Fighting Back: How One State Legislator Is Dealing with the
Arnold Foundation’s Public Pension “Reform” Efforts
A number of national research organizations are actively engaging in the public pension reform debate in several states. In many cases, their work is being supported, directly or indirectly, by grants from the Laura and John Arnold Foundation, with assets of more than a billion dollars supporting an anti-DB agenda. But a key Pennsylvania state legislator is pushing back.
By way of background, examples of such “reform” efforts include the Pew Charitable Trusts’ “Public Sector Retirement Systems Project,” being conducted in partnership with―and supported by a grant of $4.85 million from―the Arnold Foundation; and the Urban Institute’s “Public Pension Project,” a joint effort by Urban’s Program on Retirement Policy and State and Local Finance Initiative. The Urban Institute has also accepted a grant of $484,079 from the Arnold Foundation to “expand access to information about public sector retirement systems.”
The Arnold Foundation’s grants are given “not just [to] study or illuminate problems,” in their own words, but rather to “seek transformational change.” The Arnold Foundation believes that the defined benefit (DB) model is “just a bad system,” and that the “way to create a sound, sustainable and fair retirement savings program is to stop promising a benefit and instead promise an accrual or savings rate,” namely by means of either a defined contribution (DC) or cash balance plan.
Recently, as part of its “Public Pensions Project,” the Urban Institute released a report entitled, “Assessing Pension Benefits Paid under Pennsylvania’s State Employees’ Retirement System,” for which the Pew Charitable Trusts provided financial support. Pew has also been meeting recently with Pennsylvania state legislators, and has provided them with recommendations for pension policy and budget discussions.
The Urban Institute’s Pennsylvania report argues that “employees who join the state payroll at relatively young ages and stay for less than 30 years get little, if anything” from Pennsylvania’s existing state pension plan. The report concludes that pension reforms “could distribute benefits more equitably across the workforce,” and points to either hybrid plans that “combine a relatively small traditional defined benefit plan with a 401(k)-type defined contribution plan,” or cash balance plans as alternative plan designs. These reforms “could put more Pennsylvania state employees on a path to a financially secure retirement” than is currently the case under Pennsylvania’s existing DB model, the Urban Institute asserts.
However, the Urban Institute claims are not going unchallenged. On September 29, 2014, Pennsylvania State Representative Joseph Markosek, Chairman of the Pennsylvania House Appropriations Committee, sent a memo to “House Democratic Members and Interested Parties” concerning the Urban Institute’s pension report. He begins by pointing out that the report “attempts to project the retirement benefits that will be provided to short and long-term employees based on age, when they were hired and how long they work.” Urban then recommends a transition from a defined benefit plan to a hybrid or cash balance plan “in order to increase benefits for employees who separate from state service early,” he notes.
However, Representative Markosek says that the “assumptions applied in the report are not fully vetted and do not provide enough context to draw valid conclusions about the positive or negative aspects of either defined contribution or defined benefit plans.” Furthermore, Mr. Markosek notes that the Urban Institute report was funded by the Pew Charitable Trusts, and that both organizations “receive funding from the Laura and John Arnold Foundation.”
“[T]herefore, we were not surprised the authors recommended for Pennsylvania to abandon its defined benefit plan,” Markosek states, specifically noting the Arnold Foundation’s grant to the Urban Institute. He also notes that the Arnold Foundation’s involvement in the public pension debate across the country has been questioned in several news articles, and his memo provides links to some of these stories. Included is one from Pensions & Investments that discusses NCTR’s letter to Pew asking them to end their partnership with the Arnold Foundation and return its multi-million dollar grant.
Markosek concludes his memo by stating that given the “ongoing debate about the Arnold Foundation’s public pension agenda, we are very cautious about using information as sources from organizations that accept funding from the foundation.”
Meredith Williams, NCTR’s Executive Director, commended Representative Markosek for his efforts to make policymakers and others aware of the Arnold Foundation’s involvement. “The Arnold’s have woven an impressive funding web,” Williams said. “Through shrewd grants to well-respected organizations, the Arnold Foundation has, in effect, ‘laundered’ its biased money,” he went on. “In doing so, they have created a false image of many independent, expert voices advancing pension reform along the lines that the Arnold Foundation supports, when there is really nothing there but an echo chamber,” Williams explained.
“I am delighted that Chairman Markosek has called them out on this,” Williams continued. “The Urban Institute may insist that its funders do not determine research findings or influence their scholars’ conclusions,” Williams said. “However, accepting funding from an organization with such a clearly stated, aggressively pursued political agenda―the goal of which is to reject the public sector DB model―could suggest, at least to me, while perhaps not an endorsement by Urban, at least a tacit acknowledgement by them of the legitimacy of the Arnold Foundation’s agenda,” he concluded.
“I think that’s a problem when you are claiming to be unbiased in your analyses and recommendations,” Williams underscored.
“Whether it be a public pension plan refusing to cooperate with ‘research’ funded by the Arnolds, as CalSTRS has done, or a State legislator cautioning his colleagues about using information from organizations that accept funding from the Arnold Foundation, we are slowly fighting back,” Williams said. “It may be a slow process,” he observed, “but that is how you win the race: one step at a time!”
? Markosek Memo on Urban Institute Pension Report
NIRS Describes Importance of Defined Benefit Plans in Congressional Testimony
NIRS’ Executive Director Diane Oakley testified at a U.S. House Ways and Means Subcommittee hearing on September 17, 2014, describing the critical role of defined benefit (DB) pensions in ensuring retirement income security. Focusing on a key issue―predictability for both employees and employers―Oakley told the Subcommittee on Select Revenue Measures that the disappearance of secure retirement income from DB pensions and the trend since 2000 in declining workplace retirement plan coverage overall meant that Americans “face a retirement savings burden that is heavier than ever.”
Congressman Pat Tiberi (R-OH), the Subcommittee Chair, shared NIRS’ concerns. In his opening statement at the hearing on private employer defined benefit pension plans, Tiberi said that the challenges facing employers, employees, and retirees who rely on both single and multi-employer defined benefit pension plans to help provide retirement security “pose serious threats to American workers and employers.”
Tiberi believes that increasing private sector pension costs have hampered both the job growth and capital investment needed to grow the economy and have threatened retirement security for American workers. “The cost of doing nothing is too high a price to pay,” he said, and his hearing was intended to provide “the opportunity to examine challenges facing, and opportunities to strengthen, the defined benefit pension system.”
For example, one area that Tiberi identified as needing attention deals with employees whose employer is transitioning new employees into a defined contribution plan. Tiberi says that they face the prospect of their employer being forced to freeze the defined benefit plan for all employees to avoid violating the Federal tax code’s non-discrimination rules. The Ohio Republican has introduced legislation (H.R. 5381) designed to protect longer-service participants in DB plans that are closed to new entrants by allowing cross-testing between defined benefit and defined contribution plans.
In her testimony, Oakley focused on four key points:
1. DB Plans Provide Predictable Retirement Security to Middle Income Older Americans. NIRS calculates that rates of poverty among older households without DB pension income were approximately nine times greater than the rates among older households with DB pension income in 2010. In addition, DB pension recipient households were less reliant on means-tested cash and non-cash public assistance. For 2010, in what she called “terms important to governments,” that translates into spending “about $7.9 billion dollars less on public assistance to older households because of DB pension income,” Oakley underscored.
2. Role of DB Plans in Retirement Readiness of Near Retirees and Other Workers. Oakley told Subcommittee members that in 2012, only 52 percent of private sector employees age 25-64 had access to a retirement plan on the job—the lowest rate since 1979. She also pointed out a similar trend on a household level, with the share of working families in which neither the head of household nor the spouse participated in a retirement plan through their job increasing from 42.7 percent in 2001 up to 48.7 percent in 2013. Finally, the NIRS chief stressed that the typical household—even one near retirement—has only a few thousand dollars in retirement account assets, nowhere near the $100,000-plus median account for those who actually have such retirement savings.
3. Income Certainty Helping Older Americans Also Helps Steady the Economy. Oakley explained how DB plans play a stabilizing role in the economy similar to Social Security, providing not only a secure source of income for many retired Americans, but also contributing substantially to the national economy. For example, she testified that NIRS found that, in 2012, over $175 billion was paid out in pension benefits from private sector DB pension plans to 12.7 million retired Americans who were beneficiaries of these plans. She said that every dollar that private sector DB plans paid to a retired American in 2012 generated $1.98 of total output in the national economy. “Pension benefits play an important role in providing a stable, reliable source of income regardless of economic climate—not just for retired Americans, but also for the local economies in which their retirement checks are spent,” Oakley said.
4. Greater Uncertainty Pushes a Transition in Private Employer-Provided Pensions. Finally, Oakley discussed the trend in the private sector away from DB plans, noting that only 10 percent of all private employers offered DB pensions in 2011, covering 18 percent of the workforce. She said that this shift has been fueled in part by accounting and government regulations that created more volatility and less predictable balance sheet representations of financial risk and funding cost. Oakley also noted that some researchers say the switch to DC plans becoming the primary retirement vehicle carries other risk for employers, including counter-cyclical workforce trends that may require increased severance pay, raise benefit costs, and result in less job mobility within an organization. She said that recent studies also find employers with DC plans and other accumulation type plans are now finding that older employees are not retiring, causing “choke points” in talent pipelines that lead to increased turnover among younger workers.
“As always, Diane did a great job,” said Meredith Williams, NCTR’s Executive Director. “Not only did she help rebut Andrew Biggs with the American Enterprise Institute, who told a Senate hearing earlier in the week that there was no retirement crisis, but she also helped to point out some very important consequences for American businesses when their older employees cannot afford to retire,” he said.
“I think that this particular impact of retirement insecurity is often overlooked,” Williams continued. “The retirement crisis is not just about retirees and the potential for future increased governmental costs associated with social services for those in need,” he said. “America’s retirement crisis is imposing a real cost on American businesses and the American economy today,” Williams continued. “I agree with Congressman Tiberi: we cannot afford to continue to do nothing, and strengthening DB plans in the private sector is an important step in the right direction.”
“It sure makes a lot more sense to me than trying to destroy DB plans in the public sector,” Williams concluded.
? Oakley House Testimony
? House Hearing Witness List and Testimony
2014 NCTR Annual Conference Spotlight
Pew, Arnold Foundation Panel Offers Chance for Excitement
“Monday afternoon’s panel on the ‘Evolution of Investment Management’ should be pretty exciting stuff,” according to NCTR’s Executive Director Meredith Williams. The discussion, set for 3:00 PM on October 13th, will be moderated by NCTR President Tom Lee, Executive Director/Chief Investment Officer for the New York State Teachers’ Retirement System.
? Josh McGee, VP of Public Accountability for the Laura and John Arnold Foundation
? Greg Mennis, Director, Pew Public Sector Retirement Systems Project
? Stephen Cummings, CFA, CEO, Hewitt EnnisKnupp, Inc.
? Drew Guff, Managing Director, Siguler Guff
? Gregory W. Smith, Executive Director, Colorado PERA
In June, 2014, the Pew Charitable Trusts and their partner, the Laura and John Arnold Foundation, released a new report entitled “State Public Pension Investments Shift Over Past 30 Years.” This report found that State and local public pension funds have significantly changed their asset-investment strategies, shifting what they refer to as “a large percentage of fund assets” away from fixed-income securities toward equities and alternative investments, including hedge funds and private equity funds.
The report states that “Public pension plans are relying more heavily on risky assets to deliver higher long-term returns in order to keep funding costs low, just as they are simultaneously betting on a much larger risk premium than in the past.” The report concludes that these trends “underscore the need for additional public information on plan performance, insight on best practices in fund governance, and attention to the effect of investment fees on plan health.”
“As prudent investors, public pension plans have indeed made adjustments to their portfolios over the last three decades that reflect both the changes in investment opportunities that have occurred as well as the investment strategies for addressing risk that have evolved,” Williams notes. “Such changes have resulted in substantially greater investment returns than had plan portfolios not undergone such an evolution,” he pointed out.
“In addition, this on-going re-examination of investment policies has been conducted in a very deliberate, thoughtful, and transparent manner, with the extensive input of outside experts as well as in-house staff, trustees, and other government officials,” Williams continued. “The results are well-organized and documented investment policies that clearly state investment objectives and strategies designed to protect plan assets and to achieve the best possible investment yields, consistent with the standards of prudence imposed upon our fiduciaries,” he concluded.
“Therefore, I am not sure exactly why Pew and the Arnold Foundation appear to believe that public pension plans’ investment practices are problematic,” Williams said, “so we decided to ask Mr. Mennis as well as Mr. and Mrs. Arnold to come and discuss this and whatever other concerns they have with public pension plans with us.” While the Arnolds declined, they are sending Josh McGee instead, and Williams said that he commended both organizations for their willingness to engage NCTR members.
“I think it will be a fascinating discussion,” Williams said. “I am also delighted that Steve Cummings and Drew Guff have agreed to join us to help explain public pension investing, how it has indeed changed, and why alternative investments and their fee structures look a little different from other types of investing,” he continued. “Of course, there are perhaps no better public pension pros than Tom Lee and Greg Smith to help run interference,” Williams said.
“I think this panel will just be dynamite,” Williams concluded. “It is truly a ‘must-see’ event, so be sure not to miss it!”
It is not too late to register for NCTR’s 92nd Annual Conference, October 11 through the 15, at the JW Marriott in Indianapolis, Indiana. Will you be there? Representatives of more than 50 public pension systems will. Can you afford not to be?
? NCTR 92nd Annual Conference Agenda
? Conference Registration Information
? Pew/Arnold Report: “State Public Pension Investments Shift Over Past 30 Years”
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