Pensions & Investments: Public pensions being reduced
across the country
Public plans take knife to benefits
Higher costs, more retirees, political issues
all play part
June
28, 2010 Pensions & Investments
At least 24 public pension funds have cut benefits this
year as fallout from the financial crisis continues to affect their plans' stability.
The plans have been plagued by decreased funding levels due to asset drops at the same time that costs are
increasing because of factors such as retirees living longer, said Keith Brainard, research director of the National Association
of State Retirement Administrators. “They simply couldn't invest out of it,” he said. “Something
else has to change: lower benefits or higher contributions.” The association conducted a survey in May of changes made
by public retirement plans this year.
In some states, like Colorado, the
impetus for change came from the pension fund itself. Officials of the $35.4 billion Public Employees' Retirement Association
in Denver launched an 18-month town-meetings program to convince employees and retirees that their benefits must be cut.
In other cases, politicians were behind the changes. Illinois lawmakers pushed through a bill
reducing benefits for new participants in the state's five pension plans as rating agencies threatened to reduce Illinois'
bond rating over concerns of unfunded liabilities. The bill moved through both houses of the Legislature in just 12 hours,
leaving both union and pension fund officials wondering what had happened. Several weeks later, Gov. Pat Quinn signed the
bill into law.
“The changes were driven by the governor and the
Legislature,” said William Atwood, executive director of the $13.1 billion Illinois State Board of Investment in Chicago,
which has fiduciary responsibility for managing the pension assets of the General Assembly Retirement System, the Judges'
Retirement System of Illinois and the State Employees' Retirement System of Illinois.
California controversy
In California, the controversy over
benefit cuts is still playing out. Gov. Arnold Schwarzenegger has vowed not to approve the state budget without pension benefit
reform.
But the nation's largest defined benefit plan — the $201.9 billion California Public
Employees' Retirement System, Sacramento — used its own authority on June 16 to increase contributions from the
state by $600 million.
CalPERS officials set up a Facebook account where they
denounced several studies saying the fund will be insolvent in two decades.
On
another website — CalPERS Responds (http://www.calpersresponds.com) — CalPERS officials
focus on what's right with the pension system. Featured are articles such as a study showing that public employees earn
significantly less than private-sector workers and a list of what fund officials call myths, including “public pension
benefits are excessive and a drain on the public.”
Patricia K. Macht, director of external
affairs, said CalPERS officials are committed to bringing together stakeholders to deal with funding and benefits issues.
Fund officials held two, daylong discussions as well as webinars with more than 300 participating employers and featuring
the chief actuary and chief investment officer.
Officials at the $132.1 billion California
State Teachers' Retirement System, West Sacramento, the nation's second largest defined benefit plan,
are planning to launch their own campaign next year to convince state lawmakers to introduce legislation to raise contributions,
according to board documents.
CalSTRS spokesman Patrick Hill said fund officials want
the Legislature to increase the 8.25% of employee payroll that school districts and community colleges now pay CalSTRS. Mr.
Hill said raising employee contributions (now at 8%) is not on the table. CalSTRS has not yet said what increase it would
seek, but officials said that for its defined benefit program to be fully funded in 30 years, an employer contribution rate
of more than 22% would be required.
Without an increase, officials say,
the fund will run out of money by 2045.
Most changes implemented by public
pension plans this year apply only to new hires, which has critics charging that severe plan underfunding has not been addressed.
“Many pension plans remain critically underfunded,” said pension plan consultant
Girard Miller. “This issue isn't going away.” Mr. Miller, a senior strategist and consultant at the PFM Group,
Philadelphia, testified last month before a California commission studying the state's pension funds. He called for changes
to the state constitution to allow benefits cuts for state and municipal workers.
Fund overhaul results
The survey conducted last month by
NASRA shows that public pension systems in Colorado, Minnesota and South Dakota were the only ones that reduced benefits for
retirees as part of their fund overhauls.
Meredith Williams, executive director
of Colorado PERA, said the system's funded status dropped to 52% at the end of 2008 — when the fund began to feel
the effects of the financial crisis — from 76% a year earlier. He and board members then conducted an eight-city
listening tour to explain PERA's fiscal difficulties and to hear the concerns of state employees and retirees. The message
to employees was urgent: If nothing is done, the system could be out of money in a little more than two decades. “Anyone
who planned to live beyond 2030 was in trouble,” Mr. Williams said.
The
result of the meetings: Changes should affect employees on a “fair and equitable” basis and should have a meaningful
impact on the system's finances. “I didn't want to use baling wire or duct tape or bubble gum to create a short-term
politically expedient fix,“ he said.
A second tour was organized in fall
2009 to explain the proposal to cut benefits. A bill reducing benefits was approved in February 2010, but not before Mr. Williams
said he spent at least 15 hours testifying before the Colorado Legislature.
The
bill cut the automatic 3.5% yearly cost-of-living increase to a maximum of 2%. It also required new retirees to wait for at
least a year before receiving their first cost-of-living increase. Other changes decreased the payment workers would receive
if they retired early and required employees cashing out their benefits to work at least five years to get an employer match.
In Minnesota, the three statewide retirement systems — the Minnesota State Retirement
System, the Minnesota Public Employees Retirement System and the Minnesota Teachers Retirement Association — all cut
benefits for retirees. The systems have combined assets of $48 billion.
The
Minnesota State Retirement System, St. Paul, also reduced cost-of-living adjustments for retirees to 2% from 2.5% this year.
David Bergstrom, executive director, said the system got various constituent groups to support the plan through frank discussion
about the severe hit the plan's funding status took from the financial crisis. “Most of them saw the need to make
changes now so they had a solid pension going forward.” he said.
The
cuts were more severe for participants in the Public Employees Retirees Association and the Teachers Retirement Association.
PERA retirees had their COLAs cut to 1%, from 2.5%. Teachers had COLAs suspended for two years, followed by a permanent reduction
of 2% annually from 2.5%.
South Dakota introduced cuts for retirees that vary depending on the plan's funding level. For 2011,
cost-of-living increases fell to 2.1%, from 3.1%.
Hinging on lawsuits
Whether other states try to cut benefits could hinge, in part, on the outcome of lawsuits filed
by retirees in Colorado, Minnesota and South Dakota who maintain the changes violated state laws.
William Payne, a Pittsburgh lawyer with Stember Feinstein Doyle Payne & Cordes LLC, which filed the suits,
said the impact on retirees is severe. He said a Colorado retiree who received an annual pension of $33,374 in 2009 could
lose more than $165,000 in benefits over 20 years. “People earned their pension benefits, but the pension systems aren't
holding up their end of the bargain,” he said.
Illinois' changes are among the most extensive. They include
cutting COLAs to half the U.S. Consumer Price Index.
The changes came after a joint legislative
pension reform committee studied the dire financial state of Illinois' pensions plans, followed by months of negotiations
among stakeholders that went nowhere, said Dan Long, executive director of the Illinois Legislature's Commission on Government
Forecasting and Accountability in Springfield. “The parties involved just couldn't come to an agreement and everyone
realized something had to be done,” he said.
Mr. Long said the legislation will
lower the projected $551.7 billion pension liability to $295.3 billion by 2045. But critics said it does little to address
current severe underfunding. “It's a step in the right direction, but it does not address the over $70 billion in
unfunded pension liability,“ said Laurence Msall, president of The Civic Federation, a Chicago non-partisan government
watchdog organization.
In California, Mr. Schwarzenegger scored a victory on
June 16 when four labor unions agreed to increase employee payments to 10% from 5% of pay as well as to reduce benefits for
new employees. But the unions represent only around 23,000 of the 170,000 state employees.
The governor had said that he won't approve the state budget without a new second-tier pension system
for new hires. But the state Senate Public Employment and Retirement Committee killed a bill earlier this month that would
have required new hires to contribute more and work longer to receive benefits.
New York Times: States
tempt legal challenges with reductions in pension benefits
In Budget Crisis, States Take Aim
at Pension Costs
By MARY WILLIAMS WALSH New York Times
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 the salary on which public pensions
are figured at $106,800 a year, indexed for inflation. 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.”
Wall Street Journal: State
workers relent, begin accepting pension cuts
State Workers, Long
Resistant, Accept Cuts in Pension Benefits
Wall
Street Journal June 29, 2010
Some public-sector unions, trying
to avoid furloughs and layoffs, are accepting less-generous pension benefits for current workers and retirees, often for the
first time in years.
In California, where Gov. Arnold
Schwarzenegger has said he wouldn't sign a budget without a pension-fund overhaul, his office on Monday announced tentative
contract agreements with two unions, following two years of wrangling over benefit cuts. Earlier this month, four unions agreed
to similar tentative contracts. The agreements would potentially curtail benefits to 37,000 workers.
Unions and workers' associations in states such as Vermont, Iowa, Minnesota, Colorado and
Wyoming also have recently supported rollbacks not just for new hires, an easier political sell, but for current union members,
whose benefits have long been considered sacrosanct.
"It
was either the legislature was going to do it, or we were going to define it for ourselves," said Pam Manwiller, chief
negotiator and director of state programs for the American Federation of State, County and Municipal Employees in Sacramento,
one of the six California unions that has agreed to a tentative contract.
States and workers are responding to some alarming math. Recent actuarial reports have indicated
that without meaningful benefit cuts, many public pension funds could run dry in a generation or sooner.
In response, pension funds and legislatures have pushed for higher monthly contributions to
pension plans, a later retirement age and lower annual cost-of-living adjustments for current and retired workers.
Not all workers are ready for cuts. The Mississippi Alliance of State Employees, which represents
3,300 state workers, unsuccessfully lobbied state lawmakers to vote against an increase in monthly contributions to pension
plans for current employees.
The boost for Mississippi state workers,
to 9% of monthly earned compensation from 7.25%, will go into effect July 1. "It was a bitter pill to
This year, nine state legislatures have voted to reduce benefits, increase monthly contributions
or both for current workers and sometimes retirees, according to Keith Brainard, research director for the National Association
of State Retirement Administrators. Unions and workers' associations in at least two-thirds of those states have supported
the rollbacks.
"It's an exceptional moment," said Harley
Shaiken, a professor at the University of California, Berkeley, specializing in labor issues. "The depth of the crisis
and the lack of a near-term solution have led some unions to conclude that they're willing to save what they can to make
the system work."
A tentative contract recently reached
for the California Association of Highway Patrolmen would increase monthly employee contributions to 10% from 8%, and would
base retirement benefits on the highest three years of wages rather than the single highest year, to prevent pension "spiking,"
in which employees try to boost their final-year pay to increase their income for pension-calculation purposes.
In exchange, California state troopers would not be furloughed through 2013, and their salaries
would be guaranteed for three years.
"It's a significant step…to
get concessions of that magnitude," said Lynelle Jolley, spokeswoman for the office that represented Mr. Schwarzenegger
in the negotiations with the six unions.
Jon Hamm,
who negotiated the tentative contract on behalf of 7,000 state troopers, said his group concluded it needed to get on board
with cuts beyond those to new hires. "We have to take a different approach than traditional unions have taken. And that
is to be part of the solution," he said.
In some instances,
unions that are making concessions are trying to ward off what they see as a much bigger threat—the specter of a switch
from a defined benefit plan to a defined contribution plan, which is similar to a 401(k) in the private sector.
That worry was behind some recent union concessions in Minnesota, said Eliot Seide, executive
director of AFSCME in St. Paul. Mr. Seide said his board agreed to a reduction in cost-of-living adjustments for current retirees
"reluctantly," so that "we don't kill the goose that lays that golden egg."
In Wyoming, public employees have not made monthly contributions to their retirement plan since
1991. Now, recently passed legislation means some public employees will have to pay on average $60 a month toward retirement.
Kathryn Valido, president of the Wyoming Education Association, said the legislation faced
little dissent within the organization. But that could change once the adjustments go into effect on Sept. 1. "People
are busy," Ms. Valido said, "and I'm not sure the reality of paying into the system is going to really hit them
until they get that first pay stub."
Two more California public employee unions agree to pay cuts, higher pension contributions
and lower benefits
Gov. Schwarzenegger convinces two more unions to agree
to pension concessions, pay cutbacks
LA Times June 28,
2010
Two more public employee unions
-- representing doctors, dentists and engineers -- have agreed to tentative contracts with Gov. Arnold Schwarzenegger, expanding
to six the number of labor unions the governor has persuaded to accept pay cuts and pension rollbacks.
Schwarzenegger on Monday announced the deals, which include requiring employees to
work additional years before qualifying for full pensions and contributing 5% more of their salary to cover retirement costs.
The new agreements cover roughly 14,000 state employees.
The deals also include one unpaid leave day a month during the fiscal year that begins July 1. That is the
equivalent of nearly a 5% pay cut and, combined with the other changes, will save the state $66 million in the budget year.
"These agreements continue the progress toward
critically needed pension reform in California," Schwarzenegger said in a statement.
The unions also agreed that new employees would have to work 25 years, up from the
current 20, to be eligible for full retiree health benefits. Current union members also agreed to chip in 0.5% of their salaries
to cover retiree health benefits beginning in July 2012.
[Updated at 2:48 p.m.:
Only the International Union of Operating Engineers agreed to the changes for retiree health benefits. Also, for both unions
only future employees must work additional years before qualifying for full pensions.]
The deals must still be ratified by rank-and-file members of the Union of American
Physicians & Dentists and the International Union of Operating Engineers. State lawmakers must also sign off on the accords.
Schwarzenegger still has not been able to come to terms with California biggest public-employee
unions but hopes these new deals pressure them at the bargaining table. Earlier in June, he announced pacts with four labor groups representing 23,000 state workers.
The governor's office said if similar agreements are reached with all of California's remaining unions,
the state would save $2.2 billion in the coming fiscal year, of which $1.2 billion would help close California's $19.1-billion
general fund deficit.
Missouri Legislature,
in special session, considers bill tying auto plant incentives to savings from pension reform proposal
Legislative
special session runs into snags
JEFFERSON CITY | Hopes for a quick and easy special
legislative session in Missouri — already tenuous — were dashed Monday, the session’s first day of substantive
business.
Lawmakers are back in the Capitol to consider a 10-year, $150 million tax incentive package for the Ford Motor Co.
and its suppliers, and reforms to state-employee pensions expected to save hundreds of millions of dollars in future years.
The incentives are seen
as critical to convincing Ford to upgrade its Claycomo plant in suburban Kansas City and preserve jobs for nearly 4,000 workers
currently employed there.
“If we were to lose this facility, it would be a devastating blow,” Mayor Mark Funkhouser
of Kansas City told a House committee. He added: “These jobs and these families represent the lifeblood of Kansas
City, Missouri.”
Entering the week, the incentive and retirement issues were linked by the idea that one would offset the other:
The cost of the incentives would be more than balanced by the savings of the retirement reforms.
But in a hearing Monday morning, House
lawmakers made substantial changes to the auto incentive package aimed at decoupling it from the retirement legislation, which
is the subject of sharp disagreements between the House and Senate.
“It’s tremendously irresponsible to tie a pension
bill, which is very controversial, to something which is very important — that is, retaining these jobs and keeping
this plant open,” said Rep. John Diehl, a St. Louis County Republican.
The committee’s actions promise to complicate negotiations
on the bills — and perhaps imperil them.
The new version of the legislation places the automotive tax incentives within
the state’s existing Quality Jobs tax credit program, which offers tax breaks to businesses that create high-paying
new jobs.
Quality Jobs is currently capped at $80 million annually, a figure it has not approached since its creation in 2005.
Under the bill heard Monday, any automotive incentives awarded would count against the Quality Jobs cap. Proponents argue
that would essentially make it revenue-neutral to the state.
Further complicating matters, the committee added to the bill an entirely
different tax incentive program aimed at luring computer data centers to the state.
Such a program falls outside the scope of
Gov. Jay Nixon’s call bringing the special session to order. That violates the constitutional limits placed on special-session
legislation, although Nixon could expand his call at any time.
The Democrat, however, did not appear interested in doing so.
In a memo distributed
Monday, Nixon chief of staff John Watson warned that the data center legislation would put the larger bill “in a vulnerable
legal position” and threaten to “nullify” the top-priority automotive incentives.
“While the governor has been very
clear in his public comments that expanding data centers in Missouri is something worthy of our support, this is not the time
to pursue that effort,” Watson wrote.
The incentive bill is expected to be debated on the House floor today.
Also on Monday, committees
in the House and Senate considered bills concerning the retirement reforms.
Both bills would raise the retirement age for new employees
and require them to contribute to their pensions, but they differ on the creation of an investment board and other smaller
details.
Q&A
on Missouri pension reform proposal
Frequently Asked Questions/Answers about
Pension Reform Legislation
Senator Jason Crowell (blog) Southeast
Missourian June 28, 2010
(Note: Senator Crowell is chairman of the Missouri
Senate committee with oversight of pension issues, and he serves on the MOSERS board kb)
Q: What kind of retirement
plan does MOSERS administer for state employees?
A: MOSERS administers a non-contributory defined benefit plan for general state employees,
statewide elected officials, legislators and judges. A defined benefit plan guarantees a lifetime benefit for members once
they have sufficient service and meet certain age requirements using a formula that considers final average pay, service credit,
and a multiplier. The term non-contributory means that members do not contribute a percentage of their pay towards the cost
of their retirement benefit. The plan only has two sources of revenue -- contributions from the state and earnings on investments.
Q: How does that differ from a defined contribution plan?
A: A defined contribution plan is a retirement savings plan where contributions can
be made by the employee, employer or both. In defined contribution plans, employees are typically given the option of where
to invest the account, usually among stock, bond, and money market accounts. Defined contribution plans limit an employer's
pension outlay and shift the liability for investment performance from the employer to employees. At retirement, individual
account balances are available to employees to do with as they wish.
Q: Why are the benefit
provisions for state employees being changed? Are they too high?
A: The level of benefits provided to state employees are in no way considered to
be egregious; however, it could be argued that the eligibility age for retirement (age 48 for general employees retiring under
Rule of 80) is too young given the rise in life expectancies. Also, the severe decline in the financial markets has resulted
in higher retirement contribution rates at a time during which the state is already under significant fiscal stress. Given
that employee benefits comprise approximately 58% of the state's payroll, we are evaluating all retirement provisions
to look for ways in which to manage rising costs.
Q: What benefit changes are being recommended?
A: The proposed legislation
would create a new tier retirement plan that would only be applicable to employees first hired on or after January 1, 2011.
For those employees, the normal retirement eligibility for most classifications (excluding the highway patrol because they
have mandatory retirement at an earlier age) would coincide with the current minimum eligibility age of 67 for unreduced social
security benefits and they would be required to contribute 4% of their pay toward the financing of their retirement benefits.
In addition, rather than the present Rule of 80 they would have Rule of 90 and their minimum eligibility age would be 55 rather
than 48. New general employees would have ten-year vesting rather than the present five-year vesting and provisions that allow
for service purchases, portability, and the BackDROP would not be available to them (see White Paper VI, dated June 23, 2010,
for more detail).
Q: Have other states enacted similar changes in response to the fiscal
crisis?
A:
Public employee retirement plans in Arizona, Colorado, Illinois, Iowa, Kentucky, Michigan, Minnesota, Mississippi, Nevada,
New York, North Carolina, Rhode Island, South Dakota, Texas, Utah, Vermont, and Virginia have enacted various provisions in
the past year that will affect future retirement benefits. The vast majority of these changes affect new hires due to concerns
that diminishing the benefits of current employees could potentially be considered unconstitutional.
Q: Do other plans require employee contributions? If so, what is the average contribution rate?
A: The majority of public
employee retirement plans do require member contributions. In fact, MOSERS was a contributory plan at inception until 1972
when member contributions were discontinued. Nationally, the average public employee contribution rate for retirement is 5%
of pay for employees who are also covered by social security.
Q: Why is it necessary to have a separate investment
board manage assets for MOSERS and MPERS?
A: MOSERS' staff cannot manage money or serve in a fiduciary capacity to other public entities
under the present board structure. The proposed state retirement investment board would be established for the purpose of
investing MOSERS and MPERS assets, as well as other smaller funds that would like to take advantage of the professional investment
talent that is presently in place at MOSERS. The proposed investment board would be a public entity subject to sunshine laws
and state auditor scrutiny. The MOSERS and MPERS boards would remain in place to oversee the benefit management of each organization.
Q: Would the composition of the investment board be different than what is in place at MOSERS and MPERS?
A: Yes. The investment board
would be comprised of the commissioner of administration, the executive directors of MOSERS and MPERS and four members appointed
by the governor from a list of candidates with extensive investment backgrounds. Initially those names would be submitted
by the retirement system executive directors; thereafter, the full board would submit nominees to the governor, with gubernatorial
appointees being subject to Senate confirmation.
Q: What protections are in place to make sure that
the new investment board is held to high fiduciary standards?
A: The proposed board would be subject to the same statutory provisions presently
applicable to public retirement systems regarding investments including being subject to state audit and the investment board
would be subject to stricter conflict of interest laws than presently apply to retirement system boards.
Q: What do the state and the taxpayers gain through pension reform?
A: The estimated combined savings are projected to be approximately $314 million
over a five-year period.
In a survey of 53 statewide public retirement systems nationally, MOSERS was the
top performer for the 10 year period ended December 31, 2009. Relative to the average performer during that period, MOSERS'
return added $1.2 billion in value to the fund, which equates to approximately $200 in tax savings for every man, woman and
child in the state.
Q: Why are the teachers opposing legislation that specifically excludes
them?
A:
Active and retired teachers have said they are fearful that the legislation may be amended in the future to include their
retirement plans (PSRS/PEERS). The PSRS/PEERS fund has approximately $27 billion in assets and presently has its own team
of investment professionals. To address their concerns, this legislation specifically prohibits PSRS/PEERS, as well as the
Public School Retirement System of St. Louis, the Public School Retirement System of Kansas City, the Missouri local government
employee's retirement system (LAGERS), any retirement plan established by the Bi-State Development Agency, and any retirement
plan established by the Regional Investment District from using the services of the investment board so this fear is unfounded.
The objectives of establishing a state retirement investment board are to 1) extend the availability of MOSERS investment
talent to MPERS, 2) to make the services of the investment board available to smaller, locally administered public retirement
plans that may wish to take advantage of this service, and 3) to assure that the investment board will be able to function
over the long-term with transparency and oversight from investment professionals.
Pennsylvania House approves benefit reductions for newly-hired
state employees and teachers
Pa. House approves pension-overhaul bill
MARK SCOLFOROMARK SCOLFORO, Associated Press Writer June 16, 2010
HARRISBURG, Pa. (AP) — The Pennsylvania House of Representatives voted overwhelmingly Wednesday to approve significant
changes to the state's two large public-sector pension plans.
The 192-6 vote, taken without floor debate, sent
to the Senate a bill that would delay and smooth out a looming jump in costs to taxpayers and reduce some benefits for newly
hired state workers, teachers and other school employees.
For those employees, pensions would be 20 percent
smaller than they are today, unless employees opt to have more money taken out of their paychecks. The practice that lets
retirees withdraw upon retirement their own contributions, plus interest, would be eliminated. The standard retirement age
would increase to 65, and it would take 10 years, not five, to vest.
For the Public School Employees' Retirement
System, the lower benefits would apply to anyone hired after June 30, 2011. For the State Employees' Retirement System,
the benefits would involve workers hired after Dec. 31, 2010.
The legislation is designed to address a sharp
increase in the costs to taxpayers that is expected to occur in 2012. The bill would limit the amount of a single year's
increase in costs to governments and school districts, gradually increasing to a cap of 4.5 percent of payroll.
There would also be higher
minimum payments. After 2014, the state and school boards would not be allowed to pay into the system less than the so-called
"normal cost" to maintain benefits. That change is designed to reduce the wild swings in the level of government
support that can occur under the pension plans' current financial structure.
Senate Majority Leader Dominic Pileggi, R-Delaware,
called the legislation "a good first step" in cutting the costs of retirement benefits but noted the new financial
structure designed to push back the spike in costs would also cost about $52 billion over 30 years.
The reduced benefits would
save an estimated $25 billion, so the net effect would be a $27 billion price tag, most of it borne by taxpayers.
"It's very good,
I think, on the reform side, but the cost of deferral is something we need to take a look at," Pileggi said.
David R. Fillman, executive
director of Council 13 of the American Federation of State, County and Municipal Employees, which represents tens of thousands
of workers in the pension system, said his organization was supportive of the changes, given the potential for financial calamity
if the systems were not changed.
"Two-tiered pension plans sometimes are problematic," Fillman
said. "The collective union groups that worked on this were recognizing that something had to go through as we move forward.
This was the path of least resistance."
The Pennsylvania State Education Association and the state chapter
of the American Federation of Teachers both said they support the legislation as a way to address the funding problem and
avoid job losses and other cuts to education programs.
Gov. Ed Rendell said Tuesday he was following the
debate but did not indicate if he supported the House-passed approach. Messages seeking comment from Senate Republican leaders
were not immediately returned.
SERS, which mostly benefits state government employees, had 110,000
active members and 110,000 annuitants and beneficiaries at the end of December. PSERS, which consists mostly of teachers and
public school employees, had 280,000 active members and 178,000 retirees as of a year ago.
Editorial: Pennsylvania
Senate must apply pension reforms to existing plan participants
Pension bill half measure
Scranton
Times editorial
Published: June 17, 2010
A bill passed Wednesday by the state House would
help to lessen the massive impact on taxpayers of the looming state pension crisis, but it also is a fluffy golden parachute
for those who created that crisis.
Without some action by the
Legislature, the state government and every school district in Pennsylvania will face massive increases in pension plan payments.
School district payments would climb to equal a third of total payroll.
State lawmakers gave themselves a 50 percent pension increase in 2001 and authorized 25 percent increases for state
employees and public school teachers. Legislators and the public employee unions contended that pension plan investment earnings
would spare taxpayers the cost of the unwarranted, exorbitant increases - virtually moments before the investment markets
tanked and dumped the bill on taxpayers.
Panicked politicians then
deferred that bill for 10 years, a period that soon will end.
The new
House bill's principal feature is that it once again would defer much of the debt. It would spread over 10 years the payments
that otherwise would be due over three years, beginning in the 2012-2013 school year. That would reduce the annual cost but
increase the overall debt. It would limit districts' increases to 4.5 percent, as opposed to current projections of up
to 33 percent.
Even the new deferral could be wishful thinking,
however, because its projections are based on the two big state pension plans realizing annual earnings of 8 percent.
The bill also would establish some actual reforms. It would increase vesting periods from five to 10 years,
thus precluding short-term employees from gaining lifetime pensions. And it would increase the retirement age for full benefits
to 65, from 60 for state employees and 62 for school employees. Retired lawmakers would be able to collect full benefits at
55, rather than 50.
All of the measures, however, apply only to future
employees. The bill requires no accountability, no concessions and no sacrifice from the people who have concocted and benefitted
from this travesty.
The Senate must do better. It must honor the inflated
benefits from 2001 until now, but mandate a return to the pre-2001 rates going forward - for current and future employees.
And, since the lawmakers appear to believe that the markets will average earnings of at least 8 percent forever, it should
convert the plans for new state and district workers to defined contribution plans that rely on market performance rather
than taxpayers.
It is unconscionable for lawmakers, after they
and their predecessors created the crisis, to exempt themselves from the costs of rectifying it.
Roger Lowenstein: Public
pension funds are the next crisis
The Next Crisis: Public Pension Funds
By ROGER LOWENSTEIN New York Times June 21, 2010
Ever since the Wall Street crash, there has been a bull market in Google hits for “public pensions” and “crisis.” Horror stories abound, like the one in Yonkers, where policemen in their 40s are retiring on $100,000 pensions (more than their top salaries), or in California, where payments to Calpers, the biggest state pension fund, have soared
while financing for higher education has been cut. Then there is New York City, where annual pension contributions (up sixfold
in a decade) would be enough to finance entire new police and fire departments.
Chicken
Little pension stories have always been a staple of the political right, but in California, David Crane, the special adviser
to Gov. Arnold Schwarzenegger, says it is time for liberals to rally to the cause.
“I have a special word for my
fellow Democrats,” Crane told a public hearing. “One cannot both be a progressive and be opposed to pension reform.”
The budgetary math is irrefutable: generous pensions end up draining money from schools, social services and other programs
that progressives naturally applaud.
In California, which is in a $19 billion
budget hole, Calpers is forcing hard-pressed localities to cough up an extra $700 million in contributions. New York State,
more creatively, has suggested that municipalities simply borrow from the state pension fund the money they owe to that very
fund.
Such transparent maneuvers will not conceal the obvious: for years, localities and states have
been skimping on what they owe. Public pension funds are now massively short of the money to pay future claims — depending
on how their liabilities are valued, the deficit ranges from $1 trillion to $3 trillion.
Pension funds subsist on three revenue streams: contributions from employees; contributions from the employer; and investment
earnings. But public employers have often contributed less than the actuarially determined share, in effect borrowing against
retirement plans to avoid having to cut budgets or raise taxes.
They also assumed,
conveniently enough, that they could count on high annual returns, typically 8 percent, on their investments. In the past,
many funds did earn that much, but not lately. Thanks to high assumed returns, governments projected that they could afford
to both ratchet up benefits and minimize contributions. What a lovely political algorithm: payoffs to powerful, unionized
constituents at minimal cost.
Except, of course, returns were not guaranteed. Optimistic
benchmarks actually heightened the risk, because they forced fund managers to overreach. At the Massachusetts pension board,
the target was 8.25 percent. “That was the starting point for all of our investment decisions,” Michael Travaglini,
until recently its executive director, says. “There is no way a conservative strategy is going to meet that.”
Travaglini put a third of the state’s money into hedge funds, private equity, real estate and timber. In 2008, assets fell 29 percent. New York State’s fund, which is run by the comptroller, Thomas DiNapoli, a former state assemblyman with no previous investment experience, lost $40 billion in 2008. Most funds rebounded when the
market turned, but they remain deep in the hole. The Teachers’ Retirement System of Illinois lost 22 percent inthe 2009
fiscal year. Alexandra Harris, a graduate journalism student at Northwestern University who investigated the pension fund, reported that it invested in credit-default swaps on A.I.G., the State of California, Germany, Brazil and “a ton” of subprime-mortgage securities.
The financial crash provoked a few states to lower their assumed returns. This will better reflect reality, but it will
not repair the present crisis. Before the crash, retirement systems were underfinanced (they did not have sufficient funds
to pay promised benefits), but the day of reckoning was distant. Moreover, the pain was indirect. Taxpayers were not aware
that pension debts caused teachers to be laid off — only that schools had fewer teachers.
Postcrash, the horizon has condensed. According to Joshua Rauh of the Kellogg School of Management at Northwestern,
assuming states make contributions at recent rates and assuming they do earn 8 percent, 20 state funds will run out of cash
by 2025; Illinois, the first, will run dry in 2018.
What might budgets look like then? Pension
obligations are a form of off-balance-sheet debt. As funds approach exhaustion, states will be forced to borrow to replenish
them. Some have already done so. Thus, pension obligations will be converted into explicit liabilities (think of a family’s
obligation to pay for grandma’s retirement being added to its mortgage). According to Rauh, if the unfinanced portion
of all public pension obligations were converted to debt, total state indebtedness would soar from $1 trillion to $4.3 trillion.
Such an explosion of debt would threaten desperate governments with bankruptcy. Alternately,
states could try to defray pension costs from their operating budgets. Illinois, once its funds were depleted, would be forced
to devote a third of its budget to retirees; Ohio, fully half. This would impoverish every social (and other) program; it
would invert the basic mission of government, which is, after all, to serve constituents’ needs.
States really have no choice but to further cut spending and raise taxes. They also need to cut pension benefits. About
half have made modest trims, but only for future workers. Reforming pensions is painfully slow, because pensions of existing
workers are legally protected. There is, of course, no argument for canceling a pension already earned. But public employees
benefit from a unique notion that, once they have worked a single day, their pension arrangement going forward can never be
altered. No other Americans enjoy such protections. Private companies often negotiate (or force upon their workers) pension
adjustments. But in the world of public employment, even discussion of cuts is taboo.
Recently, states have begun to test the legal boundary. Minnesota and Colorado cut cost-of-living adjustments for existing
workers’ pensions; each faces a lawsuit. But legislatures need to push the boundaries of reform. That will mean challenging
the unions and their political might.
The market forced private employers
like General Motors to restructure retirement plans or suffer bankruptcy. Government’s greater ability to borrow enables it to defer hard
choices but, as Greece discovered, not even governments can borrow forever. The days when state officials may shield their
workers while subjecting all other constituents to hardship are fast at an end.
Roger
Lowenstein, an outside director of the Sequoia Fund, is a contributing writer and author of “While America Aged,”
among other books.
Opinion:
GASB's proposed accounting changes could exacerbate states' fiscal challenges
By Keith Brainard
June 29, 2010 BNA Reporter
Excerpts:
The Governmental Accounting Standards Board is reviewing accounting standards for public
pensions. The review has been under way for several years and is part of the agency's normal practice. However, the current
review coincides with one of the largest market downturns and deepest recessions in recent history. State and local government
sponsors of public pensions have been deeply affected by these recent events.
Public pension plan sponsors
welcome accounting-standard changes that increase transparency and make accounting information more useful to decisionmakers.
However, some changes under consideration may have the opposite effect, by increasing the volatility of funding levels and
required costs without improving the usefulness of the accounting information. The proposed changes could exacerbate the fiscal
challenges that states and local governments now face.
…
Although most funding shortfalls currently associated with public pension plans are
not a result of imperfect accounting standards, the public pension community supports accounting changes that would produce
better information about the ability of government plan sponsors to finance promised benefits and that could help plan sponsors
in setting appropriate benefit and contribution levels.
A large segment of the public pension community is concerned that some of the proposed
changes in the Preliminary Views would not be helpful in achieving those objectives. In particular, a proposal to move away
from the funding orientation of governmental pension accounting and reporting may not only fail to improve financial reporting
but also could make the reporting worse. Delinking accounting from the actuarial funding characteristics of public pension
plans would dangerously diminish the “decision usefulness” of current reporting. Better information on which to
base allocations of scarce resources in a budget is more important than ever in these difficult economic times.
Some of GASB's proposed
changes would simply add confusion. However, restricting flexibility by proposing changes in amortization and asset smoothing
could not come at a more inopportune time, when plans and their sponsors are absorbing the effects of the market downturn.
Finally, reporting that enables
decisionmakers to assess intergenerational equity may be an important goal, but only if it recognizes that cost-shifting can
occur in both directions. It is important that the government not shift costs to future generations, and it is equally important
that any current generation not pay more than its fair share of costs for services that benefit future generations as well
as the present one.
(Thanks to Jeannine Markoe Raymond and Leigh Snell for their assistance in drafting this article.
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Access the full article here: http://www.nasra.org/resources/MVL/BNABrainard.pdf
Michigan releases results of early retirement
incentive
State releases final numbers of retiring school employees
Flint Journal Friday, June 25, 2010
FLINT, Michigan — The state today released
the final number of school employees who decided to retire this summer, taking advantage of pension incentives the Governor
passed in May.
The Office of Retirement Services counted 17,063 who filed.
The number falls short of what the state originally hoped, but officials still estimate savings of $515 million
as a result.
The state initially estimated $670 million in savings if half of the 55,000 eligible veteran
employees had chosen to retire.
"The number of school retirements is more than
triple what we typically see in a given summer,” said Governor Jennifer Granholm in a statement.
The announcement came a day after thousands of teachers demonstrated outside
the state Capitol building in Lansing demanding stability in education funding.
“The school retirement reforms are working as we intended: helping resolve the long-term
structural imbalance in the School Aid Fund so we can properly fund K-12 education and creating thousands of job opportunities
for new teachers just entering the profession,” Granholm said in the statement.
Flint Community Schools had 216 employees, some with over 40 years of experience, make the decision to retire.
As a result, the district is bringing back 188 previously pink-slipped employees.
The incentives included a small pension boost. Those who chose not to retire will have to contribute
an additional 3 percent of their pay to fund their pensions.
The Michigan
Education Association has filed a lawsuit against the new requirement.
Pennsylvania
Legislature approves bill requiring pension funds to divest from Iran and Sudan
Frankel, House send governor bill to divest Pa. funds from Iran, Sudan
The Jewish Chronicle June 23, 2010
State Rep. Dan Frankel (D-Allegheny) hailed today's unanimous House passage of a bill that
would require the state treasurer and state pension funds to withdraw investments from foreign companies doing substantial
business with the governments of Iran or Sudan.
"We shouldn't have one dollar of public pension funds
invested in companies that do substantial business with either of those regimes, let alone an estimated $436 million,"
said Frankel, who has long advocated for the divestment legislation as a member of the House State Government Committee.
"The crisis in Sudan is the first time the United States government has labeled an ongoing international human
rights crisis as genocide," Frankel said. "Estimates are that between 200,000 and 400,000 have died. Civilians have
been systematically killed, raped and starved.
"Many Holocaust survivors have told me they want part of their
legacy to be that the Holocaust should never be forgotten, but also that it should never happen again. The United States has
tragically fallen short of that ideal in the past, in coming to the aid of Holocaust victims far too late in light of what
our government knew and when it knew it. More recently, we failed in Rwanda in the 1990s, and in the present, the world community
has been slow to respond to the Darfur genocide in Sudan. We cannot change the past, but we have a moral imperative to use
our influence in Darfur. Pennsylvania has the opportunity to make a difference as part of a larger community of state and
local governments that are divesting from companies with ties to Sudan," Frankel said.
"Iran presents
another case where we can and must use our influence. There has been much discussion of possible military intervention to
change the behavior of the Iranian government. In light of the situation in Iraq, and the commitment of additional U.S. troops
to Afghanistan, we should first take every non-military step we can with regard to Iran," he said.
The bill
(S.B. 928) would require the withholding of Pennsylvania's pension fund investments in the Public School Employees'
Retirement System, State Employees' Retirement System and Pennsylvania Municipal Retirement System from foreign companies
that are helping the Sudanese government perpetuate genocide and the Iranian government sponsor terrorism. U.S. companies
are already prohibited from such investments. The bill also would put the same restriction into law for the state Treasurer's
Office.
The House passed a similar bill in June 2008, but it died at the end of the session due to Senate inaction.
The House also passed a similar bill last December.
"We can and must learn lessons from the past. I am pleased
the state Senate has seen the light, and I hope the governor will soon sign this bill into law," Frankel said.
Louisiana Legislature approves bill creating special
license plate for state retirees
Bill Creating License Plate for Retired State Employees
is Now Law
From the Louisiana SERS website (undated)
The 2010 Legislature has approved a bill that would create
a special license plate for state retirees. Governor Jindal signed HB 96 by Thibodeaux Representative Dee Richard into law.
At least 1,000 retirees would have to apply for the plates at a cost of $25 each.
The Office of Motor Vehicles will be taking requests
for the plate. The law will be effective August 15, 2010.
(Note: proceeds from license plate sales will be used to reduce the LASERS unfunded liability.
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