In the July 28 Post and Courier, the editorial staff wrote “A vision for South Carolina pension system reform in 2020.”
Although editorial staff members are well-intentioned, they couldn’t be more wrong with their approach to South Carolina’s state pension system.
South Carolina’s state pension system is in good shape, and over the last couple of years, lawmakers have been making full payments into the system. If lawmakers decided to close the state pension system to new hires, as the editorial suggests, they would be making the same fateful mistake that other states and municipalities have made in the past.
Michigan, West Virginia, and Alaska have all, at one point, closed their pension systems to new hires. Not only did the unfunded liability of their respective pension systems worsen, but recruitment plummeted and they had a hard time retaining qualified state employees.
In Palm Beach, Florida, and Branford, Connecticut, these municipalities made the same mistake and saw their public safety officers head for the door to seek employment in other departments with better benefits.
Things got so bad in these states and municipalities that West Virginia, Palm Beach and Branford reopened their pension systems to retain quality employees and relieve their operational budgets.
South Carolina lawmakers should not repeat the mistakes of other states and cities by closing the state’s pension system to newly hired public employees. By continuing to make employee and employer contributions, the pension system will continue to stabilize.
National Public Pension Coalition
16th Street Northwest
In four days, the Kentucky House of Representatives and Senate filed, heard, debated and ultimately passed HB1. While this bill is supposed to solve the mess created by both chambers at the end of the regular legislative session, it violates the law and manages to exacerbate KRS’ funding issues.
HB1 seeks to reward quasi-governmental agencies that decide to leave KRS by offering those agencies that sever from KRS a rate freeze, while those that remain in the system continue to face budgetary pressure. These quasi agencies are forced to choose between their operating budgets and providing retirement security to their employees. The employees whose agencies leave KRS lose access to a pension that ensures they can retire in dignity and are moved to a riskier 401(k)-style retirement plan.
This portion of HB1 violates the inviolable contract the state has with these employees — making sure that they receive the benefits they were promised at the start of employment, including their pension. Violating the inviolable contract will surely end with HB1 in front of judges, costing the state hundreds of thousands of dollars.
Additionally, HB1 perpetuates the same flawed logic lawmakers used to justify other failed KRS plan design changes. With HB1 driving agencies to 401(k) plans, fewer people contribute to KRS and the system’s unfunded liability will increase. This occurred when lawmakers moved all newly hired public employees participating in KRS to a cash balance retirement plan in 2013.
The 2013 law created two problems. First, it meant public employees worked towards a diminished benefit, weakening their retirement security. Second, by diverting employee contributions from KRS, the unfunded liability grew. States such as West Virginia, Alaska and Michigan implemented similar policies, resulting in high turnover and rising pension debt.
It is important to note the cause for KRS’ current funding. It is not the fault of the employees who dedicated their careers to public service. Rather, years of lawmakers making partial or zero payments into the Kentucky Retirement System (KRS) inflated the system’s unfunded liability. When the unfunded liability reached a critical point, lawmakers implemented benefit cuts to public employees who provide vital services throughout the state.
Looking forward, Kentucky lawmakers cannot continue to diminish employees’ retirements due to the legislature’s failure to make adequate contributions. Nor can lawmakers allow the governor to continue to use special sessions to ram through legislation.
At the very least, the options presented should have been allowed to go before the full House for proper debate during the actual session. This crisis was manufactured to drive a special session and make harmful benefit cuts. A clean rate freeze should have been passed in the spring, allowing any further discussion on policy changes to take place in an open and democratic format.
Bridget Early is executive director of the National Public Pension Coalition, which is based in Washington, D.C.
After several failed attempts and a special legislative session, Kentucky — the state with the worst-funded pension system — now has a plan to ease the financial burden that employees’ retirements are taking on quasi-governmental agencies.
In signing the pension reform bill on Wednesday, Republican Gov. Matt Bevin said it provides “much needed financial relief” and “a viable path forward for our mental health agencies, rape crisis centers, local health departments and other community agencies.”
But opponents of the new law warn that the controversial changes could worsen the state pension plan’s already precarious finances.
Pension advocates say the new law threatens the solvency of the $2.7 billion Kentucky Retirement System and will likely leave it waiting decades to get the money it’s owed. The state employees’ plan is already one of the worst-funded in the nation, with just 16 percent of the assets it needs to meet its expected liabilities.
Bridget Early, executive director of the National Public Pension Coalition, says the legislation builds on years of state changes that have weakened the system.
“Instead of finding a way to get money into the system, they’ve all focused on benefit cuts,” she says. “That ultimately removed needed contributions.”
The bill was pushed for by presidents of the state’s regional universities, who say that increasing pension costs are squeezing their budgets and forcing them to raise tuition.
A similar bill passed the legislature during the regular session, but it contained extreme conditions that could have led to retirees not getting pension checks. Bevin vetoed it and called a special session to address the issue.
The state’s 118 quasi-governmental agencies can start leaving the Kentucky Retirement System in April. If they do, they have to provide other options for their employees, such as a 401(k) — but they don’t have to continue contributing money toward their retirement.
Most observers expect the law to be challenged in court, most likely by state Attorney General Andy Beshear, a Democrat and frequent Bevin critic who is running against him for governor.
In the meantime, there are eight months, a governor’s election and the better part of a legislative session until agencies are eligible to exit the retirement system. A lot could change.
“They didn’t do anything draconian that starts right now,” says Brian O’Neill, a spokesman for the Kentucky Public Pension Coalition. “There are still opportunities to work on this.”
Kentucky’s Gov. Matt Bevin got his wish, as a special session for the General Assembly to determine a fix for the state’s looming pension crisis will happen Friday morning.
Bevin’s office announced the news Monday. His administration has been trying to get a special session in order since the end of the year’s regular session, which like in 2018, failed to pass anything on a pension reform.
Last session, the governor introduced two proposals designed to help Kentucky’s retirement funds. The first was to shake up the Teacher Retirement System’s board with his own appointees. The other would have moved future university employees into a defined contribution plan and freeze the contribution rate of Kentucky’s quasi-governmental agencies for a year, which was half of a similar bill that passed, but was soon vetoed by Bevin. The governor then resubmitted his version, which tacked on the DC clause.
Quasi-agencies include regional universities, health departments, domestic violence centers, and community health centers. After July 1, members’ contribution rates to the Kentucky Retirement Systems, the institution responsible for their pensions, skyrocketed to a near 70% increase, to 83% of payroll from 49%.
The $12.3 billion fund had rapidly been making large cuts to its assumed rate of return and adjusted contribution rates in a similar fashion over the past several years. New mortality tables created a further contribution increase to the levels made this month. If nothing happens by August 10, the pension costs will become delinquent and the fund is on its own until at least next session.
The pension plan’s board would then decide how large of a fine they would have to pay to cover the delinquent plan, while still being on the hook for paying the benefits. The newfound budget constraints could lead to agencies laying off staff and possibly closing their doors.
Bevin’s latest proposal is to freeze the pension costs until April and give the quasi-agencies the option to leave the retirement system. That will be the subject of the special session, expected to last through Wednesday. If all goes well for Bevin, a bill could wind up on his desk as early as next week.
“The proposal [the governor’s administration] put through created this mess because of all of the other things they incorporated rather than just setting a rate freeze for the quasis,” Bridget Early, executive director of the National Public Pension Coalition, told CIO. “It’s unfortunate when this is how policy—particularly pension policy that impacts the livelihoods of the retirees—is being decided: in these shotgun moments that do not lend themselves to transparency or a conversation about how to address the root of the issue.”
The Kentucky Retirement System houses the retirement assets for five retirement plans, the two Kentucky Employees Retirement Systems (hazardous and non-hazardous), the State Police Retirement System, and the two County Employees Retirement Systems (also hazardous and non-hazardous). The one that affects the agencies is the non-hazardous variant of the ERS, which is about 14% funded, according to Brian O’Neill, a Louisville firefighter and spokesperson for activist group the Kentucky Public Pension Coalition.
The association opposes Bevin’s concept.
“It’s not good,” O’Neill told CIO, suggesting it also encourages and incentivizes those organizations (quasi-agencies) to mistreat their employees while giving them a way to get out of the retirement system. “Now you’ve got fewer people actually paying into the system, which harms the system as a whole.”
O’Neill also said the 401(k)-like solution also creates opportunity for those organizations to freeze the benefit package for their employees. This, he said, would continue to harm the pension system as no members would be paying into the KRS.
The Kentucky Retirement System is 39.3% funded, according to its most recent annual report.
A new Maryland law requires greater transparency in disclosing millions of dollars in fees paid by the state’s pension system to Wall Street investment firms.
The Maryland State Retirement and Pension System has reported paying about $370 million annually in fees to the firms that invest its $51 billion in assets.
But the real amount of fees paid is anywhere from $460 million to $570 million. That’s because so-called “carried interest fees” — a cut of the Maryland fund’s profits that goes to the outside investment managers — have not been not disclosed publicly.
Del. Kumar Barve, a Montgomery County Democrat, sponsored legislation this year to demand greater transparency, in part because he thinks the state is getting a bad deal.
“You, me and every member of the public can invest and get better returns while being charged lower fees than the state of Maryland,” Barve said.
Baltimore County Republican Del. Robin L. Grammer Jr. was the bill’s other lead sponsor.
At one point, the legislation sought to cap the amount of fees the firms could charge the pension system, but it was amended to become a bill requiring greater disclosure. Both chambers of the General Assembly passed the revised bipartisan legislation unanimously and Republican Gov. Larry Hogan signed it into law.
The pension system now must publicly disclose the amount it pays in carried interest fees by the end of each calendar year. The first report, due Dec. 31, will include the fees from fiscal years 2015 through 2019.
The pension system says it administers retirement benefits, as well as death and disability benefits, for more than 405,000 retired and current state employees, teachers, judges, state troopers and other law enforcement officers.
Barve argues the pension system needs reform because Maryland’s pension fund has underperformed passive index funds — costing the state about $5 billion in gains over 10 years that he says it’s missed out on. At the same time, fees the state has paid to dozens of Wall Street firms, which actively manage investments from the state pension system, have totaled more than $3 billion, Barve says.
Jeffrey Hooke, a senior lecturer at the Johns Hopkins Carey School of Business who co-wrote a report on the state pension fund for the Maryland Public Policy Institute, argued that the hundreds of millions in fees charged each year to the state could be used for better purposes — such as funding public schools.
Hooke estimates that Wall Street firms receive about $200 million a year from Maryland through carried interest fees; the state pension system puts the number closer to $90 million annually.
“It seems to me there is an opportunity to save a ton of money,” Barve said in February when he and Hooke testified for the bill in Annapolis.
“The public is not really aware of how much money we have been wasting to pay these fund managers,” said Carol Park, a senior policy analyst at the Maryland Public Policy Institute, a conservative think tank.
R. Dean Kenderdine, director of the state pension system, and Andrew C. Palmer, the system’s chief investment officer, testified in February against capping the fees. Both argued capping the fees would disincentivize Wall Street managers from bringing in higher returns for Maryland’s pensioners.
“The bill limits the system’s ability to generate better returns,” Palmer said.
Kenderdine and Palmer testified, however, they had no objection to disclosing the fees to increase transparency.
Maryland is part of a trend of states requiring greater transparency in their pension systems. In recent years, the California Public Employees’ Retirement System and the Pennsylvania Public School Employees’ Retirement System have released reports showing carried interest earned by the Wall Street general partners managing investments on their behalf.
In its first report, California reported $700 million in carried interest payments to investment firms in fiscal year 2015.
The Maryland bill became law July 1.
In just 10 days, pension contribution rates for regional universities and quasi-state agencies are set to about double. “It was one of those deals when once again, something was getting done at the very end of the session,” Larry Totten said of House Bill 358. When the legislature passed HB 358 on the very last night of the legislative session, Totten, the president of the Kentucky Public Retirees, felt it was a bad move. “It was pretty obvious that it was not a bipartisan piece of legislation, that there were issues that came up after it was passed that was not a surprise,” explained Totten.
Both Totten, and his counterpart with the Kentucky Government Retirees, Jim Carroll, say they were happy Governor Matt Bevin vetoed the bill. “I was relieved he vetoed the bill, because it had some serious problems with the bill having to do with the contract rights of participants inKentucky Retirement Systems,” Carroll said. However, they say Bevin’s replacement bill isn’t much better. Carroll said, “Think it’s a bad bill because it basically turns Kentucky retirement systems into a bank. It makes KRS, the Kentucky Retirement System basically take on the risk of allowing quasi government employers to leave the system and to pay off their liabilities over decades and that’s a bad idea when we’re the nation’s worst funded state pension system.”
“The bill has issues, not the least of which is that is penalizes, to some degree, Tier 1 and Tier 2 employees, depending on how their employers chose to leave KRS,” added Totten. Totten said he’s pleased with some of the governors changes to the original bill. “It’s got some things that the governor tried to address in his four points that he agreed to change. The fact that in the first version, a state employee could not sue a bill, was something I’d never seen before.”
Bevin has said he won’t call a special session until he has the votes. Senator Chris McDaniel (R-Taylor Mill) said he isn’t sure if Bevin has the votes yet. McDaniel told reporters, “Whether the House has the votes, I don’t know at this point. No-one has told me that the definitely do, so I just don’t know the answer to that question.”
Suzanne Miles (R-Owensboro), who is the majority caucus chair insinuated the House does not have the necessary votes, but did say she has been looking at scheduling. “I have been cross referencing multiple calendars and conferences. We have a lot of people who are signed up for conferences. As you know, if the governor calls a special session, those arrangements will be canceled and people will be coming in, rather than going to conferences. And that’s part of it. And we all know,” said Miles. Totten and Carroll are both hoping for more changes before the special session is called.
Carroll requested, “Lets look at putting funding, so these quasi government agencies can participate in KRS and not dis-enroll all of their employees. What we say is freeze it and then fund it. So lets go ahead and freeze the contribution rate that they’re paying now, that they’ve paid over the last fiscal year, for another year, and then lets take a serious look at funding options for the 2020 session.” Totten says he that’s what he wants, but he says he doesn’t think that will happen. If that doesn’t happen, he says he has an alternative, explaining, “What I want to happen is KRS get its funding so that all of us that worked 30 and 40 and 50 years in the system have pensions as we were promised when we were hired. Now, how you get there. There’s obviously different paths to how you get there. And funding on that isn’t part of the issue. I used to call it a hole in the dyke, now I think it’s more of a whack-a-mole issue.” Rates will go up July 1, the first payment at those rates won’t be due until the end of July, so lawmakers say they do have a bit more time.