it harder to implement the commission’s recommendation to change the composition of the PERS Board by setting forth the current composition of the board in an
amendment to the state’s constitution. Further, as
discussed in the next section, the Legislature did not pass legislation proposed by the PERS Board (introduced as HB 517 and SB 2218) of its own initiative designed to reduce liabilities of PERS by revising certain definitions relating to the laws governing PERS, which would have been in the spirit of what the study commission was trying to accomplish.
While no written record exists of the Legislature’s
deliberations concerning the recommendations contained in the PERS Study Commission’s report, it is possible that members of the Legislature disagreed with the
recommendations or that they believed that further deliberation would be prudent prior to taking action. In fact, the study commission recommended that the Legislature require a fiscal note and a one-year study period for legislation modifying PERS’s plan design before considering the legislation for enactment (see Exhibit 9, recommendation 19, page 92).
Response of the PERS Board to the Study Commission’s Recommendations
The PERS Board has not adopted any of the six study commission recommendations directed to it either because the board believed that it was already carrying out the intent of the recommendations, it did not have the authority to carry out the recommendations, or, the recommendation was not actuarially necessary to ensure the long-term sustainability of the system.
According to written responses from PERS’s Executive Director, for the following reasons the PERS Board did not adopt any of the recommendations contained in the study commission’s report because the board believed that:
it was already carrying out the intent of the
recommendation (recommendations 2, 22, and part of 7);
it did not have the authority to carry out the
recommendation (recommendation 3 and part of 7); or,
the recommendation was not actuarially required in order to ensure the long-term sustainability of the system (recommendations 1 and 23).
(See Exhibit 9, pages 84 through 94, for additional information.)
While the PERS Board, of its own initiative pursuant to its fiduciary responsibilities (i. e., not based on the PERS Study Commission’s recommendations), proposed lengthy
legislative changes designed to reduce liabilities of PERS by revising certain definitions relating to the laws governing PERS (e. g., providing that creditable service for periods of time after July 1, 2013, shall be awarded in monthly increments), HB 517 and SB 2218 died in conference committee.
Conclusions
PEER intends that this report dispel as many of the rumors and as much misinformation as possible about the Public Employees’ Retirement System in order to create a proper framework for policymakers to be able to identify the reforms that are needed. In this report, PEER provides key information that should be an important part of the discussion of any need for system change, such as an understanding of:
the challenges that could constrain PERS in addressing future funding liabilities;
the standards for judging the financial soundness and affordability of the system; and,
whether the PERS Board has the advisory resources and information needed to address the long-term challenge of meeting its future obligations.
PEER has not attempted to second-guess decisions made by the PERS Board of Trustees, but hopes to paint a clear picture of the information environment in which the board operates and the constraints under which it must continue to operate.
This chapter is an attempt to synthesize the report’s conclusions and bring forth the following key ideas:
A sound and attractive retirement plan is an important part of state and local employment strategy. Efforts made to reform public pension systems must be made within the context of the important role of pensions in government compensation strategy.
Enterprise thinking should continually be employed to improve the efficiency and performance of
government, but such thinking must be tempered by the contractual obligations that limit what reforms may be prudently undertaken. While system changes for future employees who have yet to join the public payroll could be made with a low risk of litigation, there appears to be little, if anything, that the state could do to reduce benefits of retirees or current employees without some form of compensating new advantage.
The financial soundness of a public pension system is more than a point-in-time comparison of assets and liabilities; it is a complex construct involving risk management strategies that help ensure that the system is always actuarially grounded, risk-informed,
and sustainable over the long term in light of all relevant environmental conditions.
While there may always be a point at which assets, regardless of risk management expertise, simply cannot sustain the system through a prolonged
economic downturn and meet the required obligations, PERS currently has risk management structures in place to help the system survive in a risk-filled marketplace and to determine when extraordinary steps are justified and must be taken. The PERS Board should be an active party in supplying policymakers with the critical information needed to make important risk-based system modification decisions.
PERS is well organized for oversight of its investment portfolios, has access to needed investment expertise, and is supplied with the technical data needed to minimize or eliminate the risks that face a defined benefit public pension system.
Although neither the PERS Board nor the Legislature has taken any action in response to the Public Employees’ Retirement System Study Commission’s recommendations, the recommendations contain elements that provide fodder for further discussion and debate.
PERS’s current financial situation is the product of a desire on the part of policymakers to improve the system’s benefit structure without providing a defined source of new funding and an unprecedented drop in markets that has placed additional strain on system assets. No legislated actions should be taken regarding system modifications without careful assessment of all relevant information and of the possible impact of such modifications.