Pension Reform Newsletter: Bill endangers Alaska’s reforms, Louisiana bills would weaken retirement system, and more

This newsletter from the Pension Integrity Project at Reason Foundation highlights articles, research, opinion, and other information related to public pension challenges and reform efforts across the nation. You can find previous editions here.

In this Issue:

Articles, Research & Spotlights 

• Alaska Needs to Answer Questions Before Jumping Back Into Defined Benefits
• Bills in Louisiana Would Weaken Public Retirement Systems
• Public Pension Investments Shouldn’t Be Guided by Politics
• New Reporting Standard Will Bring Valuable Perspective to Public Pensions
• Kansas Considers a Defined Contribution Plan

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

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Articles, Research & Spotlights

Legislation Would Introduce Costs and Risks to Alaska Retirement System

After 15 years of new workers going into a defined contribution plan, Alaskan lawmakers are considering legislation that would change course. Alaska House Bill 55 would place all peace officers and firefighters into a new tier in the historically underfunded defined benefit plan. The potential reform has not undergone any sort of risk-focused, long-term actuarial analysis, but comments from the plan’s consulting actuary suggest that the move would expose the state to adverse funding and increased contribution rates. Reason Foundation’s Leonard Gilroy and Ryan Frost summarize what limited comments have emerged on the potential risks of House Bill 55 and list several questions that legislators should ask when considering such a significant policy shift. Chiefly among those questions is, What happens if the plan achieves investment returns below its lofty 7.38% return rate assumption?

Bills Under Consideration in Louisiana Would Increase, Not Decrease, Future Risks

Louisiana’s state legislature is currently considering several bills that would affect the state’s retirement systems, and the Pension Integrity Project has testified on several of these proposals before the Senate Committee on Retirement. Senate Bill 438 would establish a hybrid plan for the Louisiana State Employees’ Retirement System (LASERS), which would improve the accrual and portability of benefits for the majority of new hires. Three bills—Senate Bill 5, Senate Bill 6, and Senate Bill 7—seek to give out benefit adjustments for retirees, but involve funding policies that would weaken the state’s ability to manage unexpected costs in the future. Senate Bill 10 would allow current teachers who already made the choice to participate in the state’s defined contribution plan the option of changing their selection and entering the defined benefit pension. As Reason Foundation explains in this backgrounder, this move would do a disservice to Louisiana teachers and would weaken their already underfunded retirement system. 

Keeping Politics Out of Public Pension Investing

A growing trend in the sphere of public pensions is the push to use the trillions of dollars in pension assets, funded through taxpayer and member contributions, to support social and political interests. In this one-page backgrounder, Reason explains the problems with this politicized approach and why allowing objectives beyond a pension plan’s fiduciary responsibility reinforces risky behavior that can hurt the pension system, workers and taxpayers. This type of politicized investment policy also introduces several technical and unnecessary challenges for plan managers.

A Chance to Enter a New Era of Financial Transparency and Awareness for Public Pension Plans

The Actuarial Standards Board has issued a change to a previously adopted standard of practice (ASOP 4) that will now require public pension plans to report their obligations using alternate discounting. While plans will continue to report their liabilities using their current discounting methods, they will now also report these figures using discounting that is more appropriate for obligations that are backed by governments. Guest actuary commentator Larry Pollack explains that this new standard will provide a valuable perspective for understanding pension promises made and the risks involved in funding them.

Testimony: Assessing the Proposed Kansas Thrift Savings Plan

In the current legislative session, Kansas lawmakers are considering Senate Bill 553, which would establish a new defined contribution (DC) plan fashioned after the federal Thrift Savings Plan. The Pension Integrity Project at Reason Foundation testified before the Kansas Senate Committee on Assessment and Taxation on the legislation, offering its evaluation of the proposed DC plan. The assessment, which uses experience with similar plans around the country, indicates that the DC plan introduced in SB 553 would reflect best practices with adequate contributions, funding policies that would not take away from the existing pension, stated objectives, and options to provide lifetime income.

News in Brief

Analysis Finds Many Employers Fail to Adequately Replace Social Security Benefits

Most public pensions work in combination with Social Security, but some employers exercise the option to opt-out of the federal program, meaning they should compensate accordingly with higher contributions. A new report from the Center for Retirement Research at Boston College looks at whether state and local employees who are not covered by Social Security are receiving an equivalent benefit from their retirement plan. About five million state and local workers are not covered by Social Security, and 43% of those have lifetime benefits that fall short of what Social Security would have provided. The study does note that the difference between benefits does vary depending on years of service and those that leave mid-career suffer the greatest discrepancy. About one-third of non-covered workers fall into this tenure range of mid-career, which is between six-and-20 years of service. The full brief is available here.

Updated Brief Highlights Continued Reductions in Return Assumptions for Public Pensions

The National Association of State Retirement Administrators (NASRA) has released its latest brief on public pension plans’ assumed rates of return. They note that the two-decade trend in return assumption reductions is likely to continue. In 2018, the average assumed rate of return for a pension plan was 7.33%. By 2021 the assumed rate had dropped to 7%, with some states going even lower. The main driver of this trend is the declining interest rate environment after the 2008-09 recession, which caused returns for safer assets like treasuries to drop substantially. The brief notes short-term market forecasts are suggesting the next decade will likely render returns below historic averages, meaning plans will either face cost increases now through further reductions in assumptions or later through market experience coming in below expectations. The full brief is available here.

Quotable Quotes on Pension Reform 

“State pensions often have an allocation to equities that is greater than the size of [the states’] annual budgets, so a correction in equity prices can ultimately have an outsize impact on the state.” 

—Municipal Market Analytics partner Matt Fabian, cited in “U.S. Retirement Funds, Heavy on Stocks, Brace for Losses,” The Wall Street Journal, March 7, 2022

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments, and suggestions to zachary.christensen@reason.org.