Pension Reform Newsletter: Pension Plans Should Avoid Social Investing Strategies, Analysis of Louisiana’s Pension Systems, 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 

• New Reports Detail the Extent of Louisiana’s Unfunded Pension Liabilities
• Census Bureau Finds State and Local Pension Contributions Come Up Short
• An In-Depth Look at New Mexico’s Teacher Pension System
• Some State Pension Plans Are Downplaying Bad Investment Returns
• Why California Pension Systems Should Avoid Social Investing Strategies

News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk

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Articles, Research & Spotlights

Analyzing Louisiana’s Public Pension Challenges 

The Teachers’ Retirement System of Louisiana (TRSL) has over $10 billion in unfunded liabilities and the Louisiana State Employees’ Retirement System (LASERS) faces a similar challenge, currently holding over $7 billion in unfunded liabilities. Since 2000, unrealistic investment expectations have been the largest factor in unfunded liability growth for both plans—adding over $4 billion to TRSL’s debt and $2.7 billion in debt to LASERS. A pair of new analyses by the Pension Integrity Project detail the factors driving these unfunded liabilities and offer stress-testing analyses highlighting the financial risks the two systems now face. Left unaddressed, Louisiana’s pension debt will likely lead to the crowding out of education funding, increased costs for taxpayers, and weakened retirement security for state workers and educators.

Census Bureau Finds State and Local Pension Contributions Come Up Short

Only 76 percent of surveyed pension plans paid their full actuarially determined contributions in 2019, according to new Census Bureau data. The data file, released in October, has liability information on 870 pension systems nationally. While this is a small fraction of the more than 5,000 state and local pension systems the Census Bureau has identified, the sample includes most of the largest public pension systems and thus covers most actuarial liabilities reported nationally. Across the Census Bureau’s sample of pension systems, the total actuarial determined contribution requirements were $149.3 billion in 2019, while the actual contributions made to those plans totaled just $144.2 billion.

New Mexico Educational Retirement Board Pension Solvency Analysis

The New Mexico Educational Retirement Board’s (ERB) latest report shows $7.9 billion in unfunded pension liabilities, up from less than $1 billion in 2001. According to a new solvency analysis by the Pension Integrity Project, in addition to failing to meet its investment expectations, making employer pension contributions below the actuarially suggested amounts added to ERB’s growing debt. Since 2003, the plan has added $2.6 billion in unfunded liabilities as a result of the interest on its debt exceeding actual debt payments (negative amortization). The new analysis examines the primary factors driving this growth in debt and provides a number of policy suggestions that would help plan beneficiaries and taxpayers.

Some State Pension Plans Try to Downplay Poor Investment Returns

Instead of admitting their public pension plans are adding more debt by falling short of investment return expectations, Kentucky, Vermont, Hawaii, and some other states are downplaying this year’s subpar investment returns by claiming they are hitting other “investment benchmarks.” However, as Reason’s Steven Gassenberger notes, meeting these benchmarks aren’t the equivalent of hitting overall investment targets. Yes, pension plans could have performed even worse during the pandemic and recession, but, unfortunately, their unfunded liabilities continue to grow.

California Should Not Promote Climate Change Policy Over Retirement Security

Some California officials have discussed pushing the state’s pension funds to incorporate environmental, social, and governance goals (ESG) into public pension investment strategies in order to help the state reach its policy goals in areas such as climate change. This strategy, called social investing, could violate the state pension plans’ fiduciary responsibilities. CalPERS, the state’s largest public pension system, has already announced it has only a 46 percent chance of meeting its investment targets in the near future and prioritizing ESG investments would mean investing in riskier, lower yield assets.

News in Brief

Teachers’ Willingness to Pay for Retirement Benefits: A National Stated Preferences Experiment

While many states across the country are considering reforms to teachers’ retirement systems, data on the pension preferences of teachers is relatively lacking. In a new academic working paper, researchers Dillon Fuchsman, Josh B. McGee, and Gema Zamarro examine teacher retirement preferences and “find that teachers would be indifferent between a traditional pension and alternative retirement plan designs if the alternatives were paired with 2 to 3 percent salary increases.” They also find that experienced teachers are more likely to prefer a traditional pension, while inexperienced teachers have no strong preferences. The working paper is available here.

Default Settings: How Ohio Can Nudge Teachers Toward a More Secure Retirement

Ohio’s teachers have three separate retirement options: a traditional pension plan, a defined contribution plan, and a hybrid plan that combines the features of both. Upon being hired, the majority of teachers end up in the pension plan, due at least in some part to the fact that it is the default option (meaning that those who do not make a selection are automatically enrolled in this plan). Chad Aldeman of Bellwether Education Partners suggests that nudging teachers towards the defined contribution plan through a switch of defaults would bring significantly higher benefits for most incoming teachers. The presentation is available here.

Quotable Quotes on Pension Reform

“Think of what we could have accomplished with the billions and billions of dollars that have gone instead towards making up for years of skipped pension payments.”

—Elizabeth Muoio, New Jersey state treasurer, quoted in “New Jersey’s pension bill has come due,” NJ.com, Nov. 5, 2020

“There’s been a funding gap, a large funding gap that’s existed for several years, and one of the issues is making sure the city is putting enough money into the plans and that it’s being invested appropriately to earn the type of return that is needed to pay the employee benefits when they retire.”

—Ted Blankenship, Naples councilmember, quoted in “Naples to contribute more to pensions to offset lower expected investment returns,” Naples Daily News, Oct. 30, 2020

“All of our asset class assumptions are generally down versus when we did this last time in 2018 for KRS. So, when we think of the investor challenge, it makes it more difficult to get to your target rate of returns with the same current policy.”

—Chris Tessman, Wilshire Associates’ senior vice president, quoted in “Kentucky Retirement Systems Leans into Stocks, Real Estate,” Chief Investment Officer, Nov. 6, 2020

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 alix.ollivier@reason.org.