FUTURE OF RETIREMENT SUMMIT
Widespread changes to retirement plans debated

WASHINGTON, DC – Aging workers and widespread changes to retirement plans challenge state and local governments.

Nationally recognized experts and practitioners gathered in Washington, DC, last week at the Future of Retirement Summit to examine how demographic, workforce, legal, financial, policy, and political challenges are changing local and state government retirement strategies.

The event was hosted by the Center for State and Local Government Excellence and moderated by Peter Harkness, founder and publisher emeritus of Governing magazine.

Center President and CEO Elizabeth Kellar opened the Summit on a cautiously optimistic note, pointing to the slowly brightening financial outlook for state and local governments as the economy recovers and stock market rises.

Kellar shared data from the Center’s annual survey of state and local government human resource professionals that measures workforce trends. The survey, which will be released next month, shows some improving conditions:

• Pay freezes still top the list of workforce changes, with 33 percent of governments reporting them in 2013 compared with 51 percent in 2012.
• Eighteen percent of respondents reported layoffs, down from 28 percent last year.
• Staff development is the top human resources issue this year.

She noted that 44 states have made significant changes in their pension plans between 2009 and 2012 and that governments in 2013 still report a high rate of change to retirement and health plan benefits: 44 percent of survey respondents said their government made changes to retirement benefits this year, most commonly increasing employee contributions.

Speakers reminded the audience that cutting retirement benefits is not costless and that pension plans must be carefully designed to provide retirement security.  And while the rate of retirements from local and state governments is growing, so, too, is the list of skilled positions that are difficult to fill.

“You have a situation where we’re coming out of a period of pay and hiring freezes and governments need to hire workers, especially those with specific skill sets,” said Center Vice President of Research Joshua Franzel. “Governments are continuing to compete for talent with an ever-recovering private sector. You’re seeing rebounding government finances that might position these governments to be able to hire more, but at the same time the [cost of] benefits are crowding out their ability to pay competitive wages.”

Alicia Munnell, director of the Center for Retirement Research at Boston College, emphasized that public pensions are not as bad off as many assert.

“You have to be so careful to point out the heterogeneity of the outcomes,” she said, “because there’s an array of differences in the funded status, how well they’re managed, and the nature of benefits. We do have a lot of plans that are fairly well funded now, but we also have a lot that are poorly funded and they are going to be in trouble almost no matter what happens.”

She said that her estimates for 2011 (the most recent figures available) show that, even with the effects of the financial crisis, public pension plans are 75 percent funded. She emphasized that pension costs in 2010 were only 4.6 percent of state and local government budgets.

Her outlook is optimistic overall. “I don’t think of it as an area where we’re going to see failure after failure after failure. If anything, I’m hopeful that we’re working our way through it.”

She agreed with moderator Peter Harkness when he concluded that, with a few exceptions, “the ill health of public pension plans is greatly exaggerated.”

Robert Clark, Zelnak professor at the Poole College of Management, North Carolina State University, reviewed overall trends in public retirement plans. Although defined benefit (DB) plans still predominate in the public sector, after decades of increasing benefits, they are now retrenching through modifications and redesigns.

“Clearly there’s a one-way direction in these last 15 years that is continuing today,” said Clark, “increasing retirement ages, increasing vesting, and a variety of other things that make these plans less generous.”

He said there is a fundamental question about whether DB plans are right for every employee. Many states are saying “no,” but he cautioned that such changes have larger ramifications both for governments’ ability to hire and retain skilled employees and for taxpayers.

“We all believe that these plans affect worker decisions – attracting, retaining, motivating, and ultimately retiring workers. We all believe that the costs affect our tax rates. How do we put those together and think about that in an integrated system?”

The upshot? “Individuals, public employees, are going to look at the future and say, ‘I’ve got to take more and more responsibility for my own retirement income. I’d better think about how I’m going to do that.’”

Munnell added that as more governments introduce defined contribution (DC) plans or DB/DC hybrid plans, they must use the lessons learned in the private sector. “The evidence is pretty clear at this point that people do not accumulate very much in these plans,” she said. “They make [investment] mistakes, they don’t join, and they take out their money when they change jobs.”

It is critical that such plans in the public sector be well designed, since many public sector workers do not have Social Security to fall back on.

Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees (AFSCME), suggested that the many public debates  can be a way to deflect public attention from the real issue: that a government may not have assets to cover its liabilities.

“It’s really about, how do we break promises to people?” he said. “A liability is nothing more than a promise. So when we reduce liabilities we’re talking about how can we break a promise? How can we do that legally under contract theory? And we rarely have discussions about the moral aspects of this. Because we don’t reach into people’s bank accounts and take money out. But for some reason it’s deemed acceptable to take people’s pension benefits — which they, in many cases in the public sector, paid for – at least paid for in part – but in all cases have earned by virtue of service.”

Louis Kosiba, executive director of the Illinois Municipal Retirement Fund (IMRF), pointed out that there are a number of factors that have led to IMRF’s 88 percent (market based) funded status:  an independent board of trustees, enforcement authority to collect employer contributions, a 7.5 percent investment assumption since 1992, and a sound actuarial approach. “We have a 100 percent funding goal,” he noted.

In a lively question and answer period, Robert Clark noted that workers with a short government career may leave with no retirement benefits other than their own contributions.  He added that there are unanswered questions about the decision many have made to raise the retirement age.  “If we raise the retirement age, they will stay.  Do we want that?”

Full video of the Summit and most of the PowerPoint presentations are posted on the Center’s website.

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For more information: Amy Mayers, amayers@slge.org, 202-682-6102

The reforms have included modifications to the eligibility requirements or benefit levels. In a few cases, state and local governments have turned to hybrid plan designs, which add a defined contribution (DC) plan while preserving a defined benefit element.

Although there has been no general trend toward shifting employees to a defined contribution plan as the primary retirement benefit, some states are beginning to look at defined contribution plans as a primary offering for certain employee groups.

How will DC plans affect retirement security?

There are questions, however, about how a shift to DC plans would affect retirement security, since they are based on individual investment returns that can fluctuate over time and do not produce a guaranteed return. As such, most experts believe they must meet a few conditions.

Some of these conditions, outlined in a recent report, “The Evolving Role of Defined Contribution Plans in the Public Sector,” include:

• making participation as simple as possible
• equipping employees with the proper tools, education, and counseling to enable them to assume greater responsibility for the financing of their retirement income
• bolstering retirement security with options for annuitization of benefits and periodic cost of living increases

For the employer, the conditions usually center around the issue of cost. An independent analysis is usually required to determine if closing a defined benefit plan and setting up a defined contribution plan will result in cost savings and, if so, when.

Montana and Florida consider DC plans

Two states are currently considering these issues as they seek to increase the role DC plans play in the retirement offerings for their public employees.

Some in the Montana legislature believe that the issue of whether to keep the state’s defined benefit plan intact or switch new hires to a defined contribution plan should be decided by state voters. A bill is currently making its way through the state legislature, which, if approved, would put a referendum on the state ballot in November 2014 that would ask voters to decide the issue. Significant debate is expected on this issue.

The Florida Senate has proposed SB 1392, a bill that would close the state’s defined benefit plan to new employees and enact a 401(k) plan for new hires. A similar bill was approved by its House last month and SB 1392 is now headed for a vote on the Senate floor. The respective bills do not enjoy unanimous support, with some lawmakers questioning the proposed savings that would result from closing the plan.

Defined contribution plans, while not approaching anything that could be described as a trend in pension reform, are gaining in popularity as other reforms increasing eligibility requirements, cutting benefits, and introducing hybrid (elements of defined benefit and defined contribution) plans have already been made. The cases in Montana and Florida will be important to watch as they could forecast similar scenarios in other states.

“Current fiscal conditions, along with changing demographics and employment structures,” she said, “are prompting many local governments to reexamine their retirement systems.”

Kellar said that a new challenge facing local government officials is to understand – and explain – what she called “dueling pension calculations.”

The Governmental Accounting Standards Board has issued new accounting standards that change the way governments calculate and report their pension liabilities.  Bond ratings agencies use another set of criteria to assess the impact of pension obligations on a municipality’s credit worthiness.

“But the most important pension number of all is what the government should budget each year to meet its pension obligations,” she said. ”That is what needs the most attention now.”

NACo and the national associations of state and local governments are part of the Pension Funding Task Force, which has issued a primer for elected officials on what they should address in their pension funding policy.

The coming year should see significant activity in several states as well.

The pension reform environment depends heavily on outside factors, including the source of the calls for reform.

• Whether the governor’s office and/or legislature initiate a reforms package influences the negotiations, especially if the two sides don’t agree.
• Non-governmental groups often are invited to participate in the reform process and collaborate on a negotiated outcome.
• The legal history of pension reform in the state is another factor, since previous legal rulings can have significant impact on what reform measures government actors can negotiate.

Oregon

In Oregon, Governor John Kitzhaber has proposed cutting benefits for current workers and retirees. The governor’s proposal would impose a limit on annual cost-of-living increases to 2 percent per year on the first $24,000 in benefits. This could be a challenge, given that in 2003 the state attempted unsuccessfully to suspend the automatic COLA temporarily as part of a prior reforms package. The suspension was challenged and struck down, the ruling stating that the COLA was part of a contractual obligation to employees.

Montana

Montana Governor Steve Bullock and the state legislature are in general agreement on the need to reform the state’s pension system, but they differ on approach. Legislative leaders indicate that they prefer a change in plan design for new employees, while the governor hopes to remedy the issue by requiring employees to make greater contributions to fund benefits.

Nebraska

Two bills introduced by a Nebraska state senator would make permanent a temporary increase in contributions for teachers and would cap cost-of-living adjustments for teachers who join the system after a future date. The bills were the result of negotiations between the legislature and state education groups that are attempting to alleviate the pressures caused by a gap of more than $100 million in state pension funding.

Addressing plan design, modifying postretirement benefit increases, and requiring more contributions are just three of the methods used by states to reform their pension systems. Each state’s situation is distinctive and, given the history of reform and potential legal challenges or precedents, each state faces unique challenges this legislative session.

Program Moderator: Peter Harkness, Founder and Publisher Emeritus, Governing magazine

Welcome and Introduction: Elizabeth Kellar, President & CEO, Center for State and Local Government Excellence [download pdf of presentation]

Session 1: Public Sector Retirement Plans: The Real Story

• Alicia Munnell, Director, Center for Retirement Research, Boston College; author of the new book, State and Local Pensions, What Now? [download pdf of presentation]
  
• Robert Clark, Zelnak Professor, Poole College of Management at North Carolina State University [download pdf of presentation]

Session 2: Pension Plan Health: What Accounts for the Differences?

• Keith Brainard, Research Director, National Association of State Retirement Administrators [download pdf of presentation]
• Louis Kosiba, Executive Director, Illinois Municipal Retirement Fund [download pdf of presentation]
• Steven Kreisberg, Director of Collective Bargaining, American Federation of State, County and Municipal Employees (AFSCME)
• Maryann Motza, Administrator, Colorado State Social Security; Vice Chair, Colorado PERA [download pdf of presentation]

Session 3: Who’s on First? Adapting to Growing Retirements and a Smaller Workforce

• Joshua Franzel, Vice President of Research, Center for State and Local Government Excellence [download pdf of presentation]
• Nancy LeaMond, Executive Vice President, AARP State and National Group
• Joseph Adler, Director, Office of Human Resources, Montgomery County, MD [download pdf of presentation]
• Kelly Logan, Secretary, Pennsylvania Office of Administration; President, National Association of State Chief Administrators [download pdf of presentation]

Download the program

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Think long term, urged Center President & CEO Elizabeth Kellar, speaking on a panel at the National League of Cities Congress of Cities in Boston this month. “When change is needed,” she said, “communication is essential.  Keep employees and the public fully informed.”

Kellar added that long-term financial modeling to analyze pension benefits is important, along with annual briefings by the plan sponsor and actuary and training for elected officials and trustees.

Moderator Kathie Novak from the Center for Priority Based Budgeting noted that elected officials should not be afraid to ask questions. Councilmember Pete Constant of San Jose, CA, agreed, noting that he had raised tough questions about the need to revamp San Jose’s pension plan for years.  San Jose voters passed a referendum this fall to reduce benefit levels, which still faces legal challenges.
Kellar stressed that the situation varies across the country so solutions need to be tailored to each locality.  “Plans that are well funded have consistently funded the annual required contribution, have appropriate full-retirement ages, and are realistic about investment assumptions,” she said.

When local governments make changes to their benefits, they need to focus on what is important to current and future employees, she added.  “Flexibility is the key to the future, including giving employees more ways to save for retirement.”

State and local workforce is aging

It is important to note some key attributes among the state and local sectors. An analysis of Current Population Survey data shows that the state and local workforce as a whole is aging:

• In 1992, the median ages of the state and local workforces were 40 and 41 years of age, respectively. This was at a time when their wage/salary private sector peers had a median age of 35.
• Today the state and local workforces have a median age of 44/45 in 2012, relative to 40 in the wage/salary private sector.
• Of particular note, in 1992 about a quarter of all state and local workers were 50 or older. As of 2012, 37 percent now fit in this age group.

Educated and becoming more so

State and local government employees have been quite educated and have become even more so over the past 20 years. Current Population Survey data show that in 2012:

• One in five state and local workers have achieved a high school education. About a third of the wage/salary private sector has this level of education.
• Twenty-eight percent of state workers have a bachelor’s degree and 29 percent have a masters, professional, or doctorate degree.
• A quarter of local government employees have a bachelor’s degree and roughly another quarter of these employees have higher levels of education.
• Among wage/salary private sector workers, 20 percent have a bachelor’s degree and 9 percent of these workers have attained higher levels of education.

These higher levels of education in the state and local sector make sense given the type of work governments do: much of it is knowledge-based and requires advanced education or training, both before and during employment.

Freezes begin to thaw

The Center for State and Local Government Excellence, along with the National Association of State Personnel Executives and International Public Management Association for Human Resources, has been tracking, through a series of surveys, changes in personnel policies state and local governments have made since the end of the great recession.

In 2012, half of the respondents reported that their governments had imposed pay freezes over the past year, 42 percent had imposed hiring freezes, and 29 percent made layoffs (“State and Local Government Workforce: 2012 Trends”).

The silver lining, if you want to call it that, is that these numbers have been improving since the end of the recession and match with Bureau of Labor Statistics figures that show state and local layoff and discharges rates decreasing from their 2009 peak .

Center surveys point to an uptick in the number of retirement–eligible employees actually retiring. This is a trend worth watching given the age demographics of the workforce overall.

These surveys also ask about what positions governments continue to have a hard time filling, even in the current economic climate. The list has gotten longer over the past few years, populated by many knowledge-based positions that require advanced training — engineers, epidemiologists, IT professionals, physicians, nurses, skilled trades, and many others. This is in an environment of 7.7 percent overall unemployment, with unemployment rates less than half that for those with a bachelors degree or higher.

Given the approaches state and local governments have taken in response to the Great Recession –  regional and inter-local cooperation on service provision, public-private partnerships, etc. — and given relatively flat government revenues, it will be some time until their employment levels return to their 2008 peak. That said, governments have difficult choices to make as to how they will offer competitive compensation and benefit packages that will attract and retain personnel with key skill sets, while also ensuring that these packages are fiscally sustainable.

Decisions made by state governments on retirement age, benefit levels, and how pensions are calculated can be difficult to change, even when a local government has an independent pension plan.

Three speakers at the ICMA (International City/County Management Association) Annual Conference last month described a decade of challenges in California, Florida, and Michigan, and how local governments are coping.

“Waking up is hard to do,” said Palo Alto, CA, City Manager James Keene, describing the perfect storm of shrinking revenues, growing service costs, and rising pension and health care costs.

Beginning in 2008, Palo Alto created a new tier of benefits, increasing the retirement age and reducing benefit levels for all employee groups.

Such changes create generational equity issues, Keene said, and with fewer active workers than retirees, the future consequences are significant.

Port Orange, FL, City Manager Kenneth Parker noted that elected officials are facing increased pressure to move from defined benefit to defined contribution plans in order to control employer costs.  He said that some local governments are freezing benefits for current employees with no more accruals and providing different benefits to new employees.  He added that share plans, offering a defined benefit plan with a defined contribution component, are another alternative.

Parker offered recommendations for local governments:

• Use long-term financial modeling to analyze pension benefits.
• Inform elected officials on the impact of pensions on the budget.
• Hire an independent actuary and pension attorney to advise them.
• Require actuaries and plan administrators to report directly to the city council annually and to provide information on past performance since inception.
• Provide training opportunities for board members and elected officials.
• Recognize that pension boards can be reluctant to recommend changes.
• Keep the public informed and provide actuarial reports and statements online.

He also noted that plan sponsors should question assumptions, rather than relying on the plan actuary and plan investment advisors.

Michigan Municipal League Policy Development Director Colleen Layton said that Michigan is one of nine states that has a constitutional guarantee that a pension benefit that has been promised and accrued cannot be eliminated or diminished.  The state has 138 state and local government pension systems; 15 percent of Michigan workers are public sector (federal, state, or local government) and 84 percent of state and local workers have defined benefit pension plans.

Layton said that the state government has tied its economic vitality incentive program to caps on employer contribution to retirement plans for new hires.  That cap is 10 percent of base salary if the employee is eligible for Social Security.

She noted that Michigan political leaders have shown a growing interest in switching government employees from defined benefit to defined contribution plans.  At the same time, Layton observed that leaders often recognize that one solution will not work for all.  Successful labor relations take years to build trust and good public communication is essential whenever pension reforms are undertaken.

THE EVOLVING ROLE OF DEFINED CONTRIBUTION PLANS IN THE PUBLIC SECTOR
New ANC, NAGDCA, and Center for Excellence Report

WASHINGTON, DC, 10/16/12 — The Arthur N. Caple Foundation (ANC) and National Association of Government Defined Contribution Administrators (NAGDCA) partnered with the Center for State and Local Government Excellence (SLGE) to review the current and future role of defined contribution plans for state and local government employees and the governments that provide the retirement benefit.

The report, “The Evolving Role of Defined Contribution Plans in the Public Sector,” aims to answer important and timely questions:

• What does the current public sector retirement plan environment look like?
• What does the future hold for defined contribution plans?
• What are effective defined contribution designs?
• What role can annuities and other guaranteed retirement income features play?
• How are financial literacy and counseling initiatives and defined contribution plans linked?
• How can structural change, if adopted by a government, be implemented to minimize costs, risks, and help employees assume more personal responsibility?
• What should be considered when assessing and potentially altering the role of defined contribution plans?

Read the full report.

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About the Center for State and Local Government Excellence

The Center for State and Local Government Excellence helps state and local governments become knowledgeable and competitive employers so they can attract and retain a talented and committed workforce. The Center identifies best practices and conducts research on competitive employment practices, workforce development, pensions, retiree health security, and financial planning. The Center also brings state and local leaders together with respected researchers and features the latest demographic data on the aging workforce, research studies, and news on health care, recruitment, and succession planning on its website, www.slge.org.

About the ANC Foundation

The Arthur C. Caple Foundation was formed to advance knowledge in the field of public sector retirement security. The Foundation, established in 2006 as a supporting organization of the National Association of Government Defined Contribution Administrators (NAGDCA), supports both individual educational opportunities and research to expand knowledge related to the importance of retirement readiness. To accomplish its mission, the Foundation operates under the following principles: Retirement Education – The Foundation is to provide higher education students with funding to study financial or retirement planning and to create opportunities for the students to participate in related learning opportunities. Research and Information Exchange – The Foundation supports research, information sharing, and collaborative endeavors that further retirement readiness and expand knowledge of retirement issues and solutions. www.caplefoundation.org

About NAGDCA

NAGDCA’s mission is to unite representatives from state and local governments that service and support defined contribution plans. NAGDCA provides an environment to foster growth in professional development of its members through networking with peers, educational opportunities, and information sharing that includes comprehensive publications, reports, and surveys. NAGDCA will promote and support federal legislative initiatives for the advancement of retirement plans. www.nagdca.org

For information contact: Amy Mayers, 202-682-6102, amayers@slge.org

Why have the national associations of state and local governments established a pension funding task force?  In a nutshell, it is because the Governmental Accounting Standards Board (GASB) has issued new pension accounting standards without any guidance on how governments should calculate the annual required contribution to fund them.

Since state and local officials make annual budget decisions, they need a rational way to determine how much the employer needs to pay each year to cover current employee pension costs as well as an appropriate portion of any unfunded pension liability.  Having a rational method to calculate and report the annual required contribution (ARC) ensures that policymakers, employees, and the public can assess how well funded their government’s pension plans are.

Task force members include the “Big 7” (National Governors Association, National Conference of State Legislatures, Council of State Governments, National Association of Counties, National League of Cities, U.S. Conference of Mayors, and the International City/County Management Association); National Association of State Auditors, Comptrollers and Treasurers; Government Finance Officers Association; National Association of State Retirement Administrators; and National Council on Teacher Retirement.  The Center for State and Local Government Excellence convenes the pension task force meetings.

The new pension funding guidelines build on work done by the actuarial community.  The consensus of the task force is that governments should adopt a formal pension funding policy that addresses these five policy objectives:

1. Ensure that pension funding plans are based on actuarially determined contributions
2. Establish funding discipline to ensure that promised benefits can be paid
3. Maintain intergenerational equity
4. Make employer costs a consistent percentage of payroll
5. Require clear reporting to show how and when pension plans will be fully funded.

Public pension plan sponsors and representatives from the finance and actuarial community have participated in early task force discussions. The task force expects to report its recommendations soon.

For more information, read Pension Funding Background and GASB’s new accounting standards.