This assistance is grounded in years of experience developing effective, bipartisan policy solutions that address the complex needs of government employers, employees, retirees, and taxpayers. The Pension Integrity Project work demystifies complicated retirement policies with advanced actuarial modeling, built by a team of experts and backed by industry-leading actuarial consultants.

To advise on the immediate and long-term effects of policy decisions, the Pension Integrity Project uses custom-built actuarial and employee benefit models that are tailored to reflect each unique retirement system. While Reason Foundation does not have access to individual participant-level data—accounting of the behavior of each individual participating member—given its proprietary nature, that level of data is not necessary to develop highly accurate models that allow for forecasting the factors most relevant to policymaking: general projections of liabilities, assets, and employer/employee contributions.

Highly accurate actuarial models require only the assumptions used by the pension system, which are publicly available and reported in the annual actuarial valuation and other common reports. The Pension Integrity Project uses the public pension system’s current assumptions to develop advanced and dynamic actuarial modeling to provide valuable context on the near and long-term fiscal and financial impacts of various policy options.

The Pension Integrity Project’s team of policy experts frequently carries out checks and calibrations—holding findings up to official actuarial reporting—to ensure the accuracy of the models used. Reason also subjects forecasts and outputs to rigorous review by policy experts and licensed consulting actuaries.

Reason Foundation’s experts are particularly proficient at delivering intricate and plan-specific analyses in a way that is easy to understand and applicable to policymakers. Reason also develops interactive tools that put the wide possibilities of modeling directly in the hands of policymakers.

The Pension Integrity Project develops several different types of modeling to address the various policies that affect the overall success of a public retirement plan:

• Funding models project the liabilities of a plan as well as the short and long-term costs associated with policies.
• Employee benefit models calculate the utility of a retirement plan over time, illustrating how well a plan delivers on benefits offered to public workers at different ages and years of service.
• Return probability analyses evaluate the likeliness of specific plans achieving different market results.

Reason Foundation Pension Integrity Project’s actuarial modeling and analysis have contributed valuable, decision-relevant information to the policymaking process in several states that have successfully implemented bipartisan public pension reforms, including Texas, Michigan, Arizona, Colorado, New Mexico, and Florida.

The Pension Integrity Project’s Modeling Methodology and Approach to Analysis of Public Retirement

The post Modeling methodology and approach to analysis of public retirement systems appeared first on Reason Foundation.

HB 22/SB 35 costs are dependent on a flawed discount rate: The claim that the proposed changes will not require any additional funding relies on the pension’s current investment return assumption. Alaska PERS would need to achieve overly-optimistic 7.25% annual returns on investments for decades to avoid additional costs to the state.

• Overly-optimistic investment return assumptions were a major contributor to Alaska’s $5.1 billion debt still owed on the legacy pension plan.
• The average assumed return used by public pension systems around the country is now just below 7%, so Alaska PERS’s current assumption is rosier than peers.
• Capital market forecasts suggest returns closer to 6% for the next 10-15 years.

HB 22 and SB 35 could cost the state an additional $800 million: Actuarial analysis of Alaska PERS that anticipates realistic market stress and multiple recessions over the next 30 years shows HB 22/SB 35 likely expose the state to significant potential costs.

Bottom Line: HB 22 and SB 35 could cost Alaska upwards of $800 million in the coming decades. Since public safety employees make up only about 10% of PERS members, this could be a very costly move that only benefits a relatively small group.

The post Pension changes in House Bill 22 and Senate Bill 35 threaten Alaska’s budgets appeared first on Reason Foundation.

• Holds $1.8 billion in unfunded liabilities;
• Is structurally underfunded by legislatively set contribution rates;
• And is expected to become insolvent around the turn of the century even if all its actuarial assumptions are met (faster if they do not).

This backgrounder examines claims the North Dakota Public Employees Retirement System is making about North Dakota House Bill 1040.

Scrutinizing NDPERS’ cost claims on House Bill 1040

The post Scrutinizing NDPERS’ cost claims on House Bill 1040 appeared first on Reason Foundation.

The post Examining the pension reform benefits of North Dakota House Bill 1040 appeared first on Reason Foundation.

Overall, the process appears to have generated a prudent set of rules that would create a program that balances client safety with strong licensee oversight under a flexible set of program rules. As a first-in-the-nation exercise in developing such a robust framework, your work overall appears to have been successful and will provide a worthy template for other states to consider following.  

Our review of the proposed permanent rules related to Oregon Psilocybin Services yielded the following observations for consideration as you approach final rulemaking.

Read the full testimony below or download the PDF here.

The post Comments on Oregon’s proposed psilocybin services rules appeared first on Reason Foundation.

Under Proposition 122, the Natural Medicine Health Act, Colorado would create America’s second state-regulated framework for allowing certified mental health professionals to administer psychedelics.

Some opponents have raised concerns about creating a legal framework for currently illegal compounds, especially in the wake of a national opioid epidemic. But this line of opposition ignores the fact that the Food and Drug Administration (FDA) has taken steps in recent years to fast-track the approval of psychedelics for use in serious mental health conditions.

For the last two decades, nonprofits have poured over $100 million into rigorous medical trials around the world to prove that psychedelics can be an effective treatment for the most challenging mental health cases, including PTSD, anxiety, suicidal ideation, ADHD, and alcohol use disorder. The outcomes of these trials have repeatedly shown that psychedelics are extraordinarily effective—often two to three times more than any other known treatment.

In 2023, physicians will likely be allowed to prescribe the psychedelic compound MDMA to those experiencing PTSD, given how far that modality has advanced in the FDA regulatory approval process. Psilocybin, the active ingredient in “magic mushrooms,” shows similar promise and will likely be available for medical prescription in the next few years.

There are several reasons for Colorado to take matters into their own hands rather than cede control over its destiny to other states or the federal government.

First, leading medical researchers, including those from Johns Hopkins, have argued that psychedelics should be taken off the list of dangerous drugs because an overwhelming amount of scientific studies show them to be safe and effective. The current legal pathway to reclassify psychedelic drugs is through the FDA approval process.

Unfortunately, the traditional pharmaceutical model does not work for naturally occurring compounds. Psilocybin mushrooms grow in nature and cannot be patented in their natural form, so pharmaceutical companies have little incentive to invest hundreds of millions of dollars into clinical trials. The FDA drug approval process was never set up to evaluate the efficacy of naturally occurring botanicals, but Colorado has an opportunity to offer its citizens access to natural medicines outside of the traditional FDA process.

Second, it is reasonable to expect psychedelic-assisted treatment through a doctor’s prescription to be extremely expensive and exclusive. A likely scenario where the FDA only permits psychedelic-assisted therapy under extremely limited circumstances and requires a protocol where each patient is privately counseled by two professionals simultaneously could cost thousands of dollars per patient.

Proposition 122 would allow professional psychedelic therapy to be administered to groups of up to 30 people rather than requiring individuals to seek more costly individualized services. Allowing this form of therapy could significantly expand access by bringing the cost down for patients to a few hundred dollars.

Third, Colorado will also be the first to legalize several promising compounds, such as iboga, which could be the most effective known treatment for opioids, alcohol, and other addictions. Right now, some nonprofits fly veterans out of the country to get life-saving treatment at clinics offering iboga and other psychedelics, returning to the US to receive follow-up therapy and counseling. Colorado can lead the way and empower its own citizens with better, more effective—and local—tools to improve their mental health

Psychedelic medicine is moving into the mainstream, and its progress is not slowing down. The election this November will determine whether voters lead the way in making the most advanced mental health treatment accessible to all Coloradans.

The post Colorado’s opportunity to determine its own mental health rules appeared first on Reason Foundation.

They examine how public pension plans factoring ESG into investment decisions may be neglecting their fiduciary obligations to maximize returns at acceptable risk levels and debate whether states pushing broad anti-ESG laws may unintentionally harm their own underfunded public pension systems.

You can view the Sept. 20, 2022, webinar below.

The post Webinar: ESG trends and impacts on public pensions appeared first on Reason Foundation.

With the state’s elected leaders prudently setting aside more than $500 million for water augmentation and conservation projects and overhauling the state agency responsible for financing water infrastructure in the closing days of the legislative session, Arizona’s robust tradition of using public-private partnerships (P3s) to deliver critical water investments appears set to enter a transformative new phase. 

The state’s economy today would not exist without the legacy of major waterworks like the Central Arizona Project or Salt River Project’s network of dams, reservoirs, and canals—projects built with extensive collaboration between federal, state, and private entities. Cities like Phoenix have also used public-private partnerships to deliver major new water and wastewater infrastructure.  

Financing water infrastructure is complex, but the fundamental issue for Arizona is simple: There aren’t enough traditional tax or ratepayer dollars today to deliver the future water infrastructure Arizona needs.

Offshore desalination plants, new reservoirs, and multistate pipeline agreements are among the types of promising—but costly—new-build water supply projects that have captured the minds of policymakers.

These projects could easily cost billions of dollars on their own and, back in 2013, the U.S. Environmental Protection Agency estimated the state would need $7.4 billion by the mid-2030s just to improve, repair, and upgrade existing water infrastructure, a figure that excludes costly expansions needed to accommodate population growth.  

Public-private partnerships provide opportunities to overcome many of the water infrastructure challenges that Arizona faces, including sourcing, conveyance, and treatment. They have been used extensively around the world to ensure water systems and treatment facilities are financed, built, operated, and upgraded in ways that minimize taxpayer exposure. 

When government water agencies enter partnerships designed to manage major financial and operational risks, they shield taxpayers and users from unexpected repairs and other costly problems.  

While water P3s typically involve large projects with high upfront costs, they also include decades-long commitments to operations and maintenance that government agencies typically lack the resources to do alone, resulting in lower operating costs over the long term. 

Private partners are on the hook for decades for managing the systems under performance-based contracts, as well as handing managed assets back to government owners in good shape. Contracts designed to protect the public interest while outlining clear terms for project delivery give partner firms the incentive to find value through the right capital investments that balance cost and quality.  

Some major P3 investments are being used to secure and deliver water from new sources to accommodate population growth. In 2016, fast-growing San Antonio, Texas, entered a 30-year, $923 million P3 to deliver up to 50,000 acre-feet of water per year via a new 140-mile pipeline to provide about half of the water needed to meet future population demand.

The partnership puts the risks of securing the water on the private partner responsible for negotiating with local landowners to secure drinking water supplies, as well as the risk of building and operating a 140-mile pipeline to deliver the water to the city from its watershed source. The project was financed with loans taken out by the private partner, which will be repaid by the city over several decades from collected user fees.

Santa Clara, California, after an unsuccessful attempt a few years back, is close to finalizing a similar 30-year, $600 million public-private partnership that would secure water from multiple sources. 

Just as Arizona’s water challenges aren’t confined to sourcing clean water, P3s can be and have been used to overcome numerous ecological and environmental challenges. Chicago, Atlanta, Baltimore, and many large cities have partnered with private firms to deliver and operate wastewater treatment and processing facilities to help prevent massive pollution problems, often to comply with EPA and state consent decrees.  

Opportunities also exist to encourage land ownership practices through P3s that reduce the strain put on water and sewer infrastructure: Prince George’s County in Maryland has worked with landowners and developers to integrate more porous ground surfaces capable of diverting stormwater from the area’s overburdened sewer systems. And San Mateo, California, is in the process of exploring an advanced water treatment P3 that can keep clean water in reserve for droughts and other hazardous conditions. 

Innovations in leak detection, a problem that results in 1.7 trillion gallons worth of lost revenue for water systems each year, are also becoming a source of water agency contracting, as technology allows detection using acoustics without digging.  

With the Arizona state legislature setting aside a major down payment for critical water projects and simultaneously expanding the state finance agency’s toolkit to deliver them the key to success will be giving governments the greatest flexibility to enter long-term public-private partnerships designed to increase water supplies through acquisition, treatment, conservation and more. 

Arizona’s continued economic success will require effective partnerships between public, private, and stakeholder interests to secure the state’s clean water future in a fiscally responsible way going forward.  

A version of this commentary first appeared in The Arizona Republic.

The post How to maximize Arizona’s water investment appeared first on Reason Foundation.

But in the 2021-22 legislative session, HB55 and HB220 both advanced through the state House of Representatives policy and fiscal committees with strong political support despite no apparent scrutiny and actuarial analysis. These bills would have opened new and financially risky tiers of the now-closed legacy pension systems for all new government workers. A Pension Integrity Project analysis found that implementing HB55 alone could have easily exposed the state to over $200 million in new unfunded liabilities by allowing current DC plan participants to switch to the proposed plan. 

There were two major arguments for the swap to a DC plan in 2005. First, the pension funds’ unfunded liabilities had already started ramping up to unsustainable levels, meaning the paydown of those debts were starting to eat too much into the state budget. Second, the state greatly feared another revenue shortage like it had in the 80s and 90s, impacting the legislature’s ability to fund already accrued and future benefits.  

The arguments from bill supporters centered around a desire to recruit and retain more public employees. Yet there is little, if any, evidence that a defined benefit pension is a relevant factor that helps drive employee recruitment and retention. A Reason Foundation working paper examining teacher retention in Alaska finds that retention rates did not change when the state swapped from a DB to DC in 2005. In addition, 86% of police stations across the country are facing a shortage of members and every one of those stations, outside of Alaska, has a pension with some defined benefit component. 

While the fiscal note analysis performed by Alaska’s pension system actuaries presented only a five-year cost projection, based on the assumption that the proposed pension tier would meet all of its actuarial assumptions, even that analysis raised some major concerns for state policymakers. It stated: “Adverse plan experience (due to poor asset returns and/or unexpected growth in liabilities) or changes to more conservative assumptions will increase the PERS DB (defined benefit) unfunded liabilities, resulting in higher contribution rates.”  

Lacking any meaningful actuarial or fiscal analyses, legislators and staff uncertain about the impacts of these bills sought an independent evaluation of potential outcomes, prompting several organizations—including the Pension Integrity Project at Reason Foundation, Americans for Prosperity, Alaska Policy Forum, Americans for Tax Reform, the American Legislative Exchange Council, and the Heritage Foundation—to provide technical assistance, policy analysis, and legislative testimony. 

Reintroducing Risk Via New Pension Tiers 

Pension Integrity Project’s analysis found that while the pension designs proposed under HB55 and HB220 did include a few modest improvements relative to the original legacy pension tiers, the designs still left far too much financial risk on the table.  

A key problem is the proposals’ use of a 7.38% assumed rate of return on investments, far higher than the national median—and higher than previous iterations of these proposals put forth by public employee stakeholders. This assumption is vital to get correct. Soon after the proposed inception of this new tier, the pension systems would have up to 15 years of liabilities already on their books because the bills stipulated that, for any member who chooses to enter the new tier, all their previously earned service in the DC plan will be transferred into the new defined benefit pension at the current 7.38% discount rate. This sets up a pension obligation bond-like situation where any downturn in market performance or lowering of investment return assumptions—both situations being almost a certainty based on 10-15 year market forecasts—would immediately create unfunded liabilities in the pension system. 

So why would a new pension proposal go the opposite direction on investment risk when all other public pension systems are rapidly dropping their assumed rates of investment return, and market forecasts predict returns more than 1% lower than the Alaska bills envisioned? The only possible explanation is that the use of a lower assumption would raise the cost of these proposals to a level that would make the supporters’ arguments of these bills being “cost neutral” an impossibility. The supposed “cost neutrality” argument from supporters is especially important due to the way Alaska funds its pension systems. Alaska has, for all intents and purposes, capped its employer contribution at 22% of pay. This new proposal, using faulty assumptions that hide the actual cost of the plan, would have eaten into the portion of that 22% that’s used to pay down legacy pension debt. If the plan was properly priced, even less would go toward paying down Alaska’s pension debt which would introduce significant risk to the promises the state has made on accrued benefits. 

Additionally, the pension systems’ actuaries noted a critical point—the current DC plan (DCR) offers nearly the same retirement benefit as proposed under HB 55 (PERS DB). Increasing employer contributions in the current DC plan and adding more annuity purchase options could yield an equivalent benefit and provide lifetime income options. In the fiscal analysis of HB55, the plan actuaries found, “On average, approximately 94% of DCR service as of June 30, 2021 was credited to PERS DB.”  

Evaluation of Alaska’s Current Retirement Offerings 

An actual state-by-state comparison of the retirement benefits earned by Alaska employees versus other statewide public employees would be prudent, because they have possibly the most generous post-employment benefits in the country. Not only does the state offer a solid contribution rate to its DC members, a Social Security replacement plan, the Supplemental Annuity Plan (SBS-AP), that puts the amount that would have gone into Social Security instead into a 401(a) account is also offered. Anyone relatively familiar with Social Security knows the poor benefit it offers for the dollars contributed into it, meaning Alaska’s employees will almost certainly earn more through the SBS-AP, if they are eligible, than they would have if they were paying into Social Security.  

Between the 12.26% of pay going into the SBS-AP (6.13% each from employee and employer) and the 13-15% of pay going into a member’s DC account (split depending on employee classification), an employee of Alaska has between 25.26% and 27.26% of pay going toward their retirement benefits each year. 

The Future for Alaska Retirement Policy 

While HB55 and HB220 fell short this legislative session, efforts to upend the state’s previous reforms will likely arise again in future legislative sessions. Recruiting and retaining public employees continues to be challenging for all states, not just Alaska. Despite misguided reasoning, there will be pressure to address these challenges with concessions in public retirement benefits. But reopening the doors to the beleaguered pension plan will resurrect major unacceptable risks while doing little to improve the state’s retention issues. Alaska policymakers will need to look elsewhere to address these challenges. 

That is not to say that there are no reforms Alaska lawmakers could consider to improve the state’s retirement systems. The legacy $7.4 billion in unfunded pension liabilities are still generating major costs in state budgets, and accounting of these debts is suboptimal, understating their magnitude with outdated market assumptions that need to be brought in line with broader industry trends. Policymakers should direct their attention to eliminating this debt as quickly as possible. Several other states have recently committed supplemental payments to address pension funding shortfalls, and Alaska would be wise to do the same.  

In 2005, Alaska policymakers made the prudent decision to recalibrate their retirement systems in a way that better served the mobility of the modern workforce and ceased any future exposure of unexpected costs for state budgets, blazing a trail for the rest of the country. Since Alaska’s landmark reform, several other states have adopted similar risk reducing measures. Instead of unraveling the state’s progress from the last 17 years, policymakers should seek to bolster the policies that brought resiliency and reliability to the retirement benefits of public workers. 

The post Alaska avoids attempt to roll back 2005 pension reform   appeared first on Reason Foundation.

The post Examining the Teachers Retirement System of Texas after the pension reforms of 2019 appeared first on Reason Foundation.

A version of this public comment was submitted to the rules coordinator for Oregon Psilocybin Services on April 22, 2022.

Thank you for the opportunity to provide public comment on the proposed rules covering Psilocybin Products, Training Curriculum, and Testing Rules (Chapter 333) pursuant to the implementation of Measure 109 (2020)/ORS Chapter 475A. 

Reason Foundation is a national 501(c)(3) public policy think tank that offers pro-bono research and technical assistance to public officials and other stakeholders to help design and implement policy solutions in a variety of areas, including public finance, public pension solvency, infrastructure, and drug policy. The emerging regulatory framework governing certain controlled substances across various states—including medical and adult-use recreational cannabis and psychedelics—is an area of particular interest. Reason Foundation has advised officials on emerging drug policy transformations in states like Michigan, New Jersey, and Nevada. We are also a founding member of the Cannabis Freedom Alliance, which seeks to advance federal cannabis legalization in a manner that respects state autonomy to self-design their own policies and ensure low barriers to market entry to maximize the opportunity for potential entrepreneurs, especially those communities that have been most severely impacted by the drug war. 

Reason commends the diligence with which Oregon Psilocybin Services (OPS) and the Oregon Psilocybin Advisory Board are approaching the groundbreaking work directed by Measure 109/ORS chapter 475A. Public agency rulemaking is always a challenging process, especially so when the underlying subject of regulation is such a new and emergent policy issue. In that light, we believe that overall, you have thus far admirably set out clear goals and objectives while ensuring that the proposed regulatory framework offers licensees significant flexibility in how to achieve them.  

At a more detailed level, our review of the proposed rules on psilocybin products, training curriculum, and testing yielded the following observations that we believe warrant additional consideration prior to finalizing the program rules: 

• Proposed Rule 333-333-1010 (p6): We understand that for the purposes of launching a manageable regulatory framework for psilocybin services that the inclination of the advisory board centers on offering a limited scope of products (oral preparations only) derived from one authorized psilocybin species (Psilocybin Cubensis). We respect that position as sensible and appropriate for the initial stage of launch. However, we hope in the future the advisory board will consider authorizing additional strains of psilocybin species beyond Psilocybin Cubensis. We also recommend expanding the range of allowed products to include alternative, non-oral consumption modalities in the interest of encouraging product diversity and a wide range of potential product price points, which could help ensure affordable access to psilocybin services consistent with the intent of ORS chapter 475A.  

• Proposed Rule 333-333-2010: The proposed rules would ban manufacturer licensees from producing psilocybin “by using genetically modified organisms such as bacteria” or “by chemical synthesis,” potentially forestalling the production of relatively low cost and high-quality psilocybin while placing upward pressure on product pricing. Market innovations have delivered synthetic, yeast-produced, and culture-grown psilocybin compounds demonstrating great promise for safe, efficient production. Accordingly, the current restrictive policy on product sourcing may drive up consumer prices and constrain low-income access to therapeutic psilocybin services, and it is unclear what purported public benefit is expected to result from such a restrictive ban, nor what societal harms the ban attempts to prevent. As current U.S. Agriculture Secretary Tom Vilsack wrote in a 2017 opinion piece, “While public skepticism around the safety of GMOs is significant, the overwhelming evidence demonstrates that these crops have not been linked to a single health risk in the more than two decades they’ve been in our marketplace.” 

• Proposed Rule 333-333-2020: This proposed rule requires the prior express approval of every psilocybin product by the Oregon Health Authority. Based on the experience of several states in the medical and recreational cannabis markets, requiring agency pre-approval of every single product licensees are allowed to manufacture will be very duplicative, and it is likely to lead to an inevitable bogging down of the review process administratively, potentially creating lengthy delays in getting new and innovative or transformative products to market. While we understand launching the program with a limited scope of product species and types, we would encourage the advisory board and Oregon Health Authority (OHA) to quickly move towards outlining a set of overarching product standards and then allow any product to pass into commerce if it meets the standards without requiring prior restraint. 

• Proposed Rules 333-333-3050 (p24) and 333-333-3060 (p25-27): The required training curriculum modules cover a comprehensive set of categories and subtopics overall. We are specifically encouraged to see the inclusion of the “Group Facilitation” curriculum module. We believe that ensuring regulatory flexibility for service center providers to offer group-based psilocybin services would likely create lower-cost pathways to services and expand access to a wider range of the population, particularly lower-income and historically marginalized populations. 

• Proposed Rules 333-333-7090 (p39) and 333-333-7100 (p40): While the testing rules overall appear to be generally well designed, we observed that the currently proscribed sample size for testing appears to be large (2% minimum) relative to a fairly low batch maximum size (1 kilogram). As we have observed from state medical and recreational cannabis markets, beyond a certain point the required sample size relative to the volume of product can create a non-negligible cost in terms of manufacturer licensees’ inventory, not to mention direct testing costs owed by licensees. Because these factors will ultimately play a major role in the pricing of products delivered, establishing the lowest-needed sample size relative to batch size is an important aspect of meeting the stated purposes of ORS Chapter 475A to advance both the safety and affordability of access to psilocybin services. We suggest that OPS consider the potential merits of adjusting the batch size up or the sample size down. 

We hope this information is useful and we welcome any related questions or dialogue from Oregon Psilocybin Services staff or members of the Oregon Psilocybin Advisory Board.

The post Oregon Psilocybin Services should carefully approach Measure 109 rulemaking appeared first on Reason Foundation.

The post Evaluating the potential impacts of Louisiana Senate Bill 438 appeared first on Reason Foundation.

• Arizona state government accounts for nearly $473 million (5%) of the current unfunded pension liabilities held by the Public Safety Personnel Retirement System (PSPRS)—including $431 million in pension debt accrued by the Department of Public Safety (DPS).
• Unfunded pension liabilities accrue interest at the same rates as the PSPRS discount rate—currently 7.3% annually—making PSPRS unfunded liabilities among the most expensive taxpayer-backed debt held by the state. For comparison, the Arizona State Retirement System (ASRS) accrues interest at a 7.0% rate annually.
• Major reforms to PSPRS enacted by the legislature since 2016, along with several prudent policy and assumption changes made by the PSPRS Board of Trustees, have dramatically reduced the system’s risk, prompting dozens of employers, like Tucson, Flagstaff, and Prescott, to adopt various new funding tools designed to pay down their PSPRS debt faster, thus avoiding the high costs of pension debt accrual.

Paying Down Pension Debt Faster Is Prudent

• The proposed supplemental, one-time appropriation would pay down unfunded liabilities for state agency employers participating in PSPRS.
• Paying down debt associated with promised, constitutionally protected pension benefits faster is a time-tested way to save taxpayers money by avoiding interest costs.
• Actuarial modeling by the Pension Integrity Project at Reason Foundation finds that Gov. Doug Ducey’s proposed supplemental $611.3 million infusion into PSPRS would:
  • Yield between $137 million and $322 million in taxpayer savings over the next 30 years, depending on investment performance.
• A $1 billion infusion into PSPRS similar to that outlined in Senate Bill 1087 would:
  • Yield between $240 million and $564 million in taxpayer savings over the next 30 years, depending on investment performance.

Takeaway: The proposed “catch-up” payments for PSPRS’ unfunded liabilities would benefit taxpayers by reducing pension debt and producing long-term cost savings.

Paying Down PSPRS Debt Faster Is a Win for Taxpayers

The post Paying down PSPRS debt faster is a win for taxpayers appeared first on Reason Foundation.

Several states facing major pension challenges have successfully transitioned to lower-risk retirement designs, including Oklahoma. House Bill 2486 attempts to undo that progress by eliminating the current Pathfinder defined contribution retirement plan and reopening the legacy pension plan, re-exposing the state to unnecessary unfunded liabilities, financial risks, and costs that would ultimately be borne by taxpayers.

Closing one of the best defined contribution plans in the country to reopen the shuttered Oklahoma Public Employees Retirement System (OPERS) defined benefit pension plan would unwind important reforms and threatens the financial condition of legacy benefits.

• Closing the OPERS defined benefit pension to new hires and adopting other prudent policy changes dramatically improved the financial solvency of the legacy OPERS pension in the last decade. OPERS was 66% funded in 2010, in the wake of the Great Recession, but stands at over 99% funded today.
• HB 2486 would move the state away from its current risk-free retirement design—where employers bear no financial liability for new hires—back to a system exposed to the same risk of unfunded liabilities that prompted the closing of that pension almost a decade ago.

Transferring defined contribution account balances to OPERS at the current discount rate would create major immediate risks.

• HB 2486 would allow current Pathfinder DC plan participants to transfer their account balances over to OPERS to fund an actuarially equivalent pension benefit, but their previously earned service would be transferred using a relatively high discount rate of 6.5%.
• Such transfers would create the risk of a pension-obligation-bond-like situation where any downturn in market performance or lowering of return rate assumptions would quickly create unfunded liabilities in the newly reopened—and currently fully-funded—OPERS system.

HB 2486 has not received a rigorous actuarial analysis or stress testing, nor has it received scrutiny from legislative finance committees, leaving important questions for taxpayers unanswered.

• Pension systems operate over generations, but legislators have only been presented with minimal administrative cost projections based on an assumption that the proposed new pension benefit would do the impossible: get 100% of its assumptions 100% right, 100% of the time.
• Major retirement plan design changes necessitate long-term actuarial analysis and stress testing to ensure financial risks to governments are transparent and clearly understood beforehand.

Bottom Line: Changes of the magnitude being proposed should receive rigorous actuarial and risk analyses that ensure future generations’ interests are protected.

The post House Bill 2486 threatens Oklahoma’s pension progress  appeared first on Reason Foundation.

• Pension systems operate over generations, but legislators have only been presented with minimal 5-year cost projections based on an assumption that the proposed pension tier would do the impossible: get 100% of its assumptions 100% right, 100% of the time.
• Major retirement plan design changes necessitate long-term actuarial analysis and stress testing to ensure financial risks to governments are transparent and clearly understood beforehand.

Despite these limitations, Buck Global—the PERS consulting actuary— gives policymakers an idea of the limited information available on the long-term impacts of HB 55. In a March 2022 Fiscal Note on House Bill 55, Buck Global concluded that Alaska taxpayers would see increases in Alaska Public Employees’ Retirement System contributions as a result of opening a new defined benefit tier. Buck Global wrote:

• “Adverse plan experience (due to poor asset returns and/or unexpected growth in liabilities) or changes to more conservative assumptions will increase the PERS DB unfunded liabilities, resulting in higher contribution rates.”
• “The impact of HB 55 on projected contribution rates depends on how large the PERS DB unfunded liabilities become.”
• “Since HB 55 will increase PERS DB liabilities and actuarial contribution rates, the State-as-an-Employer contributions increase.”
• “By shifting active P/F members (and all future P/F hires) from DCR to DB, the State will be taking on greater risk of higher contributions in future years.”

Bottom Line: Changes of the magnitude being proposed in House Bill 55 should receive rigorous actuarial and risk analyses that have not yet been conducted.

Questions Alaska Policymakers Should Ask About House Bill 55

• Given the high discount rate used by PERS (7.38%) what is the risk of underfunding in the new tier created by allowing all current DC plan participants to immediately transfer assets to the new pension system?
• Under HB 55, what happens if PERS only achieves a 7%, 6%, or 5% long-term average investment return?
• Does the timing of returns matter to the cost borne by employers?
• What happens if PERS only achieves a 5-6% average return over the next 10 years—at what point do unfunded liabilities start growing again?
• What happens if we have another pandemic?
• What happens if HB 55 doesn’t solve Alaska’s retention issues?
• What happens if there is an unforeseen major geopolitical challenge in the next several years that results in a major investment underperformance early in the new tier, increasing unfunded liabilities in the legacy plan at the same time costs start rising on the new pension plan?
• Why does HB 55 set the all-important investment return assumption at 7.38% (38 basis points higher than the national median) when Alaska Retirement Management Board advisors project 6.6% for the next decade?
• What does it take to push the actuarially-determined employer contribution over the 9% employer contribution floor?
• Why was the discount rate not adjusted in HB 55 as it was in House Bill 79 from 2020?

The post Actuary highlights House Bill 55’s costs and risks to the Alaska Public Employees’ Retirement System appeared first on Reason Foundation.

Members of the committee, thank you for the opportunity to offer our brief analysis of the Thrift Savings Plan proposed in Senate Bill 553.

My name is Zachary Christensen, and I am a managing director of the Pension Integrity Project at Reason Foundation, a national 501(c)3 public policy think tank, and prior to that, I was a public pension analyst for the Hoover Institution at Stanford University.

Through our pro-bono work with public officials and stakeholders looking to improve resiliency and promote retirement security of their retirement plans, the Pension Integrity Project has helped design and implement comprehensive and sustainable solutions that work for both government employers and their employees. We have played a technical assistance role in over 50 state-level retirement system reforms in states like Texas, Michigan, Arizona, Colorado, South Carolina, and New Mexico since 2015.

Senate Bill 553 establishes the Kansas Thrift Savings Plan, which would offer a defined contribution retirement benefit for all state employees—excluding police, firefighters, judges, and correctional officers—hired on or after July 1, 2024. Since it would become the primary vehicle for providing a secure retirement for most public workers, it is important to assess the proposed Thrift Savings Plan’s adequacy and ability to meet the needs of retirees and employers.

While decades of experience with public sector defined contribution plans have demonstrated that they can be an effective means to providing adequate retirement income for public workers, not all governmental—or even private-sector—defined contribution plans are the same. Not all DC plans meet the definition of an effective plan designed to yield a secure retirement, and many could be improved by incorporating best practices.

Upon review, the Pension Integrity Project found that the proposed Thrift Savings retirement plan in Senate Bill 553 reflects a high-quality public sector retirement plan design that incorporates best practices from national experience.

First and foremost, the plan proposed in this bill does not take away funding from the current legacy retirement plans and requires previously promised pension benefits to continue to be properly funded. This would ensure a smooth transition from past retirement offerings to the proposed future benefits. Thanks to specific provisions in SB 553, existing employees and retirees will continue to see their benefits funded at the same levels as before, and the creation of this new plan will not affect the state’s funding of benefits already promised to public workers.

Senate Bill 553 importantly avoids a shortcoming of many retirement plans by providing a formal statement of legislative intent and plan objective for the Thrift Savings Plan that is consistent with retirement best practices. This language will help members understand the goals of the plan and will serve as a foundation for future decisions by policymakers and plan administrators.

The proposed Thrift Savings Plan also satisfies the critical best practice of providing adequate contributions. Retirement experts agree that a total contribution rate of between 10% and 15% is necessary over a career to adequately fund retirement (when combined with Social Security and personal savings). The contribution design of 10% (6% from employees and 4% from the employer) with potential additional contributions and matching through the supplemental deferred compensation retirement plans offered by employers will meet these best practice contribution standards.

One common concern about DC plans is ensuring protection against longevity risk, the risk that beneficiaries outlive their retirement savings. SB553 directly addresses this risk by requiring the offering of robust lifetime income options for purchase. Providing a variety of in-plan life insurance annuities as distribution options allows retirees to eliminate the risk of outliving their retirement savings.

The proposed Thrift Savings Plan is also a good fit for a public sector workforce that is increasingly mobile and will complement the needs of government employers who are now more reliant on shorter-tenured, non-full-career workers. With employees more frequently changing jobs and remaining in positions for shorter periods, the modern workforce values more individualized and portable retirement benefits that are more in line with private-sector retirement plan offerings. Since the plan proposed in SB 553 is inherently a portable retirement benefit, it would be an appropriate default retirement plan to match the overall dynamics of your public workforce.

On the subject of making this a valuable retirement plan for the modern workforce, we have identified one possible area of improvement for the proposed Thrift Savings Plan. As currently structured, SB 553 would require five years of employment before members will be able to vest into the contributions made by employers. Our experience indicates that this is a vesting period longer than most DC plans, and it may lead to many public employees missing out on a critical part of their compensation.

All that said, the Pension Integrity Project finds the plan established in Senate Bill 553 to meet the primary objectives of retirement best practices, meaning it would serve its members well while meeting the needs of the state and its employers.

Thank you again for your time, and I would be happy to answer any questions.

The post Testimony: Assessing the proposed Kansas Thrift Savings Plan in Senate Bill 553 appeared first on Reason Foundation.

House Bill 55 (HB 55)—currently under committee consideration in the State Senate—would open a new tier in the pension plan that was closed to new entrants back in 2006. The legislation would make minor adjustments to employee contributions and retirement eligibility relative to the pre-2006 public pension system. While a defined benefit pension plan can be structured in ways to limit and share risk, HB 55 does too little to prevent growing unfunded pension liabilities, as discussed in the following sections.

In 2005, facing a massive drop in funding and growing annual costs, Alaska closed the state’s pension plan, the Public Employees’ Retirement System (PERS). Since that time, new workers were placed in the state’s Defined Contribution Retirement Plan (DCR), which has generally served as an effective retirement benefit for members (though potential improvements to the DCR design will be the subject of a future article). Alaska’s current defined contribution plan has the advantage of providing a competitive retirement benefit to public workers with a predictable and stable cost to state employers.

Opening a new tier in the previously closed PERS defined benefit pension system, as proposed in HB 55, would move the state away from its current risk-free retirement design for new public safety hires. Today, employers bear no further liability once their DCR contributions are made to the employee’s retirement account and this proposal would expose the state to the same types of unfunded liabilities that prompted closing the pension 15 years ago. Notably, the state still has $4.6 billion in unfunded PERS liabilities today despite having no flow of new plan entrants for 15 years.

House Bill 55 does include a few tweaks to the proposed new PERS tier (relative to the pre-2006 pension) that proponents suggest are intended to lower the financial risk to the state. Below is a list of these adjustments, as well as comments on these proposed changes based on the Pension Integrity Project’s experience and analysis:

1. Setting a minimum retirement age of 55 if members have 20 years of service. 
   • The legacy PERS pension had a 20-years-and-out feature, which meant that a firefighter hired at 21 could retire at 41 with his/her fully accrued retirement. 
   • “55-and-20” would improve upon that by setting a minimum retirement age, but at the same time, age 55 is also a fairly low bar as a minimum age.
2. Raising employee contribution rates from 7.5% in the legacy pension to a min 8% and max 12%.
   • While these employee rates are higher, they still fail to share the risk of unexpected costs of the plan with employers.
   • The employee rate cap also means all future underperformance beyond that limited contribution increase is placed on the backs of state and local employers and their budgets. 
   • Because the plan’s assumptions and funding design are flawed, a long-term risk of insufficient contributions still exists.
3. Suspending the post-pension retirement adjustment if the plan falls below 90% funded, and completely removing the annual Alaska cost-of0living adjustment.
   • These are both prudent cost-control measures relative to the previous policies.

To date, HB 55 has faced minimal actuarial scrutiny and there is no publicly available long-term actuarial forecasting or stress testing to justify such a financially profound policy decision. Public pension systems operate over generations, but state legislators have only been presented with minimal five-year cost projections based on an assumption that the proposed pension tier would do the impossible: get 100% of its assumptions 100% right, 100% of the time.

While the five-year cost analysis—performed by the PERS consulting actuary, Buck Global—is limited in its scope and rigor, it does raise some major concerns that should alarm state policymakers. The report states, “Adverse plan experience (due to poor asset returns and/or unexpected growth in liabilities) or changes to more conservative assumptions will increase the plan’s unfunded liabilities, which results in higher Additional State Contributions.”

It also notes that:

“[t]he impact of HB 55 on projected Additional State Contributions depends on how large the unfunded liabilities become. If the Actuarially Determined Contribution rate for HB 55 members’ pension and healthcare benefits exceeds 9%, then HB 55 will lead to larger increases in Additional State Contributions compared to what would have happened without HB 55…By shifting active P/F members (and all future P/F hires) from DCR to DB, the State will be taking on greater risk of higher contributions in future years.” (emphasis ours)

Given that the limited actuarial analysis that exists warns that the proposed reintroduction of a pension plan would also be committing Alaska to unpredictable long-term costs in the future, it is crucial for state decision-makers to first consider the implications of HB 55 over multiple decades, not just a few years.

Examining the Actuarial Impacts of the Proposed HB 55 Pension Tier

Recognizing the need for a long-term perspective on funding and costs, the Pension Integrity Project has prepared preliminary modeling of the proposed new HB 55 tier; it is important to note that these results do not include potential impacts on the legacy PERS tier and its current $4.6 billion in unfunded liabilities.

The results of our analysis indicate that, despite efforts to manage risk relative to the pre-2006 pension system available to first responders, HB 55 would still expose the state to obligations that are likely to cost much more than initial estimates indicate.

Pension Integrity Project modeling of House Bill 55 finds that the new pension plan would require a total of $743 million in employer contributions over the next 30 years, but this assumes that the fund:

1. Meets its current actuarial assumption (7.38%) each and every year—which is virtually impossible—and;
2. Never faces any unfunded liabilities along the way.

A complete evaluation of the potential costs of this bill needs to also include scenarios in which investment returns do not match the pension plan’s expectations. What is more, it is important for state policymakers to understand how the proposed plan would respond to market stresses.

With that in mind, our analysis below applies a scenario in which two economic recessions occur over the next 30 years (one in 2023 and another in 2038), and investment returns for other years come in at 6%— in line with the average 10-to-15 year forecasts in a survey of 39 financial experts.

The stress scenario applied to the new pension proposed in HB 55 would result in unfunded liabilities that would require higher contributions from state employers. Instead of the $743 million paid in employer contributions over the observed 30-year window if all current actuarial and demographic assumptions are met, Alaska would be responsible for paying $887 million instead due to the need to service growing unfunded liabilities.

Figure 1 breaks down the ranges of annual contributions both employees and employers could expect under the proposed plan. As explained above, HB 55 includes the potential for increases in employee contributions, depending on need. Predictably, the market stress scenario used in this analysis would bring rates up for employees. Market stress would also require more of the state. While employer contributions are set at 10% in the proposed plan, these rates would also need to go up to meet the demands of unfunded pension liabilities.

Failure to answer the call for higher employer contributions in this scenario would result in the accrual of expensive public pension debt. Alaska does not have a set policy to enforce these necessary contribution increases and the proposed reform does not establish one. With that in mind, we are left to assume that contribution rates would remain static, thus passing these unfunded obligations—debt—onto future generations and weighing on state and local government budgets perpetually.

Figure 1: Market Stress on Employee and Employer Contributions Under Proposed HB 55 Tier

A great deal of the risk the state would be taking on is also hidden with discounting policy. The proposed plan would discount liabilities at PERS’ current 7.38% rate. Considering most state pension plans across the country are adjusting their investment return rate expectations down to, or below, 7%, this would place the new Alaskan defined benefit discount rate on the higher end of investment expectations, meaning a good portion of the state’s potential risks and costs could be hidden.

Adjusting the discount rate of the plan down to 6% reveals that a stress scenario could result in actuarially required contributions rising more than 7% over the currently reported and expected rate, totaling 17% of payroll annually within 20 years.

The stress scenario also reveals the risks of pension debt that would still exist under the proposed reform. While the pension plan would accrue no unfunded pension liabilities under a scenario in which plan assumptions are met, recessions and overall returns that fall below the plan’s overly optimistic assumptions would create significant funding shortfalls.

Applying the two-recession stress scenario shows that the new plan could go from no unfunded obligations to having as much as $302 million in pension debt by the end of the modeled 30-year window (see figure 2).

Figure 2: Unfunded Liability Forecast of New Pension Plan Proposed in HB 55

This issue would not be exclusive to long-term perspectives, either. The proposed HB 55 pension tier would be immediately susceptible to accumulating significant unfunded liabilities due to the decision to allow current DCR plan members to transfer their defined contribution plan assets into the new pension as if they had been in the new pension the entire time. This practice would essentially use these funds to have existing members buy into guaranteed pension benefits in the middle of their careers. This policy would also represent a large and immediate new exposure to market risks for Alaska.

Proponents of the bill argue that this is a cost-neutral way to allow members to switch a defined benefit pension midstream, but this again is relying on a very improbable 7.38% rate of return. If market outcomes end up diverging from the plan’s very optimistic assumption, the funds transferred will end up being inadequate to provide the promised pension benefits, with the responsibility for the shortfall once again falling to the state.

The immediate threat of this problem surfaces in our actuarial analysis. Modeling of the new pension shows that a single recession year in 2023 could immediately generate unfunded liabilities and go from fully funded to 71% funded after just one bad year of losses.

This type of scenario should be very familiar to Alaska legislators. The state’s funding woes that precipitated the 2005 pension reform began after 2001 losses, where they saw the pension fund go from $50 million overfunded to $1.5 billion underfunded in just one year, dropping from the pension system being 100% funded to just 75% funded. According to this analysis of HB 55, those same risks that existed in PERS before its closure would still largely exist in the newly proposed plan.

Figure 3: Funding Forecast of New Pension Plan Proposed in HB 55

Had a long-term actuarial forecast been requested to accompany this legislation, and had there been a review of the financial outcomes of HB 55 in underperforming investment scenarios, Alaska policymakers would clearly see that the proposed HB 55 pension tier for first responders resembles nothing like the supposed “low-risk” or “risk-free” pension described by bill proponents.

By allowing the transfer of funds held in members’ defined contribution accounts immediately into the new pension system at an unreasonably high discount rate, the “new” pension tier would, within the first few months of existence, become a somewhat mature pension plan—with all the attendant financial risks of traditional defined benefit pension systems.

The national trend since the Great Recession of 2007-2009 has been for states to adopt greater risk controls in their traditional public pension systems and move towards a variety of plan design options with the goal of avoiding re-exposing state and local budgets to the risks of worsening unfunded pension liabilities over the long-term.

Unfortunately, House Bill 55 does not resemble those types of prudent retirement reforms. Considering the serious levels of risk that Alaska could be taking on with HB 55, policymakers should seriously consider going back to the drawing board on more effective methods of managing and sharing risk. Once risk policies that are more in line with modern reforms are agreed upon, a rigorous long-term actuarial analysis should be performed on those proposals to ensure lawmakers aren’t entering into the risky retirement commitments that created debt and fiscal challenges for Alaska in the past.

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