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By Sean Forbes
March 9 — Better public pension plan board governance can help improve the poor condition that many of the nation's state and municipal public pension plans are in, scholars with the Manhattan Institute for Policy Research Inc. said in a report.
By the most recent estimates, public pension plans have accumulated about $4 trillion in obligations, but assets to handle those liabilities total only about $3 trillion, leaving a shortfall that threatens public employees' retirement, as well as potentially impacting spending on essential public services such as health, education and infrastructure, according to the report, released March 9.
The irony is that many public pension plan boards actively push private companies to improve their governance structures, such as by having greater board diversity and more investor participation, but haven't taken the same actions for themselves, James R. Copland, a senior fellow at the institute and one of the report's authors, told Bloomberg BNA. “So that's deeply disturbing on one level,” he said.
Changes in board governance aren't the only steps that states and municipalities should take, “but if they function the way they're doing now, they're effectively punting the problem down the road,” Copland said.
Weaknesses among the boards include having the wrong composition of members and “weak, if any, fiduciary duties,” Copland said.
State and municipal funds aren't subject to the Employee Retirement Income Security Act's fiduciary duties that apply to private pension plans and are instead subject to a “hodgepodge of typically more lenient state-law requirements,” Copland and his co-author, Steven Malanga, said in the report, “Safeguarding Public-Pension Systems—A Governance-Based Approach.”
The Uniform Law Commission, which drafts state laws on various topics, provides a model law for public pension plans, but only three states—Maryland, South Carolina and Wyoming—have adopted it, the authors said in the report. the The model act is based in large part on the language of the Employee Retirement Income Security Act.
Regarding board diversity, the National Association of State Retirement Administrators found that 73 percent of 77 boards studied were composed of plan beneficiaries or elected officials, and a study by the National Education Association of 89 major public education pension plans found that only 24 required at least one citizen financial expert on the board of trustees, the report said.
Plans can improve their board composition by requiring public-citizen members, members with financial expertise and a taxpayer advocate, the report said. In addition, union members shouldn't form a majority of the board and all members should undergo a mandatory training period, the report said.
Apart from governance changes, plans also should adjust their expected rates of return on investments, Copland said. California and New York, for example, expected better than a 7 percent rate of return last year, but got less than 3 percent.
“It doesn't require a mathematics genius to see there's a problem there,” he said.
However, political push-back has made changes in some areas difficult, he said.
“To some degree, plans need to take bad medicine now to prevent bigger problems in the future,” Copland said.
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The report is at http://src.bna.com/dav.
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