The Transition Cost Mirage: False Arguments Distract from Real Pension Reform Debates

By their own estimates, state governments have accrued more than three-quarters of a trillion dollars in pension debt. When combined with municipal pension debt, conservative estimates of the total state and local unfunded liability top $1 trillion. While the global financial crisis and the recession that followed are partially to blame for this huge run-up in debt, structural problems with the traditional defined benefit system and irresponsible policy decisions are also culprits.Annual pension payments were on the rise well before financial markets took a turn for the worse in the fall of 2008. In fact, pension costs have been increasing almost universally since the tech bubble burst in the early 2000s signaling the end of the historic run-up of equity prices that occurred through the 1990s.Given that pension systems rely on investment returns to fund the majority of promised worker benefits, pension costs rise when the economy underperforms. Thus, recent pension cost increases have coincided with sharp declines in tax revenues that followed the financial crisis. This has put immense stress not only on state and local budgets, but also on employee wages and benefits.In the wake of rising pension costs and stagnant or declining budgets, many policymakers have questioned the sustainability of the current system. The accumulated pension debt will take decades to pay off (most states spread debt payments across 30 or more years), increasing cost in the medium- to long-term and leaving plans and worker benefits vulnerable to another downturn. In light of this challenging fiscal situation, many jurisdictions have looked to reform their retirement savings systems. The majority have maintained the traditional defined benefit structure, cutting benefits primarily for new workers, but in some cases for current employees and retirees as well. While these efforts reduce the cost of benefits, they do not address the root of the problem because they maintain the core structure that allowed the pension debt to grow so precipitously in the first place. Other more ambitious jurisdictions have sought to engage in comprehensive reform that will not just cut cost, but will also definitively fix the system, protecting workers and taxpayers alike.As policymakers have considered reforms, many concerns have been raised about transitions to different retirement savings systems. Opponents of reform have sought to derail these efforts by, among other things, claiming that any transition from the status quo would result in significant, unforeseen costs. This paper will briefly describe the major "transition cost" arguments and will explain why those arguments do not survive careful analysis

Why Government Needs More Randomized Controlled Trials: Refuting The Myths

The Laura and John Arnold Foundation (LJAF) today released a policy brief focused on the value and benefits of randomized controlled trials (RCTs). Such trials are widely recognized as the gold standard in scientific research. However, some critics have claimed that they are often expensive, time-consuming, unethical, or not worth the trouble. These objections are almost always overstated or false. In this brief LJAF Vice President of Research Integrity Stuart Buck and LJAF Vice President of Public Accountability Josh McGee explain why RCTs are so valuable, why they are sometimes misunderstood, and why many common objections should be given little weight.The brief addresses seven specific myths about RCTs:RCTs are expensive and slowRCTs are often unethicalRCTs are limited to narrow contexts or questionsRCTs are a black boxRCTs are not suited to complex, fast-changing programsRCTs can still be biasedRCTs are too limitedBy clarifying the value and importance of rigorous evaluation, LJAF aims to help governments use evidence to inform policies and programs that produce meaningful improvements in people's lives

Swamped: How Pension Debt Is Sinking the Bayou City

The report, co-authored by Josh McGee, LJAF Vice President of Public Accountability, and Michelle Welch, LJAF Public Accountability Research and Policy Manager, reveals that the city of Houston owes public workers at least $3.1 billion for retirement benefits they have already earned.Houston's pension debt is now a billion dollars more than the city's total general fund revenue, and the city is at a tipping point. If political leaders don't enact real reforms, the pension debt, which is continuing to rise, will threaten the city's ability to give workers and retirees the retirement they were promised. In addition, taxpayers may be forced to pay the price through higher taxes or reduced funding for roads, infrastructure, parks, and other public services that help make Houston a great place to live and work.In the report, McGee and Welch present a range of fair and sustainable solutions that would address the growing debt and put the city's pension plans -- and the city's financial health -- back on the road to recovery

A Boomtown at Risk: Austin's Mounting Public Pension Debt

The increase in Austin's pension debt over the last decade is due in part to the fact that as the population grew, demand for public services increased and the city added more than 1,000 public employees between 2010 and 2015. As the cost of providing benefits rose, the city failed to keep up with contributions to the system—skipping nearly $170 million in payments to the Employees' Retirement Plan, which is the city's largest retirement plan, over eight years. At the same time, it suffered a series of investment shortfalls system wide, which compounded the effect of the missed contributions and led to a widening gap between assets and liabilities.Despite the fact that the city is paying more and more into the plans each year, unfunded liabilities are continuing to rise. In fact, Austin spends more than half of its pension payments on debt—rather than benefits for public workers. Yet even these payments might not be sufficient to pay off the unfunded liabilities, and if the city earns less than expected on its investments, debt will rapidly rise.The brief explains that the city must take immediate steps to pay down the unfunded liabilities in order to improve the stability of its pension plans. Local leaders in Austin should take note of the pension crisis that is unfolding in Dallas. Two years ago, Dallas' pension system was in a similar position to the one that Austin is currently in. However, Dallas' pension debt doubled to$4 billion and its funded ratio plummeted to 56 percent after the plan administrators made a series of reckless decisions that have pushed the city's largest plan, the police and fire fund, to the brink of bankruptcy.The situation in Dallas should provide a cautionary example of how quickly debt can spiral out of control. In the brief, McGee and Diaz Aguirre call on Austin's leaders to make the changes necessary to ensure that the city is able to uphold its retirement promises to public workers. The authors present a number of recommendations that would help stabilize the system and address the plan's underlying structural flaws, including:Making adequate funding non-negotiable and committing to pay down current unfunded liabilities in 30 years or less.Establishing prudent and realistic funding and investment policies.Establishing local control of the pension fund in order to improve oversight and accountability.Consider enrolling new workers in plans that are simpler and easier to manage, like Defined Contribution or Cash Balance plans

Enrollment Trends in Northwest Arkansas Charter Schools

Northwest Arkansas is home to nine public charter schools, with plans to open a new charter school for the 2020-21 school year. These schools, which serve unique missions, are some of the most highly ranked schools in the State of Arkansas. While critics argue that public charter schools segregate based on race or academic ability, national evidence finds that these claims are highly context specific. What conclusions can we draw about northwest Arkansas charter schools based on enrollment trends in recent years

The Dallas Public Pension Crisis: A Warning for Cities Across Texas

In the brief, LJAF Vice President Josh McGee and LJAF Sustainable Public Finance Analyst Paulina S. Diaz Aguirre explain that unless local leaders take immediate steps to pay down the pension debt and address the plans' underlying systemic flaws, the challenges will continue to escalate."Dallas is at a tipping point," McGee said. "Without immediate reforms, the city's pension problems will become too big to fix. Workers deserve a fair and secure retirement. Local leaders must work with public servants and taxpayers to develop a sustainable solution. This is true not only in Dallas, where the problems are particularly acute, but in cities across the state. Officials must take action now to ensure that their communities remain vibrant and financially stable."The most immediate pension problem facing the city of Dallas involves its Police and Fire Pension System. The fund's Deferred Retirement Option Program (DROP), a savings account provided to members when they reach retirement eligibility, is nearly bankrupt. In the past six months alone, retirees have withdrawn at least $300 million in savings. If this "run on the bank" continues, the police and fire fund may run out of cash to pay retirees' benefits.The issues with the Dallas pension system stem from a decade of insufficient funding for both the police and fire fund as well as the plan for other municipal employees. With the police and fire fund, the problems have been compounded by two key factors. First, a broken governance structure allowed members to increase their own benefits without establishing a plan to pay for those increases. Second, a series of reckless investment decisions made by the plan's prior leadership went unnoticed. Former plan administrators invested more than half of the fund's assets in private equity and real estate, including high-risk properties such as luxury homes in Hawaii and a resort and vineyard in Napa, California. The city made less than expected on these investments, which led to a nearly$1 billion investment shortfall, hundreds of millions of dollars in asset devaluations, and a reported Federal Bureau of Investigation (FBI) review.In addition, the police and fire fund is controlled by the state legislature, which means that local leaders do not have the authority they need to make the changes that are urgently required.In the brief, McGee and Diaz Aguirre explain that plan administrators, city officials, and state legislators must immediately come together to enact comprehensive reforms. The co-authors present a number of recommendations that would help protect workers' retirement security and improve the stability of the pension system.These include:Obtaining local control of the police and fire fundStabilizing DROPDeveloping a fair and sustainable plan to pay down the pension deb

A Pivotal Moment: Assessing Houston's Plan for Pension Reform

The Laura and John Arnold Foundation (LJAF) released "A Pivotal Moment: Assessing Houston's Plan for Pension Reform," a report that provides an in-depth analysis of the City of Houston's pension reform proposal currently pending in the Texas Legislature. The report finds that the proposal includes important changes that would help protect workers and taxpayers. The reform plan was developed following discussions between Mayor Sylvester Turner and the Houston Police Officers' Pension System, the Houston Municipal Employees Pension System, and the Houston Firefighters' Relief and Retirement Fund.LJAF Vice President Josh McGee and LJAF Sustainable Public Finance Analyst Paulina S. Diaz Aguirre co-authored the report after analyzing the city's proposal and conducting independent pension modeling. They say that it is incumbent on local leaders and state legislators to work together. "There are just a few weeks left in the 2017 session—and without the ability to make changes to the pension systems on its own—the city is running out of time," the report states. "Without changes, the debt could spiral into a full-scale financial crisis. The city cannot allow that to happen. Its financial future hangs in the balance and will be decided in large part in the next month."Houston currently owes $8.2 billion in pension debt—more than any other city in Texas. It does not have enough money to pay for nearly half of the retirement benefits workers have already earned. This unfunded liability threatens workers' retirement security and has a direct impact on city finances. During the past 10 years, the city has cut public safety positions even as spending on public safety has grown by hundreds of millions of dollars due to a 55 percent increase in pension costs.The proposal seeks to address critical flaws in the city's funding practices. Under the proposal, the city would lower its assumed rate of return on investments for all plans from 8 percent or more to 7 percent; reduce benefits for public workers; and implement a financial corridor provision that would cap the city's contributions to the pension plans.The financial corridor provision is a key element of the proposal. The provision would set a minimum and maximum city contribution rate for each plan. If the city were to hit or surpass the maximum, workers would be required to make additional benefit concessions to bring costs back under the cap. LJAF's analysis shows that this mechanism would provide substantial new protections for taxpayers but would also significantly increase workers' exposure to risk.The report states that the proposal's long-term impact on workers would depend on demographic trends and the plans' investment performance, two factors that would influence how often the city would hit the cap. For example, LJAF's modeling shows that there is a two in five (40 percent) chance that the city's contribution rate would hit the maximum for the police fund at least once by 2027. If the police plan were to earn less than 7 percent on its investments in the short or long term, contribution rates would hit the cap even sooner.If investment returns match the city's assumptions, there is roughly a one in three (33 percent) chance that contribution rates for members of the police plan would increase by five percentage points or more in the next decade. Given that members of the police plan—as well as members of the other plans—have already agreed to billions of dollars in concessions, McGee and Diaz Aguirre explain that the city has an obligation to uphold its end of the bargain. They state that the city should make payments on time and in full and should take steps—such as limiting investments in risky assets including real estate, private equity, and hedge funds—to protect workers.In addition, if the proposal is implemented, the report states that the city should also make good on its promise to provide a lump-sum payment to the two plans with the largest deficits—the police and municipal employees plans. The city has proposed issuing$1 billion in pension obligation bonds to cover the payments. To benefit financially, Houston would need to earn more in the market than it costs to borrow the money. Given the current market conditions, the spread between expected bond interest rates and expected returns is relatively small. Despite the fact that the bonds pose some risk, the report argues that they are a good-faith measure that reflects the city's commitment to upholding funding promises.The report concludes that, "In the short term, the proposal would place the pension plans—and the city—on firmer financial footing. The long-term impact would depend on how the changes are implemented." It also states that Houston should make further changes to establish a comprehensive, permanent solution to its pension problems. This would include creating retirement systems for new workers that are simpler and easier to manage such as a Defined Contribution plan or a Cash Balance plan

Risky Retirement: Colorado's Uncertain Future and Opportunities for Reform

This report outlines several key findings about the Colorado Public Employees' Retirement Association (PERA).Despite larger employer contributions, the debt has increased over the past decade. For example, contributions to PERA's School Division have more than doubled since 2005; yet, the payments still do not cover the plan's full cost.Eighty-one percent of the increase in the state's unfunded pension liabilities is due to insufficient payments.Colorado is relying on a risky investment strategy to close the gap between pension assets and liabilities. Two-thirds of its investments are allocated to volatile assets such as equities, real estate, and alternatives.Recent legislative reforms will have a marginal impact on protecting PERA from economic booms and busts.The state's funding plan, which includes a costly period of negative amortization, will cause PERA to remain in a precarious financial position for decades. The period of negative amortization will cause the debt to cost much more in the long term.Colorado should take action to avoid dire financial consequences, and it should take immediate steps to improve the financial stability of its pension system. Such measures include developing a credible plan to pay down PERA's current unfunded liability, managing future cost uncertainty, and adopting a flexible funding policy. These reforms would allow Colorado to create a lasting, secure retirement plan and would help to ensure that the state is able to deliver on its promises to citizens and public employees

Did Spending Cuts During the Great Recession Really Cause Student Outcomes to Decline?

Jackson, Wigger, and Xiong (2020a, JWX) provide evidence that education spending reductions following the Great Recession had widespread negative impacts on student achievement and attainment. This paper describes our process of duplicating JWX and highlights a variety of tests we employ to investigate the nature and robustness of the relationship between school spending reductions and student outcomes. Though per-pupil expenditures undoubtedly shifted downward due to the Great Recession, contrary to JWX, our findings indicate there is not a clear and compelling story about the impact of those reductions on student achievement. Moreover, we find that the relationship between K-12 spending and college-going rates is likely confounded with contemporaneous higher education funding trends. While we believe that K-12 spending reductions may have negative impacts on student outcomes, our results suggest that estimating generalizable causal effects remains a significant challenge