Pension Reform Newsletter

Pension Reform Newsletter – January 2015

Millennials & Pensions, What caused increases in UAAL, Government lobbying against new pension rules, and more

This newsletter highlights articles, research, opinion, and other information related to public pension problems and reform efforts across the nation originating from or aggregated by Reason Foundation. To find previous editions, please visit http://reason.org/newsletters/pension-newsletter/.

Articles, Research & Spotlights

  • Millennials & Pensions – Do They Know Public Pension Systems Need Reform?
  • 10 Things the New GOP Congress Should – and Can! – Do
  • What Caused Increases in Public Pensions UAAL?
  • Government Lobbying Against New Pension Rules Does Not Align with Public Interest
  • Jerry Brown’s Legacy Depends on Focus He Doesn’t Have Yet
  • CalPERS Pension vs. Social Security Benefit
  • Unsustainable Risk Taking by Public Pensions

Quotable Quotes on Pension Reform

Access to the Pension Reform Handbook

Contact the Pension Reform Help Desk

 

Articles, Research & Spotlights

Millennials & Pensions – Do They Know Public Pension Systems Need Reform?
By Lance Christensen, Reason Foundation

After the midterm election results, there has been a lot of talk about the young people who didn’t turn out to vote. And the conventional wisdom has been that since they helped elect President Obama twice, they’ll continue to help elect Democrats. But what about all that debt piling up on their backs?

The non-partisan Legislative Analyst’s Office predicts $340 billion in debt, deferred payments, pension costs and other liabilities will be on California’s balance sheets for years to come. Gov. Jerry Brown’s latest budget dedicates just over $10 billion to pay down this debt, barely making a dent in the problem.

In total, taking the public statements of all the state systems at face value, the California defined benefit pension system had $142.7 billion in unfunded liabilities in 2012 (the figure for 2013 is not available as CalPERS has not provided the data). The aggregate funded ratio for the whole system in 2012 was 77 percent, compared to 90 percent in 2003. In 2013, the state only paid 65.6 percent of their aggregate annual required contributions.

While state government retirees collect handsome guaranteed pensions, young taxpayers will foot the bill. This has particularly serious ramifications for the millennial generation, who are sinking under the weight of public debts and obligations made by people years before they were even born.

To read the full article, go here.

10 Things the New GOP Congress Should – and Can! – Do
Editorial Staff via Reason Magazine February 2015 issue

There’s something about holding the reins of power that induces amnesia. So it’s a safe bet that when the 114th Congress convenes on Capitol Hill in January, Republican pre-election commitments to small government, civil liberties, and bureaucratic reform will quickly yield to the inevitable squabbles of a classic gridlock scenario: a lame-duck Democratic president, a newly empowered (but not veto-proof) GOP majority in the House and Senate, and a grumpy electorate that seems to be voting against politicians instead of for them.

But even with the added distraction of a presidential primary season already wheezing into gear, there are several concrete and long-overdue steps that lawmakers can take to expand the scope of human freedom and prosperity. So in the New Year’s spirit of helpfulness, Reason is offering the new Congress a 10-point list of passable policies that would help make the country more free, fair, and fun:

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7. Fix government worker pensions: Congress should help reform state and local pension systems, which have amassed more than $4 trillion in unfunded liabilities. Useful changes to policy would include amending the Internal Revenue Code to allow government workers to switch to 401(k)-style defined contribution retirement plans if their employers create them (like the federal government did decades ago), prohibiting “double dipping” of both pay and pension benefits, requiring transparent reporting of pension costs and payments, and denying access to federal tax-exempt bonds to state and local governments that borrow in order to make pension debt payments. These changes would help prevent more pension system abuse by government workers and support state and local governments trying to reform the mistakes of the past.

To read all ten policy prescriptions from Reason Magazine’s editorial staff, go here.

What Caused Increases in Public Pensions UAAL?
By Truong Bui, Reason Foundation

How did public pension plans become underfunded? A recent study by the Center for Retirement Research at Boston College provides some insights to this question. Based on the data on 150 state and local plans in the United States, the study analyses five major factors that lead to changes in unfunded actuarial accrued liability (UAAL):

  • Investment returns
  • Contributions
  • Deviations from actuarial assumptions
  • Benefit changes
  • Assumption changes

The public pension plans are divided into three groups: “Good”, “Average”, and “Bad”, according to their average funded ratios over the 2001-2013 period. The study finds that, across the three types, lower investment returns’ than assumed was the largest factor behind increases in UAAL. Shortfalls in contributions were the next major factor. However, bad plans’ contributions fell much further short of the normal cost plus interest on unfunded liability than those for the good plans. Also, bad plans’ actuarial experiences significantly deviated from their assumptions, compared to the average and good plans. These facts suggest that discipline in pension funding and reliable actuarial estimates are what set well-funded plans apart from poorly-funded ones.

To read more about this, go here.

Government Lobbying on Pension Rules Does Not Align with Public Interest
By Truong Bui, Reason Foundation

Governmental Accounting Standards Board (GASB) pronouncements 67 and 68, despite their limitations , are expected to bring about some improvements in the way governments report pension liabilities. As a result, public pension plans are predicted to report higher unfunded liabilities as the new standards are phased-in. A recent paper at Harvard Business School examines the relationship between states’ lobbying against the new rules and their finances, as well as how the lobbying aligns with public interest.

The paper finds that those states that oppose the liability increasing provisions of the new rules tend to have worse pension funding and assume higher discount rates. Also, those states are more likely to have higher deficits and face stricter balanced-budget restrictions. There is also evidence that opposing states are under stronger union influences. Financial statement users’ support for these GASB standards is positively correlated with the magnitude of pension underfunding and state budget deficits. This means the government lobbying is in conflict with public interest.

To read more about this, go here.

Jerry Brown’s Legacy Depends on Focus He Doesn’t Have Yet
By Steven Greenhut via Reason.com

Pundits who have debated how Brown will spend that capital had their questions answered. He will take two approaches – one somewhat conservative and the other more radical. The governor says he will keep the lid on government spending and long-term fiscal liabilities, while pursuing an ambitious climate-change agenda designed to slash the state’s “carbon pollution” footprint and prod the rest of the world into following suit.

Given the strong Democratic tilt of the state’s politics, the more conservative fiscal ideas were not as heartily received inside the chambers as the progressive part of his agenda. “My plan has been to take them on one at a time,” he said, referring to California’s unfunded pension and other liabilities. “For the next effort, I intend to ask our state employees to help start pre-funding our retiree health obligations, which are rising rapidly.”

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Dan Pellessier, president of California Pension Reform, touches on the big questions: Will a lame-duck Brown finally take on public-sector unions and propose deep and difficult reforms to deal with those unsustainable promises? Or will he place his real time and energy into expanding the state’s environmental regulations? The answers will determine his legacy.

To read the full article at Reason.com, go here.

CalPERS Pension vs. Social Security Benefit
By Truong Bui, Reason Foundation

Is a California Public Employees’ Retirement System (CalPERS) pension as modest as its supporters suggest? The answer is no, according to Robert Fellner at the California Policy Center. In this article , Fellner compares CalPERS pension benefits with Social Security benefits, based on different final salary levels rather than looking at only the average benefits. He finds that, given the same level of final salary, CalPERS benefits are up to five times greater than the Social Security payouts.

Specifically, CalPERS retirees with a pensionable compensation of $117,000 or more received an average pension of $126,833 in 2013. Meanwhile, a comparable private sector retiree only receives $26,292 in the annual Social Security benefit. Though the gap is reduced with a lower final salary, CalPERS benefits are almost always significantly higher than Social Security payouts at comparable salary ranges.

To read the blog, go here.

Unsustainable Risk Taking by Public Pensions
By Truong Bui, Reason Foundation

In a recent article in the Wall Street Journal, Andrew Biggs shows the bleak picture of public pensions’ risk taking. Biggs points out that many major public pension plans hold substantially more risky assets than they should. For example, California Public Employees’ Retirement System (CalPERS) invests 75 percent of its portfolio in stocks and other risky assets, while a typical participant of the plan is supposed to hold only about 38 percent risky assets. Public plans in other states are not too different: Illinois holds 75 percent in risky assets; New York state and local plan 72 percent; Pennsylvania 82 percent; New Mexico 85 percent.

Defenders of this practice often argue that public plans can afford to take more risks because they have longer investment horizons. This is called “time diversification”: the idea that time itself can diversify risks because in the long run investment losses tend to be made up by inevitable gains. The idea however is widely rejected by economists, and most economists agree that investment risks increase, not decrease, with time. Biggs has already discussed this myth in a separate paper here. Besides, many public plan managers take more risks as they believe doing so reduces pension costs by decreasing required contributions. This is again fundamentally flawed, since more risk taking merely shifts the costs to future taxpayers through contingent liabilities.

To read more about this, go here.

 

Quotable Quotes on Pension Reform

“The unwillingness of bankrupt municipalities to address the pension problem does not mean the pension problem will go away. The city will continue to see escalating pension costs and perhaps even growing unfunded liabilities should it be unable to pay the full contribution.”
Riverside Press Enterprise Editorial Board

“As traditional defined benefit pensions more and more go the way of the dodo, it is surprising to learn that one type of defined benefit plan is gaining momentum, having tripled in size since 2006. Not only that, but the growth of these plans, known as cash balance plans, is primarily attributable to the small-to-midsize retirement plan market.”
Frances Denmark, senior writer, Institutional Investor

“The pension crisis might not be one solution, but it’s multiple solutions. And we have to attack it that way.”
Mike Tobash, member of the Pennsylvania House of Representatives

“I go to Nordstrom’s and buy $10,000 worth of clothes, which I charge to my credit card. At month’s end, my credit card statement shows a balance of $10,000 and after paying other bills I have $100 remaining for the minimum monthly credit card payment. Under the old pension accounting rules, I have $100 of expenses and no debt. Under the GASB 68 rules I have expenses of $10,000 and a debt of $9,900.”
Bill Monnet, member of the Citizens for Sustainable Pension Plans

“Insofar as public unions secure for their members better pay, more generous benefits, and work rules shielding them from management discretion government doesn’t perform as well-and, consequently, neither do Democrats. Therefore, some Democrats are under pressure to take policy actions their union allies oppose. But taking such action puts them at odds with the most powerful and best-organized segment of their coalition.”
Daniel DiSalvo, assistant professor of political science, Colin Powell School at the City College of New York

“Declining participation and factors like the Great Recession have created a new reality for Taft-Hartley multiemployer plans wherein many of them are substantially underfunded.”
Joseph T. Hansen, International President, United Food and Commercial Workers International Union

 

Access to the Pension Reform Handbook

For those interested in the process and mechanics of pension reform, Lance Christensen and Adrian Moore published a comprehensive starter guide for state and local reformers. This handbook aims to capture the experience of policymakers in those jurisdictions that have paved the way for substantive reform, and bring together the best practices that have emerged from their reform efforts, as well as the important lessons learned.

To access the handbook, go here.

 

Contact the Pension Reform Help Desk

Reason Foundation set up a Pension Reform Help Desk to provide 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.

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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 lance.christensen@reason.org.

Lance Christensen
Director, Reason Pension Reform Project
Editor

Lance Christensen is the former director of Reason Foundation's Pension Reform Project.