Pension tension and getting the job done
Video source: Pennsylvania Senate GOP
My colleague Felix Salmon recently dove into the subject of public pensions and the controversy about National Public Radio accepting funding from pension reform zealot John Arnold. It’s too bad that NPR and its affiliate WNYT were not more transparent about their connection to Arnold. There is a lack of understanding about the condition of public pension systems and how many are in dire financial condition. For example, Salmon wrote:
None of this will be easy: the whole reason why pension obligations started ballooning in the first place was that local governments didn’t have the money to hand out pay raises. So the unions will push back against these ideas: they like any system which makes it easier for them to accrue valuable benefits at negligible up-front cost to the government. But if you want to guarantee vocal opposition which is almost impossible to overcome, then your best way of doing that is to combine or replace these kind of reforms with an attempt to renege on governments’ existing pension obligations.
State and local governments from coast to coast are working to achieve a soft “renege” on existing pension obligations and retiree health benefits owed to 12.9 million active plan participants and 7.8 million retirees. Public unions almost everywhere are lobbying and litigating to preserve their pension benefits. In many cases it’s simply a matter of not having enough cash to pay these obligations at the contractual or legislated levels while also supporting government services. Peter Hayes, Managing Director at Blackrock, wrote:
For states and municipalities, providers of public pension plans, the challenge is balancing near-term budgetary and operating requirements with the long-term liability of funding pension and retiree healthcare benefits. The balancing act was complicated by the financial crisis and ‘Great Recession.’ Not only had it become difficult to arrive at workable budgets, but the pension burden loomed larger as market losses caused pension asset pools to shrink, bringing funded ratios to unhealthy lows.
Public pensions have been straining for four years to make up the massive losses they sustained in the 2008 financial crisis. Pension analysis firm Milliman laid out the aggregate funding versus liabilities for the 100 largest public pension funds:
Recent stock market gains have reaped outsize returns for pension funds, but unfunded liabilities are still large. When interest rates increase it will help reduce unfunded liabilities.
The most important piece of the pension puzzle is the attention and understanding that politicians must bring to their oversight of pension funds. The Pennsylvania Senate recently held an oversight hearing of the state’s two funds and got into the weeds discussing the following:
- Estimates for combined unfunded liabilities stand at $50.5 billion
- The use of hedge funds in the systems and returns compared to traditional investments
- Use of Pennsylvania-based asset managers
- Plans to transfer $225 million in cash and investments from the Tobacco Settlement Fund to PSERS
- Cash flow problems caused by underfunding of the systems
- The probe into the actions of the SERS Chief Investment Officer and safeguards to protect funds
- The payment of high basis points for bond management, and consultant fees
- The legislature’s need for guidance in debate over pension reform
The Pennsylvania Senate is on the right track and must follow up by making the hard decisions to more adequately fund their pension plans.
In California, CalPERS, the state pension fund, recently voted to adjust its actuarial calculations to incorporate the increased longevity of plan members. Reuters reported:
California and many of its cities will soon be paying more for public pensions after the state’s giant retirement system voted on Tuesday to change the way it calculates contributions.
The move by the board of the California Public Employees’ Retirement System (Calpers) – the world’s biggest public pension fund with assets of $277 billion – was welcomed by the state’s Democratic governor, Jerry Brown, who had been pushing for Calpers to act more aggressively in how it funded the provision of pensions for city and state workers.
But higher pension contributions are bound to be met with angst by some California cities, which say they are already struggling to meet Calpers’s rate demands.
Pension contributions to Calpers are usually the biggest expense for California cities that pay into the system. Two cities in the state, San Bernardino and Stockton, are in bankruptcy. Pension costs were a significant factor in their budget crises.
Moody’s recently issued a report on the pension burden on California cities, including bankrupt Stockton and San Bernardino. Moody’s wrote about the critical need to reduce pension liabilities:
If the two California cities currently in bankruptcy, Stockton and San Bernardino, exit bankruptcy without overhauling their pension liabilities, the burden of these rising obligations will challenge their recoveries after bankruptcy, says Moody’s Investors Service in the report ‘Without Pension Relief, Bankrupt California Cities Risk Return to Insolvency.’ Moody’s points to the city of Vallejo, which exited bankruptcy in 2011 but still faces steep fiscal deficits, as an example of what may happen if pension reform is not addressed.
There is no magic formula for the pension expenses that are sustainable for state and local governments. Public unions have been pushing back on reform at every turn. But every government must review how well its pension system is funded and whether the benefits promised to employees can actually be paid. The public must be educated about this complex topic because they carry the burden of funding these pension systems.
NPR blowing its opportunity to inform the public is a loss for us. Hopefully another neutral media platform will take up the challenge.