As we’ve said before, employees always pay their full required contribution. Likewise, it is vital that municipalities make what actuaries say is needed to meet annual obligations, known as the ARC.
The Public Fund Survey Summary of Findings shows the effects of declining ARC effort during and after the Great Recession. While subsequent alterations to plans have increased some employees and employer contributions,
Implementing higher contributions, from employees and employers, takes time, as the effect of changes, such as investment losses, must first be measured through an actuarial valuation; then a legislature or other governing body must approve new contribution rates. This cycle, from actuarial event to implementation of higher contribution rates, can take several years.
We believe that, while in some cases extremely painful in the short-term, improved annual funding is key to the long-term sustainability of these pension plans and that full ARC funding should lower unfunded liabilities in the long-term, provided various actuarial assumptions are met.
The significance of funding is the one thing nearly everyone can agree on. Consider three quotes from a recent Pensions & Investments article:
‘There’s no question that we are seeing public pension funds on the mend, but we’d be doing a lot better if politicians made their payments.’ Jordan Marks, executive director of the National Public Pension Coalition
‘What you’re seeing is a commitment by policymakers to good pension funding practices. There’s no single thing that will absolutely guarantee fiscal discipline, but policymakers are understanding that they need to pay pension bills.’ David Draine, senior researcher with Pew Charitable Trust’s Public Sector Retirement Systems Project
‘We need to be serious about funding these plans. You can either pay it off in a systematic fashion, or not, but these amounts are going to be paid.’ Alicia Munnell, director of the Center for Retirement Research at Boston College
How do you get lawmakers to pay the ARC?
Calling for government action is easier said than done. At a 1978 panel discussion with the Society of Actuaries discussing the funding of public plans, Mr. E. Allen Arnold, explains:
An actuary has two kinds of problems: Actuarial problems and people problems.
The people problems actuaries encounter, working with public retirement systems, transcend those of private plans. There are three reasons:
Second: The need to satisfy more individuals, committees, legislative bodies and possible conflicting interests, rather than one individual or committee. And
Politics is counted twice: internal politics arising from differences on the retirement board, administrative dichotomy and employer-employee conflicts; and external politics as practiced by elected officials and those with special interests.
There are some who are finding ways to make lawmakers accountable—or to at least pay attention.
The Kentucky Government Retirees used social media to relentlessly message about the need to secure the ARC. They called on fellow retirees to send letters and make phone calls to legislators, as well as publishing op-ed pieces and letters to the editor to garner public support. Governor Steve Beshear included the full ARC in his 2015 budget request, and lawmakers concurred. The full ARC will add $191 million to employer contributions starting next fiscal year, money that is sorely needed given the plan’s current 23.2 percent funding ratio.
Tennessee is debating a bill that would require cities, school districts, utilities and other entities with their own pension plans to contribute of their ARC. If they fail to do so, the state could then divert tax money normally disbursed to the municipality to pay the bill.
For those states and local governments who have not been paying their ARC, why are not all energies and efforts—by stakeholders including unions and retirees, as well as the various interested reformers—focused on this most critical aspect?
The very name sounds like a nefarious practice. Thirteenth pension payments conjure images of unbudgeted bonuses, opaque to anyone outside of the public employee retirement system.
The U.S. Government Accountability Office report, “Trends in Marriage, Work, and Pensions May Increase Vulnerability for Some Retirees,” offers sobering data on the transition away from defined benefit (DB) plans to defined contribution (DC) plans: Read more
Words shape our understanding. The inclusion or omission of a word, or even punctuation, can change understanding. Just consider this reminder of the important role commas play in everyday life:
Which is why it is interesting that The New York Times has chosen the numbers it has for certain, recent stories. Read more
As anticipation mounts that Detroit will file a plan to adjust its debt with the U.S. Bankruptcy Court next week and with the ongoing confusion of public pensions, bond holders, and in the case of Detroit, art, PensionDialog spoke with Mr. Robert D. Klausner to better understand the basics of municipal bankruptcy.
Mr. Klausner’s firm, Klausner, Kaufman, Jensen & Levinson, represents state and local retirement systems in more than 20 states. He has assisted in the drafting of many state and local laws on public employee retirement throughout the United States. Following is a recap of our conversation. Read more