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:
- Analyses of Kentucky Pension Crises Set Stage for Reform Discussions
- Favorable Investment Returns for Pension Funds…This Year
- Do Public-Sector Employees Overwhelmingly “Choose” DB Plans?
- Effects of Alternative Investments on Returns and Volatility
- Los Angeles City, County Facing Massive Pension and OPEB Debt
Late last month, the consulting firm PFM Group released the final of a series of reports analyzing the causes of Kentucky’s current pension crisis and recommending a bold and far-reaching package of proposed solutions that include changes to actuarial assumptions and debt amortization methods, freezing benefit accruals and moving current and future state and local non-hazardous workers to defined contribution retirement plans on a prospective basis, and a host of other funding policy and benefit changes affecting retirees, active workers and future workers alike.
In the wake of the report, Gov. Bevin and legislative leaders have reportedly begun discussions about a comprehensive reform effort expected to culminate in a special legislative session later in the fall. With Kentucky having among the worst underfunding and the highest pension-related burden among the states, Kentucky policymakers’ efforts will be watched closely by pension experts nationally.
» Saving Kentucky’s Pensions (official Bevin administration website)
» PFM Group reports on Kentucky’s pension performance & reform recommendations
» Pension underfunding cited in Kentucky’s July 2017 credit rating downgrade
Preliminary fiscal year 2017 investment returns for public sector pension systems are starting to roll in, and the news is mostly good. This is a welcome change of pace for retirement systems across the country, given the anemic investment returns for the past two fiscal years (2015 and 2016). But according to Reason’s Anil Niraula and Daniel Takash, just as one bad year won’t permanently alter a pension plan’s financial future, one year of impressive investment gains doesn’t mean public pension systems across the country are out of the woods.
» FULL ARTICLE
A new research paper from the National Institute on Retirement Security and Milliman examined public sector plans that offer participants either a defined benefit (DB) pension or defined contribution (DC) plan and concludes that around 88% of new hires prefer DB plans to DC plans. Reason’s Daniel Takash challenges this interpretation, finding that many of the participants considered did not choose either a DB or DC plan—instead they simply stayed with the default option presented to them, a finding consistent with behavioral economics.
» FULL ARTICLE
A recent study by the Center for Retirement Research at Boston College explores pension fund investment in alternatives and related impacts on returns and volatility. The study finds that different alternative categories may have different effects on risk and returns. Further, investing in alternatives does not necessarily yield higher returns, and the additional risk involved is not clear either. However, Reason’s Truong Bui finds that this does not mean that the current investments made by public plans are not highly risky.
» FULL ARTICLE
A recently completed actuarial report shows that Los Angeles County has over $25 billion in unfunded retiree healthcare liabilities, which dwarfs the County’s already sizeable $7.4 billion in unfunded pension liabilities. Meanwhile, the City of Los Angeles is operating three pension funds for its employees that have $10.3 billion in combined pension debt. In a recent set of blog posts, Reason’s Marc Joffe writes that both jurisdictions need to take steps to address these major threats to their long term fiscal sustainability.
» BLOG: City of Los Angeles Pension Gap Surpasses $10 Billion
» BLOG: L.A. County’s $25 Billion OPEB Debt
“Modernizing the [Michigan] school employee retirement system means these benefits will be there for retired school employees in the long term, while at the same time protecting taxpayers from escalating liabilities. […] We worked hard to make sure everyone was at the table in discussions about how to best revise the system and I’m thankful for all of the input and collaboration that led to a great outcome for current and future retirees as well as all Michigan taxpayers.”
—Michigan Gov. Rick Snyder on signing into law Senate Bill 401, quoted in “Gov. Rick Snyder signs legislation that protects retirement benefits of school employees, reduces financial risks for taxpayers” (press release), July 13, 2017.
“No more pretending that everything is just fine. […] Everyone needs to understand the severity of the [pension] situation. To do otherwise will lead to solutions that fall short of solving the problem.”
—Kentucky state budget direction John Chilton in an email to city and county officials, cited in John Cheves, “‘No more pretending.’ Kentucky issues dire warning on pensions to local governments,” Lexington Herald Leader, September 7, 2017.
“This crisis is no longer on the horizon, it is at our doorstep. […] The future of Missouri’s finances are at stake, and this is a conversation that we need to have.”
—Missouri State Treasurer Eric Schmitt commenting on the state’s pension plan being only 60% funded, cited in, Summer Ballantine, “Missouri employees’ pension plan underfunded by $5 billion,” Columbia Daily Tribune, September 13, 2017.
“We’re not paying anywhere close to what we should be paying, and if we did it would absolutely decimate schools. […] It’s shocking. The numbers just keep going up, and it’s going to take a lot more out of what we’re able to do for kids in the classroom.”
—Oregon School Boards Association Executive Director Jim Green commenting on Oregon’s rising pension contribution rates, quoted in Ted Sickinger, “PERS: Oregon pension deficit climbs to $25.3B, meaning higher costs going forward,” The Oregonian, September 27, 2017.
“In total more than $250 billion will be diverted from California classrooms to finance unfunded retirement promises. That’s five times more than Bernie Madoff stole. Even the 2008 federal bank bailout doesn’t compare because in that case taxpayers got all their money back plus profits. The money already stolen in the Great California Classroom Robbery —it’s truly a theft, as explained below — will never be recovered and provides a devastating illustration of how “debt devours the future,” as Thomas Piketty puts it in Capital in the 21st Century. The victims are schoolchildren, young teachers and taxpayers.” [emphasis author’s]
—David Crane, “The Great California Classroom Robbery,” Medium.com (blog), July 8, 2017.
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Senior Managing Director, Pension Integrity Project
Managing Director, Pension Integrity Project