Pension Reform Newsletter

Pension Reform Newsletter – October 2017

This newsletter from the Pension Integrity Project at Reason Foundation 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

News Notes Quotable Quotes on Pension Reform Contact the Pension Reform Help Desk


Articles, Research & Spotlights Kentucky Governor, Legislative Leaders Release Comprehensive Pension Reform Framework In recent weeks, Kentucky Governor Matt Bevin, Senate President Robert Stivers and House Speaker Jeff Hoover released a long-awaited framework for a comprehensive pension reform effort aimed at restoring pension solvency in a state recognized for having among the worst underfunding and the highest pension-related burden among the states. The reform framework includes shifting to a level-dollar amortization policy for all state pension systems; placing future teachers and state/local non-hazardous workers into defined contribution retirement plans; leaving defined benefit pensions in place for active workers until they reach elgibility for a full, unreduced pension benefit; leaving current retiree benefits and retirement ages untouched; eliminating sick leave credit from pension benefit calculations; and freezing pension benefit accruals for legislators moving them into a new defined contribution retirement plan. Gov. Bevin and legislative leaders are reportedly considering a special legislative session in November to tackle the issue. » Kentucky Pension Reform Framework, Draft Legislation, and Plan-by-Plan Summaries» PFM Group reports on Kentucky’s pension performance & reform recommendations» return to top


New Interactive Website Details Michigan’s Local Government Pension, Retiree Healthcare Debt The Pension Integrity Project at Reason Foundation has released a new interactive website—UnfundedMichigan.org—that pulls together data from over 2,700 financial reports by counties, cities, townships, villages, commissions, and authorities across Michigan to give taxpayers a simple, clear way to find and compare the unfunded pension and health care liabilities owed by their local governments at all levels. The website reveals unfunded local government retirement benefits totaling over $18 billion statewide. UnfundedMichigan.org reveals that 81 of 83 counties in Michigan have at least one local unit of government with a pension or retiree health plan that is less than 60 percent funded, the level typically considered critically underfunded. In fact, a total of 245 of Michigan’s cities, counties, townships and other municipal units have saved less than 1 percent of what is necessary to pay for retirees healthcare benefits. » INTERACTIVE WEBSITE: UnfundedMichigan.org» PRESS RELEASE» return to top


Pension Reform Should Consider Employee Needs, Workforce Objectives A key element missing from many national pension reform discussions is consideration of what is best for employees in the long run and how plan design meets employer workplace goals, writes Pension Integrity Project senior fellow Richard Hiller in a new column. Recognizing the reality of employment patterns today is critical in designing a retirement plan that meets employee retirement goals as well as employer workforce objectives, including recruiting and retaining 21st century employees. Accordingly, employers should reject outdated thinking regarding optimal plan design and instead focus on offering retirement plans that balance employer workforce goals with the reality of employee needs. While traditional defined benefit pensions may be a great option for long-tenured workers, Hiller writes that today there are also defined contribution retirement plan designs that are focused on lifetime income, like pensions, but recognize the mobility of the modern workforce. » FULL ARTICLE» return to top


Which States Are Hiding the Most Pension Debt? Every state pension plan gets to decide what kind of accounting practices it wants to follow when reporting the value of its assets and size of its unfunded liability. As a result, states have adopted a range of different approaches, leading to inconsistencies in the reported amount of pension debt compared to more accurate methods of measuring the promises made to teachers, police officers, firefighters, and other public-sector workers. And it should not be a surprise that some states are using practices that significantly understate the amount of their promised pensions. In a new article and inforgraphic, Reason’s Zachary Christensen analyzed the actuarial valuations of the top 649 pension plans in the country to compare their reported value of unfunded liabilities versus the value of this pension debt using a “market value of liabilities.” Arizona, Georgia, South Dakota, Washington State and Nevada top the list of worst offenders. » FULL ARTICLE & INFOGRAPHIC» RELATED: How Much Do Reported Pension Obligations Increase When Using a Market Valuation of the Promised Benefits?» return to top


News Notes Report Examines Rising Pension Contributions, Crowd-Out Effects For California State & Local Governments A new Stanford Institute for Economic Policy Research working paper by Stanford professor and former state assemblyman Joe Nation examines the magnitude of employer pension contribution rate increases and explores crowd-out effects in 14 particular California jurisdictions—the state, sample cities, counties, special districts and school districts. Among the findings: total employer pension contributions expanded by an average of 400% between 2002-03 to 2017-18, and employer contributions are projected to increase an additional 76%-117% on average from 2017-18 to 2029-30. The full report is available here. New Report Finds Relationship Between Unfunded Pension Liabilities and Government Borrowing Costs A new study by the Center for Retirement Research at Boston College examines the impact of pension finances and pension reforms on governmental borrowing costs from 2009 to 2014. The study finds that while higher ratios of unfunded pension liability to government revenue are associated with higher borrowing costs, the impact of reforms on borrowing costs were not statistically significant, a finding the authors suggest may be because those governments pursuing reform also tended to have poor general finances. The full report is available here. GAO Recommends Overhaul of National Approach to Financing Retirement A new report by the Government Accountability Office finds that the current piecemeal approach to tackling U.S. retirement issues is ineffective given the interrelated nature of challenges facing the system today. It also recommends that Congress establish an independent commission to comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve how the nation promotes retirement security. The full report is available here, and the highlights are available here. » return to top


Quotable Quotes on Pension Reform “We, as a Commonwealth, have a moral and legal obligation to fulfill the promises that have been made to our public employees. This is not just about fixing our present underfunding problem. It is also about ensuring that we leave a better, financially stable Kentucky to our children. The right thing to do is rarely the easiest, but we are determined to address this crisis with the most fiscally responsible public pension reform plan in the history of the United States. I am confident that the rest of the country will pay close attention to this excellent work by our legislature and for good reason. For those retired, for those still working, and for those yet to come: we are truly fixing our broken pension systems. United we stand. Divided we fall.”
—Kentucky Gov. Matt Bevin, quoted in, “Gov. Bevin, Senate President Stivers and House Speaker Hoover Unveil Plan to Save Kentucky’s Pension Systems (press release),” October 18, 2017.

“[Pension] returns haven’t been good enough and that is why there is a big pension hole in the US; a hole that would look even bigger if the schemes used the same form of accounting as companies have to. And that creates a further problem; the current accounting approach assumes it is cheaper to fund a public pension than to fund a private one. And that makes no sense.”
—Buttonwood (blog), “Can you afford to retire?,” The Economist, October 5, 2017.

“It’s not sustainable. These costs are going to make things incredibly challenging.”
—City of Sacramento, CA finance director Leyne Milstein on a projected doubling of Sacramento’s pension contributions over the next seven years, quoted in Brad Branan, “California cities get next year’s pension bill,” Sacramento Bee, October 13, 2017.

“By not addressing the pension problem [Los Angeles’] officials are setting the table for civil conflict. Retired public employees did not cause the pension problem but neither did the citizens, taxpayers and new or un-hired public employees suffering the consequences. By not acting, uncourageous elected officials are effectively throwing those innocent parties into a boxing ring to fight over declining dollars for jobs, benefits and services they prize and expect. They will unfairly blame each other when the real culprits are the elected officials who created the problem and those who neglected to act in time to defuse the consequences.”
—David Crane, “While LA Sleeps,” Medium.com (blog), October 22, 2017. » return to top


Contact the Pension Reform Help Desk The Pension Integrity Project’s Pension Reform Help Desk provides information and technical resources for those wishing to pursue pension reform in their states, counties and cities. Feel free to contact the Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. » return to top


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 leonard.gilroy@reason.org. Leonard Gilroy
Senior Managing Director, Pension Integrity Project
Reason Foundation

Anthony Randazzo
Managing Director, Pension Integrity Project
Reason Foundation

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

Anthony Randazzo

Anthony Randazzo is a senior fellow at Reason Foundation, a nonprofit think tank advancing free minds and free markets.