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March 9, 2006

Highlights from the State and Local Government Pension Forum

Rick Mattoon
Senior Economist and Economic Advisor

Over 150 people attended the February 28, 2006, State and Local Government Pension Forum cosponsored by the Chicago Fed, the Civic Federation, and the National Tax Association. Presenters offered a wide range of perspectives on trends affecting pension funding and solvency, as well as discussing the potential impact that recognizing future OPEB liabilities will have on government finances.

I will summarize the conference discussions in an upcoming Chicago Fed Letter. Meanwhile, here are some of my impressions. By the end of the program I think a pretty firm consensus had emerged that:



  • while not a crisis, pension funding and OPEB liabilities will be the largest fiscal challenge to many state and local governments in some time. Financial commitments for these programs are growing much faster than the rate of revenue growth.
  • these commitments cannot be avoided. Even the OPEB liabilities may be a contractual obligation that must be met.
  • the secondary impact on state and local governments will be significant. Program reductions and higher taxes are likely.
  • if somehow the state and local governments can get out of their OPEB programs, this will have a negative impact on an already overtaxed Medicare system.
  • this is a major political problem since there is little reason for any governor, mayor or legislature to fix the problem.
  • The strength of the state and municipal workers unions (as shown, for example, by the recent NYC transit strike) suggests that negotiating concessions will be difficult.
  • The rating agencies are unlikely to significantly downgrade public debt when OPEB liabilities are reported. As long as the government under analysis can demonstrate a plan for meeting OPEB liabilities, they will be held harmless.

The conference had many excellent presentations. I provide a brief description of each presentation here and a link to the relevant powerpoint or speech.


The Impending Pension and Health Plan Crisis and the Impact of an Aging Work force on Talent Management
Tim Phoenix and Lance Weiss, Deloitte Consulting

Tim Phoenix and Lance Weiss discussed the aging demographics of the government work force and stressed that any change in pension or health care plans must consider issues of talent retention and talent attraction. They also provided a comprehensive history of the Illinois pension system and recent efforts to address underfunding.

An Independent View of the Credit Risks of Pension Underfunding
Richard Ciccarone, McDonnell Investment Management
John Kenward, Standard & Poor’s
Paul Nolan, Moody’s Investors Service
Joe O’Keefe, Fitch Ratings

Richard Ciccarone moderated a panel of rating agency analysts, who examined how state and local governments are handling pension liabilities and the impact that OPEB liabilities might have on government credit ratings. The analysts stressed that a primary concern is whether state and local governments have recognized their future liabilities and have a plan for meeting them.


The Regional Perspective on Pension Issues
Michael Moskow, Federal Reserve Bank of Chicago

Michael Moskow offered his perspectives on improving pension solvency and the impact of pension underfunding in the Midwest.


Are Public Pension Funds Able to Break from the Path of Social Security and the Private Sector?
J. Fred Giertz, University of Illinois and National Tax Association

Fred contrasted the relative liability of the Social Security and Medicare system to private and state and local government pension exposure. He examined resources that each sector might have to meet future expenses.


If the Pension Bomb Stops Ticking, What Happens Next?
James Spiotto, Chapman and Cutler

James Spiotto described the legal protections surrounding pension funds as well as the limits on state and local governments to restructure pension and even health care liabilities.


The Organized Labor Perspective on Pension Issues
Hank Scheff, AFSCME Council 31

Hank Scheff described why defined benefit pension programs are often best for government workers. He noted that nearly one-quarter of state and local government workers do not receive social security benefits, making pension income that much more important. He also described recent problems in Illinois pension funding.


Best Practices for Reforming Pension Governance
Lise Valentine, The Civic Federation

Lise Valentine examined governance structure for pension fund boards and spoke of the importance of having independent and citizen member representatives. She stressed that pension boards should focus on protecting the funds assets and not lobbying for any particular stakeholder group.


Finally, if you have any questions after you look over the presentations, let me know. I’ll get in touch with the presenter and try to get you an answer.

Posted by Mattoon at March 9, 2006 4:27 PM

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