Rhode Island Pensionary Red

As the Ocean State heads to court this morning to defend its landmark pension overhaul law against a challenge from public sector unions, it’s not clear the state will sport a united front. Gov. Lincoln Chafee this week expressed his view that the state should explore “reasonable settlement options,” while Treasurer Gina Raimondo wishes to remain steadfast: “We should litigate that case forcefully. The law is on our side and we have a very good case.” The kerfuffle is over the legal challenge to the Rhode Island Retirement Security Act of 2011, which Gov. Chafee signed into law a year ago last month, new law that created a hybrid plan merging conventional public defined-benefit pension plans with 401(k)-style plans. It also included a suspension of cost-of-living adjustment increases for retirees and raises the retirement age for employees not yet eligible for retirement. The new law was guesstimated to cut Rhode Island’s $7 billion unfunded pension liability by roughly $3 billion over 20 years—and the state’s hard-pressed cities and towns $1 billion over the next two decades. Five public-sector unions are challenging the law in the Rhode Island Superior Court.

Pensionary Disclosures

GFOA, in a new best practice document, wrote that state and local government issuers with pension obligations that could either affect their ability to pay debt service or hurt their financial condition should consider disclosing more pension information in their official statements. The document, recently approved by GFOA’s executive committee, says that for more extensive pension disclosures issuers should refer to guidance published in May by the National Association of Bond Lawyers. NABL worked on that guidance for more 15 months with a dozen muni market groups, including GFOA. Traditionally, most state and local governments have taken the pension-related information in their comprehensive annual financial reports, or CAFRs, and replicated that in their official statements, according to John Tuohy, deputy treasurer of Arlington County, Va., who worked on the GFOA best practice document. The organization now writes that if state and local governments’ pension obligations could be material to their debt service payments or could otherwise affect their creditworthiness, they may need to go further with their disclosures. The GFOA document recommends issuers develop procedures for determining the level of pension information that needs to be disclosed in their official statements. It says state and local governments should ask themselves a series of questions, including if the debt service on the proposed bond issue would be dependent on the same revenue source or sources as the pension obligations. Other key questions are whether there are pension-related legal restrictions or requirements that would place pension funding senior to debt service payments and whether there are pension-related trends that would be material to investors. The GFOA document says that if the answers to these questions show pension obligations could adversely affect the ability to pay debt service, then issuers should refer to the NABL paper, particularly its Appendix D, and should consider other sources for additional disclosures. These may include the pension plan’s actuarial reports, legal and legislative actions affecting pension plans or obligations, and pension information included in the government’s adopted budget.

Pensionary Tales

Local governments in Michigan would be able to issue general obligation bonds to cover costs tied to shifting to a 401(k)-style retirement plan as well as for other-post employment benefit liabilities under legislation sent to Gov. Rick Snyder Friday. Senate Bill 1129 is an effort to aid local governments’ transition to a less-costly employee retirement system and help bring down retirement liabilities, which some local officials say threaten their fiscal stability. The measure moved quickly through the state House and Senate, which approved it last Thursday with only one change since it was introduced in early summer. “Legislation doesn’t usually move that fast, but this sailed right through,” said Samantha Harkins, director of state affairs for the Michigan Municipal League, which supported the measure. The one change broadens the measure to allow local governments to issue bonds to cover their OPEB liabilities as well as costs associated from closing their defined-benefit plans. The expanded OPEB bonding authority is a happy ending for supporters who for years have pushed for such legislation. To qualify for the borrowing, municipalities would have to agree to close their defined-benefit plans. They would have the option of switching employees to a defined-contribution plan, but could not increase the benefit levels of the closed defined-benefit plan once the bonds have been issued.

Converting to a defined-contribution plan forces the government to pay more in up-front costs, as it triggers accelerated payments under the actuarial accounting method used by Michigan. The new borrowing authority is one way to avoid that penalty, supporters said. If signed by Snyder, the new law will help local governments stabilize their long-term retirement costs, according to Ms. Harkins. “That spiking in costs is going to be difficult,” she said. “This will be a long-term cost savings not only for these communities, but also for the taxpayers who are paying for these benefits, which, in their current form, are unsustainable.” Municipalities that issue bonds under the new legislation must be rated double-A or higher and the Michigan treasurer must approve it. Issuers would be able to pay off all or part of their retirement liabilities with the borrowing. They would have to stay within current debt limits and prove that they can cover the debt payments with general-fund dollars. The bonds would be structured as limited-tax GOs with few other structural restrictions. The first serial or term maturity could not occur later than five years after the date of issuance. The measure will give local governments another tool and more flexibility to pay down their unfunded accrued liability, independent Senate Fiscal Agency analyst Kathryn Summers noted in a June analysis of the legislation. Ms. Summers noted: “However, the actual resulting fiscal impact is unknown and would depend upon the cost of the security compared to market performance, the impact (if any) on the municipality’s credit rating, and the potential risks associated with converting a ‘soft’ debt of the municipality into a ‘hard’ debt with a rigid and fixed repayment schedule.” 

California Dreamin'

California Gov. Jerry Brown has signed legislation to create the nation’s first state-administered retirement savings program for private-sector workers. The new law will establish the California Secure Choice Retirement Savings Program for more than 6 million lower-income, private-sector workers whose employers do not offer retirement plans. Under the new program, employers will withhold 3% of their workers’ pay unless the employee opts out of the savings program, which can be done every two years. It would be administered by a seven-member board chaired by the state treasurer. The board would select a professional fund manager, which could be a private investment firm or the state’s public pension system, to maintain the money. State Sen. Kevin De Leon, D-Los Angeles, introduced the bill earlier this year in response to what he called the “looming retirement tsunami” as millions of lower-wage workers face financial hardship in their retirement years. The new law will not be implemented unless the savings program is projected to be self-sustaining and exempt from federal rules that cover private-sector defined benefit plans. Such plans have to meet minimum standards under the federal Employee Retirement Income Security Act. The legislation also requires the board to submit an annual audit. It was initially opposed by businesses, insurance companies and financial services firms. 

Retirement Benefits

Dane County Judge Juan Colas overturned portions of the new Wisconsin law, Act 10, affecting local governments as part of a lawsuit filed by unions in Milwaukee and Madison. The judge determined they violated free-speech rights and the equal protection clause of the state constitution, because safety personnel unions were excluded. Now, Moody’s has opined that the state court ruling overturning portions of Wisconsin’s controversial law curtailing collective bargaining rights could negatively impact local governments if it stands, Moody’s Investors Service warned. As enacted, the new law sharply limited collective bargaining rights at the state and local government level. Concurrently, the Badger State increased pension and health care premium payments for employees and cut local aid to governments to help eliminate the $3.6 billion deficit in its two-year $66 billion budget, relying on the collective bargaining changes at the local level to offset the cuts in aid. The changes were projected to save around $1 billion annually in spending by municipalities. The law stripped non-public safety unions of their right to bargain over salary and benefit issues with the exception of base wages that were capped at growth in the consumer price index. Before passage of the law last year, those issues were subject to negotiation. In its report, Moody’s noted: “Ultimate repeal of these provisions of Act 10 would be a credit negative for Wisconsin local governments, because it would slow the process of reducing public employee benefit costs by requiring negotiations with public sector unions to achieve cost savings.” While many local governments are still obligated to pay such benefits at levels set in existing contracts, Moody’s noted that many local governments have already realized significant savings during the past year. Wisconsin Attorney General J.B. Hollen appealed the Dane County decision and is asking the court to stay the lower court ruling during the appeals process. Moody’s warns that if the ruling is upheld on appeal, “Wisconsin cities, counties, villages, and school districts will have to return to traditional bargaining in order to manage personnel expenditures, a category which represents the majority of local government spending,” Madison Teachers et al v. Scott Walker, #11CV3774, Wisconsin Circuit Court, September 14, 2012.

Comin’ to you from LA, Baby

The Los Angeles City Council unanimously adopted a new retirement plan under which spouses of retired workers will no longer be eligible for city-funded healthcare. City employees will see their take-home pay reduced in years when their retirement fund takes a hit in the stock market, and employees who retire at the age of 55 after 30 years of city employment will receive pensions that are roughly one-third the amount provided to existing employees. The changes will only apply to newly hired civilian workers and will not affect the retirement benefits of police officers, firefighters, and employees at the Department of Water and Power. It will need a second vote within 30 days to go into effect. In the nonce, the council instructed city negotiators to meet with union leaders to try to find common ground and to avert a lawsuit.

Municipal Blues

U.S. District Judge Marvin J. Garbis has struck down a key provision of Baltimore Mayor Stephanie Rawlings-Blake’s overhaul of the fire and police pension system. The decision could force the city to pay tens of millions of dollars more to retirees each year. Judge Garbis held that the city’s decision to change the method for determining annual increases for retirees — resulting in less money for many — was “unconstitutional” and not "”reasonable and necessary to serve an important public purpose.” The provision was one part of a 2010 ordinance that also delayed retirement for many police and fire employees and increased their contributions to the pension system. If the ruling stands, the total cost to the city is unclear. When Mayor Rawlings-Blake introduced the pension overhaul in 2010, she said it would head off imminent fiscal crisis, saving the city at least $64 million a year. Under the adopted—but now struck-down—plan, firefighters and police officers would have been required to increase their contributions to the pension fund. Those who had worked for the city for fewer than 15 years were told they would no longer be able to retire after 20 years, but would have to work for five additional years. Retired workers also would have lost what was called the “variable benefit,” an annual increase tied to the stock market. Instead, the youngest retirees received no annual increase, and older retirees received a 1-2% annual increase. In his decision, Judge Garbis said that the law’s cost-of-living adjustments were unconstitutional in that they harmed younger retirees too severely: [The plan “had the pernicious effect of eliminating and/or reducing annual increases from retirees under 65 at the time of enactment and, consequently, significantly reducing their pensions when they became 65…it was not reasonable…There was an important public purpose to be served by the restructuring of the Plan so as to restore it to actuarial soundness and sustainability….; [H]owever, the City did not have total freedom to disregard its contractual obligations altogether.”

Pensionary Tales

The investment holdings of the 100 largest state and local public pension systems fell 1.5% from $2.76 trillion to $2.72 trillion in the second quarter of 2012, according to a U.S. Census Bureau survey released yesterday. The total cash and security holdings of these pensions, which comprise more than 89% of activity amongst public employee pension systems, fell 2.2% from the $2.78 trillion of pension fund holdings in the second quarter of 2011. Prior to the second quarter of this year, pension holdings had risen for three consecutive quarters. Total contributions to these pension systems also fell following three consecutive quarterly increases, dipping from $33.4 billion to $31.6 billion, a 5.4% decline. Total payments dropped slightly, from $54.9 billion in the first quarter to $53.4 in the second quarter, a 2.7% decline.

Pensionary Tidings

State treasurers at their annual meeting this week voted to urge Moody’s to carefully consider the consequences of its proposed changes to analyzing public-sector pension data, warning it would muddy already complicated pension issues for the public and financial markets. The resolution noted that NAST has “severe reservations” about Moody’s proposed changes. Moody’s would allow the pension obligations of state and local governments to be compared and would treat pension liabilities like debt so that it can better analyze the long-term liabilities of governments:  “Moody’s reporting of new and different pension liability and cost information at the same time that public plans are beginning to transition to the new GASB pension accounting standards will create confusion among members of the public, investors and policymakers.” NAST also agreed to send a four-page comment letter to Moody’s in response to its proposed changes. There is apprehension that even if the changes are just for accounting purposes, it will be confusing for states that have different pricing and operating pension plans while they are beginning to comply with the new GASB rules. Moody’s first announced the proposed adjustments in July, which would nearly triple, from $766 billion to $2.2 trillion, the unfunded pension liabilities reported by state and local governments in 2010. The adjustments would highlight the weakest funded pensions and could result in rating downgrades for local governments, the agency said. In its letter, NAST noted: “NAST is concerned that the proposed methodology will produce misleading results that could in fact negatively impact the accuracy of financial reports in many cases and distort comparisons across state and local governments…This methodological approach may achieve standardization at the cost of accuracy and thereby distort market pricing of state and local government borrowing.” The resolution stated that NAST believes it “would be more appropriate to employ a discount rate which recognizes the fact that public sector pension plans are significantly different from their private sector counterparts.”