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Illinois’ expensive retiree health care ruling

Illinois

Illinois suffered a blow when the State Supreme Court ruled that public employee retiree health benefits are enshrined in the state constitution and may not be adjusted via legislation. Illinois has lost an important tool for reducing $56 billion of unfunded retiree health care liabilities and $100 billion in unfunded pension liabilities. These unfunded retiree costs outstrip the state’s $33 billion of net tax supported debt.

The Chicago Tribune wrote:

The Illinois Supreme Court ruled today that subsidized health care premiums for retired state employees are protected under the Illinois Constitution, signaling potential trouble for an overhaul of pension benefits that’s also being challenged in court.

Today’s ruling also could affect the city of Chicago’s ongoing phase-out of retiree health insurance subsidies, a program Mayor Rahm Emanuel was counting on to save millions of dollars a year, as well as legislation recently approved to modify the pension plans of city workers and laborers.

The 6-1 decision centers around a 2012 law that allowed the state to charge retired workers for health care insurance premiums, which many did not have to pay depending on how long they worked for the state.

Crain’s Chicago Business identified the trouble for the state in the court ruling (emphasis mine):

Kentucky’s big pension mess

Kentucky

The Kentucky Employees Retirement System (KERS-Non-Hazardous), the nation’s most poorly-funded state pension with 23 percent of the assets needed to cover liabilities, suffered a legal blow last week. As of last June, KERS had only $3.1 billion of assets to cover the $11.3 billion in retirement commitments that it had made and $8.26 billion of unfunded liabilities.

Should the 41,000 active employees, 40,000 inactive employees and 37,000 retirees in Kentucky be worried about the security of their pensions? Given recent events, they probably should.

In a pivotal court case last Friday, U.S. Bankruptcy Judge Joan A. Lloyd ruled that an insolvent non-profit agency, Seven Counties Services, is not part of the Kentucky government and may leave KERS. This could clear the way for other financially strapped non-profit agencies across the state to flee soaring pension costs and leave KERS with more stranded liabilities. (Judge Lloyd’s opinion here). The Kentucky Courier Journal wrote:

Understanding the public pension funding gap

This is a guest post by Gregory Mennis, director of state public-sector retirement systems for The Pew Charitable Trusts. It is a response to “Late to the public pension game,” from April 2. 

The Pew Charitable Trusts has been reporting on state and local pension data since 2007 and we applaud Reuters’ attention to this important public policy issue.  Cate Long’s April 2 blog post “Late to the Public Pension Game” questioned why our report, “The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow,” relied on 2012 data, saying it was out of date. These key points explain why Pew’s latest report relies on 2012 data.

Pew has consistently used the states’ own numbers for all of its analysis, and 2012 is the most recent year for which data for all 50 states is available.  Comprehensive data for 2013 won’t be available until later this year. Cate Long’s post cites a Wilshire Consulting report that fills in the gaps of the 2013 state data with Wilshire’s own estimates and projections. Wilshire also calculated states’ plan assets on a market-value basis, rather than using the numbers as reported by state pension plans. Our practice is not to modify, alter, or project data forward.

Late to the public pension game

Pew Charitable Trusts has released an ominous report, The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow.” The report finds that in 2012, U.S. public pensions lost ground in their funding ratios and ended the year weaker than they started. What is not clear is why, in March 2014, Pew is reporting 2012 data. Because of large stock market gains in 2013, pension funding gaps are now actually shrinking, not growing. Reuters writes about the Pew report:

Factoring in promises made by local governments to fund pension benefits for their employees, total pension debt climbed to over $1 trillion as of June 30, 2012, the end of the most recent budget year for which data is available.

‘Even though we’ve seen recent market gains and reforms, the funding gap has continued to grow for pensions,’ said David Draine, a senior researcher at the Pew Center on the States.

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:

Pension underfunding crosses party lines

There is no one-size-fits-all condition for state pensions. The condition of state pensions varies from nearly 100 percent-funded plans in Wisconsin, North Carolina, South Dakota, Washington and New York to less than 55 percent in Kentucky, Connecticut, Rhode Island and Illinois.

The reasons for the funding levels span economic and historical explanations, but do they also touch the political? Are states controlled by Republicans, who are known for fiscal conservatism, harboring better-funded pensions than Democrat-controlled states, which are willing to embrace a broader array of government services?

I mashed up data about legislative control of states with funding levels of pensions plans and how much of the “actuarially required contribution” (ARC) they had made in 2012 (data from Pew page 5):

A new local pension calculus

The team at The Center for State and Local Government Excellence has set a new standard in how local pension burdens should be reported in financial documents like CAFRs. The center’s new approach for measuring a municipality’s pension burden is to aggregate the direct cost of locally-administered pension plans (both city and taxpayers’ share of costs) and contributions to state teacher and non-teacher plans on behalf of dependent school districts. The aggregated cost is compared to a community’s revenues to understand how much must support pensions.

A lot of previous pension analysis looked at pension plans’ funding levels. This study looks at the cost to taxpayers to support the pension promises they have made.

CSLGE says that its approach “measures the direct cost on the city’s finances.” It’s a vital number, but it has not been used to report the full debt burden on taxpayers. For example, when a community has municipal, school, library and sewer debt, one can understand an individual taxpayer’s debt responsibility by adding these figures.

The debate over Rhode Island’s pensions

Former SEC attorney Ted Siedle (currently formerly Putnam Investments’ compliance director), has issued a new investigative report that blasts Rhode Island Treasurer Gina Raimondo about her lack of transparency over the state’s pension investments. The report was commissioned by the Rhode Island chapter of the American Federation of State, County and Municipal Employees (AFSCME).

Raimondo says that Siedle’s allegations are entirely driven by politics, but four Rhode Island public interest groups have nevertheless encouraged the treasurer to release the pension information. From Siedle’s report (page 5):

Recently, four open-government groups – Common Cause Rhode Island, the state’s chapter of the American Civil Liberties Union, the Rhode Island Press Association and the League of Women Voters of Rhode Island released a letter to the Treasurer voicing their concerns regarding the Treasurer’s strategy of withholding hedge fund records. These groups believe that since the financial reports are paid for with public funds and detail how the state is investing the public’s money, they should be made public in their entirety; further they found ‘troubling’ the Treasurer’s decision to allow the hedge funds to decide what information to release.

Emanuel should fix Chicago’s pensions now

According to Moody’s latest report on local government pensions, Chicago’s adjusted pension and debt burden (relative to its tax base) is the largest in the nation. The city is now putting about 8 percent of its revenues toward its pension funds. But the pensions are so underfunded that if the city made the full annual pension payment it would amount to 28 percent of revenues. The city has seriously neglected funding its pension plans.

The problem is complicated by the fact that Chicago must work through the Illinois General Assembly to enact changes to pension contributions and benefits. There is little discretion at the local level on these issues. Chicago Mayor Rahm Emanuel should go to Springfield and twist arms in the General Assembly before credit rating agencies whack the city with more downgrades. Instead, Emanuel intends to push the issue off for several years and do nothing. The Chicago Tribune reports:

Faced with the prospect of a major tax hike or severe service cuts just as he stands for re-election a year from now, Mayor Rahm Emanuel told the Tribune Wednesday that his formula for fixing the financially out-of-whack government worker pension system requires ‘reform, revenue and time.’

Public pension assets reach highest-ever level

The pension doomsayers, who claim that pensions are direly underfunded and losing ground, may be surprised to hear that public pension assets grew to their highest-ever level for the last fiscal year (ending June 30). Strong equity market returns helped propel the national median investment return to 12.4 percent. The whiff of panic about public pensions should be subsiding, except for the ongoing hot spots like Puerto Rico, Illinois and Chicago. Overall, the winds have calmed.

Reuters’ Lisa Lambert reported:

Asset values at U.S. public pension funds rose 8.4 percent in the latest fiscal year to the highest level in more than 40 years, but their costs also rose, the U.S. Census reported on Monday.

Most retirement systems ended fiscal 2013 on June 30. In the final quarter of that fiscal year the cash and securities holdings of the 100 largest public-employee pensions were $2.944 trillion, up 8.4 percent from a year earlier and the highest level since the Census began collecting pension data in 1968.

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