Pension Reform Newsletter

Pension Reform Newsletter – September 2017

Analyzing Kentucky's pension crisis, L.A. city/county pension & OPEB debt, latest investment returns for pension funds, and more

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:

Articles, Research & Spotlights

Quotable Quotes on Pension Reform

Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Analyses of Kentucky Pension Crises Set Stage for Reform Discussions

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

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Favorable Investment Returns for Pension Funds…This Year

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.

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Do New Public-Sector Employees Overwhelmingly “Choose” DB Plans? Not Exactly

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.

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Effects of Alternative Investments on Returns and Volatility

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.

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Los Angeles City, County Facing Massive Pension and OPEB Debt

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

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Quotable Quotes on Pension Reform

“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,” (blog), July 8, 2017.

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Contact the Pension Reform Help Desk

The Pension Integrity Project’s Pension Reform Help Desk provides information and technical resources for those wishing to pursue pension reform in their states, counties and cities. Feel free to contact the Pension Reform Help Desk by e-mail at

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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

Leonard Gilroy
Senior Managing Director, Pension Integrity Project
Reason Foundation

Anthony Randazzo
Managing Director, Pension Integrity Project
Reason Foundation

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

The project aims to promote solvent, sustainable retirement systems that provide retirement security for government workers while reducing taxpayer and pension system exposure to financial risk and reducing long-term costs for employers/taxpayers and employees. The project team provides education, reform policy options, and actuarial analysis for policymakers and stakeholders to help them design reform proposals that are practical and viable.

In 2016 and 2017, Reason's Pension Integrity Project helped design, negotiate and draft pension reforms for the state of Arizona's Public Safety Personnel Retirement System and Corrections Officer Retirement Plan, which both passed with overwhelming bipartisan support in the state legislature and were signed into law by Gov. Doug Ducey.

Gilroy is also the Director of Government Reform at Reason Foundation, researching privatization, public-private partnerships, infrastructure and urban policy issues.

Gilroy has a diversified background in policy research and implementation, with particular emphases on competition, government efficiency, transparency, accountability, and government performance. Gilroy has worked closely with legislators and elected officials in Texas, Arizona, Louisiana, New Jersey, Utah, Virginia, California and several other states and local governments in efforts to design and implement market-based policy approaches, improve government performance, enhance accountability in government programs, and reduce government spending.

In 2010 and 2011, Gilroy served as a gubernatorial appointee to the Arizona Commission on Privatization and Efficiency, and in 2010 he served as an advisor to the New Jersey Privatization Task Force, created by Gov. Chris Christie.

Gilroy is the editor of the widely-read Annual Privatization Report, which examines trends and chronicles the experiences of local, state, and federal governments in bringing competition to public services. Gilroy also edits Reason's Innovators in Action interview series, which profiles public sector innovators in their own words, including former U.S. Transportation Secretary Mary Peters, former Florida Gov. Jeb Bush, former Indiana Gov. Mitch Daniels, former New York City Mayor Rudy Guiliani and more.

Gilroy's articles have been featured in such leading publications as The Wall Street Journal, Los Angeles Times, New York Post, The Weekly Standard, Washington Times, Houston Chronicle, Atlanta Journal-Constitution, Arizona Republic, San Francisco Examiner, San Diego Union-Tribune, Philadelphia Inquirer, Sacramento Bee and The Salt Lake Tribune. He has also appeared on CNN, Fox News Channel, Fox Business, CNBC, National Public Radio and other media outlets.

Prior to joining Reason, Gilroy was a senior planner at a Louisiana-based urban planning consulting firm. He also worked as a research assistant at the Virginia Center for Coal and Energy Research at Virginia Tech. Gilroy earned a B.A. and M.A. in Urban and Regional Planning from Virginia Tech.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

Follow Anthony Randazzo on Twitter @anthonyrandazzo