DENVER – Federal tax reform efforts could mean trouble for public pension plans, experts told members of the Government Finance Officers Association Sunday.
Speaking on a panel at the GFOA’s annual conference here, researchers said that many public pension plans are in a transitional period and that changes that have happened and may continue to happen could create communication problems with stakeholders, hamper recruitment and retention, or even make the task of fully funding retirement systems more difficult. The health of pension and other post-employment benefit plans has become a topic of increased interest in local years in the wake of high-profile municipal bankruptcies such as Detroit. Many states and localities have underfunded plans and are attempting to implement changes to make them sustainable over the long term.
“We sort of are in a period of reorientation,” said Joshua Franzel, president and chief executive officer at the Center For State and Local Government Excellence. Franzel said that his group and the National Association of State Retirement Administrators published a study in April that showed that only about half of surveyed systems make an effort to produce easily-digestible plain language communications about the state of their pensions. The study also showed that average annual required contributions as a percent of payroll rose to 16% from 9% since 2009, potentially a challenge for recruiting public employees, Franzel said.
John Saeli, vice president of market strategy and government affairs at the non-profit independent financial services corporation ICMA-RC, warned that some federal pension reform and tax reform efforts could be significant challenges for administrators of state and local plans. Rep. Devin Nunes, R- Calif., has reintroduced his public employee pension transparency act legislation from the previous three Congresses. PEPTA would bar state and local governments from issuing tax-exempt bonds unless they filed annual pension plan reports with the Treasury Department. The bill would also mandate that plans estimate their funding rations using the “risk free” U.S. Treasury bond rate of return, a rate far lower than the assumed rates of return used by most retirement plans.
While supporters of the bill and some advocates for pension overhauls say that using a risk free return provides a more honest picture of a plan’s financial health, Saeli said it would immediately cause plans to look much more underfunded than they currently do. But Saeli said legislation like Nunes’ bill could wind up taking a backseat to comprehensive tax reform.
“The big story this year is about tax reform,” said Saeli. “It is likely to happen soon.”
Saeli said that Republicans need to come up with about $2.5 trillion in savings over 10 years in order to offset the tax cuts they support, and could take a variety of paths forward to get there. While issuers have repeatedly fought the idea of capping or eliminating the tax exemption for municipal bond interest, other changes on the table could directly impact pension plans, Saeli said. A big one that has found some initial support is the idea of eliminating pre-tax deductions for retirement plans, a key selling point that encourages employees to participate in pension plans at all.
“I absolutely use that selling point, that ‘hey, this is a pre-tax deduction,’” said Debby Cherney, deputy general manager of the Eastern Municipal Water District in Southern California. “That could be really troubling.”
Saeli and Franzel said that public officials need to take timely action to have difficult conversations with pension stakeholders and be prepared to advocate for the good that the plans do.
“The longer we wait, the more difficult the conversations will become,” said Saeli.
“Know the pension narrative,” Franzel said. “Be the factual ambassador.