Forbes post, “Public Pension Roundup: Reform And Regression”

Originally published at Forbes.com on February 19, 2021

 

A round-up of reports across the country.

Florida: ending pensions for new employees?

From Tampa Bay Times,

“After years of discussions about the tricky issue of overhauling Florida’s retirement system for government employees, a Senate committee this week approved a proposal that would shut future workers out of a traditional pension plan.

“The proposal, sponsored by Senate Governmental Oversight and Accountability Chairman Ray Rodrigues, R-Estero, would require new employees as of July 1, 2022, to enroll in a 401(k)-style “investment” plan. Employees currently are allowed to choose whether to take part in the pension plan or the investment plan. . . .

“The pension plan was considered fully funded from the 1997-1998 fiscal year to the 2007-2008 fiscal year but then started running actuarial deficits, said Amy Baker, coordinator of the Legislature’s Office of Economic & Demographic Research. The deficits began during a major recession that hammered investments.”

Now, generally speaking, when an employer switches from a traditional pension to a defined contribution plan, this means a significant drop in plan benefits for employees. In Florida, that’s not the case — at least nominally not so: the employer contribution rate is the same for either type of plan, and varies only by employment class. (Of course, this doesn’t take into account any additional contributions needed to remedy funded status.) In addition, regular readers will know that I insist whenever the opportunity arises that state and local employees should participate in Social Security just as much as the rest of us do; as it happens, that is already the case for public employees in Florida. In addition, unlike the 8 year vesting of the traditional pension plan, the employer contributions to the defined contribution plan vest after only a year of service.

Kentucky: a new hybrid pension plan?

From WDRB,

“A bill creating a new pension tier for future teachers that will require them to pay more toward their retirement and work longer before they can earn full benefits passed the House Thursday.

“House Bill 258, sponsored by Rep. C. Ed Massey, moved to the House floor on a 14-4 vote and cleared the lower chamber hours later on a 68-28 vote. The measure, if passed, would put teachers and others covered by the Kentucky Teachers Retirement System hired after Jan. 1, 2022, into a new hybrid pension plan that includes foundational and supplemental benefits.

“Massey, R-Hebron, said the proposal would keep future hires from joining an already burdened and overtaxed’ defined-benefit pension system at KTRS, which actuaries expect will have unfunded pension liabilities totaling $14.8 billion and have 58.4% of the money needed to cover pension costs for current retirees and workers by fiscal year 2023.”

As described by WDRB as well as by the Louisville Courier Journal, the bill is not without opponents but there is a degree of consensus that reform is needed. However, unlike Florida, teachers do not participate in Social Security in Kentucky, so much more is at stake.

Illinois: pension spiking is back, baby

From The Patch, a local news publication in suburban Chicago:

“The Hinsdale High School District 86 board on Thursday approved a two-year agreement with the teachers union, including a “pension spiking” provision and relatively small pay raises.

“The agreement is retroactive to the beginning of the 2020-21 school year. Over the two years, teachers are expected to see base salary increases amounting to 2.2 percent.

“Under the agreement, the teachers will now get 6 percent annual increases in the last four years of their careers, up from the current 3 percent.

“This change will mean higher pensions for teachers, a practice that critics call ‘pension spiking.’ In Illinois, the state foots the bill for local districts’ pension contributions. So District 86 won’t suffer the long-term costs of the end-of-career pay hikes.”

Of course, the pension boosts won’t be free — but it will be Illinois taxpayers who will bear the cost, and quite substantially so. Receiving a guaranteed pay increase of 6%, rather than the current 3%, for four years, will mean one’s final salary is 12% higher than it otherwise would be, and one’s lifetime pension benefit (a four year average), 8% higher.

New York and Massachusetts: early retirement incentives on tap, boosting pension costs

From Spectrum News (Albany),

“Public workers in New York could have an incentive to retire early under a proposal by a pair of state lawmakers unveiled on Thursday.

“The bill backed by Sen. Peter Harckham and Assemblyman Tom Abinanti would create early retirement incentives for workers 55 and older who have 10 years of service with state or workers with 25 years of government service. A separate bill that covers early retirement for public workers in New York City was previously introduced. . . .

“To be eligible, a worker would have to be in a position that can be eliminated. . . .

“’It is better that longtime employees retire with guaranteed income than governments be forced to lay off employees who then seek unemployment benefits,’ said Abinanti. ‘Retirements in the short term will cut local payrolls, and in the long term, open jobs for those who want to work in government.’”

What is the incentive, specifically? Up to 3 years of additional service credit, based on current years of service, plus, for employers in “an optional retirement program,” additional retirement account contributions of as much as 45% of pay. In addition, employees at least 55 years old with 25 years of service would be spared the early retirement reductions that would otherwise apply — reductions which are as high as 27%, depending on age.

Not surprisingly, the bill comes with no actuarial analysis of the long-term cost of these benefit increases. And, although the plan is fully funded (based on the public plan funding methods), the new costs still must be paid by taxpayers.

Finally, according to MassLive, in Massachusetts,

“A bill that would allow teachers who are eligible to retire to purchase up to five years of service, age or a combination of the two in order to make room for new teachers has been backed by state Sen. John Velis, D-Westfield, and state Rep. Carol Doherty, D-Taunton.

“If approved, the bill known as ‘An Act to provide a retirement enhancement opportunity to members of the Massachusetts Teachers Retirement System,’ would be voted on by each city or town’s School Committee before teachers in those communities would be eligible. . . .

“The proposal was created by the Massachusetts Teachers Association as a way to provide an early retirement opportunity for teachers who have struggled to adapt to the remote teaching model and those who are at high-risk for COVID-19 and do not want to return to or continue teaching in-person while also giving opportunities to younger teachers in need of work.

“’With the money saved from allowing teachers with higher salaries and advanced degrees to retire early you could hire two teachers and then some,’ said Lori Lyncosky, president of the Westfield Education Association and a spokesperson for the Massachusetts Teachers Association which drafted the bill.”

This bill would increase the retirement benefit of an eligible teacher by adding 5 years to the teacher’s age and 5 years to the teacher’s service, or by some combination of each up to a total of 10 years. In principle, participating teachers would be required to “purchase” these credits based on a calculation of the costs; however, these calculations tend to understate the true cost, for instance, by the way assumptions are selected, or by using flat costs without regard to age, even if employees who “win” from this cost-setting are more likely to take the benefit.

It is, of course, an indicator of a broken salary schedule system at any particular school district if long-service teachers earn pay that’s double their new hire counterparts without adding double the value in terms of their experience, ability to mentor younger teachers, and the like. And this sort of incentive, even ignoring the question of whether the buy-in cost is fairly set, boosts the costs of pensions, which assume, in terms of such assumptions as retirement age, that even though teachers generally have very young retirement eligibility, a significant number of teachers will continue teaching to an older age, with the side benefit of less cost in pensions.

The bottom line: we have 50 states and 50 different pension systems, and significant differences in the reform-mindedness of those states’ legislators.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Forbes post, “Fossil Fuel Divestment Comes For New York Pension Funds – Is That Constitutional?”

Originally published at Forbes.com on December 20, 2020.

 

First Scandinavia. Then the UK. Now New York’s public pension funds will be divesting from fossil fuel companies. Whether you cheer or groan at the decision, there’s a wrinkle to it that’s important to discuss.

The fiduciary duty

Yesterday, I looked back 30 years ago to better understand New York’s well-funded pensions, and, in particular, McDermott v. Regan, the 1993 court case in which the legal principle was established that the provision in the New York state constitution prohibiting reductions in past or future accruals, also prohibits actions that would cause those pensions to be inadequately funded — forcing the state to keep the plans funded.

As it happened, there were two key elements to that ruling; in addition to the question of preserving plan benefits and plan finances, there was a further question of the role of the state Comptroller, who was and is, in the state of New York, the sole trustee of the state’s pension plans.

A key part of the court’s evaluation of the situation was that the Comptroller and the State (the Legislature) had a fiduciary duty to the participants in the retirement funds, acting exclusively in their best interests. In the court case in question, the Legislature was attempting to make a change to the pension funding method with the explicit intention of saving money — an action unquestionably not in the best interests of participants.

What’s more, the Court’s opinion references an older opinion, Sgaglione v. Levitt, from 1976. Here the Court determined to be unconstitutional a law that would have mandated that the New York state public pensions purchase bonds issued by the city of New York as a part of a rescue package to stave off default in that city’s financial crisis. The reason for this is, as with the 1993 decision, that the constitutional requirement for unimpaired pensions necessarily implies that the funds paying for those benefits must also be protected.

But in addition, this ruling found that the Comptroller had a particular duty as a trustee to make investment decisions, and to make them with the benefit of the fund in mind and no other purpose. In fact, the opinion says,

‘[It doesn’t matter] whether the purpose of the fund was to benefit not the members or retired members of the retirement systems, but to protect future taxpayers against burdens engendered by past generations of taxpayers in providing for retirement benefits of former public employees. . . . The purpose was twofold: to protect the receivers of benefits and to protect future taxpayers by use of actuarially sound retirement fund.”

The divestment motive

Which brings me to the announcement last week that New York’s state pension funds would be divesting from fossil fuels. As reported at the New York Times on Dec. 9,

“New York State’s pension fund, one of the world’s largest and most influential investors, will drop many of its fossil fuel stocks in the next five years and sell its shares in other companies that contribute to global warming by 2040, the state comptroller said on Wednesday. . . .

“The state comptroller, Thomas P. DiNapoli, had long resisted a sell-off, saying that his primary concern was safeguarding the taxpayer-guaranteed retirement savings of 1.1 million state and municipal workers who rely on the pension fund.

“But on Wednesday, Mr. DiNapoli signaled that his main reason for adopting the new plan now was his duty to protect the fund and to set it up for long-term economic success in a world that is moving away from fossil fuels.

‘New York State’s pension fund is at the leading edge of investors addressing climate risk, because investing for the low-carbon future is essential to protect the fund’s long-term value,’ he said in a statement.”

Is this credible? Is DiNapoli acting in line with his obligation as a fiduciary, out of a belief that companies in the fossil fuel business are bad long-term bets? This would, it turns out, be fully within the parameters of the Department of Labor ruling on the topic, which allowed for exactly this action as a means of complying with fiduciary duty requirements.

But the Times further reports that DiNapoli’s plan was not his own initiative but “the result of an agreement among Mr. DiNapoli and state lawmakers who, spurred by an eight-year campaign by climate activists, had been poised to pass legislation requiring him to sell fossil-fuel stocks.” And indeed, activist groups such as 350.org and DivestNY see this announcement as a hard-won victory and are lauding DiNaopoli as a “true climate hero.”

In fact, in a press release by New York State Senator Liz Krueger, the sponsors of the legislation in question, the Fossil Fuel Divestment Act, acknowledged that mandating divestment posed constitutional questions for this very reason. Their solution was to require a “Determination of Prudence issued by the Comptroller, certifying that divestment complies with his fiduciary obligations and the ‘prudent investor rule’ as defined in state law.” But the very text of this release makes it clear that their prime motivation was not to safeguard pensioners from future market crashes in the fossil fuel business, but divestment for its own sake, and that the text in the law which on the face of it maintains the Comptroller’s obligation to be a fiduciary, is really intended solely to maintain the appearance of such. “Fiduciary duty” is not a magic word that can be uttered to transform a particular investment policy from questionable to acceptable.

Would a court which has ruled that a change in funding rules (for the sake of saving money) and a mandate to invest in New York City bonds (to rescue the city from default) were both unconstitutional because they abandoned the fiduciary duty to plan participants and taxpayers, find this new change acceptable?

As it happens, there are already certain limits on New York’s pension fund investing. As of 2018 reporting, the fund had “restricted lists” with respect to tobacco companies, private prisons, and gun manufacturers. In addition, Gov. Andrew Cuomo signed an executive order in 2016 requiring divestment of public funds with respect to any companies supporting the Boycott-Divest-Sanctions campaign against Israel — though as it happens, this is a fairly short list and largely consists of companies that the state would be unlikely to investing in in any event. (Updated lists are available at the New York state website.) But these lists are much more limited in scope than the new fossil fuel divestment plan, and respond to much more narrowly-circumscribed questions of ethics.

Now, whether any particular individual or group will actually file suit remains to be seen. But if they do, a court deciding against them would have to reject these precedents.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Forbes post, “Why Are New York’s State Pensions Fully Funded? Because They Have To Be”

Originally published at Forbes.com on December 19, 2020.

 

When I write about well-funded pension plans, it’s generally to make a plea for risk-sharing plans, such as that of Wisconsin (with the “purest” risk-sharing mechanism) or South Dakota (which bases COLA adjustments on the fund’s financial strength), or other states with a legacy of fiscal conservatism and prudence. But there’s a state which, in all appearances, is an outlier: New York. In Pew’s most recent analysis, they are 98% funded, bested only by South Dakota’s 100%. How did they manage this?

Turns out, New York and Illinois have one characteristic in common: they both have specified, in their state constitutions, the protection of both past and future pension accruals. (Arizona has a similar provision, but its story is unique and deserving of a separate article.) So why are their paths so different? Why is New York the second-best and Illinois (according to the same data) second-worst?

Little of the history of New York’s pension are available online, but one key development can be traced by reading the relevant New York Times reporting from 1989 – 1990, two years when the state was facing budget cuts in the recession.

It’s a story that sounds familiar: politicians who want to avoid budget cuts decide to cut pension contributions instead.

In 1989, New York Governor Mario Cuomo proposed to save $300 million in its state budget by eliminating its pension contributions. As an unnamed staff member said (New York Times, “Cuomo Proposes Pension Changes,” Jan. 7, 1989),

”This is where the big money is. . . . All the other stuff is peanuts.”

After initially opposing the changes, the state’s Comptroller, Edward Regan, struck a bargain: at a two-year savings of $600 million, he would agree to increasing the fund’s expected return on assets from 8% to 8.75% and to lowering the expected salary increase rate from 7.3% to 7.0%. In return, Cuomo abandoned his prior proposal to change the actuarial pension funding method in order to reduce contributions. In agreeing to the changes, Regan wrote (”Cuomo-Regan Pension Pact: How They Agreed to Changes in the System,” Jan. 14, 1989), that the plan ”could send the wrong signal that pension fund earnings are a painless and permanent budget balancing tool” and this action ”leave[s] the state terribly vulnerable to an economic downturn” and ”must not be used again.”

But the next year, the state had another budget gap, and was back for more cash — this time, a contribution reduction of $273 million, by making the same change in pension funding that Cuomo had proposed, then relented on, the prior year. This shift, from an Aggregate Cost Method to the Projected Unit Credit, is technical enough that the news reporters (e.g., Newsday, Aug. 17, 1990) don’t even try to explain it, but it’s essentially the difference between, if you’re saving for your own retirement, saving a level percentage of your pay every year, and saving more as you get closer to retirement. Regan again opposed it, but the legislature approved the change.

Joseph McDermott, president of the Civil Service Employees Association, opposed it, saying, “you can’t use the pensions as a piggybank every time you do run into a problem . . . . it’s unfair to the members of the system.” And when a lawsuit was filed by McDermott and the CSEA, Regan issued an I-told-you-so statement: “the inevitable has occurred . . . . Our warnings were ignored and now the state faces a costly and potentially protracted lawsuit.”

And it was indeed protracted: the Court of Appeals found for McDermott in November of 1993. While there were certain technical issues regarding the decision-making authority of the Comptroller vs. the legislature, the court’s decision was much broader: it determined that, within the guarantee of the state’s constitution that pension benefits must not be “diminished or impaired,” is a guarantee that their funding must be secure:

“In sum, chapter 210 [the funding method change provision] impairs the benefits of the existing pension fund. Said legislation allows employers to deplete moneys in the existing pension fund by reducing the amount of employer contributions. Employers are allowed a credit of a portion of the existing moneys, and need not contribute to the pension until the reserved moneys are drastically reduced. To later replenish the fund, employers and employees must increase the amount of their contributions to the pension fund. As such, the reserve moneys will not be available for immediate investment, the return on investment of moneys in the existing fund will be significantly decreased, and the additional security provided by the reserve moneys in the pension funds will be impaired.”

This is, in fact, the polar opposite of the Illinois Supreme Court’s decisions on that state’s constitution requirement, despite its identical wording. In that court’s 2015 ruling rejecting a 2013 attempt to reform pensions, they explicitly rejected any such link, noting that at the time that the Illinois provision was added in 1970, there was no interest in adequately funding pensions, and that this constitution provision was viewed by its authors as a means of guaranteeing future pensions without obliging themselves to fund them.

Of course, this is only one small snapshot of history — but one that’s worth knowing about.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.