Public Employee Pension Plans

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These executive summaries were compiled from EMPLOYEE BENEFITS INFOSOURCE database, a source for information on employee benefits and human resources.

Eddy Award Winners Run From Serious to Pure Fun.
Steyer, Robert; Pensions & Investments; v40 no6 pp 3, 31 Mar 19, 2012; journal article

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Abstract : Detailed information and irreverent humor were prevalent at the 2012 Eddy Awards. Several projects won both plan sponsor and service provider awards, but only Lansing, Michigan's Municipal Employees' Retirement System won two sponsor awards, achieving first in both initial education and conversions for public plans with its clear and comprehensive communication program for its move to in house plan administration. Thomson Reuters' short video used humor and graphics to take first in ongoing investment education for corporate sponsors. NBCUniversal won first place in special projects for corporate sponsors, casting news anchor Brian Williams and comedian Jimmy Fallon to introduce a new 401(k) plan. Francis Investment Council LLC went against the trend of distancing communication themes from company business to take first place in special projects for service providers working with corporate plans of less than 1,000 employees with its free oven mitt promotion to encourage attendance at a 401(k) meeting for employees of Wisconsin Oven Corp.
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Pensions: New York Legislature Approves Public Employee Pension Cuts.
Silverman, Gerald B.; Daily Labor Report; no51 p A12 Mar 15, 2012; journal article

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Abstract : New York Governor Andrew M. Cuomo is expected to sign legislation approved on March 15, 2012, that is aimed at cutting about $80 billion in pension costs over three decades. S6735 would establish a separate tier for public employees hired after April 1, 2012. These hires would pay more, between three and six percent of their salary, for lower pension benefits at retirement. The retirement age would rise by one year and the pension multiplier increases to 60 percent. As the basis for pension benefit calculations, final pay will reflect five years, cap overtime and cut unused sick and vacation time. The state's public employee unions and the AFL-CIO oppose the bill, but the governor insisted it is essential to curtail spiraling public pension costs.
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State Laws: Judge Strikes Down 2011 Florida Law Requiring Public Worker Pension Contribution.
Douglas, Drew; Daily Labor Report; no46 p A9 Mar 8, 2012; journal article

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Abstract : The Florida Circuit Court struck down SB2100, a state law signed in May 2011, since it violated Florida's constitution. The judge hearing Williams v. Scott ruled provisions in the law requiring employees to contribute three percent of pay for their pensions and ending cost of living adjustments for service after July 1, 2011, violated state workers' employment contracts and took their private property without compensation. The law also limited their rights to collectively bargain working conditions. The judge granted summary judgment for the plaintiffs. The law's modifications to the Florida Retirement System were intended to help address a $3.6 billion state budget shortfall.
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Incorporating Best Practices Into Your 403(b) Plan.
Luckenbach, Carole Anne; Benefits Magazine; v49 no3 pp 22-29 Mar 2012; journal article

Availability : International Foundation of Employee Benefit Plans
Abstract : As individual participant investing becomes more important in 403(b) plans, sponsors should adopt a best practices model to support participants. Since these plans are more likely to feature investments with higher fees, fee disclosure is crucial. Unbundling services and fees and moving toward an open investment architecture plan is strongly recommended. Plan sponsors, even if not bound by ERISA, have some fiduciary responsibility under state or other laws and may want to consider fiduciary liability insurance. Aon Hewitt found that offering participants decision making tools and target date funds leads to higher returns and lower risk. Plan sponsors and committee members would do well to seek the services of an investment or pension consultant. A white paper produced by the California Teachers Association details institutional best practices for 403(b) and 457 plans, starting with the need for an appropriate plan governance structure.
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Accounting: GASB Reaffirms Scope and Approach for Changing Pension Funding-Based Model.
Lugo, Denise; BNA's Pension & Benefits Reporter; v39 p 290 Feb 14, 2012; journal article

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Abstract : The Governmental Accounting Standards Board (GASB) met considerable pushback from commenters on its mid-2011 proposal to revise pension accounting. The existing approach for measuring and recognizing assets and liabilities does not sufficiently meet financial reporting objectives, but the costs of change would be significant. Without change, the same measures can be used for accounting and financial reporting as well as for funding purposes. The GASB stated its focus should not be on funding but on financial reporting of pension benefits. The board reaffirmed that net pension liability is a liability and should be reported as such.
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Public Employees: Arizona Judge Rules Unconstitutional Law Changing State Retirement System.
Carlile, William H.; Daily Labor Report; no26 p A8 Feb 8, 2012; journal article

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Abstract : A judge struck down Arizona SB1614 which would have forced current state employees to pay more for their pension benefits. In Barnes v. Arizona State Retirement System the Arizona Superior Court granted summary judgment for seven teachers challenging the law, which Governor Jan Brewer had signed in April 2011 hoping to save $60 million annually. The judge declared changing the contribution share from 50/50 to one requiring 53 percent from employees with no additional benefit amounted to a breach of contract, infringing on the employees' contractual relationship with the state. It violated both the state and federal Constitutions and contradicted established state legal precedent.
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States Taking Hard Look at Pensions.
Kujawa, Patty; Workforce Management; v91 no2 pp 9-12 Feb 2012; journal article

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Abstract : A study by Joshua Rauh of Northwestern University reveals $4 trillion in unfunded liabilities for state and local pension systems as of late 2011. The gap caused 29 state legislatures to make significant pension plan changes in 2011, a jump from 21 in 2010 and six in 2009. The most common change was boosting employee contributions, enacted in 16 states, while 21 states made other design changes. Wisconsin exemplified the challenge felt by many states. With the largest budget shortfall in Wisconsin history, Governor Scott Walker required employees to start contributing to their benefit costs and ended many union collective bargaining rights.
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Public Plans Prepare for Switch to Mark-to-Market Accounting.
Bradford, Hazel; Pensions & Investments; v39 no1 pp 3, 22-23 Jan 9, 2012; journal article

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Abstract : In 2012, public defined benefit (DB) plans will have new accounting standards that require mark-to-market accounting. While corporate plans can ignore the voluntary standards, public plans will be obligated to use the government standards, which in the poor economic conditions of the time of the change will lead to larger liability numbers. This may make it harder for a DB plan to maintain funded status. The new rules will also make plan balance sheets more complicated and harder to explain.
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New IRS Regulation Project Tackles Definition of 'Governmental Plan'.
Dahm, Kimberly; Levine, David; Powell, David; BNA's Pension & Benefits Reporter; v39 p 31 Jan 3, 2012; journal article

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Abstract : Since governmental pension and welfare plans are exempt from ERISA standards, a growing number of political subdivisions have been arguing for the status. In November 2010, the IRS announced its intent to propose updated rules. The major challenge will be to clarify what an agency or instrumentality of a state or political subdivision of a state is. The IRS outlined several major factors and minor factors as criteria. Nongovernmental employees must be excluded from governmental plans, with limited exceptions, and the plan must be established and maintained by a governmental entity. Under the proposal, federal credit unions are seen as nongovernmental tax-exempt organizations permitted to sponsor Section 457(b) plans. The IRS will make available some transition and corrective relief and will propose separate regulations to cover Indian Tribal Governments. Governmental entities should monitor proposals and comment as needed to address concerns.
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Section 457(f) Plans: The Multi-Dimensional Substantial Risk of Forfeiture Conundrum.
Dahline, Susan L.; Journal of Pension Benefits; v19 no2 pp 89-95 Winter 2012; journal article

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Abstract : Benefit plans funded with an employer's general assets but where those assets are subject to creditors leave benefits without secure funding and at substantial risk of forfeiture (SROF) by the employee who earned it. Such unfunded nonqualified deferred compensation arrangements are subject to Internal Revenue Code Sections 457(f), 409A and 83. The IRS intends to provide guidance that will coordinate SROF definitions under each code section. However, since the codes address different purposes, it is not clear that the definitions should be identical. Section 409A aims at punishing taxpayers for abusing rules, while Section 457(f) is focused on designing ineligible plans. The definition for Section 409A may need to be more flexible than that for Section 457(f). Tax-exempt employers considering nonqualified deferred compensation plans should watch for promised IRS guidance and review existing plans for potential trouble spots.
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Solving the Public Pension Plan Dilemma.
Van Bogaert, Dan; Journal of Pension Benefits; v19 no2 pp 37-45 Winter 2012; journal article

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Abstract : Proponents of government pension funding reform argue that the funding ratio of a public defined benefit (DB) plan should be kept at or near 100 percent to ensure that plan assets will be able to pay benefits. Opponents argue that the different actuarial approaches for public plans make the need for such reform unclear, and that many public plans are already adequately funded. Those advocating reform of government pension levels argue that government pensions are too generous, while those against it say it is difficult to prove that the average public plan is too expensive. In favor of collective bargaining reform are the arguments that collective bargaining has built in conflicts of interest. Against collective bargaining reform is the fear that limiting bargaining rights would lead to a decline in work standards. Based on an objective analysis of the arguments, the author analyzes different points of view on the complex issue of the reform of public employee plans.
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Announcement 2011-79: Indian Tribal Governmental Plans.
Internal Revenue Bulletin; no2011-51 pp 892-903 Dec 19, 2011; journal article

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Abstract : The IRS and Department of Treasury issued an advance notice of proposed rulemaking pertaining to Indian tribal government plans, since the concept and key terms are not defined in the Internal Revenue Code or the language of ERISA. The Pension Protection Act and Section 414(d) of the code address governmental plans established and maintained by an Indian tribal government, subdivision, agency or instrumentality, in which plan members are employees who perform essential governmental and noncommercial activities. A draft of the proposed regulation is included for public comment.
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Public Plans: Michigan Supreme Court Upholds Governor's Plan to Tax Public Pensions.
Macaluso, Nora; BNA's Pension & Benefits Reporter; v38 p 2147 Nov 22, 2011; journal article

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Abstract : The Michigan Supreme Court ruled that most of a plan to tax public pension plan benefits complies with the state constitution, in response to In re Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38. The plan was also ruled to work with the Equal Protection Clause of the U.S. Constitution. One provision would phase out tax exemptions for higher income retirees, amounting to a graduated income tax in violation of state law. This provision could be removed from the plan. Though Governor Rick Snyder applauded the decision for providing budgetary stability with low impact, the state employees' group viewed it as a reflection of the political leanings of the heavily Republican state Supreme Court and expects to take the matter to federal court.
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Pensions: Rhode Island Governor Signs Into Law Sweeping Pension Overhaul Measure.
Kessler, Martha; Daily Labor Report; no224 p A6 Nov 21, 2011; journal article

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Abstract : Lincoln Chafee, governor of Rhode Island, signed a radical change in the state pension system into law, intended to deal with the state's unfunded liability of between $7 billion and $9 billion, lowering it by $3 billion. The Rhode Island Retirement Security Act establishes a hybrid pension structure with defined benefits and a new defined contribution (DC) component. Total state and local employer contributions will be lower in 2013, but the state will boost DC plan contributions by one percent of each employee's salary. Most employees' contributions remain the same and teachers' required contributions will be cut slightly. The greater part of the contributions will go to DC plan accounts. Employees will be vested in five years, not ten. Retirement eligibility will range from age 59 to 67 and be based on years of service, starting after June 30, 2012. Fitch Ratings hailed the law for promoting the state's financial stability.
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Public Employees: Massachusetts Governor Signs Legislation to Alter Pensions for Future State Workers.
Valliere, Rick; Daily Labor Report; no224 p A7 Nov 21, 2011; journal article

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Abstract : A law signed by Massachusetts Governor Deval Patrick should save $5 billion over 30 years but will affect pensions that state employees hired after April 2, 2012 will receive. The law raises retirement age ranges for most from between 55 and 65 years to between 60 and 67. For police officers, firefighters and corrections officers, retirement age rises to between 50 and 57 years. For others in jobs with hazardous duties, the range changes slightly to between 55 and 62 years. Pension benefits would be based on the last five years of work rather than the last three years, and the base amount for retiree cost of living adjustments increases by $1,000. Early retirement incentives will be weakened. The advocacy group Mass Retirees criticized the law as threatening public safety and penalizing those with long careers hoping to retire before age 67.
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Institutional Assets Pour Into Hedge Funds.
Williamson, Christine; Pensions & Investments; v39 no23 pp 1, 46 Nov 14, 2011; journal article

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Abstract : According to a Pensions & Investments analysis, institutional investors have put almost $39.9 billion into hedge funds from January 1, 2011 to November 10, 2011. If that pace holds for the rest of the year, it will beat 2010 by 24 percent but trail 2007, which saw more than $66 billion in institutional hedge fund investing. Some of the largest influxes have been from first time hedge fund investors, including two municipal retirement systems that plan to complete their multibillion dollar hedge fund portfolios in less than a year. Hedge fund investors in 2011 remain dedicated despite market volatility. This volatility has apparently discouraged hedge fund investors in aggregate, leading to a net $24.5 billion outflow for third quarter 2011 alone.
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Court Considers Vesting of Indexing Benefits in a Defined Benefit Pension Plan.
Godkewitsch, Clio; Canadian Benefits & Compensation Digest; v29 no5 pp 2, 4 Nov 2011; journal article

Availability : International Foundation of Employee Benefit Plans
Abstract : The Pension Plan for Certain Bargaining Employees of New Brunswick Hospitals finalized a funding policy in 2008 which was soon found to be unsustainable due to the economic recession. Forced to trim costs, the plan sought the court's interpretation of provisions regarding indexing or cost-of-living adjustments for pension benefits. In Quinn et al. v. The Province of New Brunswick et al., the Court of Queen's Bench New Brunswick judged cutbacks were necessary for the plan to survive. The court ruled the cost-of-living adjustments are vested upon plan termination or a participant's retirement or death. The proposed plan amendment was determined to comply with plan provisions when applied to those who have retired or died, and future indexing adjustments for retirees must remain in place.
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Planning a Successful Pension Funding Policy.
Segal Company: Public Sector Letter; pp 1-6 Nov 2011; journal article

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Abstract : Reviewing and updating a pension plan's funding policy is a good start to assuring stakeholders that their plan will be adequately funded. A funding policy's primary goals are creating predictable budgets, ensuring benefits are paid and making sure the costs of the plan are shared fairly across generations. The three major elements of a funding policy are the actuarial cost method by which the total cost of future benefits is allocated, the method of asset smoothing and the policy by which unfunded actuarial accrued liability is amortized. A well-crafted funding policy can not only reassure stakeholders and ensure a well-funded plan but also inform benefit policy.
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Public Employees: Many Public Sector Workers Lack Adequate Retirement Income, Study Says.
Ricaurte-Knebel, Kristen; Daily Labor Report; no202 p A8 Oct 19, 2011; journal article

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Abstract : Contrary to common perception, a Center for Retirement Research study finds that most households with retired state or local employees have income well below 80 percent of preretirement levels. Employees spending over half their careers in public employment, making up 30 percent of all households with a state or local worker, had a median replacement rate of 72 percent. Those with short to medium length tenure in the public sector had lower median replacement rates. Greg Seller, a senior vice president at study sponsor Great-West Retirement Services, recommended that public sector employers begin automatically enrolling workers in defined contribution pension plans.
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3 Keys to Enhancing Returns.
Burr, Barry B.; Pensions & Investments; v39 no21 p 15 Oct 17, 2011; journal article

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Abstract : Public pension plan executives can find better investment success by considering risk reduction, diversifying with alternative investments, and cost management. Most avoid liability driven strategies but should be aware of liability growth and design their portfolios based on that. Asset liability modeling should be a focus, with the asset mix evolving like a glide path as participant demographics and funding status change. Investment policies should be flexible and responsive to conditions but focus on both long-term goals and shorter term realities. Restructuring to a core and satellite approach provides equity exposure, done cost efficiently through indexing, and supports some active risk, all without a large cost demand on internal resources.
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State Laws: California Governor Signs One Bill on Pension Official Ethics, Vetoes Another.
Mahoney, Laura; Daily Labor Report; no197 p A8 Oct 12, 2011; journal article

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Abstract : Following ethical breaches undermining confidence in the California Public Employees' Retirement System (CalPERS), Governor Jerry Brown signed AB873 to limit jobs that former CalPERS officials can hold within ten years of leaving either CalPERS or the California State Teachers' Retirement System. The law applies to board members, administrators, executive officers, investment officers and general counsel. Brown rejected SB439 which would have lowered the value limit on gifts pension officials can accept, down from $420 limit to $50. The governor cited existing legal limits and disclosure rules without the need for specific rules for CalPERS.
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Public Plans: Public Employees Overwhelmingly Choose DB Plan When Given Choice, Study Finds.
BNA's Pension & Benefits Reporter; v38 p 1805 Oct 4, 2011; journal article

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Abstract : A 2011 study by the National Institute on Retirement Security found that between 75 and 98 of public employees in seven state retirement systems chose a defined benefit (DB) plan over a defined contribution (DC) plan when given the choice. It also found that risk pooling and higher investment returns made DB plans more cost efficient than DC plans. While private employers have moved away from DB in part because of tax laws making it nearly impossible for them to require employees to contribute, states have no such restrictions, allowing them to take advantage of the benefits of a DB plan with no more outlay than they would put into a DC plan. The study used data from state plans in Colorado, Montana, North Dakota, Ohio and South Carolina.
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Public Plans: Public-Employee Pension Assets Hit Highest Level Since 2008, Census Data Show.
BNA's Pension & Benefits Reporter; v38 p 1806 Oct 4, 2011; journal article

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Abstract : Data from the Census Bureau shows that in the second quarter of 2011, the 100 largest public employee pension plans in the U.S. had the highest holdings and investments in three years. Levels of corporate stocks slipped 1.5 percent for the quarter but were up for the year by 19.5 percent, comprising under a third of cash and security holdings. Corporate bond assets, under one-sixth of the total, rose two percent for the quarter and 5.6 percent for the year. International securities were up two percent for the quarter and 28.7 percent for the year, while federal government securities continued rising, 1.5 percent for the quarter. Total holdings and investments rose for a seventh straight quarter and were the highest since the second quarter of 2008. For the 12 months ending in the second quarter of 2011, public employee contributions fell 3.2 percent but employer contributions rose 20.9 percent.
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Public Employees: CalPERS Reforms Board Governance Rules in Response to Placement Agent Scandal.
Mahoney, Laura; Daily Labor Report; no180 p A7 Sep 16, 2011; journal article

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Abstract : On September 14, 2011, the California Public Employees' Retirement System (CalPERS) adopted governance reforms in the wake of a two-year series of ethical breaches. The transparency reforms require each CalPERS board member to sign a statement acknowledging his or her fiduciary duty and undergo fiduciary training, senior executives and investment officers to sign a certificate of no undue influence and an independent third party to assess board performance every two years. The reforms outline the responsible parties for a variety of CalPERS activities such as approvals, standards of conduct and board performance. Two bills are awaiting final approval by Governor Jerry Brown that would reduce the value of gifts CalPERS board members can accept and limit the types of jobs CalPERS board members can take within ten years of leaving the pension system.
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Tax-Exempt Aggregation Aggravation.
Burgreen, Mark G.; Journal of Pension Benefits; v19 no1 pp 50-52 Fall 2011; journal article

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Abstract : If a tax-exempt organization exerts control or is represented by at least 80 percent of another's directors or trustees, IRS regulations aggregate them for tax purposes. IRS Notice 89-23 excludes many cases where a contributing employer is controlled by a noncontributing employer and adds a new case where a noncontributing employer provides 80 percent or more of the operating funds of a contributing employer. An employer could reasonably and in good faith conclude that either Notice 89-23 trumps the regulations or that it inaccurately reiterates the regulations and only the new requirement was intended.
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