Public Employee Pensions Sherato aton Statio ation Square Pittsburgh, urgh, Penns nsylvania nia July 13, 2015
Part I PUBLIC PENSION OVERVIEW 1
The “Grand Bargain” • In theory, public employees accepted lower pay in exchange for richer benefits. • Much of this has come about as municipalities and state governments have invoked wage freezes. • Today, even with benefits included in the calculations, public employees make approximately 7% less than their private sector counterparts. Source: Center for Economic and Policy Research; U.S. Bureau of Labor Statistics 2
Public Employee Wage Growth Less than Overall Economy • Over the last thirty years, public employees’ wage growth, has been less than the growth in overall personal income. Wage growth has not scaled with the growing economy. Source : Government Accounting Office, http://www.gao.gov/new.items/d10899.pdf 3
Public Pension Coverage • Approximately 16% of the US workforces is employed by a public entity. Most receive some sort of retirement benefit. 4
Differences between Public and Private Pensions • ERISA: – No PBGC coverage – private employers generally free to establish as they see fit, within legal constraints. – Public entities’ pensions usually governed by legislative statutes • FASB vs. GASB 5
• So, what happened? The Pension Story • The traditional DB plan You’ve probably heard this • declined rapidly. before – Initially, pensions were • promised to employees. After a • Workers now tend to series of disasters, eventually, various laws were enacted to have defined protect pensions (ERISA). These laws required minimum contribution plans (401k, funding for pensions, and various protections for workers’ 403b, etc.). The workers retirement money. • But ERISA alone didn’t force companies out of pension plans. choose the investment, During the Reagan Administration, accounting rule and bear the makers finally decided to require employers to disclose consequences. the cost of their pensions – and the cost of meeting required funding. 6
• However, this has led to issues. • During the 2007-09 recession, more Americans than ever before had a direct stake in the stock market (usually through their 401ks and 403bs.) And now, those folks couldn’t retire – the number of people over 60 with jobs is up 10% -- on the flip side, the percentage of jobs held by those under 60 has fallen 7%. 7
• Since then, the stock market regained most of its ground – but 401(k)/403(b) plans have not . Why? During the recession, many workers took their money out of mutual funds investing in stocks ($90 billion). • Experts indicate that this behavior prolonged the 2007-09 recession. 8
• But, Public Pension Plans have a different story. • Why? – Different accounting rules – GASB vs. FASB. – GASB has done much less to require the disclosures that we see in private companies – that’s why we still see many more public pensions than private. So, many public employees retain pensions whereas those in the private sector do not. 9
Defined Benefit Remains Much more Common for Public Employees Type of Retirement State and Benefit Private Local Defined Benefit 24% 92% Defined Contribution 68% 33% Source : U.S. Bureau of Labor Statistics. 10
Pensions within the USW: Our position • For private employers , workers covered by DB 2011 USW Convention Resolution: “Protecting Our Pensions:” Plans has declined from “Both single employer and 50% in 1997 to 29% in multiemployer defined benefit pension plans offer the greatest income security by providing a 2011. lifetime benefit which is insured by the Pension Benefit Guaranty • However, most in the Corporation and supported by the assets of the sponsoring or participating employers, and USW still have DB plans: provide retirement benefits more efficiently than any other plans 71-87% in 2009. available.” 11
How Severe were 2008 – 09 Losses? • “Total state government revenues across the nation plummeted by a record- breaking 30.8 percent in 2009.” • “$477 billion decline…” in state tax income. Source : New York Times , January 6, 2011, at A14. 12
The Status Quo • And, public pensions Post recession, there are rising funds are now largely concerns about the cost of public pensions – most of this fueled by recovering from losses two things: sustained during the 1. GASB Rules allow governments to be less clear than corporations about their 2007 — 09 crisis: pension liabilities, this has caused fear that the costs might • “Like all investors, pension funds experienced investment losses be astronomical, and during the market downturn. A careful examination of the data 2. The growth of the Tea Party also tells us that most states have funded their promised benefits in a fiscally responsible manner. An average of 88% of the annual and similar platforms which required contribution was paid by the largest state and local frequently target Public retirement systems in the country in 2008. Pensions – keeping the issue in the private eye. As the market recovers, we find that pension funds are recovering losses and that filling the gap will be manageable. [...] Because funding of public pensions typically is a shared responsibility, just a one percent increase in contributions from employers and employees would fill the gap.” Source: National Institute on Retirement Security. 13
Is the Austerity Position Warranted? By 2018, it is expected that, with no other legislative changes, that the funded ratio for public plans will be 81% -- comparable to the “safe” or “green zone” funded ratio required under ERISA for private plans. Source : Center for Retirement Research at Boston College, State and Local Pension Plans, The Funding of State and Local Pensions: 2014 – 2018, June 2015, Number 45, available at: http://crr.bc.edu/briefs/the-funding-of-state- and-local-pensions-2014-2018/ 14
What are State & Local Governments Doing in Response? • Limiting Collective Bargaining Rights – – New Jersey, – Wisconsin, – Ohio, – Idaho, – Michigan, – Indiana, – Tennessee. • Pension “Reform”… Source : The 2010 Arvid Anderson Paper: Public Sector Collective Bargaining at the Crossroads, July 2011, available at: http://www.americanbar.org/content/dam/aba/administrative/labor_law/meetings/2011/annualmeeting/016.authchec kdam.pdf. 15
What are State & Local Governments Doing in Response? • Pension “Reform:” – Between 2001 and 2010: • 20 states both reduced pension benefits and increased employee contributions; • 13 states reduced pension benefits; • 4 states only increased employee contributions. Source : Pew Center, Road to Reform, at 2. 16
What are State & Local Governments Doing in Response? • Pension “Reform:” – 2005 – Alaska – all new employees in DC plan. – 2008 – Georgia – hybrid retirement system, new employees can choose either. – 2010 – Utah – Hybrid. – Pennsylvania – Two tier program for PSERS. – Missouri – Required employee contributions of 4% for new hires. – Illinois – Two tier, significant reduction for new hires. Source : The 2010 Arvid Anderson Paper: Public Sector Collective Bargaining at the Crossroads, July 2011, available at: http://www.americanbar.org/content/dam/aba/administrative/labor_law/meetings/2011/annualmeeting/016.authchec kdam.pdf. 17
What are State & Local Governments Doing in Response? • Pension “Reform:” – COLA Reductions: • Colorado – limited to 2%. • Minnesota – eliminated, unless plans are over 90% funded. • South Dakota – reduced COLA adjustment from 2.1% to 3.1%. • Utah capped pension COLA adjustment at 2.5% max – but there is a rolling application provision, allowing to carry over from year to year if CPI is over 2.5%. • Wisconsin – which has one of the best funded pension plans in the country, replaced its standard COLA increase with a dividend payable to retirees if investment returns are positive. – Colorado, Minnesota, and South Dakota – pending lawsuits. Source : The 2010 Arvid Anderson Paper: Public Sector Collective Bargaining at the Crossroads, July 2011, available at: http://www.americanbar.org/content/dam/aba/administrative/labor_law/meetings/2011/annualmeeting/016.authchec kdam.pdf. 18
What are State & Local Governments Doing in Response? • Increased Employee Contributions: – Colorado: 8 to 10.5%, – Minnesota: increased 3%, – Mississippi: increased from 7.25% to 9%, – Missouri: New hires make 4% contribution, – Vermont: 3.45% to 5% (teachers), – Virginia – from 5.57% to 7%. Source : The 2010 Arvid Anderson Paper: Public Sector Collective Bargaining at the Crossroads, July 2011, available at: http://www.americanbar.org/content/dam/aba/administrative/labor_law/meetings/2011/annualmeeting/016.authchec kdam.pdf. 19
The Status Quo Public Pensions Plans are the latest scapegoat for governmental budgeting woes. The headline above is from 7/10/2015. 20
Is the Austerity Position Warranted? • MYTH: Taxpayers • FACT: Most pay for the lavish distributions are earned via investment public pensions. returns earned off public workers’ own contributions – public workers contribute ~ 6-40%. 21
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