Public Pension Plans Struggle to Meet Funding Obligations

Low interest rates are one of several factors contributing to higher levels of unfunded pension liabilities at state and county pension plans across the country.

The California Public Employees’ Retirement System (CalPERS), the largest U.S. public pension plan with 1.8 million total members covered by 3,000 employers, reported a 0.6 percent net return on investments for the 12-month period that ended June 30, 2016.

The California State Teachers Retirement system (CalSTRS), which manages retirement funds for California’s 896,000 public school educators from 1,700 school districts, reported a 1.4 percent net return for the 2015-16 fiscal year ending on June 30, 2016.

Both California funds have a target annual return of 7.5 percent. CalPERS and CalSTRS had $62 billion and $74 billion in unfunded liabilities, respectively, as of the 2013 fiscal year, according to the Public Policy Institute of California. CalSTRS now states that it is on track to achieve full funding by the year 2046.

The New York State and Local Retirement System reported an average rate of return of 0.2 percent for the fiscal year on March 31, 2016, compared to its stated goal of 7 percent.

The Oregon Public Employee Retirement System (PERS) reported a 2 percent investment return in 2015, compared to its goal of 7.75 percent, resulting in an increased liability of $3 billion.

A 7.7 percent average rate of return is now the target set by most state and county pension funds across the country, according to a 2015 report by the National Association of State Retirement Administrators. The Center for Retirement Research at Boston College estimates that every 1 percent decrease in investment returns results in a 12 percent increase in liabilities.

The inability of state and municipal pension plans to properly fund current liabilities at the same time that rates of return are falling is causing significant underfunding. The situation is putting pressure on public pension managers and elected officials across the country.

New public pension accounting standards are also bringing more attention to underfunded municipal liabilities. The Government Accounting Standards Board issued GASB Statement No. 67, Financial Reporting for Pension Plans, and No. 68, Accounting and Financial Reporting for Pensions in recent years. The new reporting standards for government-administered pension plans took effect for reporting periods after June 15, 2013 under Statement No. 67, while new employer reporting standards followed one year later under Statement No. 68.

The Pew Charitable Trust reports that as of 2013, states owed almost $1 trillion in unfunded pension benefits as well as $587 billion in unfunded retiree health care liabilities. Looked at another way, Wilshire Consulting estimates that state pension obligations are only 75 percent funded as of 2013, despite that fact that most states strive to maintain an 80 percent funding level.

The State of Illinois alone has $101 billion in unfunded pension liabilities and $56.4 billion in unfunded retiree health care benefits, according to The Pew Charitable Trust. Illinois is listed by the Trust as having the third highest level of debt and unfunded retirement costs as a share of state personal income (after Alaska and Hawaii) as of 2013. In June 2016 Moody’s Investors Service downgraded the credit rating of some of the state’s general obligation bonds to Baa2, down from Baa1, which is two units away from junk bond status.

The City of Chicago is struggling with its own pension challenges. The City’s Municipal Employees’ Annuity and Benefit Fund, which covers 70,000 workers, reported that unfunded pension liabilities more than doubled to $18.6 billion at the end of 2015 from $7.1 billion a year earlier. Moody’s reduced the city’s credit rating to junk bond status in 2015.

Municipalities are responding with a wide range of measures to increase pension funding, reduce benefits, and cut expenses. Representative actions include the following.

Chicago implemented a property tax hike in 2015 to better fund the police and fire retirement funds. The mayor also seeks an increase in water and sewer levies as a means to support municipal retirement benefits.
Pennsylvania officials are evaluating a range of pension plan changes, including the possible adoption of less expensive 401(k)-style plans.
Connecticut now devotes 10% of its budget toward unfunded pension liabilities, which doubled in the past decade.
Oregon plans to increase pension funding rates, which is likely to translate into expense reductions such as teacher lay-offs, larger class sizes, and public safety cuts.
Detroit’s municipal bankruptcy was settled, in part, with pension cuts of 4.5 percent approved by certain retirees. Benefit reductions were also seen in the areas of cost-of-living adjustments and health care costs.

Pension Funding Litigation a Certainty

As states and municipalities struggle to fund pension obligations in a low interest rate environment, court battles in New Jersey, Illinois, California and Michigan may serve as precedent for similar challenges likely to unfold across the country.

ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.

The Top Five Questions About Overtime

Chances are if you’re working you will have been asked by your employer to work overtime. A lot of us can do overtime without knowing the laws behind it, but we may still have questions. This article will address five of the most common questions about working overtime in the UK.

1. What is overtime?

2. Is overtime legal?

3. Does it always have to be paid?

4. What is unpaid overtime?

5. Can you be made to do overtime?

What is overtime?

Overtime is the time you work over and above your contracted hours. For example, if you are contracted to work 9am to 5pm Monday to Friday (40 hours) and you stay late to cover for someone who hasn’t arrived for their shift or to get a project finished, this extra time working is classed as overtime.

Is overtime legal?

Yes, overtime is legal and a lot of us do it.

However, there are rules regarding how much overtime you can do. Legally, you should not work more than 48 hours in a week. If your overtime means you are working more than 48 hours a week then it could be illegal. There is a way around this, a written agreement signed by both the employer and employee; if you and your employer sign an agreement saying you are happy to work over 48 hours a week then this is legal.

Does it always have to be paid?

Maybe.

Each employer has their own policy regarding pay for overtime; you should check your contract or your employer’s terms of business to find out yours.

What is unpaid overtime?

Unpaid overtime is the overtime that you work but do not get paid for. You are effectively working for free when you do unpaid overtime.

Unpaid overtime is perfectly legal as long as your average pay for the total hours you work does not fall below the national minimum wage (£7.20 in the UK). If you end up doing so many hours that your average wage drops below £7.20per hour then the amount of overtime you are doing becomes illegal.

Example: If you work 40 hours a week and earn £328.00 each week your hourly rate works out at £8.20 per hour.

This means you can work 45.5 hours per week legally and 5.5 of those can be unpaid overtime.

If you worked 46 or more hours per week and still only made £328.00 per week then you would be doing an illegal amount of overtime as you would be earning £7.13 per hour, or less depending on the amount of overtime you worked.

Can you be made to do overtime?

You can be asked to do overtime, paid or unpaid.

You should refer to your contract if you are unsure what your employer can or cannot ‘make’ you do. Each employer has different policies and you may have already agreed, by signing the contract, to do overtime if asked. In that situation, refusing to do so could be seen as a breach of contract or misconduct.

However, if your contract is silent on overtime and you are asked to do some and refuse, you should not be sacked, especially if what is being asked is unreasonable. However, you can be noted as being uncooperative by your employer, which could work against you if a redundancy situation arises.

It is important to find the right balance of being a good, helpful employee and not having your employer take advantage of you.

In conclusion, you should now have a clearer understanding of what overtime is and what is legal and illegal regarding the amount you can work.