Category Archives: Pensions

Guest Post: Will Governor Rauner’s New Bankruptcy Proposal Break Chicago’s Pension Obligations?

Source: Michelle Wilde Anderson, OnLabor blog, May 1, 2015

Illinois Governor Bruce Rauner has decided that allowing his state’s municipalities to declare bankruptcy is an important arrow in his quiver to break “the corrupt bargain that is crushing taxpayers”—namely union influence and membership rates in Illinois. ….

…. So the recent big city Chapter 9’s eliminated costly health care benefits and deeply discounted capital market creditors’ debts, but nonetheless preserved most of their pension payments. Why they struck that balance is critical for Illinois voters and politicians to understand. Rationales in each city varied, but two main themes emerged.

First, the plan authors in Detroit saw that cutting their retirees’ benefits would sink many retirees below the poverty line in the city and the region. This was a painful humanitarian reality, but so too was it an economic one: a municipal debtor has to be stable enough to pay its obligations under its bankruptcy plan. More concentrated local poverty does not help. A second main argument against cutting pension benefits showed up in Stockton. Officials determined that cutting benefits and thereby being excluded from the state pension system would make the city uncompetitive for public employees, especially police. That was a hard pill to swallow for a city with a spiking homicide rate and no cash to spare on competitive wages. Many other concerns surfaced in both cities as well, but they amounted to a bottom line determination that there were vanishingly few fat cat pensioners to be found, and the municipalities would be even worse off—as a debtor, as a city—if they cut into their retirees’ payments. (Because these big cases and others have effectively settled, the legal fairness of the decision not to cut pension payments has never been tested by a higher court, but there are compelling arguments that these decisions are consistent with Chapter 9.) …..

Falling Short: The Coming Retirement Crisis and What to Do About It

Source: Alicia H. Munnell, Center for Retirement Research at Boston College, IB#15-7, April 2015

The brief’s key findings are:
– Today’s workers face a brewing retirement crisis due to:
* a growing need for income driven by longer lifespans, rising health costs, and low interest rates; and
* reduced support from Social Security and defined benefit pension plans.
– Fortunately, the solutions are at hand:
* Policymakers should shore up Social Security with more revenue, make 401(k)s fully automatic, and ensure everyone has access to a savings plan.
* Individuals should work longer – to age 70 if possible – and consider tapping their home equity in retirement to support day-to-day needs.
– Any delay in responding to the challenge will only make adjustments more painful down the road.

Public Plans Data

Source: Center for Retirement Research at Boston College, National Association of State Retirement Administrators, State and Local Government Excellence, 2015

The new PPD has more data…
• over 150 state and local pension plans
• over 100 variables
• annual data for 2001-2013
…and more features:
• “quick-fact” pages with data at the national, state, and plan levels
• downloadable financial reports and actuarial valuations for all sample plans
• an enhanced interactive data browser for customized searches

Some Union Pension Cuts Likely As New Federal Rules Take Shape

Source: Multiemployer Pension Reform Act of 2014 (MPRA), into law on December 16.
Central States Pension Fund Rescue Plan
Source: Central States Pension Fund, 2015

This site is an easy-to-navigate clearinghouse of comprehensive, important and up-to-date information regarding the status of Central States Pension Fund’s pension rescue planning process under the Multiemployer Reform Act of 2014 (MPRA).

Introducing the Multiemployer Pension Reform Act of 2014
Source: Andrew Douglass and Bradley Kafka, HR Magazine, Vol. 60 No. 2, March 2015

What participating employers should do to comply with the MPRA.

Lame-Duck Congress Nears Last-Minute Vote On Sweeping Pension Reform
Source: Cole Stangler, In These Times, December 3, 2015

Congress is nearing a vote on arguably the biggest change to private pension law in decades. The proposed reforms would grant sweeping new authority to the trustees of some “deeply troubled” multi-employer pension plans to slash benefits promised to current retirees—something that’s illegal under existing law. A cornerstone of some collective bargaining agreements, multi-employer plans cover more than 10 million workers, mostly in construction but also in the transportation, manufacturing, retail and service sectors. …

State Personal Income Taxes on Pensions and Retirement Income | Tax Year 2014

Source: National Conference of State Legislatures, April 2015

From the summary:
Most states that levy a personal income tax allow people who receive retirement income to exclude part of it from their taxable income. The table that accompanies this introduction provides state-by-state detail.

“Retirement income” means income from federal, state and local governments’ retirement plans, Social Security, Railroad Retirement, private pension plans, and deferred compensation plans in the public and private sectors. Retirement income excludes income from current employment, rents and dividends, disability payments and SSI. This report does not address personal exemptions or deductions that are available to every filer over some specified age, like the federal provision for a larger standard deduction for people who are 65 years old or older than for those under 65.

State policies on retirement income exclusions vary greatly, but have one or both of two purposes: to protect the income of taxpayers who are no longer in the workforce, and to serve as an economic development tool by attracting retired people to, or retaining them in, a state. Such tax provisions seem to have originated years ago as a means of assisting retired public employees who received relatively small pensions. Over the years, many states have made age, not former employment in the public sector, the criterion for retirement income exclusions.

The Time Has Come For Standardized Total Cost Disclosure For Private Equity

Source: Andrea Dang, David Dupont, Mike Heale, CEM Benchmarking, April 2015

Given the level of detail and timing of private equity manager reports, can pension funds disclose investment costs in a consistent manner across the industry? What would full cost disclosure require of a pension fund? We found a good example of this in one of our benchmarking clients. …. Less than one‐half of the very substantial PE costs incurred by U.S. pension funds are currently being disclosed. ….
Cities And States Paying Massive Secret Fees To Wall Street: Report
Source: David Sirota,, April 17, 2015

California’s report said $440 million. New Jersey’s said $600 million. In Pennsylvania, the tally is $700 million. Those figures are public worker pension fees being paid annually by taxpayers to Wall Street firms, and they have kicked off an intensifying debate over whether such expenses are necessary. Now, a report from an industry-friendly source says those huge levies represent only a fraction of the true amounts being raked in by Wall Street firms from state and local governments. In all, CEM Benchmarking concludes that America’s public pension funds are paying billions of dollars in undisclosed fees to private equity firms….

A look at today’s pension equity plans

Source: William J. Wiatrowski, U.S. Bureau of Labor Statistics, Beyond the Numbers, Vol. 4 No. 7, April 2015

The decline in the share of workers covered by traditional pension plans over the past 35 years is marked by a variety of efforts to transform these plans into vehicles that can continue to provide retirement income to workers while stabilizing the financial responsibility for employers. For example, collective bargaining disputes often involve give-and-take on the future generosity of pension benefits. Likewise, state governments have introduced less generous pension tiers for new employees as part of fiscal belt-tightening. Among the changes in pension plans tracked by the Bureau of Labor Statistics (BLS) since the late 1970s are different formulas for calculating benefits. One of those formula types is the pension equity plan, or PEP. These plans were first identified by BLS private industry surveys conducted in the late 1990s; today, they make up a small share of all pension plans. This issue of Beyond the Numbers examines the concept behind pension equity plans and looks at some unique features of these plans.

Underfunding Annual Pension Contributions: Examining the Factors Behind an Ongoing Fiscal Phenomenon

Source: Michael Thom and Anthony Randazzo, State and Local Government Review, Vol. 47 no. 1, March 2015
(subscription required)

From the abstract:
Inadequate contributions are one factor behind the gap between pension assets and benefit liabilities. Each year, many states fail to meet their required pension contribution while others consistently meet or exceed their required amount. This study seeks to identify the factors that shape actual pension contributions across the states. Results suggest that states with smaller long-term funding gaps are more likely to fund required contributions. Legislative professionalism and constitutional collective bargaining privileges reduce annual funding. The effect of partisan and institutional traits was sensitive to methodology. Revenue changes and balanced budget requirements had no significant effect on pension contributions. These results suggest a number of reform avenues, including constitutional, institutional, and programmatic changes of varying political feasibility.

How Will Longer Lifespans Affect State and Local Pension Funding?

Source: Alicia Munnell, John-Pierre Aubrey, and Mark Cafarelli, Center for State and Local Government Excellence, Issue Brief, April 2015

From the summary:
Americans are living longer – and that creates new funding challenges for state and local pension plans. Private sector plans are already required to utilize new mortality tables which account for increased longevity when formulating their cost estimates. A new issue brief from the Center for State and Local Government Excellence, How Will Longer Lifespans Affect State and Local Pension Funding?, examines the impact that incorporating longevity improvements into their costs estimates would have on the funded status of state and local defined benefit plans.
The brief explores explores what public plan liabilities and funded ratios would look like under two alternative scenarios:
– if public plans were required to use the new mortality tables designed for private sector plans; and
– if public plans were required to go one step further and fully incorporate expected future mortality improvements.
Key findings include:
– Using the private sector standard, public plans underestimate life expectancy by only 0.5 years, reducing the 2013 funded status of state and local plans from 73 to 72 percent.
– Incorporating future mortality improvements would increase life expectancy by 2.3 years and reduce the funded ratio of public plans from 73 to 67 percent.
– Public sector plans appear to be making a serious effort to keep their life expectancy assumptions up to date

The In-State Equity Bias of State Pension Plans

Source: Jeffrey R. Brown, Joshua Matthew Pollet, Scott J. Weisbenner, National Bureau of Economic Research (NBER), NBER Working Paper No. w21020, March 2015
(subscription required)

From the abstract:
This paper provides evidence on the investment behavior of 27 state pension plans that manage their own equity portfolios. Even though these state plans typically hold broadly diversified portfolios, they substantially over-weight the equity of companies that are headquartered in-state. The over-weighting of within-state stocks by these plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias: familiarity bias, information-based investing, and political considerations. While there is a substantial preference for in-state stocks, there is no similar tilt toward holding stocks from neighboring states or out-of-state stocks in the state’s primary industry. States generate excess returns through their in-state investment activities, particularly among smaller stocks in the state’s primary industry. We also find that state pension plans are more likely to hold a within-state stock if the headquarters of the firm is located in a county that gave a high fraction of its campaign contributions to the current governor. These politically-motivated holdings yield excess returns for the pension fund.