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:
- Michigan Adopts Nation’s Most Innovative Teacher Pension Reform
- Pennsylvania Enacts Major Pension Reform
- Texas Enacts Dallas, Houston Pension Reform Legislation
- Florida to Default New Hires to Defined Contribution Retirement Plan
The Michigan Legislature has just passed a first-of-its-kind, innovative pension reform bill that will provide state teachers with a new set of retirement choices and cap the growth of liabilities in the state’s current, structurally flawed retirement plan. Should Gov. Rick Snyder sign the bill, the Michigan Public School Employee System (MPSERS)—currently only 60% funded with $29 billion in unfunded pension liabilities—will have its most realistic path to solvency in the past two decades.
The reform is grounded in a focus on reducing risk, while stabilizing cost, and preserving choice. New hires will be auto-enrolled in a defined contribution (DC) retirement plan with a default 10% total contribution rate. However, if new teachers would prefer a defined benefit (DB) pension plan, they can voluntarily switch to a new “pension plus” plan that uses very conservative assumptions and short amortization schedules and splits all costs 50-50 between the employee and employer. The defined benefit pension plan includes a unique safeguard mechanism that would trigger closure if the funded ratio falls below 85% for two consecutive years. And to top it off, the reform design improves certain actuarial assumptions and infuses the plan with $250 million in additional contributions to chip away at the pension debt.
» FULL ARTICLE
» MPSERS REFORM ISSUE EXPLAINERS
[NOTE: The Pension Integrity Project at Reason Foundation provided technical assistance to many stakeholders throughout the MPSERS reform process, including the bill sponsors (Sen. Phil Pavlov and Rep. Thomas Albert), legislative leadership in the House and Senate, and many individual legislators. We also provided independent actuarial modeling during the process and offered advice on design concepts to the legislature, the Snyder administration, and the state’s Office of Retirement Services.]
Earlier this month, Pennsylvania Gov. Tom Wolf signed into law pension reform legislation that will offer all new state employees, teachers and school district employees a choice between three different retirement planning options—a full defined contribution (DC) retirement plan or one of two hybrid plans that combine a DC plan with a smaller defined benefit plan. Reason’s Eric Boehm observes that though the reform will not wash away the state’s over $70 billion in unfunded liabilities, it makes several critical changes that will lower costs and risks for taxpayers over time. In a letter to legislative leadership, the Pension Integrity Project writes that the reform will “ensure that the state is able to offer retirement security to its past, current and future employees on a sustainable basis moving forward.”
» FULL ARTICLE
» PENSION INTEGRITY PROJECT LETTER ON PENNSYLVANIA REFORM
The biggest pension crises in the Lone Star State appear to be on a path to resolution, after Texas Gov. Gregg Abbott recently signed bipartisan reform legislation affecting the beleaguered municipal pension systems in Dallas and Houston. For Dallas, the reform legislation aims to fix its ailing Police & Fire Pension System by changing the benefit structure, increasing contributions, and realigning the system’s governance. In Houston’s case, the reform legislation reduces future benefit accruals, makes a variety of funding policy changes, adopts more conservative actuarial assumptions, caps city contributions, and asks voters to approve $1 billion in pension obligation bonds.
» ARTICLE: Dallas Enacts Pension Reform Legislation
» HOUSTON COVERAGE: Pensions & Investments | Texas Tribune
The Florida Retirement System currently has $24.9 billion in unfunded pension liabilities that will be borne by taxpayers over the coming decades, and absent major reform, the state’s pension debt is likely to continue growing. While the legislature chose not to overhaul the retirement benefit design or deal with the pension debt problem head on this session, it did enact a substantive policy change: nearly all new state employees will default into Florida’s previously optional defined contribution (DC) retirement plan, and the current defined benefit plan will become the optional retirement plan. In a recent blog post, Reason’s Leonard Gilroy and Spence Purnell write that the move will reduce the financial risk to the state and taxpayers over time as more new workers enter the DC plan, while preserving the ability of new employees to elect to take a traditional pension benefit if they choose.
» FULL BLOG POST
» RELATED: Even Their Actuary Thinks Florida’s Pension Investment Return Assumption is Wrong
New Moody’s Report Paints Bleak Picture of Unfunded Public Pension Liabilities: A new Moody’s Investors Service report finds that unfunded pension liabilities for U.S. public pension funds are generally expected to continue to rise through 2020, even under optimistic investment return scenarios. In the rosiest scenario—assuming a cumulative investment return of 25% between 2017 and 2019—unfunded liabilities for the 56 public plans analyzed would fall slightly by 1%. By contrast, unfunded liabilities would increase by 15% if cumulative returns totaled 19% over the same period. The full report is available here (registration required).
New Report Card for State Teacher Pension Systems: Earlier this month, TeacherPensions.org and Bellwether Education Partners released a new report analyzing the quality of every state’s teacher pension plan. The report finds that most states are saddled with costly, debt-laden plans where most teachers fail to qualify for good retirement benefits. A total of 41 states received a failing grade, with 9 others receiving either a “C” or “D.” The full report is here.
Fitch Adopts More Conservative Pension Risk Calculations: In a report released earlier this month, Fitch Ratings announced plans to modify the way it calculates defined benefit pension plan liabilities for most state and local governments, lowering its fixed assumed rate of return assumption from 7% to 6%. The move reflects lowered near-term market return expectations amid sluggish economic growth. The Fitch report is available here.
Mercatus Center Issues New GASB 67/68 Critique: The Mercatus Center at George Mason University recently released an analysis of the implementation of the GASB 67 and GASB 68 accounting standards, based on a review of 144 public plans. The authors—Truth in Accounting CEO Sheila Weinberg and Mercatus’ Eileen Norcross—find that while GASB 67/68 were intended to improve the accuracy and transparency of reporting for public sector pension plans, they have had a mixed effect thus far. While the standards more accurately reflect the fiscal health of public plans, there is still room to improve the underlying assumptions used to measure pension obligations. The full report is here.
New Society of Actuaries Report Examines Pension Plan Contributions: A new report from the Society of Actuaries compares actual public pension plan contributions to benchmarks representing the contributions needed to pay down unfunded liabilities for 160 state and municipal pension plans for 2006-2014. Among the findings are that, in 2014, 72% of public plans experienced negative amortization—when total contributions are insufficient to chip away at unfunded liabilities—up from 65% in 2006. It also found that total unfunded liabilities rose by 150% over that period, relative to a 76% increase in employer contributions and a 30% increase in employee contributions. The full report is available here.
Census Bureau Issues Annual Public Pension Survey: The U.S. Census Bureau has released the 2016 data from its annual Survey of Public Pensions, covering public plan revenues, expenditures, financial assets, and membership information across 299 state-level plans and 5,977 local plans. The dataset is available for download here.
“It’s a better system for new teachers. It’s a better system for the taxpayer, and it offers predictability. Hopefully going forward, we’ll be able to drive more dollars into the classroom because of the reforms we’re working on.”
—Michigan State Sen. Phil Pavlov on his recently passed teacher pension reform legislation he sponsored, cited in Jonathan Oosting and Michael Gerstein, “Legislature OKs pension reform over teacher protest,” The Detroit News, June 15, 2017.
“Government must not write checks and expect the next generation to pick up the tab. This alone will not deal with our pension issues, but it’s a start.”
—Michigan State Rep. Thomas Albert on the recently passed teacher pension reform legislation he sponsored, cited in Evan Carter, “Done: With School Pension Reform, State’s Big Pension Liabilities Contained,” Michigan Capitol Confidential, June 20, 2017.
“We’re like a banana republic. We can’t manage our money.”
—Illinois Gov. Bruce Rauner, quoted in Brooke Singman, “Illinois careens into financial meltdown—and not even the lottery is safe,” FoxNews.com, June 20, 2017.
“[California Gov. Jerry] Brown has set a terrible precedent. No doubt his gambit — ie, politicians using citizen funds without citizen approval to make investment bets in order to cover up wealth transfers from citizens to employees — will be noticed by other elected officials.”
—David Crane, “California Elects Not to Pay Down Pension Debt,” Medium.com (blog), June 17, 2017.
“For every one police officer, three-quarters of the next police officer is a pension payment. That is a very scary place to be.”
—Acting Modesto, CA City Manager Joe Lopez on projections that, in eight years, the city will be paying nearly 72 cents in pension costs for every dollar in police officer salary. Quoted in Kevin Valine, “Modesto pension costs expected to skyrocket,” Modesto Bee, May 27, 2017.
“Imagine having a 30-year mortgage and each year, instead of making your mortgage payments and having 29 years of payments left, you simply re-amortize the remaining liability over another 30-year period […] Using this approach, you can manufacture lower amortization payments for yourself, but you will not eliminate the underlying liability […] That’s called open-ended amortization, and despite being an unscrupulous accounting practice, it is widespread among state pension plans.”
—North Carolina State University Assistant Professor Jeff Diebold, quoted in N.C. State University, “Most State Pension Plans Paper Over Unfunded Liabilities” (press release), June 19, 2017.
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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.