Preventing Public Pension Pitfalls

Struggling from years of insufficient contributions, combined with longer-living retiree populations, many states face mounting public pension liabilities without sufficient assets to cover them. But states aren’t sitting idly by. Public pension reform has been a major topic of conversation in statehouses across the country, and was the focus of the CSG Public Pensions and Retirement Security policy academy Dec. 10.

While some states have not yet resolved their public pension problems, Keith Brainard of the National Association of State Retirement Administrators said that the pension outlook for most states is improving—in part due to recent pension reforms.

In Kansas, enhancements to the states’ public pension benefits during the 1990s—with no accompanying increase to employee contributions—combined with a 30 percent drop in the value of the pension trust fund investments during the Great Recession, resulted in a troublesome 60 percent asset-to-liability ratio for the system.

“We were way out of balance,” said Kansas state Rep. Steven Johnson.

To fix the system, the state increased both employer and employee contributions to the system, made changes to its investments, and sold $1 billion in bonds in 2015.

For Tennessee policymakers, the key to ensuring the state retirement system was looking ahead. According to Tennessee state Sen. Randy McNally, the state adopted a hybrid defined-benefit/defined-contribution plan. New employees are required to contribute 5 percent to the defined benefit pension and have the option to contribute up to 20 percent of their salary to a 401k plan.

The state also has a pay-as-you-go system, adopted in the 1970s, which McNally said has allowed the state to realize a 93 percent funded pension program. “The ability to maintain that over the years … is one of the sacred cows we’ve left alone.”

Robert Klausner, an attorney who focuses on pension litigation, said the issue for state pensions is rather simple. “The retirement systems that have the biggest problems are the ones that didn’t put enough money in them,” he said.

Klausner warned that states that fail to adequately fund their pension systems may face even bigger costs down the road as a result of litigation.

“If everyone thinks that it’s expensive to put in the money, it’s even more expensive to pay as you go.”

What’s more, said Klausner, when governments fail to fund their retirement programs or make significant cuts to retirement benefits, employees quit—leaving states without the workers needed to provide crucial services. When Palm Beach, Fla.—one of the wealthiest communities in the nation—decided to cut its retirement benefits by two-thirds, 40 percent of the community’s public workers left within the first year.

Leon Joyner, vice president and actuary of Segal Consulting, said the solution for states isn’t a one-size-fits-all defined-benefit or defined-contribution plan. “It’s not one or the other,” he said. “It’s about balance.”

But, he said, there are a couple of key rules that can help state policymakers make fiscally sustainable and responsible decisions with the retirement systems they manage. Firstly, make sure the funding is there to pay for liabilities. “Pay your dad-burned contribution,” he said. The second rule is to keep an eye on the long term, and be ready to change as needed. Following these rules will help state governments avoid the pension pitfalls of the past, and the public scrutiny that goes along with them.

“Fiscal responsibility doesn’t make the newspapers,” said Joyner.