Pension Reform Newsletter — August 2018
© Sean Pavone |

Pension Reform Newsletter

Pension Reform Newsletter — August 2018

Texas teachers’ pension lowers assumed rate of return, pension obligation bonds a risky alternative to meaningful reform, and more.

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 
    • Texas Teachers’ Pension Lowers Assumed Rate of Return
    • Reason Event Promotes Financial Transparency
    • Pension Obligation Bonds a Risky Alternative to Reform
    • Local Agency Exits from CalPERS
  • News in Brief
  • Quotable Quotes on Pension Reform
  • Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Texas Teacher Pension System Lowers Its Investment Return Assumption

Texas’ Teacher Retirement System (TRS) took a prudent step toward improved solvency this past month when its board decided to lower its assumed rate of return from 8 percent to 7.25 percent. This action reflects trends seen around the nation, as fund managers are adjusting to projections of lower long-term returns. Some Texas teachers have expressed apprehension to the change and worry that the lower assumed rate will degrade the stability of the plan. Reason’s Marc Joffe addresses these concerns in a recent commentary, explaining that the change will not hurt the plan’s ability to provide a reliable retirement for Texas teachers. To the contrary, the lower rate is a necessary step that will protect the plan from future funding problems.

Making Government Documents Machine-Readable to Improve Transparency and Accountability

Reason Foundation is working to improve financial transparency in state and local government by promoting a transition to issuing financial reports as machine-readable documents instead of PDFs, which would raise the public sector’s reporting standards to match what the private sector has had for over a decade in order to streamline data acquisition and simplify fiscal policy analysis. Earlier this year, Reason helped craft legislation in Florida that requires financial reporting in iXBRL—a machine-readable format—for local governments starting in 2022. This month, Reason held an “XBRL Data Demo Day” in St. Petersburg, Florida, connecting public officials with companies that integrate financial statements with this format. In a new article, Reason’s Marc Joffe describes this event and other positive developments, including a newly established industry working group and model legislation for this type of reform in other areas.

Governments Issuing Pension Obligation Bonds Risk Worsening, Not Improving, Their Financial Shape

Facing rising pension costs, Chicago is considering turning to pension obligation bonds (POBs) to help improve the woeful 28 percent and 47 percent funded ratios of its two largest public pension plans. Several other state and local governments have turned to this method in the past, and some rendered positive results. Most instances, however, tell a story of POBs weakening a state or city’s fiscal standing, with New Orleans, Detroit, and Stockton serving as notable cases of this. Reason’s Anil Niraula recently detailed the risks and benefits involved in turning to POBs to fund pension plans, using analysis from the Center for Retirement Research to show that POBs can, depending on several factors, hurt more than help in improving the fiscal health of public pension plans.

Local Agency Exits from CalPERS

After a long and costly process, the Herald Fire Protection District (HFPD) left the California Public Employees’ Retirement System (CalPERS). Following just over two decades of membership in the nation’s largest public pension system, the HFPD board found CalPERS to be much too expensive and lacking in the needed flexibility to meet the district’s unique needs. The decision to leave CalPERS was made in 2016, but the procedure for exiting the system took two and a half years. Complicating the issue further, the district had to take out a large loan to be able to afford the exit cost. In this commentary, Reason’s Marc Joffe recounts the arduous journey taken by the HFPD and questions if it is time to reform policies to make it easier for smaller entities to leave larger plans.

News in Brief

Study Explores the Value of Teachers’ Pensions: New research from AEI scholar Andrew Biggs attempts to offer deeper insights on the value teachers derive from pensions by combining two analytic approaches. The first analysis rediscounts pension liabilities with a risk-free rate to reflect the guaranteed nature of promised benefits to teachers. This analysis reveals liabilities much higher than those typically assumed by pension plans, meaning pensions may be much more valuable to teachers than currently acknowledged, and may require higher-than-anticipated annual contributions. The second analysis explores the contributions and value of pensions for teachers over time, and previous studies have found that teachers with shorter careers can end up contributing more than they receive out of their pension. In bringing these two analyses together, however, Biggs suggests that when liabilities are rediscounted with the risk-free rate—rendering promised pension benefits higher than previously assumed—then even some teachers with shorter careers may ultimately get more out of the retirement plan than they put in. The full paper is available here.

Study Tests the Value of Fees to Asset Managers: In a new study, the Center for State and Local Government Excellence uses 83 of the nation’s largest public pension plans to analyze the use of asset return benchmarks, which are used to evaluate relative success in asset management. The research finds that pension plans use a wide variety of methods for benchmarking, which makes it difficult to compare one plan to another. Nonetheless, it finds that two-thirds of plans outperformed their given benchmarks from 2002 to 2016. Interestingly, in an analysis of plan fees paid to asset managers, the study finds a correlation between higher fees and poorer relative performance in reaching benchmarks. This negative relationship appears to be most common with alternative asset classes. The full study is available here.

Tying Pension Debt to Property Value: Under the assumption that unfunded pension obligations are likely to be paid at least in part through property taxes, Rob Arnott and Lisa Meulbroek perform a state-level analysis in a Wall Street Journal commentary. By tying unfunded liabilities to household numbers, they find that every household’s share of state pension debt ranges from $30,000 to $180,000, depending on the state. They also apply their analysis to the values of property nationwide, finding that unfunded state and local pension obligations equal 20 percent of real estate values, on average. The full commentary is available here.

Pension Costs Driving the Rise of Illinois Property Taxes: A new study from the Illinois Policy Institute attributes much of the state’s rising taxes on property to the growing cost of pension plans. Over the past decade, Illinois citizens have seen their property taxes increase by an average of 52 percent. According to state and local government records, more than half of that additional revenue was allocated toward skyrocketing pension costs. The study finds that expanding pension costs are crowding out spending on schools and other critical services, which is likely a contributing factor to Illinois’ sluggish growth in property value. The full study is available here.

Quotable Quotes on Pension Reform

“Our primary responsibility is to PERS members. It’s not to employers or legislators. We need to make sure the benefits that have been contracted can be paid for. The math is the math, even if it’s painful for employers. A lot of people think we set benefits. We don’t. We’re strictly making sure that the benefits the Legislature has offered are adequately funded. A lot of states play games with funding, but this board has to be really prudent to make sure the funding is there for future generations.”

–Chairman of the Oregon PERS Board John Thomas on the purpose of the board, quoted in Ted Sickinger, “PERS: Questions for the Outgoing Chair of Oregon’s Public Pension System,” The Bulletin, August 13, 2018.

“Rating agencies know we’ve got only a 6.1-percent, 20-year earnings average, so we’re not fooling anyone. This is another example of understanding what needs to be done and doing something about it. We’ve lowered the assumed rate of return. I think we’re going to have a hard time earning 7 percent over the next 20 years.”

—North Carolina State Treasurer Dale Folwell, quoted in Michael Abramowitz, “Treasurer: Reality-Based Management Healthy for State Pension Fund,” The Daily Reflector, August 15, 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

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

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.

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