This newsletter from Reason Foundation’s Pension Integrity Project 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
- Pension Boards Should Focus on Returns, Not Divestment
- For Public Pensions, Past Performance No Guarantee of Future Results
- Accounting Rules Create Perverse Risk-Taking Incentives for U.S. Public Pension Funds
- Pension Fund Investment in P3 Infrastructure
- More Participant-Elected Pension Board Members Associated with Lower Bond Ratings
- Pension Underfunding in Alabama
- Sonoma County (CA) Pension Advisory Committee Update
- Glossary of Pension Terminology
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk
Articles, Research & Spotlights
Pension Boards Should Focus on Returns, Not Divestment
Activists continue to pressure public pension systems to divest from a number of different industries, including tobacco and gun manufacturers. But as Reason’s Daniel Takash writes in a new article, it is unwise for pension funds to promote social change at the expense of pensioners. As the fiduciaries of public sector pension funds, pension boards have a primary obligation to maximize fund returns for the benefit of the pensioners rather than employing these funds to achieve political ends.
» FULL ARTICLE
For Public Pensions, Past Performance No Guarantee of Future Results
We’re all routinely told that “past performance is no guarantee of future results” when it comes to our investment portfolios, but in the world of public sector pensions, politicians regularly ignore that mantra. In a recent Orange County Register column, Reason’s Len Gilroy writes that policymakers still pretend they can rely on high annual investment returns every year, disregarding a “new normal” in the markets that threatens rising costs to taxpayers, declining pension solvency, and diminished retirement security.
» FULL ARTICLE
How Accounting Rules Create Perverse Risk-Taking Incentives for U.S. Public Pension Funds
U.S. public pension funds can set their discount rates based on their expected returns, a practice at odds with the prudent liability-based approach used by U.S. corporate pension funds and pension funds in other countries. Reason’s Truong Bui recently summarized new research finding that not only does the expected-return approach undervalue pension liabilities, but it also encourages public plans to increase risk taking in their investments to sustain unreasonably high discount rates.
» FULL ARTICLE
Pension Fund Investment in P3 Infrastructure
Public pension fund investment in infrastructure public-private partnerships continues to be a major global trend, motivated by the difficulty of achieving pension funds’ needed 7-8% overall return on their investment portfolios in today’s very low interest-rate environment. In a recent Public Works Financing column, Reason’s Robert Poole explores this trend and the policy and political implications.
» FULL ARTICLE
More Participant-Elected Pension Board Members Associated with Lower Bond Ratings
The board of trustees of a public pension plan has a large influence over the plan’s investments, asset allocation, actuarial assumptions, and benefit levels. Reason’s Truong Bui recently summarized a new study finding that elected board members may be less financially literate than appointed and ex-officio board members, who tend to have stronger financial backgrounds and thus may be inclined to adopt sounder pension policies. This implies that it may be beneficial for public plans to have more members with financial expertise on the board.
» FULL ARTICLE
New Study Examines Pension Underfunding in Alabama
A new report by researchers at Troy University examines factors influencing the declining performance of the Retirement Systems of Alabama, noting the limitations of using Actuarially Determined Employer Contributions in interpreting a system’s fiscal health. In a recent blog post, Reason’s Anil Niraula reviews the report, which demonstrates that a detailed analysis of state pension systems, unlike aggregate studies, offers an opportunity to account for the unique political, economic, demographic and financial landscape factors that a particular retirement system faces.
» FULL BLOG POST
Update from the Sonoma County (CA) Pension Advisory Committee
The Sonoma County (CA) Independent Citizens Advisory Committee on Pension Matters released a report last month detailing how the county’s pension liability has grown so rapidly in the past 15 years. Reason’s Daniel Takash examines the report in a recent blog post, summarizing its findings and recommendations.
» FULL BLOG POST
Glossary of Pension Terminology
Reason Foundation
Research and discussions about public pension systems often involve technical terms that may be difficult to understand by lay readers, especially voters and even plan members. To assist the dialogue about pension reform, Reason Foundation has recently released a glossary covering frequently mentioned pension terms and phrases.
» FULL GLOSSARY
Quotable Quotes on Pension Reform
“The longer-term returns of [CalPERS]—the three-, five-, 10-, 15- and 20-year total returns of the fund—are now below the assumed rate of 7.5 percent for the fund […] That’s a significant policy issue for us.”
—CalPERS Chief Investment Officer Ted Eliopoulos, quoted in John Gittelsohn, “Calpers Earns 0.6% as Long-Term Returns Trail Fund’s Target,” Bloomberg, July 18, 2016.
“It’s a systemic problem […] Everything is predicated on a linear 7.5 percent investment return, and that has not been sustainable. It’s a whole different paradigm to what we’ve been use[d] to in the past.”
—Oregon Public Employee Retirement System Board Chairman John Thomas, quoted in Ted Sickinger, “PERS: Oregon’s public pension costs will go up $885M next year,” The Oregonian, July 30, 2016.
“The good times almost certainly will roll again, but the question is whether there will be enough of those good years to fill in the craters left by years like the last two. It would be better for state and local governments to start grappling with the higher cost of lower pension-fund returns now, rather than waiting until more drastic and painful steps are forced upon them.”
—Los Angeles Times editorial board, “Another bad year for CalPERS,” July 27, 2016.
“[…] American accounting regulations have created perverse incentives for public pension funds. And that can mean only one thing. The rules need to change.”
—“Why public-sector pension plans take more risk,” The Economist, July 25, 2016.
“If we don’t find a way to reduce the expanding debt around our public pensions, no contract will overcome the unforgiving laws of mathematics. It’s this plain: without meaningful reform, both taxpayers and our retirees could be at risk.”
—Pennsylvania House Speaker Mike Turzai, “State pension fix needed,” Pittsburgh Post-Gazette, August 5, 2016.
“Unlike Berkshire, CalSTRS may not claim it is safely funded at anything less than assets equal to 100% of liabilities. That concept applies only when the discount rate is less than the expected rate of return. This explains why the so-called “80% rule,” a frequently mis-cited rule of thumb that pension funds are safely funded so long as assets equal or exceed 80% of pension obligations, does not apply to pension funds that discount obligations at the same rate as they expect to earn on assets. When discount rate = expected rate of return, only 100% funding is safe.”
—David Crane, “Truth Or Consequences,” (blog post), July 21, 2016.
“[S]ome pension fund officials continue to peddle the notion that the market will bail them out. The chief investment officer of CalSTRS downplayed the fund’s recent poor performance, telling Wall Street Journal that, ‘we look at performance in terms of decades, not years.’ But the debt of CalSTRS and its sister fund, CalPERS, rose from $60 billion in 2008 to $180 billion today despite a string of years when both funds far exceeded their investment goals.
Dr. Johnson once famously described second marriages as the triumph of hope over experience. Unfortunately, today that sounds like the operating philosophy of much of the public sector pension world.”
—Steven Malanga, “The Public Pension Problem: It’s Much Worse Than It Appears,” Investor’s Business Daily, July 22, 2016.
“But just as a pig with lipstick is still a pig, a pension fund in crisis is still in crisis, and ignoring that reality benefits no one, including pensioners.”
—Dan Walters, “CalPERS’ unfunded liabilities grow as investment earnings lag,” Sacramento Bee, July 20, 2016.
“The enormity of the challenges confronting pension funds — including substantial deficits, a tumultuous global economy, and a low-return environment — means that they need to be able to focus on maximizing investment returns without distraction. For those in the public sector, this includes being shielded from governmental politics. Interference by elected officials — from imposition of local economic development obligations to excessive constraints on head count and compensation that impede recruitment of talented staff — has contributed to poor investment choices, higher total costs, diminished organizations, and disappointing performance at some institutions.”
—Simon C.Y. Wong, “Public Pension Funds Perform Better When They Keep Politics at Bay,” Harvard Business Review, July 19, 2016.
For those interested in the process and mechanics of pension reform, Reason Foundation published a comprehensive starter guide for state and local reformers. This handbook aims to capture the experience of policymakers in those jurisdictions that have paved the way for substantive reform, and bring together the best practices that have emerged from their reform efforts, as well as the important lessons learned.
» FULL HANDBOOK
Contact the Pension Reform Help Desk
Reason Foundation set up a Pension Reform Help Desk to provide 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 or on Twitter (@ReasonReform). As we continually strive to improve the publication, please feel free to send your questions, comments and suggestions to leonard.gilroy@reason.org.
Leonard Gilroy
Senior Managing Director, Pension Integrity Project
Reason Foundation
Anthony Randazzo
Managing Director, Pension Integrity Project
Reason Foundation
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Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.