In October, several current and former public officials who have successfully implemented pension reform engaged in a series of public forums sponsored in part by the Reason Foundation. During one session, Josh McGee of the Arnold Foundation noted that many public entities’ solutions include underfunding employee plans instead of addressing the larger issue: a need for comprehensive benefit design reform.
According to McGee, since 2009, 47 states have made changes to their pension systems. Labor is taking a large hit, enduring drastic cuts in benefits, increased retirement age and employee contributions, plus the elimination of cost of living adjustments.
“Cutting benefits without a better funding system and better design is short-sighted,” he said. Instead, McGee recommended that any attempt at pension reform create a new plan that is sustainable and secure; provide all workers with a path to secure retirement regardless of when they were hired; simplify cost and benefit design; and put in place an ex ante plan to deal with downside risks, including liabilities that average a whopping 30 percent.
Mechanisms that end the kind of pension spiking that happened in San Diego — because excessive pay was added into final average salaries, among other reasons — and double-dipping, which happens with Deferred Option Retirement Plans, are key, he said. So are caps on pensionable pay in distressed systems.
San Diego implement balanced reform to provide reliable benefits without further burdening overtaxed residents. Key to that success was the definition of compensation, he noted.
“Look at your retirement age. We actually had some elected officials with retirement age of 0: They were retiring with benefits at age 35,” DeMaio said.
Before the recession, the state of Utah stood out for its 100-percent- funded pension funds, according to former State Senator Dan Liljenquist. Then, it lost 22.3 percent of its pension fund value almost overnight. That’s when the state discovered that it was bearing much more risk than it should have been.
As a result, even though it went into the recession 100 percent funded, at that point doing nothing would have led to bankruptcy. “We realized we couldn’t afford for 2008 to happen again,” Liljenquist said. Utah got its residents on board with pension reform by transferring the numbers to opportunity costs. The public heard that approximately 8,000 teachers would be kept out of classrooms for 25 years, that there would be 0 percent growth in public education budgets for five years and that class sizes would likely increase by up to eight students per class.
The new retirement system included closing existing defined benefit programs to new enrollees as of June 30, 2011; capping employer contributions to new retirement programs, by statute, at 10 percent of base salary; and allowing new employees to choose between a straight 401(k) plan or hybrid pension/401(k) plan.
To be certain that enough money has been set aside to cover liabilities, Liljenquist advises raising your funding rate to over 50 percent. Performance of funds over five years have failed to keep pace with liabilities, and this way they would have to get very low before it would become necessary to start liquidating assets to pay obligations.
Future downturns are inevitable, but McGee recommends attempting to mitigate them by putting in place an outline for what happens when the downturn occurs. That plan should include how unfunded liabilities will be made up, similar to Wisconsin’s, which involved rolling back cost of living adjustments and other management of downside risks.