Pension Reform Newsletter – March 2015

This newsletter highlights articles, research, opinion, and other information related to public pension problems and reform efforts across the nation. To find previous editions, please visit https://reason.org/newsletters/pension-newsletter/.

Articles, Research & Spotlights

• Does the Public Support Pension Reform?
• How Is the California Public Employees’ Pension Reform Act of 2013 Working?
• New Study on California City Pension Burdens
• 2015 California Pension Reform Summit Featuring Former San Jose Mayor Reed and San Diego Councilman DeMaio
• Reforming Public Safety Pensions in Tequesta, Florida
• Testimony on Nevada Pension Reform Bill
• Judge Won’t Let New Jersey Gov. Christie Abandon His Own Pension Reforms
• Pension-Reforming City Councilman Joins Pension Reform Project

Quotable Quotes on Pension Reform

Access to the Pension Reform Handbook

Contact the Pension Reform Help Desk

 

Articles, Research & Spotlights

Does the Public Support Pension Reform?
By Leonard Gilroy and Lance Christensen, Reason Foundation

Conventional wisdom suggests that while pension problems are likely to be a serious discussion in fiscal and budget committees in city halls and statehouses, substantive pension reform efforts will be given short-shrift, in part due to a lack of interest among the public on such a complex issue. But what if the conventional wisdom is wrong? A recent Reason-Rupe poll suggests that it may be.

According to the national Reason-Rupe poll executed by Princeton Survey Research Associates International – the same firm that conducts the Pew surveys, the public believes that pensions are an important issue to address, and there appears to be strong support for prospective reforms that would place new government workers in 401(k)-style plans.

Things become more complex when it comes to current workers and retirees, and while the public generally does not support reducing already promised pension benefits for those groups, they also strongly oppose moves to raise taxes or cut services to pay for those benefits. And there is clear support for current workers to share the costs of retirement benefits by contributing more to their own future pensions and benefits.

These results are consistent with the nature of the successful reforms we have seen in places like Utah, Michigan and Oklahoma that were largely prospective in nature. They are also consistent with the anecdotal research we have done in the past on places like San Diego and San Jose, California. To read more about the issue, go here.

Also read Adrian Moore’s commentary on the issue here.

How Is the California Public Employees’ Pension Reform Act of 2013 Working?
By Victor Nava and Lance Christensen, Reason Foundation

The state of California and its local governments are saddled with unfunded public pension liabilities estimated to be as high as $583 billion. As a result, several municipalities are struggling to balance budgets in a way that is fair to both public employees and taxpayers, while continuing to provide basic services. State legislators on both sides of the political aisle passed the California Public Employees’ Pension Reform Act of 2013 (PEPRA) to address unfunded public pension liabilities.

A recent Reason Foundation brief provides an overview of PEPRA’s key features, analyzes the strengths and weaknesses of the law, and offers recommendations for additional improvements to California’s public pension systems.

To read and download the full brief, go here.

New Study on California City Pension Burdens
By Truong Bui, Reason Foundation

A recent study by the California Policy Center analyzes the burden of pensions costs on 459 California municipalities, using a number of metrics. One of the metrics is the ratio of required pension contributions to estimated total revenue. Based on this measure, the most heavily burdened cities are San Rafael, Costa Mesa, and San Jose, which have the ratios estimated at 17.58%, 14.36%, and 13.88%, respectively. Generous retirement benefits are a common factor behind the financial state of these cities. The good news is that all of the three cities have been taking measures to reduce pension costs.

Another metric is the ratio of pension debt-to-revenue. Pension debt here equals unfunded liability plus outstanding pension obligation bonds. Based on this measure, the most heavily burdened cities are Oakland, Costa Mesa, and Richmond, which have the ratios estimated at 203.3%, 182.0%, and 180.9% respectively. The interesting thing is that some cities, such as Richmond, have more pension debt carried in the form of pension obligation bonds than unfunded liability. These cities’ pension systems, therefore, look much more favorable than they really are if only unfunded liabilities are taken into account.

Employer contribution rate, the percentage of current employee payroll that must be paid to the pension plan by the employer, is also a revealing measure. Expectedly, heavily burdened cities tend to have high contribution rates, with San Rafael, Costa Mesa, and San Jose having to pay 57.7%, 47.5%, and 70.8% respectively of their employee payrolls to their pension systems.

Based on the study’s pension cost projection to fiscal year 2020, Monrovia and Fremont are two cities that can expect to face sharply increased pension burdens. Both have 2015 pension cost-to-revenue ratios exceeding 10% and both will likely see significant cost growth from now to 2020.

The study also provides an interactive map that summarizes the key figures for each city. To read the full study, go here.

In a related column at Reason.com, Steven Greenhut opines on the state of municipal bankruptcies in California in light of the newly published federal court decision which found that the California Public Employees’ Retirement System was merely banging the legal table with its “iron fist” in the Stockton bankruptcy case. Judge Christopher Klein rejected the pension fund’s argument that California cities could not reduce pension benefits even in bankruptcy. The decision could dramatically change the way pensions are handled in future bankruptcy proceedings , even though the judge upheld the city’s workout plan, which leaves existing pensions untouched while “impairing” creditors.

To read Greenhut’s full column, go here.

2015 California Pension Reform Summit Featuring Former San Jose Mayor Reed and San Diego Councilman DeMaio
By Lance Christensen, Reason Foundation

A recent brief on the California Public Employees’ Pension Reform Act of 2013 found pension costs and debts will continue to increase and be a burden to state and municipal retirement plans. Realizing that broader reform is needed to not only reduce costs in the state plans, but also for local government plans, Reason Foundation is hosting its third annual Pension Reform Summit in Sacramento on April 10th. This summit will feature former San Jose Mayor Chuck Reed, former San Diego City Councilman Carl DeMaio, former San Jose City Councilman Pete Constant and Reason Foundation Vice President Adrian Moore. Other pension reform experts and stakeholders throughout California will also be in attendance.

Those interested in attending the summit should contact Lance Christensen, Reason Foundation’s Director of Pension Reform, at lance.christensen@reason.org.

Reforming Public Safety Pensions in Tequesta, Florida
By Leonard Gilroy, Reason Foundation

In 2010, the Village of Tequesta, Florida – a small, incorporated community of nearly 6,000 residents in northern Palm Beach County – achieved something that would make many larger municipalities envious: it reformed its public safety defined-benefit retirement plans to put them on a more financially sustainable path.

Village officials negotiated significant reforms to police and firefighter pensions in the collective bargaining process, including a full transition to a defined-contribution, 401(k)-style system for new police officers and a realignment of benefits for new firefighters entering their defined-benefit pension system. As a result, the legacy police defined-benefit pension system has gone from underfunded to significantly overfunded, new police officers benefit from a more individualized and portable retirement plan that is less costly for taxpayers, and the firefighter pension plan is on a sustainable path.

Tequesta Village Manager Michael Couzzo, who led the negotiating team in the collective bargaining process, recently sat down for an interview with Reason Foundation Director of Government Reform Leonard Gilroy to discuss the reforms enacted, the resulting benefits and more.

To read the full interview, go here.

Testimony on Nevada Pension Reform Bill
By Lance Christensen, Reason Foundation

Pension costs are a major problem for states and municipalities’ balance sheets throughout the country. Indeed, Nevada faces challenges with its pension system. According to the latest Public Employees’ Retirement System of Nevada (NVPERS) actuarial valuation report, the plan is 71% funded for the Regular employees and 74% for the Police and Fire, with $10.1 billion and $2.3 billion unfunded actuarial liabilities, respectively.

NVPERS regularly predicts an 8% rate of return, but in looking over the last 10 year average, the plans – both the Regular and Public Safety – have averaged only a 6.22% actuarial average. Lower than expected returns are significant when considering that, when dealing with investments, investors are also dealing with compound interest. If there are steep losses one year, it requires more than simply meeting the planned rate the year after – NVPERS must make up the lost ground from the previous year as well as hit the coming year’s investment goals.

Given the current trajectory of the system and the massive liabilities and financial risks they pose to the state, it is past time to reform the pension system in Nevada to make it more sustainable. It took years to get into this problem and it is going to years to dig out of the problem; Nevada must start now. AB 190 represents an important start to that process by placing Nevada on a fiscally sound path for retirement security that is fair for both public employees and taxpayers.

To read the full testimony, go here.

Judge Won’t Let New Jersey Gov. Christie Abandon His Own Pension Reforms
By Scott Shackford via Reason.com

New Jersey’s unfunded public employee pension obligations top more than $80 billion. According to a report from December, the state’s two largest pension plans could run out of money by 2024 or 2027. Non-profit policy group State Budget Solutions estimates the unfunded obligations to be much higher, more than $200 billion.

Regardless of whose numbers are more accurate, the fact is New Jersey’s pensions, like many state employee pensions, are a disaster area. But how could this be? In 2011, Gov. Chris Christie and all parties involved (including a Democratic legislature) hammered out a plan that was going to fix it. Public employees would begin contributing more to their own pensions. In turn, the state, which had failed to put in the necessary funds for decades under governors from both parties, would ramp up its payments to close that unfunded gap by 2018.

And then in less than three years Christie screwed up his own plan. Facing revenue shortfalls, he chopped down last year’s and this year’s state pension contributions, shaving down $900 million and $1.5 billion respectively. The unions sued over Christie’s betrayal. On Monday Mercer County Superior Court Judge Mary C. Jacobsen ruled against Christie and ordered him to restore the $1.5 billion cut from the budget.

To read the full story, go here.

Pension-Reforming City Councilman Joins Pension Reform Project
By Lance Christensen, Reason Foundation

We are excited to welcome pension reformer and former San Jose City Councilman Pete Constant as a senior fellow with the Pension Reform Project. Constant has been a leader in the reform movement for years and was noted in an “Innovators in Action” interview as well as this recent Reason.tv segment.

Before joining Reason Foundation, Constant served two terms as a city council member, representing the 100,000 residents of District 1 in San Jose, California. As a councilmember, Constant led a number of reform initiatives, including the city’s Fiscal Reform Plan, retirement board governance reform, and a comprehensive pension reform initiative, Measure B. Constant also held positions as a trustee and board member on public pension plan boards for both public safety and non-public safety employees of the city.

Prior to being elected to the city council, Constant served for 14 years as a San Jose Police Officer. After suffering a career-ending injury, he continued his public service on the San Jose Appeals Hearing Board. He was also a board member for the San Jose Police Officers’ Association.

To see how pension reform came about in San Jose, our case study can be found here. To read the rest of Constant’s biography and find his future work, please visit our experts’ page.

 

Quotable Quotes on Pension Reform

“There’s really no good public policy reason that local retirement systems should have such separation from their stakeholders. It’s a welcome sign that some lawmakers agree and are moving ahead with legislation to restore local control of state-governed pension plans.”
– James Quintero, Director, Texas Public Policy Foundation

“Ultimately, what it comes down to is a fixed pie in the budget. Voters are more concerned with potholes, roads, education spending, and other essential public services than making sure that pensions are paid, and whether pensioners get a 3% or 1% cost-of-living adjustment.”
– Ty Schoback, senior municipal bond analyst, Columbia Management

“New Mexico’s legislative history is reflecting decades of flip-flop legislation largely responsible for facilitating PERA’s pension challenges. Let the pension reform of SB 27 do its job without making more special exemptions and/or pension enhancements.”
– Gerald L. Chavez, Executive Director, Retired Public Employees of New Mexico

“In this difficult budget year, we need to continue to maintain that fiscal discipline and make timely contributions. Failure to do so will cost the taxpayers more in the long run.”
– Beth Pearce, Vermont State Treasurer

“The only way making a change would hurt a state’s credit rating would be if it caused liabilities to go up. But the reason for closing a pension system is to prevent them from increasing. If anything, practicing sound financial policy by moving away from traditional pension systems should improve a state’s credit rating. It limits liabilities and is a positive movement financially. That’s why thousands and thousands of businesses have made the change and they’ve done so without hurting employee recruitment or retention.”
– Randy McDaniel, Oklahoma State Representative

“People want there to be a quick fix, but this is a long-term issue. Reform is just hard to do. The news cycle covers reform efforts for a while and then they’d rather cover Greece. Unfunded pension liabilities get boring.”
– Matt Fabian, Partner at Municipal Market Analytics

“The court cannot allow the state to ‘simply walk away from its financial obligations,’ especially when those obligations were the state’s own creation.”
– Mary Jacobson, Superior Court Judge

 

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