Good morning, my name is Ryan Frost, and I’m a senior policy analyst with the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. We have been involved in around 70 pension reforms over the past seven years, all aimed at bringing down long-term risks and costs to the state and taxpayers. Prior to my current role, I spent seven years as the senior research and policy manager for the Law Enforcement Officers and Firefighters (LEOFF 2) Pension System in Washington state. LEOFF 2 has been one of the top-three best-funded public pension plans since its inception in the mid-1970s, and that has primarily been accomplished by keeping it up to date with best practices in plan design and funding policies.

Reason Foundation has worked on some of the nation’s significant pension reforms of recent years, including Arizona’s public safety plan, Michigan’s public-school employees plan, and Texas’ public employees’ plan. Pension plan design is an extremely complex issue. Much like a house, if the plan designer fails to build the pension system’s foundation properly, it can be incredibly costly to fix those later. Alaska is currently dealing with that issue in the Alaska Public Employees’ Retirement System (PERS) and Teachers’ Retirement System (TRS) plans, which have been closed since 2006 yet remain saddled with billions of dollars in unfunded liabilities.

Speaking to Alaska House Bill 22, the state legislature considered a bill identical to this last session, and Reason presented an analysis of the risks to the state in terms of potential unfunded liabilities and short- and long-term costs. Just like last session, our concern is that far too much risk is built into this proposal to reopen a defined benefit pension plan and retroactively undo the risk-reducing measures that Alaska has enjoyed since 2006. The Pension Integrity Project has never seen a defined public benefit plan proposal anywhere in the country with this much risk in the first few years of the proposed plan’s life.

Surprisingly, such a massive plan design change has yet to receive a long-term actuarial study of the potential impacts on the state budget. The only analysis the legislature received last session was a projected six-year cost figure from the PERS actuarial consultant, Buck, and an analysis performed by an outside actuary hired by the bill’s proponents.

We’ve built an actuarial model, using a certified consulting actuary, that allows us to examine and compare costs through many different scenarios, compare benefit levels of the defined contribution plan versus the proposed defined benefit, and perform an accurate risk assessment of the bill, which last year’s bill unfortunately lacked.

To that end, Reason Foundation’s initial modeling suggests that HB 22 could cost Alaska upwards of $800 million in the coming decades. While the proposed ‘new’ defined benefit (DB) plan does have a few modest improvements relative to the legacy pension tier, HB 22 still lacks sufficient controls to justify the proponent’s assertion that there is no risk to state/local budgets, as there is with the current defined contribution (DC) plan today.

The risk from this proposed bill is threefold:

1.          Allowing all previously earned service in the DC plan to be transferred into the proposed DB plan creates massive unfunded liability risk in year one.

Transferring DC balances to a DB pension fund as if they had been there all along sets up a pension obligation bond-like situation where any downturn in stock market performance or lowering of investment return assumptions would quickly create significant unfunded liabilities in the system. There was a lot of discussion at this bill’s first hearing about last year’s proposal almost passing. Let’s say the bill did pass last year, here’s what would’ve happened (and what we warned about last session): All public safety members hired since 2006 would be assumed to transfer all of their assets from the DC plan into a new tier of the PERS DB plan. This effectively means the state would have seen up to 16 years of liabilities added to the plan on day one, all priced at last year’s overly optimistic discount rate of 7.38%. PERS investment returns were negative last year, earning -6%. Missing the long-term assumption on investment returns by more than 13%, this new tier would have had a huge funding hole immediately in year one. The new PERS tier would have added over $33 million dollars in unfunded liabilities before the plan reached one year old.

2.          The current assumed rate of investment returns being used by PERS, which this new proposed plan falls under, is far too high.

Reviewing the landscape of public pension systems nationally, it would be fair to characterize the situation as a race to get down to a 5.5-6% assumed rate of investment returns for other public pension systems across the country. Alaska has followed this trend, lowering its assumed rate from 8% to 7.25% over the last few years.

These jurisdictions also commit to higher current pension contributions because lowering the assumed rate makes previously promised liabilities more expensive. This bill, for some reason, sets the assumed rate 125-175 basis points above that near-term market outlook. The Alaska Retirement Management Board (ARM) has already lowered its expected annual rate of return this year, going down from 7.38% to 7.25%. When the PERS investment return assumption is reduced again in the future—which it most certainly will—this new tier will have instantly created unfunded liabilities.

3.          While proponents claim there is built-in cost sharing, it is not true.

Employee contribution rates are essentially fixed in statute, meaning any poor plan experience that brings required contributions above the maximum rate that employees are set to pay would be borne by the state.

HB 22 is being proposed due to concerns with recruitment and retention challenges. Proponents claim they are having trouble recruiting and retaining members due to the lack of a defined benefit pension to offer to their members. However, this claim does not hold up to the data as, according to the National Police Foundation, 86% of police departments across the country face a shortage of members. Proponents stated to the prior committee that all other states offer a defined benefit for public safety employees. If all of those states are also having issues with recruitment and retention, the obvious question would be, if a defined benefit plan isn’t keeping public safety workers everywhere else, why would it be any different here? We even have an academic working paper showing that retention rates saw no change when Alaska swapped from a DB to DC in 2006.

Supporters of this bill often mention that states like Washington are stealing firefighters from Alaska. That may be true at some level, but is the pension the reason they transfer to become cops or firefighters in Washington? Recent salary data in Washington shows the average police and fire salary across the state is over $122,000 per year and firefighters alone average over $130,000 yearly. Most out-of-state police and firefighters I spoke with when I worked for that pension system pointed out that they nearly doubled their salary by moving to Washington.

Then there’s the issue that Washington is also struggling to hire new public safety, specifically law enforcement, officers. The city of Seattle is struggling to convince its current officers to work overtime as security for Seattle Seahawks games because their officers say they are burnt out from all the other overtime they have to work. This is not an Alaska-specific issue, and it is a common issue across the country. In fact, from our experience of studying and working on reforms of other public pension plans around the country, Alaska’s stated 6% turnover rate is on par or lower than what most other public safety plans across the country are seeing. For example, there’s been a major pension reform push in North Dakota, and its defined benefit pension plan for public employees has a 15% turnover rate per year.

The national trend since the Great Recession of 2007-2009 has been for states to adopt greater risk controls in their traditional pension systems and to move toward a variety of plan design options to avoid re-exposing state and local budgets to the risks of worsening unfunded liabilities. Texas, Arizona, Michigan, and Colorado are among the states that have recently adopted new, risk-managed retirement plans that provide adequate retirement benefits but also do not disproportionately burden employers with financial risk. Unfortunately, HB 22 does not resemble those types of prudent reforms.

In closing, retirement plans for public workers must meet the benefit needs of its members and must not apply unnecessary costs to government budgets. While Alaska’s current defined contribution plan is not without opportunities for improvement, it stands as a valuable benefit that works well for the modern workforce. It does not burden the state with significant debt and costs. House Bill 22, as currently written, would not fulfill these same requirements and could very realistically expose the state to immediate risks of runaway costs.

The post Testimony on Alaska House Bill 22 appeared first on Reason Foundation.

• Analysis and comments on Hawaii SB 375
  • Feb. 15, 2023, comments are here (pdf).
  • March 1, 2023, comments are here (pdf).

• Analysis and comments on Hawaii SB 669
  • Feb. 15, 2023, comments are here (pdf).
  • March 1, 2023, comments are here (pdf).

The post Comments and analysis of legal marijuana proposals and regulation in Hawaii’s SB 375 and SB 669 appeared first on Reason Foundation.

Public Oversight Hearing

Chairperson McDuffie and Councilmembers,

My name is Michelle Minton, and I am a senior policy analyst with the Reason Foundation, a nonpartisan public policy think tank. I am grateful for the opportunity to provide public comment on the state of the District’s sports betting market and offer a suggestion on how the Council could make the market more competitive, attractive, and profitable for the city and its residents.

When the City Council overwhelmingly voted to legalize sports betting in 2018, it did so for many good reasons. The first, was the DC’s Council’s recognition that outlawing sports betting, like other prohibitions, was ineffective at preventing illegal sports wagering within the city, counterproductive, and costly. Legalizing, regulating, and taxing the activity was intended to give residents and visitors legal and safe options for sports betting, guard against problem gambling, and generate much-needed tax revenue for the city.  

Back in 2018, the Council was told to expect around $90 million in tax revenue during the first four years of legal sports betting in the city. Nearly three years in, however, the city has collected less than $4.5 million in taxes total, most of which has come from the live betting kiosks at Capitol One Arena.

The explanation for this poor performance is not complicated: DC’s sports betting market is simply and fundamentally unattractive to bettors. This rejection of DC’s legal sports betting market can be seen clearest in the handle collected by our licensed bookies, which, since its launch almost three years ago, has amounted to a grand total of less than $130 million in wagers.  

That is less than the handle accepted by Maryland’s seven mobile sportsbooks in January 2023 alone, which accepted a combined $440 million in bets and generated nearly $2 million in tax revenue for the state.

Online and mobile gambling are increasingly critical components of the gambling industry, comprising 20 percent of total gaming revenue in 2022. But, the online sector is even more critical for any sort of gambling market in DC since the city has no casinos and limited options for in-person betting. The performance of DC’s sports betting market was always going to depend on the performance of its mobile sports betting sector. Unfortunately, in 2019 the DC Council at the time chose to authorize just one company, Intralot, to operate a single betting app, GamBetDC, for mobile sports betting throughout the city.  

The decision to bypass the normal competitive bidding process and offer a no-bid five-year monopoly contract on mobile sports betting to a single entity might have initially seemed the quickest way to roll out legal sports betting in DC and seize the critical first-mover advantage ahead of its neighboring states like Maryland, Virginia, and West Virginia. Yet, neither that first-mover advantage nor the promised deluge of tax revenue came to fruition. In fact, during its first year of operation, GamBetDC actually cost DC $4 million.

There are many reasons why bettors dislike GamBetDC, including its troubled rollout, glitchy geolocation, service outages, and general user-unfriendliness. On top of that, however, it is also more expensive, offering worse odds and payouts than virtually any other private sportsbook, legal or otherwise. If GamBetDC were truly the only game in town, it might have generated more interest. But, it never was and never will be gamblers’ only option since they can always return to the unlicensed bookies and offshore websites they bet at before sports betting was legalized.  

Today, however, DC gamblers need not skirt the law or go far for better options; they can merely travel to the Virginia border to access one of that state’s 14 mobile sportsbooks from their phones. This problem will only worsen as the legal sports betting markets continue to open throughout the region and as lawmakers in other states adjust regulations to make those markets more competitive.  Luckily, the solution to the problem is nearly as simple as the cause: The Council should end the monopoly on mobile sports betting in DC. As proposed by former Councilmember Elissa Silverman, who introduced legislation last year, the city should create pathways for private companies to apply for mobile sports betting licenses.

Opening the market to competition would make those license holders more responsive to consumer needs, spur innovation, and reduce prices. Competition would help create a legal market that might appeal to bettors in and outside of DC and finally begin to generate the economic benefits the Council was originally promised, which other states are already reaping.

Sincerely,

Michelle Minton
Senior Policy Analyst, Reason Foundation

The post Testimony: Making DC’s sports gambling market more competitive, attractive and profitable appeared first on Reason Foundation.

Chairperson Griffith and members of the committee:

My name is Michelle Minton, and I am a senior policy scholar at the Reason Foundation, a 501(c)(3) nonprofit, nonpartisan public policy research organization. As an expert in public policy, a Maryland resident, and former smoker, I am grateful for the opportunity to submit my testimony regarding the proposed prohibition of flavored tobacco products.

The aim of the proposed prohibition to reduce adult smoking and discourage youth initiation of any tobacco or nicotine product is a laudable one. However, based on science and historical evidence, we fear this proposal will not achieve its goal, but rather lead to greater health disparities and criminal justice inequities while radically increasing the size and danger of the illicit tobacco market.  

There is no question that smoking is deadly, but guilt by association is a poor foundation for government policy. Lumping everything under the definition of “tobacco” doesn’t change the scientific fact that noncombustible sources of nicotine (such as patches, gums, e-cigarettes, and snus) are vastly less harmful than the combustible cigarettes that will continue to be freely available throughout our state. Treating products that pose less than five percent of the risk of smoking the same as deadly combustible cigarettes, which kill half their users, is simply bad health policy.  

This proposal would prohibit the sale of any flavored tobacco product, including non-combustible, and, therefore, less harmful substitutes for cigarettes. This would include the flavored versions of products, like snus, on which many adults in Maryland rely to stay smoke-free and the availability of which the U.S. Food and Drug Administration (FDA) has deemed to be in the best interests of public health. If this proposal is enacted, Maryland would outlaw, under criminal penalty, the sale of safer products that exist now or will exist in the future.  

Youth

As with nearly all prohibitions, SB 259 is predicated mainly on the need to protect youth. While concern over youth experimentation with or the use of nicotine-containing products is worthy of attention, lawmakers should recognize that most youths do not use any form of tobacco at all.  Recent data from the Centers for Disease Control and Prevention (CDC) indicates that less than two percent of youth currently smoke, and just over 14 percent use e-cigarettes. 

In 2021, the Maryland Youth Risk Behavior Survey found that just 11 percent of Maryland high schoolers reported the use of electronic cigarettes, with the highest prevalence among white students (15 percent compared to 5 percent among black students), a significant decline from 2018  when 23 percent of high school students in Maryland reported any past-month e-cigarette use. 

Outlawing legal sales of flavored e-cigarettes and other products is unlikely to make more progress for several reasons. First, the research continues to indicate that youth do not initiate vaping because of flavors. CDC surveys show the main reason youth cite for vaping is “curiosity,” followed by peer influence or family members. The results are similar for Maryland, with 39 percent of youth citing “curiosity” as their reason for using electronic cigarettes, followed by 19 percent who said they used them because a friend or family member does. Flavor availability was cited by just 9 percent of Maryland youth as the reason they use them.

Second, most youths do not acquire the tobacco products they use from licensed retailers, but rather from friends, family, or illicit sources. For example, of the 23 percent of Maryland youth who indicated current e-cigarette use in 2018, nearly half said they got them by borrowing them from a friend.

Given the current size of the illicit tobacco market and the massive increase we expect to occur in the wake of a menthol cigarette ban, the current proposal may unintentionally provide youth with greater access to flavored tobacco products through illicit dealers who typically do not verify the ages of their customers. Moreover, youth who do avail themselves of the illicit market may have greater access not just to tobacco, but other substances as well. For example, when the Department of Justice arrested two brothers in Baltimore for conspiracy to traffic $6.6 million worth of contraband cigarettes, they were also found to be dealing in illicit oxycodone.

Illicit suppliers may also choose to make their own flavored tobacco products instead of buying them where they are legal and transporting them to Maryland. With regard to menthol cigarettes,  this task would be exceedingly simple, requiring nothing more than a would-be trafficker to legally purchase unflavored cigarettes and add menthol-flavoring with flavor beads, eucalyptus oil, sprays, and numerous other methods, the safety of which depend entirely on what is used as a flavoring agent. If this prohibition is enacted, Maryland lawmakers should probably be prepared for another outbreak of “vaping-related” lung injuries as we saw in the illicit market for cannabis oil vaping cartridges during the summer of 2019.

Lastly, laudable as the desire to prevent youth tobacco use may be, research suggests that banning flavored tobacco products may result in the perverse outcome of increasing youth smoking. For example, Yale University’s Abigail Friedman found that after the city of San Francisco enacted its ban on all flavored tobacco products in 2018, youth in San Francisco were twice as likely to smoke compared to adolescents in similar jurisdictions without such bans.

Illicit Sales  

Supporters of this and similar prohibition proposals argue that outlawing products for which there is significant demand, particularly among Marylanders of color, will not lead to increased illicit tobacco trafficking nor cause increased interactions with law enforcement. But the experiences of other jurisdictions which have attempted similar bans, as well as Maryland’s own experience with drug prohibition, make such assertions hard to believe.  

The harm or benefit of any prohibition largely depends on how those living under it respond.  With regard to this proposal, some current users of flavored tobacco may respond by quitting tobacco use altogether, eliminating the risks to those individuals. However, according to the Food and Drug Administration’s own analysis of its proposed national menthol cigarette ban,  around half will simply switch to equally non-menthol cigarettes, conferring zero health benefits. Moreover, the federal government estimated that roughly half of the public health benefits anticipated by outlawing combustible menthol cigarettes would come as a result of smokers switching to flavored non-combustible products, which Maryland’s proposed prohibition would also outlaw.

In Maryland, menthol cigarettes account for about half of all cigarettes sold in the state. Even without including all of the other flavored tobacco products, this represents a significantly-sized market which, if this proposal is enacted, would be pushed into the arms of the unlicensed tobacco dealers already operating in our state. Rather than encouraging healthier behaviors from  Maryland residents, this could increase risks to their welfare, increase enforcement costs, and divert millions in tax revenue to other states and criminal operations.  

Case Study: Massachusetts 

Massachusetts implemented the country’s first state-wide ban on flavored tobacco products in  June 2020. My colleague Jacob Rich, a policy researcher for both Reason Foundation and the  Center for Evidence-Based Care Research at the Cleveland Clinic, analyzed the ban’s impact by comparing cigarette sales in Massachusetts before and after its implementation. His analysis of national cigarette sales data shows that in the year following the prohibition, sales of menthol and non-menthol cigarettes declined in Massachusetts. However, sales in bordering counties increased, leading to a net overall increase in cigarette sales within the region of approximately 7.2 million packs. This indicates that the ban in Massachusetts merely diverted current menthol smokers to equally harmful non-menthol cigarettes and pushed sales of both menthol and non-menthol cigarettes to neighboring states.  

The result was no decrease in overall tobacco use and $125 million lost tobacco tax revenue for  Massachusetts. In Maryland, tobacco trafficking is likely to be significantly worse than in Massachusetts, given our residents’ proximity and access to neighboring states which do not yet outlaw flavored tobacco.  

Public Health 

The FDA acknowledges a “continuum of risk” for the variety of tobacco and nicotine products currently on the market, with cigarettes being the most dangerous and non-combustible alternatives,  such as snus, e-cigarettes, heated tobacco, and nicotine pouches, being the least dangerous. The FDA  has already authorized some of these products, deeming their availability to be in the best interest of public health, and allowed some to even be marketed as reduced-risk substitutes for smoking.  

The proposal before this committee would unnecessarily strip adults in Maryland of access to these  FDA-authorized and potentially life-saving alternatives, now and in the future.  

According to a 2020 study by Yale School of Public Health researchers, e-cigarette flavors are positively associated with smoking cessation outcomes for adults but not associated with increased youth smoking. Moreover, the prestigious Cochrane Review concluded that e-cigarettes are more effective than traditional nicotine replacement therapies in helping smokers quit smoking cigarettes. Criminalizing the sale of flavored e-cigarettes in Maryland, which are overwhelmingly preferred by adult vapers, risks driving users of these alternatives back to smoking while also fueling illicit tobacco markets, causing net harm to our state’s public health, social welfare, and economic well-being.  

Nicotine is not risk-free and the interest in preventing youth uptake is understandable. We all want to see fewer people smoking and fewer youth experimenting with tobacco. But the desire to protect adolescents from all risks, even those that are relatively small, does not justify at-any-cost measures like the one currently under consideration. Regulators must show regard for the needs of other populations, including youth once they reach adulthood, and consider the harm such laws may have on their welfare.  

If Maryland’s state and local authorities are competent enough to regulate flavored alcohol and soon-to-be-legalized flavored cannabis in ways that preserve adults’ ability to purchase them safely and legally without encouraging youth use, they should be similarly capable of limiting the sale of flavored nicotine products to adults in Maryland, especially when they offer current and future smokers in the state a life-saving alternative to combustible cigarettes. 

The post Testimony: Maryland Senate Bill 259 would lead to greater health disparities and criminal justice inequities appeared first on Reason Foundation.

Chair Dooling and members of the committee:

Thank you for the opportunity to offer our analysis of House Bill 226 (HB226).

My name is Steven Gassenberger, and I serve as a senior policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way.

We received our first invitation to provide research and feedback to legislative members in 2019 and have closely monitored and commented on the condition of Montana’s largest public pension funds since, including during recent consideration of HJ8 (2021) by SAVA this interim.

HB226 makes two updates to the PERS system:

1. Rearranges the way the state funds PERS-DB benefits.

Every year, PERS-DB actuaries calculate the contribution amount needed to keep the fund on track to achieve full funding within the established debt payment—or amortization—schedule. This figure is commonly called the actuarially determined employer contribution, or ADEC.

Rather than using an ADEC approach to funding retirement benefits, the state’s contribution rate has historically been set in statute, making payments into the fund controlled and predictable but often rigid and unresponsive to year-to-year needs. Only when system administrators find that the current statutory rate results in the system taking more than 30 years to become fully funded, is the statutory rate increase requested and legislatively adjusted. According to a 2020 Legislative Fiscal Division report the “…current funding policies leave the systems heavily reliant on investment earnings and unable to adjust contributions to maintain an actuarially sound basis in times of significant financial declines.”

HB226 commits the state and participating employers to fully funding benefits by a set date, regardless of investment performance or political trends. During an August 2020 hearing of the Legislative Finance Committee, PERS actuaries pointed out that “states are getting away from the old statutory funding method” and that “an actuary’s dream funding policy” is a system that adjusts “to keep up with how the plan is doing.” ADEC funding is a clear way policymakers can protect retirement benefits in bad times while finally tackling an important and expensive debt on behalf of taxpayers.

2. Sets the PERS-DC benefit as the default benefit for new employees.

Upon starting their career in public employment, new hires are offered a choice between the PERS Defined Benefit (PERS-DB) retirement benefit and the PERS Defined Contribution (PERS-DC)

retirement benefit. Currently, if an employee does not make a choice within their first year of employment, they are defaulted into the PERS-DB option. Both DB and DC plans can be adequate retirement options, but the DC plan (with its portability and steady benefit accrual) tends to be more advantageous for workers who do not continue to work with their public employer for multiple decades. Since most new workers fall into that category, it is best practice to make the DC option the default.

According to PERS data, regardless of the benefit chosen, 70% of all newly hired public employees will find other job opportunities outside of public employment within five years. An additional 15% will leave within ten years. Less than 10% of employees hired between the ages of 22 and 32 will stay in public employment for the 30 years required to earn an unreduced PERS-DB retirement benefit. As designed, the current PERS-DB default policy leaves the vast majority of public employees in a nonoptimal retirement plan, subsidizing the benefits for those employees who do stay 30+ years.

What HB226 does not do.

1. HB226 does not change the PERS-DB benefit at all.

When changes to a pension system are suggested, anxiety and fear over the loss of post-employment income increases. However, HB226 does not change the PERS-DB benefit for retirees, current members, or future employees who will choose the PERS-DB benefit option going forward. In fact, the switch to ADEC funding included in HB226 should make those retirees and current members breath a bit easier as the state would now be committing to making whatever payments are necessary to fulfill the pension benefits promised to them.

2. HB226 does not make PERS benefits more expensive.

When a system and its employers move from a statutorily set contribution rate to one determined by actuarial necessity, model projections of future contribution rates are likely to show an increase in contribution rates in the short term, with a gradual decrease over time. Some misinterpret this initial increase as an increase in cost when it is in fact a reflection of the true cost of offering a guaranteed life-time benefit payment. The alternative has been a relative increase in unfunded retirement benefits (i.e. pension debt), which now total over $2.2 billion according to PERS data. The lower statutory rate has not adequately recognized this growing unfunded liability, whereas the proposed ADEC contribution would. HB226 would not only make the employer rate more proactive going forward from a debt reduction perspective, but more transparent in its acknowledgment and mitigation of accrued yet unfunded retirement benefits.

The changes offered in HB226 would address how PERS is only optimal to a fraction of public employees at an ever-rising cost, and turn the system towards best practices in public retirement benefit design. Having retirement benefit options aligned with employee trends, and on a sustainable funding regimen, empowers public employees to choose the best retirement path for themselves and their families with confidence.

Thank you again for the opportunity to speak today, and I would be happy to answer any questions.

Steven Gassenberger
Policy Analyst, Pension Integrity Project at Reason Foundation
steven.gassenberger@reason.org

The post Comments on Montana House Bill 226 (2023) appeared first on Reason Foundation.

Chair Regier and members of the committee:

Thank you for the opportunity to offer our brief perspective on House Bill 228 (HB228).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way.

We received our first invitation to provide research and analysis to legislative members in 2019 and have closely monitored and commented on the condition of Montana’s largest public pension funds since, including during recent consideration of HJ8 (2021) by SAVA this interim.

Over the last two decades, public pension systems in Montana and across the country have experienced a clear shift in their investment portfolios away from public assets like blue chip stocks to more private and opaque—and often, higher risk—“alternative” assets like private equity and hedge funds. An asset class comprising less than 6% of the Montana PERS portfolio in 2003 now accounts for nearly 30% of all assets held by the fund, making PERS and other public pension funds some of the largest, most active investors in the world.

Although it is reasonable and prudent at times for pension administrators to expand or contract the fund’s investments in various assets over time, the shift to private assets presents a new risk for policymakers and pension fund stakeholders—politicization of pension fund investments.

Nearly every lawmaker has heard at least one call for the state to invest in, or divest from, one particular company or industry sector based on political concerns of one type or another. Sometimes—like the recent calls by some pension systems to divest from Russian companies in the wake of the Ukraine invasion—geopolitics and other national security concerns may dictate certain shifts in investment strategy. Most investment or divestment calls, however, do not involve national security, but rather narrow political interests of various factions seeking to reward or punish particular industries via the investment policies of taxpayer-backed public trust funds.

Montana has two major pension systems that are underfunded by billions of dollars today, and both face a long-term challenge of hitting unrealistically high investment return assumptions in order to generate sufficient returns to fully fund promised pension benefits. Given such a difficult challenge, placing political constraints on pension fund investments would make the goal of fully funding earned benefits harder for administrators. By providing more explicit guidance and boundary setting to public trust fiduciaries with the intention of preventing politicized investment decisions, HB228 would improve governance and give stakeholders even more confidence in their system for future generations.

Thank you again for the opportunity to speak today, and I would be happy to answer any questions.

Steven Gassenberger
Policy Analyst, Pension Integrity Project at Reason Foundation
steven.gassenberger@reason.org

The post Testimony: Montana House Bill 228 (2023) appeared first on Reason Foundation.

Full Analysis of House File 100

The post Testimony: Cannabis labor peace mandate in Minnesota HF 100 violates federal law appeared first on Reason Foundation.

Thank you for inviting me to provide our technical analysis of House Bill 1040 based on our experience evaluating pension solvency and design quality nationally, as well as answer any questions the committee may have. Reason Foundation’s Pension Integrity Project operated as pro-bono technical assistants during the interim committee process that led to this bill, building an actuarial model for the North Dakota Public Employees Retirement System (NDPERS) to help inform the process. We’ve thoroughly examined the details of this legislation, as well as the funding history of NDPERS. I have provided several supplemental materials to the committee that I hope are helpful in your consideration of this bill. 

The context for the current discussion is the looming insolvency of the North Dakota Public Employees Retirement System. Today, NDPERS is estimated to be about $1.8 billion underfunded. Even according to a recent report from the National Conference on Public Employee Retirement Systems, an organization that represents and advocates for defined benefit public pension plans, North Dakota is one of just five states that has an unsustainable public pension debt trajectory. 

Without any changes, the North Dakota Public Employees Retirement System will continue to accrue unfunded liabilities, ultimately exhausting its assets in approximately 80 years. HB 1040 would meaningfully address many of the longstanding challenges facing NDPERS, help turn it away from a path of perpetual underfunding and set it on a course to be fully paid off in the next 20 years. 

First and most importantly, House Bill 1040 fixes the systematic underfunding that the North Dakota Public Employees Retirement System has undergone over the past two decades by swapping from contribution rates set in statute to an “actuarially determined rate,” or ADEC for short. ADEC is a calculation performed during the pension valuation process that shows what plan contribution rates need to be to pay for both benefits and debt service costs. The pension benefits promised to members of NDPERS are ultimately the responsibility of the state, local governments, and taxpayers. Continuing to fall short of fully funding these pension promises unfairly passes on the cost of today’s public services to future generations. Adopting an ADEC funding policy is a crucial first step in getting North Dakota on the path to living up to its pension obligations. 

Second, this bill closes the current structurally underfunded defined benefit plan to all future new hires and instead offers them a defined contribution retirement plan that our analysis finds meets the high standards of best practices in retirement system design. The proposed reform would avoid the accrual of new unfunded liabilities related to future hires and would, in most cases, offer a more generous benefit than the current NDPERS pension. 

Our analysis, along with research from the Teachers Insurance and Annuity Association (TIAA), a Fortune 100 financial services organization, presented to the interim committee, showed that for almost any age an employee begins work, the proposed defined contribution plan’s benefits would be more generous than the current NDPERS defined benefit plan’s benefits. This is due to the extremely low multiplier of 1.75% that the NDPERS defined benefit uses for calculating benefits and the high rate of turnover in the plan. I’m unaware of any other fully defined benefit pension plan with that low of a benefit multiplier. 

While the cost of offering the current defined benefit should be low, it is saddled by years of underpaying contributions and the high-interest rate on the pension system’s accruing debt. Those are the two main factors that have moved NDPERS from being overfunded in 2000 to being $1.8 billion in debt. 

To help you visualize the thought process behind this bill, think of the North Dakota Public Employees Retirement System’s unfunded liabilities as an oil spill. The two most urgent actions are: (1) to cap the spill and (2) to clean up the oil that’s spilled already. The transition to the defined contribution plan for future hires caps the spill because no new hire would ever have the risk of an unfunded liability attached to them in the future. The second course of action is to clean up the oil already spilled, which is what the shift to proper actuarial funding does. Over the next 20 years, the state and, on a smaller scale, its local governments would be able to pay off the pension system’s $1.8 billion in debt by making full actuarial contributions to the NDPERS defined benefit plan. 

To assist that paydown, the state has also put other cash infusions into this bill, beginning with $250 million in year one and another $70 million per biennium until the plan reaches full funding. Our modeling forecasts show that these added funds, coupled with the swap to a proper actuarial funding method, would save North Dakota $1.1 billion dollars over the next 20 years relative to the status quo and finally put NDPERS back on proper financial footing. 

Lastly, I’d like to make it clear to this committee that if you hear discussions about the costs associated with this bill, those costs are not the inevitable consequence of shifting to a defined contribution plan for future hires. Instead, the costs reflect the state needing to make an overdue commitment to fully pay for the retirement benefits it has already promised generations of public workers and retirees of North Dakota, who understandably expect to have the pensions promised to them adequately funded. 

Swapping to a different retirement plan design has a negligible impact on the overall costs of any pension reform bill. No new workers are needed to “fund” previously granted benefits; pensions do not operate as Ponzi schemes and should not be treated as such. The cleanup of years of underfunding is where the costs of this bill—and most pension reform bills across the country—come from.  

The post Testimony: North Dakota’s HB 1040 would address many challenges facing NDPERS appeared first on Reason Foundation.

Thank you for the opportunity to offer our brief analysis of Senate Bill 1192 and the need to clarify the fiduciary standards of public trustees. Recent changes to the U.S. Department of Labor’s rules governing fiduciary standards emphasize the need for state leaders here in Michigan to keep the attention of public pension and public trust fiduciaries focused on the needs of retirees and taxpayers. From our perspective, Michigan Senate Bill 1192 is unique in meeting those needs as it draws from the best practices of state and local pension systems throughout the country, including Michigan, in two major ways. 

First, SB 1192 sets objective investment standards and fiduciary guardrails without directing, limiting, or otherwise interfering with public pension trustees’ core mission of maximizing investment returns for active members, retirees, and taxpayers in order to deliver their constitutionally protected retirement benefits while also ensuring reasonable taxpayer costs.  

Public trustees have a duty to weigh the risks associated with each investment opportunity, and SB 1192 supports that duty by reinforcing the pecuniary factors that a public fiduciary must use to guide its decision-making, elevating risk and performance to their rightful position as central factors in the investment decision process. Depoliticizing the investment management of these important public trust funds while also providing trustees the opportunity to take into account quantifiable risk is in the best interest of all direct stakeholders.  

Second, SB 1192 recognizes the fact that public pension fund investing has changed dramatically over the last two decades, often taking on more risk in private and opaque markets in an effort to meet investment return expectations.  

Standardizing and making public board meetings, proxy votes and limited partnerships activity increases transparency in a significant portion of the public trusts and leads to greater confidence in the system’s management by taxpayers and members. While Michigan’s pension boards appear to be generally operating with decent transparency, SB 1192’s reporting process would simply standardize an already common, but not universal, practice.  

Pension benefits are paid from net investment returns, not aspirations. Senate Bill 1192 would help ensure the goals of public pension and trust fiduciaries align with reality and the means by which trustees achieve those goals are consistently monitored so that managers can be held accountable for the effectiveness of investments relative to the overall growth and resiliency of the state’s public pension and other Treasury-managed funds. 

The post Testimony: Michigan Senate Bill 1192 would depoliticize pension investments and protect taxpayers appeared first on Reason Foundation.

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

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

Read the full testimony below or download the PDF here.

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

Thank you for the opportunity to testify today. My name is Jacob James Rich, and I am a researcher at the Cleveland Clinic Center for Value-Based Care Research pursuing my Ph.D. at the Case Western Reserve University School of Medicine. I am also a health care policy analyst at Reason Foundation, a 501(c)3 nonprofit policy research organization. I write academic research on how to reduce tobacco use and was recently awarded Case Western’s Diversity, Equity, and Inclusion (DEI) award to pursue research that addresses health disparities among marginalized populations.

The potential regulation of flavored tobacco in the city of Columbus is designed to reduce tobacco use, particularly among communities of color. Given that rates of lung disease among black Americans are higher than other populations, even amid lower rates of historic tobacco use, pursuing interventions to reduce smoking rates in this population should be applauded. However, there is little evidence that comprehensive tobacco flavor bans significantly reduce rates of smoking among adults or youth, and the criminal justice implications of a menthol ban may, in fact, further exacerbate health disparities in the black community.

Policymakers should be concerned about the differential racial impact of this regulation. Menthol cigarettes are preferred by the black population. Therefore, a menthol cigarette ban would likely allow most white people to freely and legally continue to smoke their preferred cigarettes, while communities of color would need to either travel outside city limits or source from unlicensed cigarette providers. This could be disastrous, as it may increase police officer confrontations and increase the number of street sellers who are more likely to sell cigarettes to young people.

Additionally, in just about every way possible, nonflavored cigarettes cause much more harm in the United States than menthol cigarettes. First, more people smoke nonflavored cigarettes than menthol cigarettes — both adults and youth. Second, people who smoke menthol cigarettes tend to smoke fewer cigarettes a day. Given these considerations, nonflavored cigarettes are typically the more addictive product, so a true public health approach would prioritize controlling nonflavored cigarettes. It is also not clear that the regulation will even reduce smoking.

Case Study: Massachusetts Comprehensive Tobacco Flavor Ban

On June 1, 2020, Massachusetts implemented a tobacco flavor ban. I authored an analysis that compared cigarette sales in Massachusetts after the flavor ban to the year prior to the ban, finding millions of additional cigarette sales in and around Massachusetts when combined with its bordering states. It is true that menthol cigarette bans reduce cigarette sales locally. However, if surrounding localities have lower cigarette taxes — just like they did near Massachusetts and do near Columbus — total cigarette sales actually tend to increase as residents drive across borders and buy cigarette cartons in bulk.

Conclusion

In conclusion, flavor bans at the local level have little effect on public health and potentially disastrous consequences for communities of color. Massachusetts has already conducted multiple raids after implementing its flavor ban, mostly in communities of color. I urge the city of Columbus to collaborate with community members in determining an inclusive approach to improving health outcomes among its historically marginalized populations.

Thank you for your time and consideration.

The post Testimony: The negative impacts of Columbus’ proposed ban on flavored tobacco appeared first on Reason Foundation.

I want to thank the expert panelists for including this public dialogue as part of their evaluation of the U.S. Food and Drug Administration (FDA). I would also like to make it clear that my interest in this conversation is not to advocate for or against any particular product or company. My interest is in people, the individual human beings whose lives can be drastically affected, for good or for bad, by the way government agencies approach regulation. It is people who are at the heart of the discussion about tobacco regulation and this investigation into how well the FDA is fulfilling its public mission. 

While there is no shortage of debate when it comes to how tobacco products should be regulated, there is widespread agreement that the current approach adopted by the FDA is not working. The enormous challenge facing the experts on the panel is to shed light on why that is the case and what can be done to fix it for the benefit of the public. To that end, I offer the following comments, and I hope they will bring some sober clarity to a controversial issue. 

The overarching message I would like to communicate is this: Unless there is a viable pathway for safer products to enter the market legally, there will be no innovation toward safer products, and we will continue to condemn the millions of current and future adults who enjoy the non-medical use of nicotine to one of two undesirable options—illicit market products or deadly combustible cigarettes. 

Challenge #1: A comprehensive approach to tobacco and nicotine regulation that is principles-based, reasonable, and implemented consistently across all programs

For nearly every other risky or potentially harmful behavior, we recognize that incentives matter. It is generally acknowledged that regulation cannot prevent risk, but it can encourage markets and people to be as safe as possible. Seatbelts, helmets, electric vehicles, contraception, pre- and post-exposure prophylaxis, ridesharing, opioid maintenance therapy, and Narcan are just a few examples of how the market, unhindered by regulation, has provided means to reduce the potential harm of risk-taking behaviors, both for the individuals engaging in that behavior and for those around them. 

Yet, when it comes to tobacco, the FDA, whether accidentally or not, has adopted an approach that maximizes, rather than minimizes, harm. Instead of promoting public health through a regulatory process that champions innovation, the agency has made it all but impossible for such innovation to occur or, at least, for the products of innovation to make it into consumers’ hands.

The result is that, unlike all other areas of our lives, FDA regulation has preserved and protected the most dangerous form of nicotine use, smoking combustible cigarettes, from extinction. 

This is, in part, because the regulatory framework was structured around cigarettes with the goal of suppression. Unfortunately and unsurprisingly, this framework has made it impossible for truly novel products to enter the market. Many see this blockade of new nicotine products as a positive outcome, but the perverse unintended effect is that it is still easier for combustible cigarettes to gain FDA authorization than the safer products that could displace them. Worse, it leaves consumers who already rely on less harmful forms of nicotine use frustrated and most of the public confused about the relative risks and benefits of various products.  

It doesn’t have to be this way and, for a moment in 2017, it seemed the FDA recognized the need to modernize its approach in response to the market’s rapid shift toward tobacco harm reduction. In that year, the agency announced its comprehensive plan for tobacco and nicotine regulation which recognized that tobacco products exist on a continuum of risk, that nicotine, while not risk-free, is not the main source of tobacco-related mortality or morbidity, and acknowledged that in the best interest of public health, the agency’s approach to reducing the harms caused by smoking required an equal effort to promote less harmful alternatives.  

This plan, had it been implemented, would have likely addressed many of the challenges the FDA now must address. Unfortunately, while the agency has taken steps to reduce the appeal of combustible cigarettes, it has apparently abandoned its promise to promote the development of and consumer access to safer nicotine alternatives. And the continued failure of the FDA to adhere to any sort of comprehensive approach could have disastrous consequences. Take, for example, the FDA’s proposed prohibition on menthol as a characterizing flavor in combustible cigarettes and cigars. 

The goal of the proposed menthol ban is to reduce the appeal of combustible cigarettes, used disproportionately by people of color. According to the FDA’s calculations, the ban would result in less initiation of cigarettes by youth, increase smoking cessation among adults, and lead to better health outcomes in many populations.

Those calculations, however, were based on certain assumptions about how consumers might respond to such a ban, given the other options available to them. Surprisingly, a great amount of the health benefits the FDA expects a menthol ban to produce, upwards of half, come from consumers replacing combustible menthol cigarettes with mentholated versions of noncombustible e-cigarettes. The problem with this is that few menthol smokers will have this option as the FDA has so far not authorized a single mentholated e-cigarette and has given little reason to believe they ever intend to do so. 

Recommendations for FDA: 

• Issue an updated comprehensive approach to tobacco and nicotine that is principles-based, reasonable, and implemented consistently across FDA programs to guide regulation and research. In addition to the 2017 plan, we suggest they refer to the Institute of Medicine’s 2001 Clearing the Smoke report. 

Challenge #2: Compliance standards that are clear, transparent, and predictable

In the first public meeting the Reagan-Udall Foundation held on this topic, one of the stakeholders expressed his belief that tobacco manufacturers, including those of lower-risk nicotine products, have no interest in being regulated and have intentionally submitted deficient pre-market tobacco applications in order to slow down enforcement by the agency. 

But within the nicotine alternatives market are thousands of small businesses who desperately want to understand what the FDA wants from them in order to approve their products for legal sale and reasonable regulations that would protect their companies, as well as the entire market, from bad actors. 

The problem is not that the industry doesn’t want to comply with FDA regulations, the problem is that they cannot. By constructing an opaque and seemingly arbitrary pre-market authorization process and by failing to set reasonable standards, the FDA has created regulatory hurdles too high for all but the largest tobacco makers to surmount. 

Recommendations for FDA: 

• Set clear and consistent standards, requirements, and thresholds.
• Provide detailed definitions for critical terms like “appropriate for the protection of public health” and disclose how those definitions are calculated or determined.
• Be more transparent, cooperative, and flexible; convening meetings for public discourse, workshops, and unbiased explanations for its decisions and conclusions.

Challenge #3: A more appropriate balance between innovation, risk, and the needs of various populations

The FDA’s interest in preventing potentially harmful products from entering the market is understandable. However, aversion to this risk must not come at the expense of squashing innovation that could have a positive net benefit to public health. Nor should the agency’s aversion to the small potential risks presented by new products blind the FDA to the potential risks caused by a market that is too tightly regulated that it spurs the proliferation of illicit markets or denies consumers potentially life-saving alternatives.

Similarly, the FDA’s concern about youth experimentation and initiation with novel nicotine products is reasonable. But that concern should not lead to decisions made at the expense of current and future adult smokers. The FDA certainly has a role to play in addressing the population-level risks associated with novel tobacco products, but unlike matters such as those relating to product safety, these concerns do not justify the existing bottleneck created by the FDA’s onerous pre-market approval regime.

Challenge #4: More efficient pathways to the authorization of lower-risk products

Many of the challenges faced by the FDA’s Center for Tobacco Products (CTP) in recent years stem less from resource limitations than they do from choices regarding implementation and priority-setting.

The FDA has thus far given marketing orders to just a handful of noncombustible products, the vast majority of which are owned by large tobacco firms. This will continue to be the case so long as the approval process remains onerous, slow, and wasteful. Other nations have structured regulations based on standards and thresholds, which make compliance and, more importantly for the FDA, verification a far easier and less resource-intensive task.

The results of this standards-based approval regime are vibrant markets, with devices and flavors that meet consumers’ needs, without the problems of youth experimentation that have so vexed U.S. health authorities. Adopting a similar standards-based approach, with streamlined pathways, categories for products and components, and a substantial equivalence for novel lower-risk products would allow companies (as well as the FDA staff) to conduct more efficient reviews, ensuring that the rules encourage compliance, protect the public, and leave nobody behind. 

Recommendations for FDA

• Use rulemaking power to establish streamlined Premarket Tobacco Product Application (PMTA) pathways for non-combustible products rather than forcing those products likely to be significantly less harmful than smoking to an outdated pathway even more onerous than for combustible cigarettes.
• Create a standards-based regime, with a small number of reasonable criteria for products the FDA would approve, similar to how regulation occurs in France and the United Kingdom.
• Create a substantial equivalence pathway for novel lower-risk products. This could be accomplished by “deeming” all those products which have or will receive marketing orders by the FDA as “predicate” on a rolling basis.
• Create a definition for “minor” changes as opposed to “significant” changes and created a streamlined approval process for minor changes (such as those relating to packaging, container size, and other modifications not expected to increase the potential risk of the product).
• Conduct periodic performance reviews to assess how well FDA regulation is working for consumers of reduced-risk products, based on turnaround for applicants, number of approvals for sufficient applications, and market dynamism.
• Hold public meetings with small industry participants to inform such performance reviews.

The post Testimony: FDA regulation has preserved and protected the most dangerous form of nicotine use—smoking combustible cigarettes appeared first on Reason Foundation.

Dr. Robert Califf
Commissioner, Food and Drug Administration
10903 New Hampshire Avenue
Silver Spring, MD 20993
RE: Docket No. FDA-2021-N-1349 Tobacco Product Standard for Menthol in Cigarettes

Dear Dr. Califf:

Reason Foundation is grateful for the opportunity to submit comments on the proposed rule to prohibit the use of menthol as a characterizing flavor in cigarettes. Reason Foundation’s nonpartisan public policy research promotes choice, competition, and a dynamic market economy as the foundation for human dignity and progress. Reason produces rigorous, peer-reviewed research and directly engages the policy process, seeking strategies that emphasize cooperation, flexibility, local knowledge, transparency, accountability, and results. 

The available evidence suggests prohibition of menthol cigarettes will not present significant public health benefits to the population as a whole and will produce a suite of negative consequences undermining the FDA’s goals. While studied for decades, the evidence is either conflicted or directly contrary as to whether menthol cigarettes pose greater risks for smoking initiation, progression to regular smoking, increased dependence, and reduced cessation, particularly among African Americans, compared to non-menthol cigarettes. 

The FDA has not sufficiently considered the effectiveness of menthol bans and tobacco prohibitions from other jurisdictions, the severe limitations on and public misperceptions of safer alternatives such as e-cigarettes, or the unintended consequences of possible increased cigarette consumption among those menthol smokers who switch to a non-menthol product.

The FDA has also not accounted for the extremely low levels of youth cigarette use, for which menthol remains the least favored option. Furthermore, such a prohibition will result in a host of unintended consequences, including increased tobacco smuggling, burdens on law enforcement, and more frequent interactions between law enforcement and minority communities. 

To read the full published comment, please click here or here (.pdf).

The post Public Comment: Menthol prohibition would come with negative consequences appeared first on Reason Foundation.

Chair Huffman and members of the committee:

Thank you for the opportunity to offer our brief perspective on the three interim charges before you today as they pertain to the state’s public pensions.

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. Our work in Texas includes actuarial modeling and technical analysis related to the state’s most recent and impactful reforms, Senate Bill 12 of 2019 and SB 321 of 2021. These public pension reforms represent critical initial steps toward making the state’s pension systems as strong and effective as possible.

Increasing contributions to the Teacher Retirement System of Texas (TRS) and modernizing the Employees Retirement System of Texas (ERS) benefit have taken two public pension systems that were on a financially unsustainable path and have redirected them toward long-term solvency. However, the interim charges being discussed today show us there is still an opportunity to improve on how the state and taxpayers offer retirement security to public employees. These improvements can be secured without taking on the risks of unfunded liabilities and surprise cost overruns borne by taxpayers.

Between 2000 and 2019, ERS went from having an $867 million surplus to having $14.7 billion in unfunded pension obligations. By 2019, 64% of new hires under 35 were expected to leave public employment within five years, forfeiting their contributions made on their behalf by their ERS employer. Only 14% were expected to reach a full-career, un-reduced retirement benefit. For many years the state contributed a fixed percentage of payroll toward ERS that fell far short of what actuaries calculated was necessary every year to properly fund the plan. Worse, investment markets also shifted away from high-yielding fixed assets over that period, with many public pension systems opting to increasingly rely on less transparent—and generally higher risk—alternative asset investments to achieve expected returns.

In short, Texas was structurally underfunding a retirement plan designed to address a shrinking cohort of public employees’ needs while taking on more investment risk in an unsuccessful effort to stop the problem.

During the 2021 regular session, Senate Bill 321 tackled these problems head-on. It established a debt payoff plan and a date for when all ERS’ unfunded liabilities must be fully funded. It also provided a new, risk-managed retirement option for new hires that will help ensure that state workers of the past, present, and future can rely on a strong and sustainable ERS system. These solutions also minimize taxpayer exposure to severe long-term financial risks.

Unfortunately, many of the elements that plagued ERS at that time continue to plague TRS today. Although additional state contributions and historic market returns have improved the fiscal posture of TRS on paper, outdated assumptions, funding policies, and benefit offerings make it less likely that the increased contribution levels set by SB 12 in 2019 will ever fully fund all earned benefits going forward or meet the needs of modern educators.

Actuaries advising the TRS board recently warned members about a critical element underpinning the future solvency of the system that needs updating: the current 7.25% investment return assumption. By showing how TRS uses one of the highest investment return assumptions among major public systems—the national average has fallen to 7% over the years, with major plans like CalPERS now lowering assumptions into the 6-7% range—plan actuaries offered legislators a hint of what is in store for the retirement system over the next two decades. Investment revenue is expected to underperform in the next decade relative to expectations, which combined with contribution rates being artificially capped through statute creates the conditions for unfunded liabilities to steadily accrue over the next decade—just as it has done over the last two. 

Obviously, lowering investment revenue expectations will mean actuarial cost projections will reveal previously unrecognized costs. Other states have used surplus funds or large investment gains to cover the actuarial cost of using a lower investment return assumption to avoid accruing debt. That method of minimizing risk may be particularly interesting to lawmakers looking for ways to effectively use supplemental surplus revenue without growing government, as well as retirees who depend on the plan being on the path to full funding in order to receive a cost-of-living adjustment (COLA).

Our team will be sharing actuarial modeling throughout the legislative interim that covers both ERS and TRS, highlighting areas of opportunity from a technical perspective. We hope this will help facilitate productive dialogue among stakeholders.

Finally, nearly every lawmaker has heard at least one call for Texas to invest in or divest from one particular asset or another. Sometimes—like the recent calls by some pension systems to divest from Russian companies in the wake of the Ukraine invasion—geopolitics and other national security concerns may dictate certain shifts in investment strategy. Most investment or divestment calls, however, do not involve national security, but rather narrow political interests of various factions.

The impact investment returns have on both the cost and effectiveness of retirement benefits makes placing political constraints on pension fund investments a dangerous proposition. Not only does it make the goal of fully funding earned pension benefits harder for administrators, but it rarely achieves the intended political impact. Instead of preferential treatment for certain industries, an across-the-board update of the rules and expectations set for public pension fiduciaries and enhanced reporting requirements would improve governance and give stakeholders even more confidence in their system for future generations.

The Texas state legislature has been a national leader in updating public retirement design options that empower public employees to choose the best retirement path for themselves and their families. But there is more work to do. We look forward to following up with more technical analysis and exploring these issues in greater detail throughout the interim.

The post Testimony: Teacher Retirement System of Texas can improve funding policies to benefit taxpayers, employees appeared first on Reason Foundation.

A version of this testimony was given to the Louisiana Senate Committee on Retirement on April 25, 2022.

Thank you for the opportunity to share our project’s perspective on Senate Bill 438 (SB 438) and the proposed new hybrid retirement benefit under the Louisiana State Employees’ Retirement System (LASERS). 

My name is Ryan Frost, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Prior to joining Reason, I spent seven years as the research and policy manager for the Law Enforcement Officers and Firefighters Pension System in Washington state. Our team has engaged stakeholders in Louisiana dating back to 2016, offering quantitative research and pro-bono technical assistance to advance retirement security for public servants in a financially responsible way.  

Proposing an alternative benefit design to offer new public employees is commendable because even after the historic investment returns in 2021, LASERS is still only 66% funded with $6.8 billion in unfunded pension obligations. Although current amortization schedules are set to retire some of that debt, market forecasters also expect returns to be less than what LASERS actuaries assume across all asset classes. Lower returns would increase the probability of more unfunded liabilities in the near future.  

LASERS’ financial health aside, the plan’s current benefit structure is grossly inadequate for most public employees. Only 2.5% of new hires joining LASERS at age 35 will stay in the system long enough to accrue a full retirement benefit. Seventy percent of LASERS members leave with only their employee contributions to return to them (without interest). The current LASERS benefit is simply not designed for the modern public employee. These increasingly mobile employees are being penalized in Louisiana when leaving public employment. 

While previous attempts to implement a hybrid LASERS benefit—most notably back in 2018 under Senate Bill 14—would have addressed these issues, this current proposal includes changes that would likely prevent the state and taxpayers from seeing any meaningful cost reduction or financial risk reduction. 

Reason Foundation found that the use of a 1.8% multiplier (as outlined under the guaranteed benefit portion of the bill) would make LASERS an extreme outlier among hybrid plans. For example, the State Teachers Retirement System of Ohio whose members, like LASERS members, do not pay into Social Security operates using a 1% multiplier. Hybrid defined benefit (DB) and defined contribution (DC) designs typically use a 1.0%-1.25% multiplier for the guaranteed benefit and a more prominent defined contribution portion to broaden the number of members served by the plan. 

Another feature of this proposed plan that would be less than ideal for employees is the stipulation that hybrid members must annuitize their DC balances within LASERS. If a member separates from service for any reason (including retirement) and they want to withdraw their DC money in a lump sum, they are forced to also withdraw their DB contributions and forfeit any accrued pension benefit. They forfeit that benefit and all employer contributions made to the DB as well while gaining zero interest on any contributions made to the DB. 

No other hybrid plan has this stipulation. For a typical hybrid plan, if a member separates mid-career, they can take their DC money with them and leave their DB account alone. If a member separates at retirement–no matter what they choose to do with their DC balance–they may either receive their accrued pension or take a refund of all DB contributions (both employer and employee contributions plus interest). 

Adding this anomalous stipulation unduly jeopardizes members’ retirement security. Employees should be allowed to keep their DB benefit intact even if they withdraw their defined contribution benefit. In the end, the guaranteed benefit portion of the proposed hybrid plan slightly increases benefits for new hires while maintaining the same cost and risk challenges that led to LASERS’ current funding issues.  

While a new hybrid design for LASERS members could be a prudent step forward, Senate Bill 438, as currently drafted, lacks the risk and cost-saving mechanisms of other better-designed hybrid plans.  We commend legislators, members, and stakeholders willing to examine these important public pension issues and thank you again for the opportunity to share our perspective. 

The post Testimony: Louisiana Senate Bill 438 could cause public pension woes appeared first on Reason Foundation.

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

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

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

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

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

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

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

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

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

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

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

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

Chairman Smith, Ranking Member Rounds, and fellow committee members:

My name is Baruch Feigenbaum. I am senior managing director for transportation policy at Reason Foundation, a non-profit think tank with offices in Los Angeles and Washington, D.C. For almost five decades Reason’s transportation experts have advised federal, state, and local policymakers on market-based approaches to transportation.

My Credentials on Today’s Topic

I am a graduate of the Georgia Institute of Technology with degrees in public policy, transportation planning, and transportation engineering. My master’s thesis studied induced demand in growing areas and potential solutions. Before working with Reason Foundation, I managed a vanpool program in suburban Atlanta and handled transportation issues for former U.S. House Representative Lynn Westmoreland. 

With Reason, I have authored research studies on policies that could improve mobility, highway quality, highway congestion, urban and rural transit, and the effectiveness of infrastructure financing and funding. I have worked with more than a dozen states and numerous counties to implement transportation policy reforms. I currently serve on the Transportation Research Board of the National Academies of Sciences and Intelligent Transportation Systems Committee, as well as chairman of the Bus Rapid Transit Subcommittee. Finally, I am currently writing a book on how to create a 21^st-century transit system. My testimony today draws on these experiences. 

Overview of Testimony: The Differences Between Urban and Rural Areas and Between Transit-Dependent and Transit-Choice Customers

While much of the focus in the transit world is understandably on providing mobility in urbanized areas, not enough attention is paid to rural areas. More than 60 million people live in rural areas, and some of them rely on transit services to reach their jobs, doctors, and grocery stores. 

In the transit world, we often distinguish between transit-dependent and transit-choice riders. Transit-dependent riders are those that do not have the means to access private vehicles. Transit-choice riders are those who do have the means to access private vehicles but choose transit services. Due to economic challenges in rural areas, a growing percentage of rural riders are transit-dependent today and existing transit service in many areas is inadequate. Nationally, the average transit trip takes twice as long as driving, but in rural areas the multiple is even greater. Since most rural transit riders are dependent on transit, my testimony is going to focus on serving these individuals. 

Obviously, transit service looks different in rural areas than in urban areas. While a heavy-rail subway line makes sense for New York City and a bus rapid transit line makes sense for Atlanta, fixed-route transit is seldom the best solution in rural areas. I have five recommendations for improving transit services to best serve rural populations, especially transit-dependent riders. 

Recommendation 1. Right-Size Transit Vehicles to Meet Rural Needs

While there may be some rural towns that can support a few fixed-route bus service lines, the better solutions for these rural municipalities are going to be more flexible options like demand-response transit, where vehicles alter their services to meet riders’ demands, and paratransit, which provides tailored service to people with disabilities. Several different types of vehicles are ideal for providing mobility in rural areas. The first vehicle type is a privately-owned automobile, such as a ride-hail vehicle or taxi. Many rural areas have operated dial-a-ride taxi- or Uber-like services for years. The second type of vehicle is a van that seats between seven and 15 people. These vans are often used for vanpools in urban areas but can operate as flexible, mini-buses in rural areas. The vans can transport multiple passengers from residential areas to places like grocery stores and medical complexes. Taxis and ride-hail vehicles are operated by private operators, such as Yellow Cab and Uber. Vans can be operated by the public, private, or non-profit sectors. 

For either option, there are two principal ways for citizens to schedule rides:

• By phone or by website a day before the trip, in which case a vehicle arrives at a set time the next day;
• In real-time, in which case the vehicle arrives in a two-three hour window the same day.

Recommendation 2. Contract Out Service or Create a Non-Profit to Operate Service

While the public sector has been the traditional operator of transit services, my research has revealed that contracted transit services and services delivered by non-profit agencies are better and cheaper than public-sector provision. With contracted services, the transit agency enters into a contract with a private operator, such as First Transit or TransDev. These contracts can specify specific metrics to ensure accountability and results. For example, contracts can detail the maximum number of minutes a rider can be made to wait before being picked up, the hours of day the service will operate, the geographic locations the service must include along with any restrictions on the service. Often, different geographic areas will be bundled together if one area requires higher subsidies for operating transit than another area. 

Successfully contracting out service requires both carrots and sticks. The transit operator must pay a penalty if it does not meet the contractual standards. However, the transit operator can also receive bonuses if it exceeds the standards and implements additional improvements. These contracts are open to competition and re-bid every three-to-seven years, with rigorous selection criteria, including the incumbent providers’ performance, used by the transit agency evaluating the bids. 

Another possible rural transit model is having a non-profit entity operate the service. Rural Transit Service, which operates in upstate New York, is a good model. In that case, the transit service southwest of Buffalo relies on a network of 130 volunteers to drive and maintain the vans, as well as handle administrative services. Most riders contribute money to their trips, but no riders are denied service for inability to pay. Community members also provide funding for the service. 

It is good public policy to subsidize a transit-dependent individual, who otherwise would not be able to get to work and would then need to rely on additional government assistance. Absent transit subsidies, for example, fixed-income retirees may not be able to reach important medical appointments. It makes less sense to subsidize other transit-choice riders who have the means to pay for the full costs of their transit trips. In the U.S., it is clear that all transit systems require some level of subsidies to operate, but the goal should always be to minimize subsidies while providing quality transit services to those most in need of them.

Recommendation 3. Reduce Regulations

One of the challenges that rural transit agencies have is abiding by certain onerous federal regulations. Some small counties, such as Randolph County, Georgia have actually chosen not to offer transit service because, in part, officials say that they cannot afford the staff needed to comply with regulations. To help reduce the burden on these rural systems on things like the Federal Transit Administration’s National Transit Database reporting, the federal government could allow systems below a certain size threshold to report data for their transit agency profiles but make it optional for them to report full data for the nine categories in the database, such as monthly ridership.  Congress could also eliminate costly mandates, such as Buy America, provisions that drive up costs for local governments. Many of the vans and innovative transit vehicles agencies use today are not made in the U.S., limiting the types of vehicles that transit operators can use. And because it limits competition, Buy America increases capital costs for transit vehicles built in the United States by an estimated 32%. Federal officials should examine what existing laws can be modified. For example, the Department of Transportation has proposed amending 2132-AB38 on charter service regulations of buses and vanpools and 2132-AB40 on bus testing. It is not clear what changes the Biden administration would like to make at this time, but I would recommend allowing more diverse ownership of charter service buses and ensuring bus testing conforms to how buses operate in the real world. 

Recommendation 4. Try to Improve Efficiency

Rural transit services typically struggle to cover even a small share of their costs. My Reason Foundation colleague Marc Joffe and I examined the National Transit Database to determine the farebox recovery rate for rural systems. Most systems had a farebox recovery rate of 5%-to-25%, which lags larger urban transit agencies that have farebox recovery rates of close to 40%. While several systems had farebox recovery ratios above 90%, some systems had recovery rates below 1%. Transit systems with farebox recovery rates below 1% should not charge fares, as the collection costs likely exceed the revenue collected. Rural transit services should set a goal for a farebox recovery rate of 20%.  To meet that goal, reducing staff without reducing transit service by installing a computerized dispatch system and ensuring that union contracts allow flexibility in job duties can help. Leasing vehicles or transferring liability coverage to a business association or larger government may help. Finally, determining exact business rules as to when a rider has to request service and what the drivers can and cannot do above and beyond the contract is critical. 

Recommendation 5. Focus More on Local Funding Sources and Less on Federal Funding

Funding is often the biggest challenge for rural transit systems. The recently passed Infrastructure Investment and Jobs Act (IIJA) provides a 29% increase in guaranteed federal transit funding to $91 billion over five years. Rural transit can often be funded by several different grant programs. There is a new $2 billion rural transportation discretionary grant program dedicated to rural areas. Infrastructure for Rebuilding America (INFRA) and Rebuilding American Infrastructure with Sustainability and Equity (RAISE) discretionary grants are required to award some funding to rural areas. However, my research finds local government funding is more important than federal funding in prioritizing needed transit projects because local officials know their communities best and focus more on the quality of a system and less on getting the money out the door. The state and local funding comes on top of federal funding providing a more robust revenue source. Further, state and local governments that provide a greater share of funding for a project are more likely to receive federal grants. 

For example, North Carolina bundles federal and state funds for all 100 counties into its Rural Operating Assistance Program to maximize effectiveness and prioritize needed projects and services. The state distribution amounts are based on a formula that includes population, geographic scope, and prior funding. In rural areas, this program has two components: The Elderly and Disabled Transportation Assistance Program and Rural General Public Transportation. The state also has a Home and Community Block Grant program that provides funding for the transportation of elderly residents. In addition, many local counties and/or cities provide their own funding. In some counties for every dollar of federal funding, they receive three dollars of state and local funding. 

Thank you for the opportunity to testify today on the need to improve rural transit services to better serve transit-dependent riders. I would be happy to answer any and all questions, either orally or in writing. 

The post Testimony: Improving transit services in rural communities appeared first on Reason Foundation.

Thank you for allowing me the opportunity to submit testimony on House Bill 7870. 

My name is Guy Bentley, and I am the director of consumer freedom at the Reason Foundation, a 501(c)3 nonprofit think tank. The consumer freedom project analyzes and promotes policy solutions that improve public health while avoiding unintended consequences and protecting consumer choice.

The intention behind this bill to limit tobacco use, especially among youth, is to be applauded. However, the evidence of the success of such prohibitions should raise significant concerns that the ban would promote further inequalities in the criminal justice system, push sales and tax revenue to other states, increase the illicit tobacco trade, and fail to improve public health in Rhode Island.

Case Studies: Massachusetts, Canadian Provinces, and the European Union

Massachusetts’ ban on flavored tobacco products went into effect in June of 2020. The Reason Foundation has conducted a yet-to-be-published, preliminary analysis of the ban’s impact which compared cigarette sales in and around Massachusetts the year prior to the ban and the year following the ban’s implementation. We found that there was a net increase in cigarette sales of 7.2 million packs sold within Massachusetts and in its bordering states. 

These figures likely underestimate cross-border trade because they do not also account for lost sales of flavored e-cigarettes, smokeless tobacco, or cigars. Massachusetts also saw a 15.6 million pack increase in non-menthol cigarette sales as consumers switched brands.

According to the Tax Foundation, Massachusetts lost $125 million in tobacco revenue for the fiscal year 2021.

Furthermore, according to a study published by the Journal of Law and Economics, Canadian provinces’ menthol prohibition significantly increased non-menthol cigarette smoking among young people, resulting in no overall net change in youth smoking. As for adult smokers, provincial menthol bans simply shifted smokers’ cigarette purchases away from grocery stores and gas stations. 

The world’s largest experiment in menthol prohibition is the European Union, which includes 27 countries and has a population of 447 million people. The EU ban became effective in May of 2020. Prior to the ban, Poland had the largest menthol cigarette market in the EU, making up 28 percent of total sales. An analysis funded by the Norwegian Cancer Society in partnership with the Polish Ministry of Health found there was no statistically significant decline in cigarette sales after the ban.

These results are important not just because they demonstrate an immediate economic impact on jurisdictions that introduce prohibition but, thanks to cross-border trade and the substitution of non-menthol cigarettes, any predicted public health benefits are likely to be severely limited. In other words, the loss in tax revenue is unlikely to be offset by lower health care costs or improved public health.

Public Health and Disparate Impacts

Advocates for the prohibition of menthol cigarettes correctly observe that a disproportionate number of black smokers choose menthol products. In Rhode Island, some hope the ban would dramatically reduce the state’s smoking rate. While these populations are more likely to use a menthol product while white smokers are more likely to use a non-menthol product, smoking prevalence is, in fact, lower among black youth and adults.

Black non-Hispanic young people are less likely to smoke than their white peers. In Rhode Island, 4.1 percent of white high schoolers smoked in 2019. For black Rhode Island high schoolers, the number was 3.4 percent. These data conform to Reason Foundation’s study published in 2020 showing that states with higher menthol cigarette use tend to have lower, not higher, youth smoking rates.

From a public health standpoint, as black adults and young people smoke at lower rates than non-Hispanic whites, it’s hard to ascertain why non-menthol cigarettes, which are equally dangerous, would not be subjected to prohibition while menthol products would be. 

Because menthol cigarettes are overwhelmingly the choice of minority smokers, prohibition will necessarily lead to a concentration of the illicit tobacco market in minority communities. The American Civil Liberties Union and other civil rights groups warn that the prohibition of menthols could disproportionately negatively impact people of color, trigger criminal penalties, and prioritize criminalization over public health and harm reduction. The National Organization of Black Law Enforcement Executives (NOBLE), Grand Council of Guardians (GCGNY), National Association of Black Law Enforcement Officers (NABLEO), and Law Enforcement Action Partnership (LEAP) have argued that prohibitions of all kinds disproportionately affect communities of color, and this is especially the case when it comes to banning menthol cigarettes.

Food and Drug Administration Review and Tobacco Harm Reduction

Last year, the Food and Drug Administration authorized an e-cigarette as “appropriate for the protection of public health” for the first time. The FDA is also currently reviewing e-cigarette product applications that contain reams of data on safety, efficacy, and potential threats to youth. If the FDA finds that any product is a net harm to public health, it will be removed from the market. But if the product is deemed to be net beneficial, it will be authorized for sale as appropriate for the protection of public health. 

If Rhode Island chooses to ban these products prior to the FDA concluding its review, it would limit consumer access to products the FDA may deem as a positive for public health. According to a survey conducted by the International Tobacco Control Policy Evaluation Project, 57 percent of vapers said they would continue vaping if flavors were banned and half said they would find a way to get their preferred flavor. Of most concern was the finding that close to one in five vapers said they would stop vaping and smoke instead. 

While prohibiting e-cigarette flavors other than tobacco may seem an attractive solution to the problem of youth vaping, policymakers should recognize that, according to the 2021 National Youth Tobacco Survey (NYTS), 89 percent of high schoolers are not using e-cigarettes at all and 95 percent are not using them frequently. Youth vaping has also fallen to its lowest point in seven years.

Furthermore, data released by the Centers for Disease Control and Prevention (CDC) shows flavors are not the leading reason why youth initiate vaping. According to the CDC, the primary reason youth initiate vaping is curiosity, followed by use by a friend or family member. Availability in flavors, such as mint, candy, fruit, or chocolate comes as a very distant third. Banning flavored tobacco products may also induce perverse outcomes contrary to the promotion of public health among adolescents. 

In 2018, San Francisco banned the sale of all flavored tobacco products, including e-cigarettes with flavors other than tobacco. Yale University’s Abigail Friedman found that after the ban was enacted, San Francisco area youth had double the odds of smoking compared to similar jurisdictions with no tobacco flavor ban.

“While neither smoking cigarettes nor vaping nicotine are safe per se, the bulk of current evidence indicates substantially greater harms from smoking, which is responsible for nearly one in five adult deaths annually. Even if it is well-intentioned, a law that increases youth smoking could pose a threat to public health,” said Friedman. 

According to a 2020 study by researchers at Yale School of Public Health, the use of e-cigarette flavors is positively associated with smoking cessation outcomes for adults but not associated with increased youth smoking. The prestigious Cochrane Review concluded e-cigarettes are more effective than traditional nicotine replacement therapies for helping smokers quit.

Prohibition of flavored e-cigarettes, which are overwhelmingly the choice of adult vapers, risks driving vapers back to smoking, fueling illicit markets, and forcing the closure of Rhode Island vape shops. 

The post Testimony: Rhode Island e-cigarette prohibition could create unintended consequences appeared first on Reason Foundation.

Good afternoon, my name is Ryan Frost, and I’m a policy analyst with the Pension Integrity Project at Reason Foundation. I’ve been with Reason since 2019, and prior to that, I spent seven years as the Research and Policy Manager for the Law Enforcement Officers and Firefighters Pension System in Washington state, or LEOFF 2 for short. LEOFF 2 has been one of the top-three best-funded pension plans since its inception in the mid-1970s, and that’s primarily been accomplished by keeping up to date with best practices in pension plans and funding design.
Reason Foundation’s pension team has played a key pro-bono technical assistance role on 55 pension reforms over the past six years, including the two largest being the public safety plan in Arizona and the Texas employee’s retirement system. Those reforms include new defined benefit pension tiers, new hybrid design tiers, new cash balance pension tiers, and new defined contribution plan tiers.

Accordingly, our team is agnostic on plan design. We are not ‘defined contribution or bust’ zealots; in fact, most of the reforms we’ve worked on have included a defined-benefit pension component. But each of those reforms has at its very foundation a way of paying for the pension system that ensures costs do not eat into state and local budgets and that these important benefits earned by employees are fully funded for their retirement.

House Bill 55, which would open a new defined benefit tier for public safety officers and firefighters hired since 2006, does far too little to prevent growing unfunded pension liabilities. Supporters of HB 55 claim that certain tweaks to the “new” pension would eliminate the financial risk to the state. However, these tweaks have faced minimal actuarial scrutiny to support proponents’ claims, and there is no publicly available long-term actuarial forecasting or stress testing to justify such a financially profound policy decision.

While it does have a few modest improvements relative to the legacy pension tier, HB 55 is a weak pension design and still lacks sufficient controls to justify the assertion that there is no risk to state/local budgets, as there is with the current defined-contribution plan.

Recognizing the need for a long-term perspective on funding and costs, the Pension Integrity Project has prepared preliminary modeling of the proposed new House Bill 55 tier. It is important to note that these results do not include potential impacts on the legacy Alaska Public Employees’ Retirement System tier and its current $4.6 billion in unfunded liabilities.

The results of our analysis indicate that HB 55 would very likely expose the state to new and growing unfunded liabilities. Instead of the $743 million paid in employer contributions over the observed 30-year window if all current actuarial and demographic assumptions are met, Alaska would be responsible for paying $887 million instead due to the need to service growing unfunded liabilities. That analysis is available on our website.

Public pension systems operate over generations, but state legislators have only been presented with minimal five-year cost projections based on an assumption that the proposed pension tier would do the impossible: hit all its actuarial assumptions. In short, HB 55 only works as intended if Alaska PERS does something it has never once accomplished in its entire history—get 100% of its assumptions 100% right, 100% of the time.

Despite practically flying blind to the risks and long-term trajectory of the new pension tier, the Alaska House passed it out of its chamber.

The updated fiscal note from Buck is basically a carbon copy of its previous fiscal note, only being updated for results of the latest actuarial valuation. A proper actuarial analysis of the proposal still has not been conducted.
Take, for example, a bill recently passed in Washington State for its police and fire pension system. That system has been overfunded since its inception in the mid-1970s through prudent risk analysis and funding design. Due to decades of hard work, the plan managed to create a side account to pay (in full) for any future benefit increases. The first benefit increase was passed this year: a multiplier increase.

The Washington state actuary’s fiscal note for that multiplier increase—a relatively minuscule task when compared to a complete pension design overhaul—is a shining example of the level of detail that must be considered when adjusting a pension benefit. A few things that Washington state’s fiscal note includes that the Buck fiscal note does not:

• 25-year costs to the state of Alaska;
• Stochastic modeling to assess the effect of unexpected experiences under thousands of potential outcomes;
• The expected chance that contribution rates will exceed 10%;
• Sensitivity analysis on retirement rates due to the effects of bill passage;
• And, funded status trajectory going out 30 years.

Even with the limited scope and rigor of the updated fiscal note, Buck’s analysis still raises some major concerns for state policymakers, stating, “Adverse plan experience (due to poor asset returns and/or unexpected growth in liabilities) or changes to more conservative assumptions will increase the PERS DB [defined benefit] unfunded liabilities, resulting in higher contribution rates.”

On day one of this new tier being opened, the plan will have up to 15 years of liabilities already on its books because House Bill 55 stipulates that, for any member who chooses to enter the new tier, all their previously earned service in the DCR will be transferred using an unrealistically high discount rate of 7.38%. This number is completely out of step with national trends, where the national median is now dropping under 7%. This sets up a ‘pension obligation bond-like situation where any downturn in market performance or lowering of investment return assumptions would quickly create unfunded liabilities in the pension system.

Previous proposals to put public safety into a defined benefit plan, specifically House Bill 79 (2020), set the plan’s assumed rate of return at 7%. HB 79 is nearly identical to HB 55, apart from a few changes to assumptions and minimum employee contribution rates.

Why is this proposal going the opposite direction on investment risk than previous iterations by using a higher rate, 7.38%, than the previous proposal? Our hypothesis is that the 7% assumption would raise the normal cost too high for a cost-neutral argument to hold any water because even fewer dollars would be going to legacy debt. Additionally, Buck Global notes a critical point—the current defined contribution (DC) benefit offers nearly the same retirement benefit as proposed under HB 55, suggesting that simply increasing the employer contribution in the current DC plan and adding more annuity purchase options in the current plan could yield an equivalent benefit and provide lifetime income options. Buck finds, “On average, approximately 94% of DCR service as of June 30, 2021 was credited to PERS DB.”

This means that the assets in the current DC plan holdings would cover nearly all the equivalent liabilities in the proposed new HB 55 pension tier, suggesting that the current retirement offering could potentially be improved to achieve the same policy goals. It’s also another potential explanation for why the supporters decided to use a 7.38% discount rate. Using a 7% rate would make the service-credit purchase more expensive at the time of transfer, meaning that members entering the pension tier would be effectively taking a benefit cut.

What would it take to push the actuarially determined rate over the 9% employer contribution floor? This is the first question that should have been asked in the first committee hearing on this bill. We have provided a list of other questions that should have been asked in a document accompanying this testimony.

There is a strong likelihood—and you don’t know how much until you get a real actuarial analysis beyond the minimal Buck fiscal note analysis—that the arbitrarily high 7.38% discount rate will need to be lowered within the first five years of the new tier’s life to keep up with the larger pension system trends. When that happens, costs will necessarily increase.

House Bill 55 is being proposed by public safety associations concerned with recruitment and retention challenges. Proponents claim they are having trouble recruiting and retaining members due to the lack of a defined benefit pension for their members. However, this claim does not hold up to the data as 86% of police stations across the country are facing a shortage of members. Every one of those stations, outside of Alaska, has a pension with some defined benefit component. In fact, we have an academic working paper that shows retention rates did not change when Alaska swapped from a DB to DC in 2005.

The national trend since the Great Recession of 2007-2009 has been for states to adopt greater risk controls in their traditional public pension systems and move towards a variety of plan design options with the goal of avoiding re-exposing state and local budgets to the risks of worsening unfunded liabilities over the long-term. Texas, Arizona, Michigan, and Colorado are among the states that have recently adopted new, risk-managed pension-like guaranteed retirement plans that also do not disproportionately burden employers with financial risk.

Unfortunately, HB 55 does not resemble those types of prudent pension reforms but it could be redesigned to do so if given sufficient time and if informed by robust actuarial modeling and stress testing analysis.

In conclusion, there is a way forward that can meet whatever needs this legislative body and stakeholders desire, but House Bill 55, as currently written, would not put this new tier on a successful path. We’d be happy to work with the committee and stakeholders to help draft a design that best meets those needs and follows current best practices in pension design.

Thank you for your time today, and I’d be happy to answer any questions.

The post Testimony on Alaska House Bill 55 and Buck’s updated fiscal analysis appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 10 (SB10) and the proposal for allowing Optional Retirement Plan (ORP) participants to transfer their accrued liabilities to the Teachers’ Retirement System of Louisiana (TRSL).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

Allowing ORP participants in higher education to revoke an irrevocable election they made upon entering the system, and transfer retirement liabilities to TRSL, contradicts the principles of sound pension funding and is likely to add to the system’s $9.3 billion in debt. 

The Legislative Auditor’s actuarial note makes clear SB10 is “likely not cost-neutral because the actuarial cost for the purchase is based on TRSL’s ‘comparatively generous assumptions’ and the “lack of individual underwriting that an insurance company would undertake.” 

The reason the proposed transfer of ORP funds creates a real risk of near-term TRSL unfunded liability increases lies in the system’s 7.25% assumed rate of investment return. Considering most state pension plans across the country are lowering their growth rate expectations down to, or below, 7%, any future investment underperformance—which capital market forecasts suggest is likely in the decade ahead—and/or adjustments to TRSL’s investment return assumptions will automatically create additional unfunded liabilities. 

Although the state auditor points out that this proposed change will cost more for state taxpayers, there is still no formal actuarial analysis, stress testing, or concrete reporting on exactly how much this added cost will be. Without a detailed analysis of the costs and financial risks that the state could incur under various investment outcomes, it is impossible to properly evaluate the merits of this proposed policy. 

Transferring ORP assets may not be a good deal for employees either. From the transferee’s perspective, ORP vendors may have investments with liquidity restrictions limiting the ability to comply with the 100% transfer requirement within the transfer window period. Other investments may also have early withdrawal reductions that affect the amount eligible for transfer. Even the timing of market conditions could lead to employees withdrawing their ORP at a low value.

SB10 is likely to shortchange members, increase the state’s pension debt, and weaken a TRSL system already burdened with $9.3 billion in unfunded but constitutionally protected retirement benefits.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Louisiana Senate Bill 10 is likely to increase pension debt and weaken retirement system appeared first on Reason Foundation.