This newsletter from Reason’s Pension Integrity Project 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
- Despite Poor Process, Kentucky Enacts Meaningful Pension Reform
- New Tool Details Colorado’s Unfunded Liability
- Florida Pioneers Local Data Transparency Standards
- Study: Pensions Crowding Out Municipal Budgets
News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk
Articles, Research & Spotlights
Despite Poor Process, Kentucky Enacts Meaningful Pension Plan Design, Funding Policy Reforms
Amid a flurry of public criticism, Kentucky Gov. Matt Bevin has signed into law a set of reforms meant to improve the long-term solvency of the Commonwealth’s pension plans. Reason’s Anthony Randazzo and Leonard Gilroy provide insight on the policy changes in the new law, as well as the flawed policymaking process leading up to the reform’s passage. According to their analysis, while the reform falls short in several areas, it still represents a significant step toward improving the long-term solvency of Kentucky’s beleaguered pension plans. They also find that despite the claims of spirited protestors, these improvements in no way cut the benefits of current or retired workers.
» ANALYSIS: Gov. Bevin Vetoes Interest-Free Pension Buyouts | UPDATE: Veto Overridden
Reason Releases Interactive Visualization of Colorado’s Unfunded Pension Liability
Reason has published an interactive website—UnfundedColorado.org—that visualizes in detail the causes of Colorado’s current $32 billion in unfunded liabilities. The site makes accessible to policymakers and the general public an advanced analysis of the underfunding of the state’s major pension plan maintained by the Public Employees’ Retirement Association (PERA). The analysis brings to light that the source of PERA’s current problems is not exclusive to insufficient employer contributions. In fact, two thirds of the fund’s current unfunded liability can be traced back to problems with actuarial assumptions. Reason’s Zachary Christensen explains these findings and outlines the importance of robust reform in Colorado that includes adjustments not only to contributions, but also assumptions.
» INTERACTIVE SITE: UnfunfedColorado.org
Florida Passes First in the Nation Data Reporting Standards to Improve Local Government Financial Transparency
With the help of Reason Foundation’s research and legislative outreach, Florida passed a new law that empowers the state’s chief financial officer to implement policies requiring local governments to publish their financial reports in a format that is more compatible to machine reading. Reason’s Marc Joffe and Spence Purnell detail the process leading up to this historic reform and Reason Foundation’s role in this undertaking. They explain how this change will significantly improve government transparency by making public financial data more available to those seeking to produce robust fiscal analyses. The article extends the challenge to the rest of the country to adopt similar policies.
UC Berkeley Study: Public Pension Costs Crowding Out Other Municipal Spending Priorities
A new empirical study from UC Berkeley Professor Sarah Anzia uses reported financial data for 219 cities from 2005 to 2014 to study the magnitude and effects of rising pension costs for municipalities. The study finds that 85% of the cities in the sample saw pension costs rise over the 10-year period, with an average increase in costs of 59% over that time. Anzia also connects rising pension costs with reduced government employment. Reason’s Marc Joffe examines this study’s findings and emphasizes the importance of these empirical results.
News Notes
New Study on State Pension Funding Gaps: Pew Charitable Trusts recently released their annual report on the status of all state-level pensions. The study finds that state pensions reported a cumulative funding gap of $1.4 trillion, which is an increase of $295 billion from the previous year. They analyze the drivers of the increased pension debt, namely investment shortfalls, assumption changes, and net amortization. They also compare pension costs to annual operating cash flows for states and provide detailed state-level data. The full study is available here.
Unreleased Report Finds $15 Billion Unfunded Liability for L.A. Schools: A recent financial report from the Los Angeles Unified School District shows that the district’s Other Post-Employment Benefits (OPEB) program is costing a great deal more than previously reported. According to the report, LAUSD is facing $15 billion in unfunded OPEB liabilities, which amounts to over $30,000 per student. This amount is up by $1.4 billion from the 2015 report. The school district can expect this newly reported liability to be reflected in the next financial report of the current fiscal year. Additional information is available from Reason here and here.
Quotable Quotes on Pension Reform
“It is correct that lower actuarial assumptions means that the systems require more money for future payouts to beneficiaries. What is most important, however, is that the actuarial assumptions are realistic. In fact, the board’s number one responsibility is to set the actuarial rates on investment returns, payroll growth, and inflation. These three numbers are very important because they determine the actual liability and required actuarial payments by the legislature for state employees and employees of the cities and counties.
When the new KRS Board was appointed in 2016, one of the first things we did was to undertake an examination of 10-year historical rates for these three important assumptions. We were shocked to find that the actuarial assumptions used by the previous Board were 30% – 60% higher than the actual historical averages.”
— Kentucky Retirement Systems Chairman John Farris, “Sometimes the Kentucky pension system truth is painful,” The Lane Report, March 31, 2018.
“Pensions are made more generous—with high accrual rates, low retirement eligibility ages, generous cost of living provisions—as a means of providing more generous compensation to state and local employees, without actually needing to pay anything from the current year’s budget. Costs are deferred until well after current legislators have themselves retired. Fundamentally, that’s what’s going on in Kentucky: the state’s governor, Matt Bevin, has now recognized the importance of funding pensions, and is maybe a bit embarrassed at the state’s tied-for-last-place pension funding status, but because the past generosity of pensions had been effectively borrowing from future generations, even if without the explicit label of “debt,” there is no money available to shift into better present-day compensation instead.”
—Elizabeth Bauer, “Why Public Pension Pre-Funding Matters,” Forbes.com, April 3, 2018.
“Oregon—like many other states and cities, including New Jersey, Kentucky and Connecticut—is caught in a fiscal squeeze of its own making. Its economy is growing, but the cost of its state-run pension system is growing faster…The state is not the most profligate pension payer in America, but its spiraling costs are notable in part because Oregon enjoys a reputation for fiscal discipline. Its experience shows how faulty financial decisions by states can eventually swamp local communities.”
—Mary Williams Walsh, “A $76,000 Monthly Pension: Why States and Cities Are Short on Cash,” The New York Times, April 14, 2018.
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 or on Twitter @ReasonReform. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to zachary.christensen@reason.org.
Published by the Pension Integrity Project at Reason Foundation
Edited by Zachary Christensen, Policy Analyst, Reason Foundation
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Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.