Pension Reform Newsletter – March 2014

This newsletter highlights articles, research, opinion, and other information related to public pension problems and reform efforts across the nation. You can also follow the discussion on pensions and other governmental reforms at Reason Foundation’s website or on Twitter @ReasonReform.

Articles, Research & Spotlights

• Michigan Pension Reform Case Study
• Innovators in Action: Douglas Roberts – Pioneering State-Level Pension Reform in Michigan
• Analysis: Detroit Bankruptcy Pension Reform Not Good Enough
• Public Pension Reform: Balancing Competing Priorities and Best Practices for Achieving Reform
• Why the “California Rule” is Counterproductive
• California Pension Ballot Measure Dead for Now, Proponents Aim for 2016
• Ventura County Needs the Pension Reforms that Have Succeeded Elsewhere
• GASB Toolkit for State and Local Governments to Implement New Pension Accounting Standards

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk– Get assistance for your pension reform needs

 

Articles, Research & Spotlights

Michigan Pension Reform Case Study
By Anthony Randazzo, Reason Foundation

In 1996, the Michigan state legislature passed a first-of-its-kind bill that froze the state employees’ defined-benefit pension fund for new members and created a defined-contribution pension system for future hires. Members already in the defined-benefit system were allowed to remain and their benefits continued to accrue as originally promised, though the workers were given an opportunity to take a buyout of their earned benefits and have those transferred to a defined-contribution account. New workers had their pension contributions put into personal accounts that they could manage on their own and take with them if they left employment with the state.

Given that the defined-benefit fund had a relatively healthy funding ratio, this was an unusual move at the time. But in retrospect, the decision seems highly prescient.

When the Michigan legislature did not vote to reform the public school employees’ pension fund, which is operated in the same way as the state employees’ defined-benefit system, they inadvertently created a natural experiment to determine which system would be more sustainable in the long-run. Over the past 15, years, the public school employees’ plan accrued unfunded liabilities that would have likely been mirrored by the other state employees’ fund in the absence of a defined-contribution option. This would have increased fiscal pressure on current state leaders and made Michigan worse off on the whole.

To read the full case study, go here.

Innovators in Action: Douglas Roberts – Pioneering State-Level Pension Reform in Michigan
By Len Gilroy, Reason Foundation

The latest installment of Reason Foundation’s Innovators in Action monthly interview series examines Michigan’s groundbreaking reforms to its state employee pension system in 1996. The reforms closed the defined-benefit system to new hires and created a parallel defined-contribution system. Michigan’s pioneering reforms have served as a model for similar actions taken later in Alaska, Utah and other states. I recently interviewed former state treasurer Douglas B. Roberts, Ph.D., on the factors that prompted Michigan’s historic pension reforms, how proponents made the case for reform, lessons learned, and much more.

To read the whole interview, go here.

Analysis: Detroit Bankruptcy Pension Reform Not Good Enough
By Anthony Randazzo, Reason Foundation

Detroit’s proposed pension reform from last week has a chance to be precedent setting. The city’s plan to “adjust” its $18 billion in debt by slashing as much as half of it before exiting bankruptcy includes cuts to already accrued pension benefits, as well as changes to how future public pension benefits are earned. The proposal also has less innovative, but important elements of good pension reform including forcing the city to use “market values” in accounting for its liabilities, using slightly more realistic investment return assumptions, and adjusting its defined-benefit system.

Such structural changes are bound to bring criticism. Retirees have already disseminated their displeasure with the proposed pension reform. The Official Committee of Retirees claims that the proposed changes would push 20% of the city retirees into poverty, and argues that the accounting changes are overly conservative. Other retirees have asked why the city hasn’t sold the pieces at the Detroit Institute of Arts in an auction, or sold Belle Isle, in order to lower the need for pension cuts.

These retires should be more concerned that the Detroit pension reform proposal in the bankruptcy plan doesn’t go far enough in its changes to protect their pension benefits.

To read more of the analysis, go here.

Public Pension Reform: Balancing Competing Priorities and Best Practices for Achieving Reform
By Victor Nava, Reason Foundation

With estimates pegging the state and local nationwide pension funding gap as high as $4 trillion, pension reform efforts are being spurred across the country. Political barriers are the largest obstacles in the way of reform, but in recent years several states and municipalities have been successful in enacting both significant and modest reforms.

At a recent forum held by the Brookings Institution, two studies were presented demonstrating the results of pension reform in four states, and how to balance competing priorities when reforming public pension systems. Two pension reformers from places once beleaguered by unfunded pension liabilities, San Jose Mayor Chuck Reed and Rhode Island Deputy Treasurer Mark Dingley, shared their experiences in managing crippling public pension debt.

Policy recommendations for pension reform offered Patrick McGuinn, author of one of the featured studies, include:

• States should make their complete actuarial payment every year;
• Avoid turning pension reform into an ideological issue;
• Enlist a credible and visible reform champion;
• Communicate and educate;
• Anticipate and plan for legal challenges;
• Gather and disseminate good, hard data;
• Don’t conflate pension reform with budgetary issues.

Ivan Osorio, at the Competitive Enterprise Institute, writes a compelling review of the Brookings Institution report. Read the full blog here.

To read Reason Foundation’s recent pension reform case studies on Rhode Island and San Jose, respectively, go here and here.

Why the “California Rule” is Counterproductive
By Alexander Volokh, Associate Professor of Law at Emory Law School for Reason Foundation

The so-called “California rule” on pensions basically holds that California government employees acquire a right to their promised pension benefits on day one of employment, and those benefits are assumed to be protected for their entire career in government. In other words, they are seen as permanent contractual rights that cannot be changed-unless the terms are modified to bestow enhanced benefits. Policymakers are thus precluded from later deciding to enact reforms to rein in those benefits in the interest of the financial sustainability of the pension system-such as reducing cost of living adjustments or increasing contribution rates-even if on a purely prospective basis, where previously accrued benefits would be left untouched. In a recent Reason.org article, Emory Law School Associate Professor Alexander Volokh explains why the “California rule” is counterproductive and explores several potential workarounds, including shifting to defined contribution plans, providing benefits via short-term contracts, amending the state constitution, and privatization.

Read the full brief here.

See Volokh’s related white paper from the Federalist Society here.

California Pension Ballot Measure Dead for Now, Proponents Aim for 2016
By Lance Christensen, Reason Foundation

San Jose Mayor Chuck Reed had been working on an initiative to give local officials flexibility to adjust pension obligations, but a California court rejected his appeal to force a change to the Attorney General’s controversial ballot title and summary. According to reports by the Sacramento Bee, “San Jose Mayor Chuck Reed and his allies gave up Friday after a judge rejected Reed’s challenge to the language describing the measure for purposes of signature collection.” Mayor Reed indicates that they will attempt reforms in the 2016 election cycle.

To read the news story, go here.

Ventura County Needs the Pension Reforms that Have Succeeded Elsewhere
By Anthony Randazzo and Adrian Moore, Reason Foundation

Government worker unions are leery of pension reform, but it is an idea whose time has come for cities, counties and states around the nation, including Ventura County. Ventura County taxpayers are facing $953 million in unfunded liabilities that stem from pension plan underfunding and overgenerous benefits in recent years. That debt, combined with rising costs to pay for pension benefits mean that in the future Ventura County will have to start reducing services to county residents to pay promised pensions to public employees.

To read the rest of the opinion editorial in the Ventura County Star, go here.

To see Lance Christensen’s related letter to the editor in the Ventura County Star, go here.

GASB Toolkit for State and Local Governments to Implement New Pension Accounting Standards
By Truong Bui, Reason Foundation

The Governmental Accounting Standard Board (GASB) has just released a new online pension implementation toolkit, which is available at no cost at the GASB website. The toolkit is designed to help auditors, preparers, and users of state and local government financial reports understand and apply the new pension accounting and financial report standards approved by the GASB in June 2012.

“This toolkit highlights key implementation issues and provides guidance on how preparers and auditors of state and local governments can effectively comply with the requirements,” said GASB Chairman David A. Vaudt. One can find important resources in the toolkit, such as the Guide to Implementation of GASB Statement 68, fact sheets answering frequently-asked questions regarding different types of pension plans, and responses to common misperceptions about the new pension standards. Videos outlining major implementation guides and discussing key issues are also available at the website.

To access the toolkit, go here.

 

Quotable Quotes on Pension Reform

“Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans. Investment policies, as well, play an important role in these problems. In 1975, I wrote a memo to Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the importance of investment policy…During the next decade, you will read a lot of news – bad news – about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist.”
Investor Warren Buffet in his most recent Berkshire Hathaway Annual Report for 2013

“What is the benefit to the employee or the citizens who pay taxes to have someone just sitting there waiting until they can walk out the door? Isn’t it better to have workers leave when they want? The citizens get better employees, employees who want to be there.”
Former Michigan State Treasurer Doug Roberts

“In California, particularly for municipalities with pensions under the California Public Employees Retiree System, or CalPERS, bondholders will likely continue to pay a steep price if bankruptcies remain venues for restructuring debt obligations but pension liabilities remain untouched.”
Moody’s Vice President Gregory Lipitz

“I implore you to abandon this proposal. The pension fund is not a rainy day fund to be dipped into on an ad hoc basis.”
Maryland State Comptroller Peter Franchot

“What I’m trying to do is save the pension system…I’m trying to work with the Legislature now to see what they might agree to…If the Legislature continues to take the position … then I will come out with my own plan…My patience, as you might know, is not endless.”
New Jersey Governor Chris Christie

“Retirement age is one of the things that we need to look at. We also need to look at increased contribution levels from new employees and current employees in the system for the defined benefits they’ve been getting. If they’re not willing to have increased contribution levels or the retirement age adjusted, then potentially they could have the option of joining a defined-contribution plan.”
Colorado Treasurer Walker Stapleton

 

Contact the Pension Reform Help Desk

Reason Foundation has 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.

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