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Pensions in Peril: How Municipalities Are Defusing This Fiscal Time Bomb
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Pensions in Peril: How Municipalities Are Defusing This Fiscal Time Bomb

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  • 1. State and Municipal Pension Reform in the US Where Does it Stand? Eileen Norcross, M.A. Senior Research Fellow, State and Local Policy Project Mercatus Center at George Mason University Anton/Lippitt Conference on Urban Affairs Taubman Center for Public Policy Brown University October 25, 2012
  • 2. Three States with a State and a Municipal Pension Challenge Rhode Island Pennsylvania California
  • 3. Rhode Island – Diagnose, Plan and ActTruth in Numbers: “It’s a math problem”• Notes the effect of FASB rules.• Provides analysis with corporate bond yields at Treasury website.ERS (GASB) = $4.7 billionERS (FASB)= $6.8 billionERS (MVL) = $11.4 billionThis doubles the normal cost- annual cost for current and future hires – from 10% to 25% ofsalaryRI Retirement Security Act of 20111. Hybrid plan for all employees (except police)2. COLA suspended until 80% funded3. Retirement age match Social Security (67) for non-vested and new hires5. Increase contribution (decreased for teachers)Reduces unfunded liability by $3 billion
  • 4. RI Municipalities36 locally-administered plans in 24 Rhode Islandtowns “at risk” (RI Auditor General)GASB basis: unfunded liability of $2.1 billion (40percent funding ratio, on average)On MVL basis more acute funding gaps emergeCombining MERS and local plans MVL: $6 billionunfunded liability at municipal level.
  • 5. Some considerationsMost muni pensions determined via collective bargainingand not statuteLocalities don’t require 100% funding (Moody’s singledout Coventry)POBs (Pension Obligation Bond) – Woonsocket $90million in FY 2003 (bet that investment returns > interest)2010: ARC = $2.7 million; debt service = $1.7 millionOther constraints : property tax caps; aid cuts
  • 6. Why the municipal level really matters Costs can rise quickly and crowd out spending on basic services: police, fire, emergency. …using govn’t assumptions: Auditor General 2011: to fully fund pensions and OPEB = 25% of property tax levy. In certain localities, a far bigger portion: Woonsocket (61%), Providence (51%) and Johnston (47%)
  • 7. Proposals for municipal reforms offered by RI Auditor General• Require 100% funding of local plans• Merge local plans into MERS• Eliminate obstacles to merging• Pension and OPEB outside of collective bargaining• Muni reforms mirror state reforms
  • 8. Progress to date• RIRSA takes some funding pressure off of municipal governments• “Toolkit” for municipalities• Individual municipal plans requested• Providence: 31 percent funded under GASB ($900 million unfunded liability) -union cooperation -freeze COLA -cap pensions• Pension liability reduced by $170 million move retirees from OPEB to Medicare ($18.5 million in savings in FY 2013)
  • 9. Pennsylvania – Talking About it• State-level reform is being discussed• Returns = 3.4% this year (not 7.5%)• State unfunded liability: $40 billion• Contribution triples (from $1.7 billion to 6.2 billion in 3 years (that’s 11.6% of the General Fund)• $116 billion on MVL basis• 800,000 employees
  • 10. Pennsylvania’s municipal plans• 3,200 muni plans (one-quarter of all US muni plans are in Pennsylvania)• 1,300 < 10 workers.• $7 billion unfunded liability• 27 are “severely distressed” <50% funded.• MVL basis?
  • 11. Of particular concern Scranton Pittsburg PhiladelphiaGASB unfunded $60 million $454 million $4.7 billionpension liabilityBudget $75.5 million $469 million $3.6 billion
  • 12. Consequences• Scranton is broke• City officials cut salaries to minimum wage• Similarities to Harrisburg (other debts figure into the picture)• $ 5.5 million in interest on debt in FY 2013
  • 13. PA Reform ideas and obstacles• Merge muni plans into state plan?• State is poorly funded: what’s their plan to fix it?• By law, Pennsylvania municipalities must offer a DB and not a DC plan
  • 14. California – All Over the Road• Pension Liability at the state level is massive• Major cities with problems: Los Angeles ($2 - $3 billion a year in benefits) $7.2 billion budget• Tackling it? San Jose, San Diego (Proposition B)• In bankruptcy: Stockton, San Bernardino• San Bernardino has failed to make its payment ($290 million) to CalPERS
  • 15. Principles for Reform1) Truth in Pension Accounting2) Get a plan3) If you guarantee it, value and fund the plan like you mean it.4) The role of skipping contributions, abuses, budget or funding gimmicks, risk-taking in assets5) Intergenerational fairness (among workers and taxpayers)6) Choice and Flexibility for Employees7) Shift Risk Away from Government/Taxpayer.
  • 16. Two cities to consider• Atlanta: $1.5 billion unfunded liability• Annual contributions doubled to $119 million over the last decade• Phase out DB plan, move new hires to hybrid.• Philadelphia now looking to Atlanta.
  • 17. ConclusionPublic Policy Students: This is a great area to study from many possible angles• Financial• Economic Behavior• Fiscal and Budgetary• Legal and Constitutional (rules, contracts)• Government (federalism/ state and local)• Public Policy and Public Administration
  • 18. References1) M. Barton Waring, Pension Finance, Wiley 20122) Olivia Mitchell, Wharton, U Penn; https://bepp.wharton.upenn.edu/profile/719/research3) Alicia Munnell, Boston College Center for Retirement Research http://crr.bc.edu/4) Robert Novy-Marx and Joshua Rauh, “The Revenue Demands of Public Employee Promises,” September, 2012 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=19736685) RI Auditor General reports: http://www.oag.state.ri.us/reports/MuniPensionsRI2011.pdf6) Pennsylvania Auditor General reports: http://www.auditorgen.state.pa.us/Reports/MunPen.html7) http://www.auditorgen.state.pa.us/8) Distressed PA municipalities data:9) http://www.portal.state.pa.us/portal/server.pt/community/perc_home/2513/act_205_distress_s cores/73516810) Joe Nation, Pension Math, Stanford Institute for Economic Policy Research, December, 2011.http://siepr.stanford.edu/system/files/shared/Nation%20Statewide%20Report%20v081.pdf1) Eileen Norcross and Andrew Biggs The Crisis in Public Sector Pension Plans: A Blueprint for Reform in New Jersey, June 2010, Mercatus Center at George Mason University.http://mercatus.org/sites/default/files/publication/WP1031-%20NJ%20Pensions.pdf