Friday, April 20, 2012

ALEC Model Legislation for Pension Benefits is Already Mostly in Place in Texas

The American Legislative Exchange Council has been identified as an organization that creates ‘model’ legislation on behalf of its corporate sponsors, to help them pursue their business goals. That’s a standard operating procedure in our system of government, but it’s always nice to know the origin of such proposals. We suggest you see our earlier blog on this topic, where we posit that Wall Street companies are likely sponsors of ALEC, encouraging them to support and promote defined contribution plans, like 401(k)s, as the best retirement system for employees. They would benefit from the fees associated with money management. Those fees are now ‘saved’ by local pensions that elect volunteers to manage their members funds, with the help of consultants and various money managers.

Of great interest to us are the ‘model’ principles ALEC is alleged to have crafted to “solve the funding crises in state and local defined benefit pension and other post-employment benefit plans for public employees.” The solution, according to ALEC, is that “defined benefit plans be replaced by defined contribution plans.”

[You can find this on, a site that collects all the legislation pushed by ALEC. On the home page, click “Worker and Consumer Rights,” and then the link for the zip file for “Worker’s rights, trade, pension and privatization bills.” When you do that, you will find some 110+ bills that relate to those areas, including the ALEC statement of principles on benefits.]

A few observations about this ALEC ‘statement of principles’:
1) The statement is based on the premise that all cities and states face ‘funding crises.’ This simply isn’t true of all government entities. Many run themselves well, without accumulating a lot of debt. Others don’t.

2) The Texas Pension Review Board requires Texas systems to provide several measures of their health, including their funded ratios and their amortization periods. Unfunded liabilities are not debts. That would be like considering the car you want to buy five years from now a part of your current debt load. A lot of things can happen in five years. You may change the type of car you want, you may get a better job with more disposable income available to you, or you may decide to postpone buying. There’s a reason that the pension liabilities aren’t considered part of a city’s debt structure.

3) In many Texas cities, like the case in Houston, debt obligations to fund pension liabilities already are presented to voters.

4) The approval of the Texas state legislature is required to approve any changes to the retirement benefits of each local systems plans.

5) Most Texas systems provide for sharing arrangements of contributions to the retirement systems.
All of the above address the principles suggested by ALEC in their statement of principles. In one sense, Texas is already in compliance with the ALEC principles.

However, none of these principles prove the need for defined contribution plans as the better option for taxpayers.

In fact, our studies show that taxpayers receive the most bang for their buck by continuing to support defined benefit plans in their cities. Our studies used actual data and did not even incorporate the additional training costs that are involved with staff turnover. Defined benefit plans are the most effective in attracting and retaining great employees over time. We shudder to think what would happen to budgets if young firefighters and policemen become enticed to pursue higher paying jobs as they grow into their 30s and 40s, with families to feed and tend. The only reason most forgo opportunities for more pay is their pension plan. Their defined benefit pension plan, that is. We wish we would see ALEC consider more of those concerns in their statements of principles.

In sum, many of the ALEC principles are already in use in Texas, but their core proposal, that DC plans replace DB plans, just simply isn’t supported by any facts. It’s like saying that 2+2=4, but we then need to divide by 0. We don’t. – Max Patterson

Wednesday, April 18, 2012

Is ALEC Behind Efforts to Disrupt Defined Benefit Pensions on Behalf of its Wall Street Sponsors?

As the years have passed we couldn’t help but notice how all the organizations against Defined Benefit plans for public employees use arguments that closely resemble each other. The arguments don’t usually attach any specific empirical evidence, only generalized ‘good for the goose, good for the gander’ or ‘governments spend too much’ arguments. After a little digging, we now think we know why.

Our break in the case came with recent article by Bloomberg about the American Legislative Exchange Council and how it operates.

The article tells how ALEC creates ‘model’ bills on behalf of its industry-backers and pushes those legislative efforts out to other like-minded organizations for various insertions into law at local, state and federal levels. In itself, this mode of operations is not uncommon. It’s surely a tactic used by other groups that push their agendas through various legislative means.

But in this case it’s good to know where the legislation is coming from, especially because the ultimate benefactors of a move from defined benefit to defined contribution plans would be the Wall Street firms that would administer the assets of public sector employees’ retirement accounts. They would be the ones collecting the management fees that are typically calculated yearly, as part of an assets under management calculation for mutual funds. Indeed, every mutual fund investor knows to look at their selected funds’ admin fees, which ranges from 0.25-2 percent of their invested assets. That’s the yearly fee that the manager takes off the top, so to say, regardless of whether the mutual fund makes or losses money. A 10 percent return that you see may actually have been 11 percent without a 1 percent fee. A 10 percent loss would have been a 9 percent loss, except for the 1 percent fee.

The Bloomberg article noted that a few large corporations have been pulling back from their sponsorship of ALEC, but the full list of corporate sponsors is closely kept by the organization. It’s entirely possible – and indeed likely – that Wall Street corporations are sponsors of legislation to convert Defined Benefit plans to Defined Contribution plans. We can only speculate, but the combination of facts certainly lead us in that direction. – Max Patterson