Category Archives: Public Sector

The State of State Pension Plans 2013: A Deep Dive into Shortfalls and Surpluses

Source: Rachel Barkley, Morningstar, October 2013
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….Despite the increased focus on pensions and their integral role in a government’s overall credit quality, pensions remain poorly understood because of a combination of plan complexity, the sheer number of plans, and a lack of transparency due to weak disclosure requirements. To offer a better view of the present state of major pension plans and the potential impact of their vulnerabilities on governments, taxpayers, and investors, Morningstar has analyzed current data for pension plans administered by each of the 50 states as well as the Commonwealth of Puerto Rico. Overall, we found the fiscal health of state pension plans varies drastically, with some states having exceptionally strong plans and others facing severe funding shortfalls…

…While some states are adequately managing their aggregate pension liabilities, the majority of state pension systems are coming under duress. The fiscal solvency and management of these plans varies greatly, according to two key drivers of Morningstar’s pension analysis: the funded ratio and the unfunded actuarial accrued liability (UAAL, or unfunded liability) per capita. The funded ratio, which is calculated by dividing the pension plan’s assets by its liabilities, serves as a good measure of the plan’s ability to meet its obligations. In addition, Morningstar would like to highlight the UAAL per capita, which in our opinion is a useful metric not commonly applied in the current pension analysis narrative. Similar to the debt per capita calculation in municipal credit analysis, the UAAL per capita represents the amount each person in the state would need to pay to fully fund this liability…

In aggregate, the state plans are 72.6% funded with a UAAL per capita of roughly $2,600, although funded percentages and UAAL per capita vary dramatically among the states. Several states have very strong pension systems. Six states have funded levels of more than 90%, while seven states have UAALs of less than $100 per capita. Wisconsin remains the strongest system, with a 99.9% funded ratio and a UAAL of $18 per capita. A total of 12 states have funded ratios of at least 80%, which is considered to be strong by Morningstar and recommended by the Government Finance Officers Association. On the other side of the spectrum, 26 states and Puerto Rico fall below Morningstar’s fiscally sound threshold of a 70% funded ratio….

How Sensitive Is Public Pension Funding to Investment Returns?

Source: Alicia H. Munnell, Jean-Pierre Aubry and Josh Hurwitz, Center for Retirement Research at Boston College, Issue Brief, SLP#34, September 2013

The brief’s key findings are:
– To assess the sensitivity of pension funding to investment returns, the analysis projects funded ratios through 2042 for large public plans using:
* a stochastic model of year-to-year returns; and
* a median real return of 4.45 percent, the average used by plans in 2012.
– The baseline results show that the funded ratio for the 50th-percentile outcome does not reach 100 percent because:
* plans pay only 80 percent of annual required contributions (ARC); and
* amortization approaches produce inadequate contributions.
– Paying 100 percent of the ARC and using more robust funding approaches leads to near full funding by the end of the period.
– However, even under these more favorable scenarios, the variability of returns still poses risks of funding shortfalls.

Click here for Supplemental Table

California and the Thorny Business of Cutting Current Public Workers’ Pensions

Source: Charles Chieppo, Governing, Better, Faster, Cheaper blog, October 2, 2013

…It’s true that some jurisdictions offer unsustainable pension benefits, and nearly every public retirement fund’s investment performance was hit hard by the Great Recession, but it isn’t fair to solve those problems simply by slashing current public employees’ pensions.

There are a number of things that states and municipal governments can do to help get pension costs under control. Moving to a defined-contribution and/or cash-balance plan shifts some of the risk and makes pension costs much more predictable. So do adjustable pension plans, under which benefits are guaranteed but the size of the benefit is linked to pension-fund investment performance during the previous year.

Limiting cost-of-living adjustments for retirees to a reasonable level also can help get pension costs under control. And while dialing back overly optimistic assumptions about pension-fund investment returns doesn’t cut costs, it does strip away the facade that the funds are in better shape than they really are….

Understanding the Argument for Market Valuation of Public Pension Liabilities

Source: Andrew G. Biggs, Kent A. Smetters, American Enterprise Institute, May 2013

From the summary:
This paper first reviews how public pensions value their liabilities under current GASB rules. Next, it outlines the standard approach to valuing liabilities from an economic point of view and what this market-based approach implies for public-sector pensions and their funding levels. Following that, the authors provide examples designed to better convey the qualitative principles regarding the economic approach to pension liability valuation.

The emphasis here is not on detailed calculations of how fair-market valuation would affect pension funding in states and cities around the country, nor the increased budgetary burden the pensions might impose. Likewise, the emphasis is not on how defined-benefit pensions might be reformed in light of information conveyed via more accurate accounting rules.

Rather, the intent is to provide readers with a better handle on the simple intuition that lies behind the economists’ call for fair-market valuation of public pension liabilities. Those who follow the debate are aware that economists argue for using lower discount rates to value public pension liabilities but often are unaware of why economists believe what they do. This paper aims to better articulate those beliefs.

Looting the Pension Funds – All across America, Wall Street is grabbing money meant for public workers

Source: Matt Taibbi, Rolling Stone, September 26, 2013

In the final months of 2011, almost two years before the city of Detroit would shock America by declaring bankruptcy in the face of what it claimed were insurmountable pension costs, the state of Rhode Island took bold action to avert what it called its own looming pension crisis. Led by its newly elected treasurer, Gina Raimondo – an ostentatiously ambitious 42-year-old Rhodes scholar and former venture capitalist – the state declared war on public pensions, ramming through an ingenious new law slashing benefits of state employees with a speed and ferocity seldom before seen by any local government….What few people knew at the time was that Raimondo’s “tool kit” wasn’t just meant for local consumption. The dynamic young Rhodes scholar was allowing her state to be used as a test case for the rest of the country, at the behest of powerful out-of-state financiers with dreams of pushing pension reform down the throats of taxpayers and public workers from coast to coast. One of her key supporters was billionaire former Enron executive John Arnold … who for years had been funding a nationwide campaign to slash benefits for public workers….

…Five years ago this fall, an epidemic of fraud and thievery in the financial-services industry triggered the collapse of our economy. The resultant loss of tax revenue plunged states everywhere into spiraling fiscal crises, and local governments suffered huge losses in their retirement portfolios – remember, these public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years.

Today, the same Wall Street crowd that caused the crash is not merely rolling in money again but aggressively counterattacking on the public-relations front. The battle increasingly centers around public funds like state and municipal pensions. This war isn’t just about money. Crucially, in ways invisible to most Americans, it’s also about blame. In state after state, politicians are following the Rhode Island playbook, using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters and cops – not bankers – as the budget-devouring boogeymen responsible for the mounting fiscal problems of America’s states and cities….
Matt Taibbi on How Wall Street Hedge Funds Are Looting the Pension Funds of Public Workers

Source: Democracy Now, September 26, 2013

The Effect of Employment Protection on Teacher Effort

Source: Brian A. Jacob, Journal of Labor Economics, Vol. 31, No. 4, October 2013
(subscription required)

From the abstract:
In 2004, the Chicago Public Schools and the Chicago Teachers Union signed a new collective bargaining agreement that gave principals the flexibility to dismiss probationary teachers (those with fewer than 5 years of experience) for any reason and without the hearing process typical in many urban districts. Results suggest that the policy reduced annual teacher absences by roughly 10% and reduced the incidence of frequent absences by 25%. The majority of the effect was due to changes in the composition of teachers in the district, although there is evidence of modest incentive effects for young untenured teachers.

Can Public Employees Be Trusted to Choose the Right Retirement Plan?

Source: Liz Farmer, Governing, View blog, September 19, 2013

Switching from a defined-benefit plan to a defined-contribution, 401(k)-style plan may be all the rage in states and localities these days, but whether it’s the right move for the long run was the topic of much debate Wednesday at Governing’s Cost of Government Summit in Washington, D.C…

The Development of a Model for the Distribution of Merit Pay Increase Monies for Municipal Agencies: A Case Study

Source: William R. McKinney, Michael A. Mulvaney, and Richard Grodsky, Public Personnel Management, Vol. 42 no. 3, September 2013
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From the abstract:
Merit pay is based on individual performance and is one of the most widely accepted methods to encourage and recognize meritorious job performance. At the core of an agency’s merit pay increase system is the performance appraisal instrument and interview. A recent study discussed the steps involved in creating job-specific performance appraisal instruments that can be used to assess employees’ range of performance and the interview process involved in conducting a well-defined performance appraisal. This article builds on this previous research and focuses on the final steps of a pay-for-performance system to determine how much of a merit increase will be given for different levels of performance. A case study methodology is used to review the literature on the ways in which organizations differentially compensate individuals based on their performance; to implement the recommendations of the literature review to develop a model for the distribution of merit pay increases for the Elmhurst Park District (Elmhurst, Illinois), and to evaluate employees’ attitudes toward the newly developed model in contrast to a previous model. Comparison of employee attitudes toward the original system and the newly developed system found significant mean differences on four of the six items assessing the employees’ overall satisfaction with the system and their perceptions of distributive justice.

City Employee Perceptions of the Impact of Dress and Appearance: You Are What You Wear

Source: Katherine A. Karl, Leda McIntyre Hall, and Joy V. Peluchette, Public Personnel Management, Vol. 42 no. 3, September 2013
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From the abstract:
This study focuses on city employees and their perceptions regarding the importance of dress and appearance in the public sector workplace. Using the impression management literature and self-presentation theory, we examine the impact of mode of dress worn (casual, business casual, formal business) on their self-perceptions of creativity, productivity, trustworthiness, authoritativeness, friendliness, and competence. We also examine their beliefs regarding the impact of employee appearance on customer perceptions of service quality. Our results suggest that “you are what you wear.” Respondents felt more competent and authoritative when wearing either formal business or business casual, more trustworthy and productive when wearing business casual, and least friendly and creative when wearing formal business attire. Respondents also believed that uniforms had a positive impact on customer perceptions of overall service quality, and that tattoos, athletic wear, unconventional hairstyles or hair color, sweat pants, facial piercings, revealing clothing and clothing with tears, rips or holes had a negative impact. Implications and directions for future research are discussed.

Telecommuting and Leadership Style

Source: Timothy R. Dahlstrom, Public Personnel Management, Vol. 42 no. 3, September 2013
(subscription required)

From the abstract:
Telecommuting is an increasingly popular organizational dynamic that presents unique challenges for workers, managers, and human resources departments regarding how employees relate to their organizations, as well as what telecommuters need from their managers to be satisfied, committed employees. Much is known about how employees in private companies relate to their organizations in a standard work setting. However, little is understood about how teleworkers in government organizations relate to their organizations, and how managerial leadership behaviors influence the organizationally related outcomes of telecommuters. This article reviews some of the challenges with telecommuting, focusing on telecommuting’s impact on job satisfaction and organizational commitment. The article then presents a prominent leadership style dichotomy and assesses the impact of the two leadership styles on job satisfaction and organizational commitment. The substitutes for leadership are included in this assessment. To synthesize these literatures, the final section of the article combines telecommuting challenges and leadership style to suggest the leadership style that best mediates the negative aspects of telecommuting and is, therefore, most important for employees in a telecommuting environment. Areas for further research are also considered.