Pension Reform Newsletter – May 2018
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Pension Reform Newsletter

Pension Reform Newsletter – May 2018

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 

  • Colorado Enacts Bipartisan Pension Reform
  • New Report on Austin’s Pension Crisis
  • States Adjust Investment Return Assumptions
  • Lessons from Puerto Rico’s Pension
  • Dallas Pension Sees Success from Reform

News in Brief

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Colorado Enacts Bipartisan Pension Reform

After months of debate, the Colorado Legislature passed comprehensive, bipartisan reform meant to put the struggling Public Employees’ Retirement Association (PERA) fund on a path to solvency. Among other changes, Senate Bill 200 increases employee and employer contributions, reduces Cost of Living Adjustments (COLAs), increases the retirement age for new hires, introduces an automatic annual adjustment to contributions and COLAs, and expands the plan’s optional defined contribution retirement plan to all local workers. In a new analysis, Reason’s Anthony Randazzo, Leonard Gilroy, and Zachary Christensen evaluate Colorado’s landmark reform, finding that the resulting bill falls short in several areas but nonetheless represents a significant improvement on many of the objectives of meaningful pension reform.

» FULL ARTICLE

» REFORM SCORECARD: Does Colorado’s 2018 Legislation Meet Objectives for Good Pension Reform?

Evaluating Solutions for Austin’s Billion Dollar Pension Crisis

In a new report, the Pension Integrity Project at Reason Foundation and the Texas Public Policy Foundation (TPPF) provide a detailed pension analysis for the City of Austin Employees’ Retirement System (COAERS), which currently has approximately $1.3 billion in unfunded pension liabilities and is in need of reform to ensure its long-term solvency and longevity. The report provides a detailed examination on the various factors that contributed to the city’s pension debt, and using advanced modeling methods, it evaluates a range of potential policy options that can be applied today to prevent more difficult decisions in the future.

» FULL STUDY

» NEWS RELEASE

New Jersey and North Carolina Retirement Systems Modify Investment Return Assumptions in Opposite Directions

Two states are making moves to adjust the way they view future pension liabilities, but are moving in two completely different directions. North Carolina adopted an adjustment to its assumed rate of return from 7.2% to 7.0%. Meanwhile, New Jersey has adjusted its assumed rate of return to be higher from 7.0% to 7.5% for the next fiscal year. Reason’s Anil Niraula details these differing paths and illustrates the impact a change in return assumptions makes on a pension fund.

» FULL ARTICLE

The Cautionary Tale of Puerto Rico’s Pensions

Now in the process of restructuring its debt, Puerto Rico has defaulted on over $1.5 billion in debt. This process has proven to be devastating to the commonwealth’s pension system, which will no longer be able to provide a pension to future workers and will not be able to fully pay retirement promises already made. Reason’s Marc Joffe details the chronic problems that led to the failure of Puerto Rico’s Employee Retirement System, including underpayment of required annual contributions and undercalculation of liabilities. According to Joffe, Puerto Rico serves as a lesson to the rest of the US that chronic pension mismanagement can result in serious consequences for public workers.

» FULL ARTICLE

Dallas Police and Fire Pension Reforms See Early Success

Just a year after major pension reform, Dallas is beginning to see the first signs of positive results. A 2017 change in governance structure for the Dallas Police and Fire Pension System has resulted in significantly positive steps for the plan, including a more balanced board and a more responsible Deferred Retirement Option Plan (DROP) policy. Reason’s Anil Niraula and Zachary Christensen explain that Dallas is an example of effective governance reform, and recent developments justify measured optimism for the future of the city’s pension plan.

» FULL ARTICLE

News Notes

New Paper on Pension Susceptibility to Market Volatility: Pew and the Harvard Kennedy School’s Mossavar-Rahmani Center for Business & Government released a new paper that studies the impact of lower investment returns on state pension systems and budgets. To explore the impact of market volatility, they use stress testing on the pension plans of ten states. They find that under scenarios with poor economic returns, pension system insolvency is a real possibility for states with large unfunded liabilities and low funded ratios, and many states will struggle with increasing costs. The paper also emphasizes the importance of stress testing on pension plans and recommends that this level of analysis be available to policymakers. The full paper is available here.

New Report on Rhode Island Municipal Pensions: A recent report from the Rhode Island General Treasurer grades the health and sustainability of the state’s 34 independent municipal pension plans. These “report cards” show that more than a third of the municipally managed plans are in critical condition, with assets that cover less than 60% of the promised benefits. The report also demonstrates the wide variance in investment returns across different cities, with 2017 returns ranging from 7% to 21%. A story on the results is available here and the full report is available here.

Quotable Quotes on Pension Reform

“People, particularly millennials, they move around a lot, they change jobs…[W]hat we don’t want is for [the current pension benefit structure] to be a detriment to these young people for having worked for the state. We want to attract good workers and we want to have a pension system that better meets their needs to help retain these workers.”

—Louisiana State Employees Retirement System (LASERS) Executive Director Cindy Rougeuo commenting on LASERS-backed Senate Bill 14, recently withdrawn legislation that would have introduced a hybrid retirement plan for new hires, quoted in Wallis Watkins, “Louisiana Retirement System Tries To Adapt To Changing Workforce,” New Orleans Public Radio, March 26, 2018. 

“The state’s current plan is basically a traditional pension, where employees retire with a defined benefit for the rest of their lives. The [proposed] new plan is a hybrid. A portion of it retains a guaranteed benefit, but the remainder more closely resembles private-sector plans such as a 401 (k) defined contribution plan. It would only effect employees hired beginning in 2020 and would have no impact on current state employees.

The irony is that the new plan would benefit both employees and the state. In today’s more mobile workforce, the state’s current plan penalizes workers who basically choose not to make state government a lifelong career. Data show that today the vast majority of new state hires eventually move on to private-sector careers accruing little or no retirement benefit from the state.”

Council for a Better Louisiana President and CEO Barry Erwin, “CABL: Outside forces should not derail Louisiana pension reform,” Greater Baton Rouge Business Report, April 25, 2018.

“In the event of a major market correction like the one experienced in 2008, large exposure to illiquid assets such as private equity, hedge funds, and real estate funds — where money is tied up for 10 years or more — can be treacherous […] We could find ourselves forced to sell investments at a loss at the very worst time to meet payment obligations.”

—Pennsylvania State Treasurer Joseph Torsella, quoted in Joseph N. DiStefano, “Market peaked? Pa. SERS pension trims stocks, swings back toward private buyout, real estate, hedge funds,” The Inquirer, April 30, 2018.

“I think what you see happening in the state and local and municipal sector is it has now become very, very clear how expensive defined benefit plans are. I think we’re headed for a big crisis across the country…Pensions are now becoming the tail that wags the government dog, if you will.”

—International Foundation of Employee Benefit Plans Professor at Wharton University of Pennsylvania Olivia Mitchell, quoted in Brian Eason, “In Colorado and Across US, Pensions Are Part Of Teacher’s Protest Gripes,” Colorado Public Radio, May 1, 2018.

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, Policy Analyst, Reason Foundation

Zachary Christensen is a policy analyst for Reason Foundation's Pension Integrity Project.