Accountability AC Alert for February 21, 2012 A Different Take on Public Pensions

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Accountability AC Alert for February 21, 2012 A Different Take on Public Pensions

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Thursday, February 23, 2012 - 10:00am

AC Alert for February 21, 2012
A Different Take on Public Pensions

Over the past several years, there has been a groundswell of support to change the structure of the traditional defined-benefit public pensions offered by many states and local municipalities. In defined-benefit plans, public sector employers promise a specified monthly benefit to retirees, based on an employee's earnings history, tenure of service and age -- rather than depending on investment results.

Opponents believe these plans have become too costly for state and local governments. Some of the proposals from elected officials have been quite controversial resulting in strong opposition from public sector workers and municipal labor unions. These instances have been well documented in our Hot Topics Section "Pensions: The Next Fiscal Crisis."

In the midst of this major policy debate, Thomas DiNapoli -- the sole trustee of one of the largest pension systems in the United States, the New York State and Local Retirement System -- raised more than a few eyebrows by strongly defending the traditional defined-benefit plan. In a recent letter to New York State system retirees, he said:

"Defined benefit plans like ours are the most cost-effective way to provide secure retirements for our firefighters, police and other government employees who provide valuable services. Despite what you may have heard in the media, defined benefit plans make economic sense, providing retirement benefits at half the cost of a 401-K style plan without subjecting retirees to the volatility of the stock market.

“What is often overlooked is the benefit of a stable retirement benefit on local economies. Defined benefit plans provide reliable income to retirees who spend that money in our cities, towns and villages helping to keep our economy sound.

“Pension benefits not only provide assets for investment and keep retired Americans out of poverty; they boost tax collections and support thousands of local jobs. Moreover, our investment strategy has always taken the long view, which has enabled us to withstand turmoil in the markets before." (Source: New York State Comptroller Thomas P. DiNapoli)

Whether New York's defined benefit plan will survive over the long haul remains to be seen, especially as the tab to many local municipalities across the Empire State continues to increase. However, the recent performance of the New York fund is still quite impressive:

"New York State’s retirement fund, the third-largest U.S. public pension, earned 4.83 percent on its investments in the quarter ending Dec. 31, 2011. The New York pension had 101.5 percent of the money needed to pay its obligations in 2010, better than any other state, according to an annual study by Bloomberg Rankings. For calendar year 2011, the fund gained 3.18 percent.

CALPERS, the California Public Employees’ Retirement System, the largest U.S. pension, earned 1.1 percent in 2011. The S&P 500 index returned 2.1 percent last year." (Source: Bloomberg)

What’s Ahead for US Public Employee Pension Funds and Retirement Systems?

There are fundamental pension principles long accepted that may change for future retirees. Will the defined benefit plans survive?  The situation is in flux which will keep it in our Hot Topics focus for many years. Just take a look at these recent articles:

Oregon seeks to co-lead lawsuit against financial firm
Oregon is seeking to co-lead an existing class action lawsuit and recover at least US$15.7 million from Bank of New York Mellon Corp. that was lost to the Oregon Common School Fund and Oregon Public Employees Retirement Fund. The lawsuit alleges that instead of buying and selling foreign currency at the “best execution standards,” as promised, the financial firm charged clients the least favorable rates and pocketed the difference in profits.

Senate shuffles deck on KPERS reform the coming year and beyond
(Source: Topeka Courier Journal)
A Kansas Senate committee has rejected a plan endorsed by Gov. Sam Brownback that would require new government employees to enroll in a 401(k)-style retirement program.

BNY Mellon: Pension funds' status improves
(Source: Boston Business Journal)
Stronger markets in the U.S. and around the world in January helped boost by 1.7 percentage point the funds in a typical U.S. corporate pension plan, according to Boston-based BNY Mellon Asset Management. The funded status or accumulated assets set aside for the payment of retirement benefits to employees, of a typical plan was 74.1 percent.

Republicans Propose U.S. Employee Pension Change to Fund Roads
(Source: Bloomberg)
  House Republicans are proposing that U.S. government employees, including members of Congress, pay more of their pension costs and apply the US$44.6 billion savings over 10 years to transportation projects.

Options considered to offset soaring teacher retirement costs
(Source: Richmond Times Dispatch)
Key legislators on Virginia's budget committees are considering new options for local governments to offset soaring retirement costs for teachers in the next two-year budget. The choices include giving localities the option or mandate to require all teachers and local employees to contribute 5 percent of their pay toward pension plans administered by the Virginia Retirement System.

PA's pension gap
Richard C. Dreyfuss of the Commonwealth Foundation doubts Gov. Corbett is prepared to fill a US$300 million pension hole in his pending new budget proposals, either with higher contributions, or caps on pensions for legislators, senior school administrators and others with six-figure yearly retirements, or by replacing the system with a private-sector, 401-k-style plan.

At one time, when industrial age salaries in the private sector outpaced the salaries of government workers, the “difference” for an employee entering the workforce was often the promise of payments and benefits in retirement.  Labor unions also negotiated for more generous plans for government employees.  As government salaries caught up to many similar positions in the private sector, retirement promises were not usually cut back.  Especially for government workers a promise is a promise.

However, the question today is how to pay for these benefits?  Tax dollars? Generating returns on investments in the system? Requiring a co-pay of some kind by current employees? With the recent financial crisis, all options are on the table and many public sector plans are under extreme pressure. This is a red hot topic that's not going away. Check it out, every day, with AC's Hot Topic: Pensions: The Next Fiscal Crisis.

This is just a sampling of the information in our Alert. Go here for the full text of this alert, and more information on Sustainability, and other Accountability related topics.

Keywords: Diversity & Human Resources | Accountability | Accountability Central | ESG | Energy | Pensions | Thomas DiNapoli