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How Can Troubled California Cities Address Rising Pension Costs?

Matthew Covington penned a column for the Sacramento Bee on Thursday that dives into California’s recent spree of municipal bankruptcies — and postulates that, with pension costs rising, bankrupt cities of the future may not opt to preserve pensions the way Vallejo, Stockton and San Bernardino did.

Covington is a managing director at Conway MacKenzie, a financial firm that advises distressed governments. He proposes two possible solutions that could help troubled municipalities deal with pension costs. His ideas:

– Establish a protocol for restructuring municipal pensions out of court.

For troubled municipalities, pensions are typically the single largest expense, the most intractable and the most uncontrollable (because CalPERS determines what the municipality will pay each year). If CalPERS decides to change its investment return or mortality assumptions, or its investment performance suffers, the municipality will have to pay more, regardless of its own activities. If a municipality is in dire straits and cannot meet its obligations, an orderly restructuring would likely be superior to a bankruptcy filing.

This could save tens of millions of dollars for the city in fees on lawyers and other advisers. Additionally, plans could be tailored to minimize the impact on vulnerable groups such as the elderly and long-retired pensioners whose pensions were set in the premillennial sane era, something which might not be possible in a bankruptcy case.

– Provide uniform budgeting rules and guidance.

Too many municipalities have made promises that jeopardize their long-term fiscal health. While no one wants another bureaucracy meddling in local affairs, the task force could establish certain basic rules such as requiring municipalities to have long-term budget forecasts that clearly show pension expenses and require additional disclosure when a threshold is crossed.

For example, municipalities whose pension expenses exceed 20 percent of total expenditures (the levels at which voters in the non-CalPERS cities of San Jose and San Diego ratified pension amendments) could be forced to explain why the expenditure levels do not threaten the city’s financial stability.

The costs of municipal bankruptcies are borne not just by the creditors who invested in these cities, but also by residents hit with plummeting property values and deteriorating services. California can do more to protect its citizens from these failures. Let’s put systems in place to ensure this dangerous game isn’t played again.

Read the full column here.

Photo by Pete Zarria via Flickr CC License

Video: The Differences Between Tom Corbett And Tom Wolf On Pensions

News 8 recently interviewed both Pennsylvania gubernatorial candidates. Here’s the resulting segment — Corbett and Wolf talk about pension reform, benefit cuts and how they plan to address pension funding if elected.

A quick summary of where the candidates stand on pensions, from the Associated Press:

-Corbett says the burgeoning cost of Pennsylvania’s public pensions is a crisis that requires prompt, decisive action. Wolf argues that it’s a problem that can be resolved in the years ahead.

-Corbett wants to scale back pensions for future school and state employees as a meaningful step toward savings. He says the taxpayers’ share of the pension costs for current employees — $2.1 billion this year — is crowding out funding for other programs and helping drive up local property taxes.

-Wolf contends that the pension problems are partly the result of the state contributing less than its fair share of the costs for nearly a decade and that a 2010 law reducing pension promises to future employees and refinancing existing obligations needs more time to work.

Fact Check: Has Tom Corbett Been Shorting The Pension System?

Tom Corbett has used the campaign trail to paint himself as a pension reformer – Corbett, the incumbent governor of Pennsylvania, says the pension system needs to be overhauled and supports a plan to shift public workers into a 401(k)-style plan.

His opponent, Tom Wolf, disagrees. Wolf says the problem isn’t the current system—it’s the current governor. He says the system’s current funding problem stems from Corbett’s failure to make required payments into the system.

The issue was brought up during a debate Wednesday night. WESA reports:

Wolf argued that the pension system itself is not flawed, but that the state needs to put more money into fully funding its pension obligations.

“Governors have not adequately paid into that fund,” Wolf said. “We need to figure out a way to do that, pay that debt, because that balance keeps coming up. I plan to do something about that. I will not keep delaying payment, I will do something.”

Corbett took issue with Wolf’s assertion that his and previous administrations have not adequately paid into the system, and instead said it’s the system itself that needs to be overhauled.

“We do have to, though, bite the bullet and start reforming how we’re paying into that system, rather than continuing to say we’re just going to continue to pay at $610 million new dollars each year for the next, I think it’s 25 years,” Corbett said.

Corbett seemed to dodge the issue of failing to pay the state’s actuarially required contributions (ARC). But Wolf has a point.

Since 2008, Pennsylvania has consistently shorted its largest pension funds.

The state has gone above and beyond when it comes to making payments to the Municipal Retirement System (MRS); but that system is also much smaller than the others.

Both candidates have points here. Wolf is right that Corbett has shorted the pension system. But while making full payments would be a step in the right direction, it wouldn’t solve the system’s funding crisis on its own.

Time For New Jersey To Face the “Bitter Truth”, Says Pension Panel Chairman

The chairman of the New Jersey Pension and Health Benefit Study Commission, the panel assembled by Chris Christie to address the state’s pension problems, has published a column today in the New Jersey Star-Ledger.

In it, Thomas J. Healy writes about the “bitter truth” about pensions that people will have to swallow: that Christie’s previous reforms “did not come close” to fixing the problem and now the options for fixing the state’s pension system “are uninviting”.

From the column in the Star-Ledger:

It’s time for New Jerseyans to swallow some bitter truth about our state’s public employee pension and health benefit systems.

The commitment of elected officials over two decades to offer benefits that were unaffordable, coupled with the failure of the state to make required pension contributions when they were due, has landed New Jersey on the edge of a gaping fiscal cliff. Unless the crisis is dealt with firmly and comprehensively, it is certain to become more dire in the period ahead.

[…]

Concerted efforts have been made during the past 10 years to fix the problem. However, significant pension plan reforms in 2010 and 2011 have not come close to correcting two decades of underfunding by both Democratic and Republican administrations in Trenton.

Fortunately, awareness of the need to actively address the problem cuts across both parties. Former Gov. Jon Corzine has acknowledged that “current benefits are financially unsustainable.” And, in the course of naming a 10-member bipartisan commission on Aug. 1 to study the problem and recommend possible long-term solutions, Gov. Christie warned that “if we don’t do more, and we don’t do it now, the state will be forced to make harder choices in the future.”

While this bipartisan understanding is helpful, it doesn’t diminish the complexity of the job ahead, as outlined in the just-released status report of the New Jersey Pension and Health Benefit Study Commission. Indeed, the options for making the public employee pension and health benefits systems fiscally viable are uninviting. Employees have already made concessions, and a tax increase of the size necessary to fund the escalating cost of benefits (in a state which already has one of the highest tax burdens in the nation) is unrealistic. So is any effort to divert revenues from an already tight state budget.

The commission’s second report will propose specific recommendations for reforming New Jersey’s pension system.

The first report, which came out last week, presented an overview of the fiscal situation surrounding pensions but didn’t provide ideas for reform.

Pennsylvania Candidate Wolf Doubles Down on Pension Stance

Pension reform has been a center-stage issue since May in the race for Pennsylvania governor.

During an interview this week with the Philadelphia Public School Notebook, Democratic candidate Tom Wolf forcefully doubled down on his position that pension reform isn’t the state’s fiscal priority. The exchange:

Q: How is the escalating cost of pensions impacting school financing in Pennsylvania, and what do you think should be done about it?

A: Our current pension situation is the direct result of almost 10 years of leaders in Harrisburg kicking the can down the road and the state paying less than its fair share. What we’re seeing from Gov. Corbett is more political games – he is pushing a plan that creates no immediate savings for taxpayers.

As governor, I will let Act 120 [a 2010 law reducing pension benefits to new employees] work and create innovative solutions that are fiscally responsible and fair and beneficial to taxpayers and future employees.

A further explanation of how the two candidates differ on the issue of pensions, from the Times-Herald:

Corbett says the burgeoning cost of Pennsylvania’s public pensions is a crisis that requires prompt, decisive action. Wolf argues that it’s a problem that can be resolved in the years ahead.

Corbett wants to scale back pensions for future school and state employees as a meaningful step toward savings. He says the taxpayers’ share of the pension costs for current employees — $2.1 billion this year — is crowding out funding for other programs and helping drive up local property taxes.

Wolf contends that the pension problems are partly the result of the state contributing less than its fair share of the costs for nearly a decade and that a 2010 law reducing pension promises to future employees and refinancing existing obligations needs more time to work.

Act 120 was a 2010 law that reduced pension benefits for some employees but kept intact the current defined benefit system. Wolf has been adamant that the law needs time to work.

Corbett wants to shift new workers into a 401(k)-type plan.

Photo Credit: “TomWolfYuengling” by Tom Wolf. Licensed under Creative Commons Attribution 2.0 via Wikimedia Commons

Craig Douglas: Massachusetts Candidates Need To Take Page Out of Gina Raimondo’s Book

Rhode Island’s pension system, and the race for governor surrounding it, has been grabbing all the headlines of late. But it’s neighbor, Massachusetts, is probably just as deserving of the press.

Data from the Center for Retirement Research suggests that Massachusetts’ various retirement systems are among the most underfunded in the country. And, like Rhode Island, the state will soon vote for its new governor.

Craig Douglas, the managing editor of the Boston Business Journal, says Massachusetts’ candidates for governor would do well to take a page out of Gina Raimondo’s book. From his editorial in the Providence Journal:

It’s high time Massachusetts had a governor who actually acknowledged the state pension system for what it is: a ticking time bomb.

[…]

Whereas Raimondo fought to overhaul Rhode Island’s worst-offending pension plans, Massachusetts has been a serial can-kicker. In 2011, Gov. Deval Patrick, Senate President Therese Murray and House Speaker Robert DeLeo were quick to dole out the back slaps after amending the state pension system’s funding schedule and benefits for newly hired employees. The moves, they said, would lower the state’s annual pension payments by a cumulative $5 billion through 2040.

What they didn’t mention is that, by extending the system’s payoff period by 10 years, they were baking in an additional $26.4 billion in costs for the state, according to an analysis by The Pioneer Institute. Welcome to the Bluto Blutarsky School of Pension Math.

I asked Baker and Coakley to reflect on Raimondo’s approach and whether it jives with their own pension policies. Their responses? Egh.

The Coakley camp “applauds” Patrick’s efforts to address the state’s retiree obligations, and used all sorts of buzz words and nuance to make clear that she is no Gina the Reformer. When politicians couch pension reform with terms such as “we need to take a serious look” and “additional reforms for new workers,” you can bet they are peddling yesterday’s meatloaf as today’s sloppy Joe.

As for Baker, well, his response was at once promising and disappointing. While he hit all the right talking points — better funding ratios, smarter investment strategies, an end to kicking “the can down the road” — Baker’s blueprint to tackle those problems is both vague and short on specifics. He even suggested more local aid could help address the equally frightening pension crisis affecting Massachusetts towns and cities. Come on Charlie, you’re better than that.

Or maybe not. If candidates are unwilling to take a tough stance on the fiscal straits facing Massachusetts today, when will they?

Massachusetts’ pension systems were 61 percent funded in 2013, collectively.

VIDEO: Pennsylvania Lawmaker Pushes For Hybrid Pension Plan

Republican Rep. Mike Tobash has taken to YouTube to promote his plan for a hybrid pension system in Pennsylvania.

The plan was introduced July 2 as House Bill 1353.

The group Pennsylvania Needs Pension Reform, which supports the plan and also hosts the above video on its YouTube account, provided a summary of the benefits on its website:

What the Plan Does
1. Shifts risk.
Under this plan, the future pension investment risk facing the state, school districts, and taxpayers will shift to members of the retirement plans as hybrid tier participation grows. The Commonwealth and its taxpayers would be more sheltered from risk, irrespective of market performance.
2. Delivers competitive benefits.
This plan provides new employees with retirement benefits that are every bit as competitive and desirable as those they would receive in the private sector.
3. Protects earned benefits.
The plan proactively works to protect the benefits that hard-working Pennsylvanians have already earned. Under this plan, no current employee or retiree would see any changes to his or her plan.
4. Demonstrates responsible spending.
This is the fiscally responsible thing to do; not a “quick fix” like we have seen in the past. We would be making a fundamental change to ensure we can responsibly meet our statutory obligation to the retirement systems moving forward.
5. Stops the bleeding.
The projected debt associated with our current pension systems is expected to be eliminated by fiscal year 2044 as we meet our annual payment obligations. We can eliminate the unfunded liability years sooner by putting savings back into the systems.
6. Safeguards Pennsylvania’s credit rating.
The Commonwealth’s credit rating has already suffered from the pension crisis. Our approach protects taxpayer money by helping to avoid inflated interest rates on our credit.

The Difference Between Tom Corbett and Tom Wolf on Pensions

Despite a lack of voter engagement on the issue, pension policy continues to play a large role in the Pennsylvania race for governor.

The candidates harbor very different views on how to handle the state’s pension system going forward, but the Associated Press did the service of clarifying where both candidates stand on the state’s pension issues:

PENSIONS

-Corbett says the burgeoning cost of Pennsylvania’s public pensions is a crisis that requires prompt, decisive action. Wolf argues that it’s a problem that can be resolved in the years ahead.

-Corbett wants to scale back pensions for future school and state employees as a meaningful step toward savings. He says the taxpayers’ share of the pension costs for current employees — $2.1 billion this year — is crowding out funding for other programs and helping drive up local property taxes.

-Wolf contends that the pension problems are partly the result of the state contributing less than its fair share of the costs for nearly a decade and that a 2010 law reducing pension promises to future employees and refinancing existing obligations needs more time to work.

Read the rest of the article for further clarity on where each candidate stands when it comes to taxes, education funding, and more.

Pennsylvania Auditor General Calls For “State-Wide Solution” After Audit Reveals Scranton Pension System Could Be Broke Within 3 Years

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After a two year audit, Pennsylvania’s Auditor General announced today that Scranton’s pension system could become broke in 3 to 5 years—and forcefully indicated that Scranton was symbolic of larger, state-wide pension funding issues.

On Scranton, the Times-Tribune reports:

That dire prediction [3-5 years] could be optimistic, as the pension funds face paying out as much as $10.5 million owed to retired police and firefighters because of the $21 million back pay court award to active members. The auditor general’s office did not evaluate the impact of the award in its audit released Wednesday.

With a funding ratio of just 16.7 percent, the city’s firefighters fund is in the worst condition of any plan in the state, Mr. DePasquale said, and will be unable to pay benefits in less than 2½ years. The non-uniform fund isn’t much better, projected to be insolvent in 2.6 years, while the police fund has less than five years.

The sobering news, presented at a press conference at City Hall, is contained in an audit Mr. DePasquale’s office conducted of the funds’ condition from January 2011 to January 2013.

The Auditor General said the only fiscally sustainable way forward was to reform the state’s pension system. From the Times-Tribune:

He’s called for several measures, including consolidating plans into a statewide system and increasing funding to municipalities with distressed plans.

“We don’t see any way this can be fixed by Scranton alone,” Mr. DePasquale said. “I believe strongly that a statewide solution is needed.”

While Gov. Tom Corbett and the state Legislature debated state pension system reform this summer, it has yet to address the pension crisis some municipalities face. When Mr. Corbett visited Scranton earlier this month and a reporter asked about the city’s pension crisis, he declined to weigh in.

But that reform doesn’t seem likely to come.

Pension360 covered this week Corbett’s futile efforts to kickstart pension reform. Polls have indicated the voters aren’t as engaged by pension issues as they are other issues.