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New York Comptroller DiNapoli Touts Pension Reforms in Letter

New York State Comptroller Thomas P. DiNapoli is likely to win re-election to his post without much trouble, according to recent polls.

But amidst questions about conflicts of interest in the New Jersey pension system, DiNapoli seized an opportunity to tout his own pension reform measures in a letter to the editor of the Times-Union:

A recent commentary rightfully condemned the culture of “pay to play” in which politically connected financial executives gain access to public pension money in exchange for political campaign contributions (“Public pensions, politics don’t mix,” Oct. 3).

After I was appointed state comptroller, my top priority was to restore the office’s reputation after it was badly tarnished by a scandal based on this corrupt practice. We took immediate steps to set new standards and controls to codify ethics, transparency and accountability.

In time, we have returned the office’s focus to where it should be – on the investments and performance of the New York State Common Retirement Fund. This was accomplished by: Banning the involvement of placement agents, paid intermediaries and registered lobbyists in investments; issuing an executive order and pressing the U.S. Securities and Exchange Commission to prohibit “pay-to-play” practices; and expanding vetting and approval of all investment decisions.

I’m proud to say the latest independent review of the pension fund by Funston Advisory Services found it operates with an industry-leading level of transparency and that our investment team acts within ethical and professional standards.

This review is a validation that we are on the right path and should reassure the people of New York that the pension fund is being managed properly and ethically.

DiNapoli (D) is running against political newcomer Robert Antonacci (R).

Photo by Awhill34 via Wikimedia Commons

Oregon Supreme Court Hears First Round of Arguments Over Pension Reforms

Did Oregon break its contractual obligation with public workers when the state cut pension COLAs? That’s what the Oregon Supreme Court will eventually have to decide.

On Tuesday, the court heard the first round of arguments from lawyers representing the state and public employees, respectively. From the Associated Press:

Attorneys representing public employees told the Oregon Supreme Court on Tuesday that a contract is a contract, and the justices should reject the Legislature’s attempt to reduce annual cost-of-living increases for retired workers.

But lawyers arguing on behalf of state and local governments told the justices during oral arguments there’s no evidence that lawmakers four decades ago intended cost-of-living adjustments for retirees to be a contractual obligation.

Keith Kutler, a state Department of Justice lawyer, described the cost-of-living adjustment as a gift or add-on for workers who were already retired in 1971. Because they were already retired, they could not have accepted contract terms, he said.

[…]

Greg Hartman, an attorney for the public employees, said what governments are seeking this time around amounts to a “full-scale assault” on Strunk and other prior rulings.

It is one thing, he said, to make changes to a pension system for workers who have yet to start their careers. It’s another to alter the terms of a deal for workers who agreed to provide service under certain expectations.

“If your promise is ‘we’ll get back to you on what that promise is,’ that’s not much of a contract,” Hartman said.

A few justices pressed government attorneys on the fairness issue. Justice Virginia Linder questioned why the 1971 Legislature was concerned about the future fiscal impact of the COLA if it was not intended to be a long-term contractual obligation.

Bill Gary, another attorney representing governments, countered that actuaries at the time could not determine the cost.

Some background on the pension reforms under the microscope in this case, from the AP:

State and local governments sought the pension cuts last year to avoid steep increases in their contributions to the Public Employees Retirement System. The action reduced employer contributions to the pension by roughly $800 million during the current two-year budget cycle. It’s unknown when the court will rule, but a decision is expected in time for the 2015 Legislature to deal with any fallout.

If the court upholds the changes, retired workers will see their pensions grow at a slower pace. Since the early 1970s, retirees have received an annual cost-of-living increase of 2 percent. Gov. John Kitzhaber and the Legislature reduced the annual adjustment (widely known as a COLA) to 1.25 percent on benefit amounts up to $60,000 and 0.15 on benefits exceeding $60,000.

The public employees may have precedent on their side. In 2003, the state Supreme Court struck down a law that suspended COLAs. The court said at the time that COLAs were part of the contract between the state and retirees.

Former Illinois Attorney General Pushes For “Plan B” On Pension Reform

In all likelihood, a judgment on the constitutionality of Illinois’ 2013 pension reform law will in the next six months.

Former Illinois attorney general Ty Fahner doesn’t want the state to be blindsided by the result. If the law is overturned, he says, there needs to be another plan in place.

Fahner is asking lawmakers from around the state to start developing alternate reform ideas. From the News-Gazette:

“I still hope and expect, I truly do, that the court may find Senate Bill 1 constitutional. Whether that’s a false hope or not, I need to make the point that even if they do, after all of that, we’re still in terrible shape as a state,” Fahner said. “If they overturn it, there will be incredible hardship, which is what we are trying to get people to focus on now, not because it will change their decision, but I think there has to be a debate, a discussion, right now, because if you wait until the spring when the court finally rules, it’s going to be a little bit too late.

“They’re going to be in the middle of the budget at the end of the session. Whether it’s Quinn or Rauner, they’re going to have a difficult time. I think they need to talk now.”

He’s encouraging candidates for governor and the Legislature to address the question, and wants voters to ask them about it.

“That’s all we’re trying to do with this,” said Fahner, whose group is pushing what it calls a “What If?” initiative. “It’s so profound and the damages could be so terrible that people have to think about it now and not just give a political reaction later that, ‘We’ll have to sort it out.'”

State Rep. Adam Brown, R-Champaign, said he was “more than happy to be a part of the conversation” about an alternative pension plan.

“But at this point, there are just too many unknowns,” he said.

[…]

[Senate President John] Cullerton’s spokesman John Patterson advised patience.

“It has been a long struggle to get a law through the General Assembly and now a case to the courts,” he said. “Given the complexity of the issue and the difficulty in gettting to this point, we should now see what the courts have to say. There are a lot of people with a lot of opinions, but they aren’t on the Illinois Supreme Court, and it is the justices who will ultimately tell us what can and cannot be done.

“At this point the case is still before the trial court, so it seems a bit premature to already be predicting its demise. Let’s let the judiciary do its job.”

As for Republican gubernatorial candidate Bruce Rauner’s proposal that state employees be moved into 401(k)-style, Fahner said, “The idea of a 401(k) is great, but I’m not sure it would work in the current situation.”

Fauher also questions whether the reform law goes far enough. From the News-Gazette:

“[The law] only scratches the surface of the state’s problems. We also have to look at what drives jobs from the state. We’ve got to do a lot to make this a more jobs-friendly state.”

This year, he said, 26 percent of the state budget is devoted to pension payments. By 2024, pension payments would eat up a third of the budget.

He said that would lead to higher property taxes, fewer teachers and less money for social services.

“A lot of people say this isn’t a problem, all you do is just raise more taxes. This goes back to the jobs issue. We could raise taxes again, but we already know what the job losses have been,” Fahner said. “We’re losing jobs because it’s a very hostile work environment with regulations and everything else. If you have less jobs, you have less people to pay the taxes which fund all of these needs, and that’s what is happening to us.”

Governor Pat Quinn has said he doesn’t have a “plan B” in place if the law is deemed unconstitutional.

Corbett: “Entrenched Interests” Preventing Pension Reform in Pennsylvania

Pennsylvania Gov. Tom Corbett (R) is trailing by double-digits in many polls to opponent Tom Wolf (D) – but his campaign strategy of pushing the need for pension reform appears to be unchanged.

Corbett has been the most vocal critic of his state’s pension system, but most of his fellow lawmakers – and voters, for that matter – have not reciprocated that enthusiasm for major reform.

On Monday Corbett said that “entrenched interests” are preventing pension reform. And those interests, according to the governor, have seeds in both parties.

Reported by the Intelligencer:

“There are entrenched interests out there,” the governor said. “The public sector unions are all against change … There are Republicans that don’t like me. I’m pushing change. It’s very hard to get change in Pennsylvania.”

[…]

Corbett traces the current pension problem to 2001.

That’s when the state Legislature boosted the retirement package for state lawmakers and judges by 50 percent and increased pensions by 25 percent for 300,000 active state workers and school employees. Corbett wants to roll back those increases to pre-2001 levels for current employees — an annual multiplier of 2.0 rather than 2.5 for employees and from 3.0 to 2.0 for lawmakers and judges — and place new employees in a 401(k) style retirement plan.

But the Legislature, backed by the might of public section unions, has stood in his way.

“We said to present-day employees, going forward, that we need to ratchet it back to two,” Corbett said of the annual multiplier. “Did you earn that (2.5)? I don’t think so. You did nothing new.”

Corbett said he favors the state rolling back the benefits and letting the courts decide when the unions sue. The real problem for taxpayers, he said, would occur once the issue landed in court because the judges who benefited from the enhanced pensions would be asked to rule on the matter.

“What judge in this state can hear that case?” he asked. “It’s an economic conflict of interest. … People should be upset with that. I say, let’s try it.”

Corbett re-iterated that, if re-elected, he would call a special legislative session to push through pension reform measures.

Colombia To Spearhead Pension Reform Study; Country Calls Itself “Pension Time-Bomb”

Colombia announced over the weekend that it’s seeking to study possible pension reforms to head off what the country’s President called a “pension time-bomb”. Colombia is asking international economic organizations to help with the study.

From Reuters:

Finance Minister Mauricio Cardenas will request that the Inter-American Development Bank and the Organization for Economic Cooperation and Development conduct the study, [Colombia President] Santos said at a business conference in Cartagena.

“I have given him instructions to start an in-depth study about the possibility of pension reform,” Santos said, referring to Cardenas.

The announcement comes amid calls from pension funds and insurance industry groups for the government to reform the pension system, which they say is unsustainable.

Colombia is confronting a “pension time-bomb” according to Santiago Montenegro, the president of the Asofondos pension group, as only 7.5 million of 21 million workers currently make pension contributions, a figure which points to labor market informality of close to 65 percent.

Colombia has budgeted 34 trillion pesos ($16.6 billion) for pensions in 2015, some 4.1 percent of gross domestic product.

The education and defense sectors contribute the most to pension funds, with 28.9 trillion and 28.2 trillion respectively.

The country pays monthly pensions to 1.9 million people.

Photo by Pedro Szekely via Flickr CC License

Kolivakis: Time To Face The “Brutal Truth” About Defined-Contribution Plans

Leo Kolivakis, the man behind the Pension Pulse blog, has long been a critic of replacing defined-benefit plans with 401(k)-style plans as a means of reforming public pension systems.

The Canadian Public Pension Leadership Council released a report last week arguing that converting large public DB pension plans to DC plans would be costly and ineffective. In light of that report, Kolivakis took to his blog to re-explain his aversion to the oft-considered reform tactic. From Pension Pulse:

I’m glad Canada’s large public pension funds got together to fund this new initiative to properly inform the public on why converting public sector defined-benefit plans to private sector defined-contribution plans is a more costly option.

Skeptics will claim that this new association is biased and the findings of this paper support the continuing activities of their organizations. But if you ask me, it’s high time we put a nail in the coffin of defined-contribution plans once and for all. The overwhelming evidence on the benefits of defined-benefit plans is irrefutable, which is why I keep harping on enhancing the CPP for all Canadians regardless of whether they work in the public or private sector.

And while shifting to defined-contribution plans might make perfect rational sense for a private company, the state ends up paying the higher social costs of such a shift. As I recently discussed, trouble is brewing at Canada’s private DB plans, and with the U.S. 10-year Treasury yield sinking to a 16-month low today, I expect public and private pension deficits to swell (if the market crashes, it will be a disaster for all pensions!).

Folks, the next ten years will be very rough. Historic low rates, record inflows into hedge funds, the real possibility of global deflation emanating from Europe, will all impact the returns of public and private assets. In this environment, I can’t underscore how important it will be to be properly diversified and to manage assets and liabilities much more closely.

And if you think defined-contribution plans are the solution, think again. Why? Apart from the fact that they’re more costly because they don’t pool resources and lower fees — or pool investment risk and longevity risk — they are also subject to the vagaries of public markets, which will be very volatile in the decade(s) ahead and won’t offer anything close to the returns of the last 30 years. That much I can guarantee you (just look at the starting point with 10-year U.S. treasury yield at 2.3%, pensions will be lucky to achieve 5 or 6% rate of return objective).

Public pension funds are far from perfect, especially in the United States where the governance is awful and constrains states from properly compensating their public pension fund managers. But if countries are going to get serious about tackling pension poverty once and for all, they will bolster public pensions for all their citizens and introduce proper reforms to ensure the long-term sustainability of these plans.

Finally, if you think shifting public sector DB plans into DC plans will help lower public debt, think again. The social welfare costs of such a shift will completely swamp the short-term reduction in public debt. Only economic imbeciles at right-wing “think tanks” will argue against this but they’re completely and utterly clueless on what we need to improve pension policy for all our citizens.

The brutal truth on defined-contribution plans is they’re more costly and not properly diversified across public and private assets. More importantly, they will exacerbate pension poverty which is why we have to enhance the Canada Pension Plan (CPP) for all Canadians allowing more people to retire in dignity and security. These people will have a guaranteed income during their golden years and thus contribute more to sales taxes, reducing public debt.

Read his entire post on the subject here.

Photo by TaxCredits.net

Changing the Conversation About Pension Reform

Keith Ambachtsheer, Director Emeritus of the International Centre for Pension Management at the University of Toronto, wants to change the conversation around pension reform from “dysfunctional” to “constructive”.

In a recent article in the Financial Analysts Journal, Ambachtsheer explains how the reform conversation can be “re-framed” and become more productive. He writes:

The sustainability of traditional public sector defined benefit (DB) plans has become front-page news and the subject of acrimonious debates usually framed in stark terms of DB versus DC (defined contribution). This either/or framing is unhelpful: It simply perpetuates the strongly held views of the defenders and critics of these two opposing pension models. Moving the pension reform yardsticks in the right direction requires that we stop this dysfunctional either/or framing and move on to a more constructive conversation about what we want our pension arrangements to achieve and what that tells us about how to design them.

[…]

So, how do I propose to change the conversation about pension reform from dysfunctional to constructive? By reflecting on the implications of five pension design realities:

1. All good pension systems have three common features.

2. All pension systems have embedded risks that must be understood and managed.

3. Some of these risks have an intergenerational dimension.

4. Pension plan sustainability requires intergenerational fairness.

5. Achieving this fairness has plan design implications.

The three design features common to all good pension systems are:

1. inclusiveness—all workers are afforded a fair opportunity to provide for their retirement;

2. fitness-for-purpose—the system is purposefully designed to start paying a target pension for life on a target retirement date; and

3. cost-effectiveness—retirement savings are transformed into pension payments by “value for money” pension organizations.

Surely, no rational person would disagree with these three features. So far, so good.

Ambachtsheer goes on to talk about the failings of DB plans in recent years – but says it would be a “tragedy” to scrap them for DC plans:

Remember how we talked ourselves into a “new era” paradigm as the last decade of the 20th century unfolded? As it ended, most DB plan funded ratios were well over 100%. Did we treat these balance sheet surpluses as “rainy day” funds to see the plans through the coming lean years? We did not. Predictably, we spent the surpluses on benefit increases and contribution holidays. After all, was this not a new era of outsized economic growth rates and stock market returns? Was taking on more risk not synonymous with earning even higher returns?

A decade later, we know that the answers to these turn-of-the-century rhetorical questions are no and no. On top of these stark economic realities, red-faced actuaries are now confessing that they have been underestimating increases in retiree longevity for quite some time.

Given the current poor financial condition of many public sector DB plans, it should come as no surprise that people on the far right of the political spectrum want to do away with this type of pension arrangement altogether. Doing so would be a tragedy. I agree with Leech and McNish that none of these weaknesses need be fatal if we repair them now.

But how to repair DB plans? Ambachtsheer offers the idea of defined ambition (DA) plans. He writes:

It seems to me that ditching the dysfunctional DB/DC language is the best way to start these repairs. Political leaders in the United Kingdom, the Netherlands, Denmark, and Australia have already done so. They now speak of defined ambition (DA) pension plans. Vigorous debates on how best to design and implement DA plans are taking place in all four countries.3 In my view, a good DA pension plan has six critical features:

1. A target income-replacement rate—how much postwork income is needed to maintain an adequate standard of living?

2. A target contribution rate—given realistic assumptions about working-life length, longevity, and net real investment returns, how much money needs to be set aside to achieve the pension target?

3. Course correction capabilities—the plan provides regular updates on progress toward targets and offers course correction options when needed.

4. Fully defined property rights and no intergenerational wealth shifting—the plan design is tested for intergenerational fairness and clear property rights.

5. Long-horizon wealth-creation capability—the pension delivery organization can acquire and nurture healthy multi-decade cash flows (e.g., streams of dividends, rents, tolls) through a well-managed long-horizon investment program.

6. Payment-certainty purchase capability—plan members can acquire guaranteed deferred life annuities at a reasonable price.

The entire article, which contains more analysis than excerpted here, can be read here.

Photo by AJC1 via Flickr CC License

Video: Lessons From Pension Reform in Utah

In the video above, former Utah senator Dan Liljenquist talks about the pension reform efforts he sponsored in Utah from 2008-2011 and what other states can learn from those efforts.

Liljenquist sponsored bills that ended “double-dipping” in the state, moved new hires into a defined-contribution plan and ended pension benefits for Utah lawmakers.

Montreal Unions Will Fight “Unjust” Pension Reform Bill

A union coalition representing 65,000 workers has announced workers may strike for 24 hours in protest of the proposed pension reforms contained in Bill 3. Additionally, the union spokesman said a legal challenge could be in the works.

Bill 3 would increase pension contributions and eliminate COLAs for many workers.

Report Card Grades 151 Florida Pension Plans

The LeRoy Collins Institute, a non-partisan think tank at Florida State University, recently released a report grading 151 municipal pension plans across Florida.

A quick snapshot of some of the grades, from the Florida Times-Union:

Fernandina Beach general employees – F

Fernandina Beach police/firefighters – F

Jacksonville corrections officers – F

Jacksonville police/firefighters – D

Atlantic Beach police – D

Orange Park firefighters – D

Orange Park general employees – D

Orange Park police – D

Palatka firefighters – D

Palatka general employees – D

Atlantic Beach general employees – C

Jacksonville general employees – C

St. Augustine general employees – B

St. Augustine police – A

Palatka police – A

The author of the report told the Florida Times-Union:

“Many cities are in urgent need of reform that will help reverse this decline in healthy pension funds and get more plans headed toward the honor roll,” said David Matkin, assistant professor at University of Albany-SUNY, who wrote the report.

Jacksonville’s Mayor, Alvin Brown, said he considering putting pension reform ideas on the table for the Corrections Officers Fund, the General Employees Fund and the Police and Fire Fund.

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