STUMP » Articles » A Proposal: Restructuring Current Public Pensions Through Municipal Bankruptcy » 12 November 2018, 22:04

Where Stu & MP spout off about everything.

A Proposal: Restructuring Current Public Pensions Through Municipal Bankruptcy  


12 November 2018, 22:04

Many months ago, the Society of Actuaries put out a call for papers, which led to lawyer Gordon Hamlin, Jr. to contact me for a collaboration.

I wrote about this back in April, but didn’t share our paper at that time, because we had been looking for other public venues.

In April, Gordon and I were joined by two others to argue for the idea:

Embracing Shared Risk and Chapter 9 to Create Sustainable Public Pensions

Unsustainable and Unaffordable Public Pensions Cannot be Solved by Raising Taxes or the Passage of Time, but There are Some Practical Solutions

W. Gordon Hamlin, Jr.; Mary Pat Campbell; Andrew M. Silton; and James E. Spiotto

To date, no American state or local government has adopted a realistic solution to the public pension crisis. To date, they’ve failed to follow New Brunswick’s path-breaking shared risk public pension system. To date, no local government has proposed a prepackaged Chapter 9 bankruptcy. To date, public employees and retirees have insisted that increased taxes are the only pathway to achieving full funded status, even if that is thirty or more years away. To date, constitutional provisions prohibiting legislatures from impairing contracts have forced legislatures to target only future employees. To date, many legislatures have focused on switching as many employees and retirees as possible to the 401(k) world, which has left an entire generation of Americans unprepared for retirement and the problem unsolved.

It’s time to solve this policy dilemma, which is straining state and local budgets and crowding out vital investments in education, healthcare, and infrastructure. It’s time to stop believing that anything less than 100% funding is realistic and that future legislatures and taxpayers will fund any shortfall. It is time to account properly for future liabilities by adopting a risk-adjusted rate of return and budget with realistic contributions.

My nutshell description is fairly straightforward:


There are two parts to the idea:

1. A sustainable defined-benefit pension, with risk-sharing elements
2. A legal mechanism by which current pension liabilities can be transferred to this risk-sharing system
That’s pretty much it.

The actual unique part of this proposal is the legal mechanism, which obviously hasn’t been tried in the public sphere yet.

YES, in many states, this would involve amending the constitution. As I’ve mentioned many times before, especially with regards to Kentucky and Illinois.

So, I am not a lawyer, so I’m not going to be able to argue that leg.

But I am going to argue the side that the standard DB public pension has inherent in it many risks, and many aspects that encourage public pension plan sponsors and managers to pursue ever-riskier “clever plans”.


Here it is, embedded from Scribd:

Shared Risk and Chapter 9 N… by on Scribd

If that doesn’t work for you, you can grab it from my dropbox.


As noted, I am not a lawyer, so I cannot address the legal arguments. We’ve already seen a variety of pension benefit cuts/alterations by municipalities in bankruptcy court.

But I will step through the parts I composed – many of these items, I’ve written about before… several times. But once more won’t hurt.

I will step through the table of contents – in specific, section 3 in which I go down causes of the public pension crisis in many places:

3.1 Use of the Expected Rate of Return as the Discount Rate 3.1.1 The Effect of High Discount Rates on Normal Cost
3.1.2 Using Risk-Free Rates for Valuation
3.1.3 Investment Return Assumptions of U.S. Plans versus Investment Performance
3.1.4 Other Valuation Assumptions and Funding Approaches to Reduce Current Contributions
3.2 Contribution Holidays, Taken in Good Times and Bad
3.3 Poor Governance
3.4 Investment Return Volatility and the Vicious Cycle of Chasing Returns
3.5 Legislative Grants of Unfunded Benefit Increases
3.6 Pension Spiking, Air Time, and Other Ways Participants Boost Their Benefits

To be sure, many public pension plans do not have these faults. Good for them!

But the worst? Like Illinois, New Jersey, and Kentucky? And ones entering a danger zone, like California?

They hit pretty much every one of these in their histories.

You can always email me at if you have any questions about this. I will try to hit at least one of these items per week til I run through these all.


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