Do Public Pensions Need Federal Regulation?

United States

The federal law ERISA – the Employee Retirement Income Security Act of 1974 – regulates many aspects of private pension plans.

Should public pension funds be beholden to similar federal regulation? Alicia H. Munnell of the Center for Retirement Research explored this issue in a recent column published on MarketWatch.

Munnell writes:

In a recent meeting, an expert very supportive of public-sector employees raised the question of PERISA. These initials are shorthand for federal regulation of state and local pension plans—essentially extending some or all of the Employee Retirement Income Security Act of 1974 (ERISA), which covers private-sector retirement plans, to the public sector.

I had not thought about such legislation since the early 1980s, and am not sure how I feel about it. On the one hand, proposals these days with regard to federal regulation tend to have a punitive tone—focusing mainly on getting public plans to stop using excessively high discount rates. On the other hand, serious underfunding in some plans is usually the result of delinquent behavior on the part of the sponsor.

So some regulation might be helpful, particularly now that the Governmental Accounting Standards Board (GASB) has clarified that its financial reporting standards do not constitute funding policy guidance, leaving a vacuum when it comes to public pension funding policies. But it is not clear that federal legislation could actually include funding requirements.

Munnell explores the origins of ERISA, and the reasons the federal law wound up covering private plans:

Here’s what I remember from the old days. Originally, governmental plans were included along with private plans in the legislative proposals leading up to the passage of ERISA. In the end, Congress exempted public plans from the Act and instead mandated a study of retirement plans at all levels of government to determine: 1) the adequacy of existing levels of participation, vesting, and financing; 2) the effectiveness of existing fiduciary standards; and 3) the necessity for federal legislation. The study concluded that serious problems existed and that federal regulation was necessary.

The experts believed that the federal government had the constitutional authority under the Commerce Clause of the Constitution to regulate reporting, disclosure, and fiduciary standards of state and local plans. On the other hand, the imposition of funding standards might affect the fiscal operations of state and local governments in a way that could threaten the sovereignty of the states. Hence, early legislative efforts omitted any funding regulation.

Some form of public plan legislation was introduced in each of the next four Congresses. While reporting, disclosure, and fiduciary standards may sound dull and routine, the proposed federal regulation met with passionate opposition during its long legislative history in the early 1980s. Opponents claimed that most public plans were under large systems that were generally well managed, and the public sector had not seen the flood of participant complaints witnessed in the private sector. Supporters contended that major reporting and disclosure deficiencies still existed and that the problems would persist since a major conflict of interest often exists between the goals of elected officials and sound financial management. In the absence of adequate reporting and disclosure, public officials could grant generous benefit increases and shift the costs to future taxpayers.

The two sides battled it out for several years but, in the end, no legislation was enacted for the federal regulation of state and local plans. My sense at this point, three decades later, is that federal regulation would be useful given the importance of state and local plans to the economy and the well-being of millions of workers. But the effort to pass such a bill would be worthwhile only if the legislation included funding requirements. And only the lawyers know whether funding requirements could pass constitutional muster.

Read Munnell’s entire piece here.

New Jersey Lawmaker Proposes Tweak in Pension Funding Formula To Reduce Burden

New Jersey State House

New Jersey Senator Stephen Sweeney (D) has proposed a plan to tweak the state’s pension funding formula, which would lower the state’s annual contributions to the pension system.

More details from NJ Spotlight:

Senate President Stephen Sweeney (D-Gloucester) wants to overhaul the state’s pension funding formula to make annual state pension contributions lower and more “manageable” over the next decade while preserving benefits for retirees.

“Governor (Chris) Christie says the state can’t afford to get to 100 percent funding of the public employee pension system, and he used that argument to justify cutting pension contributions by $2.4 billion and to call for public employees to pay more,” Sweeney said in an interview with NJ Spotlight. “But he’s using the 100 percent funding target to inflate the size of the problem and make it look worse than it is for his own political purposes.”

“In the private sector, 85 percent funding is considered the ‘gold standard’ under ERISA,” Sweeney said, referring to the 1974 federal Employee Retirement Income Security Act that sets the guidelines for private pension systems. “That’s manageable. We can get to 85 percent funding, and at that level, we can restore the COLAs (cost-of-living adjustments) for retirees too.”

Sweeney’s plan to change the pension funding formula would save billions of dollars in pension payments in state budgets over the next decade, while still cutting the state’s unfunded pension liability for teachers and state government workers and retirees sufficiently to guarantee the solvency of the pension system. That unfunded liability is now expected to top $60 billion by FY18, up from $54 billion before Christie’s pension cuts.

But John Bury, an actuary that blogs at Bury Pensions, says the plan achieves savings through “manipulating numbers” and doesn’t address any of the real issues facing the state’s pension system. From Bury Pensions:

Most private sector funds (excluding multiemployer plans which are a mess but including ‘one-participant’ DB plans which are thriving) ARE funded at 100 percent and, if not, have to be funded at 100% within seven years under PPA funding rules and the actuarial assumptions that define 100% are legislated (though MAP-21 and HAFTA have watered those down).  Apply those private sector PPA factors to public plans and New Jersey’s 54% funded ratio drops to 30%.

A pension system with 30 percent of the funding it needs to cover all accrued pension obligations is clearly regarded as dead to anyone in the business of understanding, and not manipulating, numbers.

Berkshire Hathaway Sued By Subsidiary Over Retirement Benefit Cuts

Warren Buffett

Workers at Acme Brick Co. say Berkshire Hathaway promised not to scale back retirement benefits when it bought the company in 2000.

Since then, Acme Brick employees have had their pensions frozen and been subjected to other rollbacks in retirement benefits. So they have sued Hathaway, the holding company run by Warren Buffett, for breaching its alleged promise. Reported by the Star Telegram:

Two employees and a retiree of Fort Worth-based Acme Brick Co., including the company’s chief financial officer, have sued the company and its parent, Berkshire Hathaway, alleging the company improperly reduced the company match on its 401(k) retirement plans and froze its pension plan.

The class action suit, filed Aug. 15 in U.S. District Court in Fort Worth, says Berkshire Hathaway, run by multi-billionaire Warren Buffett, broke a pledge it made when it acquired Acme with Justin Industries in 2000 not to reduce benefits in the company’s retirement plans.

“Since that time, the employees have stuck with the company through good times and bad, in anticipation that their benefits under the Retirement Plans would ultimately compensate them fairly,” the lawsuit says. “Now, almost 14 years later, Berkshire Hathaway has broken its promise.”

Acme Brick’s senior management on July 15 voted to make changes to the retirement plans urged by Buffett, Berkshire’s chief executive officer, and Marc Hamburg, its chief financial officer. Otherwise “Berkshire Hathaway intended to divest itself of Acme as a subsidiary,” the lawsuit says.

The class-action lawsuit alleges that Berkshire Hathaway violated the Employee Retirement Income Security Act (ERISA) when it cut benefits.

Read more on the case here.