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
- Protecting Texas Teacher Pensions
- Fort Worth Adopts Meaningful Pension Reform
- State Auditor Reports Examine Georgia TRS Solvency Proposals
- Kansas Considers Costly Change in Pension Debt Payment
- Alabama Pursues Non-Traditional Investment
- Fairfax Pensions Turning to Investment in Cryptocurrency
News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk
Articles, Research & Spotlights
Protecting Public Education and the Texas Teacher Retirement System
Texas Gov. Greg Abbott has vowed to increase teacher pay, but policymakers need to take into account the impact these changes would have on the state’s ongoing challenges with fully funding its educators’ pension plan. The Teacher Retirement System of Texas (TRS) only has 75 cents for each dollar it has promised to teachers and is currently holding $46.7 billion in pension debt. In a recent commentary, Reason’s Steven Gassenberger and Texas Public Policy Foundation’s Vance Ginn detail the current factors that Texas stakeholders must consider when looking to address both teacher pay and pension funding. They address the moral pitfalls of maintaining a pension fund that is less than fully funded, arguing that Texas teachers deserve a secure retirement.
Fort Worth Employees Vote for Meaningful Pension Reform
After a years-long process, the Fort Worth City Council has successfully passed what appears to be meaningful pension reform and a major step in the right direction for the retirement security of the city’s employees. The Fort Worth Employees’ Retirement Fund (FWERF) faced major solvency challenges, including a low funded ratio (58 percent) and a $1.6 billion funding shortfall. In need of approval from more than half of all city employees, the city council conducted an effective communication campaign to emphasize the importance of adopting major reform to its workers. Reason’s Andrew Abbott and Zachary Christensen detail the set of enacted reforms, which focus on changes to benefits and contributions and add an automatic adjustment feature to both employee and employer contributions.
Two State Reports Suggest Georgia TRS Reforms, But Are They Enough?
In two recent Georgia Department of Audits and Accounts (GDAA) reports, the state’s Teachers Retirement System (TRS) has received some much-needed attention. One report explores possible actions that could improve the financial strength of the plan while still preserving its defined-benefit features. Another report focuses on the annual unfunded liability payments made to TRS by the University System of Georgia (USG). Reason’s Evgenia Sidorova summarizes the recommendations in the first report—including changes to the benefit formula, retirement age, and cost of living adjustments—outlining the possible savings from the various proposals. She also gives an overview of the main points contained in the second report, discussing the universities’ share of the state’s pension costs.
Proposed Kansas Pension Reamortization Would Add Long-Term Costs, Debt
Gov. Laura Kelly’s latest budget proposal seeks to reduce annual pension contributions for Kansas. The method for achieving this lower annual cost, however, would end up costing the state more money—an additional $7.4 billion—in the long-term. The plan proposes that the Kansas Public Employees Retirement System (KPERS) extends its amortization schedule so the existing pension debt will not be paid off until 2047 (14 years later than is currently estimated). In a commentary on this proposal, Reason’s Raheem Williams warns that extending the amortization of pension debt will further exacerbate the risk of more pension debt in the future, particularly considering KPERS’ outdated and overly-optimistic assumptions.
The Retirement System of Alabama Acquires One of the Largest Newspaper Groups, Expanding its Non-Traditional Investments
A recent Retirement System of Alabama (RSA) acquisition of the CNHI LLC newspaper group is the latest example in a growing national trend of pension fund investment into non-traditional assets. The current environment of lower returns—often labeled as the “new normal”—has pushed many pension funds like RSA to take on more unorthodox investments in order to maintain overly optimistic assumed rates of return. In a new commentary, Reason’s Anil Niraula examines RSA’s involvement in this trend. He also adds that the investment in the newspaper group, while risky, may help to diversify the system’s investments so they are not as focused in one geographical area.
Can Blockchain and Cryptocurrencies Save Fairfax County’s Pension Systems?
Two pension systems in Fairfax County, Virginia, have invested in a private equity vehicle which will focus its funds in blockchain and cryptocurrency technologies. The intent of this move is to help dig the county out of a $3 billion hole in unfunded liabilities, but the success of investments in cryptocurrencies is difficult to predict. Reason’s Marc Joffe comments on this investment policy, noting that this risky investment strategy could pay off for Fairfax, but may be a move that exposes the county’s pension fund to too much risk.
News in Brief
New Study Examines Investment Performance of State Pensions: A newly released annual study from Cliffwater LLC uses financial reports from 66 state pensions going back to 2000 to explore trends in investment results. The study finds that average asset-weighted returns have performed well below the collective expectation of 7.75 percent. Not surprisingly, the collective funded ratio of these plans has dropped over this time period, to a calculated 73 percent in 2018. Not only did none of the 66 plans outperform the collective expected rate of growth, but not a single plan was also able to even meet its own individual expected rate of growth over the 18 years of study. Likely associated with this struggle to meet investment expectations, investment in alternative types of assets has grown since 2006. The full study is available here.
Analysis Studies Trends in California Pensions: The Public Policy Institute of California has published an analysis finding that over the past decade, CalPERS saw unfunded liabilities grow by more than $103 billion, while CalSTRS saw its pension debt grow by $84 billion over that same period. As CalPERS depends on investment returns to supply 59 percent of its promised retiree benefits, it is no surprise that a large part of the growing pension debt derives from the chronic investment performance below expected rates. The Public Policy Institute of California articulates the growing budget pressure applied to local California governments due to rising pension costs and cites research suggesting a doubling in these costs by the year 2025. The full analysis is available here.
Report Ranks, Rediscounts State Pension Debt: The American Legislative Exchange Council (ALEC) released its annual report on state-operated pensions, finding that the 2018 national unfunded liability now stands at $5.96 trillion. To reflect the constitutionally guaranteed nature of public pension benefits, the analysis discounts pension liabilities using a risk-free rate, resulting in a much higher accounting of accrued benefits when compared to numbers found in official pension system reports. The report—available here—also outlines several reforms adopted by states over the last ten years, evaluating the impact of these various policy decisions.
Quotable Quotes on Pension Reform
“A big part of the challenge is more structural and fundamental than the occasional recession,” Matheson said. “The whole defined benefit model was created at a time when individuals’ working and private lives looked different than they do today. When pension plans were first designed and popularized, people didn’t commonly live late into their 80’s and 90’s. Furthermore, as fixed-income returns have fallen over time to the very low levels we have seen persist for the last decade, this drove pensions to hold more in equities to meet their return needs, which left them very exposed during the market crashes in the 2000s.”
–Maine Public Employees Retirement System (MainePERS) Executive Director Sandy Matheson, quoted in John Manganaro, “MainePERS Has Some Suggestions for Struggling Public Pensions,” Plansponsor.com, March 21, 2019.
“If we do nothing, your pension is going to go away. I don’t want you to come back 5 to 6 years from now and say ‘what happened?’ We’re trying to fix the pension and come up with a solution…I’m giving people a chance to speak their mind. But I can tell you there are a lot of people who aren’t here who are being affected by high taxes who are ready to leave the state…We’re going to move forward and fix what’s wrong here.”
–New Jersey Senate President Stephen Sweeney, quoted in David Levinsky, “Sweeney Defends Pension Reform Plan at Town Hall,” Burlington County Times, March 13, 2019.
“I’m proud Fort Worth was able to solve our pension problem locally in a civil, collaborative manner…It is commendable that the employees understood the gravity of the problem enough to make this tough vote.”
–Texas Representative and Former Chairman of House Pension Committee Dan Flynn, quoted in Luke Ranker “Fort Worth Pension Fix costs Taxpayers, Employees. But was the Unknown Worse?,” Fort Worth Star-Telegram, February 28, 2019.
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, Senior Policy Analyst, Reason Foundation
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