1. AN UPDATE ON PENSION OBLIGATION BONDS: A new issue brief from Center for State & Local Government Excellence examines the rationale for issuing pension obligation bonds and how they have performed since the financial crisis. The instrument, which is a general obligation of the government, alleviates pressure on a government’s cash position; and it may offer cost savings if the bond proceeds are invested, through the pension fund, in assets that realize a higher return than the cost of the bond. Here are a few key findings:
- Some state and local governments issue POBs to cover their required pension contributions.
- POBs offer budget relief and potential cost savings, but also carry significant risk.
- POBs had a negative average real return from 1992-2009, but show a small gain (1.5%) when the time period is extended to 2014.
- POBs could be a useful tool for fiscally sound governments or as part of a broader pension reform package for fiscally stressed governments.
- But results to date suggest that, instead, POBs tend to be issued by governments under financial pressure who have little control over the timing.
The brief concludes that governments are more likely to issue POBs if their debt levels are high, they are short of cash, and the pension plan represents a substantial obligation to government. If the timing is good, governments will earn more on the proceeds than they have to pay in interest.
2. PENSION BOARD HAS SOLE JURISDICTION TO DETERMINE WHETHER PENSIONER SHOULD FORFEIT BENEFITS: The Supreme Court of the state of Illinois was presented with a question regarding termination of pension benefits being received by Burge, a former Chicago police officer who was convicted of committing perjury in a civil lawsuit after he denied having any knowledge of suspects being tortured in the police unit under his command. What was at issue, however, was not whether Burge, or any similarly situated police officer, is legally entitled to continue receiving pension benefits. Rather, the narrow question was who decides whether the pension benefits should be terminated. The circuit court of Cook County held that deciding whether to terminate Burge’s pension benefits was a “quintessential adjudicative function,” which rested exclusively within the original jurisdiction of defendant Retirement Board of the Policemen’s Annuity and Benefit Fund of Chicago, subject to review under the Administrative Review Law. The appellate court reversed, holding that the circuit court had concurrent, original jurisdiction with the Board to determine whether Burge’s benefits should be terminated. The Supreme Court reversed the appellate court, and affirmed the circuit court. The pension code states that the Board shall have exclusive original jurisdiction in all matters relating to or affecting the fund, including, in addition to all other matters, all claims for annuities, pensions, benefits or refunds. And while the statutory prohibition against providing pension benefits to a person convicted of a felony relating to, arising out of, or in connection with his service as a policeman is absolute, in each individual case, the statutory standard will have to be applied to discrete facts and circumstances. The Supreme Court was quick to add the opinion should not be read, in any way, as diminishing the seriousness of Burge’s actions while as supervisor, or the seriousness of police misconduct in general. The question was limited solely to who decides whether a police officer’s pension benefits should be terminated when he commits a felony. (On a motion to terminate the subject pension benefits, the vote was four to four, thus, failing to carry.) On this issue, the legislative intent is clear. The decision lies within the exclusive, original jurisdiction of the Board. Madigan v. Burge, Docket Nos. 115635, 115645 (Ill. July 3, 2014).
3. NYC PROPERLY MADE DEDUCTIONS FROM GROSS ANNUAL WAGES OF TIER 3 POLICE OFFICERS AND FIREFIGHTERS, AS MANDATORY EMPLOYEE PENSION CONTRIBUTIONS: The New York Court of Appeals was asked to consider whether Retirement and Social Security Law § 480(b) requires the City of New York to make "Increased-Take-Home-Pay" pension contributions on behalf of New York City police officers and firefighters appointed on or after July 1, 2009. These public employees are tier 3 members of the New York City Police Pension Fund and the New York City Fire Department Pension Fund. That section was enacted in 1974 as part of an omnibus pension clean-up bill, and was periodically amended thereafter to extend any program otherwise set to expire or terminate in 1974 under which an employer or a public retirement system funded by the state or one of its political subdivisions assumes all or part of the contribution that would otherwise be made by its employees toward retirement. The tier 5 pension reform legislation, approved by the Governor on December 10, 2009 and effective 30 days thereafter, made the statute permanent by striking the 2011 expiration dates then in place. The Increase-Take-Home-Pay is concededly a program within the meaning of Section 480(b). The Court of Appeals concluded that Section 480(b) only encompassed temporary programs in place as of 1974 for tier 1 and 2 members of a public employee retirement system. In other words, section 480(b) does not obligate a public employer to pay any portion of a tier 3 public employee's statutorily required pension contribution. Accordingly, the city properly deducted 3% from the gross annual wages of its tier 3 police officers and firefighters as mandatory employee pension contributions. This interpretation is consistent with the overall with the overall design of New York's tiered public employee pension systems and the series of pension reforms implemented to reduce pubic employers' pension costs. Further, the Governor vetoed the extension of Section 440(c) in June 2009 explicitly to lessen the financial burden on state and local governments of pension costs for police officers and firefighters, and increased employee contributions are a major way for public employers who offer defined benefit pension plans to reduce costs. It is difficult to believe that in December 2009 the Governor signed pension reform legislation that substantially and silently undid his six-months-earlier veto by creating a noncontributory pension for the City's tier 3 police and fire members, while at the same time tier 3 and 5 police officers and firefighters elsewhere in the state were required to contribute 3% of their annual wages to the retirement system.Lynch v. City of New York, Case No. 119 (N.Y. June 30, 2014).
4. RESULTS FROM SURVEY OF PUBLIC WORKERS ON RETIREMENT BENEFITS: For the past several years, policymakers across the country have been taking a close look at state and local retirement systems. Since 2009, 48 states have enacted retirement plan changes, with some states enacting multiple reforms, in an effort to make pension plans more fiscally sustainable. The recent and widespread adjustments to public sector retirement systems have increased the need to know more about state and local workers’ retirement preferences; in addition to increasing pension solvency and helping employees achieve a secure retirement, policymakers should aim to recruit and retain a talented public sector workforce. While many national surveys have looked at retirement-related issues, few have focused specifically on state and public sector workers. The Pew Charitable Trusts hired a national market research firm to survey public workers on retirement plan design, retirement knowledge and retirement confidence. In all, 53% were teachers or other education workers. Twenty-five percent were local non-education workers, and the remainder were state non-education workers. Some key findings are
- More than two-thirds of state and local public workers expressed confidence that they would have enough money to live comfortably in retirement -- a substantially larger proportion than those surveyed recently in a separate study of the U.S. workforce, as a whole.
- Public employees also said that they place high importance on their retirement and pension plans, they rank job security, work-family balance, and health care above retirement benefits. A majority said they were at least somewhat satisfied with their retirement benefits. However, a substantial number, especially many younger workers, indicated they were unsure what type of retirement plan their government employers offered.
- Sixty-nine percent said they were very or somewhat confident they would have enough money to live comfortably in retirement, compared with 55% of Americans surveyed in a separate study in January of 2014 (See Item 5 below and C & C Newsletter for March 20, 2014 Item 3).
- Female public employees were less likely than men to express confidence in their retirement situation: 63% of women said they were very or somewhat confident, compared with 77% of men.
5. PRIVATE SECTOR LESS CONFIDENT IN RETIREMENT FUTURE: As might be expected (see Item 4 above), private sector employees are less confident they would have enough money to live comfortably in retirement. Compare results of the Pew Charitable Trust survey with those of the Retirement Confidence Survey 2014 fact sheet #1.
6. IMPACT OF NEW MORTALITY TABLES ON PENSION PLANS:Plansponsor.com reports on Wilshire Consulting’s estimates that defined benefit pension plan liabilities will increase between 3% and 8% in total for most plans when they move to new Society of Actuaries mortality tables. Wilshire expects that many corporate plan sponsors will use the new mortality tables to calculate their accounting liabilities for the 2014 year-end disclosure. Even though the table is still in exposure draft form, auditors are likely to require the use of these tables for 2014 fiscal year-end disclosures. This move will immediately increase reported pension liabilities and therefore decrease reported pension surpluses or increase reported pension deficits on balance sheets. The increase in liabilities will increase pension expense or decrease pension income. For sponsors reporting under U.S. Generally Accepted Accounting Principles, the increase in liability will likely be reflected in higher loss amortizations over the expected working lifetime of the plan population. For plans reporting under International Accounting Standards, the increase in liabilities will likely be reflected immediately in 2014 results. Finally, the increase in pension liability values will increase their duration (that is, make liabilities more sensitive to interest rate changes). When the impact of improved mortality is adopted by Internal Revenue Service, the result will be lower funded ratios and higher minimum required contributions.
7. RECLAIMING MISTAKENLY-PAID PENSION BENEFITS: The United States Court of Appeals for the Ninth Circuit affirmed the district court’s summary judgment in favor of Alaska Electrical Pension Fund on claims (1) that the fund abused its discretion in denying Gabriel benefits under the Alaska Electrical Pension Plan and (2) that he was entitled to equitable relief under ERISA. For over three years, the fund paid Gabriel monthly pension benefits he had not earned. When it discovered an earlier determination that Gabriel had never met the plan’s vesting requirements, it terminated his benefits. The court affirmed on Gabriel’s claim that the fund violated its fiduciary duties under ERISA or terms of the plan and he therefore was entitled to “appropriate equitable relief.” The court also held that Gabriel was not entitled to an order equitably estopping the fund from relying on its corrected records that showed his actual years of service, because he failed to show a letter informing him that he would receive a pension was an interpretation of ambiguous language in the plan, rather than a mere mistake in assessing his entitlement to benefits, and he also failed to show that he was ignorant of the true facts. The court held that Gabriel was not entitled to equitable remedy of reformation based on mistake under trust or contract law principles because he failed to demonstrate that a mistake of fact or law affected terms of the plan. He also was not entitled to reformation based on fraud. Further, he was not entitled to the equitable remedy of surcharge, to receive an amount equal to the benefits he would have received if he had been a participant with the hours erroneously reflected in the fund’s records when he applied for benefits, because he did not show that the fund was unjustly enriched by its alleged breaches of fiduciary duty. In addition, the surcharge remedy Gabriel sought would not restore the trust estate, but rather would wrongfully deplete it by paying benefits he was not eligible to receive under the plan. Gabriel v. Alaska Electrical Pension Fund, Case No. 12-35458 (U.S. 9th Cir. June 6, 2014).
8. PENSION INDICES IMPROVES: Strong equity returns and a slight uptick in bond yields combined to move the pension index upward in June. The Towers Watson Pension Index increased 1.2% in June, to 75.1, following three months of decline. The equity portfolio returned 2.4%, and is up 6.5% for the year to date. Yield declines so far this year have resulted in even stronger fixed income returns. Long yields moved up slightly in June, but remain down about 50 basis points for the year. The credit spread (the incremental yield on long corporate vs. long government bonds) remains in the typical range of 90-100 basis points. Meanwhile, Mercer separately reported that aggregate funding level of pension plans sponsored by S&P 1500 companies rose 1% in the month of June, to end the second quarter with a funded ratio of 85%.
9. DETROIT, POLICE UNION MAKE TENTATIVE BANKRUPTCY DEAL: The City of Detroit reached a tentative contract with its largest police union, potentially resolving one of the city's last remaining labor disputes as it nears a potential exit from Chapter 9 bankruptcy. As reported by governing.com, the tentative deal came just before votes were due on the city's bankruptcy restructuring blueprint, called a "plan of adjustment." The Detroit Police Officers Union agreed to recommend a "yes" on the plan, after reaching a multiyear deal on wages, pensions and health care benefits. The union and the city agreed to continue negotiations to try to reach a five-year deal. The pact adds to likelihood that pensioners will approve a pension deal to help resolve Detroit's bankruptcy. The city's firefighters union is now the largest remaining city labor group yet to agree to a deal.
10. BEST CITIES FOR EMPLOYEES SATISFACTION: Where in the U.S. are employees most satisfied? The online career site Glassdoor has released its annual Employment Satisfaction Report Card by City, offering a comparison of overall employee satisfaction, including with compensation and benefits, career opportunities, number of employers hiring, and business outlook expectations. Here are the top ten (plus number 26):
- San Jose, California
- San Francisco, California
- Washington, D.C.
- Norfolk, Virginia
- Salt Lake City, Utah
- San Diego, California
- Seattle, Washington
- Oklahoma City, California
- San Antonio, Texas
- Austin, Texas
- Miami-Ft. Lauderdale
11. WHY TEACHERS DRINK: Q. What does the word “benign” mean? A. Benign is what you will be after you be eight.
12. TODAY IN HISTORY: In 1965, Rolling Stones score their 1st US #1 single “(I Can’t Get No) Satisfaction.”
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