Pension Hotspots: State Check-up
By Josh Altic
The Pension Hotspots Report is a monthly publication about local pension reform efforts.
No new efforts to initiate local pension reform measures have begun in August. This month's edition of the Hotspots report focuses on recent developments surrounding the measures that are in process currently. It also investigates the condition of California pension systems, both in cities and on a state-wide scale, in light of this year's revision in the methods of calculating pension system liabilities and funding.
New standards for calculating pension liabilities reveal $328.6 billion in promises not backed up by the assets of government agencies throughout California:
Many are celebrating in California as the state reports a surplus of over $1 billion only three years after a $60 billion deficit. But, according to a report by State Budget Solution (SBS) utilizing new rules for calculating pension liabilities, local governments and the state as a whole are in much worse shape than they are letting on.
Moody's has proposed that many debts and liabilities, especially those surrounding public pension and health care systems, have been covered up and under-reported by the city governments due to artificially high rates assumed for investment returns, usually set at 7.5%. The Governmental Accounting Standards Board (GASB), along with Moody's, has established new rules to measure the liabilities of a city that account for realistic returns, which are as much as 2% lower than the rate assumed by government agencies. According to a report released by the California Public Policy Center, when these new rules are applied to local and state government pension plans, they yield an estimated $328.6 billion gap between assets and payment promises. This is more than double the official estimate of $128.3 billion in unfunded liabilities.
Based on this new data, Moody's has already put 30 California cities under review for potential credit downgrades.
|2013 Pension Measure Count|
|Number proposed:|| |
|Coming up:|| |
|Decided measures:|| |
|Number approved:|| |
|Number defeated:|| |
Cities currently being investigated:
- Santa Monica
- Huntington Beach
- Long Beach
- Los Gatos
- Rancho Mirage
- Redondo Beach
- San Leandro
- Santa Ana
- Santa Barbara
- Santa Clara
- Santa Maria
- Santa Rosa
Several cities, including several being investigated by Moody's, are reportedly in danger of severe credit and financial risks largely due to the rising public employee retirement costs. The new criteria for analyzing pension plans, provided by Moody's and the GASB, have revealed a significant discrepancy between city reported numbers for retirement plans and the figures that represent real market value and actual investment performance. The new figures show that the pension plans of San Francisco, Inglewood, Azuza and Stockton, which were previously considered to be 80% funded or better, have dropped into the low 70s and high 60s. Under the new rules, Los Angeles has only 50% of its pension liabilities backed by assets. Below is a chart showing several examples of the city's estimates for their pension system liabilities and funding.
Numbers from the city:
|Pension fund conditions of California cities according to the cities:|
|City:||Liabilities:||Unfunded liabilities:||Percent funded:|
The chart below shows estimates from State Budget Solution on the liabilities and funding of the same cities. In many cases the new rules provide estimates of unfunded liabilities that more than double those reported by the cities themselves.
Numbers from SBS:
|Pension conditions of California cities according to new calculation methods:|
|City:||Liabilities:||Unfunded liabilities:||Percent funded:|
Pension reform court cases
Tucson pension initiative loses thousands of signatures in lawsuit over circulators:
The lawsuit brought against the petitioners behind the new Tucson pension reform initiative resulted in approximately 5,000 signatures being removed and the reassessing of signature validity by the city and county clerks. Despite this ruling from the Pima County Superior Court, supporters expect plenty of valid signatures to be left over to ensure the initiative a place on the ballot.
On July 22, Phoenix-based attorney Roopali H. Desai, representing two city employees, filed a lawsuit in an attempt to get Proposition 201 thrown off of the November ballot. The lawsuit alleges that over ten thousand signatures used to validate the initiative petition should be removed because they were collected by people either with felonies who had not had their civil rights restored or by out-of-state circulators. Lawyers from both sides of the debate argued over where the burden of proof belonged. Desai argued that the Committee for Sustainable Retirement Benefits had to prove that all of those circulating signature petitions were qualified to do so. But Lisa Hauser, an attorney on the side of the initiative, asserted that the burden of proof lay on the accusers to show evidence of invalid signature collection.
On August 16, Pima County Superior Court Judge James Marner threw out about 5,000 initiative petition signatures because they were collected by felons with unrestored rights and registration errors. Marner sent the rest of the signatures back to the city and county elections offices for re-validation. The lawsuit originally sought to have over 10,000 signatures thrown out, but the court found allegations against several circulators to be unsubstantiated. The initiative gained an estimated 17,668 valid signatures, when it needed only 12,730. Supporters estimate that there will be enough valid signatures left over after Judge Marner's ruling to keep the measure on the November ballot. The deadline to complete the new random sample was August 23.
Hauser had this to say about the lawsuit: “It appears that the number of signatures disqualified by the court will fall short of what the plaintiffs needed to remove the initiative from the ballot — even if a new random sample is conducted. We are pleased that most of (the) plaintiffs’ allegations about unqualified circulators were rejected by the court. Even so, it also appears that some of the findings made against the committee were erroneous and that the number of disqualified signatures should be much lower.”
A sudden increase in investment returns gives pension plans room to breathe: Analysts urge that this is not time for celebration but a chance to implement long term reform:
As pension funds across the nation are seeing much higher than usual investment returns, some of the immediate concern over the pension plans are being alleviated. However, financial analysts warn that this should not cause legislators to drop their guard when it comes to reform. According to Wilshire Associates, a majority of funds saw double digit returns in the 12 months preceding June 2013, with the median at 12.4%. But in the last quarter the rate dropped down to 0.24%. Keith Brainard of the National Association of State Retirement Administrators says this is a chance for public funds to look for the still much needed long term reform instead of struggling to make ends meet each year. "It is a marathon, not a sprint. I do not think any one-year returns are likely to affect the thinking about pension reforms, but we have seen very strong returns since the low point of the equity market in 2009 and it is encouraging," said Brainard.
John A. Sugden, the primary analyst in a new credit rating report from Standard & Poor's said, "Good returns are a positive development." But Sugden urged caution as reforms curbing benefits and increasing employee contributions are still necessary and take a long time to produce results. Rachel Barkely, a municipal credit analyst at Morningstar, proposed that the new GASB accounting system and the stock market "are the two key factors that will drive the pension conversation for governments over the next few years." Barkley, pointing to concerns over how possible changes in Federal Reserve policy could change market performance, said, "there is a lot of uncertainty on whether and how financial markets will keep delivering good results."
List of 2013 local pension measures
A state-wide view:
Currently, Illinois and California are featured as the two states with the worst credit ratings, according to Standard and Poor's; Illinois has the lowest and California the second lowest in the nation. As unfunded pension and health care liabilities loom over these two states, some state-wide efforts to push the states toward solvency have been initiated. These credit rating failures are closely linked to the massive unfunded retirement pension and health care liabilities found in both states.
California pension: Under Moody's new rules and estimated investment performance rates, California's unfunded pension liabilities are estimated at $328.6 billion instead of the official estimate of $128.3 billion. Governor Jerry Brown, in an attempt to prevent further ballooning of pension debt, pushed through legislation last year that, effective January 1 of this year, lifts the retirement age and lowers pension benefits for new hires. This legislation is currently being contested by several labor groups and unions whose members were affected by the reforms.
Illinois pension: Moody's new criteria affect Illinois pension fund estimates, as well. The official 2012 estimate of unfunded pension liabilities when using an investment return rate of 8% - which is even more generous than the rate used in official California estimates - is about $97 billion. The Illinois Policy Institute, using the actuarial market rate used by Moody's - 4.13% - estimates that Illinois’ unfunded liabilities in fact exceed $200 billion. Although there is no final plan yet for closing the gap between payment promises and assets, the legislative panel charged with reforming pensions discussed a plan on August 23 that would reduce employee contributions and tie cost of living adjustments to real market inflation. It was estimated that this plan could save the state $145.6 billion by 2045 and reduce the unfunded liabilities of the state by $18.1 billion.
- Pew Charitable Trust, "Cities Squeezed by Pension and Retiree Healthcare Shortfalls," March, 2013
- Pew Charitable Trust, "A Widening Gap," January, 2013
- Moody's website
- Standard and Poor's credit ratings website
- Governmental Accounting Standards Board website
- State Budget Solution webpage
- California Public Policy Center, "How Lower Earnings Will Impact California’s Total Unfunded Pension Liability," February 18, 2013
- Fox Business, "California on the Brink: Pension Crisis About to Get Worse," June 12, 2013
- Arizona Daily Star, "City of Tucson's pension initiative loses thousands of signatures," August 20, 2013
- Tucson Weekly, "Pension Initiative Facing Legal Challenge," July 24, 2013
- Arizona Daily Star, "Signatures are focus in Tucson city pension suit," August 3, 2013
- CNBC, "Rising returns give US public pension funds chance to reform," August 22, 2013
- Wilshire Associates Second Quarter 2013 investment returns report
- Los Angeles Times, "Public-employee unions push back with lawsuits over pension cuts," March 8, 2013
- PJ Media, "Moody’s: True Unfunded Liability in Illinois Pension Fund is 65% higher than the State Says," June 29, 2013