Discussion of “The Sustainability of State and Local Government Pensions: A Public Finance Approach” by Lenney, Lutz, Scheule, and Sheiner (LLSS)

Link: https://www.brookings.edu/wp-content/uploads/2021/03/1c_Rauh.pdf

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Main Comments
• Stabilization goal is reasonable to consider
• However, public sector’s approach to funding with risk assets creates
additional issues for this type of debt (unfunded pension liabilities)
relative to government bonds
• Instability due to market risk isn’t in the model, because the model is
deterministic: no distribution of possible outcomes
➢ Higher expected return you target, the greater the distribution of outcomes
• Only meaningful scenario is r=d=0% → fiscal adjustment is 14.9% of
payroll vs. current 29%. So a 51% increase.
➢ I will provide some reasons I think this might still be too low

Author(s): Joshua Rauh

Publication Date: 25 March 2021

Publication Site: Brookings

The sustainability of state and local government pensions: A public finance approach

Link: https://www.brookings.edu/bpea-articles/the-sustainability-of-state-and-local-government-pensions-a-public-finance-approach/

Conference draft: https://www.brookings.edu/wp-content/uploads/2021/03/BPEASP21_Lenney-et-al_conf-draft_updated_3.24.21.pdf

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“Given other demands, fully funding their pension plans might not be the right thing for state and local governments,” Sheiner said in an interview with The Brookings Institution. “They should compare the benefits of upping their pension investments with the benefits of investing in their people.”

Most research evaluates state and local pension plans on the assumption they should be fully funded—that is, their assets are sufficient to meet all anticipated obligations to current and future retirees. State and local pension plans, benefiting more than 11 million retirees, hold nearly $5 trillion in assets and, according to a recent estimate cited in the paper, would require an additional $4 trillion to meet all of their obligations.

However, in The sustainability of state and local government pensions: A public finance approach, the authors observe that, using the types of calculations that economists recommend, state and local pension plans have never been fully funded—meaning that they have always been implicitly in debt. Furthermore, they show that being able to pay benefits in perpetuity doesn’t require full funding. If plans contribute enough to stabilize their pension debt, that is enough to enable them to make benefit payments over the long run.

Author(s): Jamie Lenney, Byron Lutz, Finn Schüle, Louise Sheiner

Publication Date: 24 March 2021

Publication Site: Brookings

Public pensions don’t have to be fully funded to be sustainable, paper finds

Link: https://www.marketwatch.com/story/public-pensions-dont-have-to-be-fully-funded-to-be-sustainable-paper-finds-11622210967

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Governments “don’t have to pay off their debt like a household does,” said Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “They can just keep rolling it over. They’re never going to go out of business and have to pay all at once.”

Sheiner is co-author, along with Jamie Lenney of the Bank of England, Byron Lutz of the Federal Reserve Board of Governors, and Brown University’s Finn Schüle, of Sustainability of State and Local Government Pensions: A Public Finance Approach, which was presented at a Brookings conference in March.

State and local liabilities can also be likened to the federal government’s deficit and debt, Sheiner said in an interview with MarketWatch. Most economists think that as long as those numbers stay constant as a share of the economy, it’s not problematic.

Author(s): Andrea Riquier

Publication Date: 2 June 2021

Publication Site: Marketwatch

WHY TRUTH IN ACCOUNTING’S RECENT CLAIMS ABOUT PENSIONS ARE INACCURATE

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As routine as the changing of the seasons, every year, Truth in Accounting (TIA) produces a new report which declares that taxpayers across the country will somehow have to foot a huge tax bill immediately to pay for their state’s unfunded pension liabilities. However, a recent working paper from the Brookings Institution shows this is not a truthful depiction of how public pension funding works. 

TIA often argues that taxpayers are responsible for paying their city and/or state’s unfunded liabilities in a few ways. First, if a pension isn’t at 100% funded status in the course of a given year, they state that the pension is somehow in grave jeopardy and that its unfunded liabilities need to be paid immediately to ensure the pension is “debt-free.” They then calculate a supposed “taxpayer burden,” or an amount each taxpayer will have to pay to meet their state or local pension’s unfunded liabilities. 

These tactics, which are often amplified by news outlets critical of public pensions such as the Center Square, are designed to elicit fear that taxpayers will have to fork over a large bill at some point in the future for their area’s pensions. 

Author(s): Tristan Fitzpatrick

Publication Date: 2 June 2021

Publication Site: National Public Pension Coalition

Will births in the US rebound? Probably not.

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Figure 2 translates these childbearing age profiles into total number of children ever born by a certain age. The figure clearly shows that successively younger cohorts of women are having fewer children by specific ages. For instance, by age 24, the 1995 birth cohort of women had 38 percent fewer children than the 1975 and 1980 birth cohorts had at that age (0.5 compared to 0.8). This younger cohort would need to have 21 percent more children at each age from 25 through 44 to “catch up” to the earlier cohorts in terms of total lifetime childbearing. As another example, the 1990 birth cohort has had 21 percent fewer births through age 29 compared to the 1975 and 1980 cohorts; they would need to have 38 percent more births in their remaining childbearing years to catch up in terms of lifetime fertility.

Author(s): Melissa S. Kearney, Phillip Levine

Publication Date: 24 May 2021

Publication Site: Brookings

The Sustainability of State and Local Government Pensions: A Public Finance Approach

Link: https://www.brookings.edu/wp-content/uploads/2021/03/BPEASP21_Lenney-et-al_conf-draft_updated_3.24.21.pdf

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In this paper we explore the fiscal sustainability of U.S. state and local government pensions plans.
Specifically, we examine if under current benefit and funding policies state and local pension plans
will ever become insolvent, and, if so, when. We then examine the fiscal cost of stabilizing pension
debt as a share of the economy and examine the cost associated with delaying such stabilization
into the future. We find that, despite the projected increase in the ratio of beneficiaries to workers
as a result of population aging, state and local government pension benefit payments as a share of
the economy are currently near their peak and will eventually decline significantly. This previously
undocumented pattern reflects the significant reforms enacted by many plans which lower benefits
for new hires and cost-of-living adjustments often set beneath the expected pace of inflation.
Under low or moderate asset return assumptions, we find that few plans are likely to exhaust their
assets over the next few decades. Nonetheless, under these asset returns plans are currently not
sustainable as pension debt is set to rise indefinitely; plans will therefore need to take action to
reach sustainability. But the required fiscal adjustments are generally moderate in size and in all
cases are substantially lower than the adjustments required under the typical full prefunding
benchmark. We also find generally modest returns, if any, to starting this stabilization process
now versus a decade in the future. Of course, there is significant heterogeneity with some plans
requiring very large increases to stabilize their pension debt.

Author(s): Jamie Lenney, Bank of England
Byron Lutz, Federal Reserve Board of Governors
Finn Schüle, Brown University
Louise Sheiner, Brookings Institution

Publication Date: 25 March 2021

Publication Site: Brookings

N.J. teachers need to be told the truth: Their pensions are in jeopardy | Opinion

Link: https://www.nj.com/opinion/2021/05/nj-teachers-need-to-be-told-the-truth-their-pensions-are-in-jeopardy-opinion.html

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The very notable exception is New Jersey’s Teachers’ Pension and Annuity Fund (TPAF), which is by far the single-worst public pension in the Brookings study. TPAF is New Jersey’s largest public pension fund and covers all active and retired teachers. New Jersey’s Public Employees Retirement System (PERS), the pension plan for state and municipal workers, is second-worst but not nearly in the dire predicament of TPAF.

This is what Brookings had to say about TPAF: Under any of their investment return scenarios, TPAF is in “near-term trouble” — meaning near-term insolvency. Brookings projects that TPAF will run out of assets in 12-to-15 years, at which point the $4.5 billion-plus in benefits payments will have to be made from the New Jersey’s perpetually strained state budget. This would be a fiscal disaster for New Jersey and a retirement crisis for TPAF’s 262,000 beneficiaries.

Author(s): Mike Lilley

Publication Date: 5 May 2021

Publication Site: NJ.com

The coming COVID-19 baby bust: Update

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From today’s vantage point, it looks more likely that unemployment will have risen by around 5.5 percentage points in the year following the start of the pandemic (April 2020 through March 2021) from 3.5 percent to roughly nine percent. This estimate is based on observed data from the Bureau of Labor Statistics for April through November and assumes little change in the next few months. Using this revised expected change in unemployment, we would predict a 5.5 percent reduction in births from the unemployment effect alone. Applying that to the number of births in 2019 (3.75 million) suggests 206,000 fewer births in 2021.

Our original forecast also incorporated an additional reduction in births coming from the anxiety and social conditions associated with the public health crisis. We incorporated this into our forecast by examining the experience of the 1918 Spanish Flu. Back then, every spike in the death rate attributable to the flu was associated with a dramatic reduction in births nine months later. We relied on that evidence to increase our forecast based solely on labor market conditions by one to three additional percent, or another 38,000 to 114,000 fewer births.

Author(s): Melissa S. Kearney, Phillip B. Levine

Publication Date: 17 December 2020

Publication Site: Brookings

Diversity within the Federal Reserve System

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Given that Class A directors are explicitly bankers elected by bankers, it is perhaps unsurprising to see their predominance. But a trend since roughly 1980 includes a substantial and growing number of non-banking finance representatives as the third-most represented single group, after banking and manufacturing. The influence of finance on the Reserve Banks’ governance remains very strong, even among the classes of directors meant to represent other interests.

Author(s): Peter Conti-Brown, Kaleb Nygaard

Publication Date: 13 April 2021

Publication Site: Brookings

The sustainability of state and local government pensions: A public finance approach

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Their findings, however, imply that many state and local governments may be able to spend more than assumed on improving their educational systems and economically important infrastructure.

“Given other demands, fully funding their pension plans might not be the right thing for state and local governments,” Sheiner said in an interview with The Brookings Institution. “They should compare the benefits of upping their pension investments with the benefits of investing in their people.”

Author(s): Jamie Lenney, Byron Lutz, Finn Schüle, Louise Sheiner

Publication Date: 24 March 2021

Publication Site: Brookings

One year in, COVID-19’s uneven spread across the US continues

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Figure 2 provides a 12-month overview of COVID-19 rates for each of the four census regions. The winding path started with highest case rates in the Northeast, then moved to the South and West regions, which recorded especially high new case rates in July. In August and September, Midwest rates began to rise and dwarfed those of other regions in October and November. By December, the other three regions, especially the West, showed sharp gains and remained high in January, while Midwest rates fell from those of the previous two months.

In February 2021, new case rates in all four regions took a substantial downward fall from the holiday surge. Nonetheless, February new COVID-19 case rates for the Northeast, South, and West regions were still higher than rates in most months prior to November. The Midwest’s February rates were lower than in any month prior to September.

Author(s): William H. Frey

Publication Date: 5 March 2021

Publication Site: Brookings

Virus Did Not Bring Financial Rout That Many States Feared

Link: https://www.nytimes.com/2021/03/01/business/covid-state-tax-revenue.html

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Throughout the debate over stimulus measures, one question has repeatedly brought gridlock in Washington: Should the states get no-strings federal aid?

Republicans have mostly said no, casting it as a bailout for spendthrift blue states. Democrats have argued the opposite, saying that states face dire fiscal consequences without aid, and included $350 billion in relief for state and local governments in President Biden’s $1.9 trillion federal stimulus bill, which narrowly passed the House this past weekend. It faces a much tougher fight in the Senate.

As it turns out, new data shows that a year after the pandemic wrought economic devastation around the country, forcing states to revise their revenue forecasts and prepare for the worst, for many the worst didn’t come. One big reason: $600-a-week federal supplements that allowed people to keep spending — and states to keep collecting sales tax revenue — even when they were jobless, along with the usual state unemployment benefits.

Author(s): Mary Williams Walsh, Karl Russell

Publication Date: 1 March 2021

Publication Site: New York Times