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Voters Reject Phoenix Pension Overhaul

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The controversial Phoenix ballot measure Proposition 487, which would have transferred all the city’s non-public safety new hires into a 401(k)-style system, has been struck down by voters.

From Reuters:

In a big victory for city labor unions, voters rejected Prop. 487 by a margin of 56.5 percent to 43.5 percent, according to results posted online by the Maricopa County Recorder/Elections Office.

The measure proposed to end the city’s traditional defined-benefit pension plan for new workers, shifting them to a plan dominant in the private sector, with employees pay a far greater share of the cost. Existing workers could have kept their current pensions.

The initiative was one of this year’s biggest test cases pushed by pension-reform advocates, including Texas billionaire and former Enron executive John Arnold, who have argued that traditional pension plans are an increasingly unaffordable burden for cash-strapped state and local governments.

The measure, by the city council’s own admission, would have cut retirement benefits significantly for new hires.

The city’s non-public safety pension fund is 64.2 percent funded.

Knoxville Voters Approve All 5 Pension Measures on Ballot

There were five separate pension measures on the Knoxville ballot yesterday – and voters approved all five by a large margin.

The measures weren’t as far-reaching as more controversial reform initiatives such as Phoenix’s Proposition 487.

But they still introduce changes to Knoxville’s retirement system. Among the changes: more investment options for workers covered by the city’s defined-contribution plans and the appointment of finance and accounting experts to the city’s pension board.

The five measured, explained by WBIR:

No. 1: Better clarifies some terms and is essentially nothing more than housekeeping and cleaning up language.

No. 2: Gives city leaders the authority to consider granting retirees the option to take a single lump payment when they retire rather than receiving monthly payments. Note that it doesn’t automatically grant officials the option, but rather the chance to study whether they want to do it.

No. 3: Could lead to those employees covered under a contribution plan (think: 401K) to have a say in how their dollars are invested. Or at least there could be more options than what the city currently sets aside for them.

No. 4: This amendment…says that only the retiree’s spouse would be eligible for his/her retirement benefits. Right now, children and grandchildren can get them.

No. 5: This amendment…would add two new spots to the pension board. The new members would have to have expertise in finance and accounting, they would have to be city residents and they could not be city employees or folks who receive pensions from city employees.

The specific language of the measures can be found here.

Photo by Elektra Grey Photography

After Deadlock, Los Angeles Pension Lowers Assumed Rate of Return

The board of the Los Angeles City Employees’ Retirement System (LACERS) has voted to lower its assumed rate of return from 7.75 percent to 7.5 percent – a move that was recommended by the fund’s financial consultants and supported by six of its seven board members.

From the Los Angeles Times:

Los Angeles city pension agency voted Tuesday to rein in its long-range earnings forecast, putting in place changes that could throw the city’s budget $50 million deeper into the hole next year.

The City Employees’ Retirement System board responded to financial consultants who said the agency should no longer assume that its investment portfolio — money that helps cover the cost of employee pensions — will deliver an average yearly return of 7.75%.

[…]

Pension board member Elizabeth Greenwood cast the only opposing vote, saying the city needs more time to emerge from its recent financial crisis. Greenwood had called for the change, which will reduce the system’s earnings assumption to 7.5%, to be delayed until 2017.

“There is no reason we need to rush into a change that is going to slam the city’s budget that hard,” said Greenwood, who was elected to the board by civilian city employees.

[…]

The issue of pension system earnings was raised earlier this year by the LA 2020 Commission, a 13-member group of business, union and civic leaders convened by Council President Herb Wesson. (The commission’s co-chairman, Austin Beutner, is now publisher of The Times.)

In a report released in April, the commission said the city’s pension earnings assumptions should be significantly decreased, so that they are in line with the earnings forecast of Warren Buffett’s company, Berkshire Hathaway.

The commission raised the possibility of a 6% yearly earnings assumption in its report. City Administrative Officer Miguel Santana, the high-level budget official, responded at that time by warning that such a move, if carried out for public safety and civilian workers, would rip a $566-million hole in the budget.

The retirement board initially deadlocked on the proposal to scale back its earnings assumptions. Two weeks ago, pension board member Nilza Serrano said she worried about putting additional pressure on the budget. During the meeting, she walked out of the room to avoid having to cast a vote, leaving her colleagues unable to muster a majority to make the change.

On Tuesday, Serrano reversed course and voted for the reduction, saying she had reviewed the proposal more carefully.

“I got educated,” said Serrano, a Garcetti appointee.

The decision has budgetary implications for the city, because a lower return assumption forces the city to set aside more money for retirement benefits. From the LA Times:

That decision could make it harder for Mayor Eric Garcetti and the City Council to restore services trimmed during the recession, since it forces them to set aside more money in the short term for retirement benefits.

[…]

Budget officials now expect a $165-million shortfall next year and have not factored in the pension board’s changes. The board’s consultant had warned that a failure to reduce the investment return assumption now would only force the city’s budget to pay more later if earnings fall short.

The retirement fund relies on three sources of revenue to cover pensions and healthcare for retired civilian city employees: contributions from workers’ paychecks, money taken from the city’s budget and earnings on the system’s $13.9-billion investment portfolio. When investment returns fall significantly below the agency’s projections, the gap has to be made up by the city budget, leaving less money for taxpayer services.

The board’s vote was opposed by the Coalition of L.A. City Unions, which represents about 20,000 city workers — and is now in salary talks with the city. Both the coalition and Councilman Paul Koretz portrayed the move as unnecessary, since the pension fund had strong investment earnings in recent years.

“This makes it more likely that it will be difficult to give employees any kind of a cost-of-living increase … and more likely that we will provide much fewer services than we would otherwise,” Koretz said.

LACERS manages $13.9 billion in assets.

Would Phoenix’s Proposition 487 Hurt Public Safety Workers?

In exactly one week, Phoenix voters will determine the fate of Proposition 487 – the controversial ballot measure that would, among other things, end the city’s defined-benefit plan for all new hires and shift them into a 401(k)-style plan.

The measure excludes public safety workers, so nothing would change for police and firefighters. Or would it?

In recent weeks, a fiery debate has emerged over whether Prop 487 would actually harm the retirement security of the city’s public safety workers.

Dustin Gardiner at the Arizona Republic writes:

Hundreds of firefighters and police officers chant “No on 487!” outside an upscale Biltmore office tower, rallying against a ballot initiative they contend will gut their most critical benefits.

They say the measure…would jeopardize their retirement security and death and disability benefits.

That dire situation they portrayed at the protest earlier this month — suggesting Prop. 487 will eviscerate the pensions of officers and firefighters and leave families of fallen first responders without benefits — is improbable given that state law prohibits it.

Nevertheless, the hotly disputed claim has become the dominant argument in the final stretches of the campaign over the measure, which would close Phoenix’s employee-pension system for new hires and replace it with a 401(k)-type plan. The initiative is on the Nov. 4 ballot for city voters.

[…]

“Given that police officers and firefighters don’t receive Social Security and judges are apt to make unpredictable rulings, we refuse to take such risks with the public safety of our community,” leaders of the city’s police and fire unions wrote in a joint letter this week.

The Arizona Republic editorial board published a piece on Monday calling the arguments of public safety unions “thin”:

Prop. 487, which applies only to the Phoenix-run retirement system for non-public-safety employees, expressly excludes police and fire pensions. State law requires cities to contribute to the statewide public-safety pension system. The Arizona Constitution explicitly protects personnel already enrolled. Legal precedent clearly is on the side of public safety.

Even attorneys opposing Prop. 487 acknowledge that their arguments are thin. So why the fierce opposition?

Part of the explanation must be set at the feet of the Phoenix City Council, a majority of which opposes the proposition. The council created ballot language that disingenuously depicts the proposition taking action that is constitutionally forbidden.

The council majority and staff have made it clear which side they favor. It isn’t the side of the city’s taxpayers, who must bear the rapidly increasing expense of the city’s grossly underfunded pension plans.

But, largely, the anti-Prop. 487 campaign appears to be a statement by the city’s public-safety unions, which will adamantly oppose any effort to change any public-employee retirement system that promises to lessen the financial burden on the city’s taxpayers.

Even to the point of rising up against a ballot measure that will in no way affect their benefits.

But union leaders call the measure “poorly written” and maintain that the ambiguity of the measure doesn’t bode well for public safety workers. From a column in the Arizona Republic authored by the presidents of three Arizona public safety unions:

Prop. 487 will impact Phoenix police officers and firefighters. The only question is: Exactly how much?

Because of this measure’s contradictory language and because, according to the city’s analyses, Prop. 487 has the potential to make it illegal for the city to contribute to the public-safety retirement system, our groups oppose this ballot measure. Simply put: It is the wrong kind of reform.

Inevitably, Prop. 487 will end up in court for a years-long legal fight. Our opponents and The Arizona Republic editorial board have discounted that risk — and the looming massive legal bills.

However, given that police officers and firefighters don’t receive Social Security and judges are apt to make unpredictable rulings, we refuse to take such risks with the public safety of our community. We hope Phoenix residents will refuse, as well.

Read the entire column from the union leaders here.

You can read the Arizona Republic’s editorial board piece here.

Illinois Pension Case Stays On Fast Track; Arguments Set For November

Illinois’ pension reform law is going to get its day in court soon. A judge on Wednesday scheduled arguments for and against the law for next month. That means a final ruling on the law could be made by the end of the year.

The law’s opponents and defenders have one thing in common: they both want a ruling on the law’s legality sooner than later.

From Reuters:

Sangamon County Circuit Court Judge John Belz, who is overseeing five consolidated lawsuits filed by labor unions and others, set Nov. 20 for arguments for and against the constitutionality of the law passed by the Illinois legislature last December.

Public labor union coalition We Are One Illinois and other parties have been seeking an expedited ruling in the wake of a July 3 Illinois Supreme Court decision in an unrelated case that determined health care for retired state workers is a pension benefit protected by a provision in the state constitution.

The same provision, which prohibits the impairment or diminishment of retirement benefits for public workers, is the focus of the lawsuits against the state’s pension reform law. The new law, which is currently on hold, reduces and suspends cost-of-living increases for pensions, raises retirement ages and limits the salaries on which pensions are based.

In documents filed with the court on Friday, Illinois Attorney General Lisa Madigan argued that the high court’s July 3 ruling only dealt with retiree health care subsidies being part of the contractual relationship Illinois has with members of the state’s public pension systems.

“The court did not address whether such benefits are immune from the state’s exercise of its police powers. That issue was not before the court,” Madigan’s court filing noted.

In its defense of the pension reform law, Illinois is leaning heavily on its so-called police powers trumping the constitutional provision against reducing public employee retirement benefits. Those powers include the state’s ability to properly fund education, healthcare and public safety. Those sectors would experience substantial cuts if the state’s already large pension burden grows, Madigan said in the filings.

We Are Illinois released the following statement on Wednesday:

“As we have always maintained and the recent Kanerva decision confirms, the pension protection clause of the Illinois Constitution is absolute and without exception. There is no merit to the State’s purported justification for the unconstitutional diminishments and impairments that SB1 imposes. We are hopeful for a swift resolution in the plaintiffs’ favor, so that we can work with legislators willing to develop a fair—and legal—solution to our state’s challenges, together.”

Think Tank Director: Corbett’s Pension Proposal Would Increase Pension Debt and Reduce Benefits

Stephen Herzenberg, the executive director of the Keystone Research Center, took to the newspaper on Monday to counter Pennsylvania Gov. Tom Corbett’s argument that the best bet for saving the state’s pensions would be to switch new hires into a 401(k)-type plan.

Herzenberg claims in an op-ed that such a plan would provide no savings for the state, reduce benefits for retirees and actually increase the state’s pension debt.

Herzenberg starts by talking about the fees and other costs associated with 401(k) plans. From the op-ed, published in the Patriot-News:

For two years, Governor Corbett has advocated a shift from pooled, professionally managed, defined-benefit pensions to a system where each employee manages an individual account, similar to a private sector 401(k) plan.

[…]

How does the efficiency of today’s defined benefit pensions system translate, in bottom-line terms, measured by the level of contributions required to fund retirement? According to the National Institute on Retirement Security, individual 401(k)-style accounts cost 45% to 85% more than traditional pooled pensions to achieve the same retirement benefit. That’s a big efficiency gap.

A lot of this efficiency gap results from the fees that financial firms charge holders of individual accounts – for administration, for financial management and trading stocks, and for converting savings at retirement into a monthly pension check guaranteed until the end of life – an “annuity.” In essence, these fees are transfer from Main Street retirees to Wall Street. In an economy with stagnant middle-class incomes and all the gains for recent growth already going to the top, such a transfer seems like the last thing we need.

Given the high fees and low returns of 401(k)-style accounts, it is hardly a surprise that actuaries who have studied the Governor’s proposal for an immediate switch to them – or a more gradual switch under a new “hybrid” proposal that the Governor now supports – don’t find any savings.

Far from providing savings, in fact, this switch could result in a large upfront transition costs – because the investment returns on the existing pension plans would fall as the plans wind down. The Governor’s plan was projected to have a $42 billion transition cost.

He goes on to write that Corbett’s plan would be “highly inefficient” and would actually reduce retirement benefits. From the op-ed:

The switch would also reduce retirement benefits. This is not only bad for teachers, nurses, public safety personnel, and other public servants. It could also require a future wage increase to enable the state and school districts to attract and retain high-quality staff – another cost to taxpayers.

In his recent book on inequality, economist Thomas Piketty worries that high returns and low financial management costs are only accessible to massive pools of wealth. This means that the assets of the wealthiest individuals and families grow faster than the wealth of the rest of us. It reinforces the drfit back towards Gilded Age levels of wealth inequality.

But in the context of public sector retirement plans, defined-benefit pensions give taxpayers and the middle class the ability to grow their pooled retirement savings in the same manner as Warren Buffet and Bill Gates.

If define benefit pensions are poorly managed, as they have been in Pennsylvania, they do create some challenges. As with paying a credit card bill, if you don’t put in the required contributions you can run up a large expensive debt. But the way to fix that problem is to pay the required contributions, not to switch to a highly inefficient retirement savings vehicle.

Read the entire column here.

United Nations: Increased Pension Coverage Key To Future Global Development

The International Labour Organization (ILO), a UN agency, released a report yesterday warning that 48 percent of the world’s population didn’t have access to a retirement benefit of any kind in 2013.

The report, titled Social Protection for older persons: Key policy trends and statistics, said that retirement benefits make “good economic sense” and aid global economic development—but many countries are cutting back on benefits due to austerity measures. From the United Nations:

According to ILO, although more than 45 countries have reached 90 per cent pension coverage and more than 20 developing countries have achieved or nearly achieved universal pension coverage, the trend of fiscal consolidation spurred by austerity has led to a contraction in social protection for older persons with consequent adjustments.

These include cuts in health and other social services, the reduction of benefits and increase in contribution rates and the raising of the retirement age.

“These adjustments are undermining the adequacy of pension and welfare systems and reducing their ability to prevent poverty in old age,” Ms. Ortiz noted.

“The long-term liabilities of austerity take time to show up. Depressed household income levels are leading to lower domestic consumption and slowing down economic recovery. It is alarming that future pensioners will receive lower pensions in at least 14 European countries by 2050,” she added.

Meanwhile, a handful of countries have expanded pension coverage dramatically in recent years. From the UN:

At the same time, a number of countries have registered positive trends in their social protection systems. China, Lesotho, Thailand, Timor-Leste, and Tunisia, for instance, have experienced what the ILO described as “remarkable successes” in the reach of their coverage with gains ranging from 25 to more than 70 per cent of the population.

Pointing to China, in particular, Ms. Ortiz observed that the country had achieved nearly universal coverage of pensions and increased wages while other countries, such as Argentina, Bolivia, Chile, Hungary, Kazakhstan, and Poland, were reversing the earlier privatization of their pension systems as they were too expensive and had not expanded coverage.

“Public social security systems with strong social protection floors are essential for economic recovery, inclusive development and social justice, and therefore must be an integral part of the post-2015 development agenda,” concluded Ms. Ortiz, referring to the new development agenda that will succeed the landmark Millennium Development Goals (MDGs), set to expire in 2015.

Read the full report here.

Phoenix Politicians Weigh In On Pension Reform Measure

The Arizona Republic runs a great column every week where they ask a dozen major political players in Phoenix a question regarding an important issue.

This week, pensions were the issue. Specifically Proposition 487, which would shift new hires into a 401(k)-style system as opposed to a defined benefit plan.

There has been much debate over whether the law would impact police and firefighters, who are supposed to be shielded from the law.

Here’s what some Phoenix politicians had to say about the ballot measure, from the Arizona Republic:

We asked: Do you think Prop. 487 will impact the retirement benefits of current or future police officers and firefighters? Why or why not?

“Whatever the long-term impact of the proposition, it’s likely that if it’s passed, it will take years in court to clarify its true intent. The losers will be Phoenix taxpayers, who will bear the costs of a prolonged legal debate.”

— Thelda Williams,District 1, northwest Phoenix

“No. I don’t believe that ‘preamble’ is an accurate term given voters will support or oppose the measure in its entirety, including this language from Page 1 in the ‘preamble:’ ‘This Act is not intended to affect individuals who are members of, or are eligible to join, any other public retirement system in the State of Arizona such as the Public Safety Employees’ Retirement System.’ While I understand those in the system are unhappy with this initiative, the alternative is to do nothing. That is not acceptable. Inaction by the council led to this citizen action in the first place.”

— Jim Waring,vice mayor (District 2), northeast Phoenix

“Prop. 487, as written, impacts the retirement benefits of current and future public-safety personnel and does not exclude these employees as stated in the preamble. According to city analysis, Section 2.2 (C) runs counter to the current Public Safety Personnel Retirement Plan that is required by state statute for current and future public-safety employees. Therefore, future contributions to this plan would not be warranted and current public-safety employees would have these benefits frozen. Prop. 487 also prevents contributions to additional plans such as the Medical Expense Reimbursement Plan, Post Employment Health Plan and Fire Employee Benefit Trust.”

— Michael Nowakowski,District 7, southwest Phoenix and parts of downtown

“Prop. 487 will absolutely impact police and firefighters. The only section of the measure that would have the force of law makes no special exemptions for public safety — whether that was the intent of who wrote it or not. Prop. 487 is the wrong reform. It is poorly written and will have devastating effects on taxpayers, police officers and firefighters alike. These brave men and women work every day to make sure that we are safe, and we owe it to them to protect their retirement. I urge Phoenix residents to vote no on Prop. 487.”

— Daniel Valenzuela,District 5, Maryvale and west Phoenix

“The proponents of Prop. 487 did a sloppy job drafting this initiative. Prop. 487’s backers claim any harm to public-safety personnel was a careless mistake. However, this doesn’t square away with what proponents are actually trying to put in our city charter. Prop. 487 amends our charter with poorly-written language that would cost millions, making it harder for us to fund infrastructure improvements. The best-case scenario for first responders under Prop. 487 is that their status will be in jeopardy, potentially for years, as the fate of their benefits is determined by the courts following expensive litigation.”

— Kate Gallego, District 8, southwest Phoenix and parts of downtown

“Voters can fix the broken pension system, saving $500 million, by voting yes on Prop. 487. The government unions have waged an all-out campaign of disinformation to stop pension reform. Prop. 487 does not impact public safety because: 1. Public-safety pensions are administered by the state, not the city. 2. State law doesn’t allow participants in PSPRS to opt out. 3. The initiative clearly states that it does notaffect public-safety personnel. Escalating pension costs means fewer services, less police and more taxes and fees. Prop. 487 brings financial accountability. Don’t believe the disinformation the government unions are propagating.”

— Sal DiCiccio, District 6, Ahwatukee and east Phoenix

“Fellow Phoenix residents, I call it the way I see it. Prop. 487 is confusing and poorly written. If it passes, it could end up in court with the potential for millions of dollars going to legal fees, instead of supporting vital programs and services for our community. In addition, Prop. 487 could have detrimental consequences for our public-safety personnel and other city employees. Specifically, Prop. 487 could end defined-benefit pensions for Phoenix police officers and firefighters, making the women and men of public safety the only public-safety personnel in Arizona who could not earn a defined-benefit pension. Our police officers and firefighters work hard to keep our community safe, and we as a community should protect our public safety personnel’s retirement. This proposition is not the way to reform our city’s pension plan.”

— Laura Pastor,District 4, central and parts of west Phoenix

“Yes. Prop. 487 will hurt our current police officers and fire fighters, and could even end death and disability benefits for our first responders. It is one of the many reasons why I oppose this initiative. The plain language prevents the City from making contributions to the state public safety pension system. Those behind the effort have not had this intent, but this initiative was so poorly written – so badly constructed – that it will have devastating consequences for Phoenix. On top of that, it will cost taxpayers $350 million. It’s the wrong reform, and we can’t afford it.”

— Greg Stanton, mayor

Money has flooded into Phoenix in recent weeks to fund both opponents and proponents of the law. But the source of much of that money is shrouded in secrecy, as Pension360 wrote on Monday.

After Years-Long Battle, Pension Cuts Come To San Jose Firefighters

San Jose firefighters are facing higher retirement ages and lower pension benefits after they came out on the losing side of a long fight between labor unions and the city of San Jose.

Voters approved a ballot measure to cut pension benefits for newly hired public employees almost four years ago, but the firefighters had yet to adopt the changes.

Reported by San Jose Mercury News:

The changes mean newly-hired firefighters can retire at age 60 with a pension of up to 65 percent of their salary. Current firefighters can still retire at age 50 with up to 90 percent of their salary.

[…]

The final arbitration decision, announced this week, will save taxpayers millions of dollars compared to more generous retirement plans previously given to firefighters. It’s a victory for Mayor Chuck Reed, the city’s chief pension reformer, and his fiscal conservative allies that make up a majority of the City Council, who have seen the public costs for employee retirement skyrocket in the last decade.

Retired Judge Catherine Gallagher, the arbitration board chair, made the ruling nearly four years after voters approved a second “tier” of reduced retirement benefits for new employees, and more than two years after voters set limits on those pensions. Gallagher noted in siding with the city that the voter-approved measures prevented her from adopting anything that increased taxpayer costs.

The firefighters are the last of 11 city unions to implement the pension plan changes for new hires, while voter-approved cuts to current employees’ retirement plans remain tied up in court.

Firefighters unions opposed the changes. They argue that it will be harder to hire quality talent if they can’t offer better retirement benefits. As a result, they claim, emergency response times will increase and the quality of the fire department will suffer.

Nebraska Under-Reports Retirement Liabilities by Over $700 Million, Says Watchdog Group

Every year, watchdog group Truth in Accounting scrutinizes the finances of every states and produces a report on what they find.

By and large, Nebraska passed TiA’s fiscal test with flying colors—except when it came to retirement liabilities. The state reported its liabilities to be a little over $1 million. But Truth in Accounting says the liabilities are closer to $770 million.
From Nebraska Watchdog:

Truth in Accounting, an economic think tank based in Chicago, named Nebraska one of just a handful of “sunshine states” with more than enough money to pay its bills. The state has $4.3 billion in liquid assets and owes about $3 billion, for a surplus of $1.3 billion — or $2,200 per taxpayer.

However, Truth in Accounting says Nebraska’s retirement liabilities are “massively underreported” at $1.1 million. Its detailed analysis of the state’s assets and liabilities, including unreported pension and retirement health liabilities, found $772.5 million in retirement benefits promised but not funded.

“Because of the confusing way the state does its accounting, only $1.1 million of these liabilities are reported on Nebraska’s balance sheet,” TIA wrote.

The report says unfunded employee retirement benefits represent 26 percent of state bills, as state employees have been promised $772.5 million in pension benefits. The good news is Nebraska has the money to pay for the liabilities.

Read the detailed report on Nebraska’s fiscal situation here.

Photo by Tom Benson via Flickr CC

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