This document summarizes the state of pension reform in Rhode Island, Pennsylvania, and California at the state and municipal levels. It finds that all three states have large unfunded pension liabilities, especially when measured on a market value basis rather than using government assumptions. Rhode Island has enacted some reforms but municipalities still face funding gaps. Pennsylvania has over 3,200 underfunded municipal plans and some cities like Scranton are facing bankruptcy. California cities like San Bernardino have also failed to make pension payments. Comprehensive reform is urgently needed to avoid crowding out other spending with rising pension costs.

1. State and Municipal Pension Reform in the US
Where Does it Stand?
Eileen Norcross, M.A.
Senior Research Fellow, State and Local Policy Project
Mercatus Center at George Mason University
Anton/Lippitt Conference on Urban Affairs
Taubman Center for Public Policy
Brown University
October 25, 2012

2. Three States with a State and a
Municipal Pension Challenge
Rhode Island
Pennsylvania
California

3. Rhode Island – Diagnose, Plan and Act
Truth in Numbers: “It’s a math problem”
• Notes the effect of FASB rules.
• Provides analysis with corporate bond yields at Treasury website.
ERS (GASB) = $4.7 billion
ERS (FASB)= $6.8 billion
ERS (MVL) = $11.4 billion
This doubles the normal cost- annual cost for current and future hires – from 10% to 25% of
salary
RI Retirement Security Act of 2011
1. Hybrid plan for all employees (except police)
2. COLA suspended until 80% funded
3. Retirement age match Social Security (67) for non-vested and new hires
5. Increase contribution (decreased for teachers)
Reduces unfunded liability by $3 billion

4. RI Municipalities
36 locally-administered plans in 24 Rhode Island
towns “at risk” (RI Auditor General)
GASB basis: unfunded liability of $2.1 billion (40
percent funding ratio, on average)
On MVL basis more acute funding gaps emerge
Combining MERS and local plans MVL: $6 billion
unfunded liability at municipal level.

5. Some considerations
Most muni pensions determined via collective bargaining
and not statute
Localities don’t require 100% funding (Moody’s singled
out Coventry)
POBs (Pension Obligation Bond) – Woonsocket $90
million in FY 2003 (bet that investment returns > interest)
2010: ARC = $2.7 million; debt service = $1.7 million
Other constraints : property tax caps; aid cuts

6. Why the municipal level really matters
Costs can rise quickly and crowd out spending on
basic services: police, fire, emergency.
…using govn’t assumptions:
Auditor General 2011: to fully fund pensions and
OPEB = 25% of property tax levy.
In certain localities, a far bigger portion:
Woonsocket (61%), Providence (51%) and Johnston
(47%)

7. Proposals for municipal reforms
offered by RI Auditor General
• Require 100% funding of local plans
• Merge local plans into MERS
• Eliminate obstacles to merging
• Pension and OPEB outside of collective
bargaining
• Muni reforms mirror state reforms

8. Progress to date
• RIRSA takes some funding pressure off of municipal governments
• “Toolkit” for municipalities
• Individual municipal plans requested
• Providence: 31 percent funded under GASB ($900 million unfunded
liability)
-union cooperation
-freeze COLA
-cap pensions
• Pension liability reduced by $170 million
move retirees from OPEB to Medicare
($18.5 million in savings in FY 2013)

9. Pennsylvania – Talking About it
• State-level reform is being discussed
• Returns = 3.4% this year (not 7.5%)
• State unfunded liability: $40 billion
• Contribution triples (from $1.7 billion to 6.2
billion in 3 years (that’s 11.6% of the General
Fund)
• $116 billion on MVL basis
• 800,000 employees

10. Pennsylvania’s municipal plans
• 3,200 muni plans (one-quarter of all US muni
plans are in Pennsylvania)
• 1,300 < 10 workers.
• $7 billion unfunded liability
• 27 are “severely distressed” <50% funded.
• MVL basis?

11. Of particular concern
Scranton Pittsburg Philadelphia
GASB unfunded $60 million $454 million $4.7 billion
pension liability
Budget $75.5 million $469 million $3.6 billion

12. Consequences
• Scranton is broke
• City officials cut salaries to minimum wage
• Similarities to Harrisburg (other debts figure
into the picture)
• $ 5.5 million in interest on debt in FY 2013

13. PA Reform ideas and obstacles
• Merge muni plans into state plan?
• State is poorly funded: what’s their plan to fix
it?
• By law, Pennsylvania municipalities must offer
a DB and not a DC plan

14. California – All Over the Road
• Pension Liability at the state level is massive
• Major cities with problems: Los Angeles ($2 -
$3 billion a year in benefits) $7.2 billion
budget
• Tackling it? San Jose, San Diego (Proposition B)
• In bankruptcy: Stockton, San Bernardino
• San Bernardino has failed to make its payment
($290 million) to CalPERS

15. Principles for Reform
1) Truth in Pension Accounting
2) Get a plan
3) If you guarantee it, value and fund the plan like
you mean it.
4) The role of skipping contributions, abuses,
budget or funding gimmicks, risk-taking in assets
5) Intergenerational fairness (among workers and
taxpayers)
6) Choice and Flexibility for Employees
7) Shift Risk Away from Government/Taxpayer.

16. Two cities to consider
• Atlanta: $1.5 billion unfunded liability
• Annual contributions doubled to $119 million
over the last decade
• Phase out DB plan, move new hires to hybrid.
• Philadelphia now looking to Atlanta.

17. Conclusion
Public Policy Students:
This is a great area to study from many possible
angles
• Financial
• Economic Behavior
• Fiscal and Budgetary
• Legal and Constitutional (rules, contracts)
• Government (federalism/ state and local)
• Public Policy and Public Administration

18. References
1) M. Barton Waring, Pension Finance, Wiley 2012
2) Olivia Mitchell, Wharton, U Penn; https://bepp.wharton.upenn.edu/profile/719/research
3) Alicia Munnell, Boston College Center for Retirement Research http://crr.bc.edu/
4) Robert Novy-Marx and Joshua Rauh, “The Revenue Demands of Public Employee Promises,”
September, 2012 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1973668
5) RI Auditor General reports: http://www.oag.state.ri.us/reports/MuniPensionsRI2011.pdf
6) Pennsylvania Auditor General reports: http://www.auditorgen.state.pa.us/Reports/MunPen.html
7) http://www.auditorgen.state.pa.us/
8) Distressed PA municipalities data:
9) http://www.portal.state.pa.us/portal/server.pt/community/perc_home/2513/act_205_distress_s
cores/735168
10) Joe Nation, Pension Math, Stanford Institute for Economic Policy Research, December, 2011.
http://siepr.stanford.edu/system/files/shared/Nation%20Statewide%20Report%20v081.pdf
1) Eileen Norcross and Andrew Biggs The Crisis in Public Sector Pension Plans: A Blueprint for
Reform in New Jersey, June 2010, Mercatus Center at George Mason University.
http://mercatus.org/sites/default/files/publication/WP1031-%20NJ%20Pensions.pdf