RSI: Calif. Court’s Second Rejection of Pension Vested Rights May Help State Avoid Financial Disaster

Posted by Tracy Grondine on January 09, 2017 at 7:14 AM

SAN JOSE, Calif., January 9, 2017— A second decision by the California First District Court of Appeal that rejects a rigid interpretation of the California Rule of vested rights get Californians one step closer to saving the state from financial disaster, according to the Retirement Security Initiative. The ruling, in Cal Fire Local 2881 v. CalPERS, states that although an employee has a vested right to a pension, their only right prior to retirement is to a "substantial or reasonable pension."  A different panel of judges issued a similar ruling in Marin Association of Public Employees v. Marin County Employees’ Retirement Association in August 2016.

“Pension reformers in California have been advocating for years that some reasonable modifications to future pension benefits accrued for future work by current employees could be permissible under the California Constitution,” said RSI Board Member and former San Jose Mayor Chuck Reed. “It now seems it may be possible to do so.”

The Appeals Court quoted the California Supreme Court on vested rights to explain its ruling:

“Although vested prior to the time when the obligation to pay matures, pension rights are not immutable. For example, the government entity providing the pension may make reasonable modifications and changes in the pension system. This flexibility is necessary ‘to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system and carry out its beneficent policy.”

The case arose out of legislation enacted in 2012, the Public Employees’ Pension Reform Act (PEPRA), in which the opportunity for an employee to buy additional years of service credits was eliminated. Plaintiffs alleged they had a vested right to continue what is referred to as “buying airtime” because it had been permitted for years. 

Plaintiffs claimed they had a vested contractual right to purchase up to five years of airtime service credit that is not subject to elimination or destruction by legislative amendment or repeal “even before the benefit has been accessed or the time for retirement has arrived.”

The Appeals Court rejected plaintiffs’ assertion that “Public employees obtain a vested right to the provisions of the applicable retirement law that exist during the course of their public employment. Promised benefits may be increased during employment, but not decreased, absent the employees’ consent.”

The Appeals Court noted that “California law is quite clear that the Legislature may indeed modify or eliminate vested pension rights in certain cases.”

“The big question for pension reformers is whether or not the California Supreme Court will agree,” said Reed. “The Marin County case has already been accepted by the Supreme Court and this case is likely to go there as well. 

“If the Supreme Court agrees with these appellate court decisions, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster,” concluded Reed.

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RSI Releases Election Q&A with CFRB’s Marc Goldwein

Posted by Tracy Grondine on November 02, 2016 at 7:41 AM

How Would Retirement Fare Under a Clinton, Trump Presidency?

SAN JOSE, Calif., Nov. 2, 2016 — The Retirement Security Initiative (RSI) today published an interview with Marc Goldwein, senior vice president of the Center for a Responsible Federal Budget, on how retirement issues are faring in the 2016 election.  In the interview, Goldwein discussed the two major presidential candidates’ policies on social security, retirement issues, debt reduction and taxes.

Unfortunately, retirement hasn’t been a big issue this election,” said Goldwein in the interview.  “The candidates are talking very little about retirement, whereas it should be one of the top things being addressed.  This is especially true given the unsustainability of the Social Security program.”

It is estimated that Social Security, the major source of income for most retirees, will run out of funds to pay full benefits beginning in 2034. According to Goldwein, neither Hillary Clinton nor Donald Trump adequately address the problem.

Both candidates have their heads in the sand on Social Security policy,” said Goldwein. “Donald Trump’s plan is to keep the system on its current path to insolvency. Hillary Clinton’s plan expands benefits in targeted ways…but otherwise she doesn’t change the program’s benefits or touch the age requirement. Both candidates are doing tremendous disservice by taking so many things off the table.”

It would seem that public employees would have their pensions to make up for the retirement uncertainty. But, as more public pensions go underfunded, putting at risk public employees’ savings, that payoff may not be so certain. What, if anything, do the presidential candidates’ policies do to address retirement needs?

Neither Hillary Clinton nor Donald Trump have concrete plans to fix some of our most pressing retirement issues, like unsustainable pensions, holes in the Social Security program for low-income wage earners, access to retirement savings plans, and the list goes on,” said Goldwein. “What should have been a priority in the political debate, has unfortunately been put on the backburner in this presidential election.”

As for how each of the candidate's policies would impact historic levels of public-held debt (estimates show up to $5 trillion in U.S. pension debt), Goldwein said that neither of the candidate’s economic plans would slow and reverse the national debt.

“Hillary Clinton’s plan would keep national debt on the path we are headed, increasing it by a small amount: an additional $9.2 trillion in the next decade,” said Goldwein. “And while this is certainly the wrong direction, Donald Trump’s plan is catastrophically worse. It would add $5.3 trillion on top of the already $9 trillion over the next decade, putting the U.S. in unprecedented debt.”

To read more of Golwein’s interview, click here, or visit: http://www.retirementsecurityinitiative.org/retirement_and_the_2016_election.

Underfunded pension systems are one of the biggest challenges facing state and local budgets, resulting in an estimated $1 trillion to $5 trillion in total U.S. pension debt. Goldwein’s interview is part of an ongoing RSI series of pension and retirement analysis from the country’s leading policy and fiscal thought leaders. Previously in the series, RSI spoke with the Rockefeller Institute’s Donald Boyd on investment risks being taken by pension funds and their potential consequences.

 

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RSI Urges PA Legislators to Pass Pension Reform Bill

Posted by Tracy Grondine on October 26, 2016 at 8:40 AM

SAN JOSE, Calif., Oct. 26, 2016 — The Retirement Security Initiative (RSI) is urging Pennsylvania lawmakers to vote “Yes” on fundamental pension reform legislation that would save state taxpayers billions of dollars and safeguard retirement benefits for public workers. The bill, which passed a conference committee late Tuesday night, now heads to the Senate and House chambers for a yes-or-no vote.

The push to overhaul Pennsylvania's pension system comes as the state faces more than $63 billion in pension debt, which is twice the size of the state’s annual budget. According to RSI, the Commonwealth’s pension debt has skyrocketed due to continued poor decision-making, including system underfunding, risky investment assumptions and unfunded benefit increases. Pennsylvania ranks 49th among states for underfunding its pensions and is among one of the largest states nationally to underfund benefit increases, a factor that will ultimately cost the state approximately $50 billion in higher benefit payments over 30 years. 

“Pennsylvania’s pension funds went from a $20 billion surplus in 2000 to a $63 billion deficit in 2015,” said RSI Board Leader and former Utah State Senator Dan Liljenquist. “For every day that lawmakers ignore this dire situation, it increases the taxpayers’ debt by $1 for every man, woman and child in Pennsylvania, or in other words $1,500 per year for a family of four.”

Legislation now before lawmakers would create a new plan for the State Employees’ Retirement System and the Public School Employees' Retirement System beginning in 2018. Employees would be given three retirement savings options from which to choose, including two defined benefit/defined contribution hybrid plans and a straight 401K-style defined contribution plan. The bill does not affect current employees and exempts state police officers, corrections officers and certain other enforcement officers from the hybrid DB/DC or DC plans for new employees.

According to the Pew Research Center, the proposal mitigates approximately 60 percent of risk if pension investments underperform, saving taxpayers more than $10 billion if returns were 6 percent. Further, employer contributions under the proposed plan are expected to be $2.6 billion lower over 30 years than contributions under the current plan.

"This pension reform package is a solid win for taxpayers and public workers,” said Liljenquist. “Not only would the cost to taxpayers be cut $4.3 billion over the next 30 years, but employees will no longer face an uncertain future where growing pension costs threaten the solvency of their retirement plan, putting at risk their hard-earned savings.

 “For these reasons alone, it's critical that Pennsylvania lawmakers today vote ‘Yes’ on pension reform,” urged Liljenquist.


RSI Releases Pension Q&A With Rockefeller Institute’s Donald Boyd

Posted by Tracy Grondine on October 13, 2016 at 4:34 AM

“It’s the Wild West Out There”

RSI Releases Pension Q&A With Rockefeller Institute’s Donald Boyd

 

SAN JOSE, Calif., Oct.13, 2016 — The Retirement Security Initiative (RSI) today announced a new series of pension analysis from the country’s leading policy and fiscal thought leaders. To kick off the series, financial expert Donald Boyd, director of Fiscal Studies at the Rockefeller Institute of Government, shared his assessment of the growing pension funding crisis in an interview with RSI.

Underfunded pension systems are one of the biggest challenges facing state and local budgets, resulting in an estimated $1 trillion to $5 trillion in total U.S. pension debt. RSI’s new series will examine how the U.S arrived in this predicament and what steps can be taken going forward to ease the overwhelming financial burden on governments.

The just-released interview with Boyd examines investment risks being taken by pension funds and their potential consequences, as well as the flawed institutions that helped lead to this situation. It concludes with possible policy changes that would make it more difficult to wind up in this situation again.

"A typical 75 percent funded pension fund runs about a one in six chance of falling below 40 percent in the next 30 years,” says Boyd in the interview. “Portfolios are risky enough that even with full payment of contributions, bad returns could drive funding this low. This is a crisis level.”

Although some de-risking is occurring, Boyd doesn’t expect a big shift. "Incentives in the system encourage risk taking, and there are no rules to counter those incentives - it’s the Wild West out there,” he says. “There are virtually no rules - no police – for public pensions.”

To tame the ‘Wild West,’ rules and other institutions will be needed, says Boyd. For example, liabilities and annual costs in government and pension plan financial statements should be measured with discount rates that reflect the characteristics of the liability; discount rates used to determine contributions should be based on market interest rates rather than a plan’s portfolio; and plans and governments should clearly disclose information, along with measures of risk, in comprehensive annual financial reports and in municipal bond disclosures.

To read more of Boyd’s interview, click here.

 

 

About RSI:

The Retirement Security Initiative (RSI) is an advocacy organization focused on protecting and ensuring the fairness and sustainability of public sector retirement plans. RSI marshals and organizes a broad range of resources to help policymakers learn about pension issues and explore policy options. Learn more at www.RSINow.org.

 

About the Rockefeller Institute:

The Nelson A. Rockefeller Institute of Government is the public policy research arm of the State University of New York. The Institute conducts fiscal and programmatic research on American state and local governments. Journalists can find useful information on the Newsroom page of the Web site, www.rockinst.org.

 

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Calif. Court Rejects Rigid Application of Vested Rights Doctrine to Pension Reforms

Posted by Tracy Grondine on August 18, 2016 at 6:53 PM

SAN JOSE, Calif., Aug. 18, 2016—A game-changing decision this week by the California First District Court of Appeal is good news for pension reformers, according to the Retirement Security Initiative (RSI). In Marin Association of Public Employees v. Marin County Employees’ Retirement Association, the Court rejected rigid interpretation of the California Rule of vested rights, ruling that although an employee has a vested right to a pension, their only right is to a ‘reasonable pension,’ one without benefit spiking.

“Pension reformers in California have been advocating for years that some reasonable modifications to future pension benefits accrued for future work by current employees could be permissible under the California Constitution,” said RSI Board Member and former San Jose Mayor Chuck Reed. 

The Court summarized its ruling:

“ . . . while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension—not an immutable entitlement to the most optimal formula of calculating the pension.  And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension.  So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

The case arose out of legislation enacted in 2012, the Public Employees’ Pension Reform Act (PEPRA) in which some actions to spike pension benefits were prohibited in future years of service.  Plaintiffs alleged they had a vested right to continue spiking practices that had been in place for years. 

The Court described the Plaintiffs’ position as stated in their opening brief:

 “[P]ublic employees earn a vested right to their pension benefits immediately upon acceptance of employment and . . . such benefits cannot be reduced without a comparable advantage being provided.” 

The Court rejected Plaintiffs’ rigid interpretation of the California Rule of vested rights and upheld PEPRA based on a series of California cases often cited by opponents of pension reform as prohibiting any modification of benefits for current employees.

“The big question for pension reformers is whether or not the California Supreme Court will agree,” said Reed. “If it does, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster.”

 

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Statement on CPS Payment to Chicago Teachers’ Pension Fund

Posted by Tracy Grondine on June 30, 2016 at 8:02 PM

SAN JOSE, Calif., June 30, 2016—“The Retirement Security Initiative applauds Chicago Public Schools for stepping up to its obligation to fund the Chicago Teachers’ Pension Fund even as it pursues its position that Chicago teacher pensions should be funded by the State, just like every other school district in Illinois. We have previously named Mayor Emanuel as an RSI pension hero, and his continued progress on finding new resources and working collaboratively with labor on this challenge is notable.  

“The City of Chicago has reached a consensual resolution with its police, fire and laborer pension funds on funding payments and is in the process of finalizing a consensual resolution with its municipal worker pension fund, the last unresolved pension fund of the City to reach a constructive resolution of the pension funding issues. 

“Chicago embodies the spirit of what RSI is trying to accomplish: address the pension funding challenge head on and put in place reforms and or funding to assure retirement security for public sector employees.” 

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RSI Statement on Puerto Rico Financial Relief Act

Posted by Tracy Grondine on June 30, 2016 at 1:47 PM

SAN JOSE, Calif., June 30, 2016—“The Retirement Security Initiative commends Congress for its bipartisan efforts to pass the Puerto Rico Oversight, Management and Economic Stability Act and President Obama for swiftly signing the legislation into law. RSI also acknowledges board member Richard Ravitch for his unwavering commitment to the people of Puerto Rico as an advocate on their behalf.

“With nearly $44 billion in unfunded pension liabilities, Puerto Rico’s public retirement debt is deeply entangled with its total $72 billion debt. Puerto Rico’s pension debt is staggering, and when compared with U.S. state pension systems, it ranks among those with the largest debts and likely the biggest ever for pensions of its size and scale.

“To avoid similar crisis situations in other U.S. municipalities and states, it’s important that governments make tough decisions today. There are tremendous risks with delaying the adoption of sound pension policies. Ignoring pension reform is bad for everyone involved, especially pensioners and ultimately taxpayers. Puerto Rico’s past pension reform efforts came entirely too late to fix the problem.”

 

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RSI Urges PA Senate to Advance Side-by-Side Pension Plan

Posted by Tracy Grondine on June 20, 2016 at 11:41 AM

SAN JOSE, Calif., June 20, 2016–The Retirement Security Initiative (RSI) today urged Pennsylvania Senate members to reject the stacked hybrid pension proposal recently passed by the Pennsylvania House and instead replace it with side-by-side hybrid pension reform as outlined in the original SB 1071.

In a letter to Senators Patrick Browne (PA-16), Jake Corman (PA-34) and Joe Scarnati (PA-25), RSI said that it has serious reservations about SB 1071 as amended by the House to include a stacked hybrid approach. While the House bill is projected to save taxpayers an estimated $5 billion over the next 30 years, that is only a little more than 2 percent of the total projected $240 billion taxpayers’ 30-year cost for the state’s two public pensions: the Pennsylvania State Employees’ Retirement System and the Public School Employees’ Retirement System.

“While we appreciate the bi-partisan nature of the reform, the House’s stacked hybrid does not go far enough to mitigate the risk of future unfunded pension liabilities,” wrote RSI Executive Director Pete Constant. “It is unnecessarily complex, and perhaps most importantly, is such that future legislation could easily unwind this much needed reform.”

For employees hired after 2018, the House proposal would start them on a defined-benefit plan that would convert to a 403(b) defined contribution plan, which is funded similar to a 401(k) plan, for any income earned over $50,000-per-year, and for all income after 25 years of employment. The state would contribute a 4 percent match.

Whereas, the original Senate reform, passed last year, would cut the current defined benefit formula for workers hired after 2011 and pair it with a mandatory 403(b)-style plan, in which the state would contribute 2.5 percent of an employees’ pay. According to RSI, the Senate plan does a better job of cutting taxpayers' risk since the House plan keeps more employees in a guaranteed defined benefit plan for a longer amount of time.

“The side-by-side hybrid structure is a significant policy achievement, one that will help Pennsylvania meet its existing retirement commitments to public employees and begin to address its substantial unfunded pension liabilities, while providing a new retirement structure that is both more sustainable and provides adequate retirement security for new workers,” wrote Constant.

The Senate plan “will help move Pennsylvania toward a healthier, sustainable financial future,” continued Constant.  “It is far superior to the House’s stacked hybrid plan.”

To read the letter in its entirety, click here.

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RSI Announces New Executive Director

Posted by Tracy Grondine on June 14, 2016 at 6:32 AM

The Retirement Security Initiative (RSI) today announced that its Board of Directors has named Pete Constant as the organization’s new Executive Director, effective June 16, 2016. Constant brings to the position an extensive background in pension management and reform, government policy and law enforcement. He replaces Peter Furman who is retiring.

"Pete is unique in that he has a 360 degree understanding of the need for pension reform,” said RSI Board Member and former San Jose Mayor Chuck Reed. “Because of his significant career experience, he has in-depth insight of the issue stemming from his varying roles as police officer and pensioner, city council member, plan trustee and board member, and reform advocate.”

From 2015 to present, Constant was Director of the Pension Integrity Project and Senior Fellow at the Reason Foundation. There he led the team that designed, drafted and negotiated the successful public safety pension reform plan for the state of Arizona, which was passed with strong bipartisan support in both the Arizona Senate and House of Representatives and was signed into law by Arizona Governor Doug Ducey.

“Because of Pete’s tenacious efforts at facilitating consensus among Arizona stakeholders, policymakers were able to pass ground breaking pension reform legislation, effectively putting the safety pension system on a path to stability and saving the state billions of dollars in the coming decades,” said RSI Board Member and former Utah State Senator Dan Liljenquist. 

Prior to his work at the Reason Foundation, Constant served as Councilmember for the City of San Jose from 2007-2014. As Councilmember, he championed efforts to successfully balance the budget in the face of a cumulative deficit of nearly $650 million, and was instrumental in recommending and advocating policy, funding and public safety reforms.

From 2007-2014, he served as trustee of the $1.9 billion San Jose Federated City Employees’ Retirement System. From 2011-2014, he served as board member of the $2.8 billion San Jose Police and Fire Retirement Plan. During his tenure, his policy recommendations led to structural changes of the boards’ composition to include both stakeholders and financial experts, which minimized conflicts of interest and increased plan performance.

Constant began his career in law enforcement as a police officer for the City of San Jose, where he served for 11 years until an on-duty injury forced his early retirement.

He replaces Peter Furman who helped launch RSI in July 2015 and has since led its advocacy efforts and day-to-day operations.

“Peter has been instrumental in launching and growing the organization,” said Reed. “Because of his substantial contributions, RSI is well positioned to successfully implement our long term plans. We wish him the best in his well-deserved retirement and much enjoyment as he explores the backcountry in his 4WD camper.”


Statement Re: New Jersey Supreme Court Pension Decision

Posted by Tracy Grondine on June 10, 2016 at 3:47 PM

SAN JOSE, Calif., June 10, 2016 – “This week’s New Jersey Supreme Court Ruling upholding a freeze on cost-of-living adjustments for retired pensioners demonstrates why all public employees should be concerned if their retirement plans are underfunded. Not a unique situation for the Garden State, growing pension costs throughout the country are threatening the solvency of public employee retirement plans, putting at risk the hard-earned savings of many workers.

“All workers deserve safe and secure futures and retirement plans should place employees on a path to a secure retirement.  But when pension plans are underfunded and run low on money, retirement benefits become unsustainable and unpredictable, as demonstrated by what is happening in New Jersey.  The Retirement Security Initiative believes that state and local governments have an obligation to ensure that their retirement plans are sustainable, fiscally sound and responsibly managed so that all retirees and employees benefits are fair, sustainable and predictable.

“Policymakers can no longer kick the can down the road, allowing pension debt to skyrocket (such as the case with New Jersey’s $59 billion underfunded system). It’s incumbent upon policymakers to make their systems sustainable and ensure that unfunded liabilities are paid down over a reasonable time period. Refusing to reform pensions now will only lead to disaster down the road.”