cost of living adjustment

“Phantom Savings”: Top Illinois Senator Questions Gov. Rauner’s Pension Cuts

Illinois Gov. Bruce Rauner laid out his budget plan on Wednesday, and it included a number of pension cuts – decreasing annual COLAs, freezing benefits, and moving employees into a plan that yields fewer benefits.

(Under Rauner’s proposal, police and firefighters would be exempt from these changes.)

One lawmaker on Wednesday accused Rauner of using “fuzzy pension math” to calculate the savings the cuts would yield.

That followed the accusatory words of another top lawmaker, who claimed Rauner’s pension changes produced “phantom savings”.

Here’s Illinois Senate President John Cullerton:

The basic math still doesn’t work in his proposal. Governor Rauner leaves a $2.2 billion hole in the budget by relying on unrealistic revenues from a questionable pension proposal. Even as the courts review a significant test case, the governor’s plan banks phantom savings for a pension plan that may fail key legislative and judicial tests. When we passed pension reform last year, we took care to exclude possible savings from budget plans pending a legal resolution. The governor’s plan rejects that wisdom.

Indeed, when the state passed its pension overhaul in late 2013, it never included the savings in the budget. That’s because a legal challenge was sure to be brought against the law and Illinois didn’t want to assume savings only to get burned later.

Rauner’s proposals, if enacted, are likely to end up in court as well, depending on the outcome of the state’s current pension lawsuit.

Photo by Tricia Scully via Flickr CC License

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

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

Cincinnati Mayor: Pension Deal Removes “Dark Cloud” From Over City

Cincinnati Mayor John Cranley took to the newspapers on Thursday to comment on the city’s recently passed pension reform measure.

In a column in the Cincinnati Enquirer, Cranley talks about the effects of the reforms on the city’s pension funding and the compromises made on both sides.

Cranley writes:

The historic agreement reached Dec. 30 among the retirees, unions, active employees and the city – after 10 months of negotiations and a nine-hour marathon session on the final day – will ensure a good pension remains in place for current and future retirees.

Through painful but necessary benefit cuts and increased city contributions, the pension system is now on solid financial footing.

As a result of these actions, by 2016 the pension fund will be 85 percent solvent and rise to 100 percent over the next two decades, which reverses a decadelong trend of worsening solvency. What was an $862 million liability will be reduced to zero; an independent actuary has certified that the math we are using is not fuzzy, but dependable.

This resolution will restore the city’s credit and reputation, and it will allow us to use the restored credit to address other city problems that have been ignored, such as deteriorating roads.

[…]

All parties – the city included – conceded more than they intended to, but it was a rare and wonderful case of shared sacrifice and heeding the “better angels of our nature.”

The Cincinnati Enquirer provides a refresher as to the effects of the reform measure:

Under the pension agreement, the city will:

*Contribute $38 million to the pension system in 2015. The city will pay that over the next seven years by borrowing against future revenue.

*Contribute $200 million in 2016 from the financially stable retiree heath care trust fund to the pension system.

*Make a larger contribution to the pension starting in July 2016 – 16.25 percent of the annual operating budget compared with 14 percent – and continuing for 30 years.

Employees will:

*Take a three-year cost of living adjustment holiday.

*After three years, both current retirees and active employees will receive an annual cost of living adjustment of 3 percent simple interest. Most current retirees receive an increase that is “compounded,” meaning the previous year’s increase is included in the following year’s calculation. Current employees already have a 3 percent simple COLA in place when they retire.

Photo credit: “Downtown cincinnati 2010 kdh” by kdh – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Downtown_cincinnati_2010_kdh.jpg#mediaviewer/File:Downtown_cincinnati_2010_kdh.jpg

Louisiana Lawmakers Weigh Uses for Pension System’s $300 Million Reserve

Louisiana’s state pension systems have $300 million sitting in “reserve” accounts; the money is meant to fund future cost-of-living increases.

But lawmakers have begun eyeing the money, and are now weighing ways to use the money for other purposes.

One lawmaker, Senator Elbert Guillory [R-Opelousas], wants to use the money to give retirees an extra, immediate cost-of-living adjustment (COLA).

Current Louisiana law allows one COLA increase every two years. State retirees received a 1.5 percent increase this fiscal year, so they normally wouldn’t be eligible to receive another until 2016-17.

But retiree groups, along with Sen. Guillory, are pushing to use the reserve money to fund another 1.5 percent increase this year.

More details from the Advocate:

A state senator wants the 90,000-plus retirees to get an immediate boost in their pension checks.

[Retired State Employees Association legislative liaison Frank] Jobert said retirees want the money reserved for its intended purpose — cost-of-living adjustments to retiree pension checks.

The retiree group will publish the required public notice that legislation will be filed aimed at granting a cost-of-living increase, Jobert said.

Retirees will push for a 1.5 percent cost-of-living increase in the fiscal year that begins July 1 with help from Senate Retirement Committee Chairman Elbert Guillory, R-Opelousas. Retirees got a 1.5 percent adjustment during the current fiscal year. Under a 2014 law, retirees would be eligible for cost-of-living adjustments only every other year, meaning there would not be one in the new fiscal year, which begins July 1.

Other lawmakers have other plans. If history is any indication, many lawmakers likely want to use the money to pay down the state’s pension debt, which in turn will lower the state’s future pension payments and give lawmakers more money to work with in the general budget. From the Advocate:

The money cannot legally be taken out of pension systems for use in funding other areas of the budget. But the dollars can be used toward reducing the pension systems’ long-term debts, which stand at $19 billion: $12 billion for teachers’ retirements and $7 billion for state government retirees. The payments toward the UAL would reduce the required state contribution. That would free up state dollars for other purposes.

[…]

Cindy Rougeou, Louisiana State Employees Retirement System executive director, said it would not be the first time dollars were “swept” from the retiree cost-of-living accounts. She said it happened in 2009 with dollars going to payments on the systems’ unfunded accrued liability. Commonly called the UAL, the term refers to the amount of money necessary to pay out all promised future benefits. The state contributes extra dollars to pay down the immense debt.

Sen. Guillory plans to file a bill in the coming months that would give retirees the extra COLA.

Guillory is chairman of the Senate Retirement Committee.

Photo by Dewayne Neeley via Flickr CC License

New Hampshire Supreme Court Upholds Benefit Changes

The New Hampshire Supreme Court has upheld several changes key to the state’s pension reforms passed since 2011.

At issue were the definitions of a cost-of-living adjustment and “earned compensation”.

State lawmakers altered the definitions of those terms as part of pension reforms, and the court has now upheld the new definitions.

The court ruling, coupled with a related ruling by the court last month, has big implications for New Hampshire pensions.

The biggest is that public worker pensions aren’t contractually protected from being altered – regardless of whether that alteration comes from raising employee contributions or outright benefit changes.

Fitch: Lawsuit Against Chicago Pension Cuts Expected; Emblematic of Reform Difficulty

Chicago unions and public employees filed a lawsuit Tuesday to block pension changes coming in 2015 that would reduce future COLA increases and require workers to pay more toward their retirement.

In a newly released commentary, rating agency Fitch says the lawsuit was expected. But it also demonstrates the difficulty of making changes to pension benefits in a state that protects them fiercely.

From Fitch:

Tuesday’s legal challenge to Chicago’s recent pension reform plan was expected and underscores the difficulty the city faces in its efforts to put its pension plans on firmer footing. Illinois affords particularly strong legal protection to pension benefits.

If the litigation succeeds and changes to the cost of living adjustments (COLAs) and employee contributions are struck down (and no replacement legislation is passed), the city would likely revert back to the lower, statutorily based payments, as annual payments on an actuarially sound basis would rise dramatically. These increases would occur in the context of a statutorily required $538 million increase in contributions for the city’s other two pension systems (police and fire) in 2016. The city has not yet said how the increased pension costs will be accommodated, but Fitch Ratings believes they threaten to crowd out other governmental priorities and remain a formidable challenge to the city’s financial equilibrium.

The city benefits from a strong local economy and enjoys broad home rule authority to raise revenues. However, increasing pension costs are a common problem among Chicago-area governments and funding these increases will likely place a considerable stacked burden on the area’s resource base.

[…]

If the new plan is upheld, it would require significant payment increases from the city, approximately half of which are expected to be funded by increased property taxes and half by budgetary savings. The city plans to gradually increase its revenues for pension payments, which may include property taxes, by $50 million (approximately 6%) annually for five years before reaching the target increment of $250 million in the fifth year.

According to Fitch, Chicago’s pension plans carry a collective funding ratio of 35 percent.

Photo by bitsorf via Flickr CC LIcense

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

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.

CalPERS’ Administrative Expenses Are Twice As High As Peers

CalPERS incurs much higher administration costs than its peers, according to an analysis by CEM Benchmarking.

The firm measured CalPERS’ administrative costs against four other large, complex public pension plans. CalPERS paid almost double the expenses of its peers.

From the Sacramento Business Journal:

CalPERS had a pension administration cost of $215 per member — far above the peer average of $108, according to Cost Effective Measurement Benchmarking, a Canadian firm that compares public pension funds across the nation and globe.

The findings, first reported in Calpensions.com, also found that CalPERS has the highest “complexity” in the firm’s global database of 75 pensions, which can impact cost and service.

The CalPERS total service score, however, was 63, very close to the peer average of 66.

A primary reason for the higher complexity is customization. CalPERS has five cost-of-living adjustment options. Employers also can change contribution rates for new hires, allowing for an infinite number of possible plans.

The complex system requires more administrative staff, CEM representatives found, which can include legal advisers, auditors and accountants.

Those findings from two years ago are already thought to be somewhat outdated, however, because the fund has completed a computer system that was new at the time of the measurement. Pension reforms were also taking extra time and money at the time of the measurement. CalPERS expects its costs have decreased and continue to drop, and service scores to rise.

The other funds CalPERS was measured against:

– The California State Teachers’ Retirement System;

– The Florida Retirement System;

– The New York State and Local Employee Retirement System; and

– The Teachers Retirement System of Texas.

You can view the full CEM presentation here.

The Dutch Pension System’s “Hidden Risk”

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.

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

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

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