3rd Annual Public Pension Summit


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Each year, plan administrators and trustees,elected,
municipal and school district officials and industry profesionals meet and discuss the issues that are most critical to the success of
public pension plans.

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3rd Annual Public Pension Summit

  1. 1. PUBLIC SUMMIT By Bruce Barron, a frequent writer on LEXUS CLUB AT PNC PARK MAY 20, 2011 issues of policy and politicsAn Unmistakable Mood of ReformTempered by a heavy dose of political realism, pension reform was in the air as the Allegheny CountyRetirement Board hosted its third annual Pension Summit on May 20, 2011, at PNC Park’s Lexus Club.“We’re under a different kind of pressure and scrutiny these days because of the size of the pensionproblem and what it will take to fix it”, said Tim Johnson, summit organizer and Allegheny County plantrustee, in his opening remarks. Pa has a $5 billion unfunded liability in municipal pensions; add SERSand PSERS that figure explodes by 2015. “ He and many of his Allegheny County colleagues emphasizedconsistently that this pension summit was part of the effort to be proactive and encourage tough butprudent decisions before their options narrow further.Pennsylvania Senate Minority Leader Jay Costa (D-Forest Hills) summarized the status of state publicemployee pensions, including the reforms passed in 2010. Cost-saving measures included raising theminimum retirement age with full benefits from 60 to 65; raising the tenure required for full vesting fromfive years to eight; and dropping the multiplier used to calculate retiree benefits from 2.5 to 2. Costa saidthese changes will result in employer savings of $2.8 billion over 30 years.Costa indicated that no further changes in state pensionprovisions are likely in the near future, but he expressedhope that legislation to reduce “spiking” by county andmunicipal employees, championed by him and StateRep. Matt Smith (D-Mt. Lebanon), could move forwardin this session. The legislation would base pensions onan employee’s last four years of salary (rather than thelast two) and would exclude overtime. “I think there is anappetite to address this issue,” Costa stated, “because werealize where it is leading.”Following Costa’s remarks, the participants split up fortwo hours of breakout sessions to discuss aspects of More than 120 pension, political, municipal andthe pension funding problem and possible solutions. school district leaders participate at PNC Park’s LexusProminent themes emerging from the discussions are Club.summarized below.The DiagnosisAlthough causes of the current pension crisis were old news to many of the participants, the discussantsnevertheless generated an impressive array of contributing factors: • Longevity. As Mary Esther Van Shura, Director of Community Affairs for the OnoratoAdministration, pointed out, U.S. life expectancy has grown from 65 years to 78 in the time since SocialSecurity’s creation. Defined-benefit pensions designed to sustain a retiree for a few years are now providing -1-
  2. 2. monthly paychecks for decades. In many cases, employeeswho retire at age 55 or 60 with 25 to 30 years of service willlive more years in retirement than they worked. • Generous pension terms. While participantsacknowledged that the physical demands and safety risksfaced by police and firefighters deserve consideration, manysaid that the costs have become greater than taxpayerscan support. Jim McAneny, Executive Director of the PublicEmployee Retirement Commission, stated that fivePennsylvania cities are spending more money on police andfire costs alone than they generate in revenues. Mike Thomas,manager of Plum Borough, said that police there are retiring “I’m fortunate that I’m not an elected official,”on pensions 25 percent higher than the borough’s median remarked Jennifer Liptak, Allegheny Countyfamily income. Joe King, President of Pittsburgh Firefighters Council’s Budget Director. “To take a stand forLocal 1, countered that surviving widows of firemen who die on change can be scary. But if we wait, the choicesduty receive an average monthly benefit of just $625 a month; will be made for us.”“Whatever you do, please don’t touch my widows,” he pleaded. • Nonmandatory benefits. Pension lawyer Rich Miller, who represents numerous Pennsylvaniamunicipalities including the City of Pittsburgh, observed that many governments have awarded pensionbenefits beyond those required by statute, in such forms as cost-of-living increases or additional incrementsfor years of service. Many plans, he added, have created a “super-annuated benefit” for employees who takedisability retirement, setting their pensions at 60 or 70 percent of final salary rather than 50 percent—andthereby creating an incentive for employees to demonstrate a disability before their departure. • Rosy assumptions. Pennsylvania governments have shown a propensity for taking advantage ofgood market returns and assuming they would continue. When returns were high, as in 2000, employercontribution rates to the State Employees Retirement System (SERS) and Public School EmployeesRetirement System (PSERS) were lowered. McAneny of PERC described state legislation of 2003 (after theprevious two years’ negative returns) as “throwing the accounting rules under the bus and making believethat I will earn my way out of this problem in 10 years by amortizing liabilities over 30 years, but gains over10 years.” In contrast to Pennsylvania’s practice, Wade Steen, incoming Finance Director of Cuyahoga County,Ohio, noted that contributions to Ohio’s public pension funds—set at 10 percent for employees and 14percent for employers—do not change from year to year. • History of public-sector compensation. As Miller pointed out, generous pensions were enactedhalf a century ago to encourage qualified employees to accept the lower wages in the public sector. Now, inmany cases, the wages aren’t so bad—some kindergarten teachers and bus drivers earn $100,000 a year—but the pension benefits remain. Miller concluded, “We now have public-sector employees that we can nolonger afford.” • Political interests. Former state legislator and current Allegheny County Councilman Bill Robinsonprovided a no-nonsense explanation of why many public employees receive nice pensions: “It seemed likea good idea many years ago to use public money to negotiate political support. So we public officials madea very promising pension program available to people whom we wanted to love us. Except that now themoney has run out.”Spiking: Whose Fault?With Matt Smith, prime sponsor of state anti spiking legislation, moderating one of the breakout sessions,the spiking problem got detailed attention. Smith presented some imposing figures on what he called“the Allegheny County Pension Preservation Bill.” According to his calculations, a hypothetical employeeretiring at age 55 on a final salary of $56,400 and actively accumulating overtime during his last two years -2-
  3. 3. of employment could earn an annual pension of $91,000. With the provisions of Smith’s bill that numberwould be reduced to $34,800. The difference over 20 years would be more than $1.1 million—for just oneemployee.While participants questioned, as actuarial consultant Mike Dieschbourg put it, “whether the implicit socialcontract entailed in pension promises was ever intended to encompass overtime,” many pointed out thatthere is more to the spiking story than employees creatively gaming the system. Joe King noted that thetotal complement of Pittsburgh firefighters has been reduced from 895 in the year 2000 to 625 today, savingsalary costs, but necessitating greater use of overtime.Steen, who also serves on a municipal council in Ohio, declared, “The only way that spiking can happen isif the manager is not managing overtime. People don’t just show up [for extra hours], they get scheduled.Someone is failing to manage the overtime budget and busting the pension budget besides.”Van Shura pointed out the significant gender differences in relation to spiking, noting that femaleemployees (except for teachers) tend to receive pension benefits based on lower salaries, but live longerafter retirement; of Americans aged 85 years or older, more than two-thirds are women.Schools: Way Out of BalancePennsylvania school districts face a distinct set of fiscal challenges, including the significant funding cutscontained in Governor Corbett’s first budget plus legislative proposals to enact a school voucher programand further limit school boards’ ability to raise taxes without a referendum.Mt. Lebanon School Board Director Faith Stipanovich explained two dynamics that inflate school pensionobligations in ways analogous to spiking in municipal and county governments. First, teacher contractsgenerally include a “jump step” that rewards veteran teachers, usually after 15 years of employment, with alarge salary increase. Second, teachers can increase their total pay in the years prior to retirement by takingon various extra duties, with additional compensation stipulated in the contract.Mike Panza, who deals with school finance issues as both Superintendent of the Carlynton School Districtand Moniteau (Butler County) school board member, pointed out that the 1992 legislation (known as theMellow Bill for its sponsor, State Senator Robert Mellow) thatlet teachers retire after 30 years of service rather than 35 withno pension penalty “put a lot more people in the retirementsystem, and now we are starting to pay for it.”The Republican-led General Assembly is moving to removethe ten exceptions that school districts can cite in order toraise taxes by more than the stipulated maximum. Van Shurasaid that 22 percent of the exceptions claimed have beendue to rising pension obligations. Other cost-cutting ideasincluded changing the reimbursement formula for cyber-charter schools and rebalancing the bargaining environmentby docking teachers a day’s pay if they go on strike. Mike Panza, Superintendent of Carlynton School District (standing) -3-
  4. 4. Still More Opportunities The summit’s closing session brought together a wide variety of players who have made innovative contributions toward addressing pension-related issues. First to speak was Dormont council member Laurie Malka, who became an unintentional rabble-rouser last fall when she sought to educate her constituents on pension costs through the borough’s newsletter. Malka told summit attendees that, in her judgment, Dormont has had “20State Senator Jay Costa, Senate District 43 years of inept labor negotiations and inadequate contractDavid J. Mayernik, Eckert Seamans Cherin & Mellott, LLCJennifer Liptak, Budget Director, Allegheny County oversight, ending up with benefits that are now exorbitant.”Council, RBAC Trustee Her newsletter article explained how borough staff usedJoseph King, Secretary/Treasurer, Firemen’s Relief and spiking strategies to increase their pension entitlementPension Fund, City of Pittsburgh to as much as 90 percent of their final base salary. To help residents understand clearly the extent of the problem, achart accompanying the article displayed each employee’s salary without names, but with job titles.Amidst the heated reactions to this article, Malka discovered that most residents thought spiking didn’tcost the borough any money. On the contrary, she said, Dormont’s minimum municipal obligation (MMO,the amount it must contribute to keep its pension system properly funded) rose from $130,000 to $177,000in a single, two-year cycle. State aid (under Act 205 of 1984) currently covers this cost, but Malka saidthe borough is in effect “cosigning a loan” because, should the state aid go away, Dormont will still beresponsible for the payments.Wade Steen summarized the provisions of public pension reform legislation under development in Ohio.He indicated that the state legislature is expected to increase the retirement age by two years and to basepension calculations on the employee’s five highest salary years rather than the highest three.Both Moe Coleman, Director Emeritus of the University of Pittsburgh Institute of Politics, and Joe King citedinequities in the state pension aid formula, which calculates payments to municipalities based on theircurrent workforce. As a result, many suburbs (like Dormont) have their pension contributions fully state-funded while cities with shrinking workforces and large numbers of retirees receive only a fraction of whatthey need. Coleman also called the amazing fragmentation of Pennsylvania’s public pension system, withmore than 3,100 plans, a source of inefficiency. In the two years since the Institute of Politics recommendedconsolidation of small pension plans, 47 new plans have been created—of which just four have more than10 employees enrolled.Paul Brahim, a partner with BPU Investment Management, focused on a more practical issue: helpingemployees do financial planning prior to retirement. He said that, according to a Wharton Business Schoolstudy, 49 percent of high-paid employees reported having taken time off to deal with a financial crisis. Firmslike IBM, Brahim noted, offer financial counseling to employees long before they approach retirement age.Failure to plan leads to absenteeism, but also “presenteeism” which is the situation where employees cometo the office but spend significant work time on personal concerns, such as resolving their financial issuesonline.Brahim also offered suggestions as to how employers, especially if they offer defined-contribution pensionplans, can provide appropriate investment education to their employees so as to protect against the risk oflitigation alleging breach of fiduciary duty. -4-
  5. 5. Summit Consultant Dorien Nuñez warned governments considering a switch from defined-benefit (DB) todefined-contribution (DC) plans that they do not deliver the savings hoped for and bring other problemswith them. Noting that West Virginia reverted to DB public-sector pensions after switching briefly to DC,Nuñez suggested that DC plans are more about shifting risk to employees than about saving money,and that they do not achieve higher returns. “If a water main breaks, I don’t want my city employees busywatching CNBC because they’re worried about their retirement plan investments,” he stated.Jim McAneny reminded listeners that the pension problem gets worse every day, because the PennsylvaniaSupreme Court has held consistently that, once a benefit is promised to a public employee, it can neverbe taken away. “So we have to do something going forward and not dig the hole any deeper or bring newpeople into a benefit system that is not sustainable,” he stated. Noting that municipalities are required to paythe calculated minimum municipal obligation but that the state has no such requirement, McAneny saidthat during the last 15 years Pennsylvania has not paid sufficient money into SERS and PSERS to keep themfully funded.“We have to get the entire compensation system for government employees redone at the state level,”McAneny concluded. “The answers are simple, but politically impossible.” A major effort will be required topress the General Assembly into action.The Solutions Tool BoxJust as the summit identified numerous causes of the present pension woes, it also generated a variety ofpossible solutions. Following is a series of options for pension managers and elected officials to consider: • Use more reasonable assumptions regarding annual return on investments. County controller Mark Patrick Flaherty observed that the former standard assumption of an 8 percent annual return is often being lowered to 6 percent, which he believes will provide a more realistic picture and give governments a better chance of solving their funding problems. • Raise the retirement age; even a two-year increase delays everyone’s access to pension monies for two years, thereby making a huge contribution to plan solvency. • Raise the number of years required for employees to become fully vested. • Change the accrual percentages used to determine how much of the employee’s salary is accumulated in pension rights for each year worked. • Calculate pensions based on the last four or five years of base salary rather than the last two or three. • Implement anti-spiking legislation. • Follow Ohio’s example and grant employers no holiday on pension fund contributions. • Change the state aid formula to assist struggling cities more. • Place a minimum yearly contribution requirement upon state funds, just as is now required for municipal pensions by the Public Employees Retirement Commission. • Eliminate nonmandatory contributions to the pension fund. Vince Larence of Twin Capital (left), Jed Robie of Federated (center), and Craig Moyer of Stoneridge Investment Partners (right). -5-
  6. 6. Tim Johnson Acknowledgements Summit Organizer Presenters Jim Perry Snow Capital Management Executive Director David Mathews Edwin R. Boyer PA Association of Public Principal Employee Retirement System Asset Strategy Consultants Eckert Seamans Cherin & Mellott, LLC Bradford L. Rigby David J. Mayernik Paul Brahim Senior Consultant and Actuary Executive Vice President Cowden Associates, Inc. BPU Investment Management, Inc. Asset Strategy Consultants Edwin Boyer Randall Rhoades, Esq. Morton Coleman Rhoades & Wodarczyk LLC Director emeritus, Advisor Draper Triangle Ventures University of Pittsburgh William Robinson Jay Katarincic Institute of Politics Allegheny County Councilman Jay Costa ValStone Partners Matt Smith State Senator State Representative Larry Jennings Mike Dieschbourg Wade Steen Managing Director President RBAC Trustees Broadmark Asset Management Steen & Company John K. Weinstein Vincent Gastgeb Allegheny County Treasurer Mary Esther Van Shura, Ed.D. RBAC Chairman Allegheny County Councilman Director of Community Affairs Office of County Executive Dan Onorato Joseph King Ted Puzak Secretary/Treasurer RBAC Vice Chairman Firemen’s Relief and Pension Fund Sponsors City of Pittsburgh Mark Patrick Flaherty Twin Capital Management Allegheny County Controller Michael Lamb Andy Balogh RBAC Secretary City of Pittsburgh Controller Federated Investors William Gallagher Nancy Luttrell RBAC TrusteeVice President, Retirement and Actuarial Services Jed Robie Cowden Associates, Inc. Timothy H. Johnson Mellon Capital Director of Administrative Services Laurie Malka Diane Hallett Allegheny County Councilperson RBAC Trustee Borough of Dormont PIA Jennifer Liptak David J. Mayernik, Esq. Christine Sasse Budget Director Eckert Seamans Cherin & Mellott, LLC Allegheny County Council BNY Mellon RBAC Trustee James L. McAneny Carlos Pacheco Executive Director Dan Onorato Public Employee Retirement Commission Allegheny County Executive iNetworks RBAC Trustee Rich Miller, Esq. Anthony Lacenere Partner Campbell Durant Beatty Palombo & Miller P.C. PFM Advisors Dorien Nunez John Spagnola Managing Director Omniresearch Summit Consultant: OMNIResearch -6-