Pension Reform Newsletter – November 2013

This newsletter seeks to shine a light on articles, research, opinion, reformers, and other information related to pension reform. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to lance.christensen@reason.org.

Articles

• San Jose Mayor Chuck Reed Reaches Out to Labor Unions, State Legislators on California Pension Reform Initiative
• Cincinnati Votes To Kick $800 Million Can Down The Road
• Kentucky Adopts Hybrid Pension Plan
• New Mexico Pension Reforms Already Paying Off
• Another Reason for Pension Reform: Compound Interest
• Illinois Continues to Dawdle on Pension Reform

Research

• Constitutional Public Pension Guarantees: Unfair, Unaffordable, and Bad Policy
• New Report Finds Improving Pension & Healthcare Costs Loom
• Maryland’s Pension System Over $19 Billion Underfunded

Meet the Reformers

• Implementing Pension Reform Webinars, October 2013
• Innovators in Action by Len Gilroy-“Advancing Pension Reform in San Jose” with San Jose, CA City Councilman Pete Constant

Contact the Pension Reform Help Desk

• Get assistance for your pension reform needs

 

Articles

San Jose Mayor Chuck Reed Reaches Out to Labor Unions, State Legislators on California Pension Reform Initiative
By Adam Summers, Reason Foundation

In last month’s newsletter, we reported about the California pension reform ballot initiative launched in October by San Jose Mayor Chuck Reed and the mayors of four other California cities. Since the initial announcement about the measure, Mayor Reed has written letters to labor union and state legislative leaders making the case for the initiative and inviting them to participate in finding solutions to state and local pension issues. The letters discussed the negative effects rising retirement costs have had on city services and expressed frustration that elected officials do not have the power to adequately address these problems.

As Mayors, we have seen firsthand how the rising cost of public employee retirement benefits has forced cities, counties and other government agencies to cut public services, layoff hardworking employees and defer badly-needed improvements to critical infrastructure.

These costs have helped drive some cities into bankruptcy and have pushed even more towards service level insolvency. We are also deeply concerned that huge unfunded liabilities in our state’s pension funds will jeopardize cities’ ability to pay out the benefits that your members will be counting on in retirement. Yet, as elected leaders, we do not have the tools we need to address this massive problem.

While Reed’s outreach attempts are admirable, he should probably not expect any significant reciprocation. Legislative leaders did their best to stonewall and water down Gov. Jerry Brown’s pension reforms package last year, and the representatives from 18 government labor unions responded to Reed in a sharply-worded letter that questioned his sincerity in pushing for reform and called upon him to drop his ballot measure.

Read the full text of The Pension Reform Act of 2014 here.

See a copy of Mayor Chuck Reed’s letter to labor union leaders here, and a copy of his letter to California legislative leaders here.

See here for more information on San Jose’s Measure B pension reforms.

Cincinnati Votes To Kick $800 Million Can Down the Road
By Sal Rodriguez, Reason Foundation

This month, Cincinnati, Ohio voters rejected Issue 4, which would have overhauled the city pension system by transitioning new city employees from the current defined benefit system to a defined contribution, 401(k)-style plan. Issue 4, titled the Cincinnati Pension Reform Charter Amendment Initiative, would have also required the city to eliminate the over $860 million unfunded liability for the Cincinnati Retirement System (CRS) in ten years. In addition, the initiative would have tied Cost of Living Adjustments (COLAs) to the consumer price index, with a cap of 3%.

The need for reform was, and still is, obvious: As of December 31, 2012, the city reports that the pension system is only 61% funded. The CRS currently has assets of $1.3 billion to cover $2.2 billion in liabilities, leaving an unfunded liability of $872 million. These funding problems prompted Ohio Auditor Dave Yost to comment that the system “has turned into a Frankenstein’s monster … and is on the verge of spinning out of control.”

Read the full commentary here.

Kentucky Adopts Hybrid Pension Plan
By Adam Summers, Reason Foundation

Many are looking forward to the advent of Kentucky’s recently approved changes to the state’s pension system that will place all employees hired after January 1, 2014 into a hybrid pension plan. Under this cash balance plan, both employees and the government employer contribute toward the worker’s individual retirement plan, which is managed by the retirement system. Employees are guaranteed an annual return of at least four percent.

The push for reform came after a significant decline in the pension plans’ funding status. The plan for employees in non-hazardous positions, for example, went from 111 percent funded in 2002 to just 30 percent funded in 2012. By then, Kentucky had one of the worst-funded state retirement systems in the nation. The Kentucky Employees Retirement System, which covers state workers, had racked up an unfunded liability of nearly $14 billion and the Kentucky Teachers’ Retirement System had a liability of an additional $12 billion. The shortfalls were primarily due to underfunding (the state and local governments failed to make full contributions for pensions and cost of living adjustments) and overly optimistic pension investment return and other actuarial assumptions. To address these problems in the present and in the future, the reforms additionally require cost of living adjustments to be paid for upfront, and accompanying legislation was passed to provide an additional $100 million of the estimated $131 million in annual contributions that will be required to pay down the state’s pension debt.

See this Pew Center on the States policy brief for more information on Kentucky’s recent pension reforms.

New Mexico Pension Reforms Already Paying Off
By Sal Rodriguez, Reason Foundation

Pension reforms passed earlier this year by the New Mexico legislature are already paying significant dividends in the health of the state’s pension system. In 2012, New Mexico’s main public pension fund had an unfunded liability of approximately $6.2 billion and a funding ratio of just 65 percent. This year, the unfunded liability has shrunk by more than $1.5 billion to about $4.6 billion, and the funding ratio has increased to 73 percent. The state still has one of the highest employer/taxpayer contribution rates in the country but things are now looking up for the health of the pension system

According to the Public Employees Retirement Association of New Mexico (PERA), the improvement is mostly due to the legislative changes. As summarized by an Albuquerque Journal editorial:

That good news [about the pension fund’s improving finance] is courtesy of changes made by the 2013 Legislature in collaboration with unions, changes that trimmed retirement benefits, enacted stricter retirement eligibility guidelines, required government employees to pay an additional 1.5 percent of their salaries into the pension fund, and increased taxpayers’ contribution by 0.4 percentage points (about $2.3 million more a year starting in fiscal 2015).

The reforms are intended to bring the pension fund to 100 percent funding within 30 years.

See this Albuquerque Journal editorial for more details on New Mexico’s pension reforms.

Another Reason for Pension Reform: Compound Interest
By Adam Summers, Reason Foundation

In a letter to the editor of the Joliet (Illinois) Herald News, Zachary Mottl, Chairman of the Technology & Manufacturing Association of Illinois, responds to Illinois Senate President John Cullerton’s (D-Chicago) assertion that there is no real pension crisis in the state, despite a reported unfunded liability of $100 billion. Mottl provides yet another reason for pursuing pension reform: compound interest.

As a result [of having the largest reported pension liability in the nation], our credit rating continues to slide. This means taxpayers will be forced to pay even higher penalty rates when the state borrows money. Illinois already pays the highest borrowing penalty rate in the nation – nearly three times higher than California’s.

What’s worse is that the problem grows by about $21 million every day that lawmakers fail to enact reform. This debt growth, coupled with the fact that the quickly growing pension payments continue to crowd out resources for core government services, should be reason enough for lawmakers to enact reform during the fall veto session.

It is certainly true that the longer state and local governments put off needed pension reforms, the larger the liabilities grow and the more painful the ultimate resolution will be. This is a perfect example of a moral hazard problem, where politicians with a short-term focus on rewarding those who keep them in office ignore long-term issues that require fiscal restraint, and that (they hope) will not come to a head until they are no longer in office.

See the full text of Zachary Mottl’s letter to the editor here.

Illinois Continues to Dawdle on Pension Reform
By Adam Summers, Reason Foundation

Mr. Mottl’s criticisms not withstanding (see the previous article on pension reform and compound interest), Illinois legislators do not seem to be in a hurry to enact any significant reforms to the state’s pension system, which now has an official unfunded liability of $100 billion (and likely much larger)-the biggest pension liability in the nation. Just before state legislators were to return to Springfield in late October for the two-week fall session, Senate President John Cullerton (D-Chicago) denied that the state’s pension woes were a crisis and blamed business groups for supporting aggressive pension reforms in order to stave off future tax increases.

“People really misunderstand the nature of this whole problem. Quite frankly, I don’t think you can use the word ‘crisis’ to describe it at the state level,” Cullerton said in an interview on WGN-AM radio.

Such attitudes, and the nature of electoral politics, are not providing much hope to many who see the need for pension reform. An editorial from The (Champaign, IL) News-Gazette sums up this despair:

Unfortunately, after avoiding the issue for months and years, legislators still don’t show much appetite for making the hard decisions required to reduce the $100 billion shortfall.

They returned to Springfield this week for the fall veto session, and practically the first story written about the planned gathering is that legislators are reluctant to do anything controversial because the election filing period comes up in December.

Some legislators apparently fear that they will draw primary or general election challenges if they cast any tough votes.

The pragmatists have apparently concluded that controversies, particularly the emotional pension issue, should be delayed until next year. But then, of course, it will be an election year, which has always been sufficient reason in the past for avoiding controversial issues.

While deep divisions remain among legislators about how serious the problem is and what kind of reforms should be made, the solutions are not getting any easier and Illinois’s pension obligations are not getting any smaller. The state’s pension debt grows by an estimated $5 million a day.

See the Chicago Tribune articles here and here for more on the legislative wrangling over pension reform in Illinois.

View the News-Gazette editorial here.

 

Research

“Constitutional Public Pension Guarantees: Unfair, Unaffordable, and Bad Policy”
By Stephen D. Eide and Dean Ball, Manhattan Institute for Policy Research

In a policy brief for the Manhattan Institute for Policy Research, Stephen D. Eide and Dean Ball examine the seven states that have specific clauses in their constitutions that protect public employee pensions. They include Alaska, Arizona, Hawaii, Illinois, Louisiana, Michigan, and New York. According to a 2012 Pew Center on the States report, which relies upon states’ own actuarial assumptions for its figures, these seven states together account for approximately $151 billion in unfunded liabilities, or about 20 percent of the $757 billion total for all state pension systems.

Eide and Ball argue that the rigidity of such constitutional protections of pensions is unfair to taxpayers and must yield to economic realities:

The seven states that protect public pensions in their constitution should consider removing these protections, as they elevate what is fair to workers over what is affordable to taxpayers. Ordinarily, everyone should be entitled to whatever compensation they were promised. But ordinary standards of fairness don’t apply to a bankrupt city, whose challenges are, by definition, extraordinary. Pensions should not be protected by state constitutions because this may prevent insolvent cities from unburdening themselves of commitments they cannot afford to pay.

Bankruptcy, a long and costly process, should be guided as much as possible by the principle of shared sacrifice among creditors. Constitutional pension protections enhance the uncertainty of an already-complicated process and deny negotiators the flexibility they need to reach an appropriate settlement with all parties.

Read the full policy brief here.

New Report Finds Pension & Healthcare Costs Loom
By Leonard Gilroy, Reason Foundation

The latest report by Michael A. Pagano and Christiana McFarland from the National League of Cities, finds that public employee retirement costs are of increasing concern to local governments. Among the notable findings:

• “Leading the list of factors that finance officers say have increased over the previous year are health benefit costs (84%) and pension costs (80%).” (p. 5)
• “When asked about the positive or negative impact of each factor on city finances in 2013, at least seven in ten city finance officers cited health benefit costs (80%), pension costs (75%), and infrastructure demands (73%) as negatively effecting city budgets.” (p. 5)
• “Two of the factors that city finance officers report as having the largest negative impact on their ability to meet needs are employee- and retiree-related costs for health care coverage and pensions. Pension and health care costs will persist as a challenge to city budgets for years to come[.]” (p. 9)

Find the link to the full study here.

Maryland’s Pension System over $19 Billion Underfunded
By Sal Rodriguez, Reason Foundation

The Maryland state pension system is underfunded by over $19 billion as of 2012, according to Gabriel J. Michael in a recent Maryland Public Policy Institute study. This is up from $11 billion in 2008, and reflects a combination of lower than necessary contributions to the state pension system and low investment returns. According to the report, only 11 of the 36 pension funds, encompassing state and county plans constituting the state system, are meeting at least the recommended 80% funding threshold. Overall, the Maryland state pension system is only 63.47% funded.

To read the rest of the commentary, go here.

Find the link to the full study here.

 

Meet the Reformers

Implementing Pension Reform Webinars, October 2013
By Lance Christensen, Reason Foundation

In October 2013, Reason offered four educational webinars to the public which shared experiences from former and current public officials who have successfully navigated the pension reform process in various jurisdictions across the country. In the presentations, they discussed strategies for implementing pension reform in cities, counties and states across the nation.

The webinar recordings are linked here, along with a downloadable copy of the presentation material. Though the expert panel alternated in each of the presentations, each of the webinars is substantively similar.

Innovators in Action-“Advancing Pension Reform in San Jose” with City Councilman Pete Constant
By Len Gilroy, Reason Foundation

In his most recent installment of Innovators in Action – “Advancing Pension Reform in San Jose” – Gilroy interviewed San Jose, CA City Councilman Pete Constant, who was one of the chief proponents of the city’s Measure B pension reforms passed by voters last year.

San Jose’s pension contributions grew from $73 million in 2001 to $245 million in 2012, and are now consuming more than one of every four dollars spent by the city. Over the last decade, San Jose’s unfunded liability for retirement benefits (including pensions and other retiree benefits such as health, dental, and vision care) has increased from $300 million to over $4 billion. Between 1991 and 2009, even after adjusting for inflation, the average annual benefit for police and fire retirees increased 75 percent, and the benefit for other city workers increased 54 percent.

In response, Constant, Mayor Chuck Reed, and others put forth a package of reforms to restore the city’s long-term pension stability and prevent further cuts to city services. These reforms include reducing retirement benefits for future employees, reducing future, unearned benefits for existing employees or requiring these employees to contribute more to maintain their current benefit levels, increasing retirement ages, discontinuing the practice of issuing bonus “13th check” payments to retirees when pension investment returns exceed certain thresholds, reducing automatic cost of living adjustments paid to retirees, and requiring future retirement benefit increases to be approved by voters.

Read the full interview here.

 

Contact the Pension Reform Help Desk

Reason Foundation has 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. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org.

Adam Summers
Senior Policy Analyst, Reason Foundation

Lance Christensen
Director, Reason Pension Reform Project

Editors