May 05, 2011 01:00 AM

CBO: Public pension plans should change reporting, contribution methods

Hazel Bradford

With a statewide pension fund liability of $54.3 billion Washington Gov. Christine Gregoire has proposed pension reforms to reduce costs.

Bloomberg

With a statewide pension fund liability of $58.8 billion, Gov. Deval Patrick, Senate President Therese Murray and House Speaker Robert A. DeLeo, all Democrats, have proposed extensive changes that include:increasing the retirement age for virtually all state workers;eliminating early retirement subsidies; eliminating certain early retirement for all employees; pro-rating benefits based on employment history;introducing an anti-spiking rule; and eliminating the right to receive a pension while receiving compensation for service as an elected official.

With a statewide pension fund liability of $64.1 billion, Gov. Bob McDonnell recommended the resumption of employee pension contributions to the Virginia Retirement System. The House Appropriations Committee voted to require employees to contribute to the system but would give them a 5% salary increase to offset it.

With a statewide pension liability of $73.6 billion, the North Carolina Future of Retirement Study Commission recommends:allowing employees to choose between a defined benefit plan and a defined contribution plan, with new employees being defaulted into the DB plan if no choice was made within 60 days of employment;giving more flexibility to the trustees of local government retirement systems to grant cost-of-living adjustments;changing the way interest is calculated on employee contributions; andimplementing automatic enrollment in a supplemental DC plan.

With a statewide pension liability of $77.4 billion, the state has become the focal point of attention because of a proposal championed by Republican Gov. Scott Walker to end collective bargaining for state employees. However, other reforms also being considered include: increasing current employee pension contributions; and shifting employees to a mandatory defined contribution or hybrid plan.

With a statewide pension liability of $125 billion, New Jersey is facing competing reform proposals in the General Assembly. Both the Republican and Democratic plans generally follow Gov. Chris Christie's recommendations. Below are the highlights of the nearly identical plans:requiring all public employees to contribute 8.5% of pay to the fund;raising the retirement age to 65 for most workers;calculating benefits for most workers on a five-year average of their highest salaries, up from three years;rolling back a 9% pension increase approved in 2001 for current and future employees. The Democratic proposal, championed by Sen. Stephen Sweeney (left), seeks a greater rollback;shrinking the maximum benefit for police and fire department retirees to 65% of pay from 70%; andeliminating annual cost-of-living adjustments.

With a statewide pension liability of $129 billion, Gov. Rick Scott reportedly has called for changes including:shifting employees to a mandatory defined contribution or hybrid plan; andmaking employees contribute to the plan.

With a statewide pension liability of $148 billion, a Republican-sponsored bill in the Legislature includes the following reforms:reducing/freezing cost-of-living increases;increasing employee contributions; andincreasing vesting requirements or retirement ages.

Bloomberg

With a statewide pension fund liability of $453.9 billion, Gov. Jerry Brown has proposed pension reform that includes:halting pension spiking and abuse;creating a two-tiered system and renegotiating retirement benefits for new employees;stopping retroactive application of benefit enhancements;increasing all employee contributions; andprohibiting pension contribution “holidays.”

State, county and municipal pension plans should use fair-value accounting and change how they determine contributions, according to a Congressional Budget Office brief.

The CBO brief, “The Underfunding of State and Local Pension Plans,” suggests that actuarial guidelines be replaced with a fair-value approach that uses a discount rate based on future cash flows. Although the fair-value approach would increase overall estimated public plan unfunded liabilities from a currently estimate of $700 billion in unfunded liabilities in 2009 to $2 trillion to $3 trillion, the CBO found.

Fair value “provides a more complete and transparent measure” of pension obligations, but also more challenges, the CBO noted, including further strain on government budgets and shakier reporting. Still, it found that “on average, a much smaller increase in funding might turn out to be sufficient to cover pension plans' liabilities,” but did not offer further details.

The additional funding “is likely” to come from higher taxes, reduced services or higher contributions from future workers, which are all unpopular choices, the CBO noted. “But the longer they wait, the larger those shortfalls could become.”

The report said public plans average less than 80% funded status. Two other recently released reports on funding ratios shed further light on the issue. A National Conference on Public Employee Retirement Systems survey showed an average funding ratio of 75.7% as of Dec. 31, while the Pew Center on the States put the number at 78% as of June 30, 2009.

The CBO based its analysis on the Public Fund Survey of 126 state, county and municipal pension plans. That survey covers 85% of assets and participants in state and local plans, which in 2009 had roughly $2.6 trillion in assets and $3.3 trillion in liabilities.

The report comes amid congressional skirmishing over whether greater federal oversight of state and local pension plans is warranted. At a House Ways & Means Oversight Subcommittee hearing Thursday, Republicans questioned whether state and local plans needed stronger accounting rules, while Democratic panel members noted that most plans are addressing underfunding and do not need federal intervention.