Reforming the Trillion Dollar Gap in State Retirement Systems: Aggregate State Debt Exceeds $4 Trillion

A train wreck waiting to happen. That's the only way to describe the mess that state pension systems are in right now, according to a report published today by the Pew Center on the States. According to Pew, there's a $1 trillion gap between the $3.35 trillion in pension, health care, and other retirement benefits states promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay them. What's worse, the gap may be even higher given that the study was conducted prior to the market collapsing in 2008 and given the way most states allow for smoothing of investment gains and losses over time ... Many states shortchanged their pension plans in both good times and bad, and only a handful have set aside any meaningful funding for retiree health care and other non-pension benefits. And now, state policy makers who ignore the current shortfall do so at their own peril. Indeed, states that fail to address under-funded retirement systems face the very real possibility of raising taxes or taking taxpayer money that could be used for education, public safety, and other necessary services just to pay public-sector retirement benefit obligations. - Pension Systems on the Brink?, Pension Pulse, February 21, 2010

Oklahoma Governor Signs Pension Reform Law

The Oklahoman Editorial
May 13, 2011

Less talk, more action. That's been the mantra for years for those advocating for reform of the state's pension systems. Finally, the time has arrived.

Gov. Mary Fallin's signature this week on pension reform laws signaled the beginning of the end of years of piled-up pension responsibilities due in no small part to governmental inaction.

This issue “has been kicked down the road for years and years,” state Treasurer Ken Miller said.

Still, the road ahead is long. The state's seven pension systems have accrued $16.5 billion in unfunded liabilities — a financial black mark on the state that has only become worse over time.

The Republican-controlled Legislature deserves credit for pursuing the series of bills that tackle the liability by increasing the retirement age for many of those in the systems and forbids lawmakers from offering cost-of-living increases without identifying a funding source. The retirement age change affects judges, teachers, elected officials and public employees either hired or elected in the future.

Those are not easy or wildly popular changes. Lawmakers and other state leaders could have chosen the path plodded by so many of their predecessors, either ignoring the problem or adding to it by increasing benefits without paying for them. Instead, they stood up.

Starting the reform process will help ensure “that we don't one day face a crisis scenario where the state is simply unable to deliver on the benefits we've promised our retired workers,” Fallin said. Amen to that.

Some state officials had warned that the growing unfunded liability endangered the state's bond rating. A downgrade would make it more expensive for the state to borrow money, costing taxpayers more to build roads, bridges and meet other infrastructure needs. That threat's been used before in pleading with lawmakers to take action, but it wasn't enough.

The change in granting cost-of-living adjustments alone is expected to reduce the liability by about $5 billion over time, officials said. But it and the other reforms signed into law shouldn't be the end.

Policymakers must remain vigilant in not rolling back the reforms and letting the pensions again become victims of shifting political winds. Other states have moved to, or are considering moving to, a 401(k)-style retirement plan for the pension systems. As Oklahoma's unfunded liabilities become more manageable, it would be wise for officials to consider whether such a change makes sense here.

Miller, who is head of the state's pension commission, said he'll recommend more changes in the future to modernize the pension systems. But that effort absolutely depends on future legislatures showing the same sort of leadership as this one.

• Will this be the year for pension system reform in Oklahoma?
• Pension measures signed into law by Oklahoma governor
• Legislature must right pension plan of Oklahoma teachers
• Oklahoma official questions state pension mandates
• Oklahoma on well-traveled pension road
• Oklahoma pension commission makes COLA recommendation to Legislature
• Oklahoma Senate OKs plan to overhaul teachers pensions

A Gold-plated Burden: State Aggregate Debt for Public Pensions Exceeds $4 Trillion

Take $3 trillion in unfunded legacy liabilities from state-sponsored pension plans, add $574 billion more from municipal and county pensions, and you have a fiscal tsunami that will make the Great Recession look like a cake walk. [State and City Pensions Could Destroy U.S. Economy, The Kellogg School of Management at Northwestern University, October 13, 2010]

Fifteen states passed some type of reform in 2009 to help deal with post-employment benefits. Those reforms largely fell into five categories: keeping up with funding requirements; reducing benefits or increasing the retirement age; sharing the risk with employees; increasing employee contributions; and improving governance and investment oversight. Some states are taking a range of steps to rein in the cost of their pension programs. Colorado, Minnesota and South Dakota, for example, reduced their benefits for existing retired plan members last year – a measure that demonstrates that that no current or past public worker is exempt from a state’s fiscal challenges. Additionally, in 2008 and 2009, 17 states reduced future benefits or increased employee contributions. Missouri increased the retirement age to 67 for new employees to receive full benefits, joining Illinois as the state with the highest retirement age in the nation. [Special Report: Best and Worst State Funded Pensions, The Fiscal Times, March 24, 2011]

The financial demands of unfunded pension promises come as state and local governments grapple with years of falling tax revenue related to the recession. The combination has raised concern that defaults, which are historically rare in the $2,800 billion municipal bond market where local governments obtain money, could now rise. Across the local governments in the U.S., each household already owes an average of $14,165 to the pension plans of current and former municipal public employees in the 50 cities and counties studied. In New York City, San Francisco and Boston, the total is more than $30,000 a household and, in Chicago, it tops $40,000. Taxpayers in these areas risk not only local tax increases and service cuts to pay for benefits, but potentially some of the bill for the $3,000 billion unfunded obligations at the state level. The fact that there is such a large burden of public employee pensions concentrated in urban metropolitan areas threatens the long-run economic viability of these cities, as residents can potentially move elsewhere to escape the situation. [US Cities Face Half a Trillion Dollars of Pension Deficits, Financial Times, October 12, 2010]

Report Reveals Aggregate State Debt Exceeds $4 Trillion

State Budget Solutions
October 24, 2011

State Budget Solutions' (SBS) second annual state deficit report reveals aggregate state debt presently exceeds $4 trillion.

How the States Fared

The states with the largest total deficits include California, New York, Texas, New Jersey, and Illinois, respectively. California hit the bottom of the list with a deficit of more than $612 billion. The same states made the bottom of list last year, too.

Despite the high state debt levels, Vermont, North Dakota, South Dakota, Nebraska and Wyoming maintained positions at the very top of the list this year. Many of these states at the top of the list ranked very well across the board.

In predicting states' future economic performance, New York, Vermont, Maine, California, and Hawaii scored the lowest in the rankings. The states on the other end of the list include Utah, South Dakota, Virginia, Wyoming, and Idaho. The rankings are based upon economic data examined over the past 10 years to forecast future performance.

Methodology

Although states themselves present deficit figures, those amounts do not offer a full picture of the state's liabilities and can rely on budget gimmicks and accounting games to hide the extent of the deficit. SBS takes a straightforward approach to calculating total state debt, defining it as the sum of outstanding official debt, pension and other post-employment benefits (OPEB) liabilities, Unemployment Trust Fund loans, and current budget gap. While liabilities are not actually debt, they are a stream of future spending obligations that states have committed themselves to spending.

SBS calculated the total official liabilities for each state according to the latest comprehensive annual data available. The research also looks at the overall financial landscape for each state by considering top income tax rates, past economic performance, and economic outlook.

Comparison of Liabilities

Pensions and OPEB play a crucial role in straining state budgets. Minimum unfunded liabilities total more than $3.4 trillion right now. This year, SBS incorporated state pension liability figures computed by Andrew Biggs from the American Enterprise Institute (AEI) in addition to data from the Pew Institute, which were included in last year's state deficit study.

The SBS "Just How Big are Public Pension Liabilities?" report explains how pension liabilities are calculated by states according to accounting rules different from the private sector. States are, for example, allowed to assume high rates of return without taking into regard the associated high risk. The AEI figures estimate how large public pension liabilities would be if states used private sector market-valuation methods. Pew warns that its estimates are low, so the AEI numbers are preferable in estimating the true value of state debts.

Public pension liabilities stand at more than $2.8 trillion using AEI figures. With the Pew pension liability numbers, the figures stand at $656 billion, up from $452 billion last year.

According to AEI's numbers, total state debt for this year is more than $4 trillion. The total is more than $2 trillion utilizing Pew's pension liabilities, still up from $1.8 billion last year.

Sources

Income tax rates were obtained from the Federation of Tax Administrators, and state rankings for past economic performance and future economic outlook are from the American Legislative Exchange Council's 2011 report "Rich States, Poor States."

Outstanding debt and outstanding debt per capita were obtained from each state's most recent Comprehensive Annual Financial Report (CAFR), which can lag current data by one to three years. Pension numbers for this year were obtained from AEI's "The Market Value of Public-Sector Pension Deficits." A separate calculation was done using Pew's "The Widening Gap: The Great Recession's Impact on State Pension and Retiree Health Care Costs" report on pension funds as of 2009. OPEB liabilities were also found in this year's Pew report as well. Pension numbers from last year were from Pew's "The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reforms" report on pension funds as of 2008. Unemployment Trust Fund Loans were from the National Council of State Legislators, and current budget shortfalls are from the Center on Budget and Policy Priorities.

Hard-pressed American States Face Crushing Pensions Bill

The Economist
October 14, 2010

Chuck Reed is the Democratic mayor of San Jose, California. You might expect him to be an ally of public-sector workers, a powerful lobby in the Golden State. But last month, at a hearing on pension reform held by the Little Hoover Commission, which monitors the state’s government, Mr Reed lamented his crippling public-pensions bill.

“City payments for retirement benefits have tripled over the last ten years even though our workforce has declined dramatically, and we have billions of dollars in unfunded liabilities that the taxpayers must pay,” he said.

Mr Reed estimated that the average cost to his city of employing a police officer or firefighter was $180,000 a year. Not only can such workers retire at 50, but some enjoy annual pension payments greater than their salaries. They are also entitled to cost-of-living increases of 3% a year, health and dental insurance for life and lump-sum payments for unused sick leave that could reach hundreds of thousands of dollars.

Plenty of similar bills are looming in America’s public sector: in municipalities, in the federal government, and especially at state level. Defined-benefit pensions, which link retirement income to salary, are expensive promises to keep. The private sector has been switching to defined-contribution plans, in which employees bear the investment risk. But the public sector has barely begun to adjust, and has built up a huge liability to its staff. Worse, it has not funded the promises properly.

Joshua Rauh, of the Kellogg School of Management at Northwestern University, and Robert Novy-Marx, of the University of Rochester, estimate that the states’ pension shortfall may be as much as $3.4 trillion and that municipalities have a hole of $574 billion. Mr Rauh calculates that seven states will have exhausted their pension assets by 2020—even if they make a return of 8%, a common assumption that looks wildly optimistic. Half will run out of money by 2027. If pension promises are to be kept, this will place immense strain on taxes. Several have promised annual payments that will absorb more than 30% of their tax revenues after their pension funds are exhausted (see chart 1).

The severity of states’ pension woes was disguised for years, because asset markets were so strong and because of the way states accounted for the cost of pension provision. But the 21st century has been dismal for stockmarkets, where most pension money has been put. State budgets came under huge pressure as a result of the 2008-09 recession, which caused tax revenues to plunge. Meredith Whitney, an analyst who made her name forecasting the banking crisis, believes the states could be the next source of systemic financial risk.

Now the problem is making headlines, especially in California, where taxpayer groups have been highlighting the generous pensions of some former employees. More than 9,000 beneficiaries of CalPERS, the largest state retirement plan, receive more than $100,000 a year.

The stage is set for conflict between public-sector workers and taxpayers. Because almost all states are required to balance their budgets, any extra pension contributions they make to mend a deficit will come at the expense of other citizens. Utah has calculated it will have to commit 10% of its general fund for 25 years to pay for the effects of the 2008 stockmarket crash. But attempts to reduce the cost of pensions are being challenged in court and will be opposed by trade unions, which still have plenty of members in the public sector.

A pension plan is a promise to pay employees after they retire. Most liabilities fall due well into the future, once those now working retire and receive payments until they die perhaps 20 or 30 years later. Such future liabilities have to be valued, using a discount rate to reflect what they are worth in today’s money. The higher the discount rate, the lower the present value.

States use the expected return on the assets in their pension funds as a discount rate. This is often around 8%, and reflects the performance of the past 20-30 years. However, such returns will be hard to come by in future. As Bill Gross of Pimco, a giant fund-management firm, pointed out recently, given current bond yields of 2% and a typical portfolio with 60% in equities and 40% in bonds, a total return of 8% requires a return of 12% on equities. And with American equities yielding just 2-2.5%, that in turn would require dividends to grow by 9-10% a year. Dividends grow roughly in line with the whole economy—and 9-10% is just not plausible.

This reliance on returns as the basis of the discount rate is extraordinary, when you stop to consider it. The more risk the pension fund takes (for example, by buying high-yielding bonds of companies with poor credit ratings), the lower its liabilities appear to be.

“Funding the liability with risky assets doesn’t make the liability any smaller,” says Andrew Biggs, of the American Enterprise Institute, a conservative think-tank.

A state pension fund may achieve the desired returns by investing in the stockmarket. But if that does not work out, the state must still pay its pensioners.

David Crane, an adviser to Arnold Schwarzenegger, the governor of California, describes the treatment of state pension funds as “Alice-in-Wonderland accounting”. Suppose, he says, that a state had to pay a bondholder $30,000 a year for 25 years and to pay a pensioner the same sum for the same period. The bond obligation would have a present value of $425,000 in its accounts but the pension liability, with the same cashflows, would be valued at just $320,000.

Private-sector companies are no longer allowed to use assumed returns when calculating their pension-fund liabilities on their balance-sheets. They have to use corporate-bond yields. The contrast makes it appear as if public-sector pensions can be delivered on the cheap.

“The accounting suggests that governments can provide pension benefits at half the cost of a private-sector fund,” says Mr Biggs.

A more prudent way of measuring the liability is to regard a pension as a debt that the state owes its employees. So one possible discount rate is the state’s cost of borrowing, the yield on its municipal bonds. Some argue that pensioners have even greater rights than bondholders and that points to using a “risk-free” rate like the Treasury-bond yield. Both rates make the present value of pensions liabilities much higher than that declared by the states.

Using Treasury bond yields as the basis for discounting, Mr Rauh and Mr Novy-Marx calculate that states’ pension liabilities are as much as $5.3 trillion. That is 68% more than reported by the states, and produces the authors’ figure of $3.4 trillion for the gap between liabilities and assets.

In their defence, the states say that they are following the Governmental Accounting Standards Board (GASB), which recommends discounting liabilities by assumed returns. Even on that optimistic basis, states are not putting enough aside. According to the Centre for Retirement Research, their average funding ratio, using the GASB approach, fell from 103% in 2000 to 78% last year (see chart 2); with a risk-free rate underfunding would be much worse. Despite this shortfall, 21 states failed to make their full contribution to their pension funds over the past five years, according to Eileen Norcross of George Mason University in Washington, DC.

Trouble in Trenton

New Jersey provides a prime example of America’s pension difficulties. In August the Securities and Exchange Commission (SEC) charged the state with fraud for misrepresenting the underfunding of its pension plans to municipal-bond investors. This was the first time a state had been charged with violating federal securities laws. It settled the case without admitting or denying the SEC’s findings.

A study by Ms Norcross and Mr Biggs outlines, using the Treasury yield as a discount rate, how New Jersey has run up a pensions deficit of $174 billion. That is equivalent to 44% of the state’s GDP, or more than three times its official debt.

The problems started in 1992 when the then governor, Jim Florio, increased the assumed return on pension assets from 7% to 8.75%. That allowed contributions to be reduced and helped the state balance its budget. Further reforms in 1994 and 1995 eased the accounting assumptions, allowing Mr Florio’s successor, Christie Whitman, both to cut taxes and to balance the budget. In the late 1990s the fund bet heavily on technology stocks, giving a brief boost to asset values. Employees’ contributions were cut from 5% of payroll to 3%. New Jersey also increased benefits, giving pension rights to surviving spouses in 1999 and a boost of 9.1%, in effect, to scheme members in 2001, just as the dotcom bubble was bursting and the fund’s assets were falling in value. The effect of this chronic underfunding on the pension scheme for the police and firefighters is shown in chart 3.

In March Chris Christie, the Republican governor elected in November 2009, reduced the pension benefits of new state employees. Last month he unveiled a more ambitious plan with several measures that affect existing workers. These include an increase in their contributions to 8.5%, raising the qualification for early retirement from 25 to 30 years of service, moving the normal retirement age to 65 and ending future inflation adjustments. It is too soon to tell whether Mr Christie will get this plan through. Not surprisingly, the unions oppose it.

“Once again, it’s an attack on the middle class,” said Hetty Rosenstein, who heads the state chapter of the Communication Workers of America.

Other states have also started on reform, but have focused mainly on restricting the benefits of new employees. Michigan closed its defined-benefit scheme to entrants back in 1997 and Alaska moved to a defined-contribution plan for new staff in 2006. Utah is closing its defined-benefit plan to new employees next June.

But this makes only a small dent in a huge problem. The bulk of liabilities consist of promises to people already working or retired, which are often legally protected. Reducing this bill will take a much bigger reform. Mr Rauh and Mr Novy-Marx estimate that raising the retirement age by a year would trim the cost by 2-4%; a cut of a percentage point in inflation-linking would slash it by 9-11%. But states that have tried to adjust existing promises, such as Colorado, Minnesota and South Dakota, which have frozen cost-of-living adjustments, have faced challenges in court.

States will have to make difficult choices. A change to the rights of existing scheme members is sure to have an adverse effect on people on low pay, nearing the end of their careers or already in retirement. A cap on the cost-of-living adjustment, for example, would be a nightmare for pensioners were inflation to flare up, because they would have no way of making up the loss in their purchasing power.

But after years of neglecting the problem, such changes will be hard to avoid. In the words of Dan Liljenquist, a state senator in Utah and an architect of its reforms:

“This is not a conservative-versus-liberal issue, this is a reality issue.”

States Test Whether Public Pension Benefits Given Can Be Taken Away

84% of state and local employees retain defined benefit coverage, compared to 21% of private sector workers.

By Stephen C. Fehr, Stateline
August 10, 2010

State legislators are beginning to challenge one of the ironclad tenets of public pension policy: that states cannot legally reduce pension benefits for current and future retirees.

Lawmakers in Colorado, Minnesota and South Dakota voted earlier this year to limit cost-of-living increases they previously had promised to thousands of current and future retirees, who courts historically have protected from benefit reductions. Not surprisingly, retirees in each state have filed lawsuits asking judges to restore their annual benefit increases to what they were previously.

Lawmakers, state retirement systems, public employee unions and others in the pension policy arena are closely watching the outcome of the legal challenges. If the courts do not reinstate the retirees’ benefits, a flood of states could follow the lead of Colorado, Minnesota and South Dakota. The reverse also would be true.

“If the plaintiffs are successful, it may discourage legislators in other states from attempting to diminish benefits,” says Keith Brainard, research director at the National Association of State Retirement Administrators.

California Governor Arnold Schwarzenegger and New Jersey Governor Chris Christie, among other officials, favor scaling back pension benefits already promised to current employees and retirees. And a lively debate on the issue is underway in Illinois, where lawmakers reduced the cost-of-living adjustment for newly hired workers. Interest is keen everywhere: Lawmakers from around the country packed a session on modifying public pension benefits at the recent annual meeting of the National Conference of State Legislatures in Louisville.

Up to now, states trying to trim the rising cost of worker retirement benefits have taken the legally safer — and politically easier — approach of targeting benefit cuts at newly hired employees. Steps states have taken this year include increasing the amount employees contribute toward their own pensions, raising the retirement age, and adjusting the formula upon which benefits are based.

But many state lawmakers and pension administrators have concluded that cutting benefits for new employees alone will not save enough money in the short term to keep pension plans solvent over time. So they are searching for ways to zero in on the benefits of current retirees and employees.

Colorado lawmakers, facing projections showing the state’s pension system would run out of money within 30 years, approved a package of benefit reductions that lowered the annual 3.5 percent cost-of-living increase for retirees in 2010 to zero. In future years, the increase will be set at 2 percent, barring another sharp decline in investments. If the changes stand, the average retiree would lose more than $165,000 in benefits over the next 20 years, the retirees say in court papers.

South Dakota reduced the cost-of-living increase from 3.1 percent to 2.1 percent this year; future-year amounts will be tied to how well the system’s investments perform in the market. Minnesota eliminated a 2.5 percent cost-of-living increase and set it at between 1 and 2 percent for its different employee pension funds.

Case law and state constitutions history is on the employees’ side. State statutes, constitutions and case law consistently define a public pension as a contract between the state and its employees that cannot be impaired.

For example, Alaska’s state constitution makes it clear that “membership in employee retirement systems of the state or its political subdivisions shall constitute a contractual relationship. Accrued benefits of these systems may not be diminished or impaired.”

Eight other states protect workers in their constitutions. They are Arizona, Hawaii, Illinois, Louisiana, Michigan, New Mexico, New York and Texas.

In states without constitutional guarantees — Colorado, Minnesota and South Dakota fall into this category — statutes and court cases consider retirement benefits an unbreakable contract between the state and workers.

That same protection is in the contract clause of the U.S. Constitution, which says:

“No state shall … pass any … law impairing the obligations of contracts.”

Courts have determined that cost-of-living increases, which keep pension income on pace with inflation, are part of a worker’s benefits that cannot be diminished. (Generally, increasing benefits faces no legal hurdles.)

The principle of safeguarding the purchasing power of pension income through a cost-of-living adjustment is well established. Social Security, the federal government’s retirement program, instituted automatic annual cost-of-living increases in 1975. The amount of the increase has averaged about 3.3 percent a year, although for the first time in 2010, there was no increase because the consumer price index did not rise.

The Colorado, Minnesota and South Dakota lawmakers are hoping that the courts will agree that the current financial turmoil facing states imperils public pension systems as never before and calls for a new approach. If legislatures are not permitted to cut retirement costs now, the argument goes, the ability of the public pension systems to pay future benefits will be jeopardized.

“If we don’t reduce these automatic pension increases, the entire fund is poised to go bankrupt,” Republican Josh Penry, minority leader of the Colorado state Senate, told the Denver Post. “Think United [Airlines]. Think GM. That didn’t work out well for the company or the retirees.”

Attorneys for the states say in court filings that limiting cost-of-living increases was justified, and actuarily necessary.

“There can be no dispute that preserving the solvency of PERA [The Colorado Public Employees’ Retirement Association] is a legitimate governmental interest,” Colorado officials argue. Minnesota’s pension legislation “was reasonable and necessary to maintain and restore the financial stability of Minnesota’s public pension plans,” say the state’s pleadings.

Although Colorado lawmakers and state pension officials blame much of the retirement fund’s current financial troubles on investment losses suffered during the 2007-09 recession — the median decline for funds nationally was 25 percent in 2008 — the truth is that Colorado lawmakers failed to make their annually required contributions to state pension funds in good times and bad. They also boosted retiree benefits without considering future costs.

Colorado’s pension fund was fully funded in 2000. Eight years later, before the recession hit, Colorado fell to 70-percent funded and was heading down further, according to a report released in February by the Pew Center on the States, which publishes Stateline. Most pension specialists recommend a funding level of 80 percent or higher.

Minnesota lawmakers also slid on their pension fund payments. Their pension system’s funding level dropped from 101 percent in 1999 to 81 percent in 2008.

“The Legislature was cutting off funds and starving the pension system,” says Stephen Pincus, a Pittsburgh attorney representing the retirees in all three states. “They shouldn’t now be able to cry there’s no money in the pension system. They had a large hand in creating the crisis.”

South Dakota offers a twist. The state Legislature has been one of the best in the nation at financing its public employee pension system over the years; it was 97-percent funded in 2000 and 2008, according to the Pew report. Lawmakers even increased benefits two years ago. The state retirement system investments did lose more than 20 percent in value in 2008, but gained as much in fiscal 2010.

Pincus says that makes South Dakota’s targeting of current employees and retirees suspect.

“There’s no crisis in South Dakota,” he says. “They had one bad year. So they’re going to shore up their pension fund by cutting benefits to those who already receive them?”

Rob Wylie, executive director of the South Dakota retirement system, counters that when the funding level fell to 76 percent after the 2008 losses, it triggered for the first time a state law requiring the pension system to take immediate steps to return the funding level to 100 percent. Savings gained from reducing benefits for newly hired employees would have taken too many years for the system to catch up, Wylie says. So after consulting with retirees, the pension board chose to ask lawmakers to trim the cost-of-living increase.

“We could have reversed the increase in the funding formula we approved in 2008,” says Wylie. “But the retiree groups said can you find another way to slow the growth in costs without decreasing the formula? So we did.”

Asked why states are taking the risky strategy of aiming at current retirees, Robert Klausner, a Florida attorney who specializes in public pension law, says many state officials believe they have less to lose in the courtroom by challenging pension protections than taking no action at all.

“The belief is that if the employer [the state] prevails, it will have been worth the political risk,” Klausner says. “And if they lose, they will be no worse off than before.”

Klausner adds that legislatures are taking the politically-difficult step and letting the courts be the “bad guy” if they overturn the law. Retired judges are among the plaintiffs in Colorado and South Dakota.

The first case to be heard is the one in Minnesota, where a September 15 hearing is scheduled on a motion for summary judgment that will be filed by the state. Colorado’s Supreme Court already has sided once with retirees, saying in a 1961 ruling,

“Whether it be in the field of sports or in the halls of the legislature it is not consonant with American traditions of fairness and justice to change the ground rules in the middle of the game.”

Meredith Williams, executive director of the Colorado retirement system, says he is confident the state can prove that the system’s current and future financial stress will compel the court to allow the cost-of-living rollback.

“PERA has been upfront about the challenges we face,” he says.

Minnesota Judge OK’s Discovery in Pension Suit

Plaintiffs want state documents and employee depositions on decision to limit cost of living increases for retirees

By Jonathan Miltimore, Watchdog.org
September 15, 2010

A Minnesota court deferred judgment Wednesday on a lawsuit challenging legislation limiting benefit increases for retirees currently drawing checks.

Stephen Pincus, an attorney representing retirees in Minnesota, Colorado and South Dakota, said plaintiffs need internal state documents and state employee depositions to determine if officials had explored all policy options available to shore up pensions, such as increasing contributions or reducing benefits of future hires.

“From our point of view there is no reason to rush to have this case decided,” Pincus said. “We had no idea the state wanted to have the entire case decided up front.”

While many states — including sixteen this year alone — have overhauled pensions in the wake of the stock market crash, only Minnesota, Colorado and South Dakota passed legislation that trimmed the cost of living adjustments (COLA) for current recipients.

The Minnesota case, first on the docket and involving an estimated $1 billion in future allocations, has been cited as a possible bellwether for cash-strapped states struggling to find immediate means to shore up pension systems that were in trouble even before investment values plunged.

Wednesday morning’s hearing, which lasted nearly three hours, ended with Ramsey County judge Greg E. Johnson granting the plaintiffs’ request for additional time for discovery.

The state had objected to the request, arguing Minnesota case law made it clear the state had the right to modify benefits because no contract existed between employees and the state.

“There is no contract here, express or implied,” Assistant Attorney General Rita Coyle DeMueles said. “Any delay creates a cloud of (public) uncertainty.”

But Johnson, noting the likelihood of appeal and the scope of the case, denied the request and granted the plaintiffs an additional 90 days.

“If I grant summary judgment it’s going to appeal, and you’ll have that cloud of uncertainty anyway,” Johnson said. “Part of my job as judge is to make sure the record is complete.”

In 2009, the legislature lowered its 2.5 percent COLA to a rate ranging from 1 to 2 percent for the majority of the 65,000 retirees and suspended increases for retirees in the Teachers Retirement Association.

In addition to the benefit cuts, the state has phased in a series of contribution increases, but despite the law changes the funding level of state systems remains about 70 percent based on state assumptions of high future investment returns.
These figures, which assume average rates of return of about 8 percent — a number many economists believe is unrealistic — do not include other post employment benefits such as health care, which are almost entirely unfunded.

Though the judge did not rule Wednesday, the hearing did provide a glimpse of the arguments the case will likely hinge on, as attorneys sparred over jurisdiction and case law.

The strategies of the opposing councils were easy to identify, with state arguments relying heavily on state legal precedent and plaintiffs invoking federal precedent in states with more expansive histories of worker rights.

Pincus cited case law from several states in which courts determined worker benefits could not be “drastically impaired” unless the state was under severe financial stress. He charged the state with backing down on promises to workers.

“The state itself took on this obligation,” he said. “Did they even think about other (available policy) options.”

DeMueles said the cases cited by Pincus have no bearing on this case and the legislature has clearly defined authority to adjust benefits to accommodate retirees, current employees and taxpayers.

“Minnesota’s laws on the interest and rights (of workers) are distinctively different from those in other states,” she said. “All the cases mentioned involved states employing collective bargaining contracts.”

DeMueles also said Minnesota statute makes no distinction between the fiduciary obligations to current employees and retirees.

More than a dozen people attended the hearing, including Richard Maus, a retired teacher who lives in Northfield.

Maus said he enjoyed watching the hearing, but was surprised to hear the state’s council say he didn’t have a contract defining his retirement benefits.

“I saw a lot of contracts in my 30 years teaching,” he said.

Department of Labor Begins Hearings on September 15, 2010

From EBSA News:

Today the U. S. Department of Labor’s Employee Benefits Security Administration (EBSA) released the agenda for the upcoming joint hearing with the Department of the Treasury on lifetime income options for retirement plans.

Accompanying the agenda are copies of the witnesses’ requests to testify and testimony outlines. The hearing begins at 9:00 a.m. (EST) on September 14 and 15, 2010. The hearing will be held in the Labor Department’s main auditorium, 200 Constitution Avenue, NW in Washington, D.C.

A live webcast of the hearing will be available on EBSA’s Web site, as well as the agenda and requests to testify.

U.S. Department of Labor news releases are accessible on the Department’s Newsroom page. The information in this news release will be made available in alternate format (large print, Braille, audio tape or disc) from the COAST office upon request. Please specify which news release when placing your request at 202.693.7828 202.693.7828 TTY 202.693.7755 202.693.7755

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The September issue of the Liberty Coin Service newsletter has analysis and background information on the “nationalization” of private retirement accounts:

“As I understand it, the real reason for this hearing is to push the initial step for the US government to eventually nationalize (confiscate) all assets in private Individual Retirement Accounts (IRAs) and 401K plans!”

“Under the plan to nationalize private retirement accounts, the US government would get immediate cash flow from the assets in the accounts they would seize. In return, the government would only have to give up promises to pay years down the road—which will almost certainly be in depreciated US dollars. Although the term confiscation is pretty strong, it perfectly describes the current situation. The government is going to eventually force 90 million citizens to give up valuable assets in return for pieces of paper of dubious value.”

From the October issue of Liberty Coin Service newsletter, Report on September Hearing On Private Retirement Accounts:

Last month I explained how the upcoming September 14-15 joint hearing by the Departments of Labor and Treasury would be discussing the first step of a plan that has the ultimate goal of the US government seizing all assets in private retirement accounts.

The hearing came and went. The news coverage was limited and extremely low key, which is exactly what the US government wanted.

I watched a few snippets of the live broadcast of the hearing and found it incredibly boring and sleep-inducing. There were no speakers raising awkward points such as asking if these proposed changes had the goal of mandatory confiscation of private retirement assets. Instead, the speakers were raising minor side issues to do with offering annuities to all retirees with a private retirement account.

For now, these annuity programs will be provided by private companies and will be optional for the retiree. The plan outlined in the October 2008 Congressional hearings is that the annuities will later become mandatory and be provided by the US government once it takes possession of all private retirement assets and replaces them with US government bonds.

The initial talk about seizing some or all retirement assets started in 1992 after the failure of the Clinton administration to overhaul the health care system. The original plan put forth called for seizing 15% of private retirement plan assets and taxing new contributions at the 15% rate in return for granting an income tax exemption for all distributions later received.

When the Republicans became the majority party in the House of Representatives after the 1994 elections, discussion of seizing private retirement assets was put on hiatus.

After the 2008 elections, however, the Democrats controlled the presidency and both chambers of Congress. A new plan was unveiled which would result in all private retirement assets being turned over to the US government, to be replaced with government bonds paying a 3% inflation-indexed interest rate.

The only practical roadblock toward this confiscation happening within the next 2-3 years would be for the Republican party to become a majority in one or both houses of Congress in the elections coming up next month. I am hopeful that the government’s plan to seize private retirement assets will be delayed, if not completely forestalled. I will pass along any developments as they occur.

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