Public Pension Funding And Reform— Or Lack Thereof — When We’re Not ‘All In This Together’
Regular readers will know the story by now: the governors and legislators in charge of worst-of-the-worst underfunded public pension plans — Illinois, Kentucky, New Jersey, and Connecticut, each with a funded status hovering around 40% — face a likelihood of funding levels worsening even more as they make their way through the corona-recession.
In one respect, the pension funding situation is not as bleak as it might have been: when the U.S. stock market crashed in March following the realization that we would not be spared in the coronavirus pandemic, the funded status of the nation’s public pensions plans crashed — or, at any rate, dropped considerably — along with it. According to Milliman’s Public Pension Funding Index (PPFI), funded ratios dropped from 74.9% down to 66% from year-end 2019 to March 31, 2020. As it turned out, of course, the stock market recovered — for now, at least — and the PPFI stands at 71.2%, the same level as it was on March 31, 2019.
But the stock market is only part of the picture. Illinois’ revenue projections as of May 20 project a 12% tax revenue drop. Their response? Not budget cuts, certainly not a willingness to reconsider pension reform — only borrowing and the hope for federal cash. New Jersey — anticipated revenue drop 18% — has indeed cut spending, and is also deferring indefinitely its scheduled pension contributions. Connecticut, which predicted an 11% revenue drop on April 30, is likewise business-as-usual, except without embarrassing its residents by making an unseemly bailout request. And none of these states’ leaders have found it even worth discussing, to talk about pension reform. (See the National Conference of State Legislatures for revenue projections and state actions, as well as my July article on the topic.)
Which brings me to a webinar last week sponsored by NIRS, the National Institute on Retirement Security, to revisit some of their take-aways from a 2011 report on the Great Recession, “Lessons from Well-Funded Public Pensions: An Analysis of Six Plans that Weathered the Financial Storm.” In that report, they profiled six comparatively well-funded pension plans; in the webinar, they brought together experts from three of those plans, the statewide retirement systems for New York, Idaho, and Wisconsin.
Some of the characteristics of these plans are straightforward. For instance, they are more likely to have a small COLA, or at the discretion of the legislature, rather than Illinois’ guaranteed 3% compounded COLA. They also consistently make the Actuarially Determined Contribution, year after year — which means, of course, that there is no need for more burdensome catch-up contributions later on. (For example, one of the plans profiled in the original report, the Illinois Municipal Retirement Fund, is well-funded because the state compels municipalities to make their required contributions.)
But there’s another key, as identified by Bob Conlin, representing the 99% Wisconsin Retirement System, and that’s culture. Recall that the Wisconsin system involves risk-sharing: each year’s employee contribution (not just employer contribution) varies based on the requirements due to the funded status/funding method, and retirees’ benefits are adjusted up or down based on investment returns. And here are Conlin’s comments (my transcription based on the audio recording), after some preliminary words on the importance of educating participants on how their benefits work, and being asked, “Do you attribute a part of your success to a healthy culture?”
“The shared risk system . . . has been fully engrained where taxpayers and employees and retirees are kind of all in this together, and that kind of goes with the communication aspect of it, but it’s been a cultural phenomenon. It’s a little bit different than a lot of public plans, and I think over the years we have been communicating more about that, and it has kind of created a, I think, a Wisconsin ethos around our public pension system that folks are touting. They like it, they understand there’s risk with it, that retirees could actually see their pensions go down a bit, yet they’re still supportive of that because in good times, they also share in that as well, so it is a cultural thing.
“People often ask, ‘so can’t we import the Wisconsin model into our systems?’ And I — well, there are certain things you can do, there is a cultural component to it I think that takes some breeding and some cultivation to develop over time.”
Now, observing Wisconsin from across the border, there certainly appears to be more of a sense of solidarity and common culture among Wisconsinites than in Illinois. Cheese, beer, the corner tavern, the Packers, a label for Illinoisans coming north which, if written out, couldn’t be printed in a family paper. Kenosha was the subject of a “parachute-journalism” style article at Harper’s Magazine, which tried to find blue-collar union activism but missed Kenosha’s car culture, typified by the summer car shows (well, cancelled this summer). Perhaps that’s missing serious divisions not apparent to the outsider, but that raises the question of whether a state like Illinois with its long legacy of corruption, of unions and machine politicians in it for themselves, and, quite honestly, without any “glue” that holds it together, is simply incapable of implementing a retirement system that requires an “all in this together” attitude.
How do you get from here to there? So far, Illinois hasn’t figured that out, and its leaders (who are busily promoting a constitutional amendment enabling a graduated income tax, by labelling it a “fair tax” and claiming only the very rich will be affected) don’t really seem to have recognized how important this is in the first place.
As always, you’re invited to comment at JaneTheActuary.com!