A new wave of pension reform?

GOP lawmakers in Pennsylvania are pushing a proposal to shut down the state’s traditional pension plan for new hires and instead funnel them into a hybrid plan that would transfer a portion of the investment risk from the state employer to plan members. If approved, the plan essentially guarantees long-term workers a $50,000 retirement, fund. Anything beyond that would depend on the market and what employees put into it. New hires would accrue retirement benefits under a traditional, defined benefits pension only for the first $50,000 of benefits earned. Earnings beyond the first $50,000 would be earned in a defined-contribution plan. The average American pension plan pays out about $30,000 a year. So $50,000 would generally cover less than two years of a pension.

The proposal, which supporters say would save employers $11 billion over 30 years, gained steam the same week that Oklahoma Gov. Mary Fallin signed a similar reform into law. That bill, HB 2630, shut down Oklahoma's traditional plan to new hires. Starting Nov. 1 next year, new civilian state workers (excluding teachers) will enroll in 401(k)-style plans common in the private sector.

Meanwhile, in Tennessee, Gov. Bill Haslam signed into law a pension bill that requires local governments to pay their full, actuarially recommended contributions (ARC) each year. (Skipping payments is often a go-to move for cash-strapped governments.) Unlike shutting down a pension plan, this reform directly addresses the state pension plan’s current unfunded liability. (It doesn’t, however, make future required contributions smaller as the first two reforms do.) Under Tennessee’s new law, local government entities that haven’t been paying 100 percent of their ARC will have six years to gradually ramp up their yearly payments. That’s the carrot, if you can call it that. Here’s’ the stick: if local governments fail to pay 100 percent of the ARC after that phase-in period, the state will have the authority to withhold money it provides to those governments and use it to make the required payments.

You got to know when to hold ’em

New York state’s dependence on gaming revenues has grown over the past two decades, yet the share of state aid to school districts (including lottery revenues) is smaller now than in the year the New York State Lottery was created. The stats came May 30 via a report released by State Comptroller Thomas DiNapoli, who warned that the long-term impact for the state’s current casino and gaming expansion remains unclear but “it will inevitably create both winners and losers in the years ahead.”

New York, which has a fiscal year ending Mar. 31, collected $3.2 billion in gambling revenues, or an average of $161 per resident. The state’s reliance on lottery revenues has grown, rising to the equivalent of 4.6 percent of state tax revenues in FY 2013-14, compared to 3.8 percent two decades earlier. Additionally, 39 percent of school district revenues came from state aid, including 5 percent from the Lottery, in the 2012-13 school year. In 1967-68, the first year of the Lottery, the state provided 43 percent of total school revenues. DiNapoli’s report concludes that the state’s casino expansion will certainly attract more gaming spending. However, much of that spending will come from New Yorkers substituting some other consumer purchase or other type of gaming spending with spending at casinos. Therefore, the net new revenue for the state could be small.

Laying down the gauntlet on pension shenanigans

In a speech last week to the Municipal Securities Rulemaking Board, the U.S. Securities and Exchange commissioner, Daniel Gallagher, took a hard line on the way that public pension fund liabilities are calculated, chiming in on the side of conservative-minded economists who say that funds hide their true liabilities. In particular, he pointed to the now familiar argument about which discount rate to use in calculating a pension’s liability (the higher the discount, or investment, rate of return, the lower the liability).

Gallagher indicated that public pension funds are assuming the pensions will continue to earn what they have earned historically. Gallagher and others say that assumption is not appropriate going forward. Gallagher noted that plans' true unfunded liabilities remain opaque because “many assume a 7.5 to 8 percent return, when a rate in the mid-6 percent range would be more realistic.”

“This lack of transparency,” he went on to say, “can amount to a fraud on municipal bond investors, and it does a disservice to state and local government workers and retirees by saving elected officials from making the hard choices either to fully fund the pension promises that were made to public employees, or not to make the promises in the first place.” He added the SEC would quickly bring fraud charges against any corporate issuer in the private sector “for playing such numbers games. … We should not treat municipalities any differently.” Gallacher’s comments came May 29 at the MSRB’s First Annual Municipal Securities Regulator Summit.