The story
on public pensions in The New York Times (below) was egregious enough and is receiving enough attention, that we
wanted to share both it and the NASRA response, ASAP.
Also, since The Times article refers to the recent study by Joshua Rauh,
assistant professor at Northwestern University, which projects pending insolvency dates for state pension plans, accompanying
the NASRA response to The Times is a plain-language response to the recent Rauh study, A response to the Rauh study was prepared
originally by Paul Zorn and Mita Drazilov at Gabriel, Roeder, Smith, & Co., Paul Angelo at The Segal Company, and me,
and was completed and distributed a couple of weeks ago.
To accommodate requests that the response to the Rauh study be simplified
for the benefit of policymakers and members of their staff, we have prepared and linked below a “plain-language”
version of the Rauh response. We remain grateful to the authors of the original response for their help in its drafting. kb
New York Times: States grapple with changes to pension
benefits amid legal protections
In Budget Crisis, States Take Aim at Pension Costs
By Mary Williams Walsh June 19,
2010
Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct
benefits, to appease taxpayers and attack budget deficits.
Illinois raised its retirement age
to 67, the highest of any state, and capped public pensions at $106,800 a year. Arizona, New York, Missouri and Mississippi
will make people work more years to earn pensions. Virginia is requiring employees to pay into the state pension fund for
the first time. New Jersey will not give anyone pension credit unless they work at least 32 hours a week.
“We can’t
afford to deny reality or delay action any longer,” said Gov. Pat Quinn of Illinois, adding that his state’s pension
cuts, enacted in March, will save some $300 million in the first year alone.
But there is a catch: Nearly all of the cuts
so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in
so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten
the demise of the funds they were meant to protect.
Lawmakers wanted to avoid legal battles or fights with unions, whose
members can be influential voters. So they are allowing most public workers across the country to keep building up their pensions
at the same rate as ever. The tens of thousands of workers now on Illinois’s payrolls, for instance, will still get
to retire at 60 — and some will as young as 55.
One striking exception is Colorado, which has imposed cuts on its current
workers, not just future hires, and even on people who have already retired. The retirees have sued to block the reduction.
Other states with
shrinking funds and deep fiscal distress may be pushed in this direction and tempted to follow Colorado’s example in
the coming years. Though most state officials believe they are legally bound to shield current workers from pension cuts,
a Colorado victory could embolden them to be more aggressive.
Colorado pruned a 3.5 percent annual pension increase to 2 percent, concluding
that was the fastest way to revive its pension fund, which was projected to run out of money by 2029. The cut may sound small,
but it produces big results because it goes into effect immediately. State plans vary widely, but many have other costly features,
like subsidized early-retirement benefits, which could likewise be trimmed for existing workers.
Despite its pension reform, Illinois
is still in deep trouble. That vaunted $300 million in immediate savings? The state produced it by giving itself credit now
for the much smaller checks it will send retirees many years in the future — people who must first be hired and then,
for full benefits, work until age 67.
By recognizing those far-off savings right away, Illinois is letting itself put less money
into its pension fund now, starting with $300 million this year.
That saves the state money, but it also weakens the pension fund, actually
a family of funds, raising the risk of a collapse long before the real savings start to materialize.
“We’re within a few
years of having some of the pension funds run out of money,” said R. Eden Martin, president of the Commercial Club of
Chicago, a business group that has been warning of a “financial implosion” for several years. “Funding for
the schools is going to be cut radically. Funding for Medicaid. As these things all mount up, there’s going to be a
lot of outrage.”
Joshua D. Rauh, an associate professor of finance at Northwestern University who studies public pension
funds, predicts that at the current rate, Illinois’s pension system could run out of money by 2018. He believes the
funds of other troubled states — including New Jersey, Indiana and Connecticut — are also on track to run out
of money in less than a decade, unless they make meaningful changes.
If a state pension fund ran out of money, the state would be legally
bound to make good on retirees’ benefits. But paying public pensions straight out of general revenue would be ruinous.
In Illinois’s case, it would consume about half the state’s cash every year, bringing other vital state services
to a standstill.
Mr. Rauh said he thinks any state caught in that trap would have little choice but to seek a federal bailout. Bigger
pension contributions and higher taxes can go only so far.
Many state officials, hoping for a huge recovery in the markets, say
that such projections are too pessimistic, and that cutting benefits for future workers must suffice, given laws and provisions
in state constitutions that make membership in a state pension fund a contractual relationship that cannot be breached.
Lawyers, though,
are raising the possibility that those laws are being misinterpreted.
“It makes no sense to suggest that an employee who works for the
state for a single day has acquired a right to have future pension benefits calculated for the next 20 to 40 years under whatever
method was in effect on that single first day of service,” states a legal memorandum prepared for the Commercial Club
of Chicago, which is concerned that a public pension collapse would badly damage the city’s business climate.
The club’s
members include senior executives of big companies, like Boeing, Aon, Kraft, Motorola and I.B.M., that have frozen pensions
or slowed the rates at which their workers build up benefits.
Some of those cuts set off titanic battles. The most famous was at I.B.M.,
which changed its pension plan just when many of its older workers were about to earn sharply higher retirement benefits.
Aggrieved workers sued, but after a long battle, a federal appellate court found that the cuts were legal.
“An employer
is free to move from one legal plan to another legal plan, provided that it does not diminish vested interests,” or
the benefits workers have already earned, wrote Chief Judge Frank H. Easterbrook of the Seventh Circuit Court of Appeals in
Chicago. He did not distinguish between corporate employers and states.
Colorado is basing its legal defense,
in part, on a 1961 state supreme court ruling that said pension cuts for current workers were allowed if “actuarially
necessary,” and will argue that it applies to retirees as well. Other states may not have such legal tools.
In California, Gov.
Arnold Schwarzenegger has gone a different route, bargaining with the 12 unions that represent public employees. Last week
four of them agreed to let the state cut its own contributions by requiring current workers to pay sharply more for the same
pensions. The workers will contribute 10 percent of their pay, in some cases double the previous rate, to the state pension
fund. Some other states are raising employee contributions as well, though less sharply.
In New Jersey, the administration
of Gov. Christopher J. Christie recently imposed pension cuts on future hires, but has been quietly looking into whether it
could also reduce the benefits that current employees expect to accumulate in the coming years.
“Can they change the benefit
formula going forward? Sure. It’s not etched in stone,” said Edward Thomson III, an actuary and trustee of the
New Jersey pension system who was asked to offer an opinion on whether New Jersey could adopt the federal pension law —
the one that covers companies — as its governing statute.
A state assemblyman, Declan J. O’Scanlon Jr., recently introduced
a bill to ratchet back a 9 percent pension increase that the state gave most workers in 2001. “I think this will pass
constitutional muster,” Mr. O’Scanlon said. “Otherwise, I fear the whole system will fall apart. Nine years
— we’re out of money.”
NASRA response to New York Times article
June 22, 2010
The New York Times
620 Eighth Avenue
New York, NY 10018
To the Editor:
The June 19th article (“In Budget Crisis, States Take Aim at Pension Costs “) wrongly
identifies Colorado as the sole state that has modified benefits for current participants. National pension and legislative
organizations have published information revealing that, in fact, many states recently have implemented reforms to preserve
or restore public pension plans’ sustainability, that affect current participants. Other media outlets have reported extensively on these reforms and responses to them.
The Times article also ignores challenges to the findings in Joshua Rauh’s study, which uses unrealistic assumptions
and unconventional actuarial methods to arrive at startling—and questionable—projections of the pending demise
of public pensions.
Like all investors, pension funds experienced investment losses during the recent historic market decline.
Pension plans are recovering along with the market, and policy makers throughout the country are implementing adjustments
to ensure pension plans’ long-term sustainability. These adjustments include such measures as increasing employee contributions
and adjusting retirement ages and other plan provisions.
When The Times is ready to present public pension
issues in a fair and accurate manner, we remain ready to provide needed facts and context.
Keith Brainard
Research Director, National Association of State Retirement Administrators
http://www.ncsl.org/default.aspx?tabid=19588, http://www.nasra.org/resources/SustainabilityChanges.pdf
http://www.nasra.org/resources/RauhResponseFinal.pdf
Plain-language response to Rauh study
http://www.nasra.org/resources/RauhResponseFinal.pdf
Footnotes in this response include supplementary resources that may be helpful in your understanding and response
to inquiries regarding the Rauh study.
