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.