Pension Reform Newsletter — September 2018
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Pension Reform Newsletter

Pension Reform Newsletter — September 2018

Georgia’s teacher retirement plan facing risk, California pension crisis hits disadvantaged students, and more.

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 

  • Georgia’s Teacher Retirement Plan Facing Risk
  • California Pension Crisis Hits Disadvantaged Students
  • Fort Worth Needs a Multifaceted Pension Solution
  • Explaining Differences in Pension Plan Returns
  • Two Years of Good Returns Helps—But Doesn’t Fix—Pension Funding

News in Brief

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Georgia’s Teacher Pension Plan Facing Significant Financial Risk

According to a new joint report from the Pension Integrity Project at Reason Foundation and the Georgia Public Policy Foundation, Georgia’s Teachers Retirement System (TRS) needs meaningful pension reform to avoid future solvency problems. TRS’ current $24.8 billion in unfunded liabilities stem from a variety of problems, including consistently achieving returns below the assumed rate of return and other missed actuarial assumptions. This rising debt has required a nearly $600 million increase in the state’s annual pension contributions the last two years, and the report shows that future underperformance could result in the continued growth of employer contributions well beyond current levels. These growing costs are crowding out other K-12 spending in Georgia, making it increasingly difficult to dedicate education funds to teacher pay, classroom supplies and other priorities. Policymakers must find a way to both manage TRS’ existing debt and reduce the plan’s risk in the future, otherwise the retirement security of Georgia’s teachers could be threatened in the long run.

» FULL REPORT

» COMMENTARY

» SOLVENCY ANALYSIS  

California’s Pension Crisis Hits Disadvantaged Students the Hardest

Despite increases in education funding, California will still have difficulties getting much-needed resources to some of its more disadvantaged schools. Estimates from the state Department of Finance show that California schools may have to dedicate half of the recent funding increases to growing pension debts. In a recent Orange County Register commentary, Reason’s Lisa Snell identifies the increasingly difficult situation many school districts face. According to Snell, districts with higher concentrations of low-income students appropriately receive higher levels of funding, but lower-income schools that are part of a higher-income district can be left out as districts dedicate ever more revenue to legacy pension and retiree health care costs. An example of this is the Los Angeles Unified School District, which is dedicating more and more of its funding to pensions, leaving less money for critical school programs. Unfortunately, it is the lower-income schools that are hurt most by tightening budgets.

» FULL ARTICLE

» LAUSD REPORT

Fort Worth Employee Pension Challenge Requires a Multifaceted Solution

Fort Worth’s leaders and public workers face a critical decision in the upcoming months, which could determine the future solvency of the city’s pension plan. The Fort Worth Employees’ Retirement Fund (FWERF) calculates a $1.6 billion shortfall in funds available for promised retirement benefits to employees and retirees and estimates that the plan will run out of money by 2048. The city council presented a possible solution to the plan’s current problems through increased contributions and changes to benefits, but this proposal fails to address several key issues that contributed to Fort Worth’s current woes. Pension Integrity Project analysts Zachary Christensen and Andrew Abbott analyze the factors driving FWERF’s current unfunded liability and detail the types of solutions the city needs to enact lasting, meaningful reforms.

» FULL ARTICLE

Explaining Differences in Pension Plan Returns

The Center for Retirement Research (CRR) at Boston College published a study this summer on investment returns for public pension plans. The study examines returns during the period from 2001 to 2016 and finds that plans, on average, earned 5.5 percent on investments during the sixteen-year period. This result is well below the average assumed rate of return, which was about 7.6 percent. The study finds a wide range of return results between all pension plans. As Pension Integrity Project analyst Truong Bui explained in a recent article, the study’s major findings in pension plan investment returns indicate that differences in asset class returns are a bigger factor for investment performance than asset allocation. In this analysis, Bui details the significance and the weaknesses of the CRR study.

» FULL ARTICLE

Public Pension Funding Remains Challenging, Despite Two-Year Streak of Healthy Investment Returns

Incoming reports on pension plan investment returns are painting a positive picture for fiscal year 2018—welcome news following a strong year in 2017. Good returns certainly have a positive effect on a plan’s ability to achieve healthy funding, but it is wise not to place too much importance on the results of just a few years, as Pension Integrity Project analyst Anil Niraula explains in a recent commentary. Niraula lists some notable return results from this year’s reports. Using historical data, he establishes the importance of squarely focusing on long-term returns, not just those in the near term.

» FULL ARTICLE

News in Brief

Study Finds Growth in Benefit Spending Outpaces School Funding: A new study from TeacherPensions.org compares the growth in national school spending to the growth in spending for teacher’s benefits. Between 2005 to 2014, spending on benefits greatly outpaced the growth in school spending, meaning that despite an increase in funding to schools, less money is actually available for classrooms now than there was before. The study finds that spending on K-12 education increased by 1.6 percent during the timeframe, while spending on benefits grew by 22 percent. In real terms, despite a national increase in school spending, the amount that made it to the classroom was $11 billion less in 2014 than it was in 2005. The full study is available here.

Annual Report Shows Improvement in City, County Pension Funding: Wilshire Associates published its 16th annual report on the financial condition of pensions sponsored by cities and counties. Using official financial reports from 96 retirement systems, the report calculates that the average funded ratio has gone up from 66.5 percent in 2016 to 71.0 percent in 2017. The improvement in funding can be attributed mostly to strong asset returns over the past year. The report also found that nearly half of the plans studied lowered their discount rate over the previous year, causing the median rate to fall from 7.50 percent to 7.25 percent. According to the analysis, 93 percent of the studied plans are underfunded, with 14 percent falling below 60 percent funded. The full study is available here.

Benefits Growing Faster than Salaries for DC Metro: The U.S. Government Accountability Office (GAO) released a report to Congress that assesses current challenges for the Washington Metropolitan Area Transit Authority (WMATA). Among the primary concerns detailed in the report is the growing cost of the transit authority’s employee pension plan. According to the GAO’s analysis, WMATA costs have increased by an average of 3 percent every year since 2006, most of which can be attributed to the rising costs of its defined benefit plan. Contributions to the pension plan rose by an average of 19 percent every year during this period. With this report, the GAO suggests a more thorough assessment of the risks involved with its pension plan so it will be better prepared for economic scenarios that could significantly increase necessary contributions into the plan. The full study is available here.

Quotable Quotes on Pension Reform

“If the state legislature’s intent is to increase equity and positive education outcomes for California’s most disadvantaged students, leaders must make pension reforms work and address school districts’ long-term liabilities. If they don’t, taxpayers’ extra investments intended for California’s high-poverty and at-risk students will continue to be misappropriated and futile.”

–Reason Foundation Director of Education Lisa Snell, “California’s Pension Crisis Hits Disadvantaged Students the Hardest,” Orange County Register, September 8, 2018.

“The bigger issue is the so-called hidden borrowing problem that, when folks that hired teachers and firefighters and so forth 30 years ago, they didn’t pay them the full amount that would make their salaries as well as their pensions robust…Instead, they underfunded the plans, leaving today’s taxpayers to pay for services that were rendered 30 years ago.”

—International Foundation of Employee Benefit Plans Professor at Wharton Universtiy of Pennsylvania Olivia Mitchell, quoted in “The Time Bomb Inside Public Pension Plans,” Knowledge@Wharton, August 23, 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.