Pension Shortfalls Loom Large; Two Experts Talked Solutions With CCM
CT News Junkie, July 25, 2018
by CCM staff
Jean-Pierre Aubry, an expert from Boston College’s Center for Retirement Research, and W. Gordon Hamlin, Jr., president of Pro Bono Public Pensions and a 2016 Fellow in Harvard’s Advanced Leadership Initiative, gave separate presentations on what was affectionately dubbed the 800 pound gorilla in the room: Public Pensions.
In his presentation, “The Challenges Facing Public Sector Retirement,” Aubry reported on the evolving state of public pension plans, focusing on the trends since the 2008-2009 financial crisis. He notes that just over 75 percent of state plans and 55 percent of local plans have made some kind of benefit reform since 2009, including the introduction of mandatory hybrid plans that provide lower benefits, but also have a defined contribution component.
While these reforms were often necessary, they are not free from drawbacks (i.e. potentially limiting the recruiting ability of governments). Nor do they serve as a cure-all.
As Aubry noted, “most reforms have focused on new hires due to legal protections for current employees.” Because a large portion of costs are associated with the retired, reforms that affect new hires only are not impactful to the long-term sustainability of the pension funds. He gives Massachusetts as an example, where 82 percent of their pension contributions go to legacy costs. This means that most post-crisis reforms will be incremental at best.
Furthermore, despite a healthy economic environment, the overall funded status of pension plans has remained flat since the crisis.
However, the sideways movement of the overall funded status does not reflect the experience of all plans. The better-funded plans, those with a funded ratio above 80 percent in 2017, saw their funded ratio improve slightly after the crisis from about 87 percent to 90 percent. The middle plans, those with funded ratios between 60 and 80 percent in 2017, saw their funded ratio stay relatively stable at around 70 percent in the years following the crisis. But the worst-off plans — those funded less than 60 percent — saw their funded ratio steadily decline after the crisis from 62 percent to 49 percent.
Part of the difference among plans, according to Aubry, is the annual required contribution (ARC). A municipality should aim to pay 100 percent of their ARC, but that led to many plans setting an ARC that “falls far short of what is needed to pay down liabilities.”
The better-funded plans paid more of their ARC over the years, and usually set an ARC that was adequate to limit liabilities. The most-troubling news comes for the lowest funded group, which need what Aubry calls a “grand bargain.”
That will require sacrifice on the workers, retirees, and taxpayers, but how much and where that should be placed is up for consideration. Aubry said any grand bargain should consider two items: separately financing legacy costs so current employees are not further burdened, and that any new retirement plan should have substantial risk sharing to avoid this happening again.
A modest proposal for a gordian knot back to top
Gordon Hamlin, whose work while in private practice with an Atlanta law firm included acting as outside counsel to the states of Georgia, Alabama, Mississippi, and Kentucky, addressed the possibilities for municipalities to solve their pension crises “fairly and securely” through chapter 9 bankruptcy, town by town as states are not allowed to declare bankruptcy.
The solution was going to be wrought with hard choices, a proverbial gordian knot. “We are rapidly running out of solutions,” Hamlin said after driving home the point that it would not be fair to reduce pensions for current retirees, expect current employees to boost their contributions, expect current taxpayers to pay for the unfunded liabilities, moving to a 401(k) model, or, most shockingly, do nothing — creating a snowball effect that would hit education, health care, and infrastructure.
In Hamlin’s vision, the chapter 9 bankruptcy would allow towns and cities to transition to a shared risk model for employees only of those towns and cities, such as those in the Teacher’s Retirement Systems (TRS). Here a task force prepares a plan that the legislature will approve, and the three creditor classes — retirees, inactive employees, and current employees — vote on the proposal. Once a bankruptcy judge approves the filing, all future payments will go to the shared risk plan. If each municipality did this, it would create an “assembly line” of hearings.
This is not without precedent: New Brunswick tackled their funding problems by looking to the Netherlands target benefit system, and it has leveled out a volatile situation. New Brunswick is not a one-off either: the Ontario Teachers’ Pension Plan is a model plan that Hamlin states is a model to be followed, and one that ended up with a $12 billion surplus.
A bankruptcy would be a hard pill to swallow, but by pre-packaging it, the state, the citizens, and the employees in the plan would see it coming. And most importantly, it would be a plan that doesn’t attempt to pass on burdens like when Governor Malloy tried to shift the Teachers’ Retirement System over to municipalities, which CCM vehemently rejected.
Ultimately, bringing up the 800 pound gorilla in the room is often a difficult task, but he is a problem, and problems need to be solved. Aubry and Hamlin, with solid research to back them up, chose not to scold but offer solutions. And that left several in attendance asking how they could at least keep this conversation going.