There are lessons to be learned for Feds in the condition of other government plans.
The Great Recession was not kind to state and local pension funds.
These plans take contributions by employers and employees and professionally invest them in stocks, bonds, and other financial products. Similar to the situation of all investors, many state and local pension funds lost ground in funding their obligations, and a number of small localities actually declared bankruptcies and curtailed, or attempted to curtail, benefits to government workers and retirees. Meanwhile, some plans weathered not only the Great Recession but also maintained strong funding levels during the previous market crash in the early 2000s.
While federal employees’ Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) pension plans have a different funding mechanism, observers say there are lessons to be learned from the challenges and successes of state and local funds. NARFE magazine writer David Tobenkin asked pension fund experts about state and local government pension fund developments. …
From the abstract:
The high profile bankruptcy filing by the City of Detroit, Michigan, has brought to the fore the relationship between pension underfunding and the financial difficulties faced by an increasing number of municipalities and states in the United States. The problem is likely to continue to grow with more municipalities finding it necessary to explore the bankruptcy option or otherwise attempt to reduce pension and other obligations to employees and retirees. This essay is an effort to provoke discussion of the normative issues surrounding pension reform, mainly concerning how public employees and retirees should be treated in municipal bankruptcy. Should pension claimants be treated like any other unsecured creditor, or any other person who suffers when the regulatory background is altered, or is there a case for treating them as victims of a fiscal disaster beyond their control? Is pension reform just one more step in the evolution of the labor market that has made it much more difficult for lower skilled workers to achieve a middle class lifestyle? If so, how should the law react? The essay also includes some discussion of the fascinating federalism issues raised by the potential clash between state law protecting pension rights and federal bankruptcy standards. Should a federal bankruptcy court respect the decision of a state court, that the use of federal bankruptcy to reduce pension obligations would violate state constitutional protection of pension rights? This may be the most interesting federalism dispute in decades.
From the press release:
State lawmakers who are considering drastic cuts to the retirement benefits of state workers are simultaneously giving away billions of dollars in corporate tax subsidies and loopholes, often in amounts far exceeding the cost of pensions, according to a new report.
Putting State Pension Costs in Context by Good Jobs First examines 10 states where elected officials are threatening to undermine retirement security by cutting the pension benefits of their teachers, firefighters, police officers, and hundreds of thousands of other public employees. The states included in the report are: Arizona; California; Colorado; Florida; Illinois; Louisiana; Michigan; Missouri; Oklahoma; and Pennsylvania.
The findings show that in each state, the revenue lost to corporations through loopholes and tax breaks outpaces the current cost of pension benefits to state employees….
Learning to Love the Numbers of Government
Governments’ financial statements may seem intimidating to those without number-crunching expertise. But these documents contain important information that public officials need to know. Here’s how to find it.
For states throughout the country this year, there’s a common theme: a climate of uncertainty coupled with a sense of genuine opportunity. Amid worries about the federal government’s failure to boost funding for infrastructure, many states are taking steps to produce that funding on their own. Congress seems to have stalled—again—in its efforts to reform the immigration system, but states are enacting bills designed to grant new rights to some of their undocumented residents. And after a period in which higher education programs faced dramatic cuts, states are putting money back into those programs—some of them more efficiently than in the past. Here are 10 big issues states will look to tackle in 2014, and six smaller ones they’ll also address. …
Medicaid … Income Tax Revision … Minimum Wage Laws … Public Pensions … Immigration … Safety Net … Higher Education … Employee Compensation … Transportation Funding … Drones …
From the abstract:
Most private sector workers with employer-provided health insurance have a strong incentive to continue working until Medicare eligibility in order to maintain group health coverage. However, most government employees have access to retiree health coverage, which allows them access to group health coverage even if they retire before Medicare eligibility. We study the impact of retiree health coverage on the probability of stopping work among public sector workers between the ages of 55 and 64. We find that, for state and local government employees, retiree health coverage raises the probability of stopping work by 5.1 percentage points (around 28 percent) between ages 60 and 64. However, we find no evidence that retiree health coverage influences state and local employees’ decisions to stop work at ages 55-59, or that such coverage has an effect on the probability of stopping work for federal and military employees.
From the abstract:
A major factor weighing down the long-term finances of state and local governments is the obligation to fund retiree benefits. While state and local government pension obligations have been analyzed in great detail, much less attention has been paid to the costs of the other major retiree benefit provided by these governments: retiree health insurance. The first portion of the paper uses the information contained in the annual actuarial reports for public retiree health plans to reverse engineer the cash flows underlying the liabilities given in the report. Obtaining the cash flows allows us to construct liability estimates which are consistent across governments in terms of the discount rate, actuarial method and assumptions concerning medical cost inflation and mortality. We find that the total unfunded accrued liability of state and local governments for the provision of retiree health care exceeds $1 trillion, or about 1⁄3 of total state and local government revenue. Relative to pension obligations discounted at the same rate, we find that unfunded retiree health care liabilities are 1⁄2 the size of unfunded pension obligations. We also find that using assumptions concerning the growth in health care costs that are arguably more realistic than those employed by most states actually reduces the size of the liability in most cases. Pushing in the opposite direction, we find that using plausibly more realistic mortality assumptions increases the size of liability. The second portion of the paper places retiree health care obligations into context by examining the budget pressures associated with retiree health on a continuing, largely pay-as-you go basis. We find that much of the projected increase in retiree health obligations as a share of revenue is the result of health care cost growth. On average, states could put their retiree health obligations into long-run fiscal balance by contributing an additional 3⁄4 percent of total revenue toward the benefit each year. There is, however, wide variation across the states, with the majority of states requiring little in the way of additional financing, but some states requiring a significantly larger increase.