In This Issue:

Articles, Research & Spotlights 

• Montana’s plan to improve pension funding and governance
• Efforts to undo Alaska’s pension reforms could cost close to $1 billion
• North Dakota’s potential pension reform
• State pension plans’ poor investment results in 2022
• Reason’s PRO Plan offers a modern approach to public retirement

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

Articles, Research & Spotlights

Two Bills in Montana Could Improve Pension Plan Design and Funding

Montana’s Public Employee Retirement System has $2.2 billion in unfunded liabilities, and if left unaddressed, funding issues are likely to continue. A new reform proposed in the state’s legislature would address some of Montana’s ongoing pension challenges, first by committing employers to make adequate annual contributions and second by setting the existing defined contribution retirement plan as the default benefit for new employees. In recent comments to the House Committee on State Administration, Reason Foundation’s Steven Gassenberger explained how House Bill 226 would reduce long-term costs by locking the state into eliminating its pension debt and reshaping its retirement offerings to fit the modern workforce better. Gassenberger also testified on House Bill 228, which would improve governance by setting stronger boundaries on what pension plan administrators can consider when making investment decisions.

Alaska Pension Bills Could Undo Previous Reform and Cost $800 Million

Following an effort to reopen a pension plan for public workers during last year’s legislative session, Alaska policymakers are again deliberating on several bills that could undo the state’s decision to close its defined benefit pension plans in 2006. Two identical proposals—House Bill 22 and Senate Bill 35—would allow public safety workers to retroactively switch from the existing defined contribution plan to a newly opened defined benefit plan. A Pension Integrity Project evaluation of these bills and an actuarial analysis of potential long-term costs find that this change would add more expensive debt to the plan’s already $5 billion in existing unfunded liabilities and could cost the state an additional $800 million over the next 30 years. Since public safety employees only make up around 10% of the system’s members, this proposal would be a costly move that would benefit a relatively small group.

Updates to North Dakota’s Pension Reform Effort

North Dakota lawmakers continue to discuss House Bill 1040, which would commit participating employers to make required annual payments in full and make the state’s defined contribution plan the only option for new hires. This backgrounder from the Pension Integrity Project responds to a recent statement from the North Dakota Public Employees Retirement System (NDPERS) that claims the adoption of proposed House Bill 1040 would require a drastic reduction to the plan’s discount rate. The system’s claim is inconsistent with other state plans that have undergone similar reforms, and there is no legal or financial requirement to change discounting like this when a pension plan is closed.

Updated 2022 Fiscal Year Investment Results for State Pension Plans

Investment returns are a crucial part of a pension plan’s funding of promised retirement benefits. While the ultimate success and cost of a public pension do not hinge on a single year of market results, each year that a pension plan falls below investment expectations adds to the growing—over $1 trillion nationally by the latest estimates—unfunded liabilities of state-run pension plans. An update to our October 2022 analysis compiles the investment returns reported by state pensions from the 2022 fiscal year. As expected, the research shows 2022 was a notably poor year of investment returns. All state-run pensions saw results that fell short of expectations, leading to significant growth in unfunded liabilities. Reason Foundation finds the median investment return achieved by the listed pension plans was -5.2% in 2022, well below the national average expected rate of return of 7.0%. Following an exceptional 2021, the latest investment results demonstrate that public pensions still have a steep hill to climb to get back to full funding.

PRO Plan: A Better Public Sector Retirement Plan for the Modern Workforce

Beyond the crippling growth of expensive unfunded liabilities, public defined benefit (DB) plans have failed to adjust to the evolving needs of today’s increasingly mobile workforce. Defined contribution (DC) plans aren’t without their shortcomings either, a common concern being that retirees can outlive their retirement savings. Both types of plans suffer from a lack of flexibility and personalization. The Pension Integrity Project’s Personalized Retirement Optimization Plan (PRO Plan) addresses these issues by structuring a guaranteed lifetime income on the foundation of an enhanced DC plan. In this commentary, the developers of the PRO Plan, Richard Hiller and Rod Crane, summarize the advantages of this approach to retirement for public employees.

News in Brief

Paper Proposes a Novel Discounting Method for Public Pensions

Discounting is how pensions calculate the future value of liabilities they have promised, and the rate used for this calculation has a massive impact on their funding. A new paper by Florida International University researchers identifies the problems with current discounting norms, namely their tendency to understate required contributions. They also acknowledge that discounting at a zero-risk rate—a method promoted by some to reflect the guaranteed nature of government pensions—likely overstates funding shortfalls and is too disconnected from financial reality. To strike a more appropriate balance between these two approaches, the researchers propose a new discounting method that applies a lower limit based on the lowest expected return among risky assets. A historical back-testing using this new discounting method going back to 2001 saw most plans (94%) exceeding these investment return expectations, resulting in funding improvements. The full paper is available here.

Quotable Quotes on Pension Reform 

“Divestment of these holdings would do nothing to stop climate change. The companies in question can easily replace CalPERS with new investors.”

—Marcie Frost, CEO of the California Public Employees’ Retirement System, on proposed legislation to force divestment from fossil fuel companies, in “Keep Politics Out of CalPERS, Reject Senate Bill 252,” Whittier Daily News, Feb. 8, 2023.

“Each year I’ve been in office, we have reduced the assumed rate of return…If we had the more rosy assumptions, we’d probably be 86, 87% funded…So the fact that we’ve had all this turmoil, had some market turmoil, and we’re basically where we were and probably much better if you had that, I think that’s a good sign. I think we’re going to be able to build from here…At the end of the day, we really want honest accounting. And we can fudge the numbers a little bit, but you know, so we’ve been reducing that assumed rate of return. I think that’s the conservative approach. I think that’s something that makes the most sense.”

—Florida Gov. Ron DeSantis, in “Gov. DeSantis Pushes for More Pension Spending in New Budget,” Florida Politics, Feb. 1, 2023.

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, analysts Jordan Campbell and Steve Vu show the distribution of investment returns for state pension plans in 2022. You can access the graph and find more information here.

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides technical assistance 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 send your questions, comments, and suggestions to zachary.christensen@reason.org.

The post Pension Reform News: Montana’s proposed reforms, poor 2022 investment results, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Designing an optimized retirement plan for today’s public workers
• North Dakota considers pension reforms
• How ESG policies impact institutional investors
• State pension systems expand high-risk, high-reward investments

News in Brief
Quotable Quotes
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Designing an Optimized Retirement Plan for Today’s State and Local Government Employees

The discourse about public retirement policy often revolves around a binary choice between defined benefit (DB) pension plans and 401(k)-style defined contribution (DC) plans. Each has its own unique advantages and drawbacks, but both lack the flexibility to match many unique personal situations. A new paper from Reason Foundation’s Pension Integrity Project proposes that public retirement benefits need not be limited to these two choices any longer. In the new report, public retirement benefit experts and senior fellows Richard Hiller and Rod Crane introduce the Personal Retirement Optimization Plan—or PRO Plan—for the public sector. The PRO Plan adds the element of a guaranteed retirement benefit to a DC foundation to build a more secure, customizable, and portable retirement for public workers. The PRO Plan is built around the objectives of risk-managed retirement income adequacy, and unlike traditional public pension plans, does not impose funding risks on government employers. Testing this newly proposed PRO Plan design, Hiller and Crane find that the costs of providing guaranteed annuitized benefits through the PRO Plan would be much lower than an individual purchasing these benefits on their own.

• Full Report—The Personal Retirement Optimization Plan: An Optimized Design for Government Employees
• FAQ: Frequently asked questions about the PRO Plan
• Webinar: Experts discuss the need for the Personal Retirement Optimization Plan

Evaluating North Dakota’s House Bill 1040

Facing $1.8 billion in unfunded pension liabilities, and projections that the pension fund will be depleted within 80 years, North Dakota policymakers are seeking comprehensive reform of the North Dakota Public Employees Retirement System (NDPERS). The newly introduced House Bill 1040 would address many of the issues that have been plaguing the system for decades. Firstly, it would fix the state’s systematic funding deficiencies by switching from a statutory to an actuarial contribution policy. This would ensure that state and local governments are making the payments needed to fulfill all pension promises by a predetermined date. Second, the reform would provide new hires, beginning in 2025, a defined contribution (DC) plan that meets a high standard of benefit design. Reason Foundation’s analysis of House Bill 1040 finds the proposed reforms would effectively halt the accrual of new unfunded liabilities with new hires, and would reduce long-term costs of the pension plan by responsibly paying down its legacy debt.

• Testimony to North Dakota House Government & Veterans Affairs Committee
• Examining the Benefits of House Bill 1040
• The Public Pension Gold Standard, North Dakota’s HB 1040, and the Status Quo
• Does HB 1040 Meet the Objectives of Good Pension Reforms?

The Mechanics of ESG-Driven Divestment, Engagement, and Proxy Voting

Environmental, social, and governance (ESG) policies can take many different forms and are applied by a wide variety of organizations, but the foundational goal is to influence investors’ and corporations’ decision-making. In this commentary, Jordan Campbell examines two main avenues used to leverage this influence and how groups are trying to reshape the market through divestment and corporate engagement. Although there is no clear impact of ESG divestment practices, there has been a noticeable rise in ESG engagement practices, namely proxy voting. Data indicates that public pension funds have outpaced other institutional investors—and even ESG-focused funds—in throwing support behind ESG resolutions.

In Search of Higher Returns, Public Pension Systems Dive Deeper into Alternative Investments

Public pension plans saw significant investment losses in 2022, and economic forecasts indicate that more market turbulence is in store for 2023. Facing this increasingly unpredictable and volatile investment environment, and under pressure to achieve often overly-optimistic investment return assumptions, many public pension plans continue to dive deeper into high-risk, high-reward strategies. Reporting on these trends, Reason’s Steve Vu highlights several states, including New York, California, Texas, Ohio, Iowa, and New Mexico, where policymakers are loosening up limits and increasing targeted allocation in alternative investments like private equity, private credit, and real estate.

News in Brief

End-of-Year Update Describes a Tough 2022 for Public Pensions

An update to the State of Pensions report by Equable Institute summarizes the funding status of 228 state and locally administered pension plans at the end of the 2022 calendar year. Their calculations indicate that the aggregate funded ratio of these plans dropped from 83.9% funded the previous year to 77.3% in 2022, marking a significant reversal of the investment gains gathered during a record-breaking year of returns in 2021. They estimate an average return of -6.14% for the last year, which falls dramatically below the average plan assumption of 6.9%. Analysis in the report finds that—facing ongoing challenges in 2023—most state retirement systems remain fragile to a volatile and increasingly unpredictable market. The full update is available here.

Brief Examines Pension Contribution Behaviors of Governments

A new brief by the National Association of State Retirement Administrators (NASRA) focuses on the contributions that state and local employers made to fund the pension benefits promised to public workers through 2021. They find that of the more than $10 trillion in pension revenue generated since 1992, $2.5 trillion came from employer contributions, $1.1 trillion came from employee payments, and $6.5 trillion (64%) came from investment returns on those gathered funds. The brief recognizes the efforts of governments to reach actuarially determined contribution rates, finding that the average percentage of actual to actuarial contributions to be 99.3% in 2021, the best rate since 2001 and a major improvement from the below 80% paid in 2012. The brief attributes much of this improvement to reforms of contribution policies and supplemental payments from general government funds. The full brief is available here.

Quotable Quotes on Pension Reform

“There’s going to be acute fiscal pain and pressure the more you ignore the cost…If you’re not paying it down, you’re chasing it.”

—Leonard Gilroy, managing director of Reason Foundation’s Pension Integrity Project, on unfunded pension liabilities in “State Pension Plans Were Hammered in 2022. Next Year Will be Worse,” Politico, Dec. 28, 2022.

“Chicago government-worker pensions are massively underfunded. So in typical Chicago-land fashion, the City Council is betting on casino revenue to plug the pension gap. Do taxpayers and workers feel lucky?… The police and firefighter pension funds are only about 20% funded—among the worst in the country—even though 80% of city property tax dollars go toward pensions. The city’s annual pension payments have risen by $1 billion over the past three years.”

—The Wall Street Journal Editorial Board on the move to build a casino to generate tax revenue dedicated to the police and fire pension funds in “Chicago’s Big Pension Gamble,” The Wall Street Journal, Jan. 2, 2023.

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 Jordan Campbell, using Morningstar data, created a visualization comparing how public pensions and other institutional investors voted on ESG shareholder proposals. You can access the graph here.

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides technical assistance 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.

The post Pension Reform News: Modernizing public sector retirement plans, North Dakota reforms, and more appeared first on Reason Foundation.

In This Issue: 

Articles, Research & Spotlights  

• New federal rule puts ESG spotlight on states 
• The shortfalls of ESG investing 
• California’s growing pension debt 
• FTX and crypto warnings for pensions 
• Georgia improves its hybrid plan 
• Pension policies should be set by those who bear the risks

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

Articles, Research & Spotlights 

The Department of Labor’s New ESG Rule Puts the Onus on States 

The US Department of Labor (DOL) has released a new rule that reverses previous limits on what private retirement plans can consider in investment decisions. The move essentially gives plans permission to take environmental, social, and governance (ESG) factors into account, which was traditionally outside the scope of those acting as fiduciaries. The rule applies to private plans through the Employee Retirement Income Security Act (ERISA), which is not applied to public pension plans. The change does highlight, however, the ongoing debate around the politicization of retirement funds. The DOL rule also demonstrates how the answers to this debate will largely be determined through state legislation. Reason Foundation’s ESG resource website outlines issues related to ESG and public pensions and offers model legislation to help protect taxpayers’ funds from political activism. 

Scrutinizing High ESG Fees, Greenwashing, and the Politicization of Public Pension Funds 

Assets that focus on ESG are becoming more popular among investors but come with several challenges for consumers and policymakers. Reason’s Jordan Campbell identifies three growing problems with ESG-focused investing that even supporters are concerned about. First, environmental grading can be arbitrary and easy to manipulate. Second, ESG assets often incur expensive fees with little evidence of advantages in returns. Third, government involvement with this strategy can be a politicization of public funds. 

California’s Public Pension Debt Grows  

The California Public Employees’ Retirement System (CalPERS) recently updated its investment results from the fiscal year ending June 2022, adjusting its actual loss of assets from -6.1% to -7.5%. This new accounting means the nation’s largest pension lost nearly $30 billion in 2022, which will impact state and local government employers with higher annual contribution requirements. In a commentary published in the Orange County Register and elsewhere, Reason’s Jen Sidorova examines the growth of the system’s unfunded liabilities and what it means for California’s governments and taxpayers. 

FTX Collapse Is a Reminder that Public Pensions Should Exercise Caution 

The collapse of the FTX cryptocurrency exchange platform, and a year marked by significant crypto losses, have renewed questions and concerns about the pressures for public pensions to invest in these types of volatile assets. Examining public pension investments in crypto markets, Reason’s Swaroop Bhagavatula finds that some states, including Kansas, Missouri, Alaska, and Washington, have reported FTX-related losses, although not at significant levels, but, generally, public pensions plans seem to have largely avoided significant exposure.

Georgia Reinforces Its Hybrid Retirement Plan 

In what is commonly known as a hybrid approach, Georgia’s retirement plan for state employees uses a combination of defined benefit (DB) and defined contribution (DC) elements to balance portability, cost, funding, and longevity risks. Now, state policymakers are reinforcing their commitment to both this plan and its members with an increase in employer contributions to the DC portion. Reason’s Jen Sidorova outlines these changes, explaining how they will benefit both state employees and taxpayers with a more stable and adequate retirement offering. 

Who Should Be Responsible for a Public Pension Plan’s Risk Management Policy?  

Market volatility and years of growing shortfalls in pension funding raise questions about who ultimately is responsible for the risk-related decisions involved in managing a publicly sponsored retirement plan. As Reason’s Rod Crane explains, risk strategies and policies have largely been left to plan administrators to set and monitor, but the government backing of these plans means the taxpayer is the true bearer of cost-related risks. Crane reviews how industry experts imagine this risk should be balanced between parties, noting the need for pension oversight bodies with the direct authority to set and manage assumption, funding, and investment policies. 

News in Brief 

Policy Brief Examines Application of a New Actuarial Requirement 

In anticipation of a new actuarial reporting standard to be implemented in February of 2023, S&P Global Ratings has released a brief explaining what the new requirement could mean for public pension plans. The new requirement from the Actuarial Standards Board (ASB) will have pensions reporting their low-default-risk obligation measure (LDROM), which will be an accounting of liabilities and funding measurements using a very low discount rate. S&P explains that this measurement will be useful in that it will demonstrate what the costs of a plan could be if they were to eliminate market risk from their investment profile. While neither S&P nor ASB are advocating for such a shift in investment policy, the new reporting could be a valuable way to measure and compare a plan’s exposure to market risk. The full brief is available here. 

New Commentary Revisits the Success of Canadian Public Pensions 

An article posted in the Harvard Law School Forum on Corporate Governance by KPA Advisory Services’ Keith Ambachtsheer examines the history of Canada’s public pension plans, focusing on the adoption of revolutionary funding and governance philosophies in the early 90s that continue to serve the plans to date. The post titled “How Peter Drucker Revolutionized Canada’s Public Sector Pension System: Lessons for Americans” details how a mindset focused on policies that were intergenerationally fair along with unbiased, experienced governance led Canadian pensions to maintain full funding through a volatile and changing market. The plans achieved this through the early adoption of lower, risk-reduced assumptions on returns and inflation protection benefits conditional on how well the plan is funded. The full article is available here. 

Quotable Quotes on Pension Reform  

“Defined benefit pensions ‘are too critically important to the participants to use precious resources to engage in these risky strategies…We need to get back to basics and focus on the promise’ that has been made to participants in these plans.” 

—Russell Kamp, managing director at investment management firm Ryan ALM, on public pensions investing in crypto in “Amid FTX fallout, public pension fund defends its big bet on crypto-related holdings,” MarketWatch, November 29, 2022. 

“The more you limit the investments out there, there is at least a fair possibility that might ultimately impact the return. As a policymaker, I think they’ll need to be aware of that,” 

—Kansas Public Employees Retirement System Executive Director Alan Conroy on proposals to direct the system’s investments in “Kansas Pension Investment Advisers Caution Against Robust Legislative Rebuttal to ESG Activists,” Kansas Reflector, November 22, 2022 

Data Highlight 

Each month, we feature a pension-related chart or infographic of interest generated by our team. This month, Jordan Campbell created a visualization comparing the performance of ESG investments to the rest of the investments in 2022. Access the graph here. 

Contact the Pension Reform Help Desk 

Reason Foundation’s Pension Reform Help Desk provides technical assistance 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. 

The post Pension Reform News: ESG, public pensions exposed to FTX, and more appeared first on Reason Foundation.

In This Issue: 

Articles, Research & Spotlights  

• A blueprint for protecting public funds from ESG and politicization 
• Arizona’s innovation for multi-employer pension plans 
• Challenges in inflation protection for Texas teachers 
• Retention trends in the public workforce suggest the need for portability 
• What U.S. pensions can learn from the U.K. margin call 

News in Brief 
Quotable Quotes on Pension Reform  

Articles, Research & Spotlights 

Reason’s New Blueprint for ESG-related Legislation

Reason Foundation’s Pension Integrity Project has developed an ESG Blueprint to help policymakers seeking sound and effective policies for managing public funds, particularly public pension funds. The website provides an overview of what ESG is, its potential impacts on public pension systems, and model legislation to strengthen the boundaries of fiduciary responsibility, ensuring that policymakers keep public funds out of political influence campaigns. Reason’s ESG blueprint is available here, and our full archive of ESG-related analysis is here. Recent pieces include:

Arizona Creates Prefunding Program for State Retirement System

Many state-run public pensions are multi-employer plans, meaning local cities and counties participate and contribute to a single fund and share liabilities. This allows smaller governments to reap the investment benefits of a larger asset-pooled plan, but it can also mean less flexibility in paying down the unfunded pension liabilities that are impacting annual budgets. State legislators in Arizona recently passed a bill that aims to improve this flexibility for employers participating in the Arizona State Retirement System (ASRS). As outlined by Reason’s Ryan Frost and Truong Bui, Senate Bill 1082 offers a vehicle for local governments to apply extra payments to a separate account, which can be used to offset rising contributions at a later time. This is an innovation that other state-run multi-employer plans should consider employing. 

Is Texas’ Definition of an “Actuarially Sound” Public Pension System Outdated?

With high inflation continuing to degrade the value of fixed pension benefits, there is significant attention being placed on the cost-of-living adjustment policies that are supposed to cushion the blow from retirees’ losses of purchasing power. In Texas, there is a strict hurdle set in law that must be achieved before giving retired public workers a so-called “13th check.” The state must be able to demonstrate that it is “actuarially sound.” Reason’s Steven Gassenberger explains the current understanding of this hurdle, noting that it would be prudent to adjust this standard with shorter debt-payment requirements. 

More Portable Retirement Plans Would Help Public Employers Attract and Keep Workers 

Increased rates of resignation in the post-pandemic world are a continuation of a decades-long evolution in the modern workforce, with the current generation of workers switching jobs at much higher rates. This phenomenon is even more pronounced among public workers and teachers. Examining some of the latest shifts in public employee retention, Reason’s Jen Sidorova offers ways that policymakers can shape retirement benefits to better fit today’s workers, including shorter vesting requirements and increased portability. 

The U.K.’s Margin Call Offers Warning Signs for Public Pension Funds in the U.S.

A sharp increase in bond yields recently put United Kingdom pensions in a difficult position where they needed to sell off assets, resulting in what was called a ‘doom loop’ scenario that prompted intervention from the Bank of England. Reason’s Swaroop Bhagavatula looks at how this market scare was associated with liability-driven investing (LDI), which is a strategy not often used by pensions in the United States. Still, there are some valuable lessons that can be applied, namely avoiding over-leveraging and maintaining adequate levels of cash to manage any major market shocks. 

News in Brief 

Paper Rediscounts Public Pension Liabilities 

A paper from economics professors Oliver Giesecke and Joshua Rauh of Stanford University asserts that public pension liabilities should be discounted in a way that reflects the guaranteed nature of these promised benefits, which would mean using zero-risk rates based on treasury yields. Their analysis of 647 state and local pension plans in 2021 finds that, while these plans report unfunded liabilities of just over $1 trillion and an aggregated funded ratio of 82.5%, rediscounting the same plans to the proposed specifications would mean unfunded liabilities of $6.5 trillion and a funded ratio of 43.8%. The full paper is available here, and an interactive dashboard of its results is available here. 

New Survey Asks Public Employees How The Current Market Has Impacted Their Retirement 

MissionSquare Research Institute has published results from a survey of 1,003 state and local government workers focusing on how current market turbulence has impacted the perception of retirement security as well as saving behavior. The survey indicates that most (84%) of respondents feel anxious about their personal financial security. Nearly half (48%) have reduced the amount they save for retirement, naming high inflation as the cause. Over half (58%) of the polled public workers indicated that the retirement plan offered to them was a factor in their decision to stay in the job, while 33% said that this made no difference. The full report is available here. 

Quotable Quotes on Pension Reform  

“In some cases, the [midterm election] campaign rhetoric not only dismissed the danger of climate change, it went so far as to mischaracterize a strategy we believe in strongly: examining the risk factors of the environment, of social inequality, and of good governance […] But let’s be clear: Applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology. Those who say otherwise are actually advocating for investors like CalPERS to put on blinders…to ignore information and data that might otherwise help build on the retirement security of our 2 million members.” 

—CalPERS CEO Marcie Frost quoted in “CalPERS CEO Pushes Back Against Politicization ESG Investing,” Pensions & Investments, Nov. 16, 2022 

“Regardless of your view on climate change or inclusion or human rights, Mississippi’s pension system, taxpayer dollars, and college savings programs are the wrong place to experiment with investment strategies that push balance sheets to the side. Moreover, many of the policies ESG promotes tie directly to higher costs for consumers, a weaker Mississippi job market, increased inflation, and smaller investment returns – all while undermining the free market and our economic liberty.” 

—Mississippi Treasurer David McRae in “Guest Column: Protecting Mississippi’s Finances,” The Vicksburg Post, Nov. 2, 2022 

“It does limit us…We, I believe, have been successful in trying to minimize any kind of cost that might bring to you, but eventually, it’s going to bite us in the butt if we continue. So we just have to be careful and prudent about it…Our bank list is getting short.” 

—Lamont Financial Services Founder Bob Lamb on Louisiana Treasurer John Schroder pulling the state’s investments from BlackRock over their ESG approach in “Pulling Louisiana’s Investments Could ‘Bite Us in the Butt,’ Adviser Tells Treasurer,” Louisiana Illuminator, Oct. 18, 2022 

Contact the Pension Reform Help Desk 

Reason Foundation’s Pension Reform Help Desk provides technical assistance 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. 

The post Pension Reform News: ESG blueprint, Arizona’s pre-funding, and more appeared first on Reason Foundation.

In This Issue: 

Articles, Research & Spotlights  

• What ESG policies mean for public pension systems 
• 2022 investment results for state pension plans so far
• Using hybrid retirement plans to balance risk 
• Examining effective amortization policies 
• Preparing public pension systems for a recession 

News in Brief 
Quotable Quotes on Pension Reform  
Data Highlight

Articles, Research & Spotlights 

Webinar: ESG Trends and Impacts on Public Pensions 

The emergence of environmental, social, and governance (ESG) strategies has elicited several responses from state lawmakers, some of whom are concerned with outside interests overcoming the primary fiduciary obligations of the governments managing public pensions. In this webinar hosted by the Pension Integrity Project, former U.S. Securities and Exchange Commission Commissioner Paul Atkins, former CKE Restaurants Chief Executive Officer Andy Puzder, and Reason’s Leonard Gilroy discussed how ESG strategies impact taxpayers and public pensions. They also evaluated the types of anti-ESG laws that are emerging in various states. 

You can watch the webinar here and read coverage of it at Institutional Investor and The Bond Buyer, amongst others.  Here is some of Reason Foundation’s recent ESG-related analysis:

• Politics can endanger public workers’ retirement 
• Democratic treasurers defend ESG investing 
• The differences between individual and institutional investors considering ESG factors 
• The public pension systems signing on to politicized ESG investment efforts 
• The difficulties of assigning ESG ratings 

The Investment Results State Pension Plans Are Reporting for the 2022 Fiscal Year 

After breaking investment return records last year, most state-run pension plans are reporting significant investment losses for 2022. These losses will negatively impact unfunded liabilities and the costs of public pension plans in the coming years. The Pension Integrity Project has compiled all of the 2022 state plan investment results reported thus far, along with estimates of what these returns will mean for each plan. While there is a wide range of investment returns so far, the overall results show the median investment return for state pension systems in 2022 is -5.4%, with nearly all plans reporting returns well below what they were assuming to earn. 

Best Practices in Hybrid Retirement Plan Design 

A hybrid retirement plan combines the defined benefit structure commonly offered to public workers with a 401(k)-style individual account. While this is a novel concept to some, splitting retirement benefits between the two different types of plans has been a valuable way for public employers to balance the risks involved in retirement saving between the employer and employee. This policy brief by Reason’s Ryan Frost details the policies that will ensure a public hybrid plan achieves the goal of adequate retirement savings while appropriately allocating risks between all participating parties. Using examples of the federal government and states like Washington and Tennessee, policymakers can better understand the long-standing value and effectiveness of hybrid plans. 

Best Practices for Pension Debt Amortization 

With unfunded liabilities growing beyond $1 trillion for state and local pensions, U.S. governments have a steep hill to climb and a limited timeframe to raise the funding needed to fulfill the retirement benefits promised to public workers. Every pension plan has an amortization policy, which details how they intend to close whatever funding shortfall arises. These policies not only have a major impact on annual debt payments, they also determine how long a plan will hold expensive pension debt and how resilient it will be amidst unpredictable market outcomes. This new policy brief from the Pension Integrity Project outlines a few of the major decisions policymakers must make when it comes to the amortization of public pension plans, including the way that payments are calculated and acceptable timelines for eliminating debts. 

Most State Pension Plans Are not Adequately Prepared for a Recession 

The warning signs of a major recession continue to rise, which ought to be a significant concern to public pension plans. With significant levels of underfunding reported among state and local retirement plans, and too little progress made to reduce these shortfalls since the Great Recession, another economic recession would mean significant challenges for public pensions and potentially huge costs to taxpayers. Reason Foundation’s Anil Niraula and Zachary Christensen use the Teacher Retirement System of Texas to illustrate what a major recession could mean for many other public pension systems around the country. Unless policymakers make significant changes to the way governments contribute to these plans, they’ll remain especially vulnerable to periods of market turbulence. 

News in Brief 

New Report Indexes National Retirement Systems 

Mercer and Chartered Financial Analyst (CFA) Institute’s 2022 Global Pension Index ranks retirement systems globally in terms of adequacy, sustainability, and integrity. Adequacy is evaluated by the plan design and overall benefit levels. Sustainability examines the funding levels of the plan. Integrity is understood as the regulations and protections around the plan. According to this analysis, the highest-ranking countries were Iceland, Netherlands, and Denmark. The U.S. graded around the middle of the pack, with below-average marks in “integrity.” The report acknowledges a significant drop in “adequacy” from previous years for nearly all countries, likely due to the high inflation experienced across the world. The full report is available here. 

Study Finds Difference in Spending Habits from Supplemental DC Participants 

A new study from the Public Retirement Research Lab examines the spending and saving habits of public employees, finding some notable differences in how those with a primary defined benefit (DB) plan and a supplementary defined contribution (DC) plan spend compared to others with standalone DB or DC plans. According to the analysis, employees who have a primary DB plan with a flexible DC supplemental option tend to spend more and save less, which could indicate a misguided level of confidence among these members. The authors suggest that this phenomenon highlights a need for better education for new members of these types of plans. The study is available here. 

Quotable Quotes on Pension Reform  

“The majority of investment experience for people managing money, be it asset management firms or pensions, endowments, and foundations, has been with tailwinds in the last 40 years…I would say now, the environment is that tailwind may become a headwind and is likely more challenging.” 

—Los Angeles County Employees Retirement Association Chief Investment Officer Jonathan Grabel in “Are California’s Public Pension Funds Headed for Another Crisis?,” Los Angeles Times, Sept. 29, 2022 

“The state will have to pay those pensions regardless if we make that return on our investments or not. If we don’t make a return on those investments, it means higher taxes for the business community and all of us. For that reason alone, we should not be doing this” 

—New Jersey Business and Industry Association’s Ray Cantor on legislation to divest state pension funds from the fossil fuel industry in “N.J. Pension Fund Would Stop Investing in Fossil Fuels Under Bill Advanced Thursday,” New Jersey Monitor, Oct. 6, 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, analysts Anil Niraula and Jordan Campbell created an interactive distribution of the 2022 market returns from state-run pensions reported so far. You can access the map and data here. 

Contact the Pension Reform Help Desk 

Reason Foundation’s Pension Reform Help Desk provides technical assistance 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. 

The post Pension Reform News: ESG debates, public pension plans’ worrying investment results, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Webinar: Former SEC Commissioner Paul Atkins, former CKE Restaurants CEO Andy Puzder, and Reason Foundation on the impact of ESG policies
• Best practices for pension COLA design
• Which states and pension systems have adopted ESG policies?
• Cash flow challenges and solutions for public pensions
• Evaluating Alaska’s defined contribution and annuity plans
• Texas counters politicized ESG efforts with more politics
• Participation, not equity, should be the focus of retirement plans

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

Articles, Research & Spotlights

Webinar: What Does ESG Mean for Public Pension Systems and Taxpayers?

Environmental, social, and governance (ESG) trends are impacting public pension systems, retirees, and taxpayers. Join former SEC Commissioner Paul Atkins, former CKE Restaurants CEO Andy Puzder, and Reason Foundation’s Leonard Gilroy for a webinar on September 20 at 1 pm ET to discuss how ESG policies and politicized public investments may impact investment returns and saddle taxpayers with additional costs. The panel discussion will also examine if legislators pushing broad anti-ESG laws could unleash unintended negative consequences and will explore potential reforms that would help keep politics out of public pensions.

Best Practices for Cost-of-Living Adjustment Designs in Public Pension Systems

Extended periods of high inflation can be particularly challenging for pensioners, whose promised benefits usually come in the form of fixed payments. To protect retirees from losing too much purchasing power, many public employers provide a cost-of-living adjustment (COLA) benefit. Like any other retirement benefit, this brings additional costs and requires appropriate funding and limitations. A new report from the Pension Integrity Project identifies a set of best practices that policymakers should consider when structuring or reforming the COLA benefits offered to public retirees. Among those principles are the recommendations that COLAs should be pre-funded and aligned with explicit retirement plan objectives.

The Public Pension Systems Signing on to Politicized ESG Investment Efforts

Several state and local public pension systems have signed on to global climate change accords and/or formally joined activist investment groups focused on reducing climate change. This interactive map by Reason’s Jordan Campbell shows the state and local pension plans, treasurers, and investment boards taking such actions to date.

Policy Brief: The Impact of Cash Flow on Public Pensions

Because public pension plans are designed to combine annual contributions with investment returns to fulfill retirement promises, it is crucial to monitor the money flowing in and out—also known as the cash flow—of public systems. In this new policy brief, Reason’s Truong Bui uses the Montana Public Employee Retirement System (PERS) as a case study to examine the impact of cash flow, both historically and in long-term forecasts. The analysis demonstrates some of the risks that can arise when a plan has more money leaving its fund than going in.

How Alaska’s Defined Contribution Plan and Supplemental Annuity Plan Compare to the Gold Standard

Alaska’s defined contribution and supplemental annuity plans are the primary retirement offerings to the state’s public workers. In this analysis, Reason’s Richard Hiller and Rod Crane partner with the Alaska Policy Forum to evaluate these plans according to best practices for defined contribution plans. They find that the plans fulfill some of the best practices of well-structured retirement plans, while also finding that there is still room for improvement in areas such as a formal statement of plan objectives and contribution adequacy for both teachers and public safety workers.

Texas Dangerously Inserts Politics into Pension Investing

In accordance with Senate Bill 13 from the 2021 legislative session, the Texas Comptroller of Public Accounts recently released a new list identifying 10 financial firms and 348 investment funds that Texas claims are boycotting the fossil fuel industry. This means the state’s public pension funds must remove them from their investment portfolios. Reason’s Marc Joffe highlights some of the implications of this new policy and considers how this reaction to ESG investing also elevates politicized investments over core fiduciary decision-making and risks higher costs for taxpayers.

Policymakers Should Focus on Improving Participation Rates in Retirement Plans

Recent reporting from the National Institute on Retirement Security (NIRS) identifies economic inequities caused by tax incentives in retirement savings, but this analysis overlooks some key facets of how the laws promoting savings operate. Reason’s Rod Crane asserts that tax incentives are working exactly as they are meant to by benefiting those who are closer to retirement. Instead of focusing on retirement benefit inequities between the upper- and middle-classes, policymakers should simply seek to maximize the number of employees that are participating in retirement saving programs.

News in Brief

New Report Underscores Volatility for State Pensions

A new paper published by the Center for Retirement Research looks at the impact of declining stock market returns and rising inflation on pension funds. The paper shows that, despite the market drop, pension funds have still seen a net increase in funded ratios by one percentage point between 2020 and 2022. The paper goes into more depth as to how this affects amortization payments and overall contribution rates. Regarding inflation, the only types of COLA plan offered by pension plans affected by inflation are CPI (Consumer Price Index) linked. Other types, such as ad-hoc and invested-based COLAs, are unaffected. CPI-linked COLAs typically have caps of around 3.5%. Due to these caps, increases in amortization payments from inflation will be relatively limited (estimated to be between 0.4% to 1.6% of payroll). The full brief is available here.

Paper Examines Purpose and Effectiveness of ESG ratings

A new working paper from the Rock Center for Corporate Governance at Stanford University reviews the stated purpose of ESG ratings and how effective they are at achieving these goals. The paper identifies the shortcomings that exist in both the objectives and execution of current methods in grading the nonfinancial impact of companies. It also asks if the motivations of fund managers are aligned to produce accurate and reliable reports, which are crucial for calibrating ESG ratings that the market can confidently apply to decision-making. The working paper is available here.

Quotable Quotes on Pension Reform

“Starting in FY 2024, the budget will start reflecting the impact of adverse financial market conditions on pension returns.”

—New York City Comptroller Brad Lander cited in “NYC Will Need to Chip in an Extra $6 Billion to Shore up Pension Funds — Comptroller” in Pensions & Investments, September 7, 2022

“For a while, ESG looked like a good bet, and values seemed cheap. In a down market, though, ESG’s true cost is starting to reveal itself—and in a more volatile, energy-scarce market, it will only get more expensive. Politics aside, few people or fund managers will tolerate funds that underperform, and this may be the real reason ESG funds have peaked.”

—Manhattan Institute Senior Fellow Allison Schrager in “The ESG Bubble Is Bursting” in City Journal, August 30, 2022

“The concern for most investors now is ‘how do I find exposures that are going to help me stabilize the portfolio vs. investing with my values?’”

—Managing Director at FLX Networks Jill DelSignore cited in “The ESG Crown Is Slipping, and It’s Mostly the Fund Industry’s Own Fault” in Bloomberg, September 2, 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 Jordan Campbell created an interactive map showing the state and local government pension plans that have signed on with the Ceres Investor Network on Climate Risk and Sustainability and Climate Action 100+. You can access the map here.

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides technical assistance 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.

The post Pension Reform News: Join our ESG webinar, best practices for addressing inflation, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Who benefits most from defined benefit and defined contribution plans?
• California’s public pension losses will impact local governments.
• A new survey suggests retirement plans are poor tools for recruitment and retention.
• More transparency is needed on public pensions’ private equity investments.

News in Brief

Quotable Quotes on Pension Reform

Data Highlight

Articles, Research & Spotlights

Examining the Populations Best Served by Defined Benefit and Defined Contribution Plans

Research by some pension advocacy groups suggests that defined benefit pension plans enjoy a cost efficiency advantage over defined contribution plans (e.g., they generate a greater value for the same cost), but this conclusion is based on too narrow of a perspective. In a new analysis, Reason Foundation’s Swaroop Bhagavatula, Rod Crane, and Richard Hiller posit that there are many more factors that need to be considered to evaluate the efficiency of a public retirement plan. They introduce the concept of benefit efficiency, which measures how well a plan distributes its benefits to all of its members. Using hypothetical pension plans, their analysis shows that a standard defined benefit plan maximizes “efficiency” for only a narrow group of plan members, making it a less optimal option for the vast majority of public workers.

California’s Unfunded Pension Liabilities Will Burden State and Local Governments

Reporting a -6.1% return for its 2022 fiscal year, California’s pension system serving most state and local public workers—CalPERS—is bracing for growth in its unfunded liability and the inevitable hike in annual costs. Reason Foundation’s Marc Joffe notes that while CalPERS may have outperformed some institutional investors, the nation’s largest pension system’s losses in the last quarter may not have been fully captured in this figure due to the standard lag in reporting on private equity assets. Either way, Joffe notes the growth in California’s public pension debt will impose higher costs on already cash-strapped local governments and taxpayers in the state.

Retirement Plans’ Impact on Recruiting and Retention in the Public Market

A new survey of 319 government respondents by the MissionSquare Research Institute sheds some light on a common question in the sphere of public employment: Does the quality or type of a retirement plan impact a government’s ability to recruit or retain workers? Reason’s Richard Hiller argues the survey results suggest pension plans have little to no impact on a public employer’s ability to attract or keep their employees. The survey results do suggest, however, that employees respond to their perceived wellness and overall happiness. Hiller says public employers should focus on providing effective retirement plans that are optimal for as many employees as possible to improve their perceived well-being.

As Public Pension Plans Take Risks, SEC Wants More Transparency from Private Equity Funds

With economic uncertainty and shifting investment strategies, many public pension systems are now relying heavily on alternative investments to help secure the investment returns they need to fund promised retirement benefits. Reason’s Jen Sidorova outlines some of the key challenges that arise from alternative investing, including a lack of transparency and predictability. She also notes how the Security Exchange Commission’s newly proposed reporting requirements could help public pension investors better evaluate the risks involved in this opaque asset class.

News in Brief

New Report Underscores Volatility for State Pensions

A new report from S&P Global Ratings highlights the impact volatile markets are having on the funded ratios of public pension plans across the country. On average, after last year’s excellent returns, pension plans went from 69% funded in 2020 to 81% funded in 2021. According to this report, however, pension plans will likely drop back to 2020’s funded levels after this year. The report also highlights the states that used 2021 to shore up their unfunded liabilities. Thirty-eight states met their minimum contribution requirements, and 16 states exceeded them, the report finds. States like Washington, Indiana, and Utah had some of the highest contributions above what was required in 2021. The report concludes that with an economic recession likely looming, many state-level public pension reform efforts have been put on the back burner. The full brief is available here.

Quotable Quotes on Pension Reform

“Larger public pension funds fared better than smaller ones over the past year, with those managing more than $1 billion returning a median minus 6.6% and plans over $5 billion returning a median minus 5.1%, the data showed.”

—Heather Gillers, citing data from Wilshire Trust Universe Comparison Services in “Market Rout Sends State and City Pension Funds to Worst Year Since 2009,” The Wall Street Journal, August 9, 2022

“Implementing programs that enhance corporate profits is the age-old guiding principle for corporate management and no new ESG [environmental, social, and corporate governance] management principles are required to achieve these ends. Therefore, ESG as a management paradigm is only necessary when the proposed ESG programs are financially harmful to the company—the company would not adopt the program without explicit pressure from ESG advocates. Implementing programs that reduce profitability is a serious violation of management’s fiduciary responsibility.”

—Wayne Winegarden, in “Proxy Advisory Firms and The ESG Risk,” Forbes, July 25, 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 Jordan Campbell created an updated interactive map showing aggregated state pension funding levels from 2001 to 2022. You can access the map 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 email 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.

The post Pension Reform News: Comparing different pension plans, CalPERs reports negative returns and more appeared first on Reason Foundation.

Articles, Research & Spotlights  

• Previewing the Impact of 2022 Returns on State Pension Plans 
• Arizona and Michigan Dedicated to Closing Unfunded Liabilities 
• Texas Teacher Plan Considering Another Return Assumption Adjustment 
• Window Closing for Pension Obligation Bonds 

News in Brief
Quotable Quotes on Pension Reform
Data Highlight

State Pensions Again Exceed $1 Trillion in Unfunded Liabilities in 2022 

Following last year’s record-breaking investment returns, 2022 is shaping up to be a tougher year for public pension plans. A new interactive analysis from the Pension Integrity Project forecasts that poor market results from the 2022 fiscal year are likely to push the aggregate unfunded liabilities of state-run pension plans over $1 trillion, signaling that the vast majority of these plans have not stabilized and still need significant reforms to reverse the course on their funding shortfalls. The 2022 State Pension Forecaster allows users to see how various 2022 investment return rates and scenarios would impact the unfunded liabilities and funded ratios of 118 major state pension plans. For example, if the Teacher Retirement System of Texas (TRS) posts annual returns of -6% for the fiscal year, its unfunded liabilities will jump to $40 billion, and its funded ratio will drop to 83.4%. While exact reports on investment returns are not out yet, the early indicators suggest that the latest fiscal year saw most public pensions miss their assumed rates of return. While a single year of poor results will not make or break a plan’s ability to achieve long-term funding stability, this forecaster shows how most of the ground gained with great returns in 2021 will likely be lost just a year later, further illustrating the environment of high volatility that state pensions face. The forecaster is available here and our webinar demonstrating the tool is here.

Reformed Pensions in Arizona and Michigan Receiving Supplemental Payments 

Following major efforts to apply risk- and cost-reducing reforms to their pension plans, lawmakers in both Arizona and Michigan are now directing part of their state budgets to close long-standing unfunded public pension obligations. Arizona first enacted meaningful reforms for state-run public safety pensions in 2016 and has been improving nearly every year since then. Now a set of bipartisan bills will dedicate $1.17 billion to these pension plans, adding to the $1.5 billion paid last year. Similarly, Michigan passed a series of reforms to its public-school employees and state police pension plans over the previous several years and will now see a supplemental $2.5 billion go toward reducing its unfunded pension liabilities. These examples demonstrate the importance of comprehensive pension reform. In both cases, state lawmakers took prudent steps to reduce the growth of pension debt, which—now years later—makes it easier to devote state funds to eliminate the shortfalls in retirement obligations that were generated from the now resolved issues. 

Texas’ Teacher Retirement System Needs to Adjust its Investment Return Assumptions 

In line with national trends of government-sponsored pension plans, the Teacher Retirement System of Texas (TRS) is considering another reduction to its assumed rate of return. Assumptions on market returns play a significant role in a pension plan’s ability to accurately calculate the annual contributions that are needed to fulfill the retirement benefits promised to its members. To ensure that contributions aren’t falling short, TRS actuaries are suggesting the pension plan reduce its investment return assumption from 7.25% to 7.00%. In response to this potential change, Reason Foundation’s Anil Niraula and Zachary Christensen evaluate the impact that overly optimistic assumptions have had on TRS historically and apply actuarial modeling to project the long-term impact that the assumption reduction will have on the system’s funding. 

The Risks of Issuing Pension Obligation Bonds are Rising with Inflation, Interest Rates 

Many state and local governments issue pension obligation bonds (POBs) to reduce the long-term costs of holding pension debt, but this maneuver only works if the assets acquired yield more than the bond’s interest plus issuance cost. Essentially, a successful POB relies heavily on timing the market to issue the bonds when interest rates are low. As Reason’s Marc Joffe notes, the window for taking advantage of low rates appears to be closing. The Federal Reserve’s efforts to curtail inflation and deteriorating equity market conditions are putting the prospect of governments being able to reduce long-term costs through pension obligation bonds very much in doubt. 

News in Brief 

Examining the Purpose and Application of COLAs 

A new issue brief from the National Association of State Retirement Administrators (NASRA) reviews the types of inflation protection provided to retirees by government-run pension plans. They find that most plans use some form of cost-of-living adjustment (COLA), although the structure and application of this type of benefit vary greatly from plan to plan. Some governments apply an automatic COLA, meaning the adjustment is predetermined. Others use an ad hoc COLA, which requires legislative approval every year before it is applied. Some systems use performance-based policies to make adjustments only when other returns or funding requirements are met. This brief looks at reforms that have altered COLAs for state-run systems. They find that 17 states have made changes to their COLAs since 2009, eight of which impacted not just new hires, but existing employees as well. The full brief is available here. 

Quotable Quotes on Pension Reform  

“The funded ratio is back to levels not seen since the initial recovery from the global COVID shutdown” 

—Wilshire Managing Director Ned McGuire on the aggregate funding of state pension plans, cited in “State Pension Plan Funding Plunges 11.3 Points in Q2 – Wilshire,” Pensions & Investments, July 8, 2022 

“It’s like going to the ATM in Vegas and then going to the roulette wheel and it comes up red and you go back to the ATM…With pensions, you either pay now or pay more later. If you take on a strategy of increasing your risk exposure but you bet the wrong way, you’re really going to get hurt” 

– Former City Manager of Pasadena Steve Mermell on using municipal bonds toward unfunded pension liabilities, cited in “Pension Funds Plunge Into Riskier Bets—Just as Market Are Struggling,” The Wall Street Journal, June 26, 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, analysts Jordan Campbell and Truong Bui created the interactive 2022 Public Pension Forecaster that allows users to test a variety of potential funding results for all major state-run pension plans, illustrating what the latest year of market experience will mean for plans’ unfunded liabilities and funded ratios.

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. 

The post Pension Reform News: Forecasting state pension plans’ unfunded liabilities, some states make supplemental pension payments, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Florida Law to Improve State DC Plan
• Alaska Avoids Attempt to Unwind Pension Reform
• Examining NIRS’ Cost Efficiency Report
• Jacksonville’s Successful Reform Leads to Credit Rating Boost
• Proxy Voting May Be a Distraction to Pension Investors
• Lack of Focus on Lifetime Income Among Retirement Plans

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

Articles, Research & Spotlights

Major Florida Legislation Improves the State’s Default Defined Contribution Plan 

Adopting the long-time recommendation of the Pension Integrity Project, Florida lawmakers have now made much-needed improvements to the state’s defined contribution plan that serves the majority of new teachers and public employees. House Bill 5007—recently signed by Gov. Ron DeSantis and proposed as an element of his 2022 budget —will increase government contributions into public employees’ individual defined contribution accounts by 3%. This increase brings the state’s flagship vehicle for retirement benefits up to general standards for adequate savings, reinforcing the Sunshine State’s dedication to providing competitive retirement options. Now with this success solidified, Florida policymakers should continue to seek out ways to improve both defined contribution and defined benefit components of its retirement system.

Alaska Avoids Attempt to Roll Back 2005 Pension Reform 

Alaska was an early adopter of the defined contribution plan, which has been an effective plan design for providing valuable retirement benefits to public employees while not taking on additional unpredictable costs and risks. This last legislative session, two bills to replace the state’s defined contribution plan with poorly structured pension plans made it through the state House of Representatives, but eventually failed in the state Senate. The failed legislation was ostensibly introduced to help the state with its challenges with recruiting and retaining public workers, but little actual research was done to explore the fiscal effect this reform would have had, and it is unlikely that the change would actually improve the state’s ability to attract and keep employees. Seeing the need for informed analysis on these proposals, the Pension Integrity Project at Reason Foundation stepped in to educate key stakeholders of the potential risks and costs that could arise from the proposed changes. 

NIRS’ Assessment of the Retirement Efficiency Gap Leaves Out Some Key Details

Research from the National Institute on Retirement Security (NIRS) claims that an “efficiency gap” exists when comparing defined benefit (DB) and defined contribution (DC) plans. Theoretically, this gap suggests that, for the same amount of money, DB plans are able to generate more in retirement benefits. This analysis takes too narrow of a view, however, argues Reason’s Swaroop Bhagavatula. First, by only applying scenarios in which plans accurately predict actuarial outcomes–most notably returns–NIRS’ analysis seems to overlook the significant funding challenges that have plagued public pensions. Second, the analysis applies too much importance on cost efficiency, while not addressing other important factors in retirement policy, like what is optimal to the modern workforce. Devoting one’s entire attention on cost efficiency is missing the bigger picture when the majority of new workers will not remain long enough to enjoy the benefits of a DB plan.

Jacksonville’s Public Pension Reform Helps the City Get an Improved Credit Rating

Citing a package of pension reforms from 2017, Moody’s Investors Service just improved the credit rating for the city of Jacksonville, Florida. Five years ago, Jacksonville’s city council directed a major shift in retirement policy, electing to use a defined contribution plan for all new hires to slow the growth of costly and unpredictable pension debts. This, along with prudent payments to accelerate the elimination of legacy pension debt, has greatly improved the city’s financial standing. Reason’s Jen Sidorova explains the benefits that Jacksonville will enjoy thanks to its retirement reform and the improved credit rating that came about from these efforts.

Proxy Battles Are Usually an Inefficient Use of Public Pension Systems’ Resources

As major institutional investors, public pension plans can influence the companies they invest in. This influence is formally realized in the way a pension engages in what is called proxy voting, which is when a corporation allows its investors to vote on board membership decisions and other resolutions. Reason’s Marc Joffe examines some trends in how pensions have participated in this process, finding 81 recorded instances of funds formally making a case to their fellow shareholders to vote a particular way. California’s main pension for public workers, CalPERS, was the source of more than half of these, and they used their shareholder status to advance official positions ranging from climate change to board diversity. Joffe questions the purpose and effectiveness of this practice, and notes that public pensions usually have more pressing matters related to risk and funding that should take priority.

The Case for In-Plan Lifetime Income Solutions for DC Plans Is Clear, So Why the Reluctance to Implement? 

Annuity options offer an excellent solution to the largest critique of defined contribution plans, a lack of guaranteed lifetime income. But there is still a stark reluctance among retirement plans to offer these options to their members. Reason’s Rod Crane explores some of the barriers to providing annuities, namely the complexity of these options and a misaligned focus on wealth accrual over retirement income.

News in Brief

Proposed Funding Policies for Legacy Pension Debt

Jean-Pierre Aubry at the Center for Retirement Research at Boston College has published follow-up research on his previously introduced concept of legacy debt in public pensions. A number of pension plans began without policies to prefund promised benefits. As nearly all plans eventually changed this practice, a good deal of debt was generated that—as the author of this brief postulates—should not be under the same expectation of payment by the current generation. Aubry advises plans change the way they account for and pay down both legacy and new debt. For legacy debt, plans should adopt amortization policies that pay down the liability over multiple generations. For new debt they should adopt lower risk return assumptions and maintain amortization that ensures payment within the current generation. These changes would decrease annual contributions required for legacy debt, but would also reduce future funding risks with higher required contributions for new debt. The full brief is available here.

State Unfunded Liabilities Over $8 Billion When Discounting at Risk-Free Rates

The American Legislative Exchange Council (ALEC) releases an annual report that recalculates unfunded pension liabilities using a discounting method that accounts for the guaranteed nature of benefits backed by state governments. Using a risk-free rate, unfunded liabilities held by states have now exceeded $8.2 billion by 2021, which is a significant increase from the previous year. Much of this jump is attributed to declines in the risk-free rate. The report also examines the states that have enacted reforms, naming Alaska, Michigan, and Oklahoma as standouts for adopting effective changes that have significantly reduced taxpayer and budget risk. The analysis finds that 25 states have yet to adopt major contribution or plan design reforms. The full brief is available here.

Quotable Quotes on Pension Reform 

“Market volatility is the prevailing headwind for public pension funding, and over the first three months of 2022 we saw the majority of the plans in our study decline in asset values, ranging from losses of 5.52% to a mild gain of 0.50%…Given the continued fixed income and equity volatility in April and May, we expect this downward funding trend to continue in the near-term” 

– Author of Milliman’s Public Pension Funding Index Becky Sielman, cited in “Milliman Analysis: Rocky Markets Cause $167 Billion Drop in Public Pension Funded Status During Q1,” PR Newswire, May 20, 2022

“If you look at reasonable expectations going forward, it’s going to be very hard to maintain current asset/liability funded ratios in public pensions without making significant changes…Pensions have had a good decade-long run of strong investment returns, recently combined with higher liability discount rates. But those trends will eventually reverse, placing renewed downward pressure on funded ratios. If you combine that with boards that aren’t willing to make structural changes to their business model, it’s a Catch-22.”

– Co-founder of CEM Benchmarking and CEO of KPA Advisory Services Keith Ambachtsheer, cited in “Governance Issues Loom Over US Pension Funds,” Chief Investment Officer, June 2, 2022

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.

The post Pension Reform News: Florida improves defined contribution plan, Alaska pension reform roll back blocked, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Louisiana’s Hybrid Pension Proposal Falls Short
• Shortcomings of ESG Scores
• A Chance for New Hampshire to Reduce Pension Debt
• Texas Needs to Reform Teacher Pensions
• Past Pension Missteps Should Be a Warning to California

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

Articles, Research & Spotlights

Evaluating the Potential Impacts of Louisiana Senate Bill 438 

Recognizing the need to better accommodate an increasingly mobile workforce, Louisiana legislators are considering a proposal to create a hybrid pension plan for new workers in the Louisiana State Employees’ Retirement System (LASERS). Senate Bill 438 would place all new hires into a plan that combines a risk-reducing individual investment account with a defined benefit pension structure. Despite the bill’s intentions, Reason’s analysis and testimony find that the structure of the new plan would offer little risk mitigation, add costs, and be a poor fit for the modern worker. 

The Difficulties of Assigning ESG Ratings

Despite concerns with fiduciary priorities, an increasing number of public pension plans are applying environmental, social, and corporate governance (ESG) policies to their investment strategies. A major part of this trend is the emergence of ESG ratings that attempt to quantify the environmental impact of companies. In an examination of this scoring, Reason’s Jordan Campbell finds companies with a higher market capitalization tend to receive better ratings, raising some questions about the validity of ESG scoring. Do bigger companies truly have a lower impact on the environment, or are they just better equipped to comply with demanding reporting requirements?

Why Paying Down New Hampshire Pension Debt Faster Would Be a Win for Taxpayers 

New Hampshire’s state government holds over $800 million in unfunded pension obligations to public workers and retirees, but lawmakers have an opportunity to significantly reduce this costly debt. With state government revenues currently $382 million above expectations, policymakers should consider using this surplus to close the funding gap of its retirement system to reduce long-term costs and risks to taxpayers. The Pension Integrity Project’s new one-page explainer outlines the benefits of paying down New Hampshire’s pension debt sooner rather than later.

Teacher Retirement System of Texas Can Improve Funding Policies and Plan Design to Benefit Taxpayers, Employees 

Texas policymakers have adopted several major reforms to improve funding and reduce runaway costs associated with the state’s pension plans in recent years. Most notably, 2021 legislation adopted an improved funding policy and established a risk-managed retirement plan for all new workers in the Employee Retirement System (ERS). Now, as Reason’s Steven Gassenberger testified to the State Senate Committee on Finance, Texas policymakers need to make similar reforms to the Teacher Retirement System (TRS), which is still chronically underfunded and remains very vulnerable to overly optimistic market assumptions. TRS benefit offerings also need to expand to better serve the mobile nature of educators today.

California Should Learn from Past Mistakes Made with Unfunded Pension Benefit Increases 

California Senate Bill 868 would increase pension benefits for teachers who retired over 20 years ago. The bill aims to counteract the degrading effects that inflation has had on retirees’ pension benefits, but as Reason’s Marc Joffe warns, this benefit increase would come with a high price tag. The pension plan’s actuaries indicate that the move would cost the state $592 million, but this estimation could be too low because it depends on the plan achieving optimistic returns over the next few decades. The proposal would also add to California’s unfortunate history of giving out pension benefit increases without properly funding them, which has generated significant unexpected costs to public employers and taxpayers.

News in Brief

Forensic Analysis of Pension Funding: A tool for Policymakers

A new study conducted by Boston College’s Center for Retirement Research (CRR) looks at the role legacy debt plays in the solvency of pension plans in Illinois, Massachusetts, Pennsylvania, Ohio, and Rhode Island. The inception of many public pensions occurred in the early to mid 1900s and there were not the same established norms in funding practices that we see today. Many pension plans had a “pay-go” system where the funding for benefits was not saved in advance. Even those that used an actuarial funding method approached unfunded liabilities very differently, not always including legacy debt as part of the calculation for required contributions. These old funding policies, combined with underperforming investment returns and benefit increases during the 1980s and 1990s, have resulted in several plans holding significant unfunded liabilities that accrued more than half a century ago. On average, CRR reports that legacy debt is 40% of total unfunded liabilities for the five focus states, with some as high as 74% in the case of Ohio. The full brief is available here.

Quotable Quotes on Pension Reform 

“We have a lot of counties and cities that are struggling right now with inflationary costs, and every time the plan doesn’t perform, they have to put in more money.”

— North Carolina Treasurer Dale Folwell in “Pensions’ Bad Year Poised to Get Worse,” The Wall Street Journal, May 10, 2022

“Ultimately at a fiduciary level, if a pension fund’s total worst-case exposure to all earnings and income derived from autocratic nations is an insignificant fraction of its total portfolio, the composite risk is probably not worth losing sleep over, on purely financial grounds. But politics could still enter the theater stage for pension boards that ignore this issue”

– Former GASB board member and ICMA Retirement Corp. President Girard Miller in “Public Pensions’ New Quandary: Coping With Geopolitical Turmoil,” Governing, May 10, 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 Jordan Campbell created a visualization of ESG risk ratings for the nation’s largest companies, showing the difference between the S&P 500 and the Russel 2000. 

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.

The post Pension Reform News: Hybrid pension proposal falls short in Louisiana, shortcomings of ESG scores, and more appeared first on Reason Foundation.

In this Issue:

Articles, Research & Spotlights 

• Alaska Needs to Answer Questions Before Jumping Back Into Defined Benefits
• Bills in Louisiana Would Weaken Public Retirement Systems
• Public Pension Investments Shouldn’t Be Guided by Politics
• New Reporting Standard Will Bring Valuable Perspective to Public Pensions
• Kansas Considers a Defined Contribution Plan

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

Articles, Research & Spotlights

Legislation Would Introduce Costs and Risks to Alaska Retirement System

After 15 years of new workers going into a defined contribution plan, Alaskan lawmakers are considering legislation that would change course. Alaska House Bill 55 would place all peace officers and firefighters into a new tier in the historically underfunded defined benefit plan. The potential reform has not undergone any sort of risk-focused, long-term actuarial analysis, but comments from the plan’s consulting actuary suggest that the move would expose the state to adverse funding and increased contribution rates. Reason Foundation’s Leonard Gilroy and Ryan Frost summarize what limited comments have emerged on the potential risks of House Bill 55 and list several questions that legislators should ask when considering such a significant policy shift. Chiefly among those questions is, What happens if the plan achieves investment returns below its lofty 7.38% return rate assumption?

Bills Under Consideration in Louisiana Would Increase, Not Decrease, Future Risks

Louisiana’s state legislature is currently considering several bills that would affect the state’s retirement systems, and the Pension Integrity Project has testified on several of these proposals before the Senate Committee on Retirement. Senate Bill 438 would establish a hybrid plan for the Louisiana State Employees’ Retirement System (LASERS), which would improve the accrual and portability of benefits for the majority of new hires. Three bills—Senate Bill 5, Senate Bill 6, and Senate Bill 7—seek to give out benefit adjustments for retirees, but involve funding policies that would weaken the state’s ability to manage unexpected costs in the future. Senate Bill 10 would allow current teachers who already made the choice to participate in the state’s defined contribution plan the option of changing their selection and entering the defined benefit pension. As Reason Foundation explains in this backgrounder, this move would do a disservice to Louisiana teachers and would weaken their already underfunded retirement system. 

Keeping Politics Out of Public Pension Investing

A growing trend in the sphere of public pensions is the push to use the trillions of dollars in pension assets, funded through taxpayer and member contributions, to support social and political interests. In this one-page backgrounder, Reason explains the problems with this politicized approach and why allowing objectives beyond a pension plan’s fiduciary responsibility reinforces risky behavior that can hurt the pension system, workers and taxpayers. This type of politicized investment policy also introduces several technical and unnecessary challenges for plan managers.

A Chance to Enter a New Era of Financial Transparency and Awareness for Public Pension Plans

The Actuarial Standards Board has issued a change to a previously adopted standard of practice (ASOP 4) that will now require public pension plans to report their obligations using alternate discounting. While plans will continue to report their liabilities using their current discounting methods, they will now also report these figures using discounting that is more appropriate for obligations that are backed by governments. Guest actuary commentator Larry Pollack explains that this new standard will provide a valuable perspective for understanding pension promises made and the risks involved in funding them.

Testimony: Assessing the Proposed Kansas Thrift Savings Plan

In the current legislative session, Kansas lawmakers are considering Senate Bill 553, which would establish a new defined contribution (DC) plan fashioned after the federal Thrift Savings Plan. The Pension Integrity Project at Reason Foundation testified before the Kansas Senate Committee on Assessment and Taxation on the legislation, offering its evaluation of the proposed DC plan. The assessment, which uses experience with similar plans around the country, indicates that the DC plan introduced in SB 553 would reflect best practices with adequate contributions, funding policies that would not take away from the existing pension, stated objectives, and options to provide lifetime income.

News in Brief

Analysis Finds Many Employers Fail to Adequately Replace Social Security Benefits

Most public pensions work in combination with Social Security, but some employers exercise the option to opt-out of the federal program, meaning they should compensate accordingly with higher contributions. A new report from the Center for Retirement Research at Boston College looks at whether state and local employees who are not covered by Social Security are receiving an equivalent benefit from their retirement plan. About five million state and local workers are not covered by Social Security, and 43% of those have lifetime benefits that fall short of what Social Security would have provided. The study does note that the difference between benefits does vary depending on years of service and those that leave mid-career suffer the greatest discrepancy. About one-third of non-covered workers fall into this tenure range of mid-career, which is between six-and-20 years of service. The full brief is available here.

Updated Brief Highlights Continued Reductions in Return Assumptions for Public Pensions

The National Association of State Retirement Administrators (NASRA) has released its latest brief on public pension plans’ assumed rates of return. They note that the two-decade trend in return assumption reductions is likely to continue. In 2018, the average assumed rate of return for a pension plan was 7.33%. By 2021 the assumed rate had dropped to 7%, with some states going even lower. The main driver of this trend is the declining interest rate environment after the 2008-09 recession, which caused returns for safer assets like treasuries to drop substantially. The brief notes short-term market forecasts are suggesting the next decade will likely render returns below historic averages, meaning plans will either face cost increases now through further reductions in assumptions or later through market experience coming in below expectations. The full brief is available here.

Quotable Quotes on Pension Reform 

“State pensions often have an allocation to equities that is greater than the size of [the states’] annual budgets, so a correction in equity prices can ultimately have an outsize impact on the state.” 

—Municipal Market Analytics partner Matt Fabian, cited in “U.S. Retirement Funds, Heavy on Stocks, Brace for Losses,” The Wall Street Journal, March 7, 2022

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.

The post Pension Reform Newsletter: Bill endangers Alaska’s reforms, Louisiana bills would weaken retirement system, and more appeared first on Reason Foundation.

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

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.

The post Pension Reform Newsletter: Alaska’s risky pension bill, calls to divest, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Proposed Pension Reform in Alaska Comes with Major Risks
• Improving Transparency for Teacher Retirement Sytem of Texas
• ESG Investment Challenges for Public Pension Funds
• Years Like 2021 Are the Exception, Not the Rule, for Investment Returns
• Asset Windfalls Are an Opportunity to Reduce Pension Risk

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

Articles, Research & Spotlights

Alaska Bill Threatens State’s Pension Progress

In 2005, Alaska policymakers implemented public pension reforms in response to significant pension cost and funding issues. Now, state legislators are considering a pension bill that would undo many of these changes and reestablish a defined benefit pension plan for public safety workers. Analysis shows that this proposed legislation would introduce the state budget to the same risks that existed in the past. In this one-pager, the Pension Integrity Project at Reason Foundation establishes that a successful retirement plan splits the cost of benefits equally between the employee and employer and mitigates risk through realistic investment return assumptions. Since the legislation under consideration in Alaska fails to sufficiently achieve these goals, this proposed reform falls short in establishing a pension plan that would shield the state from significant long-term risks.

Texas’ Teacher Retirement System Needs More Transparency

In 2020, the Texas Sunset Advisory Commission offered several recommendations to improve the security and transparency of the Teacher Retirement System (TRS) of Texas, but legislators have yet to enact them. Reason’s Steven Gassenberger reviews these proposed policies and outlines why they are necessary when using a high-risk investment strategy like that employed by TRS. This analysis also explores the growing need for transparency and details the type of data and public reporting that would effectively implement the recommendations of the commission’s report.

Public Pension Plans Need to Consider the Risks of ESG Investing

Many public pension plans are applying environmental, social, and governance (ESG) investment strategies to avoid assets that are purported to be detrimental to society. In practice, this means institutional investors exclude securities issued by companies engaging in flagged behavior and/or apply ratings to construct an ESG-friendly portfolio. These methods have tradeoffs for pension plans, however. Reason’s Marc Joffe says ESG classifications can be inconsistent and ratings tend to be very subjective and easy to manipulate. What is more, prioritizing environmental, social, and governance interests at the cost of lower returns or reducing risk is a violation of a pension plan’s fiduciary responsibility.

Despite Historic 2021 Returns, Many Public Pension Plans Are Wisely Preparing for Lower Investment Returns

The 2021 fiscal year saw historic investment returns for public pension plans across the country. In this commentary, Reason’s Jordan Campbell notes that several public pension plans are lowering their investment return assumptions, despite the last year’s results far exceeding expectations. Still, some policymakers appear to be considering this as an opportunity for pension benefit increases, which Campbell argues is ill-advised for pension plans that are still facing unfunded liabilities.

Pension Plans Can Use 2021’s Great Returns to Reduce Future Investment Risks

Following a historic year in investment returns, pension plans have an opportunity to strengthen their funds in preparation for the lower investment returns expected going forward. By lowering their assumed rates of returns and their discount rates, pension plans reduce the risk of further accruing unfunded liabilities due to market results below expectations. Using the example of Louisiana’s pension system for public workers, Reason’s Anil Niraula demonstrates how reducing investment return assumptions uncovers hidden costs, but also bolsters the fund from future funding challenges. Waiting to make these adjustments has added significant costs to the Louisiana pension fund and others, so public pension systems should strive to be proactive in adjusting their investment return assumptions.

News in Brief

Analysis Highlights Access and Participation in Public DB and DC Plans

A new issue brief from Mission Square Research Institute uses data from the U.S. Bureau of Labor Statistics to examine the benefits that are offered to state and local public workers. Their analysis finds that 86% of public employees have access to a pension, compared to the 38% who have access to a defined contribution plan. Of those who do have access to a defined contribution benefit, approximately half select this option. On average, employees contribute 7.2% of their pay to the defined benefit plans, while employers pay 11.7% of total employee compensation. The full brief is available here.

Report on Fiscal Status of Cities Singles Out Pension Debt

Truth in Accounting recently released its Fiscal State of the Cities 2022 report, which compiles government financial reporting for the 75 most populous cities in the U.S. Their analysis finds that in 2020 these cities reported $357 billion in total debt, most of which is unfunded pension ($180 billion) and other post-employment benefit ($160 billion) obligations. The report also evaluates the time each city takes to release reporting, counting the days it takes to submit required reporting after the end of their fiscal year. This puts a spotlight on several tardy cities that are 200-to-400 days late to release their 2020 reporting. The full report is available here.

Quotable Quotes on Pension Reform

“Aggressively prepaying at least $1 billion now will save taxpayers hundreds of millions of dollars in debt service — more than $400 million saved over the next five years.”

—Kansas Attorney General Derek Schmidt on proposed legislation to make a supplemental payment into the state’s pension fund, cited in “House Panel Begins Examination of Possibly Transferring $1 Billion into KPERS,” Kansas Reflector, Feb. 9, 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 Jordan Campbell created a visualization that shows historic annual S&P 500 growth. This analysis is useful for contextualizing the latest year of pension asset returns with general market trends going back to 1979. 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.

The post Pension Reform Newsletter: State pension bills, improving transparency, ESG investing, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Alaska Legislature Considers Reintroducing Public Pensions
• Gov. DeSantis Proposes Improvement to Florida’s Defined Contribution Retirement Plan
• New Bill Would Help Arizona’s Governments Pay Down Pension Debt Faster
• How Maryland Can Help Address Pension Debt
• Mississippi Needs Pension Reform
• Milwaukee’s Pension Debt Clouds Wisconsin’s Otherwise Positive Retirement System Picture

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

Articles, Research & Spotlights

Alaska Considers Re-opening Defined Benefit Plan for Public Safety

In 2005, Alaska elected to make a defined contribution plan the primary vehicle for retirement, closing the beleaguered defined benefit plan for all new workers. Lawmakers in Alaska are now deliberating the potential reintroduction of a defined benefit pension for the state’s public safety workers. House Bill 55—which has passed through the House and is now under consideration in the State Senate—would place all new public safety workers into a new tier defined benefit pension plan but does little to address the risks that drove policymakers away from this type of plan 15 years ago. According to the Pension Integrity Project’s testimony and a 1-pager on HB 55, while a defined benefit option could, in theory, be designed to mitigate taxpayer risk, this proposal doesn’t do enough to modernize the plan to reflect the risks facing public pensions and state budgets in the modern era.

Gov. DeSantis’ Proposed Budget Would Improve Florida’s Defined Contribution Retirement Plan for Teachers, Government Workers

In his budget proposal for the 2022-2023 fiscal year, Florida Gov. Ron DeSantis proposed increasing employer contributions into the Florida Investment Plan, the defined contribution plan that covers most new public employees. The proposal would raise state contributions to employees’ plans by three percent, bringing total contributions to 9.3 percent for most teachers and government workers. This proposal would significantly improve the long-term viability of the Florida Investment plan, as displayed by our previous Florida Retirement System analysis. Even so, Florida should continue to consider additional retirement reforms, including further contributions to the Investment Plan and better investment return rate assumptions for the state’s legacy pension system.

Prefunding Arizona State Retirement System Contributions

In Arizona, policymakers are considering a novel approach to public pension funding that would allow Arizona’s cities and counties to reduce their future costs by making extra payments to the Arizona State Retirement System (ASRS) today. The legislation, Senate Bill 1082, would establish a method for local government employers to apply supplemental payments to pre-fund only their own future contributions to the pension fund. This backgrounder outlines the purpose and benefits of this policy, suggesting that it would help alleviate some of the challenges local governments face with rising pension costs.

Maryland Could Pay Down Some State Pension Debt by Leasing BWI Airport

With $20 billion in public pension debt, Maryland’s leaders should consider policy options to fund the retirement benefits already promised to state employees. One possible source of new revenue could come from a long-term lease of the Baltimore-Washington International Marshall Airport (BWI), which is owned by the state. In this opinion piece published in The Washington Post, Swaroop Bhagavatula, an analyst with the Pension Integrity Project at Reason Foundation, and the Maryland Public Policy Institute’s Christopher Summers explore how revenue from leasing BWI could be used to help pay down the state’s unfunded pension liabilities. A recent Reason study by Reason’s Robert Poole examining the lease potential of 31 U.S. airports suggests Maryland could generate up to $2.3 billion by leasing BWI.

Addressing Mississippi’s Pension Challenges

Two new one-pagers by the Pension Integrity Project examine needed reforms to the Mississippi’s Public Employees’ Retirement System (PERS). The first backgrounder gives three reasons state policymakers should move to secure and improve the retirement benefits of public employees. It explains how the current benefit options offered to employees are not serving all new members. The second one-pager explains how the cost-of-living adjustment (COLA) benefit used by PERS is failing to achieve its intended goal and is having a negative effect on the system’s financial stability.

Milwaukee Pension Debt Clouds Wisconsin’s Otherwise Positive Retirement System Picture

Wisconsin’s state retirement system is one of the best-funded and most resilient in the country, but the retirement plans for the city of Milwaukee and Milwaukee County continue to struggle with funding and runaway costs. As of the latest reporting, the city of Milwaukee’s Employes’ Retirement System has $1.3 billion in unfunded pension liabilities and pension contributions are expected to take up more of the city’s budget in the upcoming years. With a funded ratio of 75 percent, Milwaukee County is facing similar challenges. Reason’s Marc Joffe highlights the growing need to reform the city and county pension plans.

News in Brief

Analysis on the Change in Investment Strategy that Could Save Pennsylvania $100 Million in Annual Costs

Facing one of the nation’s highest levels of investment fees, the board for Pennsylvania’s Public School Employees’ Retirement System (PSERS) adopted a new investment strategy that strategically focuses more on lower-cost assets. Pew Research Center’s Project on Public Sector Retirement Systems has released an analysis on this new strategy for PSERS investments, finding that most of the fee reduction measures targeted the absolute return asset class, which made up nearly one-third of investment fees despite accounting for just under 10 percent of total assets. Pew’s full report is available here.

Brief Finds Little Difference in COVID-19 Impact Between States that Participate in Social Security and Those that Do Not

Many see Social Security as a partial safeguard from market volatility for public retirement systems since a portion of retirement benefits fall outside the responsibility of state and local government employers. Along this line of thinking, one would expect to see state retirement plans that decline Social Security participation to experience a larger funding impact in years of significant losses. A new brief from the Center for Retirement Research at Boston College applies this theory to the brief recession of 2020 but finds that both Social Security participants and non-participants weathered this market stress similarly. While a quick and significant rebound in 2021 may have masked any measurable differences between these groups, this analysis suggests that Social Security may not be as valuable of a hedge for public pensions as some expect. The full brief is available here.

Quotable Quotes on Pension Reform

“Despite a historic year in returns for many public pension plans, it’s worth keeping in mind that one good year of returns will not make up in most cases for decades of systematic underfunding.”

—Senior Managing Director of the Pension Integrity Project at Reason Foundation Leonard Gilroy in “Sagging Stocks Aren’t the Only Threat to Pension Plans,” Governing, Jan. 25, 2022

“I think the work we’ve done has helped the program; it will help the system. I don’t think this will be the end-all-be-all fix-all that gets us out of the hole…I think we make these adjustments and we monitor them for the next three to five years and then reconvene if we have to, but I think it’s a step in the right direction.”

—Vermont Sen. Corey Parent on reforms proposed by the Pension Benefits, Design, and Funding Task Force, which would commit $200 million as a one-time cash infusion and increase employer and employee contributions, cited in “Unions, Lawmakers Finalize Plan to Address Vt. Pension Shortfall,” VPR News, Jan. 11, 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, analysts Jordan Campbell, Truong Bui, Swaroop Bhagavatula, and Anil Niraula created a tool that simulates possible investment returns for a theoretical pension plan. The interactive tool uses market forecasts and allows the user to adjust how assets are allocated to generate a probability analysis of returns for the next 30 years. 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.

The post Pension Reform Newsletter: Alaska and Florida consider retirement reforms, Arizona looks to pay down debt, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• New York Teachers’ Plan Adjusts Investment Assumptions
• Houston Pension System Looks to Invest in Cryptocurrency
• A California City is Caught up in Pension Fraud Investigations
• Public Employers Need Updated Retirement Offerings to Improve Retention

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

Articles, Research & Spotlights

New York Teachers’ Pension Plan Lowers Investment Expectations

On the heels of record investment returns in 2021, many public pension plans are still expecting muted market returns over the next few decades and are appropriately reducing actuarial assumptions to better prepare their funds for this future. New York State’s teacher pension plan made this move in November, adjusting their assumed rate of return down from 7.1% to 6.95%. Reason’s Jen Sidorova notes that this decision is in line with the state’s other major pension plan—which made an even bolder investment adjustment earlier this year—and likely marks the first group of many plans that will eventually bring assumptions down below 7%.

Houston Firefighter Pension Plan Makes a Bold Move Into Cryptocurrency Investing

The Houston Firefighters’ Relief & Retirement Fund (HFRRF) made headlines in October for being among the first public pension plans to invest in cryptocurrencies. Houston’s crypto investments are expected to be just a minor share of their total portfolio, but this could mark a growing trend among institutional investors. As Reason’s Marc Joffe explains, these investments will bring several significant and unique risks, but could also prove to be an effective hedge during periods of high inflation.

CalPERS Audit Finds History of Fraud and Pension Spiking in Broadmoor Police Department

The small, unincorporated town of Broadmoor, California has allegedly become a destination for senior police officials to commit pension spiking. According to the results of a newly released audit from the California Public Employee Retirement System (CalPERS), three Broadmoor police chiefs and one retired commander were considered “unlawfully employed” and therefore received improper payments from the pension fund in the last decade. Reason’s Ryan Frost explains how these payments will impact the township and its taxpayers.

Outdated Retirement Benefits Could Be Contributing to Public Employee Hiring Issues

The pandemic has ushered in several new challenges for public employers. State and local governments have struggled with recruitments for years, and now many have also seen waves of early retirements over the last two years. In this commentary, Reason’s Steven Gassenberger suggests that public employers address this growing challenge by offering a wider range of attractive retirement options for new potential workers. The traditional defined benefit pension plan may be a good recruitment tool for some, but ignores the growing number of employees who are seeking more flexible and portable retirement options.

News in Brief

Report Examines How Flawed Funding Policies Exacerbate Inequalities in Connecticut School Districts

While most states manage a retirement system for their employees, funding and contribution policies can differ greatly. In states like Connecticut, city and county governments make no contributions toward promised benefits, meaning the state covers the tab entirely. A new report from Equable Institute and Education Reform Now Connecticut measures how the state’s contributions—or subsidies—vary per pupil for each district. The analysis finds that this practice has generated inequities between school districts, with the state dedicating proportionally more taxpayer money to well-off areas and less to areas with lower resources. The full report is available here.

New CDC Data Brief Shows Life Expectancy fell almost 2 years in 2020

New mortality data released by the National Center for Health Statistics show that the average life expectancy decreased 1.8 years in 2020, marking the largest single-year decline in 75 years. Life expectancy for men fell 2.1 years, from 76.3 to 74.2, while life expectancy for women fell 1.5 years, from 81.4 to 79.9. Heart disease and cancer continued to lead the pack with over 600,000 deaths each, but COVID-19 ranked as the third leading cause of death with more than 350,000 fatalities. Mortality is a key component in the accounting of a pension benefit – lower life expectancies mean fewer benefits need to be paid from the pension fund. The full report is available here.

Quotable Quotes on Pension Reform

“Most people think that adding leverage increases returns, and that is a mistake…Put as simply as possible: If you invest in AAA bonds, let’s say you receive 2 percent for sure. If you lever up an equity portfolio, [you may, let’s say,] have a 50 percent chance of receiving 20 percent and a 50 percent chance of losing 10 percent. The expected return is higher in this example, but you don’t receive the expected return, [and] this is where the mistake is: You either win a lot more or lose a lot more. If you are a pension fund and increase leverage, you are doing the latter — i.e. basically betting the house. You are taking the risk of losing a lot of money because you want to have a chance to become solvent.”

—Financial Economist and Researcher Ludovic Phalippou on leveraging strategies employed by public pensions, cited in “CalPERS is Turning to Private Equity and Leverage to Boost Returns and Reduce Risk. Will It Work?,” Institutional Investor, Dec. 6, 2021

“If we do nothing now, it will mean even greater and harder benefit cuts down the road as the unfunded liabilities continue to mount. Today’s $5.6-billion-plus unfunded liability will look like chump change if we continue to kick the can down the road. If we don’t have these serious conversations now, it means much more difficult conversations in three, five, or ten years from now when the crisis has exploded. We can’t delay the conversation any longer. Unless the latest task force has the courage to propose real solutions that make meaningful changes in the state’s pension system, the costs will only grow exponentially to a point where we simply cannot afford them.”

—Ethan Allen Institute Policy Analyst David Flemming on the need for reforms to the Vermont State Employees and State Teachers pension systems, cited in “David Flemming: The consequences of doing nothing about pensions,” VTDigger, Dec. 13, 2021

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.

The post Pension Reform Newsletter: Houston pension system moves into crypto investing, California pension spiking, and more. appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Department of Labor to Withhold Funds from California Due to 2013 Pension Reform
• Oklahoma Reaches Full Pension Funding
• New York State’s Updated Investment Return Assumption
• Employee Pension Contributions on the Rise
• More Governments Turning to Pension Obligation Bonds
• No Better Time Than Now to Reassess Retirement Plan Design

News in Brief

Quotable Quotes on Pension Reform

Data Highlight

Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Federal Department of Labor Halts California Transit Grants

California’s 2013 public pension reform that withstood years of legal scrutiny is now facing renewed opposition from the federal government. The U.S. Department of Labor recently indicated that it will be cutting off California transit agencies from billions in expected federal funding because the Office of Labor-Management Standards is claiming the state’s 2013 pension reform was a violation of funding conditions, specifically around mass transit workers’ collective bargaining rights. Reason Foundation’s Marc Joffe explains this development and gives background on the origin of these laws that could determine the outcome of whether California will receive around $12 billion in federal funding.

Oklahoma’s Pension Reforms Have Led the State Employees’ Plan to Full Funding

According to 2021 financial reports, the Oklahoma Public Employees Retirement System (OPERS) climbed from 66% funded in 2010 to now essentially fully funded at 99.5% funded today. The pension system’s success can be attributed to a combination of actuarial assumption adjustments that accurately estimated costs, legislative funding to bring assets back to necessary levels, and significant benefit changes that kept the growth of liabilities to manageable levels. In this commentary, Reason Foundation’s Rod Crane evaluates the reforms that brought Oklahoma out of the pension funding quagmire.

New York State’s New Pension Investment Assumptions Will Help Plan Funding

The country’s third-largest public retirement fund, the New York State Common Retirement Fund, recently adopted a significantly reduced assumed rate of return, bringing its assumption down from 6.8% to 5.9%. A new analysis from Reason’s Jen Sidorova suggests that this move will align the fund’s expectations with the forecasts of market experts. Public pension plans around the country should follow New York’s lead, as this new return rate assumption will improve the state’s chances of achieving and maintaining full funding of promised pension benefits.

Most Public Pension Plans Raised Employee Contribution Rates in the Last Decade, Report Shows

A new report from the National Association of State Retirement Administrators (NASRA) finds that 80% of states have increased pension contribution rates for employees since 2009. On average, state employees are now paying 1.25% more of their paychecks in pension contributions. Reason’s Ryan Frost summarizes these findings, explaining how many plans are turning to risk-sharing options and alternative types of plans to address growing costs.

Governments Increased Their Use of Pension Obligation Bonds in 2021

A recently released brief from S&P Global Ratings reports that the amount of pension obligation bonds (POBs) rated this year is already double the amount from the previous year, totaling $6.3 billion by mid-September. In this commentary, Reason’s Jordan Campbell summarizes the report and highlights the risks and rewards involved in issuing POBs.

Amidst Great Investment Returns, Public Pension Systems Should Reassess Plan Designs

Excellent investment returns from the last fiscal year will give many public pension plans some much-needed breathing room, but financial experts are still predicting lower returns in the long term. Reason’s Richard Hiller and Rod Crane suggest that policymakers should use this moment to reflect on how public pension plan’s can be improved to better serve their evolving workforces.

News in Brief

Brief Explores the Challenges and Potential Solutions of an Aging American Workforce

Elderly workers have played an increasingly valuable role in the country’s economic growth, but a spike in retirements during the COVID-19 pandemic could signal a shift in behavior. A new brief from the Terry Group and the Global Aging Institute examines trends in an aging workforce and highlights the economic benefits that elderly workers provide. The report surmises that the shift from defined benefit pension plans (which require higher costs for older workers) to defined contribution plans has incentivized employers to hire and retain older workers. The full brief is available here.

Quotable Quotes on Pension Reform

“It’s simply not designed for the times…Times have changed since this portfolio was put together.”

—CalPERS Managing Investment Director Sterling Gunn on their move to increase allocation in private equity investments in “Many California Public Employees to Pay More for Pensions as CalPERS Lowers Earnings Target,” The Sacramento Bee, Nov. 16, 2021

“I do think the $500,000 is going to have a very significant (positive) impact.”

—Tampa Bay Finance Director Allison Broihier on a one-time contribution to reduce unfunded pension liabilities in “City Set to Pare Firefighters’ Pension Debt,” Tampa Bay Newspapers, Nov. 12, 2021

“It’s imperative to change the governance model at PERA for the sake of the retirees, current PERA members and for that matter, the people of New Mexico because, ultimately, it’s the taxpayer that holds the bill…In my opinion, history will judge us harshly if we don’t act to clean up the governance structure.”

—New Mexico Educational Retirement Board Deputy Chief Investment Officer Stephen Neel in “Some Seek to Change Governance Structure of PERA,” Santa Fe New Mexican, Oct. 31, 2021

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by one of our Pension Integrity Project analysts. This month, analyst Anil Niraula created a visualization of expected vs actual asset growth for all state-managed pension plans from 2001 to 2021. Access the visualization and details here.

Compound Percentage Growth Based on Median Assumed vs. Actual State-Managed Pension Plan Returns (2001-2021)

Source: Pension Integrity Project database sourced from publicly available valuation reports, ACRFs, and other publications.

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.

The post Pension Reform Newsletter: California labor dispute, pension obligation bonds, increased employee retirement contributions, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Pennsylvania’s Teacher Pension System Should Reassess Plan Assumptions, Investments
• Testimony on Florida’s Defined Contribution Retirement Plan
• Leveraging Phoenix’s Airport to Address the City’s Pension Challenges
• Maryland’s Pension Plans Lowers Investment Return Assumption

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

Articles, Research & Spotlights

Suggested Reforms for Pennsylvania’s Public School Employees’ Retirement System

As a follow-up to the Pension Integrity Project’s testimony before the Pennsylvania House State Government Committee, Reason’s Jordan Campbell evaluates the plan’s probability of achieving various returns. The findings suggest that the teacher pension system is not likely to achieve even a 6% average return over the next 10-15 years—much less its current assumed return of 7%. The analysis also examines the result of expensive investment management, comparing the last five years to a hypothetical passive investment strategy.

Testimony: Recommendations for the FRS Investment Plan

This month, the Pension Integrity Project testified before the Florida Senate Committee on Governmental Oversight and Accountability to provide analysis of the state’s defined contribution plan for public employees, also known as the Investment Plan. Florida’s Investment Plan is the default retirement plan option for most new public employees, making it a vital facet of employment with the state. In the testimony, Reason’s Zachary Christensen identified areas where improvement is needed for the Investment Plan, the most important being the need for contributions from employees and the state to be increased to meet industry standards and provide adequate retirement income.

RELATED: Full Testimony Presentation: FRS Investment Plan – Assessment and Recommendations

Leasing City Airport Could Help Phoenix Pay Down Pension Debt

Nearly $5 billion in unfunded pension liabilities weigh on Phoenix, Arizona’s city budget and city staff are evaluating options to reduce the long-term costs of this pension debt. One possible source of funding to reduce unfunded liabilities could come from leasing city-owned and operated Sky Harbor International Airport. In an op-ed originally appearing in the Arizona Republic, Reason’s Leonard Gilroy explains what a new report on the potential value of airport assets could mean for Phoenix and its longstanding pension funding shortfalls.

Maryland State Retirement Pension System Lowers Investment Return Assumption, but More Reforms Are Needed

The Maryland State Retirement Pension System (MSRPS) recently announced a reduction to its assumed rate of return from 7.4% to 6.8%. This move comes on the heels of the plan’s best annual investment return in 35 years. Using various market forecasts, Reason’s Swaroop Bhagavatula analyzes the likelihood that the system meets this lower investment return assumption going forward. He finds that, while the reduced assumption is closer to newly downgraded long-term expectations, MSRPS may still need to adjust the rate down even further to reduce the risk of future unexpected liabilities and costs.

News in Brief

American Academy of Actuaries Reiterates the Dangers of the 80% Funding Myth

A widely spread and unfounded myth that pensions can healthily remain below 100% funding periodically appears in media and academia. Far too often, 80% funding is referenced as an acceptable benchmark of a healthy pension plan. In an updated brief, the American Academy of Actuaries explains once again the pitfalls of this false understanding of basic pension funding principles. The brief confirms that funded ratios are a useful measurement of the current health of a pension plan, but a comprehensive evaluation of a fund’s health includes the plan’s strategy to return to full funding—not a target below that—within an appropriate timeframe. The full brief is available here.

New Analysis Includes Retirement Benefits into Comparison between Public and Private Teacher Compensation

The difference in public and private sector compensation is a topic commonly discussed, but factors outside of wages are often left out of this comparison. Since other benefits (health insurance, retirement benefits, retiree health insurance, etc.) are major pieces of total compensation, it is very important to bake them into any comparative analysis. A new brief from the Center for Retirement Research at Boston College does just that in an analysis of benefits for public teachers and their private-sector counterparts. Their regression analysis finds that wages alone are lower for public teachers, but when all of the relevant benefits are included, there is little difference between public and private sectors. The full brief is available here.

Quotable Quotes on Pension Reform

“Since last year’s Delivering Alpha, markets are up 30% to 50%, clearly not normal…We’re enjoying it, but this is not a normal time period.”

—JPMorgan Head of Asset and Wealth Management Mary Erdoes cited in “We Asked 3 Major Investors What Happens Next in the Market — None of Them See Big Returns,” CNBC, September 29, 2021

“The Public Employee Retirement and Administration Commission and local government retirement boards should conduct full actuarial valuations of the impact of the credit bonus on pension costs…The valuations should also address the amounts of additional pension contributions that would be needed to fund this legislation and they should be completed before legislators act on the bills.”

—Pioneer Institute Economist James Bohn on a pair of bills granting unfunded retirement credits cited in “New Study Shows Massachusetts Pension Bonus Bills Will Cost Billions to Fund,” The Center Square, October 26, 2021

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by one of our Pension Integrity Project analysts. This month, Quantitative Analyst Jordan Campbell highlights a tool that visualizes all state funding ratios and assumed rates of return up through 2020, the latest official data available. 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.

The post Pension Reform Newsletter: State pension plans change investment return assumptions, how to improve Florida’s retirement plan, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Great Investment Return News, But Public Pensions Still Need Reform
• New York State Adopts Lower Investment Return Assumption
• Ohio Teachers Seek More Transparent Investments

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

Articles, Research & Spotlights

Three Reasons Why Public Pensions Still Need Reform Despite Strong 2021 Returns

Record investment returns in the 2021 fiscal year will have a significant positive impact on the funding of public pension systems, but it is also important for policymakers to recognize that one year of excellent returns does not mean public pensions no longer need reform.

The Pension Integrity Project’s latest analysis gives three reasons why a year of very good investment returns, while welcomed, has not changed the underlying challenges that continue to threaten the long-term security of most public pension plans. First, current actuarial practices mute the effect of one outsized year of good or bad performance in order to help maintain budget predictability. Second, market experts are still projecting future investment returns to be well below the assumed rate of return of most public pension plans. And third, using the modeling of various market stress scenarios, it is clear that some public plans remain very vulnerable to volatile market swings.

• RELATED: Putting a year of good investment returns for public pension plans in perspective

New York Lowers the State’s Assumed Rate of Return for Public Pension Investments

The New York State Common Retirement Fund—the nation’s third-largest public pension system—announced a blockbuster reduction to its assumed rate of return (ARR). The plan will wisely lower its assumed rate of return from 6.8% to 5.9%. This new assumption will be the second-lowest ARR among the nation’s 180 largest state and local pension plans. Reason’s Jen Sidorova details the reasoning behind this move, explaining that the new assumption will match recent experience for state pensions (5.7% over the last 20 years) and reduce the risks of future growth in unfunded pension liabilities.

Ohio’s Teacher Retirement System Lacks Investment Transparency

An independent review commissioned by the Ohio Retired Teachers Association found that the state’s teacher pension plan is paying a high price to investment managers and is lacking in transparency. Using public reporting, Reason’s Marc Joffe finds that the plan’s $175 million in alternative investment fees make up the bulk of this expense. With $24 billion in unfunded liabilities (and that amount is calculated using an overly-optimistic assumed rate of return), Ohio’s teacher plan needs to identify ways to cut costs and improve funding.

News in Brief

New Report Evaluates the ‘Funding Discipline’ of Public Pensions and OPEBs

A new report for S&P Global surveys the funding progress of state pensions plans and other post-employment benefits (OPEBs). While most plans saw a drop in funding by the end of fiscal year 2020, S&P Global finds that excellent 2021 returns will greatly improve funding levels. OPEBs, on the other hand, remain significantly underfunded, with most states not contributing enough to prefund these promised benefits. The report identifies several examples of increased “funding discipline” among pensions, in which plans are adopting less risky investment strategies while simultaneously lowering their assumed rates of return. They anticipate that this trend will continue with more plans going forward, which will lead to higher reports of liabilities, but also improvements to funding progress and volatility management. The full report is available here.

Two New Reports Assess Pension Funding Progress but Warn of Risks Ahead

Two newly released reports update the overall funding progress of state and local plans. First, Equable Institute’s “State of Pensions” report finds a dramatic funding increase in all pension plans due to the outstanding FY2021 market returns, with the aggregate funded ratio improving from 71% to 80.9%. According to the analysis, reported unfunded liabilities among all major state and local pension plans will drop from $1.48 trillion to $1.08 trillion. Despite these positive results, Equable predicts that public pension plans will (and should) continue to reduce their assumed rate of return in the coming years. Positive steps are being made to improve the resiliency of pension plans, but reforms are still needed to ensure their long-term viability. This full report is available here.

Second, a new brief from The Pew Charitable Trusts also finds that 2021 returns will help the funded levels of public pension plans exceed 80% for the first time since 2008. They recognize that state and local governments have improved on annual funding policies, leading to contributions that are closer to actuarial requirements. An increasing number of states are achieving positive amortization, meaning that they are now making progress in eliminating their public pension debt. These very positive developments aside, the report notes long-term investment returns are expected to remain low so most public plans will still need to make reforms. The full Pew report is available here.

Quotable Quotes on Pension Reform

“If we have another 2008, that’s going to devastate a lot of plans…These plans are paying out more in benefits than they are collecting in contributions, and so you have a down year, you have less assets to recover.”

—Chief Executive Officer of Cheiron actuarial consulting firm Gene Kalwarski, cited in “Blockbuster Gains Have Public Pensions Dialing Back Projections,” Bloomberg, Aug. 26, 2021

“The reality is that the problems detailed in this report are significant and can no longer be ignored. While I commend Gov. Murphy for making the full pension payment this year, the reality is that there is no solution in sight for a year when we do not have federal financial assistance. It is now time to act for the sake of our state’s future.”

—Former New Jersey Gov. Thomas H. Kean on a new state budget analysis, cited in “GSI Report: Toward a Fiscally Sustainable New Jersey: Analysis & Recommendations,” The Garden State Initiative, Sept. 22, 2021

“This is a critical issue, and one of the reasons that this needs to be watched closely is that there is such a mix of short-term and long-term benefits and challenges, depending on how this is addressed…There’s an immediate budget challenge posed by the need for this huge increase in the contribution in 2023.”

—President of Wisconsin Policy Forum Rob Henken on Milwaukee’s pension challenge, cited in “Milwaukee’s Pension Problem is Threatening City Services. Here’s What You Need to Know About the City’s Tough Choices”, Milwaukee Journal Sentinel, Sept. 9, 2021

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by one of our Pension Integrity Project analysts. This month, analysts Truong Bui and Jordan Campbell generated a tool to project 2021 unfunded liabilities and funding ratios for each major state pension plan. The tool visualizes funding progress going back two decades and allows the user to apply any 2021 return rate to preview the estimated results. 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.

The post Pension Reform Newsletter: How strong investment returns impact public pension funding appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Leveraging Airports to Improve Pension Solvency
• The Future of Pension Reform in Pennsylvania
• Solutions to Montana’s Pension Challenges
• How to Improve North Dakota’s Retirement Plan
• Experts: Forecast Worsening for Future Market Returns 
• Comparing U.S. and Canadian Public Pensions 

Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Reason Study Finds Leasing U.S. Airports Could Generate Revenues to Pay Down Debt, Pensions

A new study from Reason Foundation’s Robert Poole estimates the market values of 31 airports owned by U.S. cities, counties, and states and shows how they can maximize and monetize these assets for other high-priority public purposes, including paying down costly public pension debt. According to the report, Los Angeles could generate as much as $17.8 billion with its airport, before paying off the airport’s debt as would be required by federal law. Several other cities, including Dallas/Fort Worth and San Francisco, have airport assets valued at over $10 billion. While the leasing of airports into public-private partnerships seems novel in the U.S., this practice has become the norm in other parts of the world. To estimate the value airport properties could have on long-standing pension funding shortfalls, the study compares the potential airport values to each jurisdiction’s unfunded public pension obligations, identifying several cities and states that could completely eliminate their unfunded liabilities and greatly benefit from this policy proposal.

Comments on Pensions in Pennsylvania

Reason testified this month at the invitation of the Pennsylvania House State Government Committee. The Pension Integrity Project spoke at a two-day hearing convened to look at the future of Pennsylvania’s pension plans. The testimony by Reason’s Ryan Frost takes a broad look at the state’s pension challenges and identifies several areas that are in need of reform, including contributions, amortization, and risk management policies. It also examines the state’s policies on pension benefit garnishment and forfeiture in response to significant crimes or misconduct. A comparison among all U.S. states finds that Pennsylvania is one of just 13 that allows for this punitive action on all employee types, including law enforcement. 

The Future of Montana’s Underfunded Pension Plans

Reason Foundation’s Steven Gassenberger submitted public comment to the Interim State Administration and Veterans’ Affairs Committee, detailing the areas where reform is needed for Montana’s two major public pension systems, one for teachers and the other for all other state employees. These plans combined have accrued over $5 billion in unfunded retirement benefits. Through advanced forecast analysis, he finds that a reform proposed in the last legislative session could effectively address the challenges that continue to contribute to the state’s growing funding issues. This type of reform—which generally involves adjustments to contribution and amortization policies—would generate long-term savings for state taxpayers, and would better secure the retirement plan for the future.

How to Fix North Dakota’s Pension System

Over the last 20 years, the North Dakota Public Employees Retirement System (NDPERS) went from 115% funded to just 68% funded, driving up costs and threatening the solvency of the state’s public retirement. The largest contributor to NDPERS’ funding woes is the state’s chronic practice of making insufficient contributions into the plan. In this report, the Pension Integrity Project examines the history of NDPERS, identifying several key areas where reform is needed. The report outlines and analyzes several reform options that, in combination, would improve the long-term sustainability of the plan. These options include changes to contribution and amortization policies, in addition to a plan design for new hires that better manages risk.

Horizon Survey Predicts Bleak Future for Public Pension Investment Returns

The most recent Survey of Capital Market Assumptions by Horizon Actuarial Services compiles short and long-term market expectations from 39 financial advisors, painting a picture on how experts generally see the next 10 to 20 years going for pensions and their investments. According to this summary from Reason’s Truong Bui, most advisors have actually downgraded their expectations for the next few decades, despite the current rally from a tough 2020. This report supports the position that plans still need to be concerned about overly-optimistic assumptions, and that they are still very unlikely to close significant funding gaps with market returns alone.

What U.S. Pension Plans Can Learn from Canadian Pension Funds

While state and local pensions in the U.S. struggle with underfunding and growing annual costs, most public plans in Canada are fully funded and have enjoyed relatively stable year-to-year contributions. Policymakers should look to their northern neighbors to understand how Canada has been able to maintain similar retirement benefits without the challenges that almost ubiquitously hinder U.S. plans. Reason’s Swaroop Bhagavatula examines three major differences in policy between the U.S. and Canada, including much lower investment return assumptions, a lower appetite for risk, and a more equal sharing of costs between employees and employers.

Quotable Quotes on Pension Reform 

“This milestone is the result of an all-out effort to help employers understand and realize the true cost of public safety pension benefits and the taxpayer savings that can be achieved by paying off unfunded pension obligations … Although the large amount of additional contributions is great, the other impressive fact is the total number of employers that are taking action. Employers across the state are chopping down a mountain of pension debt.”

—Administrator of Arizona’s Public Safety Personnel Retirement System (PSPRS) Michael Townsend on employers contributing an extra $1.58 billion in 2021 to reduce unfunded pension liabilities, cited in “Cities pay millions toward $11.8B pension debt,” The Foothills Focus, August 4, 2021

“We happen to have had phenomenal returns … But we want to make sure that we take a long term look at it. And it’s nice to see a number that is 26%, but … we can’t plan on 26% a year by any stretch. It’s just a consistent approach (is needed) to whatever problem we’re facing.”

—Kansas Rep. and Chair of the House Insurance and Pensions Committee Steven Johnson, cited in “Kansas’ pension system had one of its best years ever in 2021. Where does it go from here?,” The Topeka Capital-Journal, August 17, 2021 

“It’s right in line with the governor’s admonition that he never wants to spend one-time money on ongoing things … A pension’s unfunded liability is something you tackle when you have unexpected windfalls. Because it frees up money elsewhere.”

—Communications Director for Vermont-NEA Darren Allen on the opportunity to reduce the state’s unfunded pension liabilities, cited in “Vermont is swimming in cash. Public sector unions say their ailing pensions should benefit”, VTDigger, August 5, 2021

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.

The post Pension Reform Newsletter: Leveraging airports to improve pension solvency, the future of reform in Pennsylvania, and more appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Texas Teachers’ Plan Needs Pension Reform
• How to Improve the Florida Retirement System
• Are Public Pension Funding Concerns Exaggerated?
• One Year of Great Investment Returns Does Little to Improve Long-Term Funding
• Inflation Could Have High Costs for Pension Plans

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

Articles, Research & Spotlights

The Teacher Retirement System of Texas Is In Need of Serious Reform

In its recent regular legislative session, Texas made significant improvements to the long-term solvency of its retirement plan for public workers. Unfortunately, new bills under consideration during the state’s stalled special legislative session would do the opposite for the pension plan serving the state’s teachers. House Bill 85 and Senate Bill 7 would give retired members of the Teacher Retirement System a 13th check but do not address the long-term costs facing taxpayers, the state budget and retirees. Reason Foundation’s Leonard Gilroy and Steven Gassenberger discuss why the proposed legislation is not the optimal way to protect retiree benefits from inflation and outline how policymakers could better address the challenges facing TRS.

How to Reform Florida’s Retirement System

Despite several reform efforts in recent years, Florida’s public pension system is still in dire need of comprehensive changes to its funding and benefit policies. A new analysis projects the Florida Retirement System’s short- and long-term costs and evaluates how the most recent reform bill, which failed to pass, would have impacted FRS. Actuarial forecasts show that simply closing the state’s defined benefit plan will not relieve Florida of its funding issues, but a more comprehensive reform to contribution policy would significantly improve the system’s financial strength while still providing public workers the option of a guaranteed lifetime benefit.

Brookings Paper Says There Is No Imminent Public Pension Crisis

A newly updated report from Brookings Institute suggests there is no immediate need to reform public pensions because most state and local plans are likely to continue paying promised benefits without exhausting their assets over the next 20 years. Reason Foundation’s Marc Joffe examines the report and identifies some weaknesses to the idea that pensions need not achieve full funding to maintain long-term sustainability. Following Joffe’s analysis, the author of the Brookings report offers a rebuttal.

One Year of High Investment Returns Does Little to Improve Long-Term Public Pension Funding Levels

Many pension plans’ fiscal years end in June and as their investment results begin rolling in it is important to keep these positive returns in their broader financial perspective. While a good year of market returns is welcome and will improve public pension funding, Reason’s Anil Niraula details why it will take much more than one or two good years to significantly reduce unfunded liabilities. In the long-term, economists are still projecting lower market yields over the next decade and most public pension plans will not be able to invest their way out of their current pension funding shortfalls. In most cases, structural changes are needed to get pension plans on the right track.

Cost-of-Living Adjustments Can Help Preserve the Value of Retirement Benefits But Must Be Properly Funded

Sustained inflation can threaten the value of retirement benefits promised to public workers, but benefits to reduce this effect – namely Cost of Living Adjustments (COLAs) – frequently come at a high cost with significant risk. There are steps public pension plans can take to reduce the negative impacts that inflation can have on retirees and pension funding. Reason’s Jordan Campbell summarizes the cost-of-living adjustment (COLA) policies used by states, recent reforms made to these policies, and how to build COLAs that would avoid adding more debt to pension systems.

News in Brief

New Report Outlines the Costs of New Orleans Backing out of Recent Reform

The Bureau of Governmental Research, a think tank that studies New Orleans public policy, released a new report that recounts the city’s 2020 decision to back out of a 2017 pension reform. The 2017 reform included many changes, the largest being a drastic decrease in the city plan’s multiplier. The report describes an opaque process that used poor justification to undo prudent cost-saving reforms from just three years earlier. As a result of the move, policymakers have added to the city’s long-term obligations by up to $115 million, which will ultimately be the responsibility of future taxpayers. The undoing of the 2017 reform means the city’s $300 million in unfunded liabilities are likely to grow, which will likely generate significant budget pressures and require New Orleans to shift funding away from other priorities. This and many more findings from the report are available here.

Quotable Quotes on Pension Reform

“This (policy) does generally mean a higher cost to employers and employees, but there’s a balance here … The risk mitigation policy exists to cut that risk in future years, to pocket your high returns and then seek to rebalance your portfolio in a way that doesn’t expose you to such significant drops that we saw in the Great Recession.”

—Chairman of Californians for Retirement Security Ted Toppin on the California Public Employees’ Retirement System’s policy to reduce its assumed rate of return in years of good returns in “Big year for CalPERS means higher pension costs for some public employees,” The Sacramento Bee, July 21, 2021

“This is real relief that will both spare future generations from a legacy of pension debt and give short-term budget relief to taxpayers…It was a big, difficult change, but now we’re seeing the reward of coming together to do hard things…There’s a lesson to be learned from that.”

—Connecticut Comptroller Kevin Lembo on the state making a $1.25 billion supplemental payment on its long-term pension debt in “Lembo: Extra pension payments mean big savings now — and down the road,” The Connecticut Mirror, July 15, 2021

“You’re going to increase the multiplier and the years of service, both together…When you add that to a sizable employee base, you could be adding billions to the unfunded liability.”

—Pioneer Institute Research Director and former Massachusetts Inspector General Greg Sullivan on a proposed bill to credit state employees with bonus years of service credit for work done outside of their homes in “Massachusetts pension boost for pandemic workers too costly, critics say”, The Bond Buyer, July 28, 2021

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by one of our Pension Integrity Project analysts. This month, policy analysts Anil Niraula and Jordan Campbell generated a tool displaying the latest investment returns for most state pensions. It also highlights plans’ investment returns going back two decades and shows the progression of unfunded pension liabilities over that same timeframe. Use 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.

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