Here's what we're reading this week at RSI...

Posted by Rachael Heisler on August 26, 2016 at 3:16 PM

Week of August 22, 2016


  • "A demographic crisis for pensions, driven by longer life expediencies and declining birthrates, has now become critical, thanks to historic low bond yields across the world," says John Authers and Robin Wigglesworth of the Financial Times in this in depth article, first in a series, on the growing pension crisis. 


  • The California State Assembly this week approved a measure to create a mandatory state-run pension plan for private workers. "The move could make California the first state to require companies to take part in such a system," reports The New York Times' Mary Wiliams Walsh. Read her coverage of the issue here.


  • Manhattan Institute Senior Fellow Steve Malanga takes readers inside the pension crisis with a hard look at accounting standards in this Wall Street Journal oped. "The beginning of the end of this crisis won’t arrive until more reasonable, less risky standards are in place," he says. 


  • Just 15 states contributed enough money to their pension funds in 2014 to cover benefits and begin to pay down their debt. CNN's Katie Lobosco looks at the states with the best funded pension plans and the ones with the worst shortfalls. 


Financing State and Local Pension Obligations

Posted by Rachael Heisler on August 26, 2016 at 2:07 PM

 By Lois A. Scott


Eight years ago, our country was in the grips of the worst economic recession since the Great Depression. The major financial markets lost more than 30 percent of their value as the federal government fought to protect jobs and stabilize our economy. Most economists now agree that the actions taken in the aftermath of that financial and economic whirlwind enabled the U.S. to bring unemployment in line and recover more quickly than our trading partners.

But the aftershocks of that time continue.

As the federal government provided temporary funding to hire public sector workers, state and local budgets grew to levels that could not be sustained once those federal dollars phased out. In addition, public pension plan assets plummeted, with many losing 30 percent to 40 percent of their total value. The unfunded liabilities of the plans exploded, putting even greater pressure on governmental budgets. It is difficult to see how investment returns can ever make up the lost ground. State and local governments got hit with a double whammy – operating deficits along with a pension funding crisis. Add in the deficit in repairing our nation’s infrastructure and our governments have hit a trifecta.

It’s no secret that governments throughout our country are struggling to figure out how to fix these financial problems. Attempts are made to reduce pension expenses by moving to a 401(k) style pension, reducing COLA’s, capping benefits, buying out pensions, etc. Pension and budget reforms are studied, debated and sometimes legislated and litigated. New revenues are chased and taxes raised.

Along the way, we have learned a simple truth: we are all in this together and must all share the burden of addressing the problems, including our public pension plans. Research shows that no single-handed approach (i.e. whether it’s raising taxes, cutting services or increasing workers’ contributions) can work. Rather the answer may be “All of the Above.” Policymakers will need to consider a combination of options – including new revenue - if they are to repair state and local finances and protect their economies. Increasing revenue as part of a multi-faceted approach to pension reform can help restore financial strength to our governments and lead to increased economic activity over the long term.

Someday, the economists will agree that aligning revenues and expenses is the only path forward.

Lois A. Scott, former Chief Financial Officer for the City of Chicago, is a board member of the Retirement Security Initiative.

Here's what we're reading this week at RSI...

Posted by Rachael Heisler on August 19, 2016 at 2:19 PM


Week of August 15, 2016

  • This informative four-part series in the Bond Buyer on pension funding. The series includes articles on the municipal pension crisis, legal precedent in pension policy, pension gridlock in New Jersey and Illinois, and pension bankruptcy. 

  • Commentary in Governing by Ash Center Fellow Charles Chieppo on the urgency for public pension reform.

  • Stanford Scholar David Crane's article on funded ratios. He notes, "Public pension liabilities grow at super-high rates because public pension fund boards deliberately suppress their valuation when they are created...Like a coiled spring, the more pension liabilities are suppressed when created, the harsher they snap back over time."

  • Robert Fellner's commentary on CalPERS once again missing its investment target. The Nevada Policy Research Institute director argues the importance of acting now to reform the failing system instead of waiting for the next wave of municipal bankruptcies.

  • 'Opinion: The $6 trillion public pension hole that we’re all going to have to pay for,' by Ed Bartholomew and Jeremy Gold. The two thought leaders say that "U.S. state and local employee pension plans are in trouble — and much of it is because of flaws in the actuarial science used to manage their finances."

  • These important court opinions in Kentucky and California on cost of living adjustments and vested rights; and RSI's press release on the latter.

And here's what we're watching...

The Losing Streak of Public Pensions

Posted by Rachael Heisler on August 18, 2016 at 12:03 PM

By Chuck Reed

State and local government contributions to pension funds have increased $0.59 for every $1.00 in additional tax revenues between 2007 and 2015, according to an August 10th presentation to the National Conference of State Legislatures Legislative Summit, by Donald Boyd and Yimeng Yin of the Nelson A. Rockefeller Institute of Government.

That’s good news for government workers and retirees, but even with additional tax revenues, many governments are not paying enough to keep pension debt from rising. Most are betting on risky investments to make up the difference, and are coming up short.

What happens when the economy goes into recession and rising costs are not offset by rising revenues? Higher taxes, reduced services and even greater pension debt, which will drive more taxes and more cuts in services.  Already on numerous occasions we’ve seen it play out in states and municipalities across the nation—as more and more public retirement plans face insolvency, policymakers tend to pull funds from critical public services like education, public safety and transportation to pay down pension debt.

For weaker local governments, that will set off a spiral into insolvency and bankruptcy.  Pension reform can help avoid insolvency, but must be taken before it’s too late.  As we have seen in Detroit, Stockton, San Bernadino, Vallejo and Central Falls, waiting until bankruptcy to take action just increases the pain.

U.S. public retirement programs are more than $1 trillion in debt, resulting in tremendous budget challenges for states and municipalities. It’s time that we stop the losing streak by depending on risky investments to pan out and start fully funding our pension obligations, so that taxpayers receive the services they have paid for and public employees receive the benefits they have earned. 



Here's what we're reading this week at RSI...

Posted by Rachael Heisler on August 12, 2016 at 3:36 PM

Week of August 8, 2016

• A presentation by Donald Boyd, director of fiscal studies at the Nelson A. Rockefeller Institute of Government, during the National Conference of State Legislatures Summit this week, has everyone talking. In 2014, more than 30 major public plans across the country were underpaid by $100 million or more because plans are taking more risk. Reuters reports, ‘Public Pension Plans’ Risky Investments Could Cost Taxpayers Billions,’ and Pensions&Investments writes, ‘Public DB plans adding risk to combat funding crisis as contributions rise.’

• The San Diego Union-Tribune editorializes the California Public Employees’ Retirement System’s bleak outlook in ‘CalPERS math portends grim future for government budgets,’ saying that weak investment returns and inaction of lawmakers to confront the problem is troubling news.

• The Orange County Register joined in CalPERS coverage with its Watchdog analysis of new data from Transparent California, ‘The 100K Club - public retirees with pensions over $100,000 - are a growing group,’ taxpayer reaction in, ‘Public pension figures for $100K Club hit a nerve, with some saying 'not fair!‘ and an editorial, ‘The 100K club adds new members;’ all which prompted RSI Board Member Chuck Reed’s blog post, ‘Isn’t 17 years of failure enough?

• Switching gears, the Show-Me Institute’s Michael McShane effectively outlines how teachers are impacted by the pension crisis in ‘Teacher Pensions Have a Math Problem,’ in U.S. News and World Report. Further, St. Louis Public Radio examines Missouri teacher pensions with its special report, ‘COLA fizzles: Retired Missouri teachers won’t get pension increase in 2017.’

Happy Reading!


Isn’t 17 Years of Failure Enough?

Posted by Rachael Heisler on August 11, 2016 at 6:00 PM

By Chuck Reed

For those of us who follow news about California public pensions, the term ‘100K Club’ has become synonymous in recent days with the California Public Employees' Retirement System (CalPERS) due to new data released by Transparent California and analyzed by the Orange County Register. The records show that close to 22,000 California public retirees last year each received more than $100,000 in annual pension benefits. That’s a total of $2.7 billion from a system that’s already more than $100 billion short of being able to meet its pension obligations. It’s also an increase of 20,000 retirees since 2005 who collect such a large sum.

The California system is great at promising pensions, but it is a failure at properly funding those promises. 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. So while ‘100K Club’ may be on everyone’s lips when referring to CalPERS, I think the expression ’17 Years of Failure’ is more synonymous with the organization, and more appropriate.

And taxpayers are not happy. Since the release of the ‘100K Club’ data, Californian’s are voicing their opinions in opposition to paying for an unsustainable system that is wreaking havoc on California’s finances and will continue to do so for decades to come. As one taxpayer wrote to the Register, we’re robbing our children “who silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old.”

Other taxpayers point out the discrepancy in the average annual CalPERS pension payment ($30,581) when compared to the average annual Social Security benefit for private workers ($16,092), as well as CalPERS’ use of a defined benefit plan in lieu of more financially responsible plans, such as defined contribution plans, that are favored by business.

“What this information does is remove the shroud that defines public pensions and lets people see what things cost,” Robert Fellner, research director for Transparent California, told the newspaper.

And in California, they cost a lot.

After 17 years of failure, after 17 years of overpromising pension benefits to government employees and underfunding our obligations to pension plans, it’s time to act. It's time for all California stakeholders to get engaged in finding a solution.

Dan Liljenquist: The Pension Tsunami

Posted by Rachael Heisler on August 04, 2016 at 9:19 AM

July has been a tough month for public-sector pension apologists who have denied, and continue to deny, that there is a nationwide pension crisis. Ratings agencies, bond buyers, academics, journalists, legislators and taxpayers alike are finally beginning to grasp the magnitude of the public pension debt tsunami that will, over the next several years, swamp state and local governments. For those of us who have been actively involved in the pension reform movement — including the tireless publishers of — this awakening to the very real perils we collectively face is both a welcome and a sobering development.

Traditional defined benefit pension plans make long-term, guaranteed commitments to public employees and then fund those commitments through a combination of annual contributions and investment returns. The higher the assumed investment return, the less money is required upfront to pay for the benefits. And there’s the rub.

To continue reading RSI Board Member Dan Liljenquist's special commentary to the Deseret News, click here.

Funding on a 7.5 Percent Assumption in a 6 Percent World

Posted by Rachael Heisler on July 26, 2016 at 2:01 PM

By Chuck Reed


What happens to the costs of retirement benefits for government employees if pension plans achieve a 6 percent rate of return instead what they assume (usually 7.5 percent)?  Costs will go up.  Almost everyone agrees on that point.  Exactly how much is not so clear.  But now we have a very good estimate for 800 pension plans.

The bottom line: Many plans will suffer a doubling in costs if their returns on investments are only 6 percent.  Continuing to fund plans based on a 7.5 percent assumption in a 6 percent world grossly underfunds our obligations to our public employees.

Alicia H. Munnell and Jean-Pierre Aubry of the Center for Retirement Research at Boston College, in their paper An Overview of the Pension/OPEB Landscape, recently calculated costs based on a 6 percent discount rate and a 6 percent investment return.  The numbers are striking.  The burdens of increases will be enormous in some states, counties, cities and school districts, but not in all.  As the authors point out: “The picture at the state and local level is extremely heterogeneous, so it is crucial to look at the numbers state by state and locality by locality.

“The cost analysis calculates, separately, pension and OPEB costs as a percentage of own-source revenue for states, cities and counties,” they continue.  “It then combines pension and OPEB costs to obtain the overall burden of these programs.  Finally, it adds debt service costs to provide a comprehensive picture of government revenue commitments to long-term liabilities.”

Comparing the costs of these three types of debt with “own-source revenue” allows us to see the relative burden of these long term obligations compared to other jurisdictions.

The five worst states:  Illinois, New Jersey, Connecticut, Hawaii and Kentucky.

The five best states:  Nebraska, North Dakota, Iowa, Arizona and Minnesota.  

No surprises in the best states, where costs will increase slightly.  But there will be big surprises for the people of the worst states when their costs double.

There also will be unpleasant surprises in many big cities.  The worst of the big cities, where costs will nearly double:  Chicago, Detroit, San Jose, Miami and Houston.

Many big counties will also suffer as costs double for many. The worst:  Fresno, Kern, Los Angeles and Sacramento, Calif., along with Cook, Ill. Notably, seven of the 10 worst counties are in California.

Three of the worst school districts are in New York:  Syracuse, Buffalo and Yonkers, with Clark County in Nevada and Los Angeles Unified rounding out the worst five, where costs will go up by double or more.







RSI YouTube Channel...Check it Out!

Posted by Rachael Heisler on July 08, 2016 at 9:09 AM

Do you want to know more about public pension reform from the experts themselves? Checkout RSI's YouTube channel. RSI board leaders Chuck Reed and Dan Liljenquist navigate viewers through the complexities of our pension system, how U.S.pension debt came to be so staggering, what it means for taxpayers and public employees, how RSI and its leadership can help policymakers turn the tide and success stories like Arizona. 

Head now to the RSI YouTube channel and subscribe to stay up-to-date with all of RSI's latest videos.



What Brexit Could Mean for Public Pensions

Posted by Rachael Heisler on June 24, 2016 at 2:40 PM

By Chuck Reed

Since Britain’s stunning vote to leave the European Union only mere hours ago, U.S. markets have already plummeted and markets around the world are in mayhem.  Economists warn that the vote will continue to have adverse consequences on financial institutions and markets around the globe, including the U.S., for an unforeseen amount of time.

So what does that mean for your retirement, especially if you are a public pensioner?

Most American public employee retirement systems are heavily invested in stocks because they are counting on high investment returns to cover huge gaps in funding, which were created by decades of over-promising benefits and underfunding annual contributions.

As a result, public employee retirement systems have become unsustainable and the problems have been compounded by continually increasing benefits based on unrealistic and risky market expectations. So when the stock market turns negative, as inevitably it will, pensioners will run the risk of losing their retirements or taxpayers will be left picking up the shortfall.  High risk investment practices are particularly dangerous in periods of market volatility because of the potential for big losses that cannot be recovered before the next recession.

If pension systems were set up with less risk (as they once were), more sharing of that risk and lower return expectations, then the real cost of retirement benefits would be more apparent to everyone and retirees could count on being paid what they have earned.

Today’s state and local public employee pension system is already in crisis with more than $1 trillion in unfunded liabilities. Brexit should be the wake-up call drastically needed for policymakers to turn the tide and make the systems sustainable. If they don’t get control of the public pension crisis now, events like a Brexit mean more and more plans will get further and further behind on their funding obligations. And the consequences for taxpayers and retirees are dire, as we have seen in Detroit and Puerto Rico.