of increased member retirements. Active member retirements more than doubled over the past year due to the early retirement incentive.
- A declining membership base. Total active members and annuitants decreased from 521,766 to 500,211.
- ORS’s customer service score has improved, showing that improvement efforts are paying off. Service is defined from a member’s perspective—higher scores mean faster turnaround times, more availability, more choice, and higher quality. Service improvements that could increase the score include reducing the call wait time for customers and providing more online self-service tools. ORS has a strategic plan and business plan in place to address these service improvements.
State Treasurer, State Budget Director, and Fiscal Agencies Reach Consensus on State's Economic and Revenue Projections
State Treasurer Andy Dillon, State Budget Director John Nixon, Senate Fiscal Agency Director Ellen Jeffries, and House Fiscal Agency Director Mary Ann Cleary today reached a consensus on economic and revenue figures for the remainder of Fiscal Year (FY) 2012, and for the 2013 and 2014 Fiscal Years.
Following today’s Revenue Estimating Conference, net FY 2012 General Fund-General Purpose (GF-GP) revenue is projected at $9.064 billion, up $34 million from the estimate agreed to at the January revenue conference. Net FY ’12 School Aid Fund (SAF) revenue is now estimated at $10.876 billion, up $113 million from January. Combined, GF and SAF estimates are up $146 million for FY ’12.
Net GF-GP revenue for the 2013 Fiscal Year is now forecasted at $8.970 billion, down $65 million from the January estimate, while the FY '13 SAF revenue estimate has been revised up $115 million to an estimated $11.170 billion. In FY 2014, GF-GP revenue is estimated at $9.259 billion and SAF revenue is estimated at $11.472 billion.
“The improvement in economic activity that occurred in Michigan in 2011 has carried over into 2012. Employment is rising, motor vehicle production is increasing, and tax collections are growing,” said State Treasurer Andy Dillon. “Continued improvement in the national economy, along with Governor Snyder’s ongoing efforts to create jobs and increase investment in Michigan, are expected to continue to generate economic growth in Michigan into 2013 and 2014.”
Treasurer Dillon noted there are several risks to revenue estimates agreed to today, including the on-going debt crisis in Europe, national debt concerns, and high oil and gas prices. Rising energy costs and a corresponding downturn in the economy could have a dampening effect on the state’s economic growth.
Bond Ratings
According to a recent Treasury news release, “Moody’s Investors Service, Standard & Poor’s Ratings Services, and Fitch Ratings have awarded the Michigan Finance Authority’s Unemployment Obligation Assessment Revenue Bonds ratings of Aaa, AAA, and AAA, respectively, the highest long-term rating available from each service.” Read the full press release at www.michigan.gov/treasury/0,4679,7-121-1755_1963---,00.html
A Member’s Analysis
SERA member, Dave Berquist and Treasury retiree, took a look at the recent pension summary from ORS in the Connections newsletter and compared it to the findings in the most recent CAFR and raised the following questions and recommendations.
Questions are:
- With no new hires, payroll is decreasing, yet longevity of inactive (retirees) may be increasing, so is continuing to use contributions that are level as a percent of member payroll consistent with the System paying all promised benefits when due?
- Provide the most recent long-term solvency test.
- As used in the CAFR, page 73, paragraph 2, what a prioritized solvency test? and
- What is a short condition test?
Recommendations
In view of the above, the Actuarial Assumptions in the 2011 CAFR, page 71, should be reviewed for reasonableness, particularly, assumptions:
- “…an assumed long-term real rate of return of 4.5%. Adopted 2004.” This was 8 years ago. Considering the sovereign debt issues in Europe and the nuclear, petroleum, military, and religious issues in the Middle East and Africa, is this reasonable now?
- “Unfunded actuarial accrued liabilities are financed over a declining 40-year period for years beginning October 1, 1996. Adopted 1996.” This is 16 years ago!
- The results of the study completed in 2010 to analyze the actual experience of the System versus that anticipated by actuarial assumptions then in use should be disclosed to the public.
The suggestion for increased funding of the System by legislation may need to be considered in view of the responses to these concerns. There is precedent in Public Act 64.” Dave’s full comparative analysis can be found on our web site at www.mi-sera.org.
Arm Wrestling over Health Care
According to the Employee Benefit Research Institute (EBRI) fewer people are getting employer based health care. Not only are fewer employers offering health care but fewer employees are eligible or can afford what is offered. And remember, part time workers are not eligible, in general, for employer coverage. “In 2010, half of all workers whose employer did not offer health benefits were uninsured…” So if employers don’t offer it and workers can’t afford it – who pays when persons without insurance need care? I’m pretty sure it’s you and me. So what’s so wrong with the Affordable Care Act? (LSJ 5/6/12) and EBRI (www.ebri.org)
Editor’s note: June Morse may be contacted at jmorse10@comcast.net or 517-886-9323.
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