Pension Reform Newsletter — July 2019
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Pension Reform Newsletter

Pension Reform Newsletter — July 2019

More reforms in Michigan, evaluating Oregon’s new pension legislation, New Mexico financial experts warn of pension risk, and more.

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 

  • Bills Would Improve Upon Recent Michigan Reforms
  • Evaluating Oregon’s New Pension Legislation
  • New Mexico Financial Experts Warn of Pension Risk
  • Infrastructure Investments Could Potentially Help Pensions
  • SoCal Cities Need to Prioritize Pension Concerns
  • Wisconsin: What a Fully Funded Pension Looks Like

News in Brief

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk


Articles, Research & Spotlights

Proposed Reforms Another Step in the Right Direction for Michigan Pensions

After making major overhauls to improve the solvency of the state’s public school pension system the last two years, Michigan legislators are considering a new group of reforms that would mark another crucial step in securing the state’s pension systems. House Bills 4530 through 4534 would make several policy changes to the ways several state pension plans recognize and pay off pension debt. Most notably, they would require the use of more accurate actuarial assumptions, shorten the amortization schedule for any future accrued pension debt, and require that any payments made below the actuarially required amount are rectified within one year. Reason’s Ryan Frost takes a detailed look at the proposed changes and evaluates the effects that they will have on Michigan’s retirement systems.

» FULL ARTICLE

Examining the Good and Bad in Oregon’s Patchwork Reforms to State Pensions

Oregon’s legislature passed Senate Bill 1049, making several changes to the state’s Public Employees Retirement System (OPERS) anticipated to save between $1.2 and $1.8 billion in employer contributions each biennium. To free up extra funding in the short-term, the bill extends the fund’s amortization schedule by around six years; there are currently around 16 years left to fully pay off the pension debt. The reform also re-routes employee contributions that were going into a hybrid DC plan so they will now go into an account used to fund the DB plan. Reason’s Ryan Frost examines these changes and weighs the costs and benefits associated with the reform for the plan and its members.

» FULL ARTICLE

New Mexico Holds Public Hearings to Gauge Remedies for Persistent Pension Woes

New Mexico lawmakers recently met with actuaries and financial experts in a hearing on the state’s underfunded pension funds. Combined, the state’s public employee and educators pension funds hold an unfunded liability of $18 billion, and experts warn that the funds are in danger of even worse funding woes if market performance does not meet expectations. In this commentary, Reason’s Anil Niraula describes the concerns expressed in the hearing, adding additional illustrative analysis and offering possible options for long-term solutions.

» FULL ARTICLE

New Research Shows Opportunities and Perils of Pension Funds Investing in Infrastructure

A new working paper from Clive Lipshitz and Ingo Walter of New York University evaluates the value of infrastructure investments for public pension funds. This class of investment has good upsides, with relatively high and predictable returns, and looks to be a good source of diversification. The downsides appear to be high expenses and the chance of selecting poor assets. The authors suggest increasing investment share into infrastructure to match allocations in Canada. Reason policy analyst Marc Joffe summarizes these findings and explains what this type of investment strategy could mean for public pension plans.

» FULL ARTICLE

Southen California’s Cities Are Spending Big Instead of Preparing for Next Economic Downturn

With the economy growing and revenues increasing, it is an opportune time for cities in Southern California to protect their budgets and retirement systems from future downturns by paying off pension debts. But many cities are instead using the additional funds for increasing the salaries of public workers and are taking on more risk through pension obligation bonds. In this op-ed, Reason’s Alix Ollivier uses the city of Inglewood to illustrate this concerning pattern, advising that California cities need to make the elimination of their pension debts a higher priority.

» FULL ARTICLE

How Wisconsin Fully Funded Its Retirement System

Among the many state-level pension funds that are struggling to maintain full funding, the Wisconsin Retirement System (WRS) stands out with its funding ratio above 100 percent. Introducing a range of prudent plan design policies and a willingness to respond quickly to changing markets have served the system well and can be directly attributed to the success of WRS. In a new article, Pension Integrity Project intern Kerri Seyfert gives a brief history of WRS, including the key policy decisions that helped to protect the retirement of Wisconsin’s workers, and offers lessons that can inform policymakers in other states.

» FULL ARTICLE

News in Brief

New Paper Seeks to Improve Understanding of Risk in Public Pensions: A new working paper from the Harvard Kennedy School’s Center for Business and Government—with support from Pew Charitable Trusts—summarizes the recommendations from a conference of 40 pension policy experts. While the experts at this conference differed in some areas, all agreed that policies to improve reporting on risk levels would better align incentives and ought to be considered. The paper explains that these measurements of risk should be available to all stakeholders and should guide policy decisions at all levels of leadership. The full working paper is available here.

New Draft for Accounting Standards: The Actuarial Standards Board (ASB) has released updated drafts for revisions to two of their Actuarial Standards of Practice (ASOP). ASOP number 27 establishes standards for economic assumptions when measuring pension obligations. ASOP number 35 deals with demographic and other noneconomic assumptions. ASB is now accepting feedback from the public on these changes in the form of letters. All letters received before September 15, 2019, will be considered in the next drafted version of the standards. The full drafts and contact information are available here.

Paper from Bond Issuer Studies Ways to Identify Municipal Credit Risk: A new white paper from Build America Mutual—a mutual municipal bond insurer—explores methods of recognizing cities and counties that are at a higher risk due to pension obligations. The paper identifies common causes of underfunded pensions and describes the importance of responsible amortization policy. It describes the quantitative and qualitative methods used to analyze the affordability and sustainability of a local government’s pension promises, focusing on one particular factor: funding adequacy. The full white paper is available here.

Quotable Quotes on Pension Reform

“This rising cost of pensions are serious, but, with prudence and cooperation, they are resolvable. CalPERS and our investment team must remain focused on investment returns. Local government needs improved tools to manage the pension cost arc. And we need to deliver on the promises we made.”

– CalPERS Board of Administrators Lisa Middleton “Valley Voice: With Prudent, Diligent Efforts, CalPERS Can Meet Its Obligations to Retirees,” Desert Sun, July 16, 2019.

“A lot of them are just saying that they can’t afford to work for the state anymore — particularly the younger people because they’re not as invested in PERA…They’re (asking): ‘Do I work at the state for 20, 30 years, or do I cut my losses?’”

– Colorado State Union President Skip Miller, quoted in Brian Eason, “Low Pay. Cuts to PERA. For Some State Workers in Colorado, It’s Like the Recession Never Ended.The Colorado Sun, July 8, 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

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