Governments Try Out Buyouts For Pension Reform

While state and local governments across the country have generally focused on new hires and controlling the growth of future liabilities to address pension reform, some are looking at buyouts, Governing reports.

Philadelphia’s controller Alan Butkovitz targets the city’s most expensive workers by offering members of its oldest and most generous pension plan, Plan 67, an upfront cash payment based on their estimated lifetime benefits. Plan 67 offers employees up to 100 percent of their final salary upon retirement, and is responsible for $5 billion of $6 billion in Philadelphia’s unfunded liabilities. The States of Illinois and Connecticut are also looking at lump sum payments and other creative options. Governing finds:

Pension buyouts have worked in the corporate sector where employees have taken a lump-sum payment at a slight haircut. But they haven’t been done in the public sector, thanks to the different accounting rules for public pensions that make their liabilities appear lower than comparable corporate-sector plans, said Josh B. McGee, senior fellow at the Manhattan Institute and vice president of public accountability at the Laura and John Arnold Foundation.

That can mask what a government would actually owe an employee who wants to cash out today. Indeed, an initial analysis of Bukovitz’s original idea of a straight pension buyout proved to be too expensive for the city.

Overcoming negative perceptions of buyouts, however preferable at times, also presents a political challenge.

Read the full article here.