Über die Autorinnen und Autoren

<div><p><b>Alicia H. Munnell</b> is the Peter F. Drucker Professor of Management Sciences, Carroll School of Management, and director of the Center for Retirement Research at Boston College. She has served as assistant secretary of the Treasury for economic policy and as a member of the President's Council of Economic Advisers. She was also cofounder and first president of the National Academy of Social Insurance. Munnell has written several books, including Brookings titles <i>Working Longer: The Solution to the Retirement Income Challenge</i>, with Steven Sass (2008), and <i>Coming Up Short: The Challenge of 401(k) Plans</i>, with Annika Sund&#233;n (2004).</p></div>

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

STATE AND LOCAL PENSIONS

BROOKINGS INSTITUTION PRESS

Contents

Acknowledgments.......................................................................vii1 Introduction........................................................................12 State and Local Pensions: From the 1970s to Today...................................123 The Discount Rate and Other Accounting and Funding Issues...........................484 Why Are Some Plans in Trouble and Others Not?.......................................755 Are Public Plans Budget Busters?....................................................1056 Are Public Employees Overpaid or Underpaid?.........................................1397 Do Defined Contribution Plans Have a Role in the Public Sector?.....................1708 Making State and Local Pensions Better..............................................210References............................................................................231Index.................................................................................249

Chapter One

Vallejo, California (2008), Prichard, Alabama (2010), and Central Falls, Rhode Island (2011) have filed for bankruptcy, with commentators citing pension promises to public employees as a major cause (see box). A Googling of the words "state," "pension," and "crisis" found more than a twentyfold increase between 2000 and 2011 (see figure 1-1). The Governmental Accounting Standards Board (GASB) has promulgated new standards that could dramatically change how pension liabilities and costs are reported. Many states have substantially reduced benefits for new employees and increased employee contributions across the board. Yet the majority of states should be able to recover from the devastating impact of the 2008 financial crisis. What is going on here? How did the states and localities facing serious problems get into trouble? How did the others avoid problems? And where problems exist, what changes should be made that would be both effective and fair?

This book tells the story of state and local pension plans over the past three decades. The late 1970s and early 1980s is a good place to start. In 1978, the first comprehensive survey of state and local plans, mandated by the Employee Retirement Income Security Act of 1974, awarded public plans a grade of D:

In the vast majority of public employee pension systems, plan participants, plan sponsors, and the general public are kept in the dark with regard to a realistic assessment of true pension costs. The high degree of pension cost blindness is due to the lack of actuarial valuations, the use of unrealistic actuarial assumptions, and the general absence of actuarial standards.

It was also a period when the author served as a member of the Massachusetts Retirement Law Commission and witnessed the "Wild West" up close. The then chair of the commission later pleaded guilty to state and federal charges that he engaged in a scheme to defraud the Massachusetts retirement systems.

From the perspective of the late 1970s and early 1980s, the management of state and local plans has improved dramatically. Plans began to put aside assets to pay for future benefits. Assets started to be managed professionally. Plan sponsors began to provide regular actuarial reports. And many public plan officials became subject to the same fiduciary standards that apply to the private sector. In fact, the preface to a 2001 comprehensive study of public plans from the prestigious Pension Research Council at the Wharton School of the University of Pennsylvania, of which the author is a member, awarded state and local plans at least an A–: "State and local plans in the United States have impressive levels of assets backing their liabilities, they provide reasonable replacement rates to retirees, and they invest in a manner not too different from that of private pension managers."

Two financial crises later—the bursting of the dot.com bubble in 2000 and the collapse of the entire equity market in 2008—it became clear that some state and local pensions were seriously underfunded. The ensuing recession, which decimated state and local budgets, precluded additional contributions to compensate fully for the drop in asset values. States and localities began to cut benefits for new employees, raise employee contributions, and, in some cases, shift to defined contribution or hybrid plans.

The economics profession followed with "I told you so." The issue, among the many complex questions surrounding the provision of pensions in the public sector, that economists pounced on was the rate used to discount obligations. Following the standards established by GASB, state and local plans have used the expected long-run rate of return on plan assets as the discount rate. But finance theory dictates that the appropriate rate should reflect the riskiness of the obligations; the expected long-run return backing those obligations is irrelevant. Using the economists' approach, unfunded liabilities turned out to be $2.1 trillion in 2008 rather than $507 billion. Divide the new figure by the number of residents and the problem looks insoluble.

Some problems could have been avoided by discounting obligations for reporting purposes by the appropriate rate. For example, California's plans would not have appeared overfunded in the 1990s, and the legislature might not have expanded benefits dramatically. And breaking the link between expected returns and the discount rate might have resulted in lower holdings of equities. But the discount rate is a narrow prism through which to view the hard questions public plan sponsors face.

At the other extreme, a number of governors identified public sector unions as the source of the problem. Wisconsin eliminated collective bargaining for public employees except police and firefighters. Michigan passed legislation that required each collective bargaining agreement to include a provision that allows an emergency manager appointed under the local government to reject, modify, or terminate the collective bargaining agreement. Oklahoma decided that municipal governments are no longer required to bargain, except with police and firefighters. And Ohio abolished the right to strike—a provision that was subsequently defeated by a referendum. Legislation to limit collective bargaining is currently under consideration in many other states.

Unions, like the discount rate, are too narrow a focus for understanding the complex situation facing state and local governments. Consider Illinois, a highly unionized state with generous benefits. Three of its four large state-administered plans are in terrible shape; one is much better off. Why? The answer lies largely in the fact that the sponsors of the plan for municipalities made their annual required contributions each year, whereas the state legislature failed to make the required contributions for the three other plans.

Thus, plans have a number of dimensions, including the generosity of benefits and the extent to which those benefits are funded. But more important, pension benefits are part of the compensation package used to attract and retain a skilled public sector workforce. The risk at this point is that state legislatures will cut benefits too much for new employees, so that public schools and universities, without compensating wage increases, will not be able to compete with the private sector for skilled workers....