Pension Reform Newsletter: Alaska’s risky pension bill, calls to divest, and more

This newsletter from the Pension Integrity Project at Reason Foundation highlights articles, research, opinion, and other information related to public pension challenges and reform efforts across the nation. You can find previous editions here.

In This Issue:

Articles, Research & Spotlights 

• Modeling Exposes Risks in Proposed Alaska Reform
• Pensions Are an Ineffective Tool for Recruiting and Retaining Teachers
• California Bill Would Make Pension Plans Divest From Fossil Fuel Investments
• Deferred Retirement Option Plans Come with Risk
• What States Pay For Defined Contribution Plans

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Articles, Research & Spotlights

Alaska’s Proposed Pension Bill Would Bring Major Financial Risk

Alaska legislators are currently deliberating on legislation that would open a new tier in the state’s perpetually underfunded defined benefit plan for public safety workers, which has been closed to new employees for 15 years. The bill would also allow past service for those who have been participating in the state’s defined contribution plan since 2006 to be transferred into the proposed new pension tier. A new analysis from the Pension Integrity Project warns that this move would introduce significant levels of risk to the state, which would be a major shift from their current risk-free design. Modeling of the proposed new pension shows that it would immediately be subject to potential significant underfunding and that discounting methods are greatly hiding its true costs.

Pension Plans Aren’t Helping Recruit and Retain Teachers

A mass exodus of teachers is becoming a growing concern for state policymakers, and some teachers’ unions are pointing to inadequate retirement benefits as a reason that school districts are having a difficult time retaining talented educators. However, a closer look at public school teacher sentiment shows that retirement offerings are only a minor consideration when compared to factors like salaries, argue Reason’s Zachary Christensen and Allison Tierney. An analysis of expenditures on public education shows spending going to pay for rising unfunded pension liabilities may be coming at the expense of potential raises for teachers, which suggests states and school districts could optimize teacher recruitment and retention by managing the costs of retirement plans in exchange for improved salaries.

Related: Working paper finds Alaska’s switch to a defined contribution plan had no negative effect on retaining teachers

California Looks to Divest Public Pensions From Fossil Fuel Investments

As Russia’s invasion of Ukraine and international tensions are threatening energy supplies and contributing to rising gas prices, California legislators are considering legislation that would direct the state’s nearly $800 billion in public pension assets away from fossil fuel investments. In a commentary for the California Policy Center, Reason’s Marc Joffe details how Senate Bill 1173 would go against the fiscal responsibility state pension plans have to their retirees.

Related: The pitfalls of using public pension funds for politically-driven investment strategies

Deferred Retirement Options Expose Public Pensions to Unique Risks

In response to retention challenges, states like Arizona and Florida are showing interest in expanding deferred retirement option plans (DROP) for public safety workers. These plans allow workers to begin drawing pension benefits while continuing to work after reaching their retirement age. Reason’s Ryan Frost details why DROPs come with their own risks and can be costly to introduce into pension funds that are struggling to reach full funding.

Comparing How Much States Contribute to Public Workers’ Defined Contribution Retirement Plans

A growing number of states are using defined contribution plans to provide flexible retirement options for an increasingly mobile workforce. Given that more governments are relying on this plan design, it is important to understand the contribution adequacy that’s needed to meet post-employment standards of retirement experts. This analysis by Reason’s Zachary Christensen and Swaroop Bhagavatula displays the employee and employer contribution rates used by state-run primary defined contribution plans, which can be a valuable tool to policymakers looking to improve public retirement offerings.

News in Brief

Report Identifies 2022 Challenges for Pension Funds

Ratings agency S&P Global released its outlook on public pension funds for 2022, recognizing the significant improvements in pension funding brought on by a last year’s hugely successful market returns but also warning that many pension plans are sitting on yet-to-be uncovered unfunded liabilities. The S&P report also outlines the effects that prolonged inflation could have on costs and the issuance of pension obligation bonds. Reason’s summary and thoughts on the report are here and the full S&P Global report is here.

Quotable Quotes on Pension Reform 

“In the grand scheme of public pension fund portfolios, Russia was never a big cheese. It was a sliver, and in many cases a sliver of a sliver. So pensioners certainly should not be worried about the financial fallout of this human tragedy having an impact on their monthly checks. They are far more likely to be impacted by the inflationary side effects of global petroleum-market disruption…Realistically, nothing that any public pension fund does now will have a meaningful impact on the Russian economy or its leadership. So it’s wiser to play the long game on any major holdings

—Columnist Girard Miller on the impact of Russian investments on public pension plans and the effectiveness of divestment, “The Smart Way for Public Pensions to Divest from Russia,” Governing, March 15, 2022

“It’s a hot topic…A cost-of-living adjustment can be an expensive plan provision.”

—National Association of State Retirement Administrators Research Director Keith Brainard on inflation and the costs of COLAs, cited in “Inflation Raises Expenses for Pension Funds,” The Wall Street Journal, Feb. 28, 2022

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by our team of Pension Integrity Project analysts. This month, analyst Anil Niraula created an interactive visualization of the Louisiana State Employees Retirement System’s (LASERS) experience with unfunded pension liabilities going back two decades. This is a useful way to contextualize and measure the variety of challenges facing the system. You can access the tool here.

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments, and suggestions to zachary.christensen@reason.org.