On November 10, Penn IUR hosted a book launch for its latest book in the City in the 21st Century Series, Public Pensions and City Solvency. The event brought together distinguished experts from academia, industry, and government to address the ongoing crisis of pension funding and city solvency and discuss possible solutions. Panelists included Alex Brown, Research Manager, National Association of State Retirement Administrators (NARSA); Matt Fabian, Partner, Municipal Market Analytics, LLC; Peter Hayes, Managing Director, Head of Municipal Bonds Group, BlackRock Inc.; Mathew McCubbins, Professor of Law and Political Science, Duke University; Robert Novy-Marx, Lori and Alan S. Zekelman Professor of Business Administration, Simon Business School, University of Rochester; Richard Ravitch, Former Lieutenant Governor, State of New York; Allison Schrager, Contributor, Quartz; David Skeel, S. Samuel Arsht Professor of Corporate Law, University of Pennsylvania; James Spiotto, Managing Director of Chapman Strategic Advisors LLC; John Sugden, Senior Director, Public Finance Department, Standard & Poor; Nancy Winkler, Former City Treasurer, City of Philadelphia; and moderator, Susan Wachter, Co-Director, Penn Institute for Urban Research.
Watch videos of the event or read a summary of the panel discussion below.
Susan Wachter opened the event by welcoming the panelists and audience members. The event, she noted, was the third convening on a series of discussion that examine the issue of public pensions. Wachter introduced the first panel of speakers, explaining that they would be discussing the changes that have happened in the public pension realm since the last convening. Robert Novy-Marx began by stating that the total government pension liability nation-wide had increased to a current $4.5 trillion, and he stressed the role of political economy in limiting attempts at pension reform. Both sides of the table, he argued, are incentivized to kick the can down the road to get the best deal they can. Matthew McCubbins argued that, since the writing of the book, many predictions about the future of public pensions were beginning to come true. Specifically, he highlighted places where a disproportionally high number of employees are retiring and taking a lump of their pensions causing a bank run and putting further strain on cities. In other cases, cities have had to cut jobs and employee healthcare and reduce the investment in infrastructure to pay pensions.
Alex Brown explained that the U.S. saw unprecedented numbers of pension reform from 2009-2014. The reforms varied by location but often included employee contribution rate changes, reductions in benefits, and cost of living adjustments. Despite the flurry of activity, he noted, most states kept benefits and retained the structure of their pensions. John Sugden with Standard and Poor’s (S&P) noted that there have been improvements in accounting that require more reporting and some disclosure of liability, effectively increasing transparency. While he acknowledged that there was still a long way to go towards achieving complete transparency, S&P is attempting to incorporate many of the new measures into their ratings system to bring greater light to the issues. Until we know the magnitude of the problem, he argued, we cannot create an effective solution. Alison Schragger argued for a common structure in which pensioners consistently get paid first before the bondholders. This approach, she contended, would incentivize bondholders to more fully scrutinize the ability of a city or state to repay, ultimately reducing the instances of insolvency.
Wachter welcomed Richard Ravitch to speak about his ideas for tackling the issue of pension reform. Ravitch argued for multiple solutions including requiring backed funding for pensions, increasing the transparency over operating budgets, and, if none of those work, ending the general obligation bond.
Wachter welcomed the final panel to speak on potential solutions to pension reform and city insolvency. James Spiotto stressed that the way forward was to first recognize that not all parties will get everything that they want, then bring all groups together so they are on the same page about the realistic financial situation, and finally reinvest in infrastructure to foster economic development that will increase a city’s tax base. Matt Fabian argued that a main part of the problem was the lack of a catalyst, or risk of default, to bring all groups together to solve the crisis. He advocated for allowing more default payments that create discipline and accountability.
Nancy Winkler, former Treasurer for the City of Philadelphia, discussed the city’s incremental steps to improve the complex pension issue. The newest approach includes a tiered plan that requires employee contributions above a certain income level, a closed amortization period, and a new sales tax which in-part funds pension payments. Peter Hayes, approaching the issue for the other direction, proposed that investors need to assess a municipality’s overall financial situation, not just the government’s ability to pay on an individual issue, and consider whether the investors will be compensated for the risk they are assuming going forward. David Skeel addressed the relatively recent legality of pension reform, noting that local governments in financial stress can now politically and legally restructure their pensions. Successful reform, he argued, however, is challenging, and in general the more states try to protect their pensions, the more likely they are to have pension problems.
Wachter moderated brief discussions between each panel with questions from the audience that touched on approaches for ending the policy of "kicking the can down the road" and encouraging politicians to take action now on pension reform. Wachter wrapped up the event by thanking the panelists and audience for attending. Copies of the book Public Pensions and City Solvency are available for sale online.