Beware, Pension Costs Are Creeping Up Behind You

Posted by Tracy Grondine on October 30, 2017 at 2:47 PM

Double, double toil and trouble; fire burn and cauldron bubble...

There’s nothing scarier than the systemic failure of our nation’s public pension systems—and no one is spared. Estimated at $5 trillion, U.S. public pension debt is the shadow lurking at your door, slowly creeping up behind you. The nation’s failing pension systems are responsible for higher taxes, reduced government services and, in some of the worst cases, reductions in pensioners’ promised retirement benefits. And that’s scary stuff. 

Growing pension costs are resulting in tremendous budget challenges for state and local governments. Just look at the recently released study by Stanford University examining California's unfunded pension promises and how the pension crisis is impacting city and county governments and school districts. In many cases, the state's police, fire and other critical public safety services have been reduced to pay increasing pension costs. Other services, such as public health, public assistance and transportation, are especially being hit, as well as libraries and recreational services. School districts, too, have been dealt a blow with cuts in operating expenses and staff reductions.

Just as scary, rising costs and the continual underfunding of pension systems are threatening the solvency of public employee retirement plans, putting at risk the hard-earned savings of many workers. RSI believes that all workers deserve safe and secure futures and retirement plans should place employees on a path to a secure retirement. It shouldn’t be a case of trick-or-treat: retirement benefits should be fair, sustainable and predictable.

Although today’s pension crisis is due to past policy decisions made by legislative bodies that created unsustainable systems, current policymakers can change the tide. For example, policy leaders in both Pennsylvania and Michigan faced the challenge head on this year and passed meaningful pension reform. Further, leaders in Kentucky are currently working hard to reform their broken pension system and stop the state's $37 billion pension debt bleed before it's too late.

Don’t be tricked this Halloween. State and local governments have a responsibility to provide essential services that protect the welfare and quality of life for all Americans—services that will be reduced as public pension debt continues to skyrocket. Governments also have a responsibility to fulfill their pension promises to public employees. After all, there are many things that frighten us, but our retirement futures shouldn’t be one of them.


RSI Board Spotlight: Lois Scott Named to Kroll Bond Rating Agency’s Board of Directors

Posted by Tracy Grondine on October 27, 2017 at 7:15 AM

 

Retirement Security Initiative founding board member Lois Scott this week was appointed to the Kroll Bond Rating Agency’s board of directors. Considered a trailblazer for women in the field of public finance and one of the most influential people in U.S. government, Lois is instrumental in bringing awareness to public pension sustainability challenges and working with national leaders on reform efforts.   

From 2011-2015, Lois served as the Chief Financial Officer for the City of Chicago and currently serves on the board of the Chicago Stock Exchange and the Federal Home Loan Bank of Chicago. She is chair of the Advisory Board of the Center for Municipal Finance at the Harris School of the University of Chicago, co-founder of the Municipal CFO Forum, and is well known as one of the founders of Women in Public Finance.

Click here to read special RSI commentary by Lois on financing state and local pension obligations.


Marking National Retirement Security Week with a Sound Pension Reform Plan in Kentucky

Posted by Tracy Grondine on October 19, 2017 at 9:58 AM

This week marks National Retirement Security Week. Unfortunately, most Americans face uncertainty when it comes to their retirement futures. Even public employee pension plans, which at one time were considered safe harbors for public workers to save and enjoy their retirement years, are now antiquated and failing the very people they are meant to serve. As more pension systems go without being fully funded, and plans consistently lose money, it’s the workers and retirees who are impacted the most.

Such is the case in Kentucky, which has accumulated more than $37 billion in pension debt due to such factors as inadequate funding and poor investment returns. The system faces insolvency and, without reform, state officials estimate retiree benefit checks could stop coming as early as the next three to six years.

But this week, Kentucky Governor Matt Bevin and legislative leaders introduced a comprehensive plan to stave off the impending pension crisis. The proposal, aimed at making the system healthy and solvent, would go into effect July 1, if passed by a special session of the legislature.

Here are some highlights:

  • Kentucky will have to pay its actuarially required contribution every year and create a funding formula to put hundreds of millions of more dollars into retirement plans.
  • Retirees will be protected. They will see no change in their retirement checks and their healthcare benefits will remain secure.
  • Retirement age for current public workers will remain intact and their current defined benefit plan benefits will continue until the employee attains his or her promised level of unreduced benefit.
  • Non-hazardous future employees and teachers will be moved into a modern retirement plan that offers more mobility and flexibility.

The Retirement Security Initiative believes that all workers deserve safe and secure futures and retirement plans should place employees on a path to a secure retirement, regardless of tenure. Governor Bevin’s pension reform plan will do just that.

“The right thing to do is rarely the easiest,” said Bevin. “But we are determined to address the crisis with the most fiscally responsible public pension reform plan in the history of the United States. I am confident that the rest of the country will pay close attention to this excellent work by our legislature and for good reason. For those retired, for those still working, and for those yet to come: we are truly fixing our broken pension systems.”

Growing pension costs are threatening the solvency of public employee retirement plans throughout the country, putting at risk the hard-earned savings of many workers. We tip our hat to Governor Bevin for stepping up to the state’s $37 billion challenge, saying enough is enough, and putting public workers first.

Read more about Governor Bevin’s plan here and watch his press conference here.

 

 

 

 


Study Shows the Real Cost of Pension Crowd-Out

Posted by Tracy Grondine on October 13, 2017 at 7:31 AM

Pension costs in California are ballooning so much that important community services are being crowded-out in their wake, according to a new study by Stanford University professor Joe Nation. The report, “Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030,” details jurisdictional case study after case study of failing pension systems per county, city and school system and what it means for taxpayers.

In many cases, police, fire and other critical public safety services have been reduced to pay increasing pension costs. For example, in the City of Vallejo, as the pension share of the city’s operating expenditures increased from 3.1 percent in 2003-04 to 15.2 percent in 2017-18, the number of police fell from 221 in 2004 to 143 by 2014, and the number of fire personnel remains nearly 30 percent lower than in 2004.

Other services, such as public health, public assistance and transportation, are especially being hit, as well as libraries and recreational services. In the City of Stockton¸the pension share of operating expenditures increased from 3 percent in 2002-03 to 12 percent in 2017-18, and have displaced an estimated $31 million of other city expenses this year alone. The city’s higher pension contributions have led to reductions in three functional areas: public works, libraries, and parks and recreation. Furthermore, looking ahead, pension expenditures in 2029-30 appear likely to crowd out an additional $28 million in other city spending.

California school districts are not immune to escalating pension costs. The study examines the Los Angeles Unified School District, Mill Valley School District and Visalia Unified School District. In all three areas, operating expenses, salaries and staff have been reduced to pay pension costs. Further, in Mill Valley, educational services, supplies and books have been cut. 

Source: Stanford Institute for Economic Policy Research

U.S. public retirement programs are more than $5 trillion in debt, resulting in tremendous budget challenges for states and municipalities. As more and more public retirement plans face insolvency, policymakers tend to pull funds from important public services like education, public safety and transportation to pay down pension debt. This, coupled with reduced funding for community centers, libraries and parks, leads to a reduced quality of life for all taxpayers.

The Retirement Security Initiative believes that state and local governments have a responsibility to provide essential services that protect the safety, health, welfare and quality of life for all Americans. Sadly, as the Stanford study shows, these services will continue to be reduced as public pension debt increases. While it’s easy to kick the can down the road for another day, if policymakers don’t get control of the public pension crisis now there will not be funds for essential community service programs in the future.

 


New Report Shows the Dire Reality Facing Municipalities with Pension Debt

Posted by Tracy Grondine on September 22, 2017 at 12:37 PM

By Chuck Reed, RSI Chair

 

Analysis published this week by J.P. Morgan’s Chairman of Market and Investment Strategy Michael Cembalest demonstrates the growing risk to public employees and retirees as many municipal debts outweigh revenues.  

Following up on his 2016 tri-annual credit review of U.S. states, Cembalest has added the largest U.S. cities and counties to the mix in his latest review, The Arc and the Covenants 3.0. By calculating what local governments currently spend on bonds, pensions and obligations related to underfunded pensions and retiree health benefits (termed OPED) and what they would be spending over 30 years assuming a 6 percent rate of return, Cembalest has determined that U.S. cities and counties are substantially more debt-ridden than states and have some difficult choices ahead in order to meet their future obligations.

Using a calculation called “IPOD” (short for I=interest on bonds, P=pension payments, O=OPEB payments and D=defined contribution payments, all divided by municipality revenues), Cembalest looks at current IPOD ratios and, more importantly, full accrual IPOD ratios required to service all future obligations accrued to date. And the result is dismal. To meet the full accrual IPOD ratio, many municipalities will need to significantly increase taxes, cut services or increase public worker contributions.

For example, in my home state of California, to meet its future commitments, Oakland would have to increase taxes by 22 percent, or cut spending on services by 22 percent, or increase worker pension contributions by 462 percent. In Sacramento, policymakers would have to increase taxes by 19 percent, or cut spending by 18 percent, or raise workers’ contributions by 301 percent. And there’s municipalities in far worse shape, such as Houston, which would have to raise taxes by 26 percent, or cut services by 23 percent, or increase worker contributions by an outstanding 772 percent.

So, what happens if these governments choose to ignore the crisis, to maintain the status quo and do nothing? Municipalities may continue to rely on elevated investment returns, but that would require almost impossibly high annual returns for 30 years and it’s that short-sighted optimism that helped get our country into its current pension debt crisis.

According to Cembalest, at a more conservative and realistic return rate of 6 percent, municipalities would see their pension funding ratios decrease. For example, Houston’s current 23 percent funded ratio would fall to 15 percent; Cincinnati, Ohio’s would go from 60 percent funded to 49 percent funded; and Los Angeles County’s would drop from 87 percent to 79 percent—and that’s only if municipalities maintain their current contributions.

If contribution levels fall, the funding gaps will only widen, putting at risk the retirements of many public employees. As Cembalest noted, public sector workers “have earned the benefits they accrued and which were granted by state and local legislatures, and have the right to expect them to be paid.” I couldn’t concur more.

Unfortunately, the situation is dire for many municipalities around the country and this report only further reflects the tremendous debt burden faced by our country due to overpromising benefits and underfunding pension systems and the risk it places on public employees and taxpayers.

Moving forward, pension reform can no longer be prolonged by state and municipal policy leaders while liabilities accumulate. To maintain benefits for current retirees, ensure a fair retirement for future workers and deliver government services to taxpayers without significantly increasing revenues, the debt crisis needs to be addressed now.


Pension Debt is NOT a Good Deal for Anyone

Posted by Tracy Grondine on September 05, 2017 at 9:59 AM

The latest brief from the National Conference on Public Employee Retirement Systems (NCPERS) claims that public pensions are a good deal for taxpayers. By cherry-picking a handful of spun tales and unsubstantiated theories, and by ignoring pension debt realities, the paper proves nothing more than its authors have a creative imagination. It does demonstrate how the pension industry lives in a world of optimistic assumptions and rosy scenarios only loosely connected to the taxpayers who have to pay skyrocketing retirement costs with real dollars.

In short, NCPERS premises are wrong and here’s why.

Pension funds are resilient, well-managed and have stood the test of time, according to the brief. We are certain pensioners in Detroit, Central Falls, RI, Loyalton, Calif., Prichard, Ala., and Puerto Rico, among others, would disagree. These pension funds were neither resilient nor well-managed, and certainly did not stand the test of time—and pensioners are paying the price with drastically reduced or terminated benefits.

Unfortunately, these examples are not one-offs, but instead a growing trend of mismanaged, underfunded, failing pension systems across the country.  One only has to look at CalPERS’ 18 years of failure—from a $32.9 billion surplus in 1999 to more than $111 billion debt at present—to know that U.S. pensions are not resilient and well-managed. But if that’s not enough proof, take into account the mess of Illinois’ $100 billion-plus unfunded pension liability, Connecticut’s $68 billion pension debt and New Jersey’s $49 billion debt-ridden system, which leads us to NCPERS’ next fanciful theory…

Pension funds pose little burden, if any, on taxpayers.  One word (ok, maybe two): Crowd-Out. When governments carry billions of dollars in pension debt, how can taxpayers not be negatively impacted? Again, let’s look at New Jersey, who’s Governor Christie recently proposed cutting critical funding from such important programs as higher education, homes for disabled soldiers, psychiatric hospitals and developmental disability centers, to instead put toward the state’s pension debt. Further, in Chicago, 89 cents out of every new tax dollar since 2009 has gone to pay pensions, leaving only 11 cents out of every dollar for the rest of education. And when crowd-out just doesn’t do the trick, governments raise taxes. On top of Chicago’s reduced funding for education, the city will implement a 10 percent property tax hike this year. And let’s not forget the nearly 1,500 Chicago teachers and school staff who were laid off several years ago due to the school system’s escalating pension debt.

We also take issue with NCPERS graph on the composition of income, as it is patently misleading. The chart, which shows employer contributions declining, is only accurate if you disregard employer contributions related to debt and interest. It appears the authors are using this graph to imply that employer contributions have dropped by greater than 50 percent from 2000 to 2014, when, in fact, every plan that we have ever looked at has shown that employer contributions over that time have tripled, quadrupled, or even more. Here are a few examples of increasing employer contributions: Chicago Public Schools (Fig. 2), CalPERS and nationally (Fig. 4). When employer contributions have tripled in the last decade or so and cities are putting more than 20 percent of their budgets into pension plans, that is an enormous burden on taxpayers.

NCPERS’ last theory is this: Taxpayers’ contributions are fully or partially offset by the tax revenues generated by public pension investments in the community and by the local spending of retirees who receive pension checks. This is purely speculation and obfuscation and ridiculous on its face. The fact that taxpayer funds are partially offset is meaningless. Moreover, it’s unsubstantiated. The paper’s authors even claim, “There is little or no research focused narrowly on whether tax revenues generated through pension fund investments and spending of retiree pension checks in local economies is enough to pay the taxpayer portion of pension contributions.”  Further, while we may disagree on the economic impact multiplier for defined benefit pension benefits, there is no evidence to suggest that retirees would choose to spend their money any differently if the benefit was provided via a defined contribution plan, hybrid or cash balance plan, which provides retirement benefits with much less risk to taxpayers.

U.S. pension systems are an estimated $5 trillion in debt. Such debt is NOT a good deal for the economy. It’s certainly NOT a good deal for taxpayers, who are losing out on critical government services, while continually paying more taxes. And it is definitely NOT a good deal for public employees and retirees whose very financial futures are at risk.

 

 


A Tale of Two Accounting Standards (and what it means for state & local pensions)

Posted by Tracy Grondine on August 08, 2017 at 6:35 AM

By Chuck Reed, chair of RSI 

New research from the Center for Retirement Research at Boston College shows that state and local pension plan funding fell flat, even fizzled, in 2016. Using both traditional and new Governmental Accounting Standards Board (GASB) standards, researchers Jean-Pierre Aubry, Caroline Crawford and Alicia Munnell sampled 170 state and local pension plans to determine funded ratios (refresher: old GASB standards use a smoothed value of assets, while new GASB standards, introduced in 2014, values market assets). 

It's not surprising that under both standards of measurement, pension funding across the board simply didn’t stack up. In 2016, plans were 72 percent funded under the traditional rules, with asset values of $3.5 trillion and liabilities of $4.8 trillion. Under the new rules, plans fared even worse with only 68 percent funded ratios, including $3.4 trillion in assets and $5 trillion in liabilities.

Furthermore, the researchers found that liabilities under each standard grew by 5.6 percent and 6.3 percent, respectively.

 

“State and Local Pension Plan Funding Sputters in FY 2016,” Jean-Pierre Aubry, Caroline Crawford and Alicia Munnell. July 2017. Sources: 2016 actuarial valuations; Public Plans Database (PPD) (2001-2016); and Zorn (1990-2000).

 

Why the poor performance?  It comes down to market returns and cash flow. When plans are counting on an assumed rate of return of 7.6 percent, yet only report a 0.6 percent return (as was the average in the study), it leads to drastic underfunding. Furthermore, cash flow has become increasingly negative as pension benefits continue to outweigh contributions. Many plans have not paid 100 percent of what they should have contributed since 2001, adding to pension debt. Instead, it should be the number one goal of state and local governments to fully fund employee benefits, as they are earned, and incentives to underfund commitments should be eliminated. 

 

“State and Local Pension Plan Funding Sputters in FY 2016,” Jean-Pierre Aubry, Caroline Crawford and Alicia Munnell. July 2017. Source: PPD (2001-2016).

 

No matter which standard is used to measure pension funding, state and local plans are falling short. In the meantime growing pension liabilities are threatening the solvency of public employee retirement plans. By counting on overly-ambitious rates of return, not setting adequate contribution amounts and not paying the full amount that they do set, plans are putting at risk the retirement security of many workers.

 

 

 

 

 


Kentucky Gov. Bevin Video: "We Will Save the Pension"

Posted by Tracy Grondine on August 04, 2017 at 8:12 AM

In what may be an unprecedented move, Kentucky Governor Matt Bevin took to YouTube this week to ensure the state’s public employees that he and lawmakers will do everything in their power to save Kentucky’s failing pension system (you can view the video below).

“The pension is in trouble in Kentucky,” he said of the $37 billion debt-ridden system. “This is a real issue that has to be addressed.” Bevin went on to say that without reform, the system faces insolvency and retiree benefit checks will stop coming in as little as the next three to six years.

Bevin ensured public workers that there is a unified agreement among lawmakers to save the system and despite “all the noise, all the static, all the hysteria and some of the scare tactics,” from reform opponents, “We have a legal and a moral obligation to those of you who are retired to fulfill the promises that have been made to you." Bevin has said he will call a special session with legislators later this year to address the crisis.

As with many of the nation’s underfunded pension systems, there’s a handful of reasons for Kentucky’s massive pension shortfall, including inadequate funding contributions and poor investment returns.

Moody’s this week downgraded the state’s credit rating to Aa3, claiming Kentucky “has one of the heaviest unfunded pension burden of all states,” and “the ability to stop the decline in pension funding levels will be crucial to its credit profile.”

 

 

 

 

 

 

 

 

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Liljenquist: Michigan is an Example for Pension Reform

Posted by Tracy Grondine on July 19, 2017 at 12:49 PM

The following opinion editorial by RSI President Dan Liljenquist can be read in its entirely at the Detroit Free Press by clicking here.

 

 

Michigan an example for pension reform

Dan Liljenquist, former Utah state Senator, is president

Michigan has been able to accomplish what many other state and local governments only dream of: meaningful pension reform. With recent passage of its teacher pension legislation, and Gov. Rick Snyder signing the measure into law, Michigan lawmakers have taken a critical step to ensure that Michigan will be able to meet its retirement commitments to both its current and retired teachers while creating an innovative plan for new teachers, one that is both fair and sustainable. In doing so, Michigan lawmakers have effectively capped teacher pension liabilities going forward, a move that will pay long-term dividends for the state’s residents.

Pension debt is one of the top challenges impacting state and local governments, and more often than not, it is the education systems and teachers who are hurt the most.  

A quick look across the country in places like California and Chicago reveals that escalating pension costs have become the Pac-Man of school budgets, chewing through essential funding for teachers and classrooms.  

The Michigan Public School Employee Retirement System is $29 billion in debt and only 60% funded. That’s money that should be going toward classrooms, educational programs, student enrichment and qualified teachers.

Fortunately, Michigan lawmakers seized the opportunity to reform the system...(to continue reading, click here).


Underfunding Pensions, a Disturbing Trend

Posted by Tracy Grondine on July 11, 2017 at 9:19 AM

A recently released report by the Society of Actuaries on pension plan contribution indices shows a disturbing trend of U.S. governments significantly underfunding public employee retirement plans. The report studied 160 state and large city public sector pension plans from 2006 to 2014 using contribution indices, which are metrics that compare pension plan contributions to benchmarks that represent the contribution level needed to pay down unfunded liabilities. According to the report:

  • For 130 plans, total unfunded liabilities (as reported by Government Accounting Standards Board guidelines) increased by approximately 150 percent, from $400 billion in 2006 to $1 trillion in 2014, while liabilities increased 47 percent, from $2.5 trillion to $3.7 trillion.
  • While employer contributions for the same 130 plans increased 76 percent, from $48 billion in 2006 to $85 billion in 2014, most of the 160 plans still received insufficient employer contributions to maintain their unfunded liabilities.

When this happens, it’s typically taxpayers who pay the price of the debt through reduced or cut government services (i.e., in Chicago 89 cents of every new dollar for education has gone to teachers’ unfunded pension costs since 2009) and in worst case scenarios, public employees and retirees pay with reduced or cut retirement benefits. Just take a look at what’s happened in Prichard, Ala., Central Falls, R.I., and Loyalton, Calif., when the wells ran dry and governments could no longer pay pension benefits. All could have been avoided if money had been set aside to cover obligations instead of running up unfunded liabilities.

The Retirement Security Initiative believes that state and local governments should fully fund employee benefits so that all retirees and employees get paid what they have earned. Lawmakers have an obligation to ensure that their retirement plans are sustainable and fiscally sound and unfunded liabilities should be paid down over a reasonable time period. 

Michigan is a great example of what happens when lawmakers take responsibility and reform their pension plans. Just last month, Michigan passed significant legislation that transforms the structure of the state’s teachers pensions from a defined benefit plan to a defined contribution model, while employing a mechanism that will prevent the future accumulation of unlimited pension debt, thus allowing lawmakers to pay down the state’s $29 billion pension debt over time.

All workers deserve safe and secure retirements and plans should place employees on a path to a secure retirement, regardless of tenure. And it all starts with governments fully funding their pension plans.