Two cities in Tennessee manage their own defined-benefit pensions, and it is no coincidence that both are majority Democratic, and both are underfunded. We have discussed the reasons for this in past blog posts.
Efforts at pension reform have been slow because voters in these cities do not seem to understand or care much about the future pension liabilities, which means that it is not a high priority for politicians.
For example when Nashville went to a more realistic discount rate, from 8.25% down to 7.5%, the city also changed the assumptions on pension growth so that the net effect was no additional savings. So Nashville gave the appearance of change, without the substance.
Also, for underfunded pensions, this kind of discounting creates an incentive for fund managers to go into riskier assets. Indeed, Nashville's pension manager has adopted a riskier investment strategy.
Cross your fingers.
And we still save nothing for medical pensions. That is the elephant in the room.
The obvious solution is a defined contribution schedule, like the Swedes
, or a more reasonable rate linked to the 30 year treasuries, adjusted for tax free status
, e.g. 6.5%.
The latest development is a new state law
, designed to force these cities to fully fund their pensions. It does not force cities to make up for past underfunding.