This newsletter from Reason Foundation’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:
- Beware the Trump Bump
- New Report Examines Target Date Funds
- Concerns Over Hedge Fund Hobgoblins Based on Misinformation
- Considering Proposed Paths Forward in the Dallas Pension Crisis
Higher investment returns in the wake of the November 2016 election are welcome news for pension systems around the country. While the average assumed rate of return for public pension plans (around 7.5%) is likely still too high, greater investment returns would provide troubled pension systems with much-needed breathing room. But this relief can only happen if the “Trump Bump” is here to stay. As Reason’s Daniel Takash writes, pension systems should prepare for this bump to turn out to be a “sugar high” that will subside or worse: a bubble that will burst if Trump’s economic policies fail to produce the promised gains.
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Individual investors and retirement fund managers alike are looking for best ways to balance the competing goals of portfolio diversification, de-risking of asset allocations, and securing retirement income. To that end, target date funds (TDFs) have become an increasingly popular way to provide a low-maintenance, self-adjusting investment option that automatically rebalances and de-risks the investment portfolio over time as an investor moves closer to retirement. According to a recent report by Boston College’s Center for Retirement Research, TDFs often invest in specialized assets, charge modest fees, and earn returns that are broadly in line with other mutual funds.
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Those on both sides of the pension reform movement are rightfully concerned over pension systems’ experiences with hedge funds and other alternative investments. Some of these concerns are legitimate, as hedge fund investments tend to come with high management fees that can only be justified with outstanding performance. Others are based on more general, populist mistrust of financial institutions. Asset allocation decisions for pension plans are a serious issue, but Reason’s Daniel Takash writes that opponents of hedge fund investments can do themselves a disservice when they make sweeping claims divorced from the primary cause for the rise of hedge fund investments by pension systems—the need to find ways of hitting increasingly unrealistic assumed rate of return targets.
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As the Texas 2017 legislative session unfolds, conflict and controversy continue to haunt the Dallas Police and Fire Pension System (DPFP). The severely underfunded system requires a significant infusion of contributions at minimum, as well as dismantling its solvency-destroying Deferred Retirement Option Plan program that fell victim to more than $500 million in lump-sum withdrawals last year amid pensioners’ fears of the looming insolvency of the system. Despite a lingering stalemate among policymakers over the appropriate course of action, Reason’s Anil Niraula writes that recent developments suggest that the parties may finally be finding some common ground on the potential reform path forward.
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New CRS Report on Participation in Employer-Sponsored Pensions: A Congressional Research Service report released last month examines key differences in retirement plan participation among different kinds of employees. Among the findings, the CRS reports that 85% all state and local government workers have access to a defined benefit pension plan, with 75% participating in the plan. By contrast, only 18% of private sector workers have access to a defined benefit pension plan, with 15% participating. The full report is available here.
New National League of Cities Pension Survey: Earlier this month, the National League of Cities (NLC) released the results of a survey finding that, between 2009 and 2016, 74% of cities implemented reforms designed to address their unfunded pension liabilities. The most common reform was to increase employee contribution rates (33%), followed by plan design changes (22%), reduced benefits (17%) and reduced cost-of-living adjustments (12%). The full report is here.
CalPERS Issues Pension Spiking Regulations: Earlier this month, the California Public Employees’ Retirement System (CalPERS) Board of Administration approved new draft regulations governing pensionable compensation in accordance with the 2012 Public Employees’ Pension Reform Act (PEPRA). The draft regulations eliminate six types of compensation, including bonus pay, management incentive pay, and uniform allowances. “These regulations ensure compliance with pension reform and provide consistency and guidance on anti-pension spiking laws governing pensionable compensation,” said Rob Feckner, president of the CalPERS Board. “Without the regulations the risk of employers inconsistently interpreting the law is high.” More information is available here.
Iowa PERS Lowers Investment Return Assumption: Last week, the investment board of the Iowa Public Employees’ Retirement System (IPERS) approved lowering the plan’s assumed rate of return for investments from 7.5% to 7.0%, while also lowering assumptions related to inflation, payroll growth, wage growth, and interest on member accounts in the wake of an accelerated experience study. More information is available here and here.
Quotable Quotes on Pension Reform
“The City’s annual pension contribution has grown by over 230 percent since fiscal year 2001. […] These increasing pension costs have caused us to cut important public services while the pension fund’s health has grown weaker. In fact, our pension fund has actually dropped from 77 percent funded to less than 50 percent funded during the same time our contributions were so rapidly increasing.”
—Philadelphia Mayor Jim Kenney, quoted in Jim Saksa, “Putting Philadelphia’s $149 million pension fund loss into context,” PlanPhilly.com, March 2, 2017.
“Phoenix recently released its five-year budget forecast, an estimate of future operating revenues and expenses, that shows pension costs will remain an albatross on the city’s financial health. […] Recurring deficit forecasts come as the city’s pension costs have increased more than 208 percent in the last decade. Its general-fund pension bill was about $95.3 million for the 2007-08 fiscal year, compared with $294 million next year.”
—Dustin Gardiner, “Soaring pension costs still crippling Phoenix budget,” Arizona Republic, February 28, 2017.
“Notice how CalPERS is choosing to value liabilities at the same rate as it expects to earn on assets. That’s like you owing $100,000 on a mortgage but because you think you’re going to earn twice as much as the mortgage interest rate from investing your cash in the stock market, you report your mortgage at only $50,000. That’s neither true — you owe the mortgage obligation regardless of how well or poorly you invest your other assets — nor sustainable.”
—David Crane, “It’s The Lie That Gets You: How Funded Ratios can decline even when stock markets rise,” Medium.com (blog), March 5, 2017.
“Unless the system is fixed now it will collapse. The course that we’re on suggests strongly without a doubt, the system will get to a point where the public pension funds simply will not have the money to meet the promises they made.”
—Stanford University Professor Joe Nation, quoted in Arlene Martinez, “Pension costs soar for Ventura County cities,” Ventura County Star, March 9, 2017.
“I do think there will be another conversation in the not too distant future about what is affordable for [San Francisco] and our employees for pensions […] I don’t think where we are is where we need to end up.”
—San Francisco Controller Ben Rosenfield, quoted in Romy Varghese, “Even San Francisco, Flush With Tech Wealth, Has Pension Problems,” Bloomberg.com, March 20, 2017.
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Senior Managing Director, Pension Integrity Project
Managing Director, Pension Integrity Project