Tag Archives: retirement

Comparative study of state and local pension plans

The Wisconsin Legislative Council has released their  survey of state pensions for 2010. It is a comparative study of 87 state and local pension plans and contains some interesting statistics. The ratio of active employees to retired employees is falling. In 2010 the ratio is 1.87, down from a ratio of 2 in 2008. The number of retirees is growing at a faster rate than the number of active employees. This trend may explain a policy reversal. Between 2008 and 2010 plans began to increase the retirement age for participants as well as the number of years used to calculate the average final salary. Vesting periods – the minimum number of years an employee must work to qualify for benefits – are also increasing.


California’s $500 billion pension shortfall

A new study estimates California’s pension shortfall at $500 billion. Employing a risk-free discount rate, this estimate is far higher than the $142.6 billion estimated by the state. Currently California assume a 7.75 percent discount rate for two plans: CalPERS and CalSTRS, and a 7.5 percent discount rate for UCRP. It’s an amount that is too large to be addressed solely by future benefit cuts. These findings haven’t been received very warmly by State Treasurer Bill Lockyear who says the estimate relies on an overly-low discount rate. Contrary to the Treasurer’s assessment, estimating pension liabilities isn’t about cherry-picking numbers but instead about how to accurately value pension liabilities which are guaranteed by the state of California, and thus should be considered safe and risk-free by beneficiaries.

Such a massive shortfall means bad news for California’s budget and fiscal outlook. The share of pensions in California’s budget will have to triple. Stanford professor, Joe Nation, author of the study and a former Democratic Assemblyman warns that each day the state does nothing it costs $3.4 million.

The study  finds that CalPERS under assumed rate of return of 7.75 percent has an 82 percent chance of its assets falling short of obligations. To meet the problem Nation proposes higher employee contributions, taxes, and reducing plan costs by increasing the retirement age, reducing benefit formulas, and moving to a hybrid Defined Benefit/Defined Contribution system. In addition, he critiques Governor Brown’s proposal. For more, read the study, which contains some very interesting data and analysis.


Pension News From Around the Country

In California:

LOS ANGELES — Gov. Jerry Brown offered a far-reaching proposal on Thursday to reduce the cost to government of public pension programs, calling for an increase in the retirement age for new employees, higher contributions from workers to their own pensions and the elimination of what he termed abuses that have allowed retirees to inflate their pensions far beyond their annual salaries.

In Kansas:

TOPEKA — Kansas Gov. Sam Brownback and officials of the state’s public pension system aren’t saying publicly whether they favor issuing bonds to help close a close a long-term funding gap.

In Massachusetts:

The state House of Representatives today unanimously approved a plan to tighten the state’s pension provisions and raise the age that lawmakers and public employees are eligible for retirement. The move follows passage of a similar plan by the Senate earlier this fall. Both plans would only affect future hires, not current employees or retirees.

The House version passed today would boost the retirement age from 55 to 57 and could ultimately save $6.4 billion over 30 years, House lawmakers estimate. The Senate version went farther, raising the minimum age for retirement to 60.

In Mississippi:

JACKSON, Miss. (AP) — A group charged with studying the long-term viability of the state pension system is expected to release a formal report in two weeks.

During a meeting Monday, study commission chairman George Schloegel said he thinks several changes may be needed to shore up the Public Employees Retirement System.

The Clarion-Ledger reports…lawmakers alone can make changes, and it’s unclear whether they will make any radical alterations.

In North Carolina:

North Carolina is one state that’s planning to use a high-tech solution to look into the future and the present. The state’s Department of State Treasurer announced Thursday, Oct. 27, it will implement customized analytics software to better protect pensions for 850,000 state and local government employees….According to SAS, the customized software suite North Carolina will be using includes risk and performance measurement models for fixed-income equity, private markets and hedge funds.

And, in Rhode Island:

PROVIDENCE, R.I. — The General Assembly Joint Finance Committees will resume discussion of pension overhaul legislation Tuesday morning with a hearing on parts of the proposal that deal with municipal-run pension plans….Mayors have said they want the ability to make changes similar to what is proposed for state-run plans, such as suspending cost-of-living adjustments.

(here is Emily with more on RI)

Here, again, is Jeff Miron’s estimate of the date at which each state’s debt-to-GDP ratio will exceed 90 percent (the value at which economists believe debt tends to begin to hamper economic growth).


Unlike the calculations that the states themselves use, Miron’s calculations use the more-realistic discount rate assumptions of Novy-Marx and Rauh.

(HT to the National Association of State Budget Officers for their extremely helpful “state budget press clips”)

Pension Hearings Wrapped up in Rhode Island

The Rhode Island legislature completed hearings on Tuesday on the reform bill proposed by Governor Chafee and Treasurer Raimondo. The proposed reforms, many explained here, include:

  • Freezing COLA increases in benefits for retirees for up to 19 years;
  • Creating hybrid plans for current and future employees with a defined contribution portion, similar to a 401(k) and a smaller, defined benefit portion;
  • Raising the retirement age from 62 to the age when individuals begin receiving social security;
  • Amortizing the remaining defined benefit plan over 20 years.
Now, lawmakers are debating potential amendments to the reform bill, and it could be weeks until they vote on a final version. Among union leaders, eliminating the COLA is understandably one of the most unpopular parts of the bill because it significantly reduces the amount of money retirees will receive over the the course of their retirement. However, this part of the bill is key in saving RI taxpayers about $3 billion and ensuring that the pension fund will remain solvent.
State union leaders suggest that instead of the reforms proposed by the state’s democratic administration, Treasurer Raimondo should adjust the fund’s actuarial assumptions. They support changing the fund’s expected growth rate from 7.5% to 7.75% and adjusting the assumed average life expectancy for retirees. Their resistance to more significant reform is surprising, given the dire consequences that union members suffered in Central Falls, RI. There, the local pension fund became insolvent, leading the municipality to bankruptcy. Now, many Central Falls pensioners are receiving less than half of the benefit that they were promised.
The fate of this bill in Rhode Island is important not only for local employees and taxpayers, but for troubled pension funds across the country. If Rhode Island is able to enact reforms that protect retirement benefits and taxpayers, it will serve as a model for other states.

New Tax Foundation Study on Unemployment Insurance across the States

On Monday, the Tax Foundation released a new study by Joe Henchman on Unemployment Insurance policies in the 50 states. The study highlights that while the federal-state program is supposed to be counter-cyclical, in reality states do not use periods of high growth to prepare their unemployment trust funds for recessions. At the beginning of 2008, most states were prepared to pay less than one year’s worth of high unemployment benefits, leading to quick insolvency for many states’ funds in recession.

In order to provide benefits, states have had to borrow from the federal government. Henchman explains:

Beginning on September 30, 2011, states must pay approximately $1.3 billion in interest on those outstanding balances; in many cases, businesses and employees in those states will also face increases in federal unemployment insurance tax rates as a result of those federal loan balances. These new interest obligations and tax increases, if they ultimately occur, come at a time when private sector hiring is already at a low level and states are under significant fiscal pressure. These unemployment insurance fiscal policies may exacerbate negative job growth and tax trends, instead of operating countercyclically as the program was intended.

The study also provides analysis of the different taxes and benefits across the states. The compilation of the variation of tax rates, duration of benefits, funding gaps, and other policy factors makes this paper an excellent jumping off point to look at state level reforms based on states that have performed relatively well in this program compared to the neighbors.

In a more ambitious policy proposal, Henchman recommends Individual Unemployment Benefit Accounts as an option for reform. These accounts, which Chile adopted in 2002, provide a measure of income stability during periods of unemployment. Unlike state-administered UI programs, though, private accounts do not carry the perverse incentives that may dissuade people from finding work while they are receiving these benefits because money which goes unused during unemployment can be accessed upon retirement. In 2010 Eileen Norcross and I did a brief analysis of the incentives that the current UI program provides and came to the same general policy recommendation.


Windfall for Chicago Union Leaders

In Chicago, teacher union leaders have won the lottery of municipal benefits. Twenty-three union leaders will be receiving a total of $56,000,000 in retirement. For most, these pension benefits will be greater than the salaries that they made while employed by the union. On the 1991 law that has secured these benefits, the Chicago Tribune reports:

All it took to give nearly two dozen labor leaders from Chicago a windfall worth millions was a few tweaks to a handful of sentences in the state’s lengthy pension code.

The changes became law with no public debate among state legislators and, more importantly, no cost analysis.

Because of the secrecy surrounding the collective bargaining process between policymakers and organized labor in Chicago, the article explains that it is difficult to determine the lawmakers responsible for this policy. The $56 million in pension benefits is a relative drop in the bucket at this point for the Chicago Teachers’ Pension Fund, which has been underfunded by $5 billion in the last 10 years.

However, the process by which union leaders secured these benefits is symptomatic of Illinois’ larger pension problems. Twenty years ago when lawmakers agreed to guarantee these benefits, they were not concerned about the long-term repercussions to the pension funds’ solvency, or for that matter what the size of the bill might be for future residents.

Lawmakers have the incorrect incentives to manage pension funds because they think in terms of election cycles, where strong union support can make sure they stay in office, rather than the long horizon over which taxpayers will be forced to fund these promises. Eileen Norcross documents this misalignment of incentives in a forthcoming we will be discussing further here.

Olivia Mitchell on the future of defined benefit pensions

Steve Forbes’ interview with Dr. Olivia Mitchell of Wharton on the health and future of defined benefit pension plans raises a few points worth considering for policymakers and beneficiaries:

  • Public pension liabilities are undervalued and thus underfunded.
  • In general, future retirees including Baby Boomers, face a “much more fragile retirement” than the previous generation.
  • Be concerned as public plans try to make up for losses with riskier asset portfolios.
  • The fiscal burden of public plans will put immense pressure on several major cities and states including Philadelphia, Chicago, Illinois and Hawaii.
  • Public sector transitioning to a 401(k) doesn’t solve the problem of the expense of past negotiated benefits.

Dr. Mitchell also speaks on the topic of Social Security reform, longevity, 401(K) plans and annuities. You can watch the interview here:

Reforming disability retirement in Montgomery County, MD

On the heels of Atlanta, Georgia’s sweeping pension reforms, and the cooperation of New Jersey Republicans and Democrats to reform pension and health care benefits, comes the news that City Council President (and former private sector labor leader) Valerie Ervin lead the Montgomory County Council to vote to reform disability retirement for public workers. Unions opposed the measure saying it was an issue for collective bargaining. Ervin’s reply: the council has stayed out of disability retirement for 21 and half years waiting for the unions to budge to no avail.

The political shakeup resulting from public union intransigence is noteworthy as  Robert McCartney writes in The Washington Post. Public unions wield political power. Last year a city council member was voted off the board due to union opposition for backing pension reform. In Montgomery County, “unions have played an out-sized role in politics…partly because they’re open-handed with campaign contributions and campaign workers.” Ironically perhaps union support and “boots on the street” were instrumental to Ervin’s election in 2006.

What has changed in a year? State and local budgets haven’t improved. Revenues are tight and the costs associated with benefits, often negotiated with unrealistic and erroneous accounting assumptions, are beginning to eat up larger portions of the funds used to operate services. Unions’ strategy of refusing to face numerical reality has led to budgetary gridlock and the emergence of a newly pragmatic tenor in labor-government negotiations.


Abusing disability pensions in Montgomery County?

The Washington Examiner takes a look at  disability pensions in two counties: Montgomery County, Maryland and Fairfax County, Virginia. Each county has a similar-sized police force. Between 2000 and 2008, no Fairfax County police offers received a disability pension. Between 2004 and 2009, a total of 91 police officers and 49 firefighters and sheriffs deputies received disability pensions. A further 34 Montgomery County firefighters either received disability payments or have an application pending in 2010.

Councilman Phil Andrews (D-Gaithersberg) is investigating the practice, “What is suggests is that disability retirement here is used as an alternate retirement system.”

Why? It’s a good deal, a retiree receives two-thirds of their annual salary in a tax-free pension. Secondly, according to one anonymous police officer, “Do you have any idea how easy it is to claim disability?”

A rush to retire in the public sector in New Jersey

Today’s Star Ledger reports that New Jersey public workers are retiring in record numbers, “rather than risk having their benefits cut by legislators.” Approximately 15,000 workers are estimated to have taken retirement between January and June. Couple this with last year’s record retirement of 20,000 and the state can expect to have to pay out more money from its underfunded pension system.

Unions blame Governor Christie’s public remarks. But the truth is the state’s pension system is in serious shape due to decades of bad decisions: careless benefit enhancements, erroneous accounting practices and skipped contributions. Health benefits are entirely unfunded as they are in most states. Denial of these structural flaws won’t improve the outcome for workers. Further, it points to how poorly funded states have created inter-generational inequity among public workers. Younger workers have fewer options. They can quit now, receive very little in benefits, and enter into a weak job market. Older workers can head for the exit with their full benefits locked into place and retirement assured. Another problem to consider is will the crisis in pension plans prompt an out-of-state exit and tax base erosion? While only an anecdote, one New Jersey worker says she will wait out the next 18 months until she reaches 25 years of retirement service to see what policy changes are implemented thus delaying her plans to retire in Virginia.