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Teacher Retirement Plans Reportedly in Jeopardy

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Washington--Presented with a report charging that public pension funds are "dangerously underfunded" and subject to "political manipulation," two House subcommittees heard testimony last week on the merits of proposed legislation that proponents say would be "a first step" toward stabilizing the nation's retirement systems for public employees.

The report, "Dollars and Sense: The Case for State and Local Pension Reform," was prepared for the American Federation of State, County, and Municipal Employees by Thomas C. Woodruff, a former executive director of the President's Commission on Pension Policy during the Carter Administration.

There are now some 6,630 state and local public-employee pension plans that affect 4 million teachers and 9 million other civil servants who are either working or retired, according to the afscme report. But the management of the plans--which have some $260 billion in assets--is fraught with "conflicts of interest, unprofessional portfolio management, and political manipulation," the report charges. The document was released last week by afscme officials during a joint hearing of the House Ways and Means Subcomittee on Oversight and the Education and Labor Subcommittee on Labor-Management Relations.

About 70 percent of the 13 million participants in public pension plans are en-rolled in the 100 largest plans, according to the report. About 30 percent of participants are teachers.

Labor-union leaders and researchers testified in favor of adopting the Public Employee Pension Plan Reporting and Accountability Act (peppra), which would establish a federal standard for state and local public retirement systems that would guarantee that workers could receive information about benefits and the financial condition of their pension system.

Under the legislation, which was reported out of the House Education and Labor Committee last year, workers and retired persons would receive, as a matter of course, information about their benefits and the investment of pension funds as well as reports on the actuarial condition of the programs. Other provisions in one of the bills would establish fiduciary standards and enforcement procedures. In all cases, states would be granted an exemption from provisions if the governor certified that state laws included "substantially equivalent" provisions.

Currently, teachers and other public employees cannot obtain "basic information" about their pension benefits or the rate of investment return on the pension funds, testified Linda Tarr-Whelan, director of government relations for the National Education Association.

A 1981 study by the Urban Institute, Ms. Whelan and others reported, indicated that up to 40 percent of public-employee retirement programs did not automatically furnish plan descriptions to participants. And about 18 percent did not provide this information on request.

A concurring view was expressed by Suzanne Taylor, coordinator of research for the Connecticut Education Association, who has studied state pension programs nationwide. She noted, for example, that the State of Washington has only one copy of its annual report on pension programs, and that Illinois, one of the largest pension systems, has no actual evaluation in writing.

Ms. Taylor described Northeastern states--particularly Connecticut, Massachusetts, and New Jersey--as "the worst examples of disclosure and reporting." Massachusetts, hard hit by cuts to state programs because of a 1980 tax-limitation measure, has not published a report on pension programs in two years, she said.

Ms. Taylor, who will publish a book next summer entitled The Governance and Finance of Teacher Retirement, noted that governments concentrate on administering the investment side of their pension program. They "will spend money to make money," she said, but they "will not spend money to give it away" or to inform beneficiaries about the activities of the program.

This is particularly disturbing, labor-union officials and others said, because as the population grows older and more people retire, the enormous pension programs become--in the words of Mr. Woodruff--"easy targets for budgetary and political manipulations."

According to Mr. Woodruff's estimates, the current $260-billion asset pool of state and local pension programs is expected to increase by 49 percent to $387 billion by 1987. That total represents about one-fourth of the $1.6 trillion in pension assets expected to be held by all public and private non-federal plans.

"While the growth of these funds may be a measure of increased retirement-income security for participants and beneficiaries, it also suggests a danger: The very size of these funds makes them easy targets for diversion to purposes other than providing a proper rate of return to finance benefits," Mr. Woodruff said.

"At a time of significant financial distress at the state-government level, we remain deeply concerned about the need to protect the health and solvency of our members' pension funds," said the nea's Ms. Tarr-Whelan.

"In times past, the assets of the pension funds have been managed by political leaders in a way which may have helped solve state budget problems but jeopardized investments on behalf of retirees. Even the most minimum fiduciary responsi-bilities appeared lacking on occasion," she said.

Moreover, she charged, state governments have been working for more than a decade "to reduce the state contribution to their retirement funds, exacerbating the financial difficulties of the retirement systems and transferring a pension obligation of this generation to the next generation."

When finances are squeezed, Ms. Tarr-Whelan said, "state administrations experience extreme pressure from business, real estate, and mortgage-banking interests to make pension assets available for bond purchases to aid local development, or to provide financial assistance to troubled cities."

Targeted Investments

Such investments may not be in the best interest of the plans' participants, according to Ms. Alicia H. Munnell, vice president of the Federal Reserve Bank of Boston. She cited a recent survey of state-administered pension funds that revealed that, as of June 1983, 31 states had undertaken some form of targeted or social investments, which generally do not yield high returns.

According to John J. Sweeney, executive vice-president of the afl-cio, during the period from 1971 to 1980, the median annual rate of the return on total public retirement funds was 5.8 percent. In 1981, the annual median return was only 3.3 percent, he said.

(By contrast, the Teachers Insurance Annuity Association--a retirement program for about 850,000 independent-school and higher-education faculty and staff that invests in publicly traded bonds, direct loans to corporations, commercial mortgages, and income-producing real estate--showed a return on investments for 1981 of 10.11 percent. For the 10-year period, the average return was 7.91 percent, according to Claire M. Sheehan, a publications officer for the annuity association.)

"We are not suggesting that the return rate is a direct indication of the lack of proper fiduciary management, but such a low rate of return during a 10-year period of substantially high inflation would make one question the investing practices," Mr. Sweeney said.

Ms. Tarr-Whelan of the nea noted that earnings on the investment of pension funds account for about 44 percent of the income of the major public-employee retirement systems; the remainder is provided by employer and employee contributions. Therefore, she said, "the earmarking of pension funds for goals other than the protection of assets and the earning of the greatest yield is of geniune concern" to beneficiaries and workers who worry about the future of the pension systems.

Ms. Tarr-Whelan was particularly critical of governors and legislatures for withholding money from the pension funds or refusing "to fund the retirement systems at the level recommended by the actuary."

Representative William L. Clay, Democrat of Missouri, cited the example of California's governor, George Deukmejian. In September, the Governor virtually eliminated the state's contribution to its teacher-pension system in an effort to balance the state's $26-billion budget, which at that time was $1.5 billion in the red, Mr. Clay said. (See Education Week, Oct. 5, 1983.)

(The California Teacher's Association has filed suit in state court to have the funds restored. In a statement ordered by the judge in the case on the rationale for the Governor's move, the state comptroller said last month that he agreed the funds should be appropriated but that he did not have the money to do so. The trial will begin on Feb. 22.)

A related concern raised by union leaders and observers of pension systems is the high level of "unfunded liability"--the difference between assets and the system's obligation to current and prospective retirees--in the state and local programs.

According to estimates by Ms. Munnell of the Federal Reserve Bank of Boston, the aggregate unfunded liability for state and local plans in 1983 is about $100 billion.

That total, she said, is lower than the $150 billion to $175 billion that was predicted for the funds in 1978.

Ms. Munnell noted that aggregated data, however, hide "significant variations" in the state and local funding for pension plans. A study Ms. Munnell conducted of the major public pension plans in the New England states, for example, indicated that New Hampshire has almost covered its unfunded liability with current assets, while Massachusetts has about five times more unfunded liability than assets.

All New England states had an average of four times more liability than assets, Ms. Munnell said. Nationwide, pension programs have only enough current assets to cover 70 percent of their liability.

(A report released by the Rand Corporation in 1980 indicated that the pension programs in 18 states were likely to face financial trouble. Those states, the report said, faced student-enrollment declines steeper than the national average, made automatic cost-of-living adjustments in benefits, and had state and local tax caps, slow growth rates, and high revenue-to-debt ratios.)

(The report, "The Financial Condition of Teacher Retirement Systems," cited state retirement systems in Alabama, Alaska, California, Delaware, Indiana, Kentucky, Louisiana, Maryland, Michigan, Montana, Nebraska, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Washington, and West Virginia as being most likely to face a revenue shortfall.)

According to Mr. Woodruff, under current funding plans, only about 52 pension programs in a sample of 100 would be fully funded by the year 2024 with no modifications in benefit formulas and no ad hoc increases for the cost of living. Of the remaining programs, 20 would have substantial unfunded liabilities.

"Public employees are entitled to no less protection of their retirement income than their counterparts in the private sector," Ms. Tarr-Whelan said. She and other spokesmen urged the subcommittees to once again endorse peppra.

Improvements in Recent Years

But representatives of state legislatures, state retirement systems, and county goverments argued against new peppra legislation. They said that although state and local pension plans have their faults, the states have made improvements in recent years and are capable of reforming the programs without federal interference.

"We recognize that there have been, and still are, some problems with the structures, funding situations, and reporting and disclosure policies of some state and local government pension programs," a statement from the National Association of Counties said. "We believe that state and local government officials recognize these problems, have shown that they can reform their own systems, and will strengthen reform measures in the coming years. We do not believe that the solution is for the federal government to create a new federal bureaucracy to determine, regulate, and enforce uniform reporting, disclosure, fiduciary, and administrative standards for public pension plans."

Kiliaen Townsend, a state representative from Georgia, speaking on behalf of the National Conference of State Legislatures, asserted that the federal government, which has its own major liability in the civil-service retirement program, was in no position to tell states what to do with their pension programs.

But Representative Clay, the chairman of the House Education and Labor Subcommittee on Labor-Management Relations, countered that the federal government already complies with standards that would be imposed by peppra. "Everyone knows what our unfunded liability is, so we can quote to you what people who contribute ought to know."

The concern of the hearings, Mr. Clay said, was to make sure that that same degree of reporting and responsibility to the public was available to citizens in the states.

Several of those testifying in favor of federal standards for public pension plans suggested that the government had already established a model in its private-sector regulation, the Employee Retirement Income Security Act (erisa). Designed specifically to guard against abuses in the administration of private-sector pension plans, erisa was passed by the Congress in 1974.

It requires that private pension plans disclose information on their management and financial status; it establishes prohibitions against conflicts of interest in the management of investments and "prudence" standards that require funds "to be managed for the people who receive benefits," according to Gloria Della of the U.S. Labor Department's erisa public-affairs office.

The act also sets minimum standards on participation, funding, vesting, and benefit accrual, Ms. Della said. The Internal Revenue Service has the authority to levy an excise tax on plans that violate the standards, she said.

But while the government could without much controversy establish disclosure and reporting regulations for public-sector programs, some said last week, to mandate erisa-like funding standards for public-sector programs would create serious problems.

"Controversy surrounds the degree of advanced funding needed for public systems," Ms. Munnell of the Federal Reserve Bank said, "since they are supported by governments with perpetual life and the power of taxation, which sharply reduces the likelihood of default." She also said there is some question whether federal funding standards for public plans would be constitutional. The programs have a "significant impact on the costs of running state government--a function that is protected by the 10th Amendment," she said.

One of the two peppra bills was passed by the House Ways and Means Committee last year but was not acted upon; another was killed by the committee, according to a staff member of the House labor-management relations subcommittee.

The legislation now being considered in the House would be "virtually identical to last year's bills," the staff member said.

Identical measures introduced in the Senate last February died in committee.

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