Pension Reform Newsletter – December 2013

This newsletter seeks to shine a light on articles, research, opinion, reformers and other information related to public pension problems across the country at the state and municipal levels. As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to lance.christensen@reason.org. You can also follow the discussion on pensions and other governmental reforms at Reason Foundation’s website or on Twitter @ReasonReform.

Articles

• Court Pension Ruling Gives Detroit New Hope – Steve Greenhut
• Five Reasons Why Illinois’s Pension Fix Is a Step Backward – Ted Dabrowski
• Alaska Governor Proposes $3 Billion towards Paying Down Pension Debts – Sal Rodriguez

Research

• Twenty Myths about Public-Sector Pension Plans – Manhattan Institute
• Saving Workers’ Retirement – Oklahoma Council of Public Affairs

Quotes on Pension Reform

Contact the Pension Reform Help Desk – Get assistance for your pension reform needs

Articles

Court Pension Ruling Gives Detroit New Hope

U-T San Diego columnist Steven Greenhut offers some analysis on the recent federal bankruptcy decision for Detroit and what it means for future municipal bankruptcies, especially as it applies to constitutional protections of pensions, as compared to other benefits or contracts. Greenhut writes, “This was a landmark decision not because of any surprise about the fate of Detroit, with its $18 billion in debt. The big news is the judge ruled that pension rights, which have protections in the Michigan constitution, can be ‘impaired’ under federal bankruptcy law. This could have nationwide impact if it becomes precedent.”

As this ruling applies to other states and municipalities and their perception on pension protections, he goes on to write, “Broke California cities have been assuming that they cannot address what can be their biggest liability, pension debt. That’s making it difficult to fix their long-term fiscal problems. Vallejo went bankrupt in 2008 but didn’t touch pensions. Now, the city is in trouble again. A budget document from Stockton suggests that even after short-changing creditors and raising taxes, the city might struggle in a few years. The judge in that case hinted at what Rhodes said, that vested pension benefits are not protected in bankruptcy. But Stockton, like Vallejo, chose not to take on the politically powerful California Public Employees’ Retirement System, which says pensions are sacrosanct in all situations. They saw how CalPERS battled San Bernardino as it has tried to address pension debt in its bankruptcy. So pensions have remained the elephant-sized jar of red ink in every city’s living room – until now.”

To read more of Steven Greenhut’s commentary, click here.

Five Reasons Why Illinois’s Pension Fix Is a Step Backward

Ted Dabrowski, Vice President of Policy at the Illinois Policy Institute, outlined five separate reasons why the pension reforms the Illinois General Assembly sent to Governor Pat Quinn did not go far enough and how the failure to enact real reforms may handicap future efforts. Though this column predated the actual legislation and he did not have the exact details of the bill, he lays out a prescient case against the legislation that would “keep Illinois in a chronic state of crisis.”

To see the Illinois Policy Institute’s reaction to the passed legislation – which was eventually signed by the Governor – in addition to detailed research on the problems with the pension systems in Illinois and Chicago, visit the Illinois Policy Institute website.

Alaska Governor Proposes $3 Billion towards Paying Down Pension Debts
By Sal Rodriguez, Reason Foundation

On December 5th, Alaska Governor Sean Parnell announced a plan to pay down $3 billion of an $11.9 billion unfunded pension liability. Facing rising pension costs, Alaska projects it soon faces the prospect of allocating $1 billion a year towards fully funding defined benefit pension plans. In making the $3 billion dollar payment from state savings, Alaska will be in a position to limit annual contributions to $500 million a year. The financial difficulties of the Alaska pension system underscore the need for pension reform as soon as possible, as Alaska already made significant pension reforms in 2005, closing its defined benefit system to new hires and implementing a defined contribution system in its place. Fortunately for Alaska taxpayers, the state did foresee these rising pension costs years ahead of much of the country and possibly prevented it from being worse. Unfortunately, most state and local governments have failed to take seriously the prospect of rising pension costs, growing unfunded liabilities, and the resulting strain on state and local budgets.

To read this post online, go here.

Research

Twenty Myths about Public-Sector Pension Plans – Manhattan Institute

Richard C. Dreyfuss, Senior Fellow at Manhattan Institute’s Center for State and Local Leadership, offers 20 succinct rebuttals to misinformation from opponents of pension reform . Dreyfuss writes, “State and municipal governments across the United States know that they are facing a looming financial crisis because of their pension obligations. Politically popular yet financially reckless decisions have left many of these governments with rapidly escalating pension costs. The situation is clearly unsustainable in the long term, which is why the issue of public-sector pensions is now front-page news from California to New York to Illinois (where legislators’ wages recently were suspended for their perpetual failure to resolve that state’s pension crisis).

“These days, everyone knows that public-sector pension reform is essential. But what kind of reform? And how is it to be achieved? There is no shortage of debate (and a number of jurisdictions claim that they have put reforms in place). Much of this discussion, though, is marred by misinformation and half-truths. These misconceptions are confusing the public discussion about pensions and facilitating the enactment of pseudo-reforms that are politically attractive but financially inadequate.

“This paper identifies these nuggets of misunderstanding and inaccuracy-the myths of public-sector pensions.”

Here are some of the prevalent myths Dreyfuss addresses:

• Many states have adopted comprehensive and sustainable pension reform.

• Uniformed public-sector employees require a defined-benefit plan.

• The unfunded actuarial liability is not important, since it assumes that everyone will be retiring today.

• An “80 percent funded” status is the sign of a healthy pension plan.

• The average annual public-employee pension is $25,000.

To read more of the myths and his responses, visit the Manhattan Institute here.

Saving Workers’ Retirement: A Comprehensive Plan to Save Oklahoma’s Retirement Systems – Oklahoma Council of Public Affairs

In a study just released by the Oklahoma Council of Public Affairs (OCPA), they address Oklahoma’s public employee retirement defined benefit liabilities and the impact they have on the state’s budget. Since these liabilities continue to increase, and are a threat to other state budget priorities, OCPA suggests a series of necessary long term reforms to “keep its promises to retirees, current employees and future employees, and protect taxpayers.”

To read the report, please visit Oklahoma Council of Public Affairs website.

Quotes

“Market and rating agency reaction to Illinois’ pension reform was positive. The state’s legislature and governor are to be commended for passing the legislation. The value and legality of the reform remains to be analyzed, however.”
Cate Long, guest contributor to MuniLand at Reuters.com, when commenting on recent pension reform legislation in Illinois.

“The politicians in Illinois are deadbeats. They just did not pay their bills, and, lo and behold, they’re finding that they can’t make up for all those years of not doing what they were supposed to do.”
Alicia Munnell, the Director of the Center for Retirement Research at Boston College, commenting on governments not making their required contributions for pension systems over many years in The New Yorker.

“There has been a tremendous improvement since 2010. We were the ones who realized it was unsustainable. People are living longer. This is not unique to F&P. Are we where we want to be? No. We have a plan on the table to help with that.”
Detective Robert Cherry, Jr., President of the Baltimore City Fraternal Order of Police, Lodge #3, commenting on the focus of public pension unfunded liabilities and a significant increase of retirees.

“This takes place in a totally political atmosphere, without any regard for how the bill will be paid, by whom, and when. Employees had better get concerned that there is enough cash on hand to meet retirement needs, and taxpayers had better get concerned with these massive and increasing debt obligations.”
Former Michigan state representative, Dan Angel, talking about the capricious nature in which pensions were granted in his state, as quoted in a critical 1978 actuarial report by Russell Mueller.

“This once proud and prosperous city can’t pay its debts. It’s insolvent. It’s eligible for bankruptcy. At the same time, it also has an opportunity for a fresh start.”
U.S. Bankruptcy Judge Steven Rhodes in a comment from the bench about Detroit’s bankruptcy protection in a 140 page ruling.

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.

Lance Christensen
Director, Reason Pension Reform Project
Editor