Sky Continues Not To Fall on Public Employee Pensions Around the Nation

The typical newspaper headline over the last few years has been about the failure of public employee pensions in certain cities and states to match their assets with their liabilities, meaning the benefits due to retirees. The doom-and-gloom headline would likely focus on one or two city or state plans that weren’t disciplined in funding their pensions on yearly basis, only to find themselves at some point potentially owing huge amounts for future retirement obligations they had made to people who’d dedicated their life to providing a public service.

The good news today is that we may see fewer of those sorts of headlines as cities and states do what they should to balance their books. And we are likely to see even fewer.

This week the Center for State & Local Government Excellence released a new report, “The Funding of State and Local Pensions: 2011-2015,” showing that public pension plans funded ratios slipped a modest 1 percent in 2011, to 75%, reflecting actuarial smoothing caused by a reduction in the growth rate of liabilities. In other words, as cities and states have cut back on hiring, and reformulated their plans to match income with outlays, the decline in funded ratio has declined at systems around the nation.

They didn’t say this, but I will: the system is working in terms of people across the nation coming to the realization that adjustments needed to be made to reflect a slow growth economy.

The study projects continued steadiness, and then improvements in funded status, as the economy and stock markets return to more ‘normal’ growth. Here’s the conclusion from their report:

The funded status of state and local pensions has been front page news since the collapse of financial markets in 2008. At the time, it was clear that the funded ratios of public plans would continue to decline as actuaries gradually averaged in the losses. Indeed, the funded status for 2011 was 75 percent compared to 76 percent in 2010. The decline was mitigated somewhat by much slower liability growth.

The reason that the growth in liabilities has slowed is that states and localities have laid off some workers, frozen salaries, and reduced or suspended COLAs. Because many of these changes are one-shot, liability growth is likely to pick up somewhat in coming years. Even if the liability growth rate picks up, however, phasing out years of low returns in the actuarial averaging process should lead to an increase in assets under our “most likely” stock market scenario. Specifically, if the stock market increases at about its historical rate over the next four years, the funded ratio for state and local plans should increase gradually to 82 percent in 2015.

The critics of defined benefit plans like to use scare tactics in their campaigns against public employee pensions, but the general public should see this report as continuing evidence that the “crisis” is whipped up and manufactured. Leave the system to work itself out. 

The chart below shows the funded status of Texas’ biggest state pension systems, and is available on page 12 of the report. --- Max Patterson

NIRS Study: Pensions' Benefits Create Economic Activity

Just like there are two sides to every coin there are two sides to every pension dollar. All too often we get caught up in the details of one side of the pension equation – the contributions that the taxpayer-as-employer makes to their city’s public employees’ retirement plan – and we lose sight of the other side.

If you are asking, “What other side?” you’ve demonstrated the point.

The other side is that the pension benefits are distributed to millions of people across the United States, and they do things with that money. For most pension recipients, it’s not much, probably averaging in the $1,500-3,000 per month range, but when spread out over millions of people it adds up to a significant additive to our economy.

To prove this, the National Institute on Retirement Security conducted a major study of the after-effects of pensions, when the benefits are distributed to retirees. The NIRS study offers some very significant findings that most people wouldn’t think about or know because of their focus on one side of the coin.

As such, I strongly recommend reading the NIRS report, Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures, which offers these findings for Texas:

• In 2009, 478,767 residents of Texas received a total of $10.2 billion in pension benefits from state and local pension plans.
• Their average pension benefit was $1,776 per month or a modest $21,318 per year. These benefits were for retired teachers, public safety personnel, and others who served the public during their working careers.
• Between 1993 and 2009, 19.91% of Texas’ pension fund receipts came from employer contributions, 17.05% from employee contributions, and 63.04% from investment earnings. [emphasis added].
• Retiree expenditures stemming from state and local pension plan benefits supported 128,204 jobs in the state. This represents 1.1 % of Texas’ labor force.
• The total income to state residents supported by pension expenditures was $6.0 billion.
• Retirees’ expenditures from these benefits supported a total of $20.2 billion in total economic output in and $11.2 billion in value added in the state.
• Nationally, state and local pensions support 2.9 million jobs and $443 billion in economic activity.

We highlighted the 63.04% of pension benefits that come from investment earnings because that really speaks to the success of the hardworking pension board trustees, many of whom are TEXPERS members, who have played a part in growing those investment earnings over the years across our great state. Their contribution to that phenomenal statistic should not go unnoticed. Every dollar of investment return is a dollar that taxpayers or public employees need not provide.

It is our hope that TEXPERS played a part in that equation, having fulfilled our mission over 23 years to provide pension investment and benefits administration education to our members. – Max Patterson

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 www.AlecExposed.org, 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

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