West Virginia Retirees To Rally at Capitol For Tax Exemption, COLA

capitol

The Coalition of Retired Public Employees (CORPE), a West Virginia retire advocacy group, is organizing a rally this week at the state’s capitol.

The retirees have gripes with several elements of the state’s retirement policy, and are trying to get the attention of West Virginia lawmakers.

Among the issues retirees are pushing for is a larger (or longer) tax exemption on pension income. From the WV Metro News:

The top item on the retirees’ agenda for 2015 is an increase in the tax exemption on their pension. Presently only $2,000 is exempt from taxes out of the pension and that exemption goes away at age 65. [CORPE President Ernie] Terry said other groups have a full tax exemption or a much higher threshold.

Also on the agenda: a cost-of-living-adjustment.

In West Virginia, COLAs are ad hoc – they are one-time events, and issued by the legislature on a case-by-case, year-by-year basis. Current retirees think another adjustment is in order. From the WV Metro News:

As usual, a cost of living adjustment or any pension increase would be welcomed.

“Several years ago our retirees that were age 70 received a three percent bump in their pension,” [CORPE President Ernie] Terry said. “Those people who have reached that milestone of 70 since then have not gotten anything.”

Terry said they aren’t asking for a retroactive raise, but want everyone in their class to be increased in what is already a meager pension.

The rally will be held at the capitol on Tuesday.

Rally-ers will meet in the capitol cafeteria at 8 a.m.

 

Photo by  David Wilson via Flickr CC License

Chicago Could See Credit Downgrade If Pension Changes Are Suspended Pending Lawsuit

chicago

Unions and retirees are currently challenging Chicago’s 2014 pension changes, and they are asking a judge to stop the implementation of the changes – which took effect Jan. 1 – until the lawsuit is resolved.

But a Chicago official said on Thursday that such an injunction could spur a credit rating downgrade from all three major rating agencies.

From Reuters:

Chief Financial Officer Lois Scott testified in Cook County Circuit Court that all three major credit ratings agencies have negative outlooks on Chicago’s ratings, largely due to a big unfunded pension liability that a 2014 Illinois law aims to ease for the city’s municipal and laborers’ funds.

Labor unions and retirees who are challenging the law, which took effect Jan. 1, have asked Associate Judge Rita Novak to temporarily stop it.

“I think that anything that arrests progress significantly increases our risk of downgrades,” Scott testified.

Scott said Chicago’s ratings are already lower than most big U.S. cities and that further downgrades would pump up interest rates on new fixed-rate bonds and thin the ranks of potential bond buyers and credit providers. She added the termination of interest-rate hedges and letters of credit on existing variable-rate bonds could be triggered, costing Chicago hundreds of millions of dollars.

The 2014 pension changes require city employees to contribute more to the system. The city’s contribution rate was increased, as well. Lastly, the calculation of COLAs is now linked to inflation; previously, the COLA was set at 3 percent annually.

 

Photo by bitsorf via Flickr CC LIcense

South Dakota Pension Officials Brainstorm Ways to Guard Funding Status Against Another Market Downturn

South Dakota seal

If another market downturn comes, officials at the South Dakota Retirement System want to be ready. That’s why they spent their last meeting talking about what they could do to mitigate damage if another downturn comes and plagues fund investments.

Among the options discussed: lower the fund’s assumed rate of return and raising the retirement age of new hires.

More from the Rapid City Journal:

The system trustees began talks at their quarterly meeting last week about what might be done if the system’s portfolio drops below 100 percent of fair value.

They are looking at possible responses in different scenarios, such as another crash where the value keeps dropping to the 80 percent range or worse.

The fair value stood at 107 percent of long-term liabilities as of the June 30 end of the 2014 fiscal year.

Among the questions now are whether the assumed rate of return for investments is too high at 7.25 percent annually and if so what should it be.

State investment officer Matt Clark said the council already is operating on an assumed rate of return that is less than the trustees’ assumption of 7.25 percent, because of the current conditions in the markets.

[…]

Trustees intend to take closer looks at various special benefits that aren’t available to all members because of their ages and marital status.

Trustees want costs and usage numbers for each of the special benefits.

Based on estimates using 2011-era use patterns, the special benefits are being subsidized by other members to the equivalent of about $1.6 billion in long-term liabilities.

That is approximately one sixth of the system’s current fair value.

Trustee Jason Dilges, who is the governor’s commissioner of finance and management, asked for analysis showing what would happen if various special benefits didn’t apply to new employees.

Administrator Rob Wylie emphasized during the several hours of discussions Thursday that nothing is close to a decision.

He said a fifth meeting might become necessary in 2015 because of the additional work, however.

One general consideration might be recommending that a higher retirement age of 67 be applied to new employees of the governments that are SDRS members.

State government and state universities are the largest members of the system. Many school districts, counties, cities, law enforcement agencies and special units of government participate as well.

State law requires corrective actions when the system’s value falls below 80 percent. The most recent corrective actions came in 2010.

One was the flexible cost of living adjustment that ranges from a minimum of 2.1 percent to a maximum of 3.1 percent depending on the system’s funded status each year.

The South Dakota Retirement System controls $10.6 billion in pension assets.

 

Photo credit: “SouthDakota-StateSeal” by U.S. Government. Licensed under Public domain via Wikimedia Commons

Arizona Pension Lowers Employee Contribution Rate For First Time in 5 Years; Strong Investment Returns Cited

Arizona welcome sign

Starting in July, members of the Arizona State Retirement System will pay a smaller percentage of their paychecks toward the pension system. It’s the first contribution rate decrease in five years, but it comes with a catch: retirees will not receive a cost-of-living raise in 2015.

More details on the contribution rate decrease from the Arizona Republic:

The decrease in the contribution rate, which was approved by the ASRS board of trustees, is the first in five years.

Chairman Kevin McCarthy said the reduction is small — a fraction of 1 percent — but a step in the right direction. He said it will save money for public employees and employers “who have seen nothing but increases.”

The reduction is possible because of large investment returns this past fiscal year. In addition, roughly 500 more public employees joined ASRS and began paying into the trust. Since 2009, the system annually lost thousands of active members — and their payments — because of government layoffs.

And details on the COLA:

Barbara Masztakowski, who retired in 2003 from Chandler, said it’s not fair that retirees are not getting an increase when ASRS investment staffers are.

“Truly, they should treat themselves the way they treat us,” Masztakowski said in a phone interview.

She said the formula that ASRS uses to trigger benefit increases for retirees is nearly impossible to achieve.

For a permanent benefit increase to kick in, the trust must produce a rate of return in excess of 8 percent — the assumed rate of investment growth — for 10 years and generate a pool of excess earnings.

That formula uses a “geometric and actuarially smoothed average” that takes into account compounding. The current 10-year average is about 7.6 percent, below the trigger.

Although ASRS retirees have not received a cost-of-living adjustment for nearly a decade, retirees in the more financially fragile state Public Safety Personnel Retirement System saw their COLA benefits restored earlier this year after winning a lawsuit. The ASRS retirees were not part of that case.

Paul Matson, ASRS executive director, said he understands retirees may not be happy but said he expects a benefit increase within the next few years.

The lack of a COLA is controversial among retirees because 10 of the System’s investment staffers are receiving bonuses in 2015 totaling $225,000. Fund investments returned 18.6 percent overall last fiscal year.

 

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

The Dutch Pension System’s “Hidden Risk”

EU Netherlands

The Dutch pension system has been getting lots of press in recent days – a recent New York Times report and a PBS documentary from last year have espoused the virtues of the system, which covers 90 percent of workers while remaining well-funded.

But the system carries a “hidden risk” for participants. Allison Schrager explains in BusinessWeek:

Compared with defined-benefit plans in the U.S.—rare, underfunded, and governed by accounting standards derided by almost every economist—the Dutch pension system looks even better. It does have a weakness, though, one that’s often overlooked, even though it may be the only aspect of the Dutch system that’s likely to be adopted here: In the Netherlands, annual cost-of-living increases depend on the health of the pension’s balance sheet. If returns fall, benefits don’t increase. If the fund performs badly enough, pensioners may even suffer benefit cuts.

[…]

But to call it risk-sharing makes it sound more benign than it really is, particularly because retirees can’t tolerate as much risk as working people can. Post-retirement, most people live on a fixed income. In general, it’s too late to save more or get another job. Many state employees don’t have other sources of inflation-linked income like Social Security. If “fairness” means everyone has to bear risk equally, then the Dutch system makes sense. But if it’s more “fair” to treat people differently according to their means, then it would be better to share the risk with current workers instead.

Inflation risk may not seem like a big deal now. But the future is uncertain, which is why the guarantees are so valuable. Until the financial crisis, Dutch pensioners took it for granted they’d get their cost-of-living adjustment each year. Gambling on future inflation may be preferable to an underfunded pension—or no pension at all—but it’s no free lunch.

As Schrager points out, variations of the “risk-sharing” model have made their way to the United States:

This kind of risk-sharing has been catching on in America. Public pension benefits are often secured by state constitutions, but it’s not clear whether those guarantees extend to inflation-linked adjustments. Eager to contain costs, some states have eliminated cost-of-living increases entirely. The state of Wisconsin adopted a variant of the Dutch model in which retirees in the Wisconsin Retirement System get a cost-of-living adjustment only when pension assets return at least 5 percent. Previous inflation adjustments can be clawed back; monthly checks were 10 percent smaller in 2013 as a result of the financial crisis. Although, unlike in the Dutch plans, retirement income can never fall below its nominal level at retirement.

Stanford’s Josh Rauh and University of Rochester’s Robert Novy-Marx have projected that unfunded liabilities in the U.S. would fall by 25 percent if every state adopted Wisconsin’s pension model.

Illinois Pension Case Stays On Fast Track; Arguments Set For November

Flag of IllinoisIllinois’ pension reform law is going to get its day in court soon. A judge on Wednesday scheduled arguments for and against the law for next month. That means a final ruling on the law could be made by the end of the year.

The law’s opponents and defenders have one thing in common: they both want a ruling on the law’s legality sooner than later.

From Reuters:

Sangamon County Circuit Court Judge John Belz, who is overseeing five consolidated lawsuits filed by labor unions and others, set Nov. 20 for arguments for and against the constitutionality of the law passed by the Illinois legislature last December.

Public labor union coalition We Are One Illinois and other parties have been seeking an expedited ruling in the wake of a July 3 Illinois Supreme Court decision in an unrelated case that determined health care for retired state workers is a pension benefit protected by a provision in the state constitution.

The same provision, which prohibits the impairment or diminishment of retirement benefits for public workers, is the focus of the lawsuits against the state’s pension reform law. The new law, which is currently on hold, reduces and suspends cost-of-living increases for pensions, raises retirement ages and limits the salaries on which pensions are based.

In documents filed with the court on Friday, Illinois Attorney General Lisa Madigan argued that the high court’s July 3 ruling only dealt with retiree health care subsidies being part of the contractual relationship Illinois has with members of the state’s public pension systems.

“The court did not address whether such benefits are immune from the state’s exercise of its police powers. That issue was not before the court,” Madigan’s court filing noted.

In its defense of the pension reform law, Illinois is leaning heavily on its so-called police powers trumping the constitutional provision against reducing public employee retirement benefits. Those powers include the state’s ability to properly fund education, healthcare and public safety. Those sectors would experience substantial cuts if the state’s already large pension burden grows, Madigan said in the filings.

We Are Illinois released the following statement on Wednesday:

“As we have always maintained and the recent Kanerva decision confirms, the pension protection clause of the Illinois Constitution is absolute and without exception. There is no merit to the State’s purported justification for the unconstitutional diminishments and impairments that SB1 imposes. We are hopeful for a swift resolution in the plaintiffs’ favor, so that we can work with legislators willing to develop a fair—and legal—solution to our state’s challenges, together.”

Rhode Island Gov. Candidate Allan Fung Is A Pension Reformer, Too

Mayor Allan Fung

By now, everyone knows about Gina Raimondo’s track record on pensions. Despite the controversy surrounding her 2011 reform efforts and subsequent investment strategies, she made pensions a central facet of her campaign for governor.

Her Republican opponent, Allan Fung, is now taking up a similar strategy. Fung, currently the Mayor of Cranston, has this week begun touting his own record of pension reform. From Public Sector Inc:

Like Raimondo, Fung, who served on a reform panel that helped craft the 2011 state pension changes, has been an ardent backer of trimming pensions to make them more affordable. The difference is that the media hasn’t seemed to consider that such an unusual story for a Republican politician. Raimondo, by contrast, has benefited from a barrage of stories hailing her as a Democrat willing to take on public employees and their unions.

[…]

Cranston’s current employees participate in the state’s retirement system, so the city had a stake in the state-engineered reforms. But Cranston fire and police retirees and those workers who were hired before July 1, 1995 participate in a separate city-directed plan that was deeply in debt . Although the plan has just 483 members, the vast majority of which were already retired, the plan was so expensive that it cost the city $22.3 million to support this year, amounting to 20 percent of the city’s operating budget, excluding its school system.

Earlier this year Fung struck a deal with the majority of plan members to suspend cost of living adjustments and to cap any future COLA’s at 3 percent. The deal is expected to save Cranston about $6 million a year for a plan that was so expensive that the city began winding it down in 1995. When Fung took office in 2008 the pension system had just 15 percent of the assets on hand necessary to pay its current liabilities, and Fung warned beneficiaries that a day could come when the fund went bankrupt. Now the system is on track to be fully funded, but it will take two decades.

Cranston is also saving money because Fung struck a deal to place new city employees in a 401(k) style defined contribution plan.

A side note: this election will be a historic one for Rhode Island no matter who wins. Raimondo is vying to become the first woman governor in the state’s history. Fung, meanwhile, would be the first Asian elected to that office.

 

Photo credit: “Mayor Allan Fung visits Providence” by Office of Mr. Fung. Licensed under Creative Commons Attribution 3.0 via Wikimedia Commons

Louisiana Fund Gives First Cost-of-Living Increase in 12 Years

Lousiana proof

The Municipal Police Employees Retirement System of Louisiana this week approved the first permanent cost-of-living increase for its members since January of 2002.

Members of the system will get a 3 percent COLA starting November 1, 2014. More details from KATC:

Retirees, surviving spouses and disabled employees will receive a three percent increase beginning November 1, 2014. Eligible members will receive a minimum increase of $20 per month.

The Board of Trustees voted unanimously to approve the increase at its monthly meeting. Members include Commissioner of Administration Kristy Nichols, Treasurer John Kennedy, and elected members of the municipal police community.

“It’s important that we continue to support the men and women who spent their careers protecting the people of Louisiana,” said Commissioner Nichols. “A permanent increase means they can better plan for the future.”

The last permanent cost of living adjustment (COLA) was a 2.7 percent increase in January 2002.

Act 113 of the 2008 Regular Session gave the board the authority to grant a three percent COLA to eligible retirees, survivors (widows and widowers), and beneficiaries. The Act was effective on July 1, 2008 and is a one-time only COLA.

According to the Act, the board cannot give another COLA until 2018.

 

Photo credit: “2002 LA Proof” by United States Mint. Licensed under Public domain via Wikimedia Commons

Retirees Blast Mass. City Retirement Board For “Criminal” Cutbacks

Board room

Retirees, labor group leaders and even a city councilman are upset at the Leominster, Massachusetts Retirement Board after the Board voted to eliminate a cost-of-living increase in pension payments for the fifth straight year. Reported by the Sentinel and Enterprise:

“We think it’s unconscionable that our local retirees haven’t received a (cost-of-living increase) which they need,” Shawn Duhamel, the legislative liaison for the Retired State, County and Municipal Employees Association of Massachusetts, said Wednesday. “They are largely reliant on their pension as their sole income, so not having a cost-of-living increase for five years really hurts retirees, and we think it’s unnecessary.”

Out of 105 retirement systems in the state, Leominster is the only community to deny a cost of living increase in recent years, according to the association’s monthly newsletter. Somerville is the only other community to miss a cost of living increase dating to 1998.

Mayor Dean Mazzarella defended the retirement board’s decision not to increase benefits while it works to reinvest and fully fund its post employment financial requirements.

Critics have lashed out, in part, because the COLA denial comes in the wake of the Board’s above-average investment returns and the recent decision to lower its assumed rate of return.

The Board’s investments returned 21 percent in 2013, and the assumed rate of return was lowered from 6.5 percent to 5.5 percent. From the Sentinel and Enterprise:

If the retirement board maintained projects of 6.5 percent rate of return based on 2013 earnings the city’s post employment benefits obligation would be fully funded, Duhamel said.

Leominster should be proud of its long success, which is outperforming almost all others in the state, but instead of sharing the wealth with retirees is taking a different approach, Duhamel said.

The retirement board’s projection of lower returns puts a bigger burden on taxpayers to fund the program, Duhamel said.

The board’s rate of return on investments should justify a cost-of-living increase, said at-large City Councilor Bob Salvatelli.

“With that kind of impressive return we’re making off this thing, and not giving retirees a 3 percent raise, is criminal,” Salvatelli said. “It’s not even funny; it’s criminal.”

According to city estimates, giving retirees a 3 percent cost-of-living increase would cost the city $145,000 up front and would cost $900,000 over the life of the retirees who received it.

Court: Washington Acted Within Law When It Repealed Pension Benefits

638px-Washington_Wikiproject

The Washington Supreme Court unanimously sided with the state on not one, but two pension-related decisions over this past weekend.

The court affirmed the legality of two actions by Washington in recent years: in 2007, the state repealed a “gain-sharing” policy that had given retirees a bonus when pension fund investments exceeded return expectations. Then, in 2011, Washington eliminated automatic COLAs for certain classes of retirees.

Gain-sharing and automatic COLAs were originally implemented in the mid-1990s. But when the lawmakers repealed the policies in recent years, public employee unions were quick to sue the state for breaches of contract.

Lower courts had previously sided with unions on these issues, but the case was appealed all the way to the state Supreme Court.

The high court found that, in both cases, the state acted legally when they repealed the policies. The actions weren’t a breach of contract, the court said, because the legislature had reserved the right to reverse those policies at any time.

But public employees claim they were duped—they say the state put workers in pension plans that provided less benefits, but came with promises of “gain-sharing” and automatic cost-of-living adjustments. From the Seattle Times:

Public-sector unions and others who sought to maintain the benefits concede they are pricey. But, they argued, the state had dangled the promise of the pension enhancements in the late ’90s when officials persuaded tens of thousands of workers to give up their defined-benefit retirement plans for cheaper plans.

The cheaper plans reduced the defined benefits by half while adding a mix of defined contributions and gain-sharing, which occurred when investment returns exceeded 10 percent for four straight years.

James Oswald, a Seattle lawyer who represented state ferry worker Cheryl Costello and others who sued over repeal of the gain-sharing benefit, said that when the state Department of Retirement Systems provided written material encouraging workers to give up their more expensive plans, it never informed them gain-sharing could be repealed. The workers could not have known unless they had parsed the fine print of the statute creating the benefit, he said.

“Tens of thousands of employees gave up their benefits based on representations about what they’d receive,” Oswald said. “They were never told that these benefits could be repealed, and that’s very troubling to me. That’s the kind of bait-and-switch the court would never permit a private employer to do.”

A bit of background of the “gain-sharing” policy, from the Bonney Lake Courier Herald:

The Legislature enacted gain-sharing in 1998. Gain-sharing gave certain public employee retirees (members of Plans 1 and 3) a share of extraordinary investment gains whenever the pension trust funds had average investment gains of more than 10 percent over the prior four years.

When enacting gain-sharing, the Legislature made clear that it “reserves the right to amend or repeal this chapter in the future and no member or beneficiary has a contractual right to receive” this pension provision not granted prior to the time of the repeal.” (Former RCW 41.31.030 and former RCW 41.31A.020)

The Legislature repealed gain-sharing in 2007, after paying gain-sharing benefits already earned.

When the legislature enacted automatic COLAs for retirees, they gave themselves an identical way out—writing that they “reserve the right to amend or repeal this chapter in the future and no member or beneficiary has a contractual right to receive” this pension provision not granted prior to the time of the repeal.”

Photo: “Washington Wikiproject” by Chetblong. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons