Pension Debt is NOT a Good Deal for Anyone

Posted by Rachael Heisler on September 05, 2017 at 12:59 PM

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 Rachael Heisler on August 08, 2017 at 9:35 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 Rachael Heisler on August 04, 2017 at 11:12 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.”









Read more

Liljenquist: Michigan is an Example for Pension Reform

Posted by Rachael Heisler on July 19, 2017 at 3:49 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 Rachael Heisler on July 11, 2017 at 12:19 PM

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.

New Video Explains Michigan Teacher Pensions

Posted by Rachael Heisler on June 23, 2017 at 6:40 PM

A newly released video from demonstrates just how significant recent passage of Michigan pension reform is to teachers' retirement futures. Legislation to reform Michigan's public school employee pension system passed both the House and Senate last week and is now headed to Governor Snyder to sign into law.

Michigan's teacher pension system was out of touch with the 21st century workforce. Only 20 percent of all new teachers received their full benefits, while 50 percent of new teachers received no benefits at all. Should a teacher change positions, their earned benefits would not carry with them.

But thanks to Michigan lawmakers, the future just got brighter for the state's teachers. Under the reform, future teachers will automatically be enrolled in a competitive, portable and modern defined contribution retirement plan with an option to participate in a hybrid model. This is important because it gives teachers control, freedom and flexibility over their finances and puts them on a path to secure retirement, regardless of tenure. Just as important, Michigan will be able to keep its retirement promises made to current school employees and retirees, neither of which are affected by the legislation.

To learn more about how many of the nation's teachers are negatively impacted by outdated retirement systems, and the significance of Michigan's pension reform, check out the video below.



Pennsylvania Passes, Signs Pension Reform Into Law

Posted by Rachael Heisler on June 12, 2017 at 4:49 PM


(Surrounded by Pennsylvania legislators, Governor Tom Wolf signs pension reform into law on June 12, 2017)


It's a historic day in Pennsylvania as Governor Tom Wolf has signed significant pension reform legislation into law. After years of debate surrounding the issue, the Pennsylvania General Assembly last week passed the reform legislation, SB 1, on strong, bipartisan votes. 

For the past year, RSI has worked alongside Pennsylvania legislative members and stakeholders toward formulating and passing meaningful pension reform that gives workers fair, sustainable and predictable retirement benefits. Last fall, legislation that closely resembled SB 1 fell only a few votes short of legislative passage. But through collaboration and tenacity, efforts this year paid off and legislators were able to push the reform over the finish line. "It’s a job well done and demonstrates to other state and city governments that meaningful pension reform is possible," said RSI CEO Pete Constant in a press statement.

RSI has written numerous times on Pennsylvania’s growing unfunded pension liability, bringing attention to the now infamous Pension Clock, which is located in the Pennsylvania statehouse to remind both lawmakers and taxpayers of the staggering debt. Since we began writing about the issue in February 2016, the pension debt has grown from $63 billion to more than $75 billion (with $14.8 million of debt being added daily). Such significant debt threatens the solvency of public retirement plans and threatens the retirement security of all employees and retirees. As we have observed in other areas of the country, when government pension debt spirals out of control and lawmakers are unable to meet their pension obligations, it is employees and retirees who pay the price with benefit cuts. 

To put the state’s pensions on a sustainable track, the new law will reform Pennsylvania’s Public School Employees’ Retirement System (PSERS) and State Employees’ Retirement System (SERS) from a defined benefit structure to a system in which future public employees have a choice between three retirement savings options, including two defined benefit/defined contribution (DB/DC) hybrid retirement plans and a defined contribution (DC) retirement plan. The bill does not affect current employees.

Aside from securing the retirement futures of the state's workers and retirees, the reform is expected to save Pennsylvania up to $1.4 billion and reduce the state’s unfunded pension liability by up to $4.2 billion over a reasonable time period.

“RSI 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,” said Constant in the press statement. “Pennsylvania’s pension reform package achieves that goal.”

Is Gov. Brown's Proposal a Remedy for 17 Years of Failure?

Posted by Rachael Heisler on May 17, 2017 at 12:05 AM

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.

Celebrating National Teachers Day

Posted by Rachael Heisler on May 09, 2017 at 12:03 PM


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 report, “What Do Pac-Man and Pensions Have in Common?”


California Court Should Decide Pension Fate This Year

Posted by Rachael Heisler on April 19, 2017 at 9:08 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.