Public pensions must adopt rules for long-term sustainability

When the stock market goes through a major downturn as it did last March, those of us with 401(k) or rollover IRA accounts probably experienced a similar downturn in the value of those account balances.

In addition, there is another result that will probably happen in the near future. You will probably experience an increase in your taxes. This is because pension plans in the public sector must make up the difference between the assumed rate of investment return in the plan and the actual rate of investment return.

Therefore, those of us with 401( k) plans, rollover IRAs or any other defined contribution plan not only bear the investment risk in our own plans but also bear the investment risk of public plan participants.

Public plan participants will continue to receive the same pension benefit accrual, same benefit provisions and the same cost- of-living increases as before the stock market downturn.

This is not the case with all pension plans. Pension plans in the private sector have the ability to reduce the future benefit accrual rate and alter pension benefit provisions when the plan has an increase in unfunded liabilities due to not meeting investment or other actuarial assumptions.

After the stock market downturn in 2008, the largest pension plan that I administer, a 46,000-participant private union pension plan, reduced the future benefit accrual rate for all participants by 58%.

There was no reduction in a participant’s accrued benefit or a retiree’s benefit, but the benefits accruing in the future were reduced by 58% so that the plan would be sustainable long-term. That plan has now moved out of critical status, pension costs were maintained at an affordable level and the plan is now on a sustainable trajectory.

Public pension plan costs increased dramatically over the last 10 years. Public pension benefit levels are also ridiculously high. For example, the average annual pension benefit for the city of San Rafael for a full-service employee (more than 30 years of service) is $110,000 and includes cost- of-living increases each year (3.5% last year). These high benefit levels have put a strain on virtually every public budget in California. We have seen reduced services, layoffs and the inability to give pay raises due to increased pension costs.

It is not just California that has this problem. Instead of helping those critically affected by the pandemic, Congressional Democrats tried to include $160 billion for state and local governments in the upcoming stimulus package, much of it projected to be used to pay down unfunded pension liabilities.

Our legislators continue to resist any major public pension reform.

There are two things that must happen before we have a sustainable, fiscally responsible public pension system:

• Provide for some pension benefit flexibility by allowing, at a minimum, that prospective pension benefit accruals for all participants can be reduced if funded status falls below a statutorily defined level.

• Establish rules that force plans to make changes that keep or attain that defined funding level.

In order to accomplish this, the interpretation of the California Rule must change. The California Rule is an interpretation of existing statute that does not allow for any reduction in pension benefits, even benefits accruing in the future, for any current plan participant without a corresponding increase in benefits elsewhere. This has made it virtually impossible for public entities to ever get control over pension costs and unfunded liabilities.

The Tax Reform Act of 2006 for private pension plans requires plans to make reductions to benefits if the plan falls below statutorily defined funded levels. This has forced pension boards to make those tough decisions on benefits that they would not otherwise make but are necessary for the longterm sustainability of the plan.

Both of these two needed changes exist in private pension rules. The blueprint is already in place. There is absolutely no reason that these rules should not be adopted in the public sector and it is critical that they do so.

Those of us with 401(k) plans, rollover IRAs or any other defined contribution plan not only bear the investment risk in our own plans but also bear the investment risk of public plan participants.