The Bond Buyer on Aug. 16 published a commentary of mine called “Pension 'Reform’ Plus Smart Lawyers May Help Save States” (the headline was chosen by The Bond Buyer). The main point of the commentary was that states, having attempted to balance their budgets over two to three rough fiscal years, had run out of the easier fixes, and would now turn more aggressively towards pensions as a potential source of budgetary savings.
I identified a process of pension-expense reduction that started with the easiest thing to change politically (reduction or elimination of cost-of-living adjustments) and progressed on to more politically difficult but financially significant changes. The second set of changes was changing pension benefits for new employees, while the third and most difficult change was adjusting benefits for current retirees. My conclusion was that the market would likely see an increase in legal activity as various constituencies battled over pension benefits.
I was gratified to see in the Wall Street Journal and in an Associated Press release last week a discussion of just this trend. The WSJ article described how a Minnesota court is set to consider if the state can change pension benefits for current pensioners. “Minnesota last year replaced its previous pension formula … with a flat 2.5% increase,” the Journal reported. According to AP, “Since 2008, New Jersey and at least 19 other states from Wyoming to Rhode Island have rolled back pension benefits or seriously considered doing so — and not just for new hires, but for current employees and people already retired.”
I could quote more, but that would simply be a waste of space. The articles both discuss steps states are taking to help resolve budgetary problems by reducing pension benefits.
That this trend is gaining steam is undeniable. As far as the merits of these approaches from a policy standpoint, I am agnostic. The sole point of the Aug. 16 commentary was to point out this trend and suggest that it would gain strength, which it in fact has.
Analytical Services Division
Loop Capital Markets