Why municipal pension systems may be a very good idea

February 9, 2013

Muniland ground rule number one: Never use the state of Rhode Island as example of national issues. The state has been poorly managed and dominated by union interests for decades. Rhode Island is a high school dropout when it comes to fiscal management. The underfunding of its public pensions is exhibit one.

Josh Barro of Bloomberg has broken muniland’s number one rule and used Rhode Island’s public pension system to argue about systems nationwide. He writes:

This lack of attention has meant that local plans are much more likely than statewide plans to have become deeply underfunded. Of the 110 statewide pension systems covered by the Public Funds Survey, the worst-funded is the Illinois State Employees’ Retirement System, with a funding ratio of 35.5 percent. Sixteen of Rhode Island’s 36 local plans are worse funded than Illinois SERS.

But the doyenne of public pensions, Alicia H. Munnell of the Center for Retirement Research, writes in a February 2013 report (page 7):

Although press accounts often suggest that locally administered plans are significantly less funded than those administered by states, our sample of 128 local plans from 43 states suggests that they are nearly as well funded and have been closing the gap in recent years. Averages, as always, hide a lot of variation and a number of plans, including large cities such as Chicago, Philadelphia and Providence, have seriously underfunded plans.

There are many nuances in pensions. Munnell points out that government pension contributions at the local level are bigger because they carry the load of police and firemen who usually retire at 50 or 52 years old and require more pension assets to sustain (page 4):

The Annual Required Contribution at the local level, however, is substantially larger than at the state level, because police and fire plans – which provide relatively high benefits at younger ages – are expensive.

Texas is an example where a number of city-run pension plans are performing better than state-run plans. The Statesman.com reported that the two state-run plans, Teacher Retirement System and Employees Retirement System, are funded at 83 percent:

A recent study by the Pew Center on the States declared Texas ‘a solid performer’ when it comes to managing its pension liabilities. Both Teacher Retirement System and Employees Retirement System have about 83 percent of the assets they need to cover future benefits — levels considered sustainable by experts.

The Texas state pension plans are less well-funded than some Texas city plans and more well-funded than others, according to the Center for Retirement Research (page 14):

Rhode Island has become a media magnet, but it is useless to try and understand the national landscape using the state as a prism. The title of Barro’s Bloomberg piece, “Why Municipal Pension Systems Are a Terrible Idea,” falls flat after the smallest bit of research. Even near-bankrupt Detroit has public pensions that are in good shape at 99.9 percent and 87.1 percent funding levels (page 12).

Chart source: Locally-Administered Pension Plans

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