In a few short months, state, county and municipal pension systems will be releasing their comprehensive annual financial reports (CAFRs). These are extremely important documents that pension systems must compile to comply with the accounting requirements set forth by the Governmental Accounting Standards Board (GASB). CAFRs are important because they give you a snapshot in time of how your pension system is doing, providing the financial and statistical data to let you know whether your system is meeting its stated goals and offering a valuable insight into how city, state or county officials manage public finances.
The reason I’m bringing this up is because of a recent Forbes story about the City of Chicago’s latest CAFR and what it reveals about their pension funds. If you haven’t been watching what’s happening in Chicago, you should be, because it’s a perfect example of what not to do when it comes to funding public employee pensions. Chicago’s combined pensions have declined from 27% funded at the end of 2017 to only 23% funded now. That’s not a pretty picture. While the assets have suffered some losses in market value, Forbes reports that “by far the largest contributor to the plans’ worsening funded status is that the city is not contributing even the minimal amount necessary to ‘tread water.’” For years, Chicago has failed to make the annual actuarially determined contribution (ADC) that represents the amount needed to fund benefits over time, shorting three of its four pension funds (the police fund’s report has not yet been released, although it will no doubt show the same pattern) by about $800 million less than the bare minimum it should have provided.
In today’s reality, with all the pressures from so-called pension reform (which actually means elimination), how any union can allow its state, county or municipality not to make its full ADC is beyond me. I know there’s a debate about whether pensions should be funded at 100% or 80%. I realize I will probably receive pushback from some folks, but having worked in a city that claimed it was on the verge of bankruptcy and blamed the pension underfunding, and in addition having talked to people who worked in cities that did declare bankruptcy, I believe pensions should be 100% funded. Pensioners in Detroit saw up to a 30% reduction in their pension payments, which a federal appeals court approved because of the city’s declared bankruptcy. That is quite a hit and could dramatically change someone’s lifestyle, especially at a point in life when going back to work is difficult.
Each of us is individually vested in our pension, and each of us has a responsibility to make sure that the fund is doing what it’s supposed to, even retirees. As public safety union leaders, we need to ensure that our counties and municipalities are paying their full ADC. I recognize that pensions are long-term investments, so if your system is in the 70–80% funded range, it’s not as great a concern, but we must always be vigilant and hold our cities and counties accountable for making these payments. Don’t buy into their three-card Monte when they claim they need to take away from the pension system to build a new stadium or something similar. Your pension should be the number-one thing that is paid by your city or county! This happened in my city; we went 10 years without a pay raise, lost retiree health care and saw reduced benefits for new hires — and we were at 63% funding.
I know CAFRs aren’t fun to read, but there’s a lot of good information in there. Look at things like the funding level; smoothing periods (which allow funds to base their pension liability on the average over a longer period of time), the shorter the better; and the discount rate (the anticipated long-term rate of return on the system’s investments). For a while, we saw CalPERS trustees divesting from certain stocks for social reasons versus maximizing returns, although not so much anymore; however, our elected leaders in Sacramento continue to force CalPERS via the legislative process. When pension systems are over 100% funded, maybe that’s something they can do, but until that point, their goal at a minimum should be to meet their discount rate, strive for 100% funding and maximize investment returns.
Recently, CalPERS stated it did not make its discount rate of 7%, so employers will have to contribute more money to the system, which means less pay and benefits for employees. Overall, in the last 30 years, CalPERS has been exceeding its discount rate and that is good news.
I can tell you from personal experience that we all need to pay attention to what’s happening with our pension systems, read and understand the data, and stay vigilant to protect and preserve the benefits we’ve worked so hard to earn. If you don’t, the likes of Arnold, DeMaio and Reed will surely be watching them, and they are more than happy to take them away!