Economy & Budget

Mismanaged pension funds are imperiling state budgets

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As the looming public pension storm gathers strength, debate is expanding past technical matters and into the governance structures of taxpayer-funded pension plans. The problems that beset our public pensions are not the result of random chance, evil spirits, or swamp gas. They are the result of conscious decisions made by human beings. Even in cases where the legislature or city council has the final say, boards of trustees are usually extremely influential in the decision-making process.

Now, some states and municipalities are beginning to mull changes to who sits on plans’ boards of trustees, with potential consequences for avoiding – or exacerbating – conflicts of interest. 

{mosads}Boards are usually composed of a mixture of trustees or directors appointed by elected officials and those elected by plan members. The elected board members represent the perceived interests of the members, while the appointed members represent the broader interests of the taxpayers and communities as a whole.


However, many of the elected trustees are more responsive to their members’ desires than to their long-term interests. Thy end up supporting new benefits or resisting cuts or reforms that might be necessary to ensure that public servants’ retirements are actually secure. Often that resistance is indirect, as when boards rely on overly optimistic return assumptions, or take on too much risk in their portfolios.

A board’s voice is often the pre-eminent one heard by plan members and retirees, who frequently direct their own advocacy organizations to testify and lobby in opposition to reforms. Boards also become the expert opinions on whom elected officials rely for their own decisions.

Some states are trying to make boards more responsible. Unfortunately, in my home state of Colorado, the Democrat-controlled State House of Representatives just passed up an opportunity to improve matters.

The dynamic around Colorado’s Public Employee’s Retirement Association (PERA) represents the influence that even boards of limited power have. In its public statements, everything is fine, plans are on track, funds are all on their way to nirvana, until they’re not

But the board itself has contributed substantially to the current underfunding. It moved too aggressively into stocks during the Dot-Com Bubble, and paid the price during the burst. For years, afterwards, it kept the assumed rate of return unrealistically high. At the behest of the governor at the time, it sold service credit at a deep discount to encourage turnover. Since the last major reform in 2010, the PERA board has consistently opposed virtually every reform proposal, even minor ones such as opening up the defined contribution plan to more employees. 

Currently, the state treasurer is the only one of 15 board members responsible to the state’s taxpayers. The rest are elected by PERA members, and usually are also PERA members themselves. A recently proposed bill would have replaced six of the elected members with appointees by the governor and treasurer. Regrettably, the bill was killed in committee, missing a real opportunity for improved governance.

In New Jersey, proposed changes to the Fire and Police pensions would actually make things worse. As Chuck Reed of the Retirement Security Initiative points out, it’s right to want to keep public pensions from being a political football. But the proposed bill would turn over the benefits management to a member-elected board, while leaving the investment and funding responsibility in the hands of appointed trustees, effectively letting members vote themselves increased benefits at the expense of other community priorities.

Typically, the political conflict of interest comes when a public employee union helps elect legislators or school boards or city councilmen who then accede to favorable benefits packages. New Jersey’s proposed changes might make things more efficient by cutting out the middle-man, but in this case the middle-man happens to be the voter whose ox is getting gored.

The consequences aren’t just theoretical, they’re real-world, and it’s not only the retirees’ and taxpayers’ futures that are on the line here.

States’ broader ability to borrow is being put at risk, imperiling the well-being of entire communities. A 2016 study by Daniel Smith and John Dove of Troy University, and Courtney Collins of Rhodes College in Memphis showed that boards with a higher proportion of appointed trustees were consistently associated with higher state bond ratings and lower borrowing costs.

As if to prove the point, Moody’s just cut New Jersey’s bond rating by one grade, in large part because of concerns about the state’s ability to handle its public pension burden.

Even as unfunded liabilities have risen, real state-level reforms and restructurings have been surprisingly hard to come by. Given that there’s no mystery about the decisions that need to be made, maybe it’s time to take a harder look at the decision-makers themselves.

Joshua Sharf (@JoshuaSharf) is a fiscal policy analyst at the Independence Institute, a free market think tank in Denver.

The views expressed by contributors are their own and are not the views of The Hill.

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