Challenges in Pension Reform

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CHALLENGES IN PENSION REFORM

A RESEARCH PROJECT SUBMITTED TO THE FACULTY OF NATIONAL UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF

MASTER OF PUBLIC ADMINISTRATION

NOVEMBER 2012

By
James Michael Sandburg

Capstone Project Faculty Advisor
Gary Geiler

CAPSTONE PROJECT APPROVAL FORM

I certify that I have read the Project of James Michael Sandburg entitled Challenges in Pension Reform, and that, in my opinion, it is satisfactory in scope and quality for the degree of Master of Public Administration at National University.

Approved by:

____________________________________________________________________ Gary GeilerDate

ABSTRACT
The purpose of this study is to examine the challenges faced by public sector administrators as they grapple with restoring pension plans to solvency and sustainability. The objectives are to research and describe how public pension plans have become insolvent over the course of the past dozen years; to discuss legal issues that make reform difficult; to suggest how to involve unions in meeting the challenge of reforming pension plans through negotiation with collective bargaining units; to discuss how to achieve pension reform without violating constitutional and statutory protections; to suggest a means of paying off unfunded pension liabilities. Unfunded public sector pension liabilities has become a nationwide problem, with total unfunded liabilities totaling between 1 and 5 trillion dollars, depending upon investment return assumptions. Pension problems have plagued the City of San Diego, California, since the late 1990s. Pension reform became a key element in San Diego’s 2012 mayoral race. The prevailing candidate stood alone among three challengers, as the only one who seemed to recognize the depth of the legal implications of pension reform that will be discussed herein. The idea has become widely held that implementing public pension reform is essential to restore pension plans to financial health and sustainability. The premise of this study is that it is possible to accomplish necessary reforms without alienating stakeholders, and without exacerbating the problem by doing further battle in the courts. In the end, pension abuses can be eliminated, sound principles of pension finance can be sustained, and the public interest can be preserved.

TABLE OF CONTENTS
CAPSTONE PROJECT APPROVAL FORMii
ABSTRACTiii
LIST OF TABLES AND FIGURESv
Chapter I: Introduction7
Background7
Problem Statement10
Purpose and Objectives11
Limitations of our Study11
Summary of Remaining Chapters13
Chapter II: Pensions in Peril14
Chapter III: Social Security23
Chapter IV: Reform Propositions34
Chapter V: Legal and Constitutional Hurdles43
San Diego Pension Issues:43
ERISA Pension Reform:47
Contracts Clause:48
Due Process & Takings Clause:49
The Due Process and Equal Protection Clause:49
The Eyes of a Nation May Be Upon San Diego51
Chapter VI: Union Participation53
The Meyers-Milias-Brown Act (MMBA):53
The Public Employment Relations Board (PERB):54
Chapter VII: Pension Obligation Bonds56
Chapter VIII: Conclusions and Recommendations62

LIST OF TABLES AND FIGURES
2.1 Illinois State Retirement System Rate of Return on Investment………..…..16 3.1 Summary data for 2010 and 2011………………………………………………………19 3.2 Select Unfunded Accrued Pension Liabilities……………………………………….29

Chapter I: Introduction
Background. The life cycle in America and most developed countries is to spend the first five years learning to walk, talk, and manage our bodily processes. We then spend a dozen to 16 years gaining an education and figuring out what we want to be when we grow up. Once we determine that, some of us then need to continue with another several years of education to gain an advanced degree or two, and learn the specialized skills of our chosen occupation. We then spend the next 30 or 40 years...
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