Pace of pension reform ebbs after 49 states change laws

As the flood of reform efforts aimed at public pension funds becomes a trickle, the main concern is whether the newfound fiscal discipline will hold.

While the sense of urgency has diminished, reform attempts have become a legislative staple, as public retirement systems continue to grapple with unfunded liabilities and political pressure to change.

The financial crisis and its aftermath sparked some kind of pension reform in every state except Idaho. Now “it appears to be the slowest pace of reforms since 2008,” said Keith Brainard, Georgetown, Texas-based research director of the National Association of State Retirement Administrators. In a study of 32 plans in 15 states representing 65% of participants in its public plans database, the Center for Retirement Research at Boston College found most already have taken steps to reduce future pension costs by some combination of increasing employee contributions, raising age and tenure requirements, trimming salary calculation formulas used to set pension levels and shrinking or stopping cost-of-living increases.

Surprisingly, while reform debates were often seen as taking a page from the private sector and moving away from defined benefit plans, research due later this spring from the center will show less activity than expected. CRR researchers found that just 15% of public plan sponsors introduced some form of defined contribution plan after 2008, compared with 20% pre-crisis.

A key distinction of the post-recession approaches to DC plans is their mandatory nature, unlike earlier moves that gave employees the option of having a DC plan. Six states — Georgia, Michigan, Rhode Island, Utah, Tennessee and Virginia — shifted to a mandatory hybrid plan since 2008, while Kentucky and Kansas went the cash balance plan route. Louisiana tried to mandate DC participation but was blocked by the courts after participants sued. Only Michigan and Alaska require new hires to participate solely in a defined contribution plan.

Many of the reforms to date have focused on newly hired workers. Those savings will take longer to realize, “but in the long run these cuts are going to get the costs below what they were before the recession,” said Alicia Munnell, director of the retirement research center. “That does take care of the criticism that they can't afford DB.”

In terms of reform attempts, the National Conference of State Legislatures found 29 states saw 166 pension bills introduced in 2014 alone, many of which addressed minor changes or proved too controversial to survive. One of the most high-profile reform bids came from Chuck Reed, the mayor of San Jose, Calif., who sought a voter referendum to allow local governments to renegotiate pension benefits for public employees. That bid was defeated in court last month.

Alive in just a few states

With many state legislative bodies already adjourned for the year, major pension reform is alive for now in just a few states: Lawmakers in Florida and Oklahoma are considering a shift to DC plans only for newly hired workers; in Pennsylvania, Gov. Rick Corbett is pushing the idea of a hybrid plan.

But the political prospects in all three states are far from certain.

One big reason things have gotten quieter is the improving economy.

Wilshire Consulting, a unit of Wilshire Associates Inc., Santa Monica, Calif., found the aggregate funding ratio of 134 state defined benefit plans reached 75% in the fiscal year ended June 30, thanks largely to strong global equity markets that saw pension fund assets growing faster than liabilities.

The U.S. Census Bureau found that the 100 largest public pension funds reached their highest combined asset levels in 2013 since its first survey in 1968. Assets reached $3.192 trillion last year, a 12.5% increase from 2012.

For many public pension plans, investment losses since 2008 are just making their last appearance on balance sheets, but recent investment gains haven't been booked yet. Reforms passed in recent years should be given time to work before judging plans' ongoing health, say public pension experts.

While some of the most recent reform efforts were driven by ideology, in other cases “it has been an effort to simply not pay for years of underfunding” or to avoid other spending cuts, said Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees, Washington.

“We are seeing a few governors going back to the well out of political desperation. Beyond that, there's not much new or different.”

Jordan Marks, executive director of the National Public Pension Coalition in Washington, whose members include public-sector unions, said: “There's no question that we are seeing public pension funds on the mend, but we'd be doing a lot better if politicians made their payments.”

David Draine, senior researcher with Pew Charitable Trust's Public Sector Retirement Systems Project, Washington, said he's seen recent improvement, with some legislatures passing laws or even amending state constitutions to ensure pension payments are made, regardless of who is in office.

Commitment

“What you're seeing is a commitment by policymakers to good pension funding practices. There's no single thing that will absolutely guarantee fiscal discipline, but policymakers are understanding that they need to pay pension bills,” said Mr. Draine.

“We need to be serious about funding these plans,” agreed Ms. Munnell. “You can either pay it off in a systematic fashion, or not, but these amounts are going to be paid.”

One new wrinkle in 2014 that could dampen recent improvements is Governmental Accounting Standards Board rules that will, for the first time, add another number to the political equation: net pension liability. Until now, public pension fund executives focused on their actuarially required contribution when setting annual pension funding targets.

Adding a system's total unfunded liability, instead of just the current amount due, to its financial reports will make an underfunded plan look worse, and even a relatively well-funded one look less so. “I worry about losing the ARC,” said Ms. Munnell. “After the new GASB kicks in, it will just be harder to judge whether sponsors are doing a good job.”

Dana Bilyeu, Salt Lake City-based executive director of the National Association of State Retirement Administrators, is optimistic. “Change is inevitable because we live in a different world today since 2008. But the basic pillars of plan design — mandatory participation, shared financing, benefit adequacy, pooled investment and longevity risks, and lifetime benefit payouts — have not changed,” she said.