Category Archives: Pensions

When the City Goes Broke: Pensions, Retirees, and Municipal Bankruptcies

Source: Kevin M. Lewis, Congressional Research Service, CRS Legal Sidebar, LSB10116, April 10, 2018

In recent years, a significant number of cities, towns, and other municipalities in the United States have found themselves increasingly unable to pay their debts. In order to offer municipalities relief from many types of debts they cannot repay, Chapter 9 of the Bankruptcy Code authorizes certain municipalities to file for bankruptcy. However, filing for bankruptcy may adversely affect the municipality’s creditors, especially beneficiaries of underfunded municipal retirement plans (who, along with bondholders, often hold “the lion’s share” of a municipality’s financial obligations). Because a number of municipalities face a “dramatic and growing shortfall in public pension funds,” many “firefighters, teachers, police officers, and other public employees” who purportedly have “a right to pension benefits at retirement” face a significant risk that their pensions will ultimately not be fully repaid. The fact that public pensions, unlike their private counterparts, are neither subject to the “vesting and funding rules imposed by” the Employee Retirement Income Security Act of 1974 nor “protected by the federal pension guarantee program operated by the Pension Benefit Guaranty Corporation” could, according to some commentators, further exacerbate that risk. Moreover, because courts presiding over municipal bankruptcy cases have generally been “amenable to modifying pension debt in bankruptcy,” retirees’ pension benefits may potentially be significantly curtailed when a municipality declares bankruptcy. Although many Chapter 9 debtors have ultimately opted not to cut pensions “for political or practical reasons,” courts and commentators generally accept that, under certain circumstances, municipalities “have the legal ability to shed pension debt” in bankruptcy if they so choose.

This Sidebar first explains how, under current bankruptcy law, Chapter 9 debtors have significant freedom to modify their outstanding pension obligations through the bankruptcy process. The Sidebar then explores proposals to alter the legal principles governing the adjustment of municipal pensions in bankruptcy….

Why More Than A Million Teachers Can’t Use Social Security

Source: Cory Turner, NPR, All Things Considered, April 20, 2018

Teachers have staged protests in recent weeks in West Virginia, Oklahoma, Kentucky, Colorado and Arizona. Some are fighting lawmakers who want to scale back their pensions.

It’s no secret that many states have badly underfunded their teacher pension plans for decades and now find themselves drowning in debt. But this pensions fight is also complicated by one little-known fact:

More than a million teachers don’t have Social Security to fall back on.

To understand why, we need to go back to Aug. 14, 1935. That is when President Franklin Delano Roosevelt signed the original Social Security Act.

Asset Growth Trend Continues in Fourth Quarter 2017: Q4

Source: Melinda Caskey, Deron Pope, and Gritiya Tanner, U.S. Census Bureau, Report Number: G17-QSPP4, March 2018

For the 100 largest public-employee pension systems in the country, assets (cash and investments) totaled $3,785.9 billion in the fourth quarter of 2017, increasing by 2.7 percent from the 2017 third quarter level of $3,684.7 billion. Compared to the same quarter in 2016, assets for these major public-pension systems increased 11.6 percent from $3,392.1 billion. The main driver of this gain is earnings on investments, which totaled $142.2 billion during the fourth quarter of 2017. Earnings on investments make up for the deficit between contributions and benefits paid out, and are a critical contributor to the sustainability of pension plans (see Figure 1). The summary highlights the major asset categories (equities, debt instruments, and cash equivalents) and does not reflect all of the categories published for the Quarterly Survey of Public Pensions.
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Retirement Planning Decisions: Choices Between Defined Benefit and Defined Contribution Plans

Source: Susannah Bruns Ali, Howard A. Frank, The American Review of Public Administration, OnlineFirst, Published April 12, 2018
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From the abstract:
As states move toward offering defined contribution retirement plans as an alternative or addition to traditional defined benefit pensions, they need to consider the preferences and long-term consequences for different groups of employees. This study looks at which plan employees choose when given the option of either a defined contribution or defined benefit plan. The strongest driver of that choice is education level where the most educated prefer defined contribution plans and the least educated stay in defined benefit plans. A unique contribution of this study is that we include region of origin as a study and determine that cultural differences influence plan selection. The study also explores the role of sex, age, and tenure. Challenging other studies on financial planning, these findings indicate that sex and age are not significant factors. This research was conducted using data from more than 4,000 employees from Florida International University and an interview with HR professionals. By understanding retirement preferences in a more nuanced way, we can better craft our approaches to retirement security and financial literacy training in public sector organizations.

Understanding Decisions in State Pension Systems: A System Framework

Source: Gang Chen, The American Review of Public Administration, Vol. 48 no. 3, April 2018
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From the abstract:
State governments establish pension systems to provide retirement benefits to public employees. State governments as sponsors, state legislatures as policy makers, and public-sector unions as representatives of public employees may exert considerable influence over the decisions made in pension systems. This study applies a system framework to examine these influences. It focuses on four decisions in pension systems: benefits, employer contributions, employee contributions, and the asset smoothing period. The findings show that changes in the short- and long-term financial conditions of a state government have different influences on pension decisions, and that legislatures and public employee unions play important roles that affect these decisions.

The Funded Status of Local Pensions Inches Closer to States

Source: Jean-Pierre Aubry, Caroline V. Crawford and Alicia H. Munnell, Center for Retirement Research at Boston College, SLP#58, January 2018

The brief’s key findings are:
– Since 2001, the aggregate funded status of local pension plans has lagged behind that of state plans, but the gap has been closing recently for two reasons.
– First, local plans continue to receive more of their required contributions than state plans and are a bit more likely to use stringent funding methods.
-Second, in recent years, local plans have earned stronger investment returns than state plans, perhaps partly due to a lower allocation to alternative investments.
– Despite this progress, many local plans – like their state counterparts – still face significant funding challenges.

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Detroit’s bond redemption a credit positive step toward addressing rising fixed costs

Source: David Levett, Rachel Cortez, Alexandra S. Parker, Moody’s, Issuer Comment, March 21, 2018
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The retirement of $52 million of principal and $2 million of interest on its financial recovery bonds is the latest example of the city’s effort to strengthen its financial position as it prepares for a $140 million increase in pension contributions in fiscal 2024.

U.S. tax law fuels changes to employee benefit and compensation programs

Source: Willis Towers Watson, February 21, 2018

Willis Towers Watson’s recent pulse survey on impacts from the new tax law reveals that the most common changes organizations have made or are planning or considering include expanding personal financial planning, increasing 401(k) contributions, and increasing or accelerating pension plan contributions. Other potential changes include increasing the employer health care subsidy, reducing or holding flat the employee payroll deduction, or adding a new paid family leave program in accordance with the Family Medical and Leave Act’s tax credit available for paid leave for certain employees.

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