Look for Realistic Returns

Posted by Rachael Heisler on May 12, 2016 at 7:51 AM

In a letter to the editor of the Milwaukee, Wisconsin Journal Sentinel, RSI's Chuck Reed today said that Milwaukee County Executive Chris Abele misrepresented what is meant by reducing the public pension's targeted rate of return. Earlier this month Abele told public employees that the reduction would have adverse consequences ("County pension contribution to increase," May 4).

"Labeling these increased payments as an "adverse consequence" is mischaracterizing to both public employees and taxpayers," Reed wrote. "By lowering the expected rate of return, both employees and employers are recognizing the true cost of pension benefits and that both groups are responsible for paying these costs.

"Failure to adopt realistic rates of return result in underfunding that can have horrible adverse consequences. Just ask the public employees of Puerto Rico, Detroit, and Central Falls what happens when retirement plans are underfunded and governments run low on money.

"State and local governments carry approximately $4 trillion in pension debt due to systemic underfunding caused in large part by using unrealistic assumptions of market returns. When plans are underfunded, retirees, employees and taxpayers are all at risk.

"The county pension board made a step in the right direction by reducing its target rate to 7.5%; many economists argue that these rates should be even lower. Few pension managers count on 8% returns these days, and more than two-thirds of state retirement systems have decreased their assumptions since 2008.

"Reducing expected rates of return reduces risk of "adverse consequences" for retirees, current employees and future taxpayers. That's a good thing."

Reed Interview on California Public Pensions

Posted by Rachael Heisler on May 09, 2016 at 2:02 PM

RSI's Chuck Reed sat down this week with David Kersten from the Kersten Institute for Governance and Public Policy to discuss what's ahead for California's public pension system, both at the ballot box and in the state legislature. 

"We are spending so much more on retirement benefits," says Reed of California's mounting pension debt. "That's essentially the Department of the Past that is getting all the money.  The Department of the Future, which is our kids, is suffering." 








RSI Heroes of the Week: Contra Costa Pension Board

Posted by Rachael Heisler on May 06, 2016 at 4:40 PM

It’s not often that a public pension board lowers its investment target rate in order to meet realistic market expectations – so when it does happen, that board deserves to be recognized. Such was the case in late April when the Contra Costa County Employees' Retirement Association (CCCERA ) board voted to lower its target rate to 7 percent (the average target is 7.68 percent). As an editorial in the East Bay Times points out, “The move places the retirement system at the forefront of sanity along with just a few other pension plans, including San Jose, which also recognize how unrealistic investment projections have been in the past.”

As the Retirement Security Initiative has continually pointed out, the U.S. pension crisis is due to years of policymakers playing pension roulette in a high-stakes gamble. Most pensions are built on unsustainable systems that thrive in bull markets, but fall short when markets aren’t performing well. In the end, it’s taxpayers who are left picking up the shortfall. This can be seen looking at California as a whole, which carries nearly $64 billion in pension debt because of such bad state and local policy decisions.

Many pension boards will shoot for an unrealistic target rate, banking on high returns and enabling employees to contribute less toward their retirement futures. But when the target is unrealistically high, and employee contributions are too low, it’s the taxpayers who are responsible for making up the difference. Read more here about what happens when systems are set up to only thrive with high returns in high-risk scenarios. RSI believes that pension systems should be set up with less risk, more sharing of that risk and lower return expectations to meet today’s market realities.

By lowering its target rate, CCERA is thinking long-term about how it will be able to fund its retirement obligations for its 20,000 current and retired public employees, without crippling future generations of taxpayers. RSI applauds the CCERA board for living up to the organization’s mission to deliver retirement benefits to its members and their beneficiaries through prudent asset management. It’s refreshing to see a pension board walk the walk.


Dan Liljenquist: Puerto Rico is Bankrupt

Posted by Rachael Heisler on May 05, 2016 at 1:52 PM

Puerto Rico is bankrupt, and if you think that is hyperbole, just look up the definition of bankrupt in Webster’s dictionary. I will save you the trouble; here it is: “bankrupt: a person, business, etc., that is unable to pay its debts.” On Monday, Puerto Rico defaulted on a $400 million debt repayment, and its governor, Alejandro Garcia Padilla, has said that there are more defaults to come. Puerto Rico, an island with just 3.5 million people, has racked up debts of $115 billion ($71 billion in bond debt and another $44 billion in pension debt) over the past couple of decades. That equates to a per person debt burden of nearly $33,000 for every man, woman and child on the island where the median family income is $19,000 per year.

Read more of Liljenquist's special to the Deseret News here.

Alabama Pensions Need Reform, Despite Rhetoric

Posted by Rachael Heisler on May 02, 2016 at 10:11 AM

By Chuck Reed and Dan Liljenquist

Retirement Systems of Alabama Executive Director David Bronner conjures Shakespeare in his most recent opinion editorial to say there has been Much Ado made of a supposed pension crisis underway in Alabama. Bronner tells of past reform efforts that did little to help the state out of its economic quagmire and insinuates that $15 billion of unfunded pension debt is really no big deal. He completely ignores the good that would come from true pension reform by way of less taxes and increased community services. As the Bard himself wrote, We know what we are, but know not what we may be.

In truth, the Alabama pension system is broken. The state now pays more than $1 billion per year toward the debt and that’s only going up. Alabama’s pension debt is skyrocketing despite huge, ever-increasing cash infusions from taxpayers and there’s no end in sight. Sadly, taxpayers’ children and grandchildren will be picking up the tab for Alabama’s pension debt 30 years from now. And the longer Mr. Bronner and the Retirement Systems of Alabama (RSA) thwarts efforts to fix the problem, the more debt the state racks up for future taxpayers.

As Alabama House Representative Lynn Greer stated in an editorial, “The haze of misinformation surrounding the debate often obscures the reality: the state has at least a $15 billion funding gap that will not be closed until 2050, at the earliest…state leaders have a duty to ensure a solvent pension system for public employees and retirees. They also have a duty to protect future generations of Alabamians from inheriting a fiscal catastrophe.”  In short, Alabama needs a new retirement system for public employees that won’t bankrupt the state and better protects taxpayers.

For every new employee the state hires into the current system, it makes a likely 60-year pension commitment in which it doesn’t have the funding to guarantee. As Rep. Greer pointed out, the pension system is currently guaranteeing 8 percent returns and taxpayers are making up the difference when the market falls short. RSA’s approach is an act of faith, which depends on smooth sailing and no hiccups in the market for the next 30 years. As any economist will tell you, this is not realistic nor responsive to the market.

As in many states (including Pennsylvania, more than $66 billion in pension debt, which Mr. Bronner held up as a shining example of having accomplished pension reform) pension debt is the Pac-Man of the Alabama State budget; it’s chewing through funding for other essential programs and services. Skyrocketing pension costs are choking out funding for every key service including schools, higher education, public safety, corrections, transportation and Medicaid. Just last year “state parks and driver's license offices were closed, road projects were threatened, and law enforcement offices braced for lay-offs. All the while, Alabama's public pension system received nearly $1 billion from taxpayers,” according to Greer.

Earlier this year, Rep. Greer and the Joint Committee on Alabama Public Pensions recommended the creation of a retirement plan for new public employees that would virtually eliminate the risk of future pension liabilities going forward, providing sufficient retirement security for new workers. And importantly, the plan wouldn’t cost taxpayers anything more. Instead it better guarantees the state can meet its current obligations to current employees and retirees.

Not all pension reformers are out for the money, as Mr. Bronner will have you believe (in fact, the plan recommended by Rep. Greer and his committee clearly established that RSA would control and manage every penny of the money invested, both under the old plan and the new).  Some of us are merely former state and city leaders who have seen firsthand the financial catastrophes brought about by spiraling out-of-control pension debt. We have been in the trenches and know what it takes to reform state and municipality systems, saving taxpayers billions of dollars, while protecting every penny earned by public employees. It can be done.

We’ll leave you with one more Shakespeare quote that we feel is fitting for the anti-pension reform rhetoric currently taking place in Alabama and elsewhere throughout the country, which is: Our doubts are traitors and make us lose the good we oft might win by fearing to attempt.




RSI Heroes of the Week: Public Pensions and City Solvency Authors

Posted by Rachael Heisler on April 22, 2016 at 6:18 PM

Understanding the nearly $4 trillion public pension crisis that plaques the U.S. can be challenging. Not only is the issue complex and multi-faceted, it is widespread. The tentacles of pension debt reach into most every U.S. city, threatening financial stability and prohibiting economic growth, leaving citizens with increased taxes and decreased community services.

So when a good resource comes along that not only explains the underlying issue of public pensions, but offers viable solutions, pension reform advocates take note. Such is the case with the new book, Public Pensions and City Solvency. Written in an understandable, direct style, a myriad of pension expert contributors provide analyses and practical approaches to traversing the fiscal quagmire in which many cities find themselves.

Retirement Security Initiative Board Member and former Lieutenant Governor of New York Richard Ravitch contributed the book’s foreword and Wharton School academicians Robert Inman and Susan Wachter provide the conclusion. The meat of the book includes an economic perspective of public pensions by Joshua Rauh, a leading scholar in the study of unfunded pension liabilities; legal framework by Amy Monahan, an authority in public employee benefits law; and political context and means for solutions by leading political scientists D. Roderick Kiewiet and Mathew McCubbins.

For their contributions to pension reform—explaining the ins-and-outs of the issue and offering viable solutions going forward—plus, for giving us a really good read, they are RSI’s heroes of the week. Order your copy today.

Read more

God Save the Queen (and the UK from Pension Debt)

Posted by Rachael Heisler on April 21, 2016 at 3:01 PM

There’s much ado happening today in Britain…the Queen’s 90th birthday, National Tea Day (ironically) and sweeping news that the country’s pension debt is devastatingly worse than originally estimated. 

A report released this week by the Adam Smith Institute, a UK think tank, found that the British government has been concealing more than £1.85 trillion ($2.65 trillion) in liabilities on top of its national debt. That’s the equivalent of £53,822 ($77,120) for every man, woman and child in the UK.  Of that debt, unfunded public pension liabilities make up a staggering two-thirds. An estimated £1.3 trillion ($1.86t) will need to be found to cover the 93 percent of public sector pensions that are currently unfunded, according to the report.

Here in the U.S., governments carry an estimated $4 trillion in public pension debt, equal to an incredible, $12,000 per U.S. citizen. And the similarities don’t end there. Like the U.S., British policymakers created unsustainable systems dependent on high-risk plans with tax-payers being held responsible when the schemes go south and, like here in the U.S., British policymakers continue to rack up enormous debt while avoiding true pension reform.

“Homeowners worry about their mortgages and cut back when they are overstretched, but governments don't,” said Eamonn Butler, the Institute’s director. “Instead they keep taking on new liabilities, with schemes that buy votes today but mortgage the future of our children and grandchildren.” 

Calling the pension schemes “wildly reckless” and “deeply immoral,” Butler continued, “Every law going through Parliament should have a price tag showing not just what it costs us today, but what it will cost us far into the future. Then, like the rest of us, politicians will have to live within their means.”

The report warns that the British government must immediately begin cutting excessive public sector liabilities and recommends drastically cutting the level of defined benefit pensions, or otherwise “condemn future generations to staggering financial turmoil.”

Public Pensions: Houses of Cards Ready to Topple

Posted by Rachael Heisler on April 20, 2016 at 12:09 PM

An article published today by the Manhattan Institute highlights a significant challenge with U.S. public pensions, a challenge that the Retirement Security Initiative is all too familiar with: the almost complete reliance of public pensions on a thriving bull market.

The vast majority of public pension systems are houses of cards built on risky holdings like stocks, hedge funds and real estate. Unbalance just one piece of the structure and the houses collapse. We can see this very scenario already playing out across the country as many state and local governments face service cuts and tax increases due to tremendous pension debt. As it is, public pension systems already carry trillions of dollars in unfunded liabilities. Major market downturns continue to add hundreds of billions of dollars more.

Just picture what would happen if we are suddenly faced with a bear market.  A state pension that is expecting an 8 percent return will instead be faced with a 20 percent loss. It would take 56 percent investment returns the following year to close this new 28 percent hole.  Since such returns never happen, taxpayers are forced to shovel in even more money to fill the hole. 

Today’s pension crisis is due to policy decisions made years ago by legislative bodies that created unsustainable systems. Couple that with several years of a bull market, which lulled those in-charge into thinking they could increase benefits based on unrealistic and risky market expectations. These policymakers did so knowing that taxpayers would be left picking up the shortfall when the bottom fell out.

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. The price of benefits, like those offered today in most plans, would be so high that public employees would likely never have asked for them, preferring instead to receive higher wages or other benefits, and we wouldn't find ourselves in this current predicament. So while the market downturn isn’t to blame, it is exposing our pension systems for what they are.

While today’s policymakers didn’t create the mess they find themselves in, it is most certainly incumbent upon them to turn the tide and make the systems sustainable. 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 the ramifications could be dire.


California Faces Higher Taxes, Fewer Services Without Pension Reform

Posted by Rachael Heisler on April 13, 2016 at 3:10 PM

By Chuck Reed

Special commentary for the California State Treasurer's publication, 'Intersections.'

California’s economy is looking up. The unemployment rate is down and most industrial sectors are growing. Yet, even in these good times, governments statewide are raising taxes and fees, boosting tuition and cutting services, all in order to pay for rising retirement costs.

Between 2003 and 2013, annual pension costs for California governments jumped from $6.4 billion to $17.5 billion, and are still rising. The California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) agencies are absorbing massive increases in contributions.

The state controller reports more than $240 billion in unfunded liabilities for state and local pension obligations. California Common Sense, a non-partisan policy group, calculates nearly $160 billion of unfunded liabilities for retiree health care obligations. This $400 billion in retirement debt is driving massive cost increases, which in turn are driving cuts in services and tax increases.

Without reform, California faces a future of higher taxes and fewer services. Some local governments already face service delivery insolvency and bankruptcy. More will join them in the next recession, and public employees, retirees, residents and taxpayers will suffer, as they did in Vallejo, Stockton and San Bernardino.

CalPERS and other opponents of pension reform tell us not to worry because over 20 years (1994-2014) CalPERS has earned more than 7.5 percent per year on its investments. But look at what happened to the CalPERS unfunded liabilities during that time: Unfunded liabilities grew by more than 150% per year. According to its Comprehensive Annual Financial Reports, the CalPERS’ unfunded liability grew from $3 billion to $93 billion in the same 20-year period. So when CalPERS tells you not to worry, you should think twice.

To continue reading Reed's commentary, click here.

RSI Hero of the Week: Jacksonville Citizen Activists

Posted by Rachael Heisler on April 08, 2016 at 7:56 PM

It was Samuel Johnson who said that great works are performed not by strength but by perseverance. It’s that kind of persistence and determination that paid off earlier this week when Florida’s First District Court of Appeal decided in favor of Jacksonville taxpayers in a case that was more than a decade in the making.

To understand the significance of the case, let’s go back 15 years to a private meeting that was held between the City and the Jacksonville Police and Fire Pension Fund. The result of the meeting was a 30-year agreement giving pensioners a 3 percent cost-of-living increase, among other benefits. The problem with the meeting, what was soon to be contested, was that it violated the state’s sunshine laws.

Then, fast-forward almost 10 years. Concerned citizen activist Curtis Lee filed suit against the city and the pension fund for violating the open meeting laws. Lee, who’s been referred to as Don Quixote, a hero to the people, was joined in the suit by government watchdog group, Concerned Taxpayers of Duval County. They contended that the City and pension fund met privately to bargain over and finalize pension matters, strangle holding the city’s attempt at true pension reform.

For four years Lee fought the pension deal—a battleground on which he spent thousands upon thousands of his own dollars and traded more than 1,100 emails with City Hall. In March 2015, his efforts paid off when a circuit judge ruled that the pension deal was created illegally and was therefore void.

And…the pension fund appealed.  So, add on another year, more time, emails and money spent on legal fees. It must have seemed like a never-ending cycle for Lee and the taxpayers’ group. That was until this week, when the Court of Appeal not only upheld the lower court’s ruling, but made it impossible for the pension fund to make an appeal to the State Supreme Court.

It is citizen activists like Lee and the Duval County taxpayers’ group, whose relentless fight for a more open and transparent government, that are true heroes, and therefore, RSI’s Heroes of the Week.