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
- Michigan Enacts Local Pension & OPEB Transparency Standards
- California’s School Districts Spend More and More on Retirees
- Pension Funding Policies Put Colorado’s Credit Rating at Risk
- How the Tax Cuts and Jobs Act Impacts Pension Funds
- Major Advisors Lower Their Long-Term Investment Return Outlooks
News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk
Articles, Research & Spotlights
Michigan Enacts Nation-Leading Pension, Retiree Health Care Funding and Transparency Standards for Local Governments
In December 2017, the state of Michigan passed a first-in-the-nation transparency bill for local pension and other post-employment benefits (OPEBs). Currently, the state’s over 450 defined benefit retirement plans had a combined $18 billion in pension and OPEB debt, a figure that threatens local budgets by crowding out essential services and necessitating future tax increases to pay for already-promised benefits. Reason’s Anthony Randazzo, Len Gilroy, and Daniel Takash examine how the reform creates standardized reporting requirements, minimum funding standards, and mandatory corrective action plans for distressed municipalities to put Michigan’s municipalities on track toward full funding.
California’s School Districts Are Spending More and More on Retirees
As required contributions to fund pensions and other post-employment benefits (OPEBs) for retirees grow, these contributions take up increasingly-scarce resources for current government services. California school districts pay between $30 and $525 per student to finance retiree healthcare benefits. Writing for the Orange County Register, Reason’s Marc Joffe explains how while the pension costs are fixed by the state, local districts have the ability to change OPEBs to provide savings so more money can go into the classroom.
Pension Funding Policies are Putting Colorado’s Credit Rating at Risk
Colorado’s Public Employees’ Retirement Association (PERA) suffers from an unfunded liability that has been expanding over the past 15 years. Credit rating agencies are beginning to take note of the state’s growing $33.8 billion in unfunded pension promises. Reason’s Zachary Christensen details the latest warning in Colorado’s credit rating outlook in Standard & Poor’s (S&P) Global Ratings. One of the major factors contributing to S&P’s possible downgrade is that since 2003, government employers have, by law, made pension contributions below the minimum amount required to avoid increased unfunded liabilities. State policymakers need to adjust the way they determine their annual contribution to pensions if they want to avoid a harmful credit downgrade.
How the Tax Cuts and Jobs Act Impacts Pension Funds
After the long struggle in Washington, DC to pass the Tax Cuts and Jobs Act (TCJA), lawmakers across the US are preparing for how TCJA will impact their bottom lines. In a recent commentary, Reason’s Daniel Takash finds that TCJA offers a mixed bag for those concerned about pension funding. The reform’s boost to the stock market has built on the “Trump Bump” and boosted investment returns across the country, providing plans with a badly needed boost to their funding. However, by removing the State and Local Tax (SALT) deduction, high-tax states run the risk of losing revenue in the long-run, making required pension contributions an even tougher pill to swallow for struggling pension systems.
Major Advisors Lower Their Long-Term Investment Return Outlooks, Curbing Public Pension Plans’ Enthusiasm
Fiscal year 2017 was a banner year for pension fund investment returns, but looking into 2018 and beyond, it’s clear that the fundamental changes in the global economy that have created the “new normal” of low investment returns have institutional investors lowering their expectations. In this commentary, Reason’s Anil Niraula explains how the recent change in 10-to 15-year outlook for investment returns from 5.75 percent to 5.25 percent by J.P. Morgan Asset Management is further evidence that pension systems across the country should reduce their investment risk and adopt more conservative assumptions in the new global economy.
News Notes
Critiquing Illinois’ Pension Obligation Bond Proposal: The state of Illinois is considering issuing a $107 billion pension obligation bond (POB), the largest such security in history. TeacherPension.org explains the several pitfalls in this option and advises state policymakers seek other options. The full blog post is available here.
New Report Explores New Jersey’s Pension Crowd-Out: The Manhattan Institute recently released a study on New Jersey’s pension liabilities—Garden State Crowd-Out—which calculated the amounts that need to be contributed to the system for the state to live up to its promises. The report finds that New Jersey must increase its government contributions threefold, and that this would take up 12 percent-15 percent of the state’s total budget. The full report is available here.
Report Projects Major Pension Spending Increases for California Cities: The League of California Cities is citing a recent report that estimates significant increases in payments cities will need to dedicate towards pensions in the coming years. According to the study, most California cities will need to increase their spending on CalPERS by at least 50 percent within the next seven years. The full report is available here.
Quotable Quotes on Pension Reform
“Here is how the math works. For fiscal 2017, the state budget collected $34.4 billion in revenues and contributed $1.9 billion to pensions. That’s just 40 percent of what the state’s actuaries determined New Jersey needed to pay in order to fund new pension credits that employees were earning and begin to pay off the debt in the system; the amount the state did contribute represents 5.5 percent of state revenues. By 2023, when the state has pledged to make full payments of its required contribution, New Jersey would have to put $4.9 billion of state revenue into the retirement system—a figure that does not include the lottery contribution. Thus, under optimistic economic scenarios, required pension contributions could easily gobble up 12 percent of the state budget.”
— Steven Malanga and Josh McGee, “Garden State Crowd-Out: How New Jersey’s Pension Crisis Threatens the State Budget,” Manhattan Institute, January 2018.
“For years, self-interested parties, overly generous promises whose true costs were often shrouded by flawed actuarial analyses, and failures of public leadership had caused unsustainable public pension liabilities.”
—California Gov. Jerry Brown, quoted in “Cases could open door to pension cuts for California workers,” Associated Press, December 28, 2017.
“Although New Jersey’s state government did contribute $8.76 billion over eight years to the retirement funds under Christie, as he said, that was far less than the $31.65 billion total he faced in minimum payments. Christie averaged a 28 percent ADC over eight years. Although they paid $3.4 billion in total, the five previous governors combined averaged 21 percent from 1995 to 2010. According to Moody’s, 28 percent is “well below the level that would allow the state’s reported net pension liability to ‘tread water’ — or remain stable from one year to the next, assuming investment return and other actuarial assumptions are met.” In layman’s terms, that means 28 percent is not enough to get back to fiscal health.”
— Salvador Rizzo, “Chris Christie’s dubious claim he saved $120 billion in the N.J. pension system,” The Washington Post, January 11, 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.
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Published by the Pension Integrity Project at Reason Foundation
Edited by Zachary Christensen, Policy Analyst, Reason Foundation
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