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:
- Arizona Reforms Second Public Safety Pension Plan
- South Carolina Adopts New Funding Policy
- In Defense of Full Pension Funding
- IMF Report Predicts Slow Productivity Growth in Years to Come
Arizona recently enacted pension reform legislation that will put Arizona’s struggling Corrections Officer Retirement Plan (CORP)—which has accumulated at least $1.4 billion in unfunded liabilities since 2000 and stands at only 53% funded today—on a path to financial solvency. The CORP reform is expected to shift approximately 90% of new hires into a defined contribution retirement plan and nearly eliminate the potential for new unfunded liabilities once the current pension debt is paid off.
The reform had strong bipartisan support in the legislature and garnered the support of public safety associations, employers, and taxpayer advocates. The Pension Integrity Project at Reason Foundation assisted in the collaborative process by developing and analyzing reform options and serving as an intermediary negotiator between the legislature, labor groups, and employer representatives.
That a comprehensive pension reform could attract such a diverse group of stakeholder supporters is noteworthy on its own. Even more important is that the CORP pension reform marks the completion of a two-year, bi-partisan process of overhauling retirement benefits for all public safety employees in Arizona. Taken together, these reforms demonstrate that a collaborative, stakeholder engagement process can successfully deliver substantive policy change without the typical political divisiveness often seen in pension reform debates.
» FULL ARTICLE
» PRESENTATION: Analysis of Arizona CORP Pension System and Reform (April 2017)
[NOTE: The Pension Integrity Project at Reason Foundation played a central role in designing the policy option set, providing actuarial analysis of proposed reform concepts, and negotiating the final enacted reform. For more information about the CORP reform process, contact Reason’s Leonard Gilroy.]
Last month South Carolina enacted a law that will increase employer contributions into the South Carolina Retirement System (SCRS) and Police Officers Retirement System (PORS), the two largest public pension plans in the state. According to Reason’s Anthony Randazzo and Anil Niraula, these plans will be better off with the funding policy changes relative to the status quo, but more reform work still needs to be done to put South Carolina on a true path to sustainability and solvency.
» FULL ARTICLE
» TESTIMONY: South Carolina Pension Analysis (Oct 2016)
» EXPLAINER: Why South Carolina Needs a New Retirement Plan for Future Hires
» EXPLAINER: Why New Hires Are Not Necessary to Fully Fund the SCRS Pension Plan
A recent report by the Haas Institute at the University of California, Berkeley asserts that the public pension crisis is overblown and that public sector retirement systems are really just victims of overzealous Government Accounting Standards Board rules related to reporting risk. The report further contends that it is wrong to treat permanent governments like private companies that may shut their doors because this creates avoidable financial pressures on government employers. In a recent Forbes.com article, Reason’s Anthony Randazzo and Leonard Gilroy find that this report, while a thoughtful and nuanced critique, seeks to upend pension accounting in ways that would—counter to its intention—jeopardize retirement security for public employees, not enhance it.
» FULL ARTICLE
A new report by the International Monetary Fund outlines a pessimistic view for global productivity in the near- and medium-term future. In short, productivity growth is more likely to slow down than increase in the coming years due to demographic changes, underinvestment in human capital, and a lack of innovation. According to Reason’s Daniel Takash, the lack of innovation and productivity growth means overall growth in investment returns will likely be sluggish for the foreseeable future.
» FULL ARTICLE
New Hoover Institution Report Finds $3.8 Trillion in Unfunded State and Local Pension Liabilities: The Hoover Institution recently released its annual report on pensions—Hidden Debt, Hidden Deficits—which found that total unfunded pension liabilities rose to $3.85 trillion in 2015, which is approximately $434 billion more than the previous year and more than double the amount that is officially recognized by the pension plans. The report also found that pension systems saw average investment returns of only 2.87% in 2015, relative to an average discount rate of 7.36%. The report, which covered 649 U.S. public pension systems, is available here.
New Pew Report Finds $1.1 Trillion in Unfunded State Pension Liabilities: The Pew Charitable Trusts recently released their annual report on state pension funding—The State Pension Funding Gap: 2015—finding that unfunded pension liabilities reached $1.1 trillion in fiscal year 2015, an increase of $157 billion (17%) over 2014 levels. Further, the aggregate funded ratio of these pension plans was 72% in 2015, down from 75% the previous year. The full report is available here.
Analysis: Pension Benefits Not Helping Teacher Retention: In a new Education Next article, Chad Aldeman and Kelly Robson at Bellwether Education Partners reviewed teacher pension plans in all 50 states, comparing the share of employees that vest in their employer contributions, as well as the share that fulfill the requirements to receive full pension benefits. Examining teacher pension plans’ assumptions, they found that on average, over 50% of teachers do not receive any employer pension benefits because they leave before they are eligible, and only one in five stays on the job long enough to receive full benefits at retirement. The full analysis and 50-state breakdown is here.
Quotable Quotes on Pension Reform
“Return now to what’s wrong with the financial management of public pensions in the United States. It boils down to this: the plans, as currently managed, do not account for the cost of investment risk. As a result, the true cost of providing a secure pension benefit is more than what is reported, so funding is insufficient.
This means benefit payments down the road will depend to a significant degree on the ability of future governments to make up potentially significant shortfalls. The money incorrectly thought saved in smaller government contributions today is just the unaccounted-for market price of risk. That leaves the risk itself to be borne by someone in the future.”
—Ed Bartholomew, “Public Pension Plans,” Milken Institute Review, April 28, 2017.
“As the astute reader will infer, employees profit from the highest possible investment return assumption being used by CalPERS to set Normal Costs. The higher that rate, the lower the Normal Cost, which is their only cost. But the higher that rate, the greater the likelihood of Unfunded Liabilities. Because public employees control CalPERS, investment return assumption rates have been set at levels virtually guaranteeing the creation of Unfunded Liabilities. That transfers wealth from citizens to employees. The transfer has been huge: citizens are already on the hook for $60 billion of Unfunded Liabilities for state employee pensions accruing interest at 7.5% per year and more transfers are occurring every day CalPERS continues setting Normal Costs unfairly low.”
—David Crane, “California Cover Up,” Medium.com (blog), May 19, 2017.
“[S]tates should stop trying to use pension plans as a tool to shape their workforce and instead think of them as a source of retirement benefits for a large and important class of workers. A close look at the financial assumptions that undergird their plans shows that the states themselves don’t believe these incentives are effective at retaining teachers; in fact, they count on high rates of teacher turnover in order to balance the books. Focusing instead on offering retirement plans that provide all teachers the opportunity to accrue adequate benefits would be a more realistic and equitable approach.”
—Chad Aldeman and Kelly Robson, “Why Most Teachers Get a Bad Deal on Pensions,” EducationNext.com, May 16, 2017.
“Our elected officials must heed the advice of pension fund managers, respect the evidence and reject divestment of California public monies [from companies involved with the Dakota Access Pipeline project]. Decisions affecting California’s pension funds must be guided solely by what is best for the monies under their management. Anything less will hurt retirees, taxpayers and businesses.”
—Carlos Solorzano, CEO of the Hispanic Chambers of Commerce of San Francisco, “Divestment from California public pension funds is bad for pensioners,” San Francisco Chronicle, April 12, 2017.
“[T]axpayers have a right to decide how much they’re willing to spend on the people employed by their municipality or state. Hiding the true cost of that compensation by lowering the pension funding requirements — while simultaneously relying on an unpriced, undisclosed call option on their future earnings to make the math work — is both unfair and undemocratic.”
—Megan McArdle, “Don’t Mess Around With Government Pensions,” Bloomberg View, April 11, 2017.
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Senior Managing Director, Pension Integrity Project
Managing Director, Pension Integrity Project