Pension Reform Newsletter – September 2014

This newsletter highlights articles, research, opinion, and other information related to public pension problems and reform efforts across the nation. To find previous editions, please visit https://reason.org/newsletters/pension-newsletter/.

Articles, Research & Spotlights

• Pension Reform Handbook: A Starter Guide for Reformers
• San Diego Pension Reform Case Study
• Are Teacher’s Pensions in Louisiana a Bargain for the Taxpayers?
• Public-Employee Compensation vs. Private-Employee Compensation
• Who Pays for Public Employee Health Costs?
• The Golden State’s Pension Reforms Get Spiked
• Dealing with Baltimore’s Pension Liabilities by Selling City Parking Garages
• Update on America’s Total Unfunded State, Local Government Pension Liability

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk

 

Articles, Research & Spotlights

Pension Reform Handbook: A Starter Guide for Reformers
By Lance Christensen and Adrian Moore, Reason Foundation

Reason Foundation has just released its pension reform handbook as a comprehensive starter guide for state and local reformers. This handbook aims to capture the experience of policymakers in those jurisdictions that have paved the way for substantive reform, and bring together the best practices that have emerged from their reform efforts, as well as the important lessons learned. By presenting these alongside the general principles and approaches that work to reform public policy, this handbook represents a “what you need to know” starter guide for anyone planning to reform their jurisdiction’s pension system.

The handbook begins by outlining the causes of pension problems, before taking the reader through seven pension reform case studies. It offers guidance to policymakers seeking to research their jurisdiction’s pension problem, lays out the general principles of reform, and then examines in detail what it takes to build a successful reform effort from the ground up.

To access the handbook, go here.

San Diego Pension Reform Case Study
By Adam Summers and Lance Christensen, Reason Foundation

The city of San Diego was once revered as one of the best-run cities in the country. In just a few short years, a couple of ill-advised plans to intentionally underfund the city’s pension system sent the self-described “America’s Finest City” from the heights of being touted as one of the most efficiently run large cities in America and the most efficient of California’s largest cities to the depths of financial despair, near bankruptcy, and a new moniker: “Enron-by-the-Sea.”

As of 2012, San Diego faced a nearly $2.3 billion unfunded pension liability. The city’s annual pension payment increased from $43 million in 1999 to $231 million in 2012, and consumed about 20% of the general fund budget in 2012. In addition, the city’s unfunded retiree health care liability was estimated at approximately $1.1 billion in 2011, but a deal reached between the city and its labor unions that year is expected to save over $700 million over 25 years. As of 2012, the retiree health care liability had been reduced to an estimated $444 million.

Faced with such serious problems, San Diego embarked on a series of pension reforms in order to help the city right its financial ship and get on the road to fiscal recovery. Perhaps the most well-known of these reform measures is Proposition B, which was featured on the June 2012 ballot. A recent study at Reason Foundation examines the history that led to the pension problems in San Diego, the path to reform, the Proposition B reforms adopted in 2012, the bureaucratic and legal hurdles the city still faces in implementing its reforms, and the lessons learned from San Diego’s experience.

To read more about the study, go here.

Are Teacher’s Pensions in Louisiana a Bargain for the Taxpayers?
By Lance Christensen and Adam Crepelle, Reason Foundation

According to the 2013 Comprehensive Annual Financial Report of the Teachers’ Retirement System of Louisiana (TRSL), the TRSL has unfunded actuarial accrued liability (UAAL) of $11.3 billion, with the funded ratio being only 56.4%. Louisiana had a population of about 4,625,470 people in 2013. This means each Louisiana citizen is responsible for approximately $2,450 of TRSL’s funding gap.

The average pensioner in TRSL who depends on a sustainable fund for their retirement may be troubled by this, but their pension board doesn’t seem to be phased by the huge liabilities that may impact their personal retirement funding. In fact, the TRSL member handbook claims the overextended pension plan it provides TRSL members is a great deal: “What a bargain!…The TRSL benefit the teacher paid $50,000 for is worth more than $335,000!”

To fulfill this promise, the TRSL assumes an unrealistic discount rate of 8 percent and relies on high expected investment returns to compensate for the low required contribution. That did not turn out well, as evidenced by the hefty unfunded liability and a fifteen-year rate of return of only 6.2%. The gap, of course, is picked up by taxpayers. In this case, “bargain” is clearly a relative term, and you don’t need a degree in mathematics to figure out who is on the better end of this bargain.

To read more about the issue, go here.

Public-Employee Compensation vs. Private-Employee Compensation
By Truong Bui, Reason Foundation

Government employee compensation has attracted increasing attention in the wake of growing pension and healthcare costs for public workers. Many argue that since government employees receive lower salaries than their private counterparts, it makes sense to reward them with higher benefits, including pension benefits and health insurance. In a paper at the American Enterprise Institute, Andrew Biggs and Jason Richwine look at compensation data in each state and compare non-public safety state government employees with comparable workers in the private sector.

Rather than merely comparing salaries between the two groups, the authors look at total compensation, which consists of salaries and employee benefits, including pensions and retiree health plans. They also control for differences in education, experience, and other factors to ensure comparability. In addition, they analyze non-monetary aspects of public employment, with an emphasis on job security.

The authors find that while public-employee wages may be on average lower than those paid in the private sector, state government workers in most states receive greater total compensation than comparable private-sector ones who work for large employers.

To read more about the paper, go here.

Who Pays for Public Employee Health Costs?
By Truong Bui, Reason Foundation

The cost of healthcare has been rising rapidly, and this is true for both public and private sectors. How have state and local governments dealt with rising employee healthcare costs? In a recent study for the National Bureau of Economic Research, economist Jeffrey Clemens of the University of California, San Diego, and economist David Cutler of Harvard, seek to answer this question. The authors look at several ways that state and local governments could manage rising healthcare costs, which include: reducing employee wages; reducing generous healthcare benefits for employees; reducing other non-labor inputs and quality of public services; or increasing revenue by raising taxes or issuing more debt.

Using data from school districts, the study finds that only a small portion (15 percent) of increases in healthcare costs are offset through reductions in wages. 85 percent of the cost increases go directly to higher total compensation. These increases in employee compensation are financed by transfers from higher levels of government, “from sources subject to significant discretionary reporting”. Also, the relative strength of the teachers’ unions has an influence on how the rising healthcare costs are shared. “Districts with weak unions appear to have offset increases in health care costs much more through reductions in the generosity of benefits”.

To read more about the study, go here.

The Golden State’s Pension Reforms Get Spiked
By Victor Nava, Reason Foundation

Last month, a California Public Employee Retirement System (CalPERS) committee approved a proposal that would allow 99 types of supplemental pay benefits to count toward state and local government employees’ pension benefits, nullifying, by administrative fiat, one of the key anti-spiking provisions in California’s Public Employees Pension Reform Act of 2013 (PEPRA).

PEPRA was quite clear in what does and doesn’t constitute pensionable compensation for employees hired in 2013 or later. PEPRA states that pensions for new employees must be based on employees “normal monthly rate of pay or base pay,” and the law specifically excludes one-time or ad hoc payments from being counted towards pensionable pay. However, the CalPERS committee determined during the August 19 hearing that temporary upgrade pay, along with 98 other different types of special pay items, will be counted as normal pay and will count toward pensions for all employees.

PEPRA was a weak effort by the California legislature at passing pension reform. While it left a lot to be desired it did have a few good, cost saving provisions in it like the special benefit pay anti-spiking provision. The CalPERS board ruling eliminating this anti-spiking provision will further reduce the effectiveness of PEPRA as a law that can make California’s pension system sustainable.

To read more about the issue, go here.

Dealing with Baltimore’s Pension Liabilities by Selling City Parking Garages
By Leonard Gilroy, Reason Foundation & Christopher Summers, Maryland Public Policy Institute

Baltimore Mayor Stephanie Rawlings-Blake recently announced a plan to sell off city-owned garages to generate between $40 million and $60 million that would be used to make improvements to city recreation centers. In a recent Baltimore Sun article, Reason’s Leonard Gilroy and Maryland Public Policy Institute president Christopher Summers wrote that this plan would represent an encouraging step toward shedding non-essential city assets and investing in more important priorities for the city’s residents and long-term fiscal health.

However, despite Baltimore’s commendable recent reforms that will help it stop digging pension problems deeper, the city still faces hundreds of millions of dollars in unfunded pension liabilities. Gilroy and Summers write that while investing privatization proceeds in recreation centers would certainly bring quality-of-life benefits, policymakers should consider whether that’s a better long-term investment for taxpayers than paying down unfunded pension liabilities.

Read the whole article here.

Update on America’s Total Unfunded State, Local Government Pension Liability
By Truong Bui, Reason Foundation

A recent study at the California Public Policy Center estimates the funding status of all US state and local government pensions systems based on the latest data from the US Census Bureau, combined with recent analysis by Wilshire Associates, a global investment advisory firm. The study finds all state and local pension systems at the end of 2013 had an estimated $3.6 trillion in assets and $4.86 trillion in liabilities, and an aggregate funded ratio of 74 percent, based on a median discount rate assumption of 7.75 percent.

The funded ratio changes dramatically when the discount rate is adjusted. The study offers two alternative cases. In the first case where the discount rate is 6.2 percent, which is the rate of return of a hypothetical fund containing 80 percent equity and 20 percent income instruments between 1900 and 1999, the funded ratio dropped to 61 percent. When the discount rate is reduced to 4.33 percent, which was the Citigroup Pension Discount rate in July 2014, the funded ratio falls to only 49 percent. In the second case, the unfunded liability rises to $3.70 trillion, compared to $1.26 trillion in the base case that uses the 7.75 percent discount rate assumption. These results are in line with a previous research on state pension unfunded liabilities. The study also provides an Excel file to estimate the unfunded liability amount with a specified discount rate input.

The author concludes with five recommendations for public sector pensions based on the principles governing Social Security:

• Increase employee contributions

• Lower benefit formulas

• Increase the age of eligibility

• Calculate the benefit based on lifetime compensation instead of final few years of earnings

• Make the benefit progressive

To read the study, go here.

 

Quotable Quotes on Pension Reform

“That means we can’t repair our roads, hire more deputies, or keep the libraries open because we have debt… You’re passing on the financial burden to the next generation. People that aren’t even hired yet will be working to support people who will retire soon.”
–Deidre Kelsey, Merced County Supervisor

“Our pension benefits are so generous that we really are creating millionaires.”
–Bill Gulliford, Jacksonville City Councilman

“Urban areas across the state are facing similar problems,” Grove said. “Shortfalls such as those seen in Scranton are putting a massive strain on local government services and we need to act now to reform the municipal pension systems before it is too late.”
–Seth Grove, State Representative, York, Pennsylvania

“The expanded definition of pensionable compensation exposes public employers to higher pension liabilities and contribution expenses, and appears to be a step backward from recent reforms… This decision expands the definition of pensionable compensation, in apparent conflict with PEPRA, and will increase pension costs for public employers if implemented. The magnitude of impact from this decision is not yet clear, but it raises more questions about the sustainability of California’s pension reform efforts, which continue to face legal and institutional challenges. Particularly worrisome to Fitch is the absence of detailed information on the analysis of its projected costs.”
–Stephen Walsh, Director; Doug Offerman, Senior Director; Rob Rowan, Senior Director; Fitch Ratings

“Is it equitable for government sponsored investment entities to control over $3.6 trillion in market investments, investments made in an economic environment which, if successful, perpetuates the gains of productivity flowing disproportionately to the wealthy elite, yet which, when unsuccessful, hits up taxpayers to cover the losses?”
–Ed Ring, Executive Director, California Public Policy Center

 

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

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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