1. Finance Sub-Committee
Meeting on Pensions
Bridget Gainer, Chair
Cook County Pension Sub-Committee
June 29, 2011
Info@BridgetGainer.com
312-603-4210

2. Paths to Solvency
Paths to Solvency
Commissioner Gainer 2

3. Introduction
 The Cook County Pension Fund is currently funded
at 60.7%. The funded status has dropped 30% in
the last ten years and 15% in the last five.
 Cook County, as the employer, has made their full
statutory required contributions to the Pension
Fund every year and has repaid any loans from
the fund.
 The statutory contribution is a multiple of the
employee contribution and unrelated to the
actuarial value of the liability being accrued by
the fund.
Paths to Solvency
Commissioner Gainer 3

4. Benefits, Employer & Employee Contribution: No Change
80.00% • Projected funded status with
60.00% no changes to benefit formula
40.00%
Funded
or contribution levels
20.00% Status
0.00%
2010 2020 2030 2038
-20.00%
Millions Billions
$400 $28
$23
$300 $18
ER Cont. Assets
$200 $13
EE Cont. $8 Liability
$100 $3
$0 -$2
2010 2020 2030 2038 2010 2020 2030 2038
Table 1
Paths to Solvency
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5. Benefits: No Change
Employee Contribution: No Change (8.5% of pay)
Employer Contribution: Increase Employer contribution to reach 80% in 2040
• Employer Contributes 21.49% of payroll
85.00%
80.00% annually beginning in 2012
75.00%
70.00%
• Employer currently contributes
Funded
65.00% Status approximately 13% of payroll
60.00%
55.00%
50.00%
2010 2020 2030 2040
Millions
Billions
$1,000
$25
$800
$20
$600 ER Cont. Assets
$400 $15
EE Cont. Libaility
$200 $10
$0 $5
2010 2020 2030 2040 2010 2020 2030 2040
Table 2
Paths to Solvency
Commissioner Gainer 5

6. Benefits: Multiple 2.4 to 2.2; FAS = final 8 years; retirement age increased 5 years;
COLA reduced to lesser of 3% or ½ CPI.
Employee Contribution: an additional 1% of Salary to 9.5%
Employer Contribution: No formula change, but increases with wage & contributions
• Changes only apply to those under 50
70.00% • Multiplier changed from 2.4% to 2.2%
65.00% • Final Average Salary changed to average of last 8
60.00% yrs.
Funded
55.00%
Status • COLA reduced to 3% or half of CPI
50.00% • Retirement Age increased 5 years
45.00% • Employees Contribute 9.5% of Salary
40.00%
2010 2020 2030 2040
Millions
Billions
$400
$25
$300
ER Cont. $20
$200 Assets
EE Cont. $15
$100
Liabilities
$0 $10
2010 2020 2030 2040
$5
2010 2020 2030 2040
Table 12
Paths to Solvency
Commissioner Gainer 6

7. Benefits: Multiple 2.4 to 2.2; FAS = final 8 years; retirement age increased 5
years; COLA reduced to lesser of 3% or ½ CPI.
Employee Contribution: Additional 1% of Salary to 9.5%
Employer Contribution: Ramp over 10 years until 80% funded in 2040.
85.00%
80.00%
• After 10 years Employer Contribution
75.00%
70.00% Funded levels off at 16.42%
65.00% Status
60.00%
55.00%
50.00%
2010 2020 2030 2040
Millions Billions
$800 $25
$600 $20
ER. Cont. Assets
$400 $15
EE Cont. Liabilities
$200 $10
$0 $5
2010 2020 2030 2040 2010 2020 2030 2040
Table 13
Paths to Solvency
Commissioner Gainer 7

8. Benefits: Basket of Changes only applies to Employees under age 50:
Employee Contribution: Additional 1% of Salary to 9.5%
Employer Contribution: No formula change, but increases with wage & contributions
• Benefit changes apply only to
70.00% Employees under age 50
60.00%
50.00%
• Employer contributes at current formula
40.00% Funded
30.00% Status
20.00%
10.00%
0.00%
2010 2020 2030 2040
Millions Billions
$400 $25
$300 $20
ER. Cont. $15 Assets
$200
EE Cont. $10 Liabilities
$100 $5
$0 $0
2010 2020 2030 2040 2010 2020 2030 2040
Table 15
Paths to Solvency
Commissioner Gainer 8

9. Benefits: Basket of Changes only apply to those under age 50
Employee Contribution: Additional 1% of Salary
Employer Contribution: Ramp over 10 years until 80% funded in 2040
 Changes only apply to those under
85.00%
50
80.00%
75.00%  Multiplier changed from 2.4% to
70.00% Funded 2.2%
65.00% Status  FAS to average of last 8 years
60.00%
55.00%  COLA reduced to 3% or half of CPI
50.00%  Retirement Age increased 5 years
2010 2020 2030 2040  After 10 years Employer
Contribution levels off at 16.42%
.
Millions $25
$1,000 $20
$800
$15 Assets
$600 ER Cont.
Liabilities
$400 EE Cont. $10
$200
$0 $5
2010 2020 2030 2040 2010 2020 2030 2040
Table 16
Paths to Solvency
Commissioner Gainer 9

10. Employer Contribution
$1,000,000,000
$900,000,000
$800,000,000 No Change
$700,000,000 Basket
$600,000,000 Basket only under 50
$500,000,000
80% Funded as Level Dollar
$400,000,000 Amount
Basket and 80% Funded
$300,000,000 Goal
Basket and 80% Funded
$200,000,000
Goal only under age 50
$100,000,000
$0
2010 2020 2030 2040
Paths to Solvency
Commissioner Gainer 10

11. Funded Status
90.00%
80.00%
70.00%
No Change
60.00%
Basket
50.00%
Basket under 50
40.00%
80% Funded as Level
Amount
30.00%
Basket and 80% goal
20.00% Basket under 50 and
80% goal
10.00%
0.00%
2010 2020 2030 2040
-10.00%
Paths to Solvency
Commissioner Gainer 11

12. Results
 If no action is taken the Cook County Employee Annuity and
Benefit Fund will have no assets and the County would have
to enter a pay-as-you-go policy by 2038.
 Even if benefits are modified slightly by using the changes in
the basket, that still will not bring the fund to an 80%
solvency.
 In order to be 80% solvent by 2040 there will have to be
increases by the Employer greater than the current statutory
contribution limits, increase in Employee contributions and
changes to the retiree benefit structure.
Paths to Solvency
Commissioner Gainer 12

13. 401(k)/Defined Contribution
Research Report
401(k) Report
Commissioner Gainer 13

14. Defined Contribution Plans for a Public Workforce
Senate Bill 512, the pension bill debated in Springfield this year, contained a
provision for a self-managed plan for all State, City of Chicago and Cook County
employees. This was a new development, as 401(k) style plans are currently
limited to the State University Retirement System (SURS) system. With funded
ratio‟s for public plans dropping and calls for budget cuts, nationally, the
conversation has grown around switching from Defined Benefit (DB) retirement
plans to Defined Contribution (DC).
These calls are countered by those uncomfortable with the increased risk for the
employees of market volatility and longevity risk. Arguments have been put
forward in support of maintaining the DB status quo, amending DB plans and
moving toward DC. Recently, new 401(k) vehicles have been introduced that
focus on maintaining the retirement income security within a DC plan.
For a public sector population without the guaranteed income of Social Security,
the stability of the future retirement income stream is paramount. As the demand
for 401(k) like vehicles grows for this population, plans with greater income
security, investment decision support, employee education and annuity-like
features have increased.
The following report details the results of national studies on the way employees
use 401(k) plan assets, academic research or best practices and case studies
from other public plans.
401(k) Report
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15. “Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cash outs
Are Eroding Retirement Income”
Hewitt 2011
Examined: The behavior of 1.8 million employees in 110 large 401(k) plans
nationally to assess their ability to provide sufficient retirement income
 28% of all active participants had a loan outstanding.
 70% of Employees that had loans outstanding at termination defaulted on the
repayment.
 In 2010 over 6.9% of 401(k) participants took a withdrawal of funds.
 401(k) members with lower salaries were more likely to take a withdrawal and
more women were taking withdrawals than men.
 The majority of employees that took a withdrawal did so due to eviction or
foreclosure.
 42% of the workers that lost their jobs in 2010 took a cash out of their 401(k)
 Younger workers who change jobs are more likely to cash out their 401(k)
 Cashing out a 401(k) reduces future retirement income between 11% and 67%
Suggestions: Enact measures that reduce loans, withdrawals and cash outs
 Restrict the number of loans allowed and the amount an employee can borrow or
withdraw
 Limit the reasons for hardship withdrawals
 Simplify rollover process for those who are leaving employment for a new
position
401(k) Report
Commissioner Gainer 15

16. “Leakage of Participants’ DC Assets: How Loans, Withdrawals, and
Cash outs Are Eroding Retirement Income”
Hewitt 2011
30.00%
25.00%
20.00%
15.00% Percentage of 401(k)
Participants with Loans
10.00%
5.00%
0.00%
2005 2006 2007 2008 2009 2010
401(k) Report
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17. “Leakage of Participants’ DC Assets: How Loans, Withdrawals, and
Cash outs Are Eroding Retirement Income”
Hewitt 2011
10.00 20.00 30.00 40.00 50.00 60.00
0.00% % % % % % %
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401(k) Report
Commissioner Gainer 17

18. “401(k) Plans in Living Color: A Study of 401(k) Savings
Disparities Across Racial and Ethnic Groups”
Ariel Investments July 2009
Examined: The results of an analysis of private sector 401k plans
broken down by participant race.
 African Americans are 167% more likely to take a hardship
withdrawal than white participants.
 Hispanics borrow from their 401(k) plans at a higher rate than
whites, but a lower rate than African Americans.
 Asian workers are the lease likely to borrow against their 401(k)
Suggestions: Implement best practices to increase retirement
income security
 Encourage employers to collect and report their 401k data by race
and ethnicity
 Change loan features to facilitate retirement income stability
401(k) Report
Commissioner Gainer 18

19. 401(k) Plans in Living Color: A Study of 401(k) Savings Disparities Across
Racial and Ethnic Groups”
Ariel Investments July 2009
401(k) Report
Commissioner Gainer 19

20. “Defined Contribution Pension Plans in the Public Sector: A
Benchmark Analysis”
Wharton School, University of Pennsylvania 2008
 The University of Pennsylvania Wharton School comprised a list of best practices for 401(k)/Defined
Contribution Pension Plans that will help provide an adequate and secure retirement income.
Eligibility and Participation Mandatory Enrollment/Opt Out
Waiting period of a year or less for participation
Vesting 100% Vested after one year of employment
Contributions (Employer and Employee) 12% of pay if covered by Social Security
18 to 20% of pay if not covered by Social Security
Investments Mandatory/default investment into lifecycle target-date funds
Limited menu of options of major asset classes
Distributions Pre-retirement:
No lump sum distributions at job change
No hardship withdrawals
No plan loans
Retirement:
Level of mandatory annuitization with inflation-protected income
Limited lump-sum distribution
Administrative Structure and Fees Single vendor recordkeeping structure
Single point of contact for participants
Larger plans standard: total administrative and investment costs not to
exceed 100 basis points
Other Participant Services Broad-based employee investment education
Individual-specific investment advice
Services delivered through multiple modes: call center, internet and in-
person
401(k) Report
Commissioner Gainer 20

21. “Look Before You Leap; The Unintended Consequences of Pension Freezes”
National Institute on Retirement Security Oct. 2008
West Virginia Case Study:
 In 1991, the West Virginia Teacher‟s Retirement System (TRS), a DB
plan, was frozen, and all newly hired teachers were put into a new
plan, the Teachers Defined Contribution Retirement System (TDC).
 In 2004 the State conducted a study of teacher‟s retirement 401(k)
plans and determined that the average balance was $41,478 with only
6% of participants accumulating over $100,000.
 The State decided that allowing teachers to invest themselves was too
risky and passed a law in 2005 that moved all new teachers into a DB
plan.
 When given the opportunity to move from the DC plan back to the DB
plan over 75% of West Virginia teachers under 40 switched into the
DB.
401(k) Report
Commissioner Gainer 21

22. Governance
Governance
Commissioner Gainer 22

23. Cook County Pension Fund Board
Nine Member Board 22%
 4 Elected by Current
Employees
 3 County Employees
 1 Forest Preserve
Employee
 3 Elected by Retirees
 2 County Retirees
 1 Forest Preserve Retiree
78%
 2 Appointed
 1 by the Treasurer
 1 by the Comptroller
Ex Officio
Elected
Investment Committee
 Committee of the Whole
Governance
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24. Types of Pension Fund Members
 Elected Members: Elected by active or retired members of the
retirement system.
 Ex Officio: Members of the Board of Trustees by virtue of appointment or
election to another public office. Example: County Treasurer.
 Appointed: Members appointed by the elected Chief Executive or
Governing Body. Subject matter expertise can be required. i.e.,
investment, finance or actuarial. Also called “Public Appointments” based
on duty to represent taxpayer interest in the performance of the pension
fund, akin to independent directors on corporate boards.
 A study by the University of Michigan Found the Average Board was (Hess
2005):
 36% Elected
 15% Ex Officio
 44% Appointed
 The Same study found that the optimal level of elected board membership
was a maximum of 47%
Governance
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25. Board Composition: Local and National Funds
 State of FL Retirement System:  Cook County Annuity & Benefit Fund:
100% Ex Officio 77% elected, 23% appointed
 Public Safety Retirement System AZ:  Municipal Employees and Benefit Fund
75% appointed, 25% Elected of Chicago: 60% Elected, 40% Ex Officio
 AZ State Retirement System:  Fireman’s Annuity and Benefit Fund of
Chicago: 50% Elected. 50% Ex Officio:
100% Appointed Fire Commissioner, City Treasurer,
Comptroller, Clerk
 LA County Board of Retirement: 45%
Appointed, 45% Elected, 10% Ex Officio  Chicago Laborer’s Pension and
Welfare Fund: 50% appointed by the
 CALPERS: 25% Appointed, 50% Elected, Mayor, 50% appointed by the Laborers
25% Ex Officio Union
 Iowa Public Employee Retirement  Policeman Annuity and Benefit Fund
Board: 85% Appointed, 15% Ex Officio of Chicago: 50% Appointed, 50% Elected
 NJ Public Employee Retirement  IMRF: 50% Elected by members, 50%
System: 35% Appointed, 65% Elected elected by participating governments
 TX County/District Retirement System:
 IL State Employees: 45% Appointed,
100% Appointed 45% Elected, 10% Ex Officio
 ISBI: 55% appointed, 45% ex-officio
Governance
Commissioner Gainer 25

26. Other Funds Publicly Appointed Member’s Qualifications
 AZ State Retirement System:  Iowa Public Employees
Four of the members shall have at Retirement System: Three public
least ten years' substantial members, appointed by the
experience as any one or a Governor, who are not members of
combination of the following: IPERS and who each have
 1. A portfolio manager acting in substantial institutional investment
a fiduciary capacity. experience or substantial
 2. A securities analyst. institutional financial experience.
 3. An employee or principal of
a trust institution, investment  Illinois Municipal Retirement
organization or endowment Fund: A nominee for executive
fund acting either in a trustee must be employed by an
management or an investment IMRF employer as a chief executive
related capacity. officer, chief finance officer, or other
 4. A chartered financial analyst officer, executive or department
in good standing as determined head.
by the association for
investment management and
research.
 5. A professor at the university
level teaching economics or
investment related subjects.
 6. An economist.
 7. Any other professional
engaged in the field of public or
private finances.
Governance
Commissioner Gainer 26

27. Results of Research Data
 The percentage of the board that is elected by members or serve ex-officio has a
positive effect on funding level (or appearance of funding).
 “asset allocation and the funding level decisions indicate member elected
trustees are more focused on a stable, sustainable plan to provide future
benefits as opposed to chasing higher returns through a riskier asset allocation.
 The object of higher funding is strengthened by the presence of ex-officio
trustees, who serve as part of their job responsibilities. (Harper 2008)
 „There are board characteristics that significantly correlated with investment manager
outperformance……. The (greater the) length of the board term has a negative
relationship with manager returns versus the benchmark.‟ (Harper 2008)
 In the University of Michigan Study, “once the board consists of 47% member-
elected trustees, there are diminishing returns to placing an additional member-
elected trustee on the board.” (Hess 2005)
 Any board that operates effectively includes members who have a mix of skills,
competencies, and behaviors, Board composition should reflect the varied interests of
those responsible for funding the plan and should include plan participants and
retirees, citizens of the governmental unit, and officers of the plan sponsor, as well
as independent directors. This assures balanced deliberations and decision making.
(GFOA 2010)
Governance
Commissioner Gainer 27

28. Disability Benefits
Disability Benefits
Commissioner Gainer 28

29. Disability and Pension
 If an employee‟s disability continues after the maximum ordinary
disability benefit, then the employee can withdraw before age 60 from
service and receive their maximum benefit allowed. There will be no
penalty for withdrawal from service before age 60.
 While on disability, pensionable years of service accumulate as if the
employee were working and any time spent on disability counts to
overall service credit.
 In determining the final average salary, any years spent on disability
are credited with the salary the worker was receiving whey they were
injured.
Disability Benefits
Commissioner Gainer 29

30. Annual Cash Outflow from the Pension Fund for
Disability Payments
Disability Benefits
Commissioner Gainer 30

31. Pension Fund Disability Cost Breakdown
$14,000,000
$12,000,000
$10,000,000
$8,000,000 Duty
$6,000,000 Ordinary
$4,000,000
$2,000,000
$0
2009 2010
Disability Benefits
Commissioner Gainer 31

32. County + Pension Fund Disability Costs
$35,000,000
$30,000,000
$25,000,000
$20,000,000 Pension Fund
Disability Payments
$15,000,000
Cook County Workers
$10,000,000 Compensation
$5,000,000
$0
2006 2007 2008 2009 2010
Disability Benefits
Commissioner Gainer 32

33. Disability Annual Cost as % of Total Fund
Expenditures
Disability Benefits
Commissioner Gainer 33

34. Recent Changes
and Comparisons to
Pension Funds Across
the Country
Recent Changes and Comparisons
Commissioner Gainer 34

35. Recent Changes
New Jersey Pension Fund
 Retirement Age increased to 65 for all future employees. Current
retirement age is either 60 or 62 depending on date of hire.
 EE Contribution: Increase 1% now and a 1% increase over the next 7
years. State Employees currently paying 5.5%.
 Benefit Formula
 Current Employees: 65% of Final Average Salary, plus 1% for every year
over 25 years of service up to 30 years of service.
 Future Employees: 60% of Final Average Salary, plus 1% for every year
over 25 years and up to 30 years of service.
 ER Contribution: 2018 begins a 30 year amortization plan.
 COLA: No additional COLA for current retirees, Eliminates COLA for all
future retirees.
 Reported to save $300 Million next year and over $3 Billion in the
next 10 years.
Recent Changes and Comparisons
Commissioner Gainer 35

36. Recent Changes
New York Pension Fund
 Creates the 6th tier of pension benefits in the NYS system.
 Retirement Age: Increased to 65, currently 62 for most
and 57 for teachers.
 Vesting: Increased to 12 years from 10.
 EE Contribution: Increases to 6% from 3%
 ER Contribution: Maintains the Current Actuarially
Required Contribution.
 Reported to save $93 Billion over the next 30 years.
Recent Changes and Comparisons
Commissioner Gainer 36

37. Recent Changes
Atlanta Pension Fund
 Current Employees can remain in their current plan, but contributions
will increase from 8% to 13% of Salary.
 New Employees now participate in a Hybrid Plan
 1% Defined Benefit Multiplier for every year of service
 Employees contribute 8% for their Defined Benefit Portion
 Employees contribute a minimum of 3.75% to a Defined Contribution,
401(k) style plan. Employees can opt to contribute an additional 4.25%.
 ER matches the Employee Defined Contribution 100%.
 15 years to vest in Defined Benefit Portion, 5 years to vest in Defined
Contribution Portion
 Retirement age for police and fire is increased to 57 from 55
 Retirement age for other employees is increased to 62 from 60.
 Reported to save the city $25 million over the first year and over
$300 million over the next 30 years.
Recent Changes and Comparisons
Commissioner Gainer 37

38. Recent Changes
Florida Pension Fund
 Current Employees
 No COLA increase after July 1, 2011, was 3% annually.
 Contribution increased to 3% from 0%
 Future Employees
 Same changes as current Employees, plus
 Vesting increased to 8 years, from 6 years
 Final Average Salary determination is 8 highest fiscal years average, was
the 5 highest average.
 Normal Retirement age is 65 for most employees, 60 for special risk
employees (police, fire, etc. )
 All employees will continue to participate in the Social Security
System
Recent Changes and Comparisons
Commissioner Gainer 38

39. County Comparison
 The following charts outline a Comparison between the Cook County
Pension Fund and the following Counties:
 Los Angeles County CA
 Maricopa County AZ, A member of the Arizona Retirement System
 Miami Dade County FL, A member of the Florida Retirement System
 Harris County TX, A member of the Texas County and District Retirement
System
 Cook County and Los Angeles County do not participate in Social
Security, the other funds do participate in Social Security
Recent Changes and Comparisons
Commissioner Gainer 39

40. County Comparison
Retirement Age
70
60
50
40
30 Full Benefit
20
10
0
Cook County Los Angeles Maricopa Miami Dade Harris
County County County County
Recent Changes and Comparisons
Commissioner Gainer 40

41. County Comparison
Vesting
10
9
8
7
6
5
Years of Service
4
3
2
1
0
Cook County Los Angeles Miami Dade Maricopa Harris County
County County County
Recent Changes and Comparisons
Commissioner Gainer 41

42. County Comparison
Multiplier and Final Average Salary (FAS)
Multiplier Final Average Salary
 Cook County: 2.4%  Cook County: 48 Highest
consecutive months in the
last 10 years
 Los Angeles County: Between
11.82% of FAS and 100%  Los Angeles County: Highest
depending on years of service Monthly average of any 12
when retired consecutive months
 Miami Dade County: 1.6%  Miami Dade County: Average
of five highest years of
creditable service
 Maricopa County: 2.1% to
2.3% depending on years of  Maricopa County: Highest 36
service months of last 10 years
 Harris County Texas: Not a DB  Harris County: Not a DB plan
plan
Recent Changes and Comparisons
Commissioner Gainer 42