Pension Reform Newsletter – June 2018
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Pension Reform Newsletter

Pension Reform Newsletter – June 2018

Volatility in returns, bleak outlook for major school district, Michigan's pension reforms 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 
    • New Reason Study Finds Bleak LAUSD Fiscal Outlook
    • Michigan Takes the Next Step in Pension Reform
    • Volatility in Returns is Impacting Pension Funding
    • Illinois and Michigan Attempt to Balance State and Municipal Responsibility
  • News in Brief
  • Quotable Quotes on Pension Reform
  • Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Reason Identifies Causes and Provides Solutions for LAUSD Pension Woes

The Los Angeles Unified School District (LAUSD) faces major reductions in student enrollments—which reduces the district’s revenue—at the same time that costs from pension and benefit obligations continue to take a larger portion of available funds. Recent audits show that the school district’s pension and benefit liabilities surpass its assets by $5.1 billion, putting the nation’s second-largest school district on shaky footing for the future. In this new Reason study, Lisa Snell, Aaron Garth Smith, Tyler Koteskey, Marc Joffe, and Truong Bui perform a comprehensive analysis on LAUSD’s current fiscal challenges. The study explains trends in student enrollment and details the impacts of these shifts. It also provides an analysis of the factors that are driving the upward trends in the district’s expenditures. The study concludes by offering five recommendations that LAUSD can implement to secure its fiscal security for the future.
» Executive Summary
» Full Study
» Infographic
» Blog Post on Pension Findings

Michigan Takes the Next Step in Fixing its School Employee Pension

Last week, Michigan Gov. Rick Snyder signed into law Public Act 181—also known as House Bill 5355—which is the next critical step in securing the future of the Michigan Public School Employees Retirement System (MPSERS). This reform is a continuation of major steps going back to last year to improve the funding of the plan. The bill establishes a gradual reduction of the assumed rate of payroll growth, which has long been overestimated, resulting in underpayments to the MPSERS. The rate will eventually reach zero and annual payments will henceforth be based on a level-dollar method, which will effectively lock the state’s contributions into the same amount each year.
» News Article on Bill’s Passage
» Reason’s 2017 Testimony and Detailed Analysis of MPSERS

How Return Volatility and Cash Flow Effects Impact Pension Funding

Much of the debate on public pensions centers on assumed rates of return and discount rates. Little is said, however, on the effects that market volatility and cash flow have on a fund’s fiscal health. In an exploration of this concept, Reason’s Truong Bui presents several scenarios to illustrate the major influence of market volatility. He demonstrates that funds with the exact same long-term returns can have vastly different results, in reality, depending on the flow of cash in and out of the fund as well as the timing of good or poor returns. Using advanced stress-testing methods, he shows the wide range of outcomes that every pension fund faces while looking into the future. With this in mind, he advocates that plan administrators adopt similar methods to better prepare their funds for all possible outcomes.
» Full Article

Illinois and Michigan Raise Questions on Municipal and State Responsibility

Several states are wrestling with striking a sensible balance between state and municipal responsibility for local pensions. The city of Harvey will be the first of several Illinois municipalities that will face the implementation of a new law that is meant to promote responsible pension funding by local governments. The law allows the state’s comptroller to intervene in revenue disbursement if there is evidence of sustained underpayment to the municipal police or firefighter pension plans. Reason’s Zachary Christensen explains this increasingly relevant law and examines its effectiveness at balancing fiscal responsibility between municipal and state actors equitably. Meanwhile, Michigan is taking a different approach to a similar problem. To increase municipal responsibility, Michigan enacted new reporting standards that require reports from all local governments regarding pension and retiree health care solvency. Additionally, plans deemed as “underfunded” by the state must submit a corrective action plan. Reason’s Anil Niraula reports on the first year of implementation for Michigan’s new reporting requirements and evaluates its effectiveness so far.
» Full Article on Illinois
» Full Article on Michigan

News in Brief

Early Positive Results from Colorado’s Pension Reform: Just a month after the passage of major bipartisan pension reform, S&P Global Ratings has revised its credit outlook on Colorado from “negative” to “stable.” While it is still early to make any long-term judgments on the reform, this quick response from S&P gives a symbolic stamp of approval on the changes made to the state’s pension plan. The full article is available here and a short update from Reason’s Zachary Christensen is available here.

New Study Evaluates Investment Options for Public Pension Plans: The American Investment Council has released a study that analyzes the investments of 163 U.S. public pensions. According to their findings, private equity investments outperform the other common investment options with 10-year annualized returns of 8.6%. Public equity, fixed income, and real estate investments have returns of 6.1%, 5.3%, and 4.7% respectively. Appropriately, public equity accounts for nearly half of the investments of the selected group of pensions. The full study is available here.

Does Texas’ Municipal Pension Plan Offer a Possible Retirement Solution?: A recent TeacherPension.org article presents the case of the Texas Municipal Retirement System (TMRS), which uses a cash balance plan design. Author Kirsten Schmitz explains the value that local Texas public workers are finding in this plan, demonstrating the strengths of this plan to both employees and employers. The full article is available here.

Quotable Quotes on Pension Reform

Kicking the can down the road was not an option. If we did not act, taxpayers would be on the hook for an additional $2.3 billion in debt this year. A credit rating downgrade could impact our schools’ ability to pass bond measures — a critical funding source for cash-strapped districts from Denver to Durango. It also meant that current and future retirees were looking at a less stable fund.”

—Colorado House Majority Leader K.C. Becker on the passage of SB-200 pension reform, “Putting PERA on a Path to Prosperity,” The Denver Post, June 15, 2018. 

“Fifteen years ago, a pattern started in Colorado, where more benefits were promised with a lack of money to back it up…Other legislation since then has increased funding without redesigning programs, leaving us where we are today. We needed to structurally change our pension programs to essentially stop digging the hole while we’re trying to fill it.”

—Colorado Senator Jack Tate on the passage of SB-200 pension reform, quoted in Samantha Fillmore, “Colorado Enacts Pension Reform,” The Heartland Institute, June 13, 2018.

“We understand that these changes will not be easy, but we believe shared impact across the membership and with employers was absolutely necessary…The PERA retirement system is stronger because of the comprehensive modifications enacted by the Colorado General Assembly and signed into law by Governor Hickenlooper. This legislation would not have been possible without the dedicated leadership of the bill sponsors, Senators Jack Tate and Kevin Priola, House Majority Leader KC Becker and Representative Dan Pabon.”

Chairman of the PERA Board of Trustees Timothy M. O’Brien on the passage of SB-200, “Colorado PERA Reform Legislation Signed by Governor Hickenlooper,” Colorado PERA, June 4, 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, Policy Analyst, Reason Foundation

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