Public pension funds not out of the woods yet
It’s a new year, and some of the tribulations
of 2013 are behind us. But one of the issues
that should carry over into 2014 is concentrated
attention on public pensions.
In the fall Reason Foundation sponsored a
series of public forums to share success stories
and advice on stopping the financial hemorrhaging
caused by pension obligations. Current
and former public officials who have successfully
implemented pension reform participated.
During one session, Josh McGee of the Laura and John 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.
He said that since 2009, 47 states have made changes to their pension
systems and that 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, any attempt at pension reform
should 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.
To be certain that enough money has been set aside to cover liabilities,
former Utah State Senator Dan Liljenquist advised 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, so McGee recommended 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 and other management of downside risks.
Among the specific steps for setting up a pension reform project
that were elaborated by forum participants were:
- Understand the current liability and contribution structure;
examine administration practices; pull existing labor contracts to
understand the benefit structures; benchmark compensation and
benefits to the local labor market; and compile examples of excessive
payouts and/or underfunding and debt.
- Examine options for reform by understanding the timetable for labor
contract changes; explore avenues for implementing reform, such as
legislative votes, public initiatives and legal challenges; and engage
outside counsel to review case law, contract terms and reform options.
- Create coalitions of reformers by identifying the power centers
that drive government policy; create a small steering committee that
will “own” the project; tap existing reform resources like the Reason
Foundation, Arnold Foundation and others; and request “angel funding”
for fiscal and legal analysis.
- Build the political and fiscal case. Consider testing the waters of
government counsel and pension board on reform concepts; create
summary materials that state the case for reform, with answers to
objections; conduct polling on reform concepts to capture public support;
and be prepared to address phony transition cost objections.
- Engage elected leaders and labor unions by identifying one or
more “sponsors” from among elected officials, both inside and outside
of the government entity; and brief all elected officials, even if
they are inclined to oppose, because this gives them the chance to
get on board and make this their idea.
- Take your case public: Define the problem well, first, in part by
engaging media on the problems that were uncovered and by holding
town hall meetings/hearings. Tell them where the money is going,
and what they’re sacrificing for these big pensions. Once the problem
is well defined, reveal solutions.
Happy New Year. Best wishes on all of your 2014 endeavors.
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