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Pension Funding May Be First Fight of 2015 for New Jersey Lawmakers

At some point in 2015, pension reform will become a hot topic in the New Jersey Legislature. The only question is when the battle will heat up.

From the looks of things, the fight over pension reform could begin sooner than later.

From New Jersey 101.5:

Funding New Jersey’s public employees’ pension system could be the first major fight in 2015 and it will likely pit long-time allies against one another. Gov. Chris Christie is calling for new reform, but state Sen. President Steve Sweeney (D-West Deptford) has drawn a line in the sand and said he will support further reform.

“He (Christie) has to fund it. We actually did the things that were necessary to fix it. He needs to fund the pension fund,” Sweeney said. “No matter what changes you make to a pension system, if you don’t meet the financial needs of it at the same time – no fix will work.”

The law required the state to contribute $1.6 billion into the pension system last fiscal year, but Christie paid in only $696 million. He signed an executive order to enable the lesser payment. The payment for this fiscal year was to be $2.25 billion, but the governor said he’ll contribute $681 million.

The governor must make the full $2.25 billion payment this year, according to Sweeney, who acknowledged it will be difficult.

“It’s going to put a lot of pressure on the budget, but we knew it. The big picture here is the lack of growth in the economy and he’s been the governor for five years now so he can’t point fingers at others,” Sweeney said.

[…]

Last fall, Christie began making his case for pension reform. He said it is an important, long-term project.

“It’s something that we can’t ignore because it will first crowd out any other type of investments the state wants to make in important projects around the state, and it will then ultimately bankrupt the state,” Christie said.

Gov. Christie has made it clear that reforms would likely mean further benefit cuts.

Sweeney, on the other hand, is pushing for a funding solution that involves more state money going to the pension system.

Photo By Walter Burns [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Lawmakers Weigh In On Cincinnati Reform Deal

Cincinnati and its public worker unions last week approved a series of pension reforms that will see the city contribute millions more to the pension system annually. In exchange, workers and retirees will see cuts in their COLAs, and some workers will be held to a less generous benefit formula.

The Cincinnati Enquirer asked for opinions on the reforms from three city council members. Here’s what they said:

David Mann

“Everyone is taking a haircut, including the city. I don’t know that there was any other choice. The only issue I have is where the $38 million will come from. But in terms of the overall problem, that is relatively minor. This is really good news.”

Christopher Smitherman

“This is the biggest issue the city faces. It’s not one of the issues on the public’s radar, but it is a huge deal for taxpayers. This deal brings certainty to the problem. The mayor’s experience with the Collaborative Agreement allowed him to have the vision to apply that experience to the pension.”

Yvette Simpson

“I’m happy there is a resolution, but there are lots of questions. Why do we have to infuse $38 million when don’t know where that money is coming from? Why are we borrowing money to put into the pension system?”

Cincinnati Mayor John Cranley also gave his comments:

“It was important to do this now,” Cranley said. “”We can’t have the city’s credit — which is also the city reputation — continually at risk by not tackling this problem. State Auditor David Yost basically said he was going to look at putting the city on fiscal watch if we did not get this resolved by the end of the year. He has been in contact with judge and me all year. That would have been a catastrophic blow to our reputation nationally.”

Under the reforms, the pension system is projected to be 100 percent funded within 30 years.

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Jacksonville Pension Board Sends Reform Measure Back to City Council With Changes in Mind

The board of Jacksonville’s Police and Fire Pension fund was set to vote on the city’s pension reform measure on Monday. But instead of an up-or-down vote, the board has requested several changes to the measure and sent it back to the city council for approval.

Both entities need to approve the measure before it is passed into law.

The changes the board is requesting, according to News4Jax.com:

John Keane, executive director of the fund, said the board has several concerns that it will express to the city:

– Calls on city council to guarantee a funding source for its $40 million annual contribution required by the agreement.

– Not willing to accept reduced cost-of-living increase from the agreed 3 percent annual to a variable rate between 0 and 6 percent for active and retired police and firefighters. The board is requesting it be increased to 0 to 6 percent.

– City council approved a 0-10 percent rate for deferred retirement (DROP) each year. Pension board wants higher rate: 2-14.4 percent.

– The original deal with the mayor allowed the terms of the plan to be renegotiated after 10 years. City council changed that to three years, which is not acceptable to the pension board.

The board said a primary concern is making sure current employees are confident that the revised pension plan will give them a secure future.

Members feel the funding deficit was created by the city, so the changes should be made strictly on the backs of the employees.

“We’ve gotten to this point today simply by fact that city has not saved for a rainy day,” said Richard Tuten, a member of the pension fund’s board.

The board and the council have a self-set deadline of January 15 to come up with a final proposal.

Photo by pshab via Flickr CC License

Newspaper: Rhode Island Should Settle Pension Suit With Retirees, But Keep Savings Intact

Rhode Island Governor-elect Gina Raimondo said last week that one of her top priorities was reaching a settlement with workers in the long-running lawsuit against the state’s 2011 pension reforms.

The Providence Journal opines that a settlement would be ideal for everyone – if the law’s savings are kept intact. From the Providence Journal:

State leaders — led by Governor-elect Gina Raimondo — are again eyeing a possible settlement with the unions that are challenging the 2011 overhaul in court. The state’s goal, presumably, is to retain the bulk of the savings created by the overhaul and avoid the risk of losing — an outcome that could cost taxpayers hundreds of millions of dollars that they cannot afford.

That goal is a good one, as long as the bulk of the overhaul savings is retained. Even with those savings, the state’s public pension costs are high, and those tax dollars pay for retirement plans that are often far more generous than those in the private sector.

There is also the issue of uncertainty. The projection that the taxpayer contribution rate will slowly nudge downward assumes that the state’s $8 billion pension portfolio will meet its annual investment goal of 7.5 percent. If that goal is reached or exceeded, all well and good. But if the investment returns fall short, the cost to taxpayers could rise.

The idea of reaching a settlement also raises logistical concerns. There are more than two dozen communities enrolled in the state-run Municipal Employees Retirement System, which will be impacted by the outcome of the pension lawsuit. Naturally, most if not all of these municipalities will want to have a say in any negotiated settlement.

If a settlement is reached, it could look a lot like the one that was almost accepted in 2014. In that deal, 95 percent of the state’s savings were retained. In exchange, pension increases were given to retirees and some employees.

But that deal fell through when one retiree group rejected it.

Photo by By Jim Jones (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

The Impact of Cincinnati’s Pension Reform Deal

Cincinnati’s pension deal, struck last week, is widely considered to be a true compromise: no one is particularly happy with the outcome and every party made sacrifices as part of the bargain.

But how exactly does the deal affect the benefits of retirees and current employees?

A quick refresher on the main points of the deal, from Cincinatti.com:

* Three-year freeze on any increases to pension benefits for current and future retirees.

* Changes compound increases to a 3 percent simple increase for current and future retirees.

* Creates $200 million in savings in the health care system, and shifts those savings over the pension, which is not as well funded.

* City puts in $38 million this year and then commits to putting in 16.25 percent of payroll (currently $26 million) for each of the next 30 years. About half of that would come from the general fund.

The Cincinnati Enquirer explains the impact on retirees, including a COLA change:

Health benefits will not change for existing retirees under the fund, including a benefit that keeps health care for surviving spouses. But those retirees took perhaps the biggest hit of all the different constituencies at the table.

Most current retirees receive what is called a compound COLA, which calculates the previous years’ raises into a current year’s adjustment. That generous benefit goes away, replaced by a flat 3 percent annually like the current workers will receive. But retirees did get one bonus: That 3 flat percent will be calculated off the current levels, not those at retirement.

In addition, the city is creating its own retiree drug prescription program which it hopes will save $100 million, and is creating a Medical Expense Reimbursement Program (MERP) to pay whatever difference between an alternate plan and the city’s plan. This would be voluntary, however, and retirees can simply stay with the existing city plan.

How the deal affects current employees:

Under the deal, all current workers and retirees won’t get any raises (cost of living adjustments) to their pension payments for three years. For current workers, that means they won’t see any increases for the first four years they are retired. But in return, current employees probably got the best deal of any party to the agreement.

Under changes made in 2011, such adjustments for current workers were capped at 2 percent, but indexed to inflation, meaning in slow economies, only a minimal raise might be on the way. Now, they are guaranteed 3 percent annually for 30 years after the initial three-year holiday.

In addition, some of those workers clawed back a somewhat more generous benefit calculation formula, while older workers hired before 2006 also got the ability to retire after 30 years of service with no age requirements.

So retirees and workers will have to stomach some changes they may not like.

But in exchange, the city has promised to pay around $26 million annually into the pension system over the next 30 years.

Under the deal, the pension system could be fully funded in 10 years.

Photo credit: “Downtown cincinnati 2010 kdh” by kdh – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons

Pension Board to Cast Final Vote on Florida Reforms

The board of Jacksonville’s Police and Fire Pension Fund will vote Monday on a pension reform measure that would improve its funding status but also affect member benefits.

The measure was passed by the City Council in early December. More from the Jacksonville Business Journal:

The final status of the pension reform package, which calls for a mix of surging money into the pension fund and cutting benefits, rests with the board, who can either reject it altogether, elect to modify it or accept it.

Rejecting it would kill the legislation, while modifying it would mean that City Council would have to agree to changes proposed by the board.

The city’s latest estimates of the savings the pension reform legislation could bring come to about $1.33 billion over 30 years.

The legislation’s approval, however, will mean nothing unless the city decides how to pay off the $1.6 billion in debt it already owes the pension fund. Some of the suggestions by the city include infusing $300 million to the fund by increasing its and JEA’s annual contribution to the pension fund.

Pension360 will track the outcome of the vote.

Photo by pshab via Flickr CC License

Kentucky Lawmakers to Push for Pension Reforms Before Funding Teachers’ System

The Kentucky General Assembly is considering issuing billions of dollars worth of bonds to help fund the state’s Teachers’ Retirement System (KTRS).

But the funding may come with a catch as many lawmakers want to attach strings to the funds, which range anywhere from forcing new transparency requirements on the system to making benefit changes.

From the Courier-Journal:

So far, legislators have pre-filed at least four bills that would alter some aspect of teacher pensions, and leaders from both the House and Senate say any bonding needs to be paired with reforms.

“There is not a lot of enthusiasm for borrowing more money to pay off the KTRS debt without structural changes accompanying that effort,” said Senate Majority Leader Damon Thayer, R-Georgetown.

Thayer said lawmakers need to consider adjustments to employee contributions and cost-of-living increases, along with new policies that promote transparency in the system.

House Speaker Greg Stumbo, who argues that bond proposals have merit under today’s market conditions, likewise favors measures to improve oversight and transparency as part of the overall funding scheme.

“I think to sell it, it needs to be part of the package,” Stumbo, D-Prestonsburg, said.

[…]

McDaniel, R-Latonia, is sponsoring a bill that would require public retirement systems — including KTRS — to disclose more information about use of investment middlemen known as placement agents.

In the House, Rep. Jim Wayne, D-Louisville, has pre-filed legislation that would, among other things, ban the use of placement agents and require KTRS to publicly disclose information about investments and contracts.

Wayne said the bonding proposal makes some fiscal sense if the state can borrow money at a interest rate lower than its investment return.

But he warned that lawmakers can’t trust the system to act in the best interest of retirees without more transparency, and he says the funding problem is better addressed through tax reform.

KTRS manages $17.5 billion in assets.

Former Enron Trader Continues to Fund Pension Policy Reforms From Behind the Scenes

Former Enron trader John Arnold has given large amounts of money to various public pension reform initiatives around the county in recent years.

Many of those measures mandate a shift to a 401(k)-style system, or allow benefit cuts.

Most recently, he gave $1 million in support of Proposition 487, a Phoenix ballot measure that would have shifted new city hires into a 401(k)-style system.

From Politico:

When former Enron trader and Texas billionaire John Arnold donated more than $1 million to a November 2014 initiative to reform the public pension system in Phoenix, Ariz., pension activists took notice.

Arnold’s donation to Proposition 487, also known as the Phoenix Pension Reform Act, constituted close to 75 percent of total donations for the ballot measure, which failed. Had it passed, it would have moved new state employees from a defined benefit plan into a less-generous (and less expensive) defined contribution plan such as a 401(k).

Despite his Arizona defeat, no one believes Arnold is done.

Arnold’s money has also been involved in reform initiatives in Kentucky, Rhode Island and California. From Politico:

In the 2014 cycle, Arnold and his wife donated $200,000 to a super PAC that supported Democrat Gina Raimondo’s successful gubernatorial campaign in Rhode Island. As Rhode Island’s state treasurer, Raimondo had enacted pension benefit cuts that cost her union support. Rahm Emanuel, who made similar changes to Chicago’s pension system, also received financial assistance from Arnold.

San Jose Mayor Chuck Reed, another Democrat, tried, unsuccessfully, to place an initiative on California’s November 2014 state ballot that would have allowed public employers, under specific circumstances, to reduce employee benefits and to increase contributions to underfunded plans. Arnold bankrolled the entire effort, to the tune of $200,000.

According to data compiled by the NPPC, based on donations disclosed on the website of the Laura and John Arnold Foundation and on news articles, Arnold has since 2008 spent more than $53 million on pension policy reforms, not all of it in the political realm. (In an email interview with Reuters, Arnold disputed those numbers.)

Other beneficiaries listed include universities and think tanks such as Brookings and the Pew Research Center. Much of the money was spent to support pension reforms, but some was spent on education reform. Both efforts, unions point out, tend to favor benefit cuts to public employees.

[…]

The Arnold Foundation is also participating in the Colorado Pension Project, chaired by former Colorado governors Bill Owens, a Republican, and Richard Lamm, a Democrat. As governor, Lamm drew national headlines 30 years ago when he said that elderly people who were terminally ill had a “duty to die and get out of the way.” (Lamm will turn 80 next year.) The Colorado Pension Project’s website says that recent legislative reforms to the state pension system — which reduced cost of living adjustments, raised the retirement age for new employees and increased employee salary contributions — did not go far enough. McGee said Arnold’s foundation was drawn to the state’s history of “fruitful left ideological discussions.”

Read the full Politico report here.

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Illinois Likely Faces Long Odds on Pension Reform Ruling

In 2015, the Illinois Supreme Court will decide the legality of the state’s pension overhaul that reduced benefits of public workers.

But if legal challenges to similar laws in other states are any indication, the chances of Illinois’ pension reform being upheld are slim, according to a Reuters analysis.

From Reuters:

Court rulings in Arizona show that Illinois, which has the worst funded pensions of any U.S. state, may not have much chance.

The problem is that Illinois, Arizona and New York states all provided public workers, such as police, teachers and even judges, near iron-clad pension guarantees that were embedded in their state constitutions.

Two Arizona laws enacted in 2011 to increase employees’ pension contributions, restrict certain people from receiving pensions, and institute a new formula for calculating benefit increases, floundered in the face of legal challenges. One law, challenged by teachers, was overturned by a Maricopa County judge in 2012, while another, contested by retired judges, was tossed out by the Arizona Supreme Court in February this year. The courts tied their rulings to constitutional language that membership in public pension systems is a contractual relationship, and retirement benefits cannot be “diminished or impaired.”

Illinois and its Republican Governor-elect Bruce Rauner are likely to find themselves in similar bind to Arizona where the only answer appears to be a long-shot effort to amend the state constitution.

“There aren’t many options at this point,” said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College, referring to both states. “The (pension) payments need to be made or the constitution needs to be changed.”

Altering the constitution, however, isn’t a practical option. From Reuters:

Altering the Illinois Constitution’s 1970 pension provision would be a massive undertaking, requiring a three-fifths vote of lawmakers in the House and Senate to get it on the ballot. It would then need approval from three-fifths of voters or a majority of individuals actually voting in a general election — not an easy proposition as people often don’t vote on every item on the ballot and given Illinois is a largely Democratic state with activist public unions.

Illinois’ state-level pension systems were collectively 42.9 percent funded as of June 30, 2014.

Report: Japan Pension Set to Benefit From Reforms

Japan’s Government Pension Investment Fund (GPIF) – the largest pension fund in the world – implemented numerous changes in 2014, including an asset allocation shake-up and the hiring of its first chief investment officer.

A new report says the reforms will benefit the fund going forward. From Chief Investment Officer magazine:

A report jointly published by Cerulli Associates and the Nomura Research Institute (NRI) stated that the reforms to the ¥130.9 trillion ($1.1 trillion) pension, announced by its management team earlier this year, would help it become “more dynamic.”

“In terms of hiring, the GPIF will not be shackled by low salaries and will be better positioned to recruit top-notch talent,” said Yoon Ng, Asia research director at Cerulli Associates. “This will add more quality to its external manager selection processes.”

[…]

“With public pension fund reforms in place, the GPIF… may show a stronger tendency to hire managers with highly distinctive investment strategies that are differentiated from and relatively uncorrelated with other companies’ strategies,” the report offered.

Atsuo Urakabe, a senior researcher at NRI, said the new asset allocation would push the GPIF to hire managers with “highly distinctive investment strategies” that can offer uncorrelated performance, as it seeks to achieve a higher annual return.

Cerulli’s report said Japanese pension funds had been “bogged down by ultra-conservative investment policy requirements” but pointed to the GPIF’s reforms as an indication that other pensions in the country could revise their asset allocations, diversify, upgrade risk management, and reform governance.

As well as identifying external managers, Cerulli’s research paper predicted that Japanese public pension funds outside of GPIF may seek to build up their in-house expertise.

“In the long run, this will help to bring their costs down and lead to some insourcing of assets that had previously been farmed out to be managed,” the report said.

The GPIF manages $1.1 trillion in assets.

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