Pension Reform Newsletter: New Analysis of Other Post Employment Benefit Debt, Florida Considers Pension Reform, 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 

• Study Says State, Local Retiree Healthcare Debt Totals $1.2 Trillion
• Testimony: Examining Solutions for the Florida Retirement System
• Nebraska Legislature Considering Stress Testing
• California Policymakers Should Address Pension Debt
• Why Paying Down Arizona’s Unfunded Pension Liabilities Makes Sense for Taxpayers

News in Brief

Quotable Quotes on Pension Reform

Data Highlight                                     

Contact the Pension Reform Help Desk

Articles, Research & Spotlights

New Study Shows State and Local Governments’ Other Post-Employment Benefit Debt Totals $1.2 Trillion

A new report by the Pension Integrity Project’s Marc Joffe provides a comprehensive assessment of other post-employment benefits (OPEBs) debt on an unprecedented national scale. State and local government provided other post-employment benefits include benefits such as retiree health care and dental care. The new study captures OPEB data for all states and most cities, counties and school districts in the U.S. — making it the most extensive effort yet to examine the subject. Notably, the report finds that just 15 governmental entities account for half the total national OPEB liability, which currently equals $1.2 trillion.

Testimony: Examining the Status of the Florida Retirement System

Florida policymakers have taken several steps to improve the financial security of the Florida Retirement System (FRS) over the past decade, but the pension plan still faces significant challenges. Recent adjustments to the plan’s assumed rate of investment return, for example, are still not enough to properly account for growing pension obligations and will likely lead to a pattern of insufficient annual payments into the pension system. Fortunately, the state legislature is showing interest in continuing the effort to reform FRS. The Pension Integrity Project testified on the changes needed for FRS to keep its promises to its retirees, noting the important role that data analysis and technical expertise should play in any reform effort.

Legislation in Nebraska Would Use Stress Testing to Assess Municipal Pension Sustainability

For years, the Pension Integrity Project has recommended pension systems use stress testing to recognize and help address a pension plan’s financial vulnerabilities that can arise from potential unforeseen economic events The Nebraska legislature has introduced a bill to require comprehensive annual stress testing on municipality-administered pension plans. In his recent testimony to the Nebraska Retirement Systems Committee, Reason’s Steven Gassenberger explains what the potential impact of the bill might be for Nebraska’s pension plans and how stress testing can better secure the affordability and sustainability of promised benefits to public workers. An additional, detailed commentary also evaluates how the current bill meets the objectives of pension reform.

California Should Prioritize Paying Down Public Pension Debt

Due to the COVID-19 pandemic and expected budget shortfalls, California Gov. Gavin Newsom decided to forgo properly funding the state’s pension plan by skipping a planned $2.4 billion supplemental pension payment last year. However, state revenues have greatly outperformed earlier estimates and California policymakers should reconsider reinstating the supplemental payment and recommit to paying down the state’s pension debt. Reason’s Marc Joffe details the ways unfunded liabilities are harming California’s economic growth and could worsen.

Quickly Paying Down Arizona Pension Debt Is a Win for Taxpayers

The Arizona State Senate has proposed a $300 million appropriation as a one-time supplemental payment toward the state’s public safety pension system. Reason’s Leonard Gilroy provides analysis on this proposal, explaining how the payment would reduce the system’s unfunded liabilities and help state and local employers reduce large interest payments that they are currently paying on pension debt. While the exact savings depends greatly on investment performance, Reason’s pension modeling analysis indicates that this one-time payment could save Arizona taxpayers up to $500 million over the next 30 years.

News in Brief

S&P Global Ratings Expect Growing Issues for Pension Plans in Upcoming Fiscal Year

Many of the financial difficulties that emerged during the 2020 recession will continue to affect state and local pensions. S&P Global Ratings has released a new study of five potential trends affecting pension systems in 2021 and beyond, warning that the market turmoil last year will continue to affect investment returns. The study is available here.

National Conference on Public Employee Retirement Systems Releases Yearly Study of Pension Trends

The National Conference on Public Employee Retirement Systems (NCPERS) releases a yearly study exploring the retirement practices of the public sector. In general, they find that the market effects of the COVID-19 related recession were less severe than expected. Although they note, the pandemic has introduced new capabilities for the public to listen to their public pension board meetings through video recordings and phone calls. The study is available here.

Equable Institute Releases Explainer on Pension Data Sources

As a particularly quantitative field of analysis, pension finance discussions rely heavily upon high-quality data sources. Equable has released a new primer detailing commonly-used sources of pension data, as well as an evaluation of the strengths and limitations of each source. This is an excellent tool for those interested in seeking and understanding the metrics that best explain trends in public pension funding policies. The primer may be found here.

Quotable Quotes on Pension Reform

“All too often, what cities, in general, have experienced is that these assumptions have been overly optimistic, with the systems’ earnings being overestimated and cost of benefits underestimated, resulting in a level of unfunded liabilities that the city is required to pay.”

—Paul Payne, St Louis Budget Director, cited in “Nearly nine years after reform, city poised to reverse some fire pension changes,” St Louis Post-Dispatch, January 19, 2021

“This is one of the major reasons why our budgets went up and taxes, in turn, have gone up. We have an opportunity right now to make a financing decision that saves the town and taxpayers significant money. This means year-after-year savings for taxpayers for the next 25 years.”

—Shari Cantor, West Hartford Mayor, discussing growing pension liabilities in  “Mayor: New pension measures could save West Hartford taxpayers for years,” West Hartford News, February 1, 2021

“We put in millions of dollars every year from our General Fund that usually pays for other services, for parks and recreation, for road repair, for other services to our community from there. So, the more we put into our pension payments from our General Fund the less services we can provide to Tucsonans.”

—Regina Romero, Tuscon Mayor, cited in “Tucson invests for pension payments,” Arizona Public Media, February 12, 2021

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by one of our Pension Integrity Project analysts. This month, Quantitative Analyst Jordan Campbell investigates the relationship between public pension investments and declining bond yields. Read more about the tool here.

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 this publication, please feel free to send your questions, comments and suggestions to alix.ollivier@reason.org.