Pennsylvania Gov. Wolf Proposes $3 Billion Pension Bond

Tom Wolf

Pennsylvania Gov. Tom Wolf unveiled his budget proposal on Tuesday, and it contained a number of pension-related items.

The biggest was undoubtedly the proposed issuance of $3 billion in pension bonds, to be used to pay down the liability of the Public School Employees Retirement System (PSERS).

As is always the case with pension bonds, the state runs the risk of worsening its financial position. But if PSERS’ investment returns exceed the bonds’ interest rates, the state will come out on top.

More from Philly.com:

“A portion of the current unfunded liability for PSERS would be refinanced to take advantage of historically low interest rates, with all savings reinvested to reduce that liability.” Wolf wants to borrow $3 billion and give it to PSERS so it can reduce the recent increase in pension subsidies by school districts and the state treasury.

[…]

Given recent bond prices and Pennsylvania’s bond rating (third-worst of U.S. states after Illinois and New Jersey), rates for taxable Pennsylvania pension bonds “would be about 3.25% (for 10-year bonds) and maybe 4% in 30 years,” Alan Shanckel, municipal bond strategist for Janney Capital Markets in Philadelphia, told me. Pennsylvania would have to pay that percentage and beat its self-imposed 7.5% investment return target each year to make the bond pay.

Pennsylvania’s state-level pension plans are about 62 percent funded, collectively.

New Orleans Looks for Ways to Cut Pension Costs

cutting one dollar bill in half

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.

More from NOLA.com:

New Orleans Municipal Employees Retirement System board at a January meeting released a list of the potential alterations, which included raising the retirement age and increasing the amount of money employees are required to contribute. The board forwarded the possible changes to its actuary to evaluate how they would impact the health of the pension fund, benefits for employees and the city’s budget.

[…]

Nearly all the proposals it released at the January meeting would affect only future employees. That means the city wouldn’t see much relief for many years.

Raising the employee-contribution rate from the current 6 percent of salary to 7 or 8 percent is among the only proposals by the board that would affect current workers and immediately impact the unfunded liability.

The board is examining these changes under request from City Council President Stacy Head, according to NOLA.com, who asked the board last year to come up with a list of possible benefit changes.

Pension costs are eating up increasingly large chunks of the city budget, and it’s likely the Council is looking for ways to cut those costs in the future.

Louisiana considers pension benefits as a contract between employee and employer. It’s likely, then, that legal action would accompany any benefit changes.

 

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Virginia Governor Proposes Extra $150 Million Payment to Pension System This Year

Virginia

Virginia Gov. Terry McAuliffe wants to put an extra $150 million in the state’s teacher retirement fund this year in a bid to reduce the state’s pension contributions in future years.

The extra money would also reduce future pension payments from school districts.

From the Richmond Times-Dispatch:

The proposed payment to the teacher fund would reduce government contribution rates for teacher pensions by 0.35 percentage point beginning in fiscal 2016, according to the Virginia Retirement System in a presentation to the Senate Finance Committee on Tuesday.

The reduced rate would save the state about $10 million and local school systems $15.8 million.

The governor’s pending budget proposal also would accelerate the 10-year payback of more than $741 million in contributions the General Assembly and Gov. Bob McDonnell deferred in 2010 to balance the two-year state budget at the end of the recession.

[…]

The teacher retirement plan carries the largest unfunded liability, estimated at $14.3 billion last year using the same methodology as used to calculate the rates. (The unfunded liability of the plan is $11.9 billion, if based on the current market value of system assets, but that method is subject to big swings in market value that would make rates unstable, VRS officials said.)

Local governments pay about two-thirds of the employer retirement costs for teachers, and the state pays the rest. The climb in pension contribution rates — projected to peak in 2018-19 — has put heavy pressure on school system budgets. Next year, for the first time, local school systems will have to show that liability on their books under new federal accounting rules — about $500 million each for Chesterfield and Henrico counties.

The state’s teacher retirement system was 65.4 percent as of June 30.

Florida to 19 Local Pension Plans: Fix Funding Issues Now

Florida

Nineteen of Florida’s most underfunded local pension plans received “call to action” letters from the state Tuesday, calling for the systems to immediately begin formulating a plan to deal with their funding issues.

From the Florida Times-Union:

The 19 pension plans all are less than 50 percent funded, prompting the terse letter from the Department of Management Services, the state agency tasked with reviewing local pensions.

DMS Secretary Chad Poppell sent letters to Jacksonville Police and Fire Pension Fund executive director John Keane and Raymond Ferngren, administrator of the Jacksonville Corrections Officers’ Pension Fund and the Jacksonville General Employees’ Disability Fund. The Alachua School Board Early Retirement Plan and Ocala General Employees’ Retirement System also received letters, and Jacksonville Chief Financial Officer Ronald Belton was copied.

The letter to Keane pointed to the Police and Fire Pension’s $1.6 billion unfunded liability and said current funding was only enough to pay 37.3 cents of every dollar owned to retirees and current employees.

“As a result, your plan should consider taking action to prevent future taxpayers from having to incur costs,” Poppell wrote.

Coincidentally, Poppell serviced as Jacksonville’s chief of human resources under Jacksonville Mayor John Peyton.

The Police and Fire Pension letter also mentions ongoing discussions with city officials to reform the pension, saying they “are not yet realized.”

“The Department of Management Services requests you immediately notify all active and retired members of the plan regarding the plan’s conditions and what actions will be taken to improve it,” it said.

It’s unclear whether the funds will have any punishment if they don’t comply with the letter’s demands.

 

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Kansas Treasurer Voices Support For Governor’s Pension Bond Plan

Kansas

Kansas Treasurer Ron Estes is backing Gov. Sam Brownback’s plan to issue $1.5 billion in bonds to go towards funding the state’s Public Employees Retirement System.

Pension officials told Kansas lawmakers last week that such a decision, coupled with Brownback’s plan to delay pension payments, could end up costing the state almost $4 billion.

From the Topeka Capital-Journal:

The gambit put forward by Gov. Sam Brownback carries risk, the state’s treasurer said in an interview, but the state government’s general budget needs infusion of $137 million that would be available over the next two years by adjusting the Kansas Public Employees Retirement System. Kansas’ general operating deficit over the next 18 months has been estimated to be $700 million.

“The changes the governor suggests will help address the state’s budget shortfall while keeping KPERS in line with the pension reform plan passed by the 2012 Legislature,” Estes said.

Three years ago, legislators and Brownback committed the state to higher contributions to KPERS and other system reforms to chip away at a $9.8 billion funding gap on scheduled payouts to retirees through 2033.

Under the governor’s latest plan, the break-even point for the pension system would be pushed to 2043. The cost of delaying resolution of the deficit in KPERS could cost the state as much as $9 billion — nearly double the existing unfunded liability — when carried forward over three decades.

“You can lower your payments now, but if you add 10 years of payments, you’re going to pay more,” said Alan Conroy, executive director of KPERS.

“There are pros and cons to it,” said Estes, who is on the KPERS board of directors. “It’s a reasonable burden.”

Brownback also urged legislators to authorize issuance of $1.5 billion in bonds to infuse the pension system with capital that would be invested in the markets. The bonds might cost the state less than 5 percent, Estes said, while the average rate of return in the KPERS’ portfolio is about 8 percent.

“The bonding is a great idea,” he said. “We can take that $1.5 billion and invest it with other KPERS’ assets and start making money.”

Brownback is planning on delaying state payments to the pension system by $39 million in fiscal year 2015-16 and by $92 million in fiscal year 2016-17.

 

Photo credit: “Seal of Kansas” by [[User:Sagredo|<b><font color =”#009933″>Sagredo</font></b>]]<sup>[[User talk:Sagredo|<font color =”#8FD35D”>&#8857;&#9791;&#9792;&#9793;&#9794;&#9795;&#9796;</font>]]</sup> – http://www.governor.ks.gov/Facts/kansasseal.htm. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Seal_of_Kansas.svg#mediaviewer/File:Seal_of_Kansas.svg

Kansas Pension Officials: State’s Plan to Delay Pension Payments Could Cost Billions in Long-Run

Kansas

Kansas Gov. Sam Brownback in December diverted a $58 million payment from the pension system and used the money to plug holes in the state’s general budget.

The governor is seeking to delay more state payments to the pension fund, and is also looking to offset some of the costs by issuing pension obligation bonds.

But pension officials told lawmakers Tuesday that such a decision could end up costing the state between $3.7 billion and $9 billion in the long run.

From the Kansas City Star:

Changes to the state’s pension system proposed by Gov. Sam Brownback could cost Kansas $3.7 billion in the long run, lawmakers learned Tuesday.

The governor seeks to delay payments intended to shore up the state’s pension system to save money in the short term.

The Kansas Public Employees Retirement System faced an unfunded liability of $9.8 billion at the beginning of 2014. The state was on pace to pay it down to zero by 2033 because of reforms enacted during Brownback’s first term.

Instead, Brownback proposed Friday to pay down the unfunded liability more slowly, by 2043, to save money during the ongoing state budget crisis.

“It’s like the mortgage on your house. If you pay less, you’re going to pay longer and you’re going to pay more,” Alan Conroy, the executive director of KPERS, told the House Appropriations Committee.

The delay would increase costs overall by $9.1 billion. But Brownback proposes issuing $1.5 billion in bonds, and the profits from the interest on those bonds would partially offset that cost.

Rep. Kathy Wolfe Moore, a Kansas City, Kan., Democrat, said the state was undoing the progress it had made in reforming the pensions system.

“It costs us $9 billion with a B (to enact the governor’s plan). … So we’re doubling what we have now? We’re doubling our unfunded actuarial liability?” Wolfe Moore said. “We’re going in exactly the wrong direction as far as I can see.”

Kansas PERS was 56.4 percent as of the end of 2013.

 

Photo credit: “Seal of Kansas” by [[User:Sagredo|<b><font color =”#009933″>Sagredo</font></b>]]<sup>[[User talk:Sagredo|<font color =”#8FD35D”>&#8857;&#9791;&#9792;&#9793;&#9794;&#9795;&#9796;</font>]]</sup> – http://www.governor.ks.gov/Facts/kansasseal.htm. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Seal_of_Kansas.svg#mediaviewer/File:Seal_of_Kansas.svg

Top New Hampshire Lawmaker Forms Pension Reform Study Committee

New Hampshire

New Hampshire House Speaker Shawn Jasper is forming a 14-person panel to study the state’s retirement system and potential reforms.

The committee was announced Wednesday. More from the Associated Press:

House Speaker Shawn Jasper is making pension reform a priority of the new legislative session by creating a 14-member committee to study the system that provides retirement benefits for public employees.

New Hampshire’s public pension system faces a $4.5 billion unfunded liability and Republicans want to reform the system. Jasper announced the committee Wednesday and appointed Rep. David Hess, a Hooksett Republican, as chairman.

The committee is made up of nine Republicans and five Democrats. The committee is tasked with studying how the program is funded, eligibility and ways to modify the system.

The state Supreme Court recently upheld changes made several years ago that increase the contribution rates for state employees.

The public pension system covers about 50,000 active and 30,000 retired workers.

The New Hampshire Retirement System was 66 percent funded at the end of fiscal year 2013-14. The system manages $7.41 billion in assets.

 

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Video: Solving Teacher Pension Underfunding

Here’s a long discussion on the state of teacher pension systems and how public policy can address the systems’ liability issues while causing the least amount of harm to teachers, retirees and students.

From the video description:

America’s teacher-pension systems (with up to a trillion dollars in unfunded liabilities according to some estimates) present a raging public-policy dilemma. Career teachers absolutely deserve a secure retirement, but lawmakers promised them benefits that the system cannot afford, as those promises were based on short-term political considerations and bad math. Now the bill is coming due, and someone’s going to get soaked.
What’s the least bad option going forward? Who should bear the brunt of this legacy of fiscal irresponsibility? Current retirees? Today’s teachers? New teachers? School districts? Taxpayers? The students themselves?

 

 

Texas Pension Official: Liabilities Could Hurt State Credit Rating Sooner Than Later

Texas sign

Texas budget analysts and pension officials are attempting to draw lawmakers’ attention to the unfunded liabilities of the Employee Retirement System of Texas. The analysts and the director of the pension system say the liabilities, if left unaddressed, could lead to a credit downgrade for the state.

From the Austin American-Statesman:

At a legislative hearing this month, outgoing Employee Retirement System Executive Director Ann Bishop piqued lawmakers’ interest when she said the plan’s current unfunded balance of $7.5 billion could at some point affect the state’s good credit rating if the Legislature doesn’t devise a plan to pay it off. The 2016 onset of new accounting rules will double that risk, she noted. The state only has 77 cents for every dollar needed to pay future benefits, according to the retirement system. If not addressed during next year’s legislative session, it is projected to grow to nearly $10 billion by 2018.

The agency again has asked the state for additional funding to make the plan actuarially sound – so that contributions and investment returns cover expenses and payouts – which it has not been since 2003. That would require an additional $350 million every two years.

Absent that, Bishop told members of the Senate State Affairs Committee that the solution is some combination of more benefit cuts or increased contributions from both the state and employees. Lawmakers in 2009 and 2013 increased state and employee contributions and cut benefits for newly hired workers.

While that “has done a lot to help close the gap,” Bishop said “it isn’t enough.”

“It will have to be fixed. And it’s just going to get worse before it gets better,” she told the committee, noting the plan will run out of money to pay for promised pension benefits by the 2050s if nothing changes.

That “sounds like a long time from now,” she continued, but “when you’re talking about attracting people into the workforce and you’re telling them they’re going to pay into a fund for 30 years and not have it in their retirement, that’s not much of a benefit.”

She also warned that further diminishing the plan could inspire a lawsuit or – even worse – spark a mass retirement exodus as more than a third of the state’s workforce is either already eligible to retire or will become so in the next five years. In 2013, retirees received an average annuity of $18,946 from the plan.

ERS Texas manages $25.6 billion in assets.

Pennsylvania Lawmaker To Propose Shale Tax to Fund Pensions

Pennsylvania flag

A Pennsylvania representative is planning to introduce a bill in January that would levy a 3.5 percent tax on companies that frack in the state. The revenues – estimated to be $400 million annually – would then go to paying down the Public School Employees’ Retirement System’s (PSERS) unfunded liabilities.

From Main Line Media:

The way state Rep. Kate Harper sees it, a shale tax could ensure drillers are paying their fair share and help solve the state’s pension crisis at the same time.

Harper, R-61, began circulating a memo Dec. 17 to get co-sponsors for a bill she plans to introduce in January calling for a 3.5 percent shale tax, with the proceeds estimated at $400 million annually, going toward the state’s $32 billion unfunded Public School Employees’ Retirement System liability.

“If we don’t get pensions under control, everybody’s school taxes are going up,” Harper said. “My bill adds a severance tax to the existing impact fee and uses it for education, specifically pensions.

“I believe the majority of Pennsylvanians are OK with fracking,” she said, but they want two things: regulation of the industry to ensure the water stays clean; and, if the money is needed that the drillers pay their fair share.

The bill is similar to one introduced last session by state Rep. Madeleine Dean, D-153, that Harper co-sponsored but didn’t even get out of committee, in that it would keep the current impact fee in place, she said.

Those fees are used to address infrastructure and other impacts in communities where drilling takes place, and to contribute to several statewide environmental programs, a press release from Harper says. So far, the impact fee has generated more than $630 million.

[…]

“If the tax is too high we will lose jobs, so I’m trying to have them pay at a reasonable level and not discourage them so they leave the state,” Harper said. The 3.5 percent tax she is proposing “is not onerous on the drilling industry” and “compares favorably with the 5 percent tax in West Virginia,” she said.

PSERS was 63.8 percent funded as of June 30, 2014.