…. Research suggests that the real world differs from these assumptions, in some ways that mean the assumptions may understate risks, and in other ways that mean the assumptions may overstate risks. Investment returns may not be normally distributed and may not be independent over time. Perhaps more important, investment returns and tax revenue may be correlated: a poor economy may cause investment returns to fall short of expectations, and may also cause tax revenue to fall short. The resulting increase in required employer contributions may cause additional fiscal pressure if increases come when tax revenue is low.
We address these issues, focusing on the correlation between tax revenue and the economy, by building a small macroeconomic model that can generate internally consistent stochastic scenarios of growth in real gross domestic product (GDP) and returns from stock and bond investments. ….
Note: This paper will be presented at the 2018 Municipal Finance Conference on July 16 & 17, 2018.
State governments with large unfunded pension liabilities are paying more to borrow from capital markets than are other states, according to Chuck Boyer of the University of Chicago Booth School of Business.
In the paper, “Public pensions, political economy and state government borrowing costs,” to be presented at the 2018 Municipal Finance Conference at Brookings this week, Boyer argues that markets view states with large pension deficits as riskier investments. His evidence suggests that states are already paying for municipal government’s unfunded pension liabilities in the form of higher borrowing costs. He asks two questions: 1) how are state governments’ borrowing costs affected by unfunded pension obligations? and 2) do states with political constraints face higher borrowing costs?
Boyer constructs a panel dataset using each state’s Comprehensive Annual Financial Reports for the period 2005 to 2016. He focuses on balance sheet variables—revenues, expenses, assets, and liabilities—to capture a state’s financial health and credit default swap (CDS) spreads – the premium paid to protect buyers from an issuer defaulting – to measure borrowing cost. The author reasons that CDS reflects market sentiments better than market yields because CDS are more liquid, and because they are standardized, whereas market yields may be affected by additional features of a particular bond.
I find that public pension funding status has a robust and statistically significant relationship with state borrowing costs, as measured by credit default swap spreads. A one standard deviation increase in the net pension liability to GDP ratio is related to an 18 basis point increase in CDS spreads. This effect is most pronounced among states with constitutional protection for pension liabilities, suggesting the markets perceive these legal protections as material. I also find suggestive evidence that states with more powerful unions pay higher borrowing costs. Results are robust to using spreads from the underlying bonds themselves. These findings highlight the fact that states are already paying for potential future pension problems through higher borrowing costs.
The problem of underfunded public pensions confronts a number of states and local governments in the United States. In the past, numerous public employers in the United States have agreed to pension benefits that now appear challenging to afford given current revenues and the increased cost of providing governmental services. Further, this challenge has been exacerbated by past failures to set aside sufficient moneys to meet the pension benefits obligations incurred to date. All of this is occurring on the heels of the Great Recession of 2007, followed by an anemic recovery, and at a time many states and local governments are faced with an aging infrastructure that must be attended to and increased demands for basic public services (sanitation, water, streets, schools, food inspection, fire department, police, ambulance, health and transportation) that must be met. Because the public pension underfunding problem pits the requirement of meeting pension obligations against the need to provide for essential public services, all citizens have an interest in the fair and equitable solution to the dilemma.
Unfortunately, a just and effective method of resolving unaffordable public pension obligations has been elusive for some public governmental employers and employees. This is due in part to promised pension benefits costs exceeding the government’s ability to pay and the failure to fund promptly the incurred obligations. In some cases, solving the problem has been complicated by the lack of any ability to adjust or modify pension benefits to those that are sustainable and affordable to the fullest extent possible without adversely affecting the funding of essential public services. This paper will provide a review of some legal and practical obstacles that have been making needed pension reform and balancing the budget difficult, if not impossible, and will suggest possible new approaches to the problem that have not yet been tried. …..
From the press release:
….The takeaway? Almost all employees (94%) want their employers to ensure the benefits offered have a meaningful impact on their quality of life, like paying off student loan debt and offering more flexible work arrangements. But before employers attempt a benefits overhaul, they should perhaps focus on better education and communication about their existing benefits. Just under half (48%) of employees report knowing all the perks their employers offer, and only 40 percent say their employers help them understand the benefits that are available…..
Benefits can be an even stronger incentive than salary when considering a job offer, and an unattractive benefits package may drive candidates away.
– Sixty-six percent of workers agree that a strong benefits and perks package is the largest determining factor when considering job offers, and 61 percent would be willing to accept a lower salary if a company offered a great benefits package.
– Forty-two percent of employees say they are considering leaving their current jobs because their benefits packages are inadequate.
– Fifty-five percent have left jobs in the past because they found better benefits or perks elsewhere.
Both benefits and perks matter
When evaluating benefits, quality health insurance reigns supreme. But when it comes to perks, the survey findings indicate that workers want to maximize their time spent at work and appreciate conveniences that help them get the most out of their days.
– When considering a potential employers’ benefits (defined in the study as “standard forms of compensation paid by employers to employees over and above salary”), workers prioritize health insurance (75%), followed by retirement funds and/or pensions (21%).
– Highly rated perks (defined in the study as “workplace-related extras”), that workers want to see more of in the workplace are:
– early Friday releases (33%)
– flexibility and remote working (26%)
– onsite lifestyle amenities, like gyms and dry cleaning (23%)
– unlimited vacation time (22%)
– in-office meal options, like communal snacks or food courts (18%)
– onsite childcare (15%)
When it comes to benefits and perks, one size does not fit all
Age, income level and gender all play a role in the benefits that employees prioritize:
– Forty-one percent of respondents aged 18 to 24 said their current employers do not offer student loan repayment benefits, but wish they did.
– Workers aged 50+ named health insurance as the top benefit they wish their employers offered.
– Nearly a third (28%) of respondents who earn more than $150,000 annually say bonuses are one of the most important perks when considering new employment.
– More women than men want better parental leave policies (women: 22% vs. men: 14%) and onsite childcare (women: 15% vs. men: 6%).
– More men than women would like to see their employers offer life insurance (women: 15% vs. men: 23%).
The State of Minnesota (Aa1 stable) approved legislation late last month that will change certain public pension benefits and modestly increase plan contributions by government employers and employees. The changes are credit positive for the state and its local governments because they will reduce unfunded pension liabilities and improve plan funding. Even after the changes, however, local governments across Minnesota, particularly school districts, will continue to face high pension burdens….
From the summary:
Labor unions deserve credit for many of the workplace policies that Americans now take for granted—a 40-hour work week, a minimum wage, pay for overtime, and protections from health and safety hazards—and the labor movement continues to champion state and local policies such as paid sick days and paid family leave, policies that are beneficial to all working women and families. Because hiring, pay, and promotion criteria and decisions are more transparent for union members, gender and racial bias is minimized. Women, and especially women of color, who are either affiliated with a union or whose job is covered by a union contract, earn higher wages and are much more likely to have employer-provided health insurance than women who are not in unions.
Among women working full-time, those in unions have median weekly earnings of $942, compared with $723 for non-union workers, an increase of $219, or 30 percent (Figure 1). For all of the major racial and ethnic groups of women, median earnings are higher when comparing full-time workers in unions with full-time non-union workers. The earnings advantage is largest for Hispanic women. Non-union Hispanic women have the lowest earnings of any racial/ethnic group of women, $565 weekly, but Hispanic women in unions earn $264 more weekly, a 47 percent increase, than those who are not.
From the summary:
“The Union Effect in California” is a three-part series exploring the ways in which unions affect the lives of all working people—both union members and nonunion members—in California. The studies were conducted as the U.S. Supreme Court prepares to issue a ruling in Janus v. American Federation of State, County, and Municipal Employees that threatens to weaken public sector unions.
The first study, Wages, Benefits, and Use of Public Safety Net Programs, shows that by bargaining together through unions, California workers increase their earnings by approximately $5,800 per worker annually, for a combined total of $18.5 billion. Union workers also have more access to health and retirement benefits, thereby reducing reliance on the state’s public safety net programs.
By Ken Jacobs and Sarah Thomason
The second study, Gains for Women, Workers of Color, and Immigrants, shows that, while all workers in California have higher wages and greater access to benefits when covered by a union contract, those workers who earn the least in nonunion workplaces—women, people of color, and immigrants—gain the most.
By Sarah Thomason and Annette Bernhardt
The third study, A Voice for Workers in Public Policy, analyzes unions as a countervailing force to corporate power in the state. It explores union-backed policies promoting the rights of workers—union and nonunion alike—and addressing broader issues facing working families in the state. Included are policies in the areas of minimum wage, worker benefits, workplace safety, wage theft, employment-based sexual harassment, whistleblower protections, education, immigration, consumer protections, infrastructure and housing, climate policy, and criminal justice.
By Jenifer MacGillvary and Ken Jacobs
The argument that taxpayers cannot afford public pensions has gained traction despite a woeful lack of empirical evidence to support it. Legislators across the nation are contemplating options for the future funding of public-sector worker retirement benefits at a time when competition for finite state and local resources is fierce. The reasons are familiar: the lingering effects of recession and misguided budget priorities have taken a toll. Time and again, defined-benefit pensions for firefighters, police officers, teachers, and other public servants have ended up on the chopping block, even though plan participants have consistently held up their end of the bargain.
Unintended consequences often flow from policy actions that are made with short-term pressures in mind. There is a real risk that reducing or even dismantling public pension benefits will ultimately backfire. Tn this installment of ongoing research on the impact of public pensions on the U.S. economy, NCPERS set out to quantify that risk.
The question we asked is this: How does the payment of defined pension benefits and the investment of pension assets impact state and local economies and revenue generation? ….
Minnesota’s new pension bill is a positive step toward improving funding of the state’s pension plans, but because contributions remained fixed in state statute, there could eventually be a regression in plan funded status, in S&P Global Ratings’ view.
From the summary:
Since 2009, the Center for State and Local Government Excellence has partnered with the International Public Management Association for Human Resources and the National Association of State Personnel Executives to conduct a study on state and local workforce issues. This year’s report contains both 2018 data on emerging issues like the gig economy and flexible work practices and longitudinal data on recruiting challenges, retirement plan or health benefit changes, hiring, and separations from service.