Candidates spar on DB vs. DC

The question of whether public retirement plans should be defined benefit or defined contribution is the dominant pension-related issue in many states as the Nov. 7 elections near.

In only two states — South Carolina and Iowa — are there contentious pension and investing issues that have nothing to do with a debate over DC plans vs. DB plans.

South Carolina voters will decide on a change to the state constitution allowing state-operated retirement funds to invest in international securities. South Carolina is the only state that still restricts its pension funds' investments to domestic holdings. If the referendum is approved, it still must be approved by each house of the General Assembly before the next election.

The state's Republican candidate for treasurer, Thomas Ravenel, has made the referendum an issue in his campaign, charging incumbent Grady Patterson with being against the change. But Trav Robertson, a spokesman for Mr. Patterson, denied the charge. "Mr. Patterson has come out in favor of that referendum … Mr. Patterson's only concern is that we make sure we're not funding … terrorist countries or organizations."

Michael Sponhauer, a spokesman for the $26 billion South Carolina State Retirement System, Columbia, said the fund's investment staff is not backing either candidate, but does want the referendum passed.

In Iowa, Democratic gubernatorial candidate Chet Culver's call to use state pension fund money for local venture capital investments has prompted Republican opponent Jim Nussle to run ads asserting "You can't trust Chet Culver with your financial security."

For all the controversy in Iowa, the idea isn't an entirely novel one. For example, in June, the $15 billion Indiana Public Employees' Retirement Fund created a $105 million Indiana Investment Fund to make Indiana-based private equity investments.

As for the DB vs. DC issue, while the debate doesn't always break down along strict party lines, Republican candidates in several states have taken the lead in touting defined contribution plans this year.

In New York and Massachusetts, Republican gubernatorial candidates John Faso and Kerry Healey have called for new public employees to be enrolled in defined contribution plans. While their platforms are less specific, Ron Saxton, the Republican nominee for governor in Oregon, and Anne McCarthy, the GOP candidate for Maryland's comptroller, say that idea should be studied.

In Illinois, where Democratic incumbent Rod Blagojevich and Republican challenger and state Treasurer Judy Baar Topinka have traded charges over who bears responsibility for that state's $39 billion public pension funding gap, Ms. Topinka also has mentioned the need to study a defined contribution plan option, according to spokesman John McGovern.

Susan Del Percio, a spokeswoman for Mr. Faso, said introduction of a defined contribution system would be a step toward achieving budgetary predictability for New York's counties and municipalities, paving the way for property tax relief while limiting the scope for sweetheart deals by special interests.

Mr. Faso's opponent, prominent state Attorney General Eliot Spitzer, didn't return calls. Mr. Spitzer has a comfortable lead in the polls, and critics say he hasn't taken up the pension question. Mr. Spitzer has "paid as little attention to (that issue) as possible. ...The fight has not been joined," said Edmund J. McMahon, a senior fellow at the Manhattan Institute, a New York think tank which favors defined contribution plans for public employees.

Around the country, the push to "privatize" public pension funds is getting "very little traction," said Richard C. Ferlauto, the director of pension and benefit policy with the American Federation of State, County & Municipal Employees, Washington. "Any attempt to replace a DB plan with a DC plan is seen as a direct attack on people's ability to retire with some modicum of economic security," he said.

If that's conventional wisdom, the facts don't back it up, countered Edward Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America, Washington. "There's no doubt that a DC plan can be developed in the public sector side that can match a DB plan … it's just a matter of how you structure it," he said.

DC proponents, while conceding there's no clear momentum in favor of dumping DB plans at the moment, predict the political environment is poised to become more favorable. Over the coming years, as regulatory changes force states and cities to clearly disclose what they owe in benefits, "people are going to start asking questions about what they're paying for ... and then you're going to see the push back," predicted David John, a fellow with the Washington-based Heritage Foundation.

The current political cycle follows a year in which both sides scored points. The labor backlash in early 2005 that beat back California Gov. Arnold Schwarzenegger's attempt to introduce a defined contribution system for new public employees was a win for defined benefit supporters, while defined contribution backers can point to Alaska's decision in May 2005 to create a 401(a) plan for new employees as a victory.

In Alaska, however, the matter is far from settled. New details about the costs of implementing the changes are prompting both main gubernatorial candidates there to grapple once again with the issue. Democrat Tony Knowles is calling for a reversal that would open the state's DB plan again to new public employees — which spokeswoman Patty Ginsburg called a front-burner issue for voters in November. Curtis Smith, a spokesman for Republican candidate Sarah Palin, didn't return repeated calls, but observers said Ms. Palin is open to some modifications that would introduce DB-style features into the 401(a) plan.

Mike Davidson, legislative director with the Anchorage-based Alaska Professional Fire Fighters, which has endorsed Mr. Knowles, said nightly advertising should help make pensions a key issue in a race that has narrowed in recent weeks.

On the national level as well, DB supporters call Alaska a key battleground. Alaska was the one "we lost" last year, and this year that decision could be amended or even reversed, said Jim Mosman, executive director of the National Council on Teacher Retirement, Sacramento, Calif. Hank H. Kim, executive director and council for the Washington-based National Conference on Public Employee Retirement Systems, agreed, saying the Alaska vote could "go a long way toward determining whether the hastily and error-riddled DC conversion law will be entrenched or whether lawmakers will have a public policy debate that thoroughly considers the advantages and costs of DB."

Observers on both sides of the DB-DC divide expect the debate to grow increasingly heated over the coming decade.

Scott Pattison, executive director of the National Association of State Budget Officers, Washington, said the issue could move to the forefront in five to 10 years, as waves of baby boomers retire and public pension funding becomes an ever larger line item on state budgets, highlighting the disparity in benefits between public and private retirees.

Whether they share that view, DB supporters say they're gearing up for a tougher fight down the road. "We're not resting on our laurels," said NCTR's Mr. Mosman. "There's no question there are interests out there that want to see DB plans go away."

Mr. Mosman said his organization is pooling resources with the Washington-based National Association of State Retirement Administrators and the Council of Institutional Investors to more effectively push for defined benefit plans.

Daniel Pedrotty, counsel with the AFL-CIO Office of Investment, Washington, said organized labor is pursuing a similar approach, with the AFL-CIO, the American Federation of Teachers and the Service Employees International Union, among others, set to roll out a "public pension coalition," this fall. Everyone has put money into the pot, and participants are in the final stages of "wrapping up bylaws," after which a director will be hired, he said.

DC proponents predict defined benefit plans will increasingly find themselves in need of a little advocacy. As funding costs balloon, and state budgets are crimped, the broader electorate's support for maintaining a type of plan fewer and fewer people in the private sector can enjoy should weaken, said the Heritage Foundation's Mr. John.