Category Archives: Public Sector

Pensions v 401(k)s: An Illinois Case Study

Source: Kezmen Clifton, OnLabor blog, May 26, 2017

Illinois’ pension liability is estimated to stand at more than $130 billion. The reason behind Illinois’ ever-growing pension liability is one of debate. Some attribute the deficit to legislators voting on pension bills they didn’t fully understand. Others argue that politicians chose to kick the pension ball down the road to avoid raising taxes or cutting spending on their watch. Still others, like Illinois Governor Bruce Rauner, argue the structure of the pension system itself is to blame: employees change jobs as a way to qualify for more than one pension and many seek raises in their final years as that guarantees them higher payouts during retirement.

While there is much debate about the cause of the deficit, its existence is certain. Despite being in the top 1/3 of the nation’s wealthiest states, Illinois has one of the most poorly funded retirement systems in the country. Illinois has only funded 39 cents for every dollar it has promised to pay out in pensions. The pensions of similarly populated states like New York and Pennsylvania are far better funded, with New York at 89 percent and Pennsylvania at 62 percent, respectively. It is clear that Illinois needs to rethink its current pension scheme. Some groups like Illinois Policy, a conservative think tank, advocate for Illinois to adopt 401(k)s for new government workers, but the idea has not received much traction among state employees. While the traditional debate has been between keeping traditional defined benefit plans like pensions or moving to a defined- contribution plan like a 401(k), there is a lesser explored option as well: the hybrid 401(k)-pension plan. The hybrid plan combines the guaranteed income of a pension while lowering employer contributions with a 401(k)…..

How Bad Could it Get (Legally)?

Source: Benjamin Sachs, OnLabor blog, May 26, 2017

It’s a good moment to think creatively and expansively about how to revitalize the U.S. labor movement. This important work is underway, with contributions from academics, labor lawyers, union organizers, and others. Substantive debates about the future of labor law and labor organizing now populate the pages of publications ranging from the Yale Law Journal to Boston Review. Much of this writing evidences an appropriate degree of optimism – the pieces assume a future in which, for example, progressive law reform might be possible, or in which workers can regain power through increased use of strikes even in the absence of law reform, or in which fundamental aspects of U.S. political economy (and political ideology) might be transformed. This kind of optimism is necessary to visionary thinking, and it’s badly needed today.

But, I thought it might also be worth writing from the opposite perspective and asking how bad it might really/plausibly get over the next handful of years. Most of us know much of this already, so you might wonder what the point of such a morose exercise would be. The idea is not to wallow. To the contrary, the idea is that putting in one place the major pieces of what could go wrong (legally) over the next few years could help as we continue to imagine and build a better future for the labor movement. As Van Jones put it recently, “hope for the best but expect and prepare for the worst.”

Some caveats. One, and most important, what follows are not predictions, and I do not mean to suggest that these things are likely. Instead, these are thoughts about the kinds of negative developments that seem within the realm of the possible (even though, with respect to every one, I think the better arguments are on the other side). Two, given the limits of my expertise, I focus exclusively on how bad labor law could get, leaving to others the question of how bad things could get on other fronts. Three, I may be wrong in two directions: omitting other possible problems and including things that aren’t plausible. For that reason, we invite follow-on posts that offer either kind of corrective. Four, and finally, it might be worth saying that this exercise goes against my own nature, which, for better or worse, skews optimistic (as I’ve been critiqued for being).

All that said, here’s what seems within the realm of the plausible: ….

2016 Annual Survey of Public Pensions

Source: U.S. Census Bureau, May 25, 2017

From the press release:
Employer pension contributions made by state and local governments increased by 6.5 percent or $8.5 billion while earnings on investments dropped by $105.7 billion to $49.9 billion, according to the U.S. Census Bureau’s newly released report.

“The 2016 Annual Survey of Public Pensions found that total contributions were $191.6 billion in 2016, increasing 6.6 percent from $179.7 billion in 2015. Government contributions accounted for the bulk of them, $140.6 billion in 2016, increasing 6.5 percent from $132.0 billion in 2015, with employee contributions at $51.0 billion in 2016, climbing 7.1 percent from $47.7 billion in 2015,” according to Phillip Vidal, chief, Pension Statistics Branch.

The other component of total revenue — earnings on investments — declined 67.9 percent to $49.9 billion in 2016, from $155.5 billion in 2015. Earnings on investments include both realized and unrealized gains, and therefore reflect market fluctuations.

In 2016, the total number of beneficiaries of state and local government pensions increased
3.3 percent to 10.3 million people, (from 10.0 million in 2015 and 9.9 million people in 2014). The benefits they received rose 5.4 percent to $282.9 billion in 2016, from $268.5 billion in 2015.
Meanwhile, total assets decreased 1.6 percent to $3.7 trillion in 2016, from $3.8 trillion in 2015.
The Annual Survey of Public Pensions provides a comprehensive look at the financial activity of the nation’s state and locally-administered defined benefit pension systems, including cash and investment holdings, receipts, payments, pension obligations and membership information. Statistics are available at the national level and for individual states. State and Locally Administered Defined Benefits data will also be released on May 25, 2017.

Making your dollars count - Top 9 states: public-sector retirees' benefits for total contributions

When Ties Bind: Public Managers’ Networking Behavior and Municipal Fiscal Health After the Great Recession

Source: Benedict S. Jimenez, Journal of Public Administration Research and Theory, Volume 27 Issue 3, July 2017
(subscription required)

From the abstract:
This study examines the relationship between managerial networking and the fiscal health of city governments in the United States that faced a serious budget crisis during and immediately after the Great Recession. Do public managers’ ties with external stakeholders help improve the fiscal health of these cities? Or do these ties bind city officials to decisions that further exacerbate the fiscal difficulties of their governments? These questions are answered using data from a survey of municipal governments across the United States with a population of 50,000 or more, and financial data from Comprehensive Annual Financial Reports (CAFR) covering more than 200 cities and for three fiscal years. Using instrumental variable regression to address possible common source bias and simultaneous causation, there is strong evidence that an external networking orientation is associated with a decline in city government fiscal health, whether the measure used is perceptual or CAFR-based.

State Public Pension Funds Increase Use of Complex Investments

Source: Pew Charitable Trusts, April 2017

From the overview:
State and locally run retirement systems currently manage over $3.6 trillion in public pension fund investments, most of which are held by states. Broadly, half of these assets are invested in stocks; a quarter in bonds and cash; and another quarter in what are known as alternative investments, such as private equity, hedge funds, real estate, and commodities.

Although governments and employees contribute to pension funds, investment earnings on plan assets are expected to pay for about 60 percent of promised benefits. In a bid to boost investment returns and diversify investment portfolios, public pension plans in recent decades have shifted funds away from low-risk, fixedincome investments such as government and high-grade corporate bonds. During the 1980s and 1990s, plans significantly increased their reliance on stocks, also known as equities. And over the past decade, funds have increasingly turned to alternative investments to achieve investment return targets.

Greater investment in equities and alternatives can provide higher financial returns but also bring heightened volatility and risk of shortfalls. Most funds exceeded their investment return targets during the bull market of the 1990s but then suffered losses during the volatile financial markets of the 2000s—leading to higher pension costs for state and local budgets. The volatility inherent in public funds’ investment strategies can be seen in more recent results as well, with large funds posting fiscal year gains of over 12 percent in 2013 and 17 percent in 2014, but only 2 percent in 2012, 4 percent in 2015, and 1 percent in 2016.

The shift toward more complex investment vehicles has also brought higher investment fees. State funds reported paying more than $10 billion in fees and investment-related costs in 2014, which amounted to their largest expense. Those fees, as a percentage of assets, have increased by about 30 percent over the past decade, a boost closely correlated with the rising use of alternative assets, which has more than doubled since 2006. Additionally, state funds are paying billions of dollars in unreported performance fees associated with these alternative investments…..

Why Is Government One of the Worst Industries for Equal Pay?

Source: Katherine Barrett & Richard Greene, Governing, May 18, 2017

Women working in public administration make, on average, 25 percent — or $16,900 — less than men.

Related:
Unions help narrow the gender wage gap
Source: Elise Gould and Celine McNichols, Economic Policy Institute, Working Economics Blog, April 3, 2017

….One promising way to address both gender-specific disparities and the broken link between all typical workers’ pay and economy-wide productivity growth is through the resuscitation of collective bargaining. Unions have been proven to provide women with higher wages and better benefits. As shown in the figure below, working women in unions are paid 94 cents, on average, for every dollar paid to unionized working men, compared to 78 cents on the dollar for non-union women as a share of non-union men’s dollar. Furthermore, hourly wages for women represented by unions are 23 percent higher than for nonunionized women. Unions provide a boost to women regardless of their race or ethnicity. The gender wage gap is significantly smaller among both white and black unionized workers than their non-union counterparts. Unionized workers are also more likely to have access to various kinds of paid leave, from paid sick days, vacations, and holidays to paid family and medical leave, enabling them to balance work and family obligations…..

The State Pension Funding Gap: 2015 Market volatility deepens the divide between assets, liabilities

Source: Pew Charitable Trusts, Issue Brief, April 2017

From the overview:
The gap between the total assets reported by state pension systems across the United States and the benefits promised to workers, now reported as the net pension liability, reached $1.1 trillion in fiscal year 2015, the most recent year for which complete data are available. That represents an increase of $157 billion, or 17 percent, from 2014.

A state pension plan’s annual funded ratio gives an end-of-fiscal-year snapshot of the assets as a proportion of its accrued liabilities. In aggregate, the funded ratio of these plans dropped to 72 percent in 2015, down from 75 percent in 2014. Investment returns that fell short of expectations proved to be the largest contributor to the worsening fiscal position, with median overall returns of 3.6 percent.1 On average, state pension plans had assumed a long-run investment return of twice that—7.6 percent—for fiscal 2015.

Though final data for 2016 are not yet available, low returns will also be reflected there. Based on returns averaging 1.0 percent for that year, the net pension liability is expected to increase by close to $200 billion and reach about $1.3 trillion. Market volatility will also have a significant impact on cost predictability in the near and long terms.
Related:
Downloadable data

Local Government Employee Health Insurance Programs, 2016: Summary Report of Survey Results

Source: International City/County Management Association (ICMA), May 2017

From the summary:
The International City/County Management Association (ICMA), in collaboration with Cigna, an ICMA Strategic Partner, launched a national survey in the summer of 2016 to learn about the current state of local government employee health insurance programs. ICMA and Cigna conducted this research in follow-up to a similar survey conducted in 2011. The 2016 survey was sent via postal mail to a sample of 3,110 local governments. An online submission option was also made available. The survey was addressed to the Human Resources Director of each selected local government. The response rate was 23.0%, with 714 local governments responding. With this response, the margin of error is +/- 3.5% at the 95% confidence level.

Retiree Health Care Benefits for State Employees in Fiscal Year 2015

Source: Alex Brown, National Association of State Retirement Administrators, NASRA Issue Brief, May 2017

From the overview:
Other Postemployment Benefits (OPEB) is an umbrella term that characterizes retirement benefits, other than pensions, that are offered to employees of state agencies and participating political subdivisions who meet designated age and/or service related eligibility criteria. The most significant costs associated with OPEB benefits are for employer-subsidized health care for retired employees.
The brief discusses how different plan designs, coverage levels, and financing arrangements are associated with varying costs for sponsoring state governments.

Among the findings:
– Most states provide retiree health benefits to retired state employees, and benefits vary in design and delivery;
– More than three-fourths of the cumulative $585 billion in unfunded state OPEB liabilities are held by ten states;
– State spending on retiree health benefits was equal to 1.4 percent of total FY 15 state fund expenditures.

As state and local governments seek to reduce their liabilities, many public employers continue to accumulate assets to prefund future retiree health benefits and to reduce OPEB through program and policy changes.

Retirement Risk Innovation: State Shared-Risk Pensions

Source: Keith Brainard, Olivia Mitchell, Forbes, May 1, 2017

Concerns are growing about how to best manage risk in retirement. Traditional defined benefit plans can impart considerable risk to employers, while 401(k)-type plans place all or most risk on employees.
Shared-risk retirement plans are garnering attention and excitement around the globe. Outside the U.S., developments include “defined ambition” plans of the Netherlands and New Brunswick, Canada. There are also several striking examples of shared-risk plans right here at home. In fact, most U.S. state and local government retirement systems today embed risk-sharing features, and many new models have been developed in recent years. These retirement plan models provide ideas and inspiration for other retirement plans.