The bankruptcy filing of Detroit and the nearly unprecedented triple-downgrade of Chicago’s general obligation debt by Moody’s Investors Service this summer have garnered national headlines, but the pension problems that were cited as major reasons for the moves exist in state and local governments across the country.
The Economist magazine in late July published “The Unsteady States of America,” which estimated states’ pension systems are underfunded by at least $2.7 trillion, or 17 percent of the nation’s total annual economic output. But that estimate may be too low. The Economist noted, “By the states’ own estimates, their pension pots are only 73% funded. That is bad enough, but nearly all states apply an optimistic discount rate to their obligations.… If a more sober one is applied, the true ratio is a terrifying 48%.”
It’s with these problems in mind that the American Legislative Exchange Council has come out with “Keeping the Promise: State Solutions for Government Pension Reform,” a 37-page report on how states and local governments can deal with these pension issues in ways that protect taxpayers and government employees. The author is Dan Liljenquist, a former Utah state senator who has toured most of the country addressing government pension reform. He served as chairman of Utah’s Retirement Committee and drove pension reforms there that put the state’s system on good financial footing.
“The title of the report is by design,” Liljenquist said. “The reform principle we need to lead with is workers did not cause the market collapse [in 2008] and the big underfunding problems. The number one goal should be to make sure we can meet commitments.
“But these defined benefit systems are unstable because of [overly optimistic estimated] rates of return. We cannot guarantee returns without significant deferred risk. We must treat the problem for what it is. It’s like a chemical spill. First we cap the spill and then we start cleanup.”
Cleanup, he said, begins with “making reasonable adjustments like ending pension spiking and double dipping and making cost-of-living adjustments contingent on the financial health” of the pension system where these moves are allowed.
But these moves may not be enough to avert insolvency, he said.
In his report, Liljenquist notes, “There is ample evidence to suggest that legislators should move from defined-benefit systems to properly designed alternatives, such as defined-contribution, cash-balance, or hybrid plans. Several states have moved in these directions, including Michigan (defined-contribution), Kansas (cash-balance) and Utah (hybrid).”
The report explains the features of the alternatives and their relative advantages and disadvantages. Importantly, it also suggests ways to craft a message that makes relatively esoteric concepts such as “discount rates” and “funding ratios” understandable to readers. And perhaps more importantly, the report shows how public employees have been persuaded to support pension reform in states where successful reforms have been enacted.
“Keeping the Promise: State Solutions for Government Pension Reform,” Dan Liljenquist, American Legislative Exchange Council: http://heartland.org/policy-documents/keeping-promise-state-solutions-government-pension-reform