The Future of Public Employee Retirement Systems
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mitchell olivia s anderson gary the future of public employe
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- 14 / The Evolution of Public Sector Pension Plans 267
- 268 Robert L. Clark, Lee A. Craig, and Neveen Ahmed
- 14 / The Evolution of Public Sector Pension Plans 269
- 270 Robert L. Clark, Lee A. Craig, and Neveen Ahmed
- Pension Fund Activism: The Double-Edged Sword
- 272 Brad M. Barber
- 15 / Pension Fund Activism: The Double-Edged Sword 273
- Institutional activism: theory In this section, I formally lay out a simple framework to analyze the expected effects of institutional activism. Shareholders versus Managers
- 274 Brad M. Barber
Notes 1 The member handbook for the New Mexico public employees’ retirement asso- ciation (PERA 2008: 5) states: ‘New Mexico enacted legislation creating a public employees retirement system in 1947. New Mexico was the last state in the con- tinental United States to establish a retirement system for its public employees.’ However, this information conflicts with other secondary sources and with data 14 / The Evolution of Public Sector Pension Plans 267 collected by the authors in their survey of current state plan administrators; see below. 2 ‘State welfare pensions for the elderly were practically nonexistent before 1930s’ (Social Security Administration 2008). However, the Great Depression created a well-recognized crisis in old-age welfare, and by 1935, 30 states had adopted some form of old-age assistance program. Although these programs were authorized by the state legislatures, they were typically managed by the counties, and the establishment of a plan was often a county-level option (USBLS 1931, 1932). 3 By 1961, the state employees in each of these states participated in Social Security (Mueller 1961). 4 This statement must be qualified by the fact that as early as 1930, 21 states offered some type of pension benefit to their teachers, who made up the single largest group of state workers. Although teachers’ salaries were typically paid by local school boards with some combination of state and local monies, the pensions were administered by the states (Clark, Craig, and Wilson, 2003). 5 The authority allowing voluntary participation in Social Security by public employees is contained in section 218 of the Social Security Act. As a result, these state agreements are referred to as section 218 agreements. Each state’s Social Security Administrator is responsible for managing these agreements. 6 Interestingly, legislation enacted in 1986 requires that all state and local employ- ees hired after March 31, 1986 must be covered by Medicare; to date, no such mandatory coverage is required for Social Security. 7 Almost three quarters of the public employees who remain outside the Social Security system reside in just seven states: California, Ohio, Texas, Massachusetts, Illinois, Colorado, and Louisiana. 8 State employees in Alaska were once included in Social Security; however, in 1980, Alaska withdrew its employees from the system. 9 The Pension Task Force on public pension systems reported that some plans were terminated and restructured when public employees were first covered by Social Security (US House of Representatives 1978). 10 In 1999, the GAO (1999) reported that 21 of the 48 states with DB plans had considered terminating their DB plan and replacing it with a DC plan. However, eight years later, the GAO (2007) still found only two states with DC plans. 11 A 2006 survey by the National Association of Government Defined Contribu- tion Administrators found that on average only 21.6 percent of eligible state employees made voluntary contributions into in these plans (GAO 2007). Likely causes of this low level of participation are the absence of matching employer contributions and the more generous benefits provided by primary pension plans in the public sector. 12 Also see Munnell and Soto (2007). 13 The data in Table 14-4 are for 1984 because the 1982 report did not include detailed information on contributions. 14 Of the 46 state plans included in the 1982 regression, 11 plans cover only state employees, three plans cover state employees and teachers, 14 plans cover state and local employees, and 19 plans cover state and local employees and teachers. 268 Robert L. Clark, Lee A. Craig, and Neveen Ahmed In the regressions below, the dummy that represents plans for all three groups of workers is the omitted variable. 15 For various reasons, not every state-run plan in the United States is included in either the Wisconsin study or our data set. For example, the Wisconsin study includes plans that cover workers other than state employees. Some states maintain separate plans for teachers or local government workers, and there are dozens of state-run plans that represent small, well-defined groups, such as state judges or legislators, that are excluded (see Mitchell et al. [2000]: Table 14-2 for a complete tabulation of systems.) In addition, in 1982 the following plans were omitted: Indiana Public Employees’ Retirement Fund (PERF) and Teachers’ Retirement Fund (TRF) had a hybrid, 1.1 percent contribution rate combined with a ‘money purchase’ annuity component; Nebraska School Employees Retire- ment System (SERS) had a money purchase plan; and Oregon Public Employees Retirement System (PERS) has 1.5 percent plus a money purchase plan. Also, Tennessee Consolidated Retirement System (TCRS) had an ‘integrated table’ plan, and Tennessee had some information missing; thus so we used the 1984 formula. For 2006, the deleted plans include: Indiana PERF and TRF has hybrid, ‘money purchase’ option; Nebraska SERS has a money purchase plan; and Ore- gon PERS has 1.5 percent plus a money purchase plan. For Arkansas, we used 2 percent; and for Massachusetts, we used 2.5 percent instead of 0.1–2.5 percent age-related state formula. 16 This is not an indicator of the actuarial soundness of the state plans. However, as Hustead an Mitchell (2000: 6) note, when it comes to the financial state of these systems, ‘the status of public plans is not always transparent or comparable across systems.’ 17 Data are available from the authors on request. References Brainard, Keith (2007). Public Fund Survey Summary of Findings for FY 2006. George- town, TX: National Association of State Retirement Administrators. (2009). ‘Redefining Traditional Plans: Variations and Developments in Public Employee Retirement Plan Design,’ in O.S. Mitchell and G. Anderson, eds., The Future of Public Employee Retirement Systems. Oxford: Oxford University Press. Clark, Robert and Ann McDermed (1990). The Choice of Pension Plans in a Changing Regulatory Environment. Washington, DC: American Enterprise Institute. Lee Craig, and Jack Wilson (2003). A History of Public Sector Pensions in the United States. Philadelphia, PA: University of Pennsylvania Press. Craig, Lee A. (1995). ‘The Political Economy Public-Private Compensation Differ- ential: The Case of Federal Pensions,’ Journal of Economic History, 55 (2): 304–20. Fishback, Price V. and Shawn Everett Kantor (1995). ‘Did Workers Pay for the Passage of Workers’ Compensation Laws?’ Quarterly Journal of Economics, 110 (3): 713–42. (2000). A Prelude to the Welfare State: The Origins of Workers’ Compensation. Chicago, IL: University of Chicago Press. 14 / The Evolution of Public Sector Pension Plans 269 Gruber, Johnathan, and Alan B. Krueger (1991). ‘The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers’ Compensation Insurance,’ in D. Bradford, ed., Tax Policy and the Economy, Vol. 5. Cambridge, MA: MIT Press, pp. 111–43. Hirsch, Barry T. and David A. Macpherson (2007). Union Membership, Coverage, Density, and Employment by State and Sector, 1983–2007. Union Membership and Coverage Database from the CPS. Online at www.unionstats.com. Hustead, Edwin C. and Olivia S. Mitchell (2000). ‘Public Sector Pension Plans: Lessons and Challenges for the 21st Century,’ in O.S. Mitchell and E.C. Hustead, eds., Pensions in the Public Sector. Philadelphia, PA: University of Pennsylvania Press, pp. 3–10. Mitchell, Olivia S. and Robert Smith (1994). ‘Public Sector Pension Funding,’ Review of Economics and Statistics, 76(2): 278–90. David McCarthy, Stanley C. Wisniewski, and Paul Zorn (2000). ‘Developments in State and Local Pension Plans,’ in O.S. Mitchell and E.C. Hustead, eds., Pensions in the Public Sector. Philadelphia, PA: University of Pennsylvania Press, pp. 11–40. Moore, Michael J. and W. Kip Viscusi (1990). Compensation Mechanisms for Job Risk: Wages, Workers’ Compensation, and Product Liability. Princeton, NJ: Princeton Uni- versity Press. Mueller, Marjorie (1961). ‘Retirement Plans for State and Local Employees,’ Monthly Labor Review, November: 1191–99. Munnell, Alicia (2005). ‘Mandatory Social Security Coverage of State and Local Workers: A Perennial Hot Button.’ Issue Brief No. 32. Boston, MA: Center for Retirement Research at Boston College. Kelly Haverstick, and Mauricio Soto (2007). ‘Why Have Defined Benefit Plans Survived in the Public Sector.’ State and Local Pension Plans Brief No. 2. Boston, MA: Center for Retirement Research at Boston College. Mauricio Soto (2007). ‘State and Local Pensions are Different From Private Plans.’ State and Local Pension Plans Brief No. 1. Boston, MA: Center for Retire- ment Research at Boston College. Public Employees Retirement Association of New Mexico (PERA) (2008). Public Employees Retirement Association of New Mexico Member Handbook. Santa Fe, NM: Public Employees Retirement Association of New Mexico. Social Security Administration (2007). ‘How State and Local Government Employ- ees Are Covered by Social Security and Medicare.’ SSA Publication No. 05–10051. Washington, DC: Social Security Administration. (2008). Historical Background and Development of Social Security. Washington, DC: Social Security Administration. Social Security Board (1937). Social Security in America: Part II Old Age Security. Washington, DC: Social Security Administration. Streckewald, Frederick (2005). ‘Social Security Testimony Before Congress.’ Hear- ing before the House Ways and Means Subcommittee on Social Security, June 9. Washington, DC: Social Security Administration. US Bureau of Labor Statistics (USBLS) (1916). ‘Civil-Service Retirement and Old- Age Pensions,’ Monthly Labor Review, June: 635–51. 270 Robert L. Clark, Lee A. Craig, and Neveen Ahmed US Bureau of Labor Statistics (USBLS) (1931). ‘Operation of Public Old-Age Pen- sion Systems in the United States, 1930,’ Monthly Labor Review, June: 1267–80. (1932). ‘Operation of Public Old-Age Pension Systems in the United States in 1931,’ Monthly Labor Review, June: 1259–69. (1988). Employee Benefits in State and Local Governments. Bulletin No. 2309. Washington, DC: US Government Printing Office. (1996). Employee Benefits in State and Local Governments. Bulletin No. 2477. Washington, DC: US Government Printing Office. (1998.) Employee Benefits in State and Local Governments. Bulletin No. 2531. Washington, DC: US Government Printing Office. US Department of Commerce, Bureau of the Census (various years). Statistical Abstract of the United States. Washington, DC: US Government Printing Office. http://www.census.gov/compendia/statab/. (various years). Census of Governments: Employee-Retirement Systems of State and Local Governments. Washington, DC: US Government Printing Office. (2004). Census of Governments: Employee Retirement Systems of State and Local Government. Washington, DC: US Government Printing Office. http://www.census.gov/prod/2004pubs/gc024x6.pdf. US General Accounting Office (GAO) (1999). State Pension Plans: Similarities and Differences Between Federal and State Designs. GAO/GGD-99–45. Washington, DC: US Government Accountability Office. (2007). State and Local Government Retiree Benefits: Current Status of Benefit Struc- tures, Protections, and Fiscal Outlook for Funding Future Costs. GAO-07–572. Washing- ton, DC: US Government Accountability Office. US House of Representatives, Committee on Education and Labor (1978). Pension Task Force Report on Public Employee Retirement Systems. Washington, DC: US Govern- ment Printing Office. Wisconsin Legislative Council (various years.) Comparative Study of Major Public Employee Retirement Systems. Madison, Wisconsin: Wisconsin Legislative Council. Chapter 15 Pension Fund Activism: The Double-Edged Sword Brad M. Barber Does institutional activism create value for shareholders? Proponents of activism argue that institutions are merely providing necessary monitoring of corporations with poor performance. Critics view activism as the actions of meddlesome portfolio managers spending investors’ money to interfere in corporate policy. Who is right? To answer this question, I begin from basic economic principles and analyze a simple framework where a portfolio manager has the unfettered objective of maximizing the value of an investment portfolio. 1 I argue that the benefits of institutional activism—narrowly for the investors at the institution and broadly for society—hinge critically on the prevalence of two agency costs. The first agency cost is the well-known conflicts of interest between shareholders and corporate managers; corporate managers may pursue projects that benefit themselves, but not shareholders. Effective monitoring by institutions can reduce these agency costs—benefiting not only their investors, but raising the value of stocks for all investors. I refer to this type of institutional activism as ‘shareholder activism.’ The second agency cost, less widely discussed than the first, is the con- flicts of interest between portfolio managers and investors. Portfolio man- agers may pursue investment policies that benefit their own objectives, but not those of investors. The large block of voting rights under the control of institutional portfolio managers presents the most obvious potential source of agency costs. Just as this voting power can be used to benefit shareholders through effective monitoring of corporations, the voting power can be abused by advancing the interests of portfolio managers 2 that are different from those of their investors and reduce the value of the portfolio they manage. Generally, institutional activism in this arena centers on social issues, such as disclosure of greenhouse gas emissions, divestment in Sudan, or tobacco firms. Thus, I refer to this type of institutional activism as ‘social activism.’ Social activism may lead to desirable or important social benefits. For example, institutional pressure may cause corporations to reduce pollution 272 Brad M. Barber or be more vigilant in monitoring child labor practices. But pollution abatement technologies and the monitoring of labor practices is costly. Consequently, the social gains will often hurt the bottom line and potential returns earned by shareholders. Thus, a portfolio manager who is attempt- ing to maximize the value of an investment portfolio would not pursue social activism when it forces corporations to incur avoidable costs. Many investors choose socially responsible mutual funds precisely because these funds invest in firms that are consistent with their personal values. However, most institutions (e.g., public pension funds) are not provided with such a clear moral mandate from their investors. The two agency costs create a tension that renders the ultimate gains of institutional activism an empirical question. While admittedly imprecise, I argue that simple empirical methods—short-run event studies and the long-run returns of portfolios of targeted stocks—are the best methods available to estimate the net benefits of institutional activism. While institutional activism is widespread, my discussion and empirical analyses focus on the efficacy and prudence of California Public Employ- ees’ Retirement System (CalPERS) activism—a long-time leader in the institutional activism. For almost two decades, CalPERS has been active in pursuing corporate reforms. In recent years, this activism has come under increased scrutiny as CalPERS took public stands on a wide range of issues including corporate governance, greenhouse gas emissions, auto fuel efficiency, labor negotiations, investments in tobacco firms, Iran, Sudan, South Africa, and the independence of audit committees. Using simple empirical methods, I estimate the gains to the high profile activism of CalPERS focus list firms over the period 1992 to 2007. My short- run analysis indicates that CalPERS activism yields positive, but small, mar- ket reactions of 21 basis points (bps) on the date focus list firms are publicly announced. These announcement effects are too small to conclude they are reliably positive. I and many others have previously concluded this evidence was more persuasive, but in the last two years—particularly 2006— the so-called ‘CalPERS effect’ has been negative. However, it is worth noting that these small effects, if truly caused by CalPERS activism, yield wealth creation of $1.9 billion dollars over the 16 year period that I analyze. My long-run analysis yields intriguing, but inconclusive results. Portfolios of focus list firms earn annualized abnormal returns ranging from 2.1 to 4.5 percentage points annually at holding periods ranging from 6 months to 5 years. If these abnormal returns are causally linked to the activism of CalPERS, the wealth creation is enormous—as much as 20 times greater than the short-run benefits and as large as $39.4 billion through December 2007. Unfortunately, while economically large and positive, the estimates of long-run abnormal returns are not reliably positive. Long-run returns are simply too volatile to conclude that the long-run performance of focus 15 / Pension Fund Activism: The Double-Edged Sword 273 list firms is unusual. I argue that previous studies, which document reliably positive long-run abnormal returns for focus list firms, either fail to account for the characteristics of focus list firms and/or rely on faulty statistics. Having established a reasonable estimate of the value of CalPERS activ- ities surrounding focus list firms, I review the nature of reforms that CalPERS publicly pursues at these firms through shareholder proposals sponsored by CalPERS at focus list firms. Without exception, the CalPERS proposals increase shareholder rights. Empirical research establishes a strong link between shareholder rights and firm value and provides strong support for prudence of CalPERS’ initiatives designed to improve share- holder rights. Thus, these governance-related reforms at focus list firms are uniformly shareholder (rather than social) activism. However, CalPERS has also pursued social activism unrelated to their annual focus list firms. Often, this social activism is pursued at the behest of either of state legislative action (e.g., divestiture from Sudan or Iran) or the 13-member board (e.g., tobacco divestiture) that oversees CalPERS investments. I review some of the high profile decisions made by CalPERS. Many of these decisions lack clear evidence—empirical or theoretical— that CalPERS activism would improve shareholder value. CalPERS manages the assets of over a million public employees, retirees, and their families. When there is no clear link to improvements in shareholder value, whether CalPERS activism is in the best interests of those whose money they manage depends critically on the personal preferences of investors. The remainder of this chapter is organized as follows. The first section provides an overview of the theory underlying institutional activism. In the second section, I provide empirical evidence regarding the short-run and long-run performance of CalPERS focus list firms. In the third section, I review the nature of reforms pursued at focus list firms and provide anecdotes regarding other activism pursued by CalPERS outside of their focus list initiative. Institutional activism: theory In this section, I formally lay out a simple framework to analyze the expected effects of institutional activism. Shareholders versus Managers . It is well known that conflicts of interest may arise between shareholders, who seek to maximize firm value, and firm managers, who may have interests other than value maximization (e.g., empire building or maximizing compensation packages). These conflicts create a cost for shareholders that lead to lower firm valuations. Absent these agency costs, the market would reach some maximum agency-cost- free valuation, call it V ∗ . 274 Brad M. Barber Absent any monitoring by investors, agency costs (A) take a (relatively) large percentage of this maximum valuation. Investors can reduce the agency cost bite taken out of the valuation pie by monitoring corporations, but monitoring is costly, varies in effectiveness, and, no doubt, has dimin- ishing marginal returns. In the top graph of Figure 15-1, I represent agency costs as a decreasing, convex function of monitoring resources (M). Large institutional investors invest tens of billions of dollars in stocks— generally in an index fund or at least an equity portfolio that tracks the market reasonably well. Nonetheless, even the largest institutional investors own only a small percentage of the total market. For example, CalPERS, with US equity investments of $80 billion in January 2008, owns approx- imately 0.5 percent of the total market, which is valued at approximately $16.5 trillion in December 2007. For CalPERS to justify investment in the monitoring of corporate managers as a value enhancing proposition, a dollar spent on monitoring must increase the value of monitored firms by at least $200 ($1/0.5%), since CalPERS only owns a small slice of the monitored firms. If CalPERS prudently spends $1,000,000 on monitoring each year, the expenditure would lead to a minimum increase in firm value of $200,000,000. This analysis presumes the benefits of activism are limited to the firms that are directly pursued by an institution. But widespread monitoring by institutions can also deter corporate malfeasance. If corporations know that institutions stand ready to publicly excoriate firms that engage in practices that reduce shareholder value, corporations will be less likely to engage in these practices in the first place. The deterrence benefits of activism are exceedingly difficult to measure, but nonetheless provide additional justification for institutional activism. In general, a savvy portfolio manager will choose a monitoring cost (M ∗ ) that maximizes the value of his portfolio (P ∗ ). In panel B of Figure 15-1, I depict the manager’s portfolio value as a function of the monitoring costs that he incurs. In principle, the optimal level of monitoring (M ∗ ) will be achieved when the marginal cost of monitoring equals the marginal benefit (i.e., reduction in agency costs realized in the manager’s portfolio). Unfortunately, in practice, it is nearly impossible to estimate precisely the marginal benefit of monitoring. Thus, it is difficult to determine ex-ante whether institutions are investing in an optimal amount of monitoring. Even with the benefit of over a decade of hindsight, it is difficult to precisely estimate the total value of the gains resulting from CalPERS activism. I discuss this issue at length in the empirical section of this chapter. Download 1.26 Mb. Do'stlaringiz bilan baham: |
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