Pension Reform Newsletter: California’s Risk, Reforms for New Mexico, Arizona’s Credit Upgrade, and More
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Pension Reform Newsletter

Pension Reform Newsletter: California’s Risk, Reforms for New Mexico, Arizona’s Credit Upgrade, and More

Plus: Why millennials should worry about public pension debt, how overly optimistic investment return assumptions are hurting Florida, and the latest on Louisiana's pension system for teachers.

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 

  • Weighing In on Proposed Reforms for New Mexico’s Pension System
  • California’s Pensions Should Keep an Eye on Risk
  • Louisiana Teachers Need Comprehensive Pension Reform
  • Credit Rating Upgrade Doesn’t Clear Arizona of its Pension Problems
  • Florida’s Pension Making Adjustment to Return Assumption
  • Pension Shortfalls Affect Millennials More than Most

News in Brief

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk 


Articles, Research & Spotlights

New Mexico Needs Pension Reforms, Shared Sacrifice to Pay for Promised Retirement Benefits

Recommendations from the New Mexico Public Employees Retirement Association’s (PERA) Pension Solvency Task Force advocate for several steps that would steer the pension fund to a path that is less perilous than its current trajectory. In this commentary, Reason’s Andrew Abbott, Anil Niraula and Leonard Gilroy explain the long-term benefits that would come from these policies. They conclude that the changes, which seek a shared sacrifice across both members and taxpayers, would be in all stakeholders’ best interests going into the future.

» FULL ARTICLE

California’s Pension Systems Need to Continue Reducing Risk

In recent years, two of the nation’s largest public pension systems, CalPERS and CalSTRS, sent a message to the rest of the country by reducing their assumed rates of return to 7 percent, rates lower than the national average. The latest year of returns supports the prudence of this move, as they reported gains of 6.7 percent and 6.8 percent respectively. But market projections indicate that upcoming returns could be well below the expectations of the California systems, marking a need for continued reduction in expectations. In an opinion piece in the Orange County Register, Reason’s Leonard Gilroy and Zachary Christensen explain the risk still facing CalPERS and CalSTRS. They advise that the systems’ managers ought to act sooner rather than later to protect the fiscal health of the state, as well as the retirement security of its public workers.

» FULL ARTICLE

Slight Improvement, But Same Story: Louisiana Teachers’ Pensions Are Still in Trouble

The Teachers’ Retirement System of Louisiana (TRSL) reported good investment returns in 2018, which resulted in a reduction of $200 million for the system’s unfunded liabilities. The one-year shift is undoubtedly a positive development, but it will take more than one good year to get the teachers’ system out of its $10.3 billion hole. In an effort to convey the challenges facing TRSL in their entirety, Reason’s Anil Niraula and Steven Gassenberger revisit an analysis on the sources of the system’s growth in pension debt. They find that the pension’s managers need to secure the future of the system by adopting more conservative assumptions going forward.

» FULL ARTICLE

Credit Rating Upgrade Doesn’t Clear Arizona of its Pension Problems

According to an update from Arizona’s Governor, Doug Ducey, Moody’s Investors Service will be increasing the state’s credit rating from Aa2 toAa1, placing Arizona in the second-highest possible classification. Among the reasons for this upgrade, Moody’s cited below-average pension liabilities. The news is clearly a positive for The Grand Canyon State, but the development ought not be interpreted by policymakers as a sign that Arizona’s pension woes are behind them. As explained by Reason’s Steven Gassenberger, the state’s pension systems still face significant funding shortfalls, and many of the problems that created the current unfunded liabilities still exist.

» FULL ARTICLE

Florida’s Pension Debt to Rise As It Lowers Assumed Rate of Return to More Realistic Levels

After years of warning from its own actuarial consultants, plan managers of the Florida Retirement System (FRS) have decided to lower their assumptions on investment returns. The system recently announced that it will lower its assumed rate of return from 7.4 percent to 7.2 percent. While this is a move in the right direction, it is still above the amount advised by the actuaries watching over FRS. In this commentary, Reason’s Raheem Williams, Zachary Christensen, and Steven Gassenberger outline the dangers in maintaining overly optimistic assumptions when it comes to pension management, explaining that FRS will continue to underestimate its pension obligations and fall short in annual contributions until it adopts more realistic assumptions.

» FULL ARTICLE

What Pension Debt Means to Millennials

Most millennials aren’t likely to be concerned about the growing costs and the widening of funding shortfalls in public pensions, but these issues will impact their lives much more than any previous generation. Underfunded pensions represent debts that will eventually need to be paid, either through higher taxes or reduced services, and much of those costs will be experienced by the younger generation down the road. Reason’s Jen Sidorova describes the inevitable costs of underfunded pensions, and how funding shortfalls today add a burden to the pocketbooks of younger people.

» FULL ARTICLE

News in Brief

New Report Uncovers Shortcomings for Teachers in Non-Social Security States: Several states—15 in total—have elected that their public workers not participate in Social Security, making up for the lack of this benefit through their standard pension plan. As a result of this option, nearly 40 percent of all public K-12 teachers depend fully on the state-managed system. Legislation from 1990 requires that the benefits provided in lieu of Social Security at the very least match the level of benefits they could have had through the federal program, but a new report from TeacherPensions.org finds that some states and cities may be falling short on this standard. The report advises Congress to take a closer look at the current standard to ensure teachers are receiving sufficient retirement benefits. The full report is available here.

Paper Explores Options for Annuitizing Defined Contribution Accounts: Defined contribution retirement plans offer several options for benefit distribution at the time of retirement. One effective yet underused method for ensuring steady payments throughout one’s entire retirement is to use the accrued funding to purchase an annuity, but there are several different types of annuities from which to select. In this paper, the Center for Retirement Research (CRR) examines a few different annuity options. The center compares immediate annuities, deferred annuities, and additional Social Security through delayed claiming, identifying the strengths and weaknesses of each option. The full paper is available here.

Analysis Highlights the Importance of Pre-Funding Pensions: Recent academic research papers argue that governments need not pre-fund pension benefits as they do today, that striving for full funding is not necessary and that the priority should instead be to stabilize the growth of debt relative to available funds (i.e. the tax base). In response to this assertion, University of Arkansas pension experts Robert Costrell and Josh McGee perform an analysis on the contributions and unfunded liabilities for CalSTRS under the two methods of pension fund management (the traditional closed amortization method and the proposed open amortization policy with stabilized pension debt). They find that perpetually rolling over the system’s pension debt—as some recent papers have suggested—would dramatically increase the risk of reaching a point where the fund is out of money. The full analysis is available here.

Policy Brief Illustrates the Real-World Results of Pension Crowd-Out: Growing pension costs in public education are making it more difficult to find the funding for other priorities like teacher pay raises or classroom improvements. Most states are experiencing serious crowd-out in school funding due to ever-increasing payments on unfunded pension liabilities, but the actual effect of this problem is difficult to grasp. This new policy brief from Edunomics Lab at Georgetown University makes leaps in communicating the real-world costs pension debt imposes. The authors accomplish this by expressing annual pension debt payments by the number of students and teachers individually in six states. Using this method, they are able to show the money that could be available for teacher salary increases if the pension debt were already paid off. The full brief is available here.

Quotable Quotes on Pension Reform

“This is a crisis no one wants to solve, at least not quickly. The Chicago Teachers scheme is aiming for 90 percent funding, but not until 2059—long after many retired members will have died. New Jersey’s teachers’ scheme is not scheduled to be fully funded until 2048. Such promises might as well be dated ‘the 12th of never’. The bill for taxpayers seems certain to rise substantially. For the states with the biggest pension holes, political conflict is in store.”

–“America’s Public-sector Pension Schemes Are Trillions of Dollars Short,” The Economist, November 14, 2019. 

“The decadelong bull market has buoyed the holdings of public pensions, whose median returns averaged 8.57 percent a year for the 10 years ending in the third quarter, according to Wilshire TUCS. These retirement funds still face significant shortfalls because many pension funds have relied on overly optimistic investment-return targets that kept annual contributions low.”

–Heather Gillers, “Public Pension Plans Continue to Shift Into U.S. Stocks,” The Wall Street Journal, November 5, 2019.

“What I see is this is that our credit rating is vulnerable because of the assumptions and the methodologies that we’re using that are inconsistent with what they say are prudent and responsible approaches to funding the pension.”

–Head of the State Division of Bond Finance Ben Watkins on the recent decision to lower FRS return assumption, quoted in Lloyd Dunkelberger, “Keeping Florida’s Pension Fund Financially Healthy Won’t Be Cheap,” Florida Phoenix, November 6, 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 and @ReasonPensions. 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

Zachary Christensen is a policy analyst for Reason Foundation's Pension Integrity Project.