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New Orleans Looks for Ways to Cut Pension Costs

The board of the New Orleans Municipal Employees Retirement System (NOMERS) – the city’s largest public pension fund – is considering a series of cost cutting measures, some that involve trimming benefits.

Under consideration: increasing employee contributions and raising the retirement age, according to NOLA.com. The changes are currently being examined the system’s actuary.

“Everybody’s Not Going To Retire At The Same Time”: Actuary Evaluates Former Illinois Governor Edgar’s Pension Comments

Last month, former Illinois governor Jim Edgar gave his thoughts on the state’s pension situation. He notably said he didn’t support the state’s pension reform law, and said the following:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it.”

Actuary Mary Pat Campbell, who runs the STUMP blog, weighed in on Edgar’s comments. As you’ll see, she is not a fan of Edgar’s pension knowledge. The full post is below.

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By Mary Pat Campbell, originally published on STUMP

Seems that not all recent Illinois governors end up in prison, (Quinn isn’t out of the woods yet!) but perhaps they should be jailed for this crap:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.”

First off, we do have an appearance of the 80% canard, but there’s a new lie that’s been creeping in that is pissing me off: “Oh, it’s not a problem right now… it would only be a problem if everybody retired at the same time.”

Let me explain, conceptually, what the pension liability is supposed to represent, and what the unfunded portion represents: it is what people have earned for their PAST service, and is using all sorts of assumptions, such as THE AGE THEY WILL PROBABLY RETIRE.

The actuarial value of the pension, under even the craziest approaches, does not assume everybody retires right now.

Let’s consider your pension value for a person still working: each extra year of service, they’ve earned some more. They are also a year closer to retirement. As long as they keep working and are still alive, the value of their pension increases, under most pension benefit design. Sometimes you’ll see a pension value drop at later ages, but that’s getting persnickety (though it has had some repercussions elsewhere).

The pension valuation is supposed to be a snapshot, indicating what has ALREADY BEEN EARNED. There are approaches that try to capture future salary increases, and tries to make accrual less drastic (as one usually does see huge increases in pension value right before retirement under some approaches).

The main time the pension value would be decreasing for a person is when they’re in retirement, as they’re not accruing more benefits, and each year they’re one year closer to death. The time the pension gets paid out is generally getting shorter. If the pension fund cannot cover retiree benefits, it’s in a really bad condition.

And here’s the deal: some pensions are not able to cover just the current retiree portion of the benefits:

Nobody is any more worried now than they were before the New Jersey Pension Study Commission report came out. Yes, “[t]his problem is dire and will only become much worse if meaningful steps are not taken quickly” but what does that really mean to anyone?

…. Scary Conclusions

1. For retirees there may be about $15 billion to cover $40 billion in liabilities and that’s ONLY for retirees leaving absolutely NOTHING for the 151,669 participants who have not yet started receiving monthly benefits except, for now, the refund of their contributions.

2. There is an equally good chance that Conclusion #1 is overly optimistic

I doubt New Jersey is the only state in that situation. As noted earlier, Kentucky is looking really bad.

And in my recent teaser, I showed a set of graphs I am developing for various pension plans. The ones being shown were for Texas Teachers Retirement System. I will explain them in a later post, and start showing you some truly scary information — using the official numbers from the plans themselves.

But shame on Gov. Edgar for mouthing the same bullshit everybody else does in favor of underfunding the pensions. I have looked at over a decades’ worth of Illinois pension valuations, and for all major funds (except one), they deliberately underfunded by substantial amounts, even in “good” years.

If you’re not going to make contributions when times are good, guess what will happen to the pensions when times are bad?

I guess ex-Gov. Edgar wants to cover his own ass for the pensions being underfunded in the go-go 90s, when he was governor (1991 – 1999). Hey! Everybody was doing it! 80% is good enough!

NO, IT’S NOT.

SHAME.

Judge: Unions Must Use Different Argument If They Want To Overturn Baltimore Reforms

After several years and numerous legal battles, a federal judge today affirmed that a series of pension reforms enacted by Baltimore in 2010 were constitutional.

But the judge, Barbara Milano Keenan of 4th U.S. Circuit Court of Appeals, left the door open for unions to again challenge the reforms. This time, unions will have to bring a different legal argument to the table.

Quick context: In 2010, Baltimore overhauled its police and fire pension systems and implemented reforms—higher employee contributions, higher retirement ages and lower COLAs—which were projected to save the city $64 million annually. Details from the Baltimore Sun:

Under the mayor’s plan, firefighters and police have been required to increase contributions to the pension fund — now 10 percent of their salaries. Many officers were told that they would no longer be able to retire after 20 years, but would have to stay on the force for 25 years to receive their pensions. Retired workers also lost what was called the “variable benefit,” an annual increase tied to the stock market. Instead, the youngest retirees receive no annual increase through the variable benefit, and older retirees receive a 1 percent or 2 percent annual increase.

The bolded section is key. The first legal challenge against the reforms centered around the decrease in COLAs. Unions argued that the change was illegal because Maryland, like many states, treats pension benefits as contracts that cannot be impaired.

Most states sidestep the contract issue by applying reforms to new hires only. But Baltimore had decreased COLAs for retirees as well.

So, in 2012, a District Court ruled the change illegal, saying “elimination of the variable benefit constituted a substantial impairment of certain members’ contract rights, and that the impairment was not reasonable and necessary to serve an important public purpose.”

The ruling today overturned the District Court’s decision and re-instated the COLA decreases. The logic behind the ruling, from Reuters:

The appeals court said the reform was a “mere breach of contract, not rising to the level of a constitutional impairment or obligation.”

It also dismissed the notion that allowing the reform to go through would give a city “unfettered discretion to breach its contracts with public employees,” because of protections in Maryland law.

“This contention lacks merit because, under Maryland law, the city is only permitted to make reasonable modifications to its pension plans,” wrote Keenan. “Any reduction in benefits ‘must be balanced by other benefits or justified by countervailing equities for the public’s welfare.’”

But the judge said unions could change their argument, and they might have another shot at overturning the legality of the reforms in court.

Judge Keenan said that unions should argue the city took “private property for public use, without just compensation.”

And unions do plan to keep fighting.

“We have to get with our attorneys and decide which way to go, whether it’s federal or state,” said Rick Hoffman, president of the firefighters union. “I personally think this ruling strengthens our stance.”

Photo: “Ext-Night” by Basilica1 Licensed under Public domain via Wikimedia Commons

Los Angeles Pension Reforms Rescinded by Labor Board; City Will Appeal

The Employee Relations Board, a five-member panel that handles labor complaints in Los Angeles’ City Hall, probably didn’t expect to become famous overnight.

But they’ve become a household name in Los Angeles this morning, after news broke that the Board voted to rescind a series of pension reforms passed by Los Angeles in 2012.

The Board ruled that city officials did not properly negotiate the reforms –which reduced pension benefits for new hires and raised retirement ages—with municipal employee unions. From the LA Times:

The Employee Relations Board voted unanimously Monday to order the City Council to rescind a 2012 law scaling back pension benefits for new employees of the Coalition of L.A. City Unions, on the grounds that the changes were not properly negotiated. That law, backed by Mayor Eric Garcetti when he was a councilman, was expected to cut retirement costs by up to $309 million over a decade, according to city analysts.

Ellen Greenstone, a lawyer for the labor coalition, described the vote as a “huge, big deal” — one that shows the city could not unilaterally impose changes in pension benefits on its workforce.

Coalition chairwoman Cheryl Parisi said in a statement that the reduction in benefits, which included a hike in the employee retirement age, “devalues middle-class city workers and their dedication to serving the residents of Los Angeles.

The city’s labor board is a quasi-judicial body that reviews complaints from unions, managers and individual employees. Under the city’s labor ordinance, the panel has the power to invalidate decisions by the council, said the board’s executive director, Robert Bergeson.

If council members do not agree with Monday’s decision, they can file legal paperwork seeking to have a judge overturn it, Bergeson said.

City officials have previously argued that changes in the retirement benefits of future employees do not need to be negotiated. The 2012 law rolling back benefits applied only to employees hired after July 1, 2013. Budget officials had hoped that the reductions would trim the city’s retirement costs by more than $4 billion over a 30-year period.

The board’s decision comes as the city’s contributions for civilian employee retirement costs have climbed from $260 million in 2005 to an estimated $410 million this year, according to a recent budget report.

Los Angeles, meanwhile, plans to appeal the board’s decision. From Bloomberg:

Los Angeles will appeal an administrative panel’s decision to roll back changes in public employee pensions that were expected to save as much as $4.3 billion over 30 years, a spokesman for Mayor Eric Garcetti said.

The second most-populous city’s Employee Relations Board concluded yesterday that officials failed to properly consult with municipal employee unions before pushing through the changes in a City Council vote in October 2012.

The city will appeal the board’s 5-0 vote in court, Jeff Millman, a spokesman for the mayor, said by e-mail. Millman said Garcetti, a 43-year-old Democrat, disagreed with the ruling, although Millman didn’t spell out the reasons.

Los Angeles was expecting to save between $3.9 and $4.3 billion over the next 30 years. If the city does indeed appeal the ruling, the reforms will then land in front of a judge, who will have the final say.

Photo: “LA Skyline Mountains2″ by Nserrano – Own work. Licensed under Creative Commons

Reform Watch: Australia To Raise Retirement Age to 70

The world is now watching Australia as the country readies itself for a bold shift in pension policy: raising the retirement age to 70, which would be the highest retirement age in the developed world.

Australia’s workers had previously been able to retire at 65. The five year increase will be phased in over many years, and will take full effect in 2035. The plan was announced by Australian Treasurer Joe Hockey:

Hockey is part of the Liberal-National coalition that won power in September, pledging to end what he called the nation’s Age of Entitlement and repair a budget deficit forecast to reach $49.9 billion AUS this fiscal year. Australia is leading the charge for a group of advanced economies from Japan to Germany that are pushing the retirement age higher to head off a gray disaster caused by a growing army of pensioners and a declining pool of taxpayers.

The ratio of working-age Australians to those over 65 in the world’s 12th-largest economy is expected to decline to 3-1 by 2050 from 5-1 in 2010. In Japan it’s already below 3-1 and in Germany it’s close to that level, according to the International Labor Organization.

“While Australia may be the first to raise the age to 70, it won’t be the last,” said Steve Shepherd of international employment agency Randstad Group in Melbourne. “The world will be watching this.”

Australia’s 2.4 million state-retirement-age pensioners draw about $40 billion AUS a year, making it the largest government spending program. That’s forecast to rise 6.2 per cent a year over the next decade, according to an independent review commissioned by Prime Minister Tony Abbott. The program provides the main source of income for 65 per cent of retired Australians.

Failure to rein in the program would put a greater onus on younger workers to fund it through increased contributions and taxes. Raising the pension age may also mean more competition for those just starting in the workforce. Unemployment among those aged 15-24 reached a 12-year high of 13.1 per cent in May, more than double the national average of 5.8 per cent.

It’s also interesting to note the results of a recent study on retirement age:

Research shows many people struggle to work until they are 60, let alone 70. The Household, Income and Labour Dynamics in Australia (HILDA) Survey shows that the average retirement age from 2003 to 2011 for men was 62.6 years old and for women it was just under 60. While that is rising, it is still well below the current retirement age of 65.

And the HILDA data shows, for men, nearly half of all retirements are involuntary with most due to poor health. Women are more likely to retire on their own terms but still 43 per cent retire due to reasons such as ill health, losing their job or having to care for others.

The rest of the world will be happy to sit on the sidelines and watch this fascinating policy shift play out.