Wednesday, August 26, 2015

Public pension shocker: Shutting a pension plan actually costs taxpayers money

Amid the nationwide panic over the rising costs of public employee pensions, one proposed solution is nearly universal: States and municipalities should shutter their traditional defined benefit plans and place all new employees in a 401(k)-style defined contribution plan instead.

That's the idea in a proposed California ballot initiative we reported on last week. The measure, which would end defined benefit plans for new employees as of Jan. 1, 2019, was praised by the Wall Street Journal as one that would "end defined-benefit pensions and save taxpayers billions of dollars."

As it turns out, the Journal -- and the drafters of the initiative -- have the math exactly wrong. The experience of states that did exactly that shows that taking these steps sharply increases pension costs to taxpayers while providing employees with markedly poorer retirement benefits.

The evidence comes from a study by the National Institute on Retirement Security, whose board and advisors comprise officials of public pension agencies and leading academic experts on pension economics. The study examined the experience of West Virginia, Michigan and Alaska, each of which responded to rapidly rising unfunded liabilities in their defined benefit public pension funds by closing those plans and placing new employees in defined contribution plans.

The study found that in most cases the unfunded liabilities in the old plans rose sharply, the employees in the new plans failed to build sufficient nest eggs for comfortable retirement and the cost of pensions went up. West Virginia eventually reopened its defined benefit plan to those new employees, and they piled back in. Alaska has considered doing so, but hasn't passed the required legislation.

The main problem with closing defined benefit plans is that the demographics within the closed plans change quickly. Without new members coming in, the number of active workers making contributions shrinks. The loss of young members making contributions for years before retirement is especially damaging. California's giant pension fund, CalPERS, made this point in a 2011 white paper; its findings are confirmed by the experiences of the three states.

"A misperception persists ... that defined contribution plans 'save money' when compared with traditional pensions," the National Institute study says. But the three states in its survey "experienced a much different reality over time."

West Virginia, which closed its defined benefit plan for teachers to new workers in 1991, was paying benefits to 27,000 retirees by 2005, while fewer than 18,000 active teachers were still making contributions (6% of their paycheck, with the rest of the fund cost coming from the state). Meanwhile, teachers in the new plan were struggling, especially after the stock market crash of 2000-02. By 2005, the average account balance was only $41,478, and of 1,767 teachers over age 60, only 105 had balances higher than $100,000. West Virginia found that the cost of its contributions to the defined-contribution plan was roughly twice that of the traditional plan, for crummier benefits.

Michigan made a similar discovery. The state closed its traditional plan to new hires in 1997, substituting a contribution to a 401(k)-type plan of at least 4% and up to 7% of employee pay per year (depending on the worker's own contribution). This looked like a bargain, since the state was then contributing 9.1% of pay to the defined benefit plan.

Then demographics and two market crashes took over. The aging workforce in the old plan accrued ever-rising average liabilities while the return on the plan assets fell. The plan, which had been overfunded by $734 million in 1997, showed an unfunded liability of $6.2 billion by 2012.  In 1997, the state's required annual contribution per active member was $4,140; by 2013, it was $37,100.

All three cases shared one fundamental reason for the traditional plans' fiscal problems: The government failed to keep up with its own contribution obligations. This is endemic across the nation. It's also the core reason for the unfunded liability in public pension plans in California, where public employers were given contribution "holidays" in the 1990s, when a bloated stock market made the public pension funds look permanently flush. When the stock market tide ran out, the wreckage emerged--and public employees, not the public officials who shortchanged the pension funds, were blamed.

The National Institute's report is a reminder that it's wise to ask who benefits in a shift in public employee pensions from defined-benefit to defined-contribution plans. Not the taxpayers, and not the employees. That leaves the major promoters of public-pension panic: Wall Street investment operators, such as billionaire John Arnold. Wall Street collects billions in fees from big public pension funds, but its take from millions of individual retirement accounts is potentially much higher. The lesson for taxpayers and public employees alike is clear: when you hear "experts" talking about how ending defined benefit plans will save everybody money, keep your hands on your wallets.

Wednesday, August 19, 2015

LASERS Sustainability Affirmed in Legislative Actuary Report

A new report, Sustainability of the Louisiana State Retirement Systems, was presented by the Legislative Actuary last week at the Public Retirement Systems Actuarial Committee (PRSAC) meeting. The conclusions in the report affirm the sustainability of LASERS. The most important findings include:
  • The defined benefit plan administered by LASERS is inexpensive, about half the cost of Social Security;
  • The debt payment (Unfunded Accrued Liability), makes up the lion's share of the state's employer contribution to LASERS; which means changing the type of benefit plan we offer would not improve the state's financial situation;
  • The positive financial status of the LASERS plan, coupled with the difference that legislative reforms are making to reduce the debt payment, indicates there is a high likelihood that the UAL will be paid off early.

Additional information is found in this report by The Advocate.

Monday, August 17, 2015

Despite debt, state pension plans for workers, teachers in a ‘relatively good financial position,’ analysis finds

Marsha Shuler
The Advocate

Despite a staggering debt, the state’s two largest pension plans — for state employees and teachers — are sustainable and are in a “relatively good financial position,” the Legislature’s retirement financial guru reports.

And the state government retirement systems are still cheaper than the cost of enrolling teachers and state workers in the federal Social Security program, according to the analysis.

About 250,000 people, actively employed and retired, are members of the Louisiana State Employees Retirement System, better known as LASERS, and the Teachers Retirement System of Louisiana, or TRSL.

“The problem with the retirement systems is not the plan design, but rather, it is the fact that ... debts have accumulated in the past that now must be paid,” legislative actuary Paul Richmond said.

Most of the hefty contributions state government makes to the systems are extra payments aimed at eliminating the systems’ combined $19 billion in unfunded accrued liability. UAL is an actuarial term that refers to the difference between the retirement benefits state government promised to pay its employees in the future and the amount of assets presently on hand. The state systems’ massive debt came because past Legislatures and governors did not provide sufficient dollars to cover promised benefits.

Richmond said the contributions to pay off that debt are “generally sustainable” and said there’s a 50-50 chance that LASERS and TRSL will be fully funded by 2029.

“If the UAL is out of the picture, what this says is that the cost of the current benefits for LASERS is 3.5 percent (of pay) and for Teachers 4.2 percent because of the reforms the Legislature has made,” Legislative Auditor Daryl Purpera said. “This is not a very expensive benefit structure. Anything less than 6.2 percent (the cost for Social Security) is really wonderful. It’s very sustainable.”

Louisiana is one of seven states that don’t have employees enrolled in federal Social Security, opting decades ago to instead run its own pension system.

LASERS and TRSL operate traditional defined-benefit plans that determine long-term pension commitments based on a formula that includes the number of years worked and salary earned.

The Legislature, with the pension systems’ support, has made a series of changes in recent years. Changes included increasing the retirement age for new hires; computing the pension benefit based on the final five — instead of three — years of employment; adopting laws to prevent major increases in salaries prior to retirement; and limiting cost-of-living adjustments for retirees.

All those factors played into Richmond’s analysis, which shows decreasing state and local contributions to cover normal costs of the pension systems.

“The reality is the people in the old plan over time will retire and be replaced by new people under new plans that are less costly,” TRSL Executive Director Maureen Westgard said. That is driving down costs year by year, she said.

LASERS Executive Director Cindy Rougeou said Richmond’s report reaffirms that the benefit structure is not the problem. “It’s the financing of the UAL,” Rougeou said. In the case of LASERS, the debt payment was $630 million out of $700 million in contributions.
Gov. Bobby Jindal attempted to extensively overhaul the system, saying it was too costly. He pointed to the escalating pension costs to the state.

“You could not create a benefit structure more economical for the state,” Rougeou said. “The legislative reforms are making a huge difference.”

Voters, decades ago, approved a constitutional amendment requiring the elimination of the UAL by 2029.

Extra payments are appropriated annually toward debt eradication.

A 2014 law is projected to save taxpayers $5 billion over time because pension debts will be paid off sooner. The legislation, sponsored by state Rep. Joel Robideaux, R-Lafayette, puts more retirement system “excess earnings” — those over 7.75 percent — toward debt retirement before dollars go into a special account through which retiree cost-of-living raises are funded.

LASERS and TRSL also reduced their projected annual investment returns from 8 percent to 7.75 percent. All the earnings above that mark go to paying off the debt.

Because the systems expect to earn less, the more money made over the 7.75 percent mark means the more money that can go toward paying off debt and thus end up lowering payments required of the state.