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
- Reforms Haven’t Helped Florida’s Pension Plan
- Can Washington State Afford a COLA For Its Teachers?
- Examining Pension Underfunding in Arkansas
- Elizabeth Warren’s Private Equity Proposal Would Hurt Pensions
- How California Can Better Support Its Teachers
News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk
Articles, Research & Spotlights
Reason Analysis: Florida’s Retirement System Still Needs Fixes, Despite Recent Reforms
Many Florida residents depend on the state’s largest public pension, the Florida Retirement System (FRS). While state lawmakers have passed several noteworthy reforms over the past two decades—most notably the establishment of a default defined contribution plan—a newly released analysis from the Pension Integrity Project at Reason Foundation indicates that still much more needs to be done to fully secure the retirement of the sunshine state’s public servants. The report finds two significant challenges the system faces. First, FRS needs to address solvency issues caused by a number of issues, including overly-optimistic market assumptions and amortization methods. Second, they need to address inadequate contributions into the defined contribution plan that are undermining retirement security for state and local government workers.
The High Cost of the Proposed Cost-of-Living Adjustments to Washington’s Pension Plans
Union leaders for Washington state teachers are pining for a one-time cost-of-living adjustment (COLA), claiming it would be a simple way to demonstrate their support for the state’s valuable educators and school employees. But adding such a benefit would not be as simple as the unions would suggest. Simply lumping on a COLA without any additional funding means that a pension system already stuck with $8.4 billion in unfunded liabilities would be saddled with even more debt. In this commentary, Reason’s Ryan Frost details the complexity of this issue, pointing out that one way or another someone needs to pay when any retirement benefit is added.
Examining Pension Underfunding in Arkansas
The Arkansas Public Employees Retirement System (APERS) Board of Trustees is beginning to broach the subject of growing concerns revolving around the state’s underfunding of promised pension benefits. State policymakers would be wise to take action on the issue, according to Reason’s Anil Niraula, as the state is sitting on a $2.28 billion shortfall in funds available for retirement benefits. Niraula’s analysis breaks down the sources of APERS’ pension debt to help identify the largest contributing factors for policymakers to tackle.
Elizabeth Warren’s Private Equity Plan May Harm Public Employees
A plan from presidential candidate Elizabeth Warren proposes to reign in private equity funds, making leveraged buyouts much less profitable. This could potentially bring significant harm to the returns of pension funds, thus jeopardizing the retirement security of teachers, first responders, and other government employees. In a recent article for the California Policy Center, Reason’s Marc Joffe explores some of the unintended negative consequences that could come about if the plan were set in motion.
How California and School Districts Can Help Teachers Save for Retirement
Members of California’s teacher pension plan have the option to supplement their retirement with 403(b) deferred compensation plans, but as designed under California state law, these plans may not be the best option when it comes to returns and affordability because they incentivize investment in insurance products with high commissions and high surrender charges. As Reason’s Marc Joffe recently wrote in the Orange County Register, the state and school districts should be eyeing simple reforms that could enable many more teachers to increase the amount they save for retirement.
News in Brief
New Guide Explains the Importance of Consensus Building While Reforming Public Pensions: A newly released guide from the Governing Institute and the Retirement Security Initiative highlights best practices in promoting and passing effective pension reform. The paper details the challenges many state and local governments face, with sizable pension debts and growing market volatility. Using examples of bipartisan reforms in Arizona, Pennsylvania, Michigan, Houston, and Colorado, the authors demonstrate the variety of policy changes that can help steer a government to better pension funding. They explain the importance of first understanding and communicating the problem so a consensus can develop among stakeholders, as well as the usefulness of stress testing and transparency in the reform process. The full guide is available here.
New Brief Explores the Impact Public Pension Boards Have on Returns: There are several different ways to structure and manage public pension boards, but little is known on how pension fund governance affects the performance of that fund. A new brief from The Center for Retirement Research at Boston College seeks to answer this question. The authors study the key factors that they believe to be influential to board effectiveness—structure, composition, size, and member tenure. Using these factors, they develop a “Board Effectiveness Index” which they use to score various boards of public pension plans. According to their analysis and scoring, there is a positive correlation between more effective boards and higher long-term market returns. The full brief is available here.
Quotable Quotes on Pension Reform
“Out of the public eye, public-sector pension expenditures are quietly and persistently eating into local government budgets. As a result, local government workforces in many places are shrinking. This doesn’t just mean fewer government jobs to go around. It means that all those who rely on local government services are in danger of losing those supports. Many Americans take for granted that their local governments will provide public services like police protection, fire protection, street sweeping and refuse collection. But it may well become harder for local governments to carry out those basic functions — because of rising pension costs.”
–Professor of Public Policy and Political Science at the University of California Berkeley Sarah Anzia, “A Silent Pension Crisis is Eating Away Local Government Services. Here’s What You Need to Know,” The Washington Post, August 5, 2019.
“It is entirely possible for a state or city to properly fund a Defined Benefit pension plan; it just takes discipline, plus either a risk-sharing design or a willingness to suck it up and pay more when the math requires it. It is likewise possible under either a Defined Benefit or Defined Contribution system for the state to promise a retirement benefit that meets its employees needs for adequacy while not overspending.”
–Elizabeth Bauer, “No, Public Pension Reform Experiments Have Not Failed” Forbes.com, August 16, 2019.
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. 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, Senior 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.