Public Pensions Watch IV: the saga continues

[campbell]

http://papers.ssrn.com/sol3/papers.c...act_id=2081150

Did the SEC and S&P Let 14 States Destroy Their Pensions?


Christopher B. Tobe
Stable Value Consultants

June 10, 2012


Abstract:
14 States have broken balanced budget clauses of their own constitutions in addition to defying the rules of pension mathematics. I contend that the ratings agencies and the SEC are enablers by allowing this partial payment culture to exist and not punishing states and localities enough for not making their Actuarially Required Contribution (ARC). The dirty little secret of at least 14 states is that politicians have misled the public as both political parties have conspired to secretly borrow $100’s of billions from their pensions.

Number of Pages in PDF File: 8

So, it's the regulators' and credit raters' fault for not raising the state debt costs. Not the states that didn't make the contributions.

[campbell]

http://ncpers.org/News/?newsid=165

The 2012 NCPERS Fund Membership Study, conducted by the National Conference on Public Employee Retirement Systems (NCPERS) and Cobalt Community Research, surveyed no less than 147 public pension funds in April and May. The vast majority – 84 percent – were local pension funds, while the remaining 16 percent were state pension funds. Those funds cover more than 7.5 million active and retired public employees and have assets exceeding $1.2 trillion.
....
Among the study’s key findings:
-Participating funds reported a solid average funded level of 74.9 percent, only slightly below the 2011 average of 76.1 percent. According to its February 2011 report Enhancing the Analysis of U.S. State and Local Government Pension Obligations, Fitch Ratings considers a funded ratio of 70 percent or above to be adequate.

-Both one-year and 20-year returns reported by participating funds point to continuing long-term improvement in funded status. While one-year returns were slightly lower than 2011’s (12.5 percent compared to 13.5 percent), all longer-term returns were higher: three-year returns jumped from negative one percent to 4.4 percent; five-year returns grew from 3.6 percent to 4.4 percent; 10-year returns increased from 4.0 percent to 5.3 percent, and 10-year returns grew from 8 percent to 8.7 percent.

-Pension funds are designed to pay off liabilities over an extended period of time (the amortization period), to ensure long-term stability and to make annual budgeting easier through more predictable contribution levels. This year’s survey found that amortization period averages 24.6 years – down from 25.8 years in 2011.

[Brad Gile]

Originally Posted by campbell

Great news, everybody -- it's tough to reach target return in this market, so ya gotta lard on the risk!

http://www.bloomberg.com/news/2012-0...junk-debt.html

This will end well.

Stay away from fans. Atmosphere will be shitty at best.

[campbell]

more on that larding up of risk

http://www.governing.com/columns/pub...uble-down.html

Many U.S. public pension plans have a propensity to imprudently invest their portfolios more aggressively than private plans or their Canadian and European peers with similar demographics. That's one of the findings documented in a study by an international trio of academics. That paper is potentially the most important research in the public pension arena this decade.

The controversial but carefully constructed findings should be studied and taken to heart by pension boards, plan administrators, investment officials and consultants, and actuaries, as well as the public officials and future taxpayers who will ultimately bear the cost of increasingly higher-risk portfolio strategies if they fail.

Paper here:
http://papers.ssrn.com/sol3/papers.c...act_id=2070054

abstract:

We use an international pension fund database to compare the asset allocation and liability discount rates of public and non-public funds in the U.S., Canada and Europe. We document that U.S. public funds exploit the opaque incentives provided by their distinct regulatory environment and behave very differently from U.S. corporate funds and both public and non-public pension funds in Canada and Europe. In the past two decades, U.S. public funds uniquely increased their allocation to riskier investment strategies in order to maintain high discount rates and present lower liabilities, especially if their proportion of retired members increased more. In line with economic theory, all other groups of pension funds reduced their allocation to risky assets as they mature, and lowered discount rates as riskless interest rates declined. The arguably camouflaging and risky behavior of U.S. public pension plans seems driven by the conflict of interest between current and future stakeholders, and could result in significant costs to future workers and taxpayers.

[campbell]

Look like some public pensions can be yanked (for criminal activity)

http://thetimes-tribune.com/news/mel...sion-1.1330429

HARRISBURG - Former Sen. Robert Mellow's federal guilty plea has resulted in the forfeiture of his sizeable $138,958 annual state pension, according to records released Friday by the State Employees' Retirement System.

SERS officials determined the state pension forfeiture applies to Mr. Mellow's pension because on May 9 he pleaded guilty to federal charges of conspiracy to commit an offense against the United States and to defraud the United States.

The decision means that Mr. Mellow, 69, of Archbald, will no longer receive the monthly $11,580 check he has collected since leaving the Senate at the end of 2010. Under terms of the forfeiture law, Mr. Mellow will keep the payroll contributions he made to his pension without interest.

"After careful review of your record and the applicable law, SERS has determined that your entire retirement benefit is forfeited as of May 9, 2012, the date you entered your guilty plea in Federal Court," SERS wrote in a letter to Mr. Mellow. "Accordingly, your monthly annuity payments will cease, and the disbursement for May 2012 is the final monthly annuity payment that you will receive from SERS."

....
Mr. Mellow joins a number of other former state legislative leaders convicted of public corruption crimes in recent years in losing his pension. They include former House Speakers John Perzel, R-Philadelphia; and Bill DeWeese, D-Greene; former Senate Democratic Appropriations Chairman Vincent Fumo, D-Philadelphia; former House Appropriations Chairman Brett Feese, R-Lycoming; and former House Minority Whip Mike Veon, D-Beaver.

[campbell]

http://www.mercurynews.com/opinion/c...tewide-problem

Because of improper actuarial calculations, Contra Costa's public employee retirement system overpays about 10 percent of its pensioners -- and taxpayers must make up the resulting shortfall.

It's a statewide problem. Paul Angelo, senior vice president for The Segal Co., the retirement system's actuary, says 18 of 20 county-level pension systems in California, including Alameda County, use the same calculation method. Segal is the actuary for a majority of those systems.
....
The Contra Costa association administers pension benefits for 17 public agencies, the largest being the county. At retirement, most employees choose the standard pension plan: Payments are based on formulas that consider years worked, top salary and retirement age. Upon the retiree's death, a spouse, domestic partner or minor child receives 60 percent of the benefit.

Following state law, the retirement system also offers retiring workers options of smaller pensions but, upon death, they can pass on the monthly benefits to one or more survivors for the rest of their lives. Those survivors could be grandchildren with much longer life expectancies. In fact, they need not even be relatives.

For those choosing optional payouts, an actuary calculates how payments to retirees should be reduced to ensure sufficient funds are left for payments to their designated survivors. The value in today's dollars of the future benefits should be the same if the employee chooses the standard retirement plan or one of the options. It should be, according to the law, "actuarially equivalent."

But in making those calculations, Angelo acknowledges, his firm doesn't account for pension cost-of-living increases of up to 3 percent annually. Consequently, the retirement system has not sufficiently reduced the payments to the retirees or surviving beneficiaries.

For example, consider someone retiring at age 57 who designates a 27-year-old beneficiary. According to Angelo, the pension payments to both are 12 percent higher than if the cost-of-living adjustments had been factored in. The younger the surviving beneficiary, the greater the overpayment.

The cost of overpayments must be shouldered by public agency employers, in this case, Contra Costa taxpayers. Pension contribution rates for employees are unaffected.

The practice apparently has been going on for decades. It came to light when Segal in May submitted benefit payment calculations for a retiree. Trustee Debora Allen noticed the assumptions included no cost-of-living adjustment.

and more at the link.

I have a feeling that this particular benefit is not going to persist much longer.

[exactuary]

Originally Posted by campbell

http://www.mercurynews.com/opinion/c...tewide-problem

and more at the link.

I have a feeling that this particular benefit is not going to persist much longer.

I've got a feeling that a large actuarial tort lawsuit is coming.

[jbken]

The next paragraph of the article makes the main point:

"If ever there was an argument for financial experts on pension boards, this is it. Allen is a certified public accountant whom county supervisors last year appointed as a trustee."

You see this on boards all over NJ - Improvement Authorities, Utilities Authorities, Planning Boards - all staffed with event planners and fund raisers.

[campbell]

Originally Posted by jbken

The next paragraph of the article makes the main point:

"If ever there was an argument for financial experts on pension boards, this is it. Allen is a certified public accountant whom county supervisors last year appointed as a trustee."

You see this on boards all over NJ - Improvement Authorities, Utilities Authorities, Planning Boards - all staffed with event planners and fund raisers.

Hey, John -- plausible deniability. I cannot imagine any knowledgeable professional wanting to touch these plans with a ten-foot pole (and, of course, many of these plans do not want anything approaching a knowledgeable person on their boards)...you want to be associated with these disasters?

[jbken]

Originally Posted by campbell

Hey, John -- plausible deniability. I cannot imagine any knowledgeable professional wanting to touch these plans with a ten-foot pole (and, of course, many of these plans do not want anything approaching a knowledgeable person on their boards)...you want to be associated with these disasters?

Maybe it's time the participants in these plans started demanding competence and honesty on their boards. Same deal with politicians. Sure you want them dumb enough to give you anything you want but not so dumb that they forget to fund it.

I would love to be on a board but, like with jurors, the lawyers want blank slates to control.