Pension Reform Newsletter – May 2014

This newsletter highlights articles, research, opinions, and other information related to public pension problems and reform efforts across the nation. To find previous issues of the newsletter, please visit our website.

Articles, Research & Spotlights

• Reforming Defined-Benefit Pension Systems in Bakersfield and Kern County
• Debunking Pension Reform Myths in West Virginia and Alaska
• Calculating Public Sector Pensions in All 50 States
• American Transparency – Opening the Books
• Majority of Government Workers Will Fare As Well or Better under Reforms
• Proposed Chicago Reforms: What’s at Stake and How Much It Will Cost?
• Defined Contribution Plans in the Public Sector: An Update
• Distilling Pension Reform Concepts to the Public

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk

 

Articles, Research & Spotlights

Reforming Defined-Benefit Pension Systems in Bakersfield and Kern County
By Len Gilroy, Reason Foundation

The latest installment of Reason Foundation’s Innovators in Action monthly interview series-which profiles innovative policymakers in their own words, highlighting good government efforts delivering real results and value for taxpayers-examines current Kern County (California) Supervisor and former Bakersfield City Councilman Zack Scrivner, who championed successful reforms to financially unsustainable defined-benefit pension systems at both the city and county level.

As a city councilman, Scrivner spearheaded Measure D, a ballot measure approved by Bakersfield voters in 2010 that reformed the city’s pension system for newly hired public safety employees. Scrivner continued those efforts at the county level after being elected to the Kern County Board of Supervisors in 2010, having successfully negotiated for comprehensive pension and healthcare contribution reform with county public employee unions in 2012. I recently interviewed Scrivner on the rationale for the city and county pension reforms, the similarities and differences between them, lessons learned, and more.

To read the full interview, go here.

Debunking Pension Reform Myths in West Virginia and Alaska
By Anthony Randazzo & Victor Nava, Reason Foundation

Pension reform debates are often muddled by myths and misunderstanding. One of the most enduring myths is that a shift from a defined benefit plan (DB) to a defined contribution plan (DC) will increase cost and unfunded liability. The cost argument is due to misconceptions about accounting rules and investment principles. The debt argument rests on a basic misunderstanding about pension funding demonstrated in two recent blog posts at Reason Foundation.

The first blog post is a detailed rebuttal of a recent commentary by Diane Oakley, executive director of the National Institute on Retirement Security, on West Virginia’s pension reform. In her article, Diane argues that West Virginia’s transition to the Teacher Retirement System (WVTRS) from a DB plan to a DC plan worsened the pension’s unfunded liability, and that the state’s later decision to close the DC “generated savings” and reduced the debt.

Reason’s research into the pension’s history shows a different story. The WVTRS did not get worse but improved, albeit very slowly, under reform. The shift to the DC plan was irrelevant to the funding of the DB plan’s liability. Later improvement of the unfunded liability had nothing to do with the state’s closing the DC plan and re-opening the DB plan. In short, whatever liabilities remaining in a DB system during reform exist in spite of reform, not because of reform.

In a similar fashion, another blog post examines the claim that pension reform in Alaska has exacerbated the state’s unfunded gap. Here, critics of the reform again fail to understand the mechanism by which unfunded liability is paid. In fact, failure to make 100% of the annual required contribution payments and unrealistic actuarial assumptions are the main culprits of the decline in funding level.

To read the blog post on West Virginia, go here.

To read the blog post on Alaska, go here.

Calculating Public Sector Pensions in All 50 States
By Lance Christensen, Reason Foundation

In an effort to compare the retirement benefits between public and private sector employees more accurately, the PublicSectorInc.org project of the Manhattan Institute has launched an expanded version of its public pension calculator tool . The previous version of the calculator only showed information from 13 states. The new calculator features pension systems in all 50 states making the comparisons all the more interesting.

While a large majority of private sector employees in America participate in a defined contribution pension system, most likely a 401(k), the opposite is true for public sector employees who participate in a defined benefit pension system. Defined benefit pension systems guarantee a level of compensation for the rest of the retiree’s life, paid for by taxpayers. Making an apt comparison of the difference between the two systems in potential benefits upon retiring can be very difficult. This new calculator simplifies the comparison.

The calculator also allows the user to determine the amount of money one would have to save to purchase an annuity for a comparable public sector job which has a defined benefit plan. For instance, when considering a median public school teacher retiree from last year, a private sector teacher would have to save the following amounts to get the same benefit:

• $868,000-$950,000 in the California State Teacher Retirement System.
• $1.1-1.2 million in Illinois.
• $1-1.1 million in Connecticut.

One of the architects of the pension calculator, Stephen Eide, commented, “Pension reform has several justifications, such as the excessive costs of the current defined benefit system, and its lack of inter-generational equity. The pension calculator is intended to contribute to the debate by helping the public understand just what a great deal the typical state and local employee gets.”

For those taxpayers interested in how their pensions compare to the government workers whose salaries they’re paying through their taxes, visit the calculator here.
To read this piece online, go here.

American Transparency – Opening the Books
By Lance Christensen, Reason Foundation

Transparency is an easy promise to make during campaign season, but difficult to keep once candidates become elected officials. It requires the dogged oversight of concerned citizens to keep a check on the political class and to make sure that their tax dollars are appropriately spent. American Transparency, an Illinois based non-profit, is doing the hard work of checking on government spending. They started posting Illinois salaries and pensions in September of 2011. Founder, Adam Andrzejewski, said, “Our mission is to post ‘every dime’ taxed and spent at every level of government across America.”

Today, Openthebooks.com has over 1 billion lines of government spending online from the federal, state and local levels, including government salaries and pension payments. The goal this year is to acquire 2 billion lines. They currently have at least partial salary or pension data for 36 states online and on their awarding winning mobile app, free for Apple and Android users.

Recently appearing on Fox Business News The Independents special, “Where’s the Pork?” , Andrzejewski related stories of local salary abuse after his group posted nearly 5 million California salary and pension records. At the taxpayer’s expense, the pay, perks and pensions of the top 14,500 “highly compensated” federal, state and local public employees cost nearly $5 billion. These salaries will result in decades of pension costs as these people retire.

The website is having an impact on stories that may not have an obvious relation to salary and pension data. Last week, OpenTheBooks.com showcased the salaries, bonuses, job descriptions, and total dollars spent in the troubled Phoenix Veterans Affairs Office. CNN first alleged up to 40 veterans died waiting for medical care and up to 1,400 veterans were placed on a secret “wait list” for months.

Andrzejewski questions whether the VA facility is an employment farm, or a medical system. OpenTheBooks.com data shows a total workforce of 3,170, but only 227 doctors and 576 nurses were employed. The top 100 executives and doctors made a cumulative total of $70 million from 2011-2013. Only 1 quality assurance person was employed and an inordinate amount of money was spent on public affairs, gardening, interior design and architecture. After the scandal broke, Director Sharon Helman was placed on administrative leave, but it should be noted that she received the largest bonus in the agency in 2013.

Openthebooks.com does not shy away from conflict and hope to hold all elected officials accountable, regardless of party whether that be through their open database or through litigation to overcome rejected Freedom of Information Act requests for all pension data. Whether it’s a Republican or a Democrat, it does not matter to Andrzejewski who stated. “If you are hiding public spending or cheating taxpayers, we come after you.”

Majority of Government Workers Will Fare As Well or Better under Reforms
By Truong Bui, Reason Foundation

A recent paper from the Urban Institute shows that, contrary to what reform opponents often claim, pension reform in Kentucky does not jeopardize employees’ retirement security. Starting in 2014, newly hired state and county employees will enroll in a new cash balance plan. The paper indicates that workers with less than 25 years of service before separation are likely to fare better under the new plan, while those with more than 25 years of service will accumulate more benefits in the traditional plan. However, since most employees leave Kentucky government employment before completing 25 years of service, the new plan is a substantial improvement for the majority of workers. Even long-term workers who do not as well in the cash balance plan will remain financially secure in retirement, with Social Security and pension benefits replacing most of their pre-retirement earnings. By replacing the “back-loaded” structure of the old plan with the new structure that grows benefits smoothly overtime, the new plan also distributes benefits more equally over the workforce.

Kentucky’s reforms suggest that cash balance plans may be better suited for the 21st Century public sector labor force. While the new plan is designed to cost the same as the traditional plan, employer costs are more predictable, reducing the risk of underfunding due to erroneous actuarial assumptions. Additionally, the new plan allows the worker’s account balance to earn investment returns even after they leave the employer. As today’s labor force is more mobile and workers change jobs more often, this feature is likely to attract more recruits and improve the state’s productivity.

To read the paper, go here.

The Urban Institute also provides an interesting interactive tool that ranks state pensions according to various criteria. The tool can be accessed here.

Proposed Chicago Reforms: What’s at Stake and How Much It Will Cost?
By Truong Bui, Reason Foundation

A new study conducted by the Anderson Economic Group demonstrates how underfunding public pensions has forced the city of Chicago to consider adopting costly reforms. These reforms would not only increase the contribution rate of employees and the city government, but also reduce future benefits for current employees and retirees. Delaying, or not implementing, the reforms will lead to even more dire consequences. The following are the study’s key findings on pension reforms proposed by Mayor Rahm Emanuel and passed by the state legislature:

• The city’s two major pension funds, the Municipal Employees’ Annuity and Pension Fund (MEABF) and the Laborers’ Pension Fund (LABF), were underfunded by a total of almost $10 billion in 2013. Without reforms, these funds will run out of money in 2027 and 2030, respectively. The proposed reforms will help the city achieve 90% funding by 2055.
• The reforms will add an extra annual amount of $450 million in contributions from the city by 2021. That amount will increase to $530 million in 2025, equivalent to 9% of city revenues in 2012.
• The reforms will also add another $50 million in annual payments from city employees by the year 2021, an increase of 29%.
• These reforms will significantly lower the benefits for current and future retirees compared to what they were promised under the original plan.
• Waiting five more years to implement the reforms will cost over $200 million a year in 2026 and beyond.
• Discipline on the part of city and state policy makers to resist deferring pension contributions is the key to the reform’s success.

To read the study, go here.

Defined Contribution Plans in the Public Sector: An Update
By Truong Bui, Reason Foundation

Though DC plans have lately received a lot of press attention when it comes to pension reform, a recent report from the Center for Retirement Research at Boston College by Alicia H. Munnell, Jean-Pierre Aubry and Mark Cafarelli finds that very few states have adopted pure DC plans. Moreover, most of the recent reforms have been a move to either a hybrid plan (a defined contribution plan combined with a defined benefit component) or a cash balance plan. Only 2% of public sector workers are covered by pure DC plans, compared to 89% of workers under traditional DB plans. Hybrid and cash balance plans cover 7% and 2% of public workers, respectively.

In total, non-traditional pension participants account for about 11% of the pubic workforce, and the number is expected to increase to 19% in 2042. The shift to alternative pension plans reflects the desire to bring about greater financial sustainability to cities and states and more benefits and flexibility to short-tenure workers.

Over at Teacherpensions.org, Leslie Kan notes the growth in the non-traditional plans from details found in the report. “Nationwide over the last five years, the number of public sector workers enrolled in voluntary or mandatory defined contribution, cash balance, and hybrid plans combined climbed from 942,000 to over 1.1 million participants, while assets in those plans rose from a $22.9 billion to $46.6 billion. Hybrid plans alone grew from around 13.3 billion in assets to 21.9 billion from 2007 to 2012, and now have over 736,000 participants.”

To read the Center for Retirement Research’s full report, go here.

Distilling Pension Reform Concepts to the Public
By Lance Christensen, Reason Foundation

It is often difficult to make complex pension concepts accessible and easy to understand for the general public. Yet, two members of Costa Mesa’s Pension Oversight Committee in California have attempted to do just that. Attorneys John Stephens and Tim Sesler wrote a 3 piece series in their local newspaper, Daily Pilot, that not only clarified the pension reform discussion happening in their jurisdiction, but also distilled the more difficult issues for a broader audience. They included a glossary of terms.

It does not take an expert to communicate changes in public policy. Reaching out to the general public through feature articles, opinion editorials and letters to the editor can demystify reform efforts and help concerned citizens know how reform can impact their tax dollars, government services and their lives. Stephens and Sesler provide a template for explaining pension reform. You can find the following 3 parts of their series linked below:

• Commentary: Explaining the work of the Pension Oversight Committee
• Commentary: How PEPRA has changed the rules for recent hires
• Commentary: Learning the language of public pensions

 

Quotable Quotes on Pension Reform

“Corporations have already made far more progress on reducing pension risks than state and local governments, and the difference is likely to grow given the slow and uneven pace of reform among municipal entities…The negative budgetary and actuarial ramifications of enacting retroactive defined-benefit enhancements is hard to understate. Not only are accrued liabilities immediately increased, but the singular action renders all previous years’ normal costs inadequate, forcing current and future generations of stakeholders to pay the bill while providing retroactive discounts to the previous generation of taxpayers and employees.”
-Al Medioli, Moody’s Vice President, Senior Credit Officer & co-author of “Divergent Pension Risks: US Corporates Will Remain in Far Better Position than State and Local Governments”

“No more will these men and women stand by while firefighters cut deals that only benefit them while screwing the cops and every other city employee.”
-Will Buividas, Phoenix Law Enforcement Association’s chief negotiator

“The pension theft bill must not be implemented before the courts have ruled. The fair and proper thing to do is not allow this legislation to cause any damage until the courts have spoken on its constitutionality.”
-Michael Carrigan, Illinois AFL-CIO President

“If you care about the amount of education money, I’d like to see (reform) part of this year’s budget.”
-Rep. Bill Adolph (R-Delaware, PA) Appropriations Committee chair

“The General Assembly enacted reforms to the pension system in 2011 to protect the long-term viability of the State’s pension fund, maintain a defined benefit program and ensure State employees and teachers that their hard-earned pension benefits will be there in the future…As a result of this reform, the State now contributes $1.6 billion each year – nearly 70% of all annual contributions – to the State Retirement System. As a result of actions taken in the budget, this year, the State will invest an additional $100 million into the pension plan – above the $1.6 billion that the State is required to invest to sustain the pension system, instead of the $200 million additional funding we had originally planned. Supplemental contributions increase by $50 million annually until they reach $300 million in fiscal 2019 and will remain at $300 million each year until the system is 85% funded.”
-Talmadge Branch, House Majority Whip in the Maryland House of Delegates in his highlights email of 2014 Legislative Session achievements sent to his constituents.

 

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. Please 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 lance.christensen@reason.org .

Lance Christensen
Director, Reason Pension Reform Project
Editor