Posted by Tracy Grondine on May 16, 2017 at 9:05 PM
Last week California Governor Jerry Brown proposed to double the state's contribution to the California Public Employees’ Retirement System (CalPERS) to nearly $12 billion in the next fiscal year. The money would come from California’s Surplus Money Investment Fund, or “Rainy Day” fund, and, according to Brown, would reduce CalPERS' unfunded liabilities, saving the state $11 billion over the next several decades.
Although there are varying thoughts and some very good points on Gov. Brown’s remedy, we commend the Governor for tackling California’s pension fiasco head on and trying to find a solution for what at times seems an improbable situation.
CalPERS is more than $111 billion in debt, which means it is $111 billion short of having enough money to pay pension obligations for government workers and retirees, despite massive injections in payments by state and local governments. If left unchecked, it’s projected that California’s contributions to CalPERS will double from $5.8 billion in 2017 to $9.2 billion in 2023.
As RSI Board Leader Chuck Reed has said, the California system is great at promising pensions, but it is a failure at funding those promises, and the result is 17 years of failure by CalPERS. The first domino fell in 1999, when the state legislature granted retroactive pension payments to retirees, and they have continued to fall since with taxpayers left to pick up the pieces. Those falling dominoes have taken CalPERS from a surplus to a pension debt of more than $100 billion in just 17 years.
Sadly, it's not only CalPERS. The California State Teachers’ Retirement System is just as bad. In 1999, CalSTRS also had a surplus. As of 2016, it was in the hole by $96.7 billion.
After 17 years of failure, after 17 years of overpromising pension benefits to government employees and underfunding obligations to pension plans, it’s time to act, as Gov. Brown has done with his latest proposal. This much is clear: CalPERS has had 17 years of failure, and, without action, its debt will only continue to spiral.
Posted by Tracy Grondine on May 09, 2017 at 9:03 AM
Today is a celebration of teachers across the nation. Most of us can likely reflect with gratitude on one or more of our teachers in college, high school and even elementary school who had a profound impact on our learning. As Bill Gates once said, “Technology is just a tool. In terms of getting the kids working together and motivating them, the teacher is the most important.” We at RSI certainly agree.
Teaching has always been considered an under-appreciated, under-paid job in comparison to the importance the position holds in helping form and educate a student’s mind, and, in a larger context, to its relation in the continuity of a free society. Sadly, though, as old-school public pension systems across the U.S are continually underfunded, it’s the teachers who are paying the price.
“When governments are dedicating hundreds of millions of additional dollars to pay for market losses, they can’t afford things like teachers,” said RSI Board Member and former Utah Senator Dan Liljenquist last year in Forbes. “When pension costs explode, teachers’ salaries typically become stagnant. In Utah, for example, we typically fund pensions first, healthcare second, and then whatever resources are left over go to salaries. And that’s not the way things should be.”
One needs to look no further than Chicago to see what happens to teachers when pension systems run amok. Just last year, the school district had to lay-off more than 500 teachers and an additional 500 school workers, due in part to rising pension costs coupled with underfunding of the system. In Chicago Public Schools, 89 cents out of every new tax dollar goes to pay pensions, leaving only 11 cents out of every dollar for the rest of education.
Aside from pensions being underfunded, other costly problems can arise for teachers due to the way many pension systems are built and administered. Take for instance Missouri, which uses a ‘three-year rule’ to determine a teacher’s final pension. Under the system, which is shared by many teachers’ pensions throughout the country, all teachers contribute the same percentage of pay annually to the pension fund, but because the pension is based on the last three-years of a teacher’s career, rather than a career-long average, it’s the teachers who get bigger raises toward the end who will earn a larger pension.
Usually it is rural teachers who get the short end of the stick, explained James Shuls, assistant professor of educational leadership at the University of Missouri-St. Louis last month in the St. Louis Post-Dispatch. “The poorer school district gives much smaller raises over time,” Shuls explained. “They have a relatively flat salary schedule.” In his latest study, Shul explains that well-funded districts can be more generous in pay, which results in a huge discrepancy in pensions.
Shuls’ latest study will appear this spring in the Journal of Education Finance. He has written about other issues with teacher pensions, including their growing cost and the risk they pose for taxpayers.
For more information on what's eating teachers’ salaries and pensions, check out TeacherPensions.org report, “What Do Pac-Man and Pensions Have in Common?”
Posted by Tracy Grondine on April 19, 2017 at 6:08 AM
By Chuck Reed
Decision making and management of California’s public pensions should be open, transparent and non-political. Unfortunately, as Judy Lin points out in her recent LA Times article, that’s not been the case. California’s major public pension systems continue to over promise and under fund employee benefits, racking up hundreds of billions of dollars in pension debt, and California’s cities are helpless to do anything about it.
The California Supreme Court will soon have an opportunity to change that paradigm by allowing future benefits for future work to be negotiable. The so called “California Rule” has been used to prevent negotiations over benefits that have not yet been earned, creating a massive obstacle for pension reform to control pension debt. The limits of the California Rule will be decided by the Court in several cases where public employees believe they have a right to spike their benefits above what their salary entitles them to receive.
Learn more here and here.
Chuck Reed, former Mayor of San Jose, is a board member of the Retirement Security Initiative.
Posted by Tracy Grondine on April 11, 2017 at 2:43 PM
RSI Interview with Bob Williams, founder and senior fellow of the Freedom Foundation and Senior Fellow with the American Legislative Exchange Council. Williams was the founder of State Budget Solutions, which is now a project of ALEC.
Underfunded pension systems are one of the biggest challenges facing state and local budgets, resulting in more than $5 trillion in total U.S. pension debt. In an effort to examine how we arrived in this predicament and what steps can be taken going forward to ease the overwhelming financial burden on governments, the Retirement Security Initiative (RSI) will talk with leading fiscal and pension experts to get their opinion and analysis on the funding crises. The below Q&A with Bob Williams, founder and senior fellow of the Freedom Foundation and Senior Fellow with the American Legislative Exchange Council, is the third in our series.
RSI: How did you become interested in the issue of public pensions?
BW: As a Washington State Legislator (1978-88), I was one of two state legislators out of 147 legislators who took an interest in state pensions and tried to get my fellow legislators interested in pension reform.
RSI: During your career of working on state budgetary issues, what are the most significant changes you’ve seen in the public pension space?
BW: The great unpublicized success of the higher education faculty’s defined contribution system (higher education faculty in most states have access to a DC pension system) and the many legislators ignoring the growing (more than $5.6 trillion unfunded pension liabilities) crisis. How has that impacted state governments’ fiscal health? It is a problem that most legislators ignore, but the day of reckoning is rapidly approaching. For example, in Chicago Public Schools, 89 cents out of every new tax dollar goes to pay pensions, leaving only 11 cents out of every dollar for the rest of education.
RSI: Can you talk about your recent publication “Unaccountable and Unaffordable 2016: Unfunded Public Pension Liabilities Near $5.6 Trillion” and what was the biggest surprise for you while conducting your research?
BW: The biggest surprise is how the problem has grown in the past two years – from $4.7 trillion to $5.6 trillion—an increase of $900 billion in just two years.
RSI: In the report, you used three different metrics to gauge the severity of the pension problem across the 50 states: unfunded pension liability per capita, the funded ration and total unfunded pension liability. Can you talk about the first metric, unfunded liabilities per capita, and how that affects taxpayers?
BW: The longer states delay reforming pensions, the more the unfunded liabilities per capita will rise. For example, in Illinois the per capita unfunded liability has grown from $25,740 in 2014 to $28,200 in 2016 (or $112,800 for a family of four).
RSI: We at RSI think that pension debt is the most challenging issue facing state and local governments, yet it’s not on the radar of most taxpayers or public workers. How can we in the pension reform community do a better job communicating the significance of the problem to these constituencies?
BW: Communicate (perhaps through videos and other tools) what has occurred in Pritchard, Ala.; Central Falls, R.I.; Washington Park, Ill., and Detroit, showing what happened to retirees when those areas went bankrupt. Have another video showing how K-12 teachers have to work 10 years in Florida and Texas in order to be vested in the pension system, as opposed to National Education Association headquarters staff who have a defined contribution option available to them.
RSI: Going forward, what are your recommendations to policy leaders that could help them fix their broken pension systems and begin reining in their state or municipality’s pension debt?
BW: Reality is not negotiable. More disclosure is required to all legislators showing the key assumptions (i.e. assuming a 7.5 percent annual rate of return; life expectancies; etc.); switching to a defined contribution system for all new employees; recognizing that if you give state employees the facts you can get them on your side. We saw this occur in Arizona with the pension reforms for police and firefighters. Public employees didn’t create the problems – state legislators and public union officials did.
Posted by Tracy Grondine on April 07, 2017 at 6:45 AM
The George Mason University’s Center on State and Local Leadership has named RSI Board Member James Spiotto State & Local Leader of the Week. Read more from the program's weekly eNews letter below. To learn more about GMU's Center on State and Local Leadership, click here.
State & Local Leader of the Week
Our State & Local Leader of the Week is James E. Spiotto, a long-time critical advocate for tools to help cities, counties, public school districts, and states to address severe fiscal distress. He is the Managing Director of Chapman Strategic Advisors LLC, a consultancy providing educational and strategic insights to market participants concerning municipal finance topics of interest and the co-owner and co-publisher of MuniNetGuide.com, an online resource specializing in municipal-related research and information concerning state and local government, including public finance, infrastructure, job market data, and economic statistics and analysis.
Mr. Spiotto played the pivotal role in the enactment of the municipal bankruptcy reforms signed into law by former President Ronald Reagan in 1988—he has a long and storied career representing municipalities, including testifying both in federal bankruptcy courts and before the United States Senate and House Judiciary Committees in conjunction with the amendments to the Bankruptcy Code involving Municipal Bankruptcy. Jim has contributed significantly to thought leadership around municipal defaults and bankruptcy, including co-authoring the volume The Law of State and Local Government Debt Financing (Thompson West), authoring chapters on municipal defaults and bankruptcy in The Handbook of Municipal Bonds (Sylvan Feldstein and Frank Fabozzi, editors, published by John Wiley & Sons, Inc.), and authoring a chapter on financial emergencies: default and bankruptcy in the Oxford Handbook of State and Local Government Finance (Robert D. Ebel and John E. Peterson, editors).
Mr. Spiotto is also an author of Municipalities in Distress?, published by Chapman and Cutler LLP and available from Amazon.com and Primer on Municipal Debt Adjustment, published by Chapman and Cutler LLP and available upon request from the firm. In May 2014, the National Federation of Municipal Analysts honored Jim with an award for his contributions as a thought leader within the municipal bond industry: he was recognized for his “prominent voice” on the topic of municipal bankruptcy and his years of groundbreaking research and analysis that have long aided state and local leaders on the critical intricacies of Chapter 9 bankruptcy.
Posted by Tracy Grondine on April 03, 2017 at 6:28 AM
Today is National Employee Benefits Day. Sponsored by the International Foundation of Employee Benefit Plans, the day is all about beefing up employee benefits communications. At RSI, we think retirement benefit plans should be open and transparent, and funding levels and risks fully disclosed and communicated to all participants.
We are reminded of the 200 retirees of the LA Works consortium who were recently blindsided when they learned their pensions would be slashed due to low funding. What is currently happening with the consortium’s retirees is due to the pension plan being systematically underfunded, while employees were left in the dark. Retirees now question how after paying into the pension fund for up to 30 years employees were never made aware of the risks.
Growing pension costs are threatening the solvency of public employee retirement plans, putting at risk the hard-earned savings of many workers—yet many employees aren’t made aware of the impending disaster. RSI believes that all workers deserve safe and secure futures and retirement plans should place employees on a path to a secure retirement. Communicating with employees and retirees about their retirement plans would go a long way toward this goal.
Check out the National Employee Benefits Day site, where you can learn more about employee benefit communications and how you can take a bite out of benefits communication.
Posted by Tracy Grondine on March 30, 2017 at 10:00 AM
“What parent in his or her right mind would give a teenager unlimited use of an unlimited credit card?” RSI Board Leader and former San Jose Mayor Chuck Reed asks in his latest oped. “No parent I know. So we must ask what legislator in his or her right mind would give public-employee unions unlimited use of tax dollars to pay for unlimited public-employee pensions? You would think the answer to that would be ‘no one.’ Not so in New Jersey.”
The state Legislature has just approved Senate-Bill 3040 to turn over the police and fire pension system to the police and fire unions. Well, most of the system, anyway. The part of the system that pays for the benefits would still belong to the taxpayers. The public-employee unions would get to decide what benefits they want and how much to charge the taxpayers. The taxpayers get to pay the bill. The whole bill. Public employees want better benefits? No problem. The taxpayers will pay.
New Jersey’s public pension debt hit $49 billion last year, of which the state has assets enough to cover only 56.5 percent of the liabilities. Just this week New Jersey’s credit rating was downgraded for the eleventh time under Governor Christie. Moody's said the downgrade “reflects the continued negative impact of significant pension underfunding, including growth in the state's large long-term liabilities, a persistent structural imbalance, and weak fund balances.”
In turn, the State Assembly has decided to turn the $26 billion Police and Firemen's Retirement System (PFRS) over to the unions to manage. The board that will oversee the pension fund is made up of trustees dominated by beneficiaries, says Steve Malaga, a fellow of the Manhattan Institute.
But the new 12-member board would also have powers beyond managing investments, including the ability to decrease members' contributions into the fund, to reinstate annual cost-of-living adjustments that the state suspended, or even change the formula the system uses to calculate final pensions.
The only problem is that this has already been tried around the country and has helped create some of the nation's biggest pension fiascos, as workers and unions have managed pensions for their benefit, leaving taxpayers on the hook for huge losses. This is not the kind of reform that Jersey residents facing tens of billions of dollars in pension debt need.
“If you think legislators and governors have been irresponsible, too willing to give out sweet benefits and too unwilling to pay for them, you are right,” says Reed. “But legislators and governors at least have to face the voters from time to time. Instead, this bill would put people in charge of making decisions who never have to face the voters. People who have no interest in controlling the spiraling costs of existing or future benefits would get unlimited credit cards. New Jersey is set to jump from the frying pan into the fire.”
Former New Jersey State Treasurer Andrew Sidamon-Eristoff calls the move “a very, very bad idea.”
Let’s get real. $26 billion is one heck of a lot of money. The depressing history of public-pension fund scandals suggests the need for constant vigilance. Unchecked by the need to coordinate its daily functions with the Division of Investment, a separated PFRS will enjoy greater autonomy with less constructive scrutiny from the press and public. Moreover, it’s not at all clear what procedural, procurement, and anti-conflicts standards will apply to certain PFRS board functions, such as the selection of fund managers and providers of professional services. Forgive me, but I can’t help worrying.
In sum, S-3040 is a shameless special-interest power grab at taxpayer expense. The state Assembly will soon consider a companion bill. Out of respect for itself, if not the voters and taxpayers of this state, the Assembly should quietly deep-six this embarrassment.
Posted by Tracy Grondine on March 15, 2017 at 10:04 AM
The Irish proverb goes, ‘May there always be work for your hands to do, may your purse always hold a coin or two,’—a sentiment we’d wager most everyone shares. Unfortunately, though, it takes more than good luck and well-meaning to achieve a secure financial future, especially when unfunded public pensions factor into the equation.
Whether a public worker or private employee, most all Americans are impacted by the public pension crisis facing our nation. Totaling an estimated $5 trillion debt, state and local unfunded pension liabilities are costing taxpayers big.
Just look at states like Illinois, Pennsylvania and Alabama, and cities such as Chicago and Detroit–all in financial straits because of unfunded pension liabilities. As pension debt continues to go unchecked, policymakers tend to pull funds from important public services like education, public safety and transportation to pay it down. And when that doesn’t do the trick, they tend to raise taxes.
Growing pension debt not only costs taxpayers, it threatens the solvency of public employee retirement plans, putting at risk the hard-earned savings of many workers. Look at what’s happening in California to the retirees of the now-defunct LA Works job training agency. Because LA Works’ pension went without being fully funded and its debt went unpaid after the agency folded in 2014, CalPERS is now considering cutting the benefits of the nearly 200 former employees by as much as 63 percent. You may recall in November CalPERS voted to reduce City of Loyalton retiree benefits because the town hadn’t kept up with its pension funding before dropping out of the CalPERS system.
Both scenarios, along with countless others happening throughout the country, are happening because policymakers over-promise and underfund employees’ retirement futures. It’s pretty straightforward really, a simple lesson we all learned in adolescence, the importance of living within our means. Yet, when policymakers don’t, it’s the retirees who are dealt the blow.
Employees should get every cent they earn and taxpayers should get all they pay for, and not be overtaxed for a system in need of reform. In short, all workers deserve safe and secure futures, and ‘a coin or two’ in their pockets.
Posted by Tracy Grondine on March 08, 2017 at 10:50 AM
Connecticut public pensions are in rough shape. The State Employee Retirement System (SERS) currently faces $21 billion to $25 billion in unfunded pension liabilities, depending on how they’re calculated. To address the problem, the Yankee Institute recently commissioned Securing Our Future: A Menu of Solutions to Connecticut’s Pension Crisis, in cooperation with the Reason Foundation. Backed by a full actuarial model of SERS, the report outlines options for putting people before pensions and getting Connecticut out of a repeated cycle of deficits.
According to the Yankee Institute, “If even a few of the reforms in this paper were enacted, the state could save hundreds of millions of dollars a year in payments to our pension system, and almost $9 billion over the next 30 years. One reform alone – bringing employee contributions up to the national average level of 6 percent – would save $290 million over the next two years.”
The report suggests such measures as lowering the plan's assumed rate of return, increasing employee contributions and offering new hires a defined contribution or cash-balance plan.
Also this week, the Urban Institute issued a report card for the nation’s pension systems. Not surprisingly, Connecticut earned across the board Cs, Ds and Fs, with a D for its police and fire pension, an F for its teachers’ pension and a D for the state’s overall grade.
Earlier this year, the Connecticut General Assembly approved a plan to restructure the state’s funding calculation and amortization schedule, based on an agreement between Connecticut Gov. Dannel Malloy and the State Employees Bargaining Agent Coalition. The plan reduces the assumed rate of return from 8 percent to 6.9 percent, which, according to RSI, is still overly optimistic. At the time, RSI recommended that contributions be based on a more realistic rate of return that is closer to the 5.4 percent rate that was achieved by the state from 2001 to 2014.
“If you proceed based on the 6.9 percent number, either more money should be put into the plan by the state and the employees, or plan redesign and benefit changes should be implemented to reduce costs to close the funding gap that will likely be created by assuming a 6.9 percent rate of return,” RSI board member Chuck Reed wrote in official comments to the Connecticut Office of Policy and Management.
According to RSI, the 6.9 percent assumed rate is unrealistic and could lead to Connecticut taxpayers shouldering the burden for decades to come, especially if meaningful, structural pension reform is not implemented.
Posted by Tracy Grondine on March 07, 2017 at 9:40 AM
A guest editorial by RSI board member Dan Liljenquist this week in the Lincoln Journal Star talks of the challenges Lincoln faces if its police and fire pension is not reformed. The plan, currently $190 million in debt, is on a slippery slope toward insolvency if structural changes to the plan are not made soon, argues Liljenquist.
Lincoln has an opportunity to reform its plan with RSI-supported Legislative Bill 30 (LB30), by Nebraska State Sen. Mark Kolterman, which would move both Lincoln's and Omaha's police and fire plans closer to sustainability, according to Liljenquist.
"LB30 would transition new employees from the current defined benefit structure to a cash-balance program that uses lower assumed return rates and cuts future risk in half," wrote Liljenquist. "The reform would not affect current employees and retirees, except to help ensure that retirement promises that were made to them can be kept.
"Lincoln has a real opportunity with LB30 to make its police and fire pension plan sustainable, cutting the risk for workers and taxpayers," he continued. "It’s an opportunity that, in my opinion, Lincoln should readily embrace, instead of just waiting and hoping for the best."
To read more of Liljenquist's editorial, click here.
To learn more about LB30, click here.