Pension Words of Wisdom

Earl Pomeroy’s Top-Ten “Lessons Learned” for Public Pensions

By Leigh Snell, NCTR Federal Relations Director
(reprinted with permission)

Earl Pomeroy was the U.S. Representative for North Dakota’s at-large congressional district from 1993 to 2011, and served on the powerful House Ways and Means Committee. He was one of the most knowledgeable Members of Congress when it came to retirement security in general and public pensions in particular, and he was a staunch believer in and defender of the defined benefit approach.

In addition to speaking about the national retirement savings crisis and the reasons for it (including, in his opinion, the shift from defined benefit plans to defined contribution plans, which he characterized as “the biggest reason for many”), Mr. Pomeroy also gave his top 10 “lessons learned” for public pension plans. Pomeroy said that he gleaned these from a long conversation with Sparb Collins, the director of the North Dakota Public Employees Retirement System, based on both their long careers in public service.

It is a list that we would all do well to remember and utilize in our conversations with others concerning public pension plans and the defined benefit model:

1. Risk shared collectively beats risk carried individually. Earl summarized this by reminding the audience that this is the spirit behind Social Security: “All of us protect each of us.” He also noted that the rejection of President George W. Bush’s effort to create private accounts in Social Security reflected the public’s overwhelming desire for “coverage/protection” versus “exposure/opportunity.”
2. Avoid panic decisions; the sky is not falling. Noting the old adage that “Figures lie and liars figure,” Earl reminded his audience that pension debates are rarely on the level. He said that “Proponents of pension reform use funding assumptions which exaggerate funding challenges in order to drive legislation in ‘crisis response’ mode rather than engage in a straight-forward discussion of allocation of risk.”
3. Failure to fund plans is intergenerational theft. A failure to fund jeopardizes pension plans, reduces future benefits, and increases costs to taxpayers down the road, Earl observed. It is an “act of theft” against future generations, he said.
4. Asset liability matching for pension funds is misused. Pension funds are NOT banks or insurance companies, Earl stressed. “Assets do not need to constantly match liabilities,” he underscored. They only need to match when liabilities are owed or can be called.
5. Long-term liabilities are appropriately funded in part by long-term earnings. In other words, keep a long term perspective. “Risk-free” or “zero risk” reserving using a Treasury rate only, as Earl described the theory of financial economists such as Joshua Rauh, only creates a 100 percent risk of what Earl noted as “funding shortfalls, lower benefits, and higher taxpayer and employee contributions.
6. Public pensions do not exist in their present form by accident. As Earl pointed out, current public pension design is rationally tied to employment incentives necessary to make the public sector work. He also used this opportunity to criticize as “all wrong” the paper that was presented later in the conference by the Urban Institute that was critical of public plan design as being unfair to younger employees and bad for public policy. Noting that while he may not have worked in a Washington think tank, he did have many years’ experience as North Dakota’s Insurance Commissioner running a state agency, and he didn’t want a plan design to encourage mobility. He said that instead, he wanted the pension benefit to encourage a career committed to longevity in order to handle the complex work of his agency. “Have a bit of humility,” he cautioned researchers: “Thousands of plans overseen by tens of thousands of trustees” over the years “have given this some thought.”
7. A good offense is often used as a defense. Earl used this as an opportunity to both discuss the recent behavior of credit rating agencies such as Moody’s as it pertains to public plans, while also encouraging plans to do the right thing and then tell people about it. He noted the role of such agencies in “blessing” bad paper from the worst of the subprime mortgage “scam” and now coming up with new evaluations of public plan liability that is “not rationally linked to the assessment of plan performance over time.”
8. Be wary of non-stakeholders suddenly showing great interest in your business. “You may have a math problem: they may have an agenda,” he warned. Earl noted examples of what he called “helpful stakeholder leadership,” mentioning both NCTR and NASRA by name, and the responsible “tweaks” to governmental plan structures that have been made across the country in recent years. He contrasted them to the “predetermined prescriptions” of ALEC, Grover Norquist and “others.”
9. Congress is incapable of devising “one-size-fits-all” responses in this realm of local control. Earl gave examples of poorly thought-out examples of Congressional tinkering, citing the [Representative] Nunes’ “PEPTA” legislation and the [Senator] Hatch annuity proposal by name. Local (non-Federal) plans support local purposes over the long term to best attract and retain State and local employees, he reminded his audience.
10. There is no news value in competently performing public pension funds or prudent, technical fixes. “Forget about the chatter; focus on the numbers” is how Steve Yoakum, the Executive Director of the Public School and Education Employee Retirement Systems of Missouri, characterized Earl’s point.