Pensions in Peril: How Municipalities Are Defusing This Fiscal Time Bomb
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
Three States with a State and a Municipal Pension Challenge Rhode Island Pennsylvania California
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
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.
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
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%)
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
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)
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
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?
Of particular concern Scranton Pittsburg PhiladelphiaGASB unfunded $60 million $454 million $4.7 billionpension liabilityBudget $75.5 million $469 million $3.6 billion
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
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
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
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.
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.
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
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