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Report: Kentucky reforms benefit most workers—but hurt some, too

It’s early yet, but a new analysis of Kentucky’s recent pension overhaul says that the reforms are working—at least for some.

The study, released by the Urban Institute today, shows that the state’s reform measures will result in more benefits for most workers, although the most experienced workers in Kentucky’s system are not likely to benefit at all.

From the Courier-Journal:

Researchers concluded that the shift will provide at least as much lifetime benefit to 55 percent of vested employees and that most workers with up to 24 years of service will fare better compared to the traditional plan.

But, the report notes, most workers with more than 25 years of service, or those hired later in life, would benefit more from the traditional plan. And employees with 30 years or more will receive about $180,000 less under the change, it said.

The reform measures, signed into law last year, switch public employees from a defined-benefit plan to a hybrid cash-balance plan.

A recap of the new plan:

The state’s traditional retirement plan determined pension benefits based on an employee’s salary. The cash balance approach guarantees a 4 percent return while basing additional benefits on investment performance at Kentucky Retirement Systems. But the change only applies to employees hired after Jan. 1.

Proponents argue that it will help spread out investment risks between government and workers and save the state money during economic downturns.

Draine said the report shows 90 percent of the benefits went to only a quarter of employees under the old system, while that number drops to 66 percent with the reforms.

But critics contend that it makes retirement income less predictable for public employees.

Kentucky is also required under the law to make its full Actuarially Required Contribution, which it frequently skipped out on over the past decade. That comes at a cost of about $100 million annually, which was paid for by eliminating COLAs and increasing the state’s personal income tax.

As of 2011, Kentucky’s retirement system has the 7^th highest unfunded pension liability in the country. The Kentucky Employees Retirement System is only 50.5% funded.

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Detroit’s pension landscape altered after major deal between city, retirees

Detroit, labor unions and the retirees they represent have been locked in federal mediation for months in the wake of the city’s bankruptcy proceedings. The negotiations centered on two competing concepts: pulling the city out of bankruptcy without pushing its pensioners into poverty.

The two sides had long been unable to find common ground, but the urgency of the issue meant something had to give. This weekend, something finally did.

The two sides emerged from mediation last Friday to announce they’d reached a deal in principle that supports Detroit’s restructuring plan but doesn’t gut retirees’ benefits.

USA Today gets into the deal’s details:

Friday’s deal sweetens the stakes for retirees on three major fronts:

• Pension cuts. It would cap total cuts to monthly pension benefits at 20% — critical because some pensioners in the city’s General Retirement System faced huge reductions beyond the base 4.5% cuts to all civilian retiree checks. That’s because Detroit wants to take back what it said were excessive interest payments made to retirees who invested in an annuity savings fund in 2003-2013. The total amount of the so-called annuity “claw back” would be capped at 15.5%, lower than the initial 20% the city had negotiated with the general pension fund.

• Retiree health care. The city agreed to set up a $450 million pot of money for retiree health care, up from less than $300 million previously offered. That additional money would guarantee current retirees monthly stipends for life, instead of eight years, as Detroit had proposed. The stipends vary by worker depending on their income level and whether they were disabled on duty, but the minimum is $125 a month.

• Possible future restoration of money. Detroit and the committee also agreed to firmer targets and goals that would allow retirees’ pension cuts to be reduced if the city’s pension fund investments perform well and other terms are met, Alberts said.

The tentative deal means the retiree committee will recommend that Detroit’s 32,000 pension beneficiaries approve the agreement. Individual retirees still have to vote on the city’s plan before any pension cuts are finalized.

Detroit also reached a separate deal today with 14 of its unions and 3,500 retirees on a five-year collective bargaining agreement.

From the Detroit Free-Press:

The deal includes restoration of some pay for city workers who have faced wage freezes and a 10% pay cut in recent years, although details will vary by union, according to a person familiar with the proposal who wasn’t authorized to discuss it and spoke on condition of anonymity.

Other factors in the deal include work-rules concessions from the unions, the person said.

Detroit’s public safety unions, which have formed a coalition in negotiations with the city, are not part of the deal announced today, said Mark Diaz, president of the Detroit Police Officers Association. The public safety labor coalition also includes the Detroit Fire Fighters Association, the Detroit Police Command Officers Association and the Detroit Police Lieutenants and Sergeants Association.

Diaz said the public safety unions are still open to negotiating with the city, but proposed contract terms so far have been unacceptable. The city has been offering police officers wages starting at $14 an hour, Diaz said.

Union members and federal bankruptcy court will have to ratify the agreement before it goes into effect.

Photo Credit: University of Michigan via Flickr Creative Commons License

Alaska mulls using savings to cover pension-funding shortfall

Alaska is a state far removed geographically from the rest of the country it belongs to. But financially, it may as well be a part of the lower 48—because, unfortunately for Alaska, the United States’ public pension problems know no borders.

The state’s lawmakers have been trying to address the state’s pension funding shortfall—the fund was only 59.2% funded as of 2011, 9^th worst in the country—with concrete proposals for months.

Alaska governor Sean Parnell proposed in December that the state move $3 billion from its rainy day fund into its retirement system in an effort to start paying down its $12 billion pension obligation.

The plan went to the state House of Representatives, where it passed with near unanimity, and now the bill has passed the Senate as well—albeit with some changes. In essence, the plan is to use the state’s savings account to infuse its retirement system with $3 billion in additional contributions over the next 25 years.

The Republic has more details:

The Senate Finance Committee’s rewrite of HB385 calls for a contribution rate determined by what’s known as a level percent of pay method for 25 years. While the bill itself does not include dollar amounts, information provided by the Legislative Finance Division and Buck Consultants indicates combined annual payments for the two systems starting at about $345 million in 2016 and slowly building to about $514 million in 2038. It calls for a final payment of about $490 million the following year.

The information shows the Senate Finance approach extending payments by three years beyond Parnell’s plan, which called for annual payments of $500 million between the systems after the infusion, and costing slightly more — about $13 billion total for Parnell’s plan compared with about $13.3 billion under the committee approach.

These are projections, not predictions, Buck and Legislative Finance Division Director David Teal have pointed out.

Though the bill now differs slightly from Gov. Parnell’s original plan, he was happy with the result.

“With this legislation, we are strengthening the state’s AAA bond rating and ensuring future generations are not saddled with this debt,” he said in a press release.

Photo Credit: SalFalko via Flickr Creative Commons License

Judge: Challenges to Rhode Island pension overhaul will move forward

Rhode Island’s 2011 pension overhaul—considered to be the most sweeping pension reform law in the country—has had its fair share of legal challenges.

A number of public sector unions and retiree groups currently have suits pending against the law, and their arguments, as with similar cases in other state, center on provisions in the state constitution that protect pensions as contracts.

Rhode Island was hoping that those arguments wouldn’t hold water and requested to have the cases thrown out. But Superior Court Associate Justice Sarah Taft-Carter ruled today that the unions’ arguments are too strong to simply dismiss.

From the Washington Times:

Unions and retirees have argued that their pension benefits constituted an implied contract, while the state disputes that. Taft-Carter notes in her decision that unlike some other states, Rhode Island’s constitution and law do not explicitly state that public employees have a contractual right to their pension benefits.

But she writes that other factors support it being a contract, such as the fact that workers have served the public for a required number of years and contributed a required percentage of their salaries to the pension system in return for pension benefits.

“A valid contract exists between plaintiffs and the state, entitling plaintiffs to their pension benefits,” she wrote.

Taft-Carter notes that her standard for reviewing the state’s motion to dismiss was not whether the lawsuit is likely to succeed, but rather to assume the allegations are true, and examine the facts in a light favorable to the unions and retirees.

Rhode Island Gov. Lincoln Chafee and Treasurer Gina Raimondo said in a joint statement that they expected the judge’s decision and are now preparing for trial.

Photo Credit: Governor Chafee via Flickr Creative Commons License

Detroit shifts $100 million to pension funds after bond deal

For Detroit’s bondholders, hope was fading fast—after the city went bankrupt, it was suggested that it could cut bond recoveries to as little as 15 cents on the dollar.

But Detroit agreed yesterday to pay bondholders as much as 74% of what they are owed, in a deal that means as much to bondholders as it does to the city’s retired workers.

That’s because the remaining 26% of bond payments will go straight into the pension system—a cash infusion that will total $100 million.

The deal is part of an effort to keep the city’s pensioners above the poverty line. But they will still face sharp cuts in their benefits, according to Bloomberg:

Under a plan submitted to the court in February and revised last month, pensions for police and firefighters would be cut about 6 percent if they vote for the plan, 14 percent if they don’t. Pensions for other city workers would be cut by about 26 percent if they vote yes and by about one-third if they don’t.

About 20 percent of current pensioners would be pushed below the poverty line by the plan, according to a committee of retirees that has been negotiating with the city.

The deal still requires the approval of Judge Steven Rhodes of the US Bankruptcy Court for the Eastern District of Michigan.

Photo Credit: University of Michigan via Flickr Creative Commons License

New Jersey, facing pension crisis, slapped with credit downgrade

Standard & Poors downgraded New Jersey’s credit rating today, and—surprise, surprise—the state’s pension funds were a major factor.

S&P downgraded New Jersey’s credit rating one notch. It has gone from what S&P considers a “high grade” (A+) to a “medium grade” (AA-).

The downgrade comes despite efforts by lawmakers, including Gov. Chris Christie, to curb the state’s pension woes. Those efforts included mandating higher annual payments by the state, raising retirement ages, freezing cost-of-living-adjustments and increasing employee contributions.

From the New Jersey Spotlight:

In explaining the decision to lower New Jersey’s credit rating from AA- to A+– a rating higher than only California’s A and Illinois’s A- among the 50 states – S&P’s analysis specifically cited a “trend of structurally unbalanced budgets that include only partial funding of pension obligations and the reliance on one-time measures that are contributing to additional pressure on future budgets; a large and growing unfunded pension liability; significant postemployment benefit obligations; and an above-average debt burden.

Notice the bolded statements—that’s a whole lot of ways for S&P to say that pensions are crippling the state’s finances.

And you can’t blame them. New Jersey’s pension fund remains underfunded by about $52 billion.

Photo Credit: Bob Jagendorf via Wikimedia Creative Commons

Consultant rips North Carolina for “over-the-top” pension fund fees

The State Employees Association of North Carolina (SEANC) smelled something fishy going on at the North Carolina Treasurer’s office even before they hired a consultant to investigative the fees paid to the Wall Street money managers who handle the state’s pension funds.

The ensuing investigation found that North Carolina isn’t just paying sky-high fees—the state is hiding them, as well.

According to the hired consultant, North Carolina paid a whopping $416 million in fees to Wall Street last year alone; the fees went primarily to Franklin Street Advisors, the firm that manages much of North Carolina’s pension fund assets.

The consultant hired to investigate, Edward Siedle, provides more details at Forbes:

Indeed, it appears that the massive hidden fees she’s not disclosing dwarf the excessive fees she has. For example, the fee information provided to SEANC indicates that…the pension paid $1.8 million in asset-based fees and $800,000 in incentive fees, or a total of approximately $2.6 million for managing approximately $360 million. This amounts to an apparent 50 basis point asset-based fee and a 5 percent incentive fee. (To date the Treasurer has failed to provide the investment advisory contracts which recite, in part, the fees money managers charge the pension.)

Since Franklin Street is a fund of funds, the underlying hedge fund managers are generally paid a 2 percent asset-based fee and a 20 percent incentive fee. It appears that the Treasurer is not disclosing the significant fees paid to the underlying hedge fund managers actually managing the money—fees which are far greater than Franklin’s fees for simply overseeing them.

It appears that the undisclosed underlying fees related to the Franklin investment alone—just one of the hundreds of funds in which state pension has invested—amount to $7.2 million in asset-based fees and $3.2 million in incentive fees or $10.4 million in 2013.

Since it appears that Franklin has managed this account for approximately 12 years, the undisclosed asset management fees paid to this manager alone appear to exceed $120 million.

However, based upon a review of relevant SEC filings, it appears that there may be additional significant fees, amounting to an estimated $3 million annually, paid to Franklin that are not disclosed.

A spokesman for the state’s Treasurer’s office claimed the consultant, Siedle, drew his conclusions by making assumptions that are “not based on conventional industry standards.”

The spokesman also said the fees paid to its money managers are in line with what other states pay.

A recent study by the Maryland Public Policy Institute examined the relationship between the performance of public pension funds and the investment fees they pay. The study found that, over the last 5 years, the pension funds of the 10 states that paid the least amount of fees all outperformed the funds of the 10 states paying the highest fees.

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Task force to Jacksonville: raise taxes to save pensions

When it comes to funding its pension system, Jacksonville doesn’t have the best track record. In fact, it has just about the worst: only Chicago and Philadelphia run pension funds that are unhealthier than Jacksonville’s.

With that in mind, the city put together a task force to recommend ways to improve the solvency of its pension system. That’s no easy task, considering that most solutions are bound to be unpalatable to a large segment of the population.

In a 51-page report released today, the task force called for shared sacrifice—higher employee contributions, higher retirement ages for some and higher taxes for all.

The specifics, from the Florida Times-Union:

Taxpayers — The City Council would increase property taxes and give voters a choice whether to replace the higher property taxes with a half-cent sales tax. The extra money would pay down faster what the city owes the Police and Fire Pension Fund.

Police and firefighters — Their share of money from their paychecks going to retirements would rise to 10 percent from the current 7 percent rate. New hires would work longer to get pensions. Current workers would have smaller cost-of-living adjustments on portions of their pensions.

Police and Fire Pension Fund — The board would appoint an investment advisory committee. The board would have greater leeway to make investments that are riskier but can generate higher returns to support pension obligations.

Jacksonville’s pension system is only 39% funded.

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Oklahoma moves forward with bill aiming to eliminate traditional pensions for state workers

Oklahoma’s landscape is dotted with abandoned frontier forts, Civil War battle sites and other relics of history.

Now you might be able to add another relic to that list: state sponsored defined-benefit pension plans, which could soon become a remnant of the past in Oklahoma.

The state’s House of Representatives passed a bill today that would shift newly hired state workers from the current defined-benefit system into a 401(k)-style defined-contribution plan.

Under the plan, employees would allocate at least 3% of their paychecks to the retirement plan, and the state would match those contributions up to 7%.

The bill doesn’t apply to teachers, firefighters or police officers, and would only cover state workers who are hired after November 1, 2015.

The Associated Press has more details:

The state worker salary bill would set aside 3 percent of the previous fiscal year’s payroll costs for salary adjustments each year and give the Office of Management Enterprise Services authority to set pay structures and determine if targeted adjustments are needed.

Its author, Rep. Leslie Osborn, R-Mustang, said it will provide initial raises to the state’s lowest-paid workers, including corrections, human services and public safety workers, at a cost of about $40 million.

State worker salaries are about 20 percent below comparable jobs in the competitive labor market. The measure would boost salaries to 90 percent of private-sector pay over four years.

Opponents of the measure are concerned that it shifts too much risk onto workers. The payout of a 401(k) plan is determined by the performance of its underlying investments, which means an economic downturn would severely decrease the value of retirees’ nest eggs.

The bill now moves to the Senate, where it is expected to pass.

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Colorado Treasurer says open data the key to pension solutions

In 2011, Colorado State Treasurer Walker Stapleton asked for access to data regarding his state’s pension fund; as a member of the pension board, he had seen first-hand how unhealthy the system was, and he wanted access to the “financial DNA” of the system—data on the top 20% of beneficiaries, their annual benefits, age of retirement, former job and last 5 years of salary.

His request for the data was denied, so he filed a lawsuit to get it.

Stapleton still hasn’t seen that data, but three years later, he’s still trying to get it. Now his lawsuit sits in the state’s Supreme Court awaiting oral arguments and he’s closer than ever to learning more about the Colorado retirement system, which is only 63% funded.

Stapleton sat down today with Bloomberg to discuss Colorado’s pension system:

Q: You have said that the Colorado Public Employees’ Retirement Association’s return assumption is unrealistic. In November, it lowered the rate to 7.5 percent from 8 percent. Should it be cut further?

A: Absolutely. There’s more opportunity to go lower. States that have conservative assumptions as their rates of return have assumptions in the sixes, and as a result their plans are quote unquote healthy or better-funded than our plan is. Colorado has consistently ranked in the bottom 20 percent of funding ratios for state public-pension programs.

Q: What changes do you recommend to reduce the pension liability?

A: Retirement age is one of the things that we need to look at. We also need to look at increased contribution levels from new employees and current employees in the system for the defined benefits they’ve been getting. If they’re not willing to have increased contribution levels or the retirement age adjusted, then potentially they could have the option of joining a defined-contribution plan.

Stapleton says in the same interview that transparency in retirement systems is the key to making them healthier—obtaining the data about payouts is the only way to construct a plan to reduce the unfunded liabilities that weigh the system down.

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