Pension Reform Newsletter — December 2018
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Pension Reform Newsletter

Pension Reform Newsletter — December 2018

California’s rising taxes linked to rising pension costs, pension woes contribute to Vermont credit rating downgrade, 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 Teacher Pension Analysis Reveals Solvency Challenges
  • California’s Rising Taxes Linked to Rising Pension Costs
  • Local California Governments Turning to Pension Obligation Bonds
  • Pension Woes Contribute to Vermont Credit Rating Downgrade
  • Birmingham Needs to Focus on Pension Reform

News in Brief

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk


Articles, Research & Spotlights

New Report: Assessing the Solvency of the Teachers Retirement System (TRS) of Texas  

Texas’ largest public pension, the Teacher Retirement System (TRS), plays a critical post-employment role for the state’s educators and is rightly considered a significant priority for state policymakers and citizens alike. But the system has seen $35.4 billion of unfunded liabilities mount over the past two decades, creating an urgent need for meaningful reform guided by a clear understanding of existing problems. To that end, Reason’s Pension Integrity Project partnered with the Texas Public Policy Foundation to release a policy brief and series of one-pagers detailing the pension solvency challenges currently facing TRS. The analysis reinforces the importance of well-informed policy decisions when dealing with a pension system so essential to the future of public education in Texas.

» FULL BRIEF

» ONE-PAGERS

For Californians, Are Rising Taxes Going to Services or Pensions?

This November, over a hundred Californian municipalities requested more from their taxpayers through ballot measures, many of which were represented as necessary increases for the expansion of public services. Municipal budgets, however, reveal that an increasing amount of public funds are being consumed by growing pension costs. Reason’s Steven Gassenberger and Jen Sidorova coauthor this commentary that explores the growing costs pensions are placing on California cities and counties. They examine several different municipalities that, while facing similar fiscal obstacles, are taking different approaches in explaining to their taxpayers why they are asking for more public funding.

» FULL ARTICLE

Local Governments Beware: Pension Obligation Bonds Are a Risky Response to Rising CalPERS Bills

Amid rising pension costs, several local California governments are attempting to take advantage of the relatively low interest rates offered through public obligation bonds (POB) to close pension funding gaps. While this type of policy can work under the right circumstances, it exposes these local governments and their citizens to the real risk of even higher costs. Reason’s Marc Joffe takes a close look at a few California cities and counties that are turning to POB issuance to shore up their pension debts. He explains that, when going down this path, timing can be everything, and the time may not be right for these local governments.

» FULL ARTICLE

Moody’s Downgrade Highlights Necessity for Vermont Pension Reform

Last month’s general obligation bond rating downgrade ought to spark concern among Vermont taxpayers and policymakers. Among the primary concerns triggering the downgrade is the state’s growing pension debt. In a recent commentary, Reason’s Andrew Abbott and the Ethan Allen Institute’s David Flemming describe the looming policy obstacles Vermont faces and the importance of righting the state’s pension status. They lay out an opportunity for improvement, showing that the state can—like Michigan—use meaningful pension reform to achieve a higher credit rating.

» FULL ARTICLE

Don’t Ignore Birmingham’s Pension Problem

Birmingham, Alabama Mayor Randall Woodfin recently expressed his commitment to fixing the city’s chronic underfunding of its pension for public employees. After more than a decade of underpayments into the system, the city’s pension now stands at just 73.43% funded. The mayor is homing in on ways to begin paying the full required annual contribution, but failing to reform the system’s assumptions will likely continue to cause more funding problems in the future. In a new commentary, Reason’s Raheem Williams details the challenges currently facing Birmingham’s underfunded pension system and recommends that city officials seek a comprehensive solution to fix all the various problems currently holding the retirement plan back.

» FULL ARTICLE

News in Brief

Kentucky’s Pension Reform Struck Down in Court: Earlier this year, Kentucky Governor Matt Bevin signed into law Senate Bill 151, which enacted significant and meaningful changes to the state’s pension system. Reason commented on these reforms, concluding that, despite the questionable process, the changes represented a positive step toward achieving long-term solvency for the state’s retirement plan. Last week, Kentucky’s Supreme Court struck down the bill on procedural grounds, and a subsequent special session of the legislature failed to again push the bill forward. Reason’s analysis on the failed reform is available here and the court’s ruling on the bill is available here.

Interactive Data Visualization of State Pensions: Pew Charitable Trusts has released a new interactive website that provides access to their data research on the pensions of all 50 states. This new tool uses data from 230 public pension plans administered at the state level and allows the reader to see a wide variety of indicators of financial health from the past 15 years. With its various visualizations, the website shows comparisons between states and national averages. The interactive tool is available here.

New Paper Finds Limits on Work Hours Don’t Reduce Benefits: Some public pensions place restrictions on the amount of benefits that can be collected at retirement. Another method to control the level of benefits distributed is to limit the number of hours an employee can work, thus putting a limit on the amount of pay that can be included in a plan’s benefit calculation. A new working paper from the National Bureau of Economic Research examines this method, finding that hour limits reduce part-time work, but have no significant impact on final benefit calculations. The summary and full paper are available here.

Quotable Quotes on Pension Reform

“You can’t count on risky investments to make up for years of under-funding.”

–Allison Schrager, “Public Pensions Get Desperate,” Allison’s Ode to the Second Movement (e-newsletter), December 17, 2018.

“[T]he pension math hasn’t changed. In fact, it’s getting worse. Barring a major Santa Claus rally in financial markets, if PERS’ investments finish the year where they are today – a 1.5 percent overall return – they will fall well short of the system’s assumed return of 7.2 percent. That means the system’s unfunded liability will grow by another $3.5 to $4 billion, to $26 billion.

That amplifies the fact that a good chunk of any tax increase will inevitably be used to pay down the pension deficit, not to buy anything new. Statewide, public employers’ pension costs will increase by $1.1 billion in the next biennium, $680 million of which is attributable to state agencies and school districts funded out of the state general fund. Figure another $700 million rate increase for schools and state agencies in the following biennium. Those aren’t great optics for a tax increase that’s supposed to be funding more school days and smaller classes and mitigating college tuition hikes.”

–Investigative Reporter Ted Sickinger on Oregon’s growing pension costs, “PERS Q&A: Any Chance of Pension Reforms in 2019 and if so What?” Oregon Live / The Oregonian, November 30, 2018.

“Absent reform, teachers’ share of the LAUSD budget will keep shrinking. That’s because, absent reform, retirement costs are a fixed and growing cost while teacher staffing and salaries are variable factors.”

–David Crane, “LAUSD Revenues = $298,000 Per Teacher: Why is so Little Reaching Teacher Staffing and Salaries?Medium.com (blog), December 12, 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, Senior Policy Analyst, Reason Foundation

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