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Old 09-24-2017, 07:40 PM
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Mary Pat Campbell
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okay, I have a big dump coming (uh, twhs...)

I will group these by state, and spoiler by subtopic.

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Old 09-24-2017, 07:44 PM
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Mary Pat Campbell
Join Date: Nov 2003
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Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 79,402
Blog Entries: 6

California pensioners: Your COLAs are safe, for now

The state’s largest pension fund on Tuesday shot down a pitch from a Republican lawmaker who wants it to study how much money it could save by cutting benefits for retired public workers.

Sen. John Moorlach of Orange County in July wrote letters to CalPERS board members – Richard Costigan and Dana Hollinger – making two touchy requests for the pension fund.

In one, Moorlach wanted CalPERS to estimate how much money it could save by temporarily suspending cost-of-living adjustments for retirees. CalPERS has different retirement plans that allow cost-of-living adjustments of 2 to 5 percent for its pensioners.

In the other, Moorlach asked CalPERS to look at reducing benefits for current workers and retirees by moving them into the less generous plans public agencies began offering in 2013, after Gov. Jerry Brown signed a pension reform law.
Moorlach submitted bills this year that would have carried out those ideas, but they died in the Democratic-controlled Legislature. A dozen local government leaders attended this week’s CalPERS meeting and implored the fund to study Moorlach’s requests.

They say they’re struggling with fast-rising pension costs, which could double over the next five years in some communities, and they want the information so they can negotiate contract changes with their unions.

“None of us are interested in negotiating with our bargaining units for something that takes away from them and doesn’t solve the problem,” said Phil Wright, West Sacramento’s human resources director.
Today, CalPERS is considered underfunded because it has about 68 percent of the assets it would need to pay all of the benefits it owes immediately. That number sets off alarms for Moorlach and others who worry public agencies won’t be able to make good on their debts.

“We’re 32 percent off,” said Hollinger, who has asked CalPERS actuaries to study how cost-of-living adjustments affect the fund. “I’m worried about the future of all our hard-working constituents who earned a pension. I want to make sure the money is there for them.”

The CalPERS board did not vote on responding to Moorlach. Instead, a majority of members criticized the requests, making clear that a motion to respond to Moorlach would fail. Several CalPERS members and union advocates suggested the data would be used one day in a political campaign targeting public employee pensions.

“I love data, but I’m not sure I want to help write the bullet point for the initiative,” said J.J. Jelincic, member of the California Public Employees’ Retirement System Board of Administration.

Added CalPERS President Rob Feckner: “We’re being asked to fund somebody else’s pet project.”


Pension System Balks at Calls to Divest from Fossil Fuels

Can San Francisco’s pension system kick the big oil habit?

While the San Francisco Board of Supervisors has voted unanimously since 2013 for full divestment from fossil fuels, the San Francisco Employees Retirement System (SFERS) has postponed its decision, even in the face of dismal returns. SFERS is now accused of “dithering” on the financial challenges of climate change.

SFERS Board President Victor Makras is in favor of divesting. He spoke at a Government Audits and Oversight committee hearing September 5, stating the $500 million investment in fossil fuel funds has not been a money-maker for the 28,000 City employees.

“We’re avoiding the debate, and we’ve got our heads in the sand. What we’ve seen over the last four years is diverting from transparency,” said Makras. “The fund managers should call out for us that this has not had good returns and bring us recommendations.” Makras proposed a divestment vote at last month’s SFERS board meeting. That vote was postponed.

A city employee retiree took the podium at the Board of Supervisors hearing and confirmed the low rate of return on the investment in fossil fuels. “Four years ago, the price of oil was over $90 a barrel,” he said. “Now it’s half that.”

SFERS Executive Director Jay Huish also spoke, and confirmed that over the last three to five years, the performance of fossil fuels has diminished, but says that there is a still a place to continue holding them as a hedge against inflation in a ten-15 year horizon. Huish says SFERS has hired expert managers who understand they need to hold these stocks as long term investments.

But SFERS is no stranger to divestment. The pension system has a history of engaging in social issues dating back to 1988, when it divested of tobacco. In 2013, the board voted to rid the portfolio of all stocks related to firearms retailers and manufacturers, including those in firearms manufacturer Remington.
S.F. employee pension fund under pressure to unload fossil fuel stocks
The San Francisco Employee Retirement System is facing mounting pressure to unload its roughly $470 million worth of investments in the fossil fuel industry, which would make it the first major pension fund in the nation to do so.

On Tuesday, the Board of Supervisors is expected to pass a resolution urging SFERS officials to consider selling all fossil fuel investments. It’s the second time since 2013 that city lawmakers have asked the governing board of San Francisco’s $23 billion employee pension plan to reconsider the fossil fuel companies.

But after what critics say has been four years of procrastination, time may be running out for the board to make an independent decision on the issue. Supervisor Aaron Peskin, who authored the resolution, said if the board doesn’t address the issue soon, he’s prepared to put a ballot measure before voters next year that would compel the the fund to sell its fossil fuel stocks.

But SFERS and other large public pension plans across the country have resisted calls for divestment, claiming it would hurt the retirement system’s financial health. The SFERS governing board is bound by law to uphold its fiduciary duty, a legal mandate to act in the best interest of the fund.

The retirement system’s board is made up of seven members, three of whom are elected by active and retired SFERS members. Another three are appointed by the mayor, and one member is selected from the city’s Board of Supervisors. Currently, that’s Malia Cohen.

Both SFERS staff and NEPC, an investment consulting firm retained by SFERS, have recommended against divesting, largely on financial grounds.

Selling off a well-performing part of the portfolio, SFERS officials argue, would deal a financial blow that could constitute a breach of their duty to the fund and the pensioners who have paid into it. Last year, SFERS paid out $1.24 billion to over 28,200 retirees and their beneficiaries.

“This is a very difficult legal question and discussion that every fiduciary on every public pension plan across the United States is dealing with today,” said Jay Huish, the SFERS executive director, speaking before the supervisors’ Government Audit and Oversight Committee last week. “None of them have been able to come forward and do a complete ban.”
At the oversight committee meeting last week, Huish said he doesn’t disagree with Makras’ conclusions about the performance of the fund’s fossil fuel stocks over the past five years, but he maintained that the stocks performed better over a 10- to 15-year window. “These types of assets … serve a purpose. And we believe we’ve hired expert (investment) managers who understand that they need to hold these stocks, even though they are losing short-term,” Huish said.

That explanation did little to placate Peskin, who serves on the oversight committee.

“It’s getting to the point where … if you can’t get there and your board can’t get there, it’s going to be incumbent on me and my colleagues to get you there,” Peskin said.

“I will certainly be interested in the legal analysis of forcing us to sell at a potential loss without having repercussions on the members of the board as fiduciaries,” Huish replied.

“I’ve got some theories,” Peskin said, wryly.

City of Los Angeles Pension Gap Surpasses $10 Billion
Marc Joffe
September 6, 2017, 4:12pm

California pension worries most often focus on CalPERS and CalSTRS, the state’s two multi-employer behemoths. But the state has many other underfunded plans, and these city and county systems pose significant challenges for governments that contribute to them.

The City of Los Angeles faces the largest municipal pension funding gap, measured in absolute dollar terms.. According to the city’s 2016 Comprehensive Annual Financial Report, Los Angeles’ Net Pension Liability totaled $8.2 billion. Curiously, this number does not appear on the city’s government-wide balance sheet (called a Statement of Net Position). Instead, the $8.2 billion is reported as part of L.A.’s long-term liabilities, resting in the footnotes of the city CAFR at pages 133 and 141.

But the city’s pension debt is actually even worse than this reported $8.2 billion. Drilling down further into the CAFR, we find that the pension liability data is based on actuarial valuations from 2015. Actuarial valuations of the City of Los Angeles’ three pension systems for 2016 were not available at the time the city’s CAFR was prepared, so accountants relied on prior year data. However, since the CAFR was released, all three Los Angeles pension systems have published their 2016 actuarial reports. Thus, we can get a preview of what the pension debt will look like when L.A. updates its CAFR.

All three plans reported increased unfunded liabilities because investment returns for the period July 1, 2015 to June 30, 2016 were lackluster – below 1% for all three funds. WPERP’s unfunded pension liability increased the most — from $1.1 billion in 2015 to $2.2 billion in 2016 — because plan administrators changed the discount rate assumption they were using from 7.50% to 7.25%, resulting in a larger reported amount of promised pension checks (even though the actual number didn’t change, only the accounting of them).

A pension system’s liability is the present value of expected future payments — or in other terms, the total value today of all promised pension checks for the future. The lower the rate at which these future payments are discounted, the higher the reported liability in current dollar terms. On June 1, 2017, the LAFPP board voted to reduce that system’s discount rate to 7.25%, following WPERPs lead. LACERS staff has also proposed moving to 7.25%, but the board has deferred action on their proposal.

The LAFPP move and pending LACERS decision will further increase the reported size of liabilities and unfunded liabilities in subsequent city CAFRs. LAFPP estimates that its new discount rate and other economic assumption changes will increase system liabilities (and unfunded liabilities) by $682 million; for LACERS the increase would be $328 million.

Although these discount rate changes are a step in the right direction, they still leave the Los Angeles systems with more aggressive assumptions than those used by CalPERS and CalSTRS. Both statewide systems are transitioning to a 7% discount rate. If all three Los Angeles systems went from 7.25% to 7%, the city’s unfunded pension liabilities could be expected to rise by another $1.5 billion.


Morning Report: City Gets a Break as Pensions Bills Grow
Last week, city pension fund trustees made a change that will make pension bills larger for the city and its employees.

In 2016, the city of San Diego sent $261 million to the pension system, writes VOSD’s Scott Lewis. That’s nearly all the funds the city collected in sales tax the same year, $275 million. This year the city sent the pension system $325 million. Next year, projections put the amount the city will send to its pension system at $329 million.

For years, the pension system assumed that the money it collected through taxes and paycheck contributions would get a return of 7 percent when invested every year for 30 years.

That number was a high estimate and last week, trustees of the pension system decided to would lower that return assumption for next year to 6.75 percent, reports Lewis. The following year it would decrease further to 6.5 percent.

That means that employees will have to make higher contributions from their paychecks and that includes the San Diego Police Department, which is already facing a recruitment and retention problem. The city would need to give police officers – who are expecting an actual raise – a nearly 2 percent raise with the new pension contributions, just to keep their salaries where they are.

But there was something else worked into this pension decision that lowered the city’s contributions over the next few years, Lewis reports, which means the city might actually be able to pony up for those police raises.
The City Gets a Break as Big Pension Bills Loom
This year, the city sent the pension system $325 million.

Next year, the treasurers project it could reach $329 million. Of all the bluster about pensions, that these kinds of bills might come was the heart of the concern.

The pension fund has only three sources of money. It gets money from the employees, who contribute with every paycheck. It gets money from the city, via those checks we send over, funded by taxes.

The pension fund combines that, and makes money on its vast portfolio investments across the world.

For years, the pension system assumed its investments would earn an average of 7 percent every year for 30 years.

But last week, trustees of the once chaotic and beleaguered system made a change. They decided to assume that the system would only earn 6.75 percent on its investments next year. The year after that, they decided to drop it again to 6.5 percent – the most conservative assumptions in the state.

The moment trustees tell actuaries to assume they’ll make less in investment returns, the bill gets larger for everyone else.

Indeed, next July police officers and firefighters in the system will see their take-home pay drop 0.9 percent of their salaries as the pension fund claws for higher contributions.

The year after that, police officers will have to contribute another 0.9 percent. That means that, as the city grapples with a recruitment and retention crisis in the police department, it will have to give them a nearly 2 percent raise just to keep them where they are.

The expected rate of return of pension investments is called the “discount rate.”

“I understand what they’re doing and I’m not opposed to reducing the discount rate, especially if the actuary believes returns will be below that,” said Brian Marvel, president of the Police Officers Association. “It would have been nicer if they’d done smaller amounts of lowering over a longer period of time.”

Marvel didn’t seem too concerned, though. His union is currently in negotiations with Mayor Kevin Faulconer and it expects to get raises.

The other side, though – the city and taxpayers – got a kind of break in the deal. Next year’s $329 million bill will actually be less. More like $312 million.

The employees have to pony up. How did the city get out of it?

“They took an additional step to ensure a more consistent cash flow into the system,” said Mark Hovey, CEO of the San Diego City Employees’ Retirement System.

It was a complex move but essentially they pushed off some of the pain. It surprised me because after 13 years of covering San Diego politics, one basic law I knew was that if they lowered the assumption of what they earned in the market, it would cause significant pain.
Over the long term, the bill will come but Hovey and his team argued that in the future years, the city will get an enormous break. Its pension bills will drop by more than $200 million in 2029.

Basically, when the city closed the pension to new hires in 2012 (except for police) it forced itself to pay off the debt of everyone else in just 15 years. When that’s over, taxpayers will experience enormous relief, but Hovey said the income from the city dropping that much could cause the pension system to have to sell assets or otherwise come up with cash to send out its regular monthly pension checks.

The thing is, the pension system is paying out more than it’s taking in every year. So trustees want to make sure the city has to pay more in 2029 than it would have under the old plan.


Cities urge CalPERS to help ease staff, pay cuts
The city manager of once-bankrupt Vallejo expects soaring police pension costs to reach 98 percent of pay in a decade. Lodi employees dropped from 490 to 390 in the last decade. And Oroville, after cutting a third of its staff, recently cut police pay 10 percent.

Eight cities struggling with rising pension costs urged the CalPERS board yesterday to analyze two ways to reduce the cost of pensions, even though the proposals were said by the CalPERS attorney to be unconstitutional under current law.

State Sen. John Moorlach, R-Costa Mesa, asked the CalPERS board to analyze the cost of suspending cost-of-living adjustments and giving current employees, for work done in the future, the lower pension for employees hired after Jan. 1, 2013, under reform legislation.

The chairman of the League of California Cities pension committee, Bruce Channing, Laguna Hills city manager, told the CalPERS board that cities throughout the state are “gravely concerned” about “unsustainable” pension costs and all options should be considered.

“Cutting staff, as we have done in my city, is becoming a recurring pattern,” Channing said.

Five unions and retiree groups urged rejection of Moorlach’s request, saying a COLA cut would harm retirees with small pensions. They said Moorlach wants to do away with pensions and should do his own analysis, rather than pass the cost to CalPERS.

The CalPERS board president, Rob Feckner, said he won’t repeat what he said on first seeing the Moorlach letter. He said the request did not come from the entire Legislature, and if Moorlach really believes in his “pet project” he should find another way to fund it.

Vallejo filed for bankruptcy in 2008 and did not cut pensions, a trend followed by the Stockton and San Bernardino bankruptcies in 2012. Vallejo said CalPERS threatened a long legal battle. The other two cities said they needed to be job competitive, particularly for police.

There was speculation several years ago that Vallejo, which had higher costs than the other two cities, may be headed for a second bankruptcy. The Vallejo city manager, Daniel Keen, said he took office three months after Vallejo exited bankruptcy in 2011.

Keen told the CalPERS board yesterday that Vallejo has the same gradual erosion of services that the other seven cities talked about, despite an increase in the sales tax and a tax on medical marijuana.

“We are facing dramatic increases in our pension rates, as are many cities,” Keen said. “We will be looking at 98 percent rates for public safety by ’27-28 and 55 percent rates for our miscellaneous employees in that time frame.”
Others urging CalPERS to do the cost analysis requested by Moorlach were Concord, Santa Rosa, Chico, Yuba City, and the California Special Districts Association.

Opponents said the Moorlach proposals would violate the “California rule,” a series of state court decisions widely believed to mean that the pension offered at hire becomes a vested right, protected by contract law, that can’t be cut unless offset by a comparable new benefit.

Al Darby of the Retired Public Employees Association said the Moorlach request is an “anti-pension proposal” that the CalPERS actuary extimates would cost 80 hours of work time, not counting followup questions.

He said CalPERS was being asked to do opposition on itself, which is absurd. He said cities should explore other methods of relief, such as better use of technology, innovative contracting, and taxing power.

Neal Johnson of SEIU Local 1000 said the fact that the request comes from one legislator, not a committee, seems to have a “certain aim.” He said the advocates say all options should be considered but the request is for just two.

“It is self-serving,” he said. “It is not in the benefit of the 1.5 million members of the system, and I hope you will reject it. As I said, the data is there. They can do the analysis.”

Board member J.J. Jelincic said “a big problem is that what we are being asked to do is a bullet point for an initiative that will pick out the most extreme number and will ignore all the conditions that went into the assumptions.”
Board member Richard Gillihan said he probably would not support the reforms Moorlach wants analyzed, particularly the COLA cut. But he said the request is being “twisted” by some of his colleagues.

Because the CalPERS staff often responds to stakeholder requests without going to the board, he said, the fact that the Moorlach request is before the board suggests that the board is politicizing it.

He said the Moorlach request comes from not just one legislator but also the cities that urged that CalPERS provide the data. He said it’s difficult to negotiate with the unions, as some members suggested, without the data.

“We are just going to disregard their interest in the data,” Gillihan said. “I find that somewhat insulting.”

Given the comments of most board members, the committee chairman, Richard Costigan, said he would not call for a vote. He instructed the CalPERS chief executive, Marcie Frost, to tell Moorlach where to get information to answer his request.
Gullixson: What is being squeezed out to pay increasing pension costs?
Here’s an important question to pose to Sonoma County’s new pension advisory committee. For that matter, it should go to all local elected officials. How much are rising pension costs crowding out other spending — money for public assistance, park maintenance and “soft services” such as libraries and museums?

If the county, cities and school districts are honest, local residents probably won’t like the answer. And given the increased contributions that local agencies are having to pay to the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, the “crowding-out effect” of pensions is expected to get far worse.

“In counties, what we are seeing is a decrease in spending share in particular in public assistance and health care,” said Stanford professor Joe Nation, who represented Marin and southern Sonoma counties in the state Assembly until being termed out in 2006. “The irony here is as pension costs increase, the people who are arguably being hurt the most are the people who can least afford it. It’s people who need the public assistance from counties.”

Nation, now project director at the Stanford Institute for Economic Policy Research, hosted a workshop on Tuesday where he presented the preliminary findings of a study of this crowding-out effect. His research team looked at the finances of cities such as Los Angeles, Sacramento and Pacific Grove as well as counties and school districts — small, medium and large — and the state as a whole. These case studies offer a snapshot of what’s happening statewide.

Los Angeles County, for example, was contributing 3 percent of its operating budget toward pensions in 2002 before public employee retirement benefits were boosted retroactively almost statewide. Since then, that slice of the pie has nearly tripled to about 8.7 percent. According to the Stanford analysis, it is expected to grow to 10.2 percent by 2029-30, if the county meets its goals of about 7 percent average annual return on investments. If not, and returns come in at more around 5 percent, the share of the budget taken up by pensions will be 13.8 percent — an 11 percent increase in just 17 years.
And the problem is not likely to get any better, given the massive phased-in contribution increases that school districts face each year in order to meet a state goal of making CalSTRS fully funded by 2047. As of April 6, CalSTRS only had about 64 percent of the assets needed to meet its obligations.

Meanwhile, CalPERS, the largest pension fund in the nation with some $323 billion in assets, has only 68 percent of the assets needed to cover the promises made to public employees. And, as with CalSTRS, it has cut expectations on investment returns from an annual average rate of 7.5 percent to 7 percent for the next 20 years.

Lowering expectations on returns means local agencies need to pony up more money to bolster the funds, which means more services and programs getting squeezed.

“Based on what we are seeing,” said Josh Rauh, professor of finance at the Stanford Graduate School of Business, “I would say get ready for much higher taxes and much worse public services.”

So what services are being squeezed in Sonoma County and local cities? It’s not clear, but we can guess. The most honest answer can be found in the final report issued last year by the county’s Independent Citizens Advisory Committee on Pension Matters. The committee calculated that the enhanced benefits Sonoma County granted to employees have cost the county an extra $260 million over the 10 years from 2009 to 2016. That’s money that “would have been available to fund critical public services,” the report said.
Unfortunately, that committee has since been disbanded, replaced earlier this month by a permanent seven-member advisory panel on pension reform. In addition to having three members of the previous committee, the panel now includes two members with ties to organized labor and a former assistant executive officer for CalPERS. The seventh is former Rep. Lynn Woolsey, who represented this region in Congress for 20 years. The jury is out for now on whether this group will continue the good work of the previous panel or try to sugarcoat what’s happening. For my money, the best way to tell is how thorough it will be in looking at not just the cost of pensions in dollars but the costs in terms of reduced services. The public may not always understand the long-term impacts of unfunded liabilities. But they understand the cost of poor roads, shabby parks and reduced public assistance. Ultimately, it’s never programs that really get squeezed. It’s people.


For Whom CalPERS’s Funded Status Tolls
Some pension beneficiaries are safer than others.

A recent news article incorrectly describes the funded status of the California Public Employees Retirement System (CalPERS) as follows:
“Today, CalPERS . . . has about 68 percent of the assets it would need to pay all of the benefits it owes immediately.”
That is not correct. CalPERS does not have 68 percent of the assets it would need to pay all of the benefits it owes immediately. For that purpose it has only 38 percent.
68 percent is the ratio of pension assets to the present value of pension obligations discounted at the expected rate of return on assets. It means that CalPERS currently has 68 percent of the assets needed to pay benefits assuming it earns the expected rate of return over the period during which the benefits are scheduled to be paid, not immediately.
In contrast, the “immediate” ratio is the one CalPERS uses when a government for which it manages pension obligations seeks to terminate its plan. In that case, liabilities are discounted at a rate reflecting immediate defeasance via US Treasury obligations. Using that rate CalPERS has only 38 percent of the assets it would need to immediately fund benefits.
The difference is critically important to SOME — but not all — beneficiaries of government pension promises in California. That’s because pension beneficiaries in California fall into two very different categories:
1. Beneficiaries whose obligations are owed or guaranteed by the state DO NOT have to worry about funded status. Because states may not declare bankruptcy, beneficiaries owed or guaranteed their pensions by the State of California can expect to be paid regardless of CalPERS’s funded status. Examples of “protected” beneficiaries include employees of the state and California State University.
2. Beneficiaries whose obligations are not owed or guaranteed by the state DO have to worry about funded status. Because local governments and special districts may declare bankruptcy, failure of such an entity combined with inadequate funding could mean a reduction or elimination of retirement payments. Examples of such “unprotected” beneficiaries include employees of local governments or special (eg, water or fire) districts.
In other words, only unprotected beneficiaries, eg, city, county, and special district workers, are at risk to funded status. In contrast to employees whose obligations are owed or guaranteed by the state, unprotected beneficiaries should be keenly interested in the funded status of their pension plans. CalPERS and other public pension funds should make sure pension beneficiaries know the difference.
Public workers from two more towns expected to lose CalPERS pensions
Ten workers and retirees from government agencies in two far corners of California likely will see their pensions slashed because their employers have not paid bills to the state’s largest retirement fund in more than a year.

Trinity County Waterworks District No. 1 west of Redding and Niland Sanitary District from Imperial County are in line to become the third and fourth government agencies to break with CalPERS over the past 12 months in a manner that shortchanges their retirees.

The CalPERS Board of Administration is scheduled next week to vote on ending contracts with the two small districts because they’re in default.
The districts are expected to join the town of Loyalton in Sierra County and an organization called the East San Gabriel Valley Health Consortium as small governments that are falling out of CalPERS because of different financial stresses.
In Trinity, five current and former employees will see their promised pensions slashed by 70 percent. Niland’s five beneficiaries will see a 92 percent to 100 percent cut in pension benefits, according to CalPERS’ staff reports.

To fully fund their workers’ pensions, the two districts would have to muster up hefty termination fees. CalPERS asks for that money up front, and then moves the separating agency to a low-risk fund called the terminated agency pool.

CalPERS says Niland owes about $200,000 to cover the long-term costs of its employees’ pensions in the terminated agency pool, while Trinity owes some $1.6 million. Trinity has asked CalPERS for a 30-year, no-interest payment plan to cover the termination fee, but the district and the pension fund have not reached a deal, according to CalPERS.

More than 1,500 local government agencies are part of CalPERS, the $333 billion pension fund. As a whole, CalPERS has about 68 percent of the assets it would need to pay all of the benefits it owes to its members immediately.
A new CalPERS financial assessment of its participating agencies shows that 16 of its members are in worse-than-average shape, with less than 60 percent of the assets they’d need to fund full retirements for their employees.
Niland, although a part of CalPERS since 1995, fell far behind on its pension bills because it did not properly register its employees with the pension fund. CalPERS spotted the problem when one of the workers called the pension fund to ask about his status, according to CalPERS.

Trinity Waterworks is not in financial trouble, its district manager said. It voted to leave CalPERS in 2015 as it shifted its business model to one that relied on a contractor, meaning it did not have new public employees.

It has set aside money for CalPERS, but it does not have the full amount the pension fund wants.

“I’m hoping the story isn’t over,” Trinity’s Craig Hair said.

More small governments could follow the ones that left CalPERS recently.

Three other small departments, including the Herald Fire District near Galt, have filed notices to separate from CalPERS.

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Old 09-24-2017, 07:44 PM
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Mary Pat Campbell
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 79,402
Blog Entries: 6

I just learned the limit of post length on the AO.

Here comes the last part of:



Spoiler: newsletters&utm_campaign=pi-investments-digest-20170921&CSAuthResp=1506009585577%3A0%3A73393%3A0% 3A24%3Asuccess%3A27E6B54A015F2ADD37108923E8DEFBAA
Bumpy ride seen for CalPERS proposal
CalPERS Chief Investment Officer Theodore Eliopoulos wants to boost returns by starting a direct investment program in private equity or finding another alternative to the traditional limited partner model, but the road ahead won't be smooth for the largest U.S. defined benefit plan.

The CIO of the $333.3 billion California Public Employees' Retirement System would face hurdles that would make it difficult to implement a direct investment program, say private equity and pension experts.

Competing on salaries for top talent against private-sector asset managers is considered the biggest challenge. How the program would be set up and whether it would answer to trustees is another challenge, experts and board members said.
If the direct-investment plan moves forward, Sacramento-based CalPERS would be taking a page from its Canadian peers, which started making direct private equity investments in the 1990s, pension experts said. CalPERS officials, who discussed the idea at a July 17 board meeting, plan to issue a more details about the direct investment program in six months.

Direct investing would reduce some of the approximately $800 million in fees CalPERS pays annually to private equity managers. But the size of the reduction is unclear because Mr. Eliopoulos said CalPERS would continue to participate in some private equity funds as a limited partner.

Private equity is CalPERS' best-performing asset class over the 10- and 20-year investment periods. But the fund's program shrunk to $26.2 billion as of May 31 from $34 billion four years earlier because of the difficulty private equity firms are having in finding suitable investments.

"There is a lot of competition," Mr. Eliopoulos said in a July interview, noting the large number of investors seeking available opportunities in commingled private equity funds.
Another option — never done before by a public pension plan — would be to outsource much or all CalPERS private equity program to a money manager that could potentially leverage better deals with private equity managers than CalPERS staff. Sources say Mr. Eliopoulos has talked to BlackRock (BLK) Inc. (BLK) about possibly taking over all or part of CalPERS private equity program. BlackRock is the world's largest asset manager with more than $5 trillion in assets under management, but its private equity program is a relatively small part of its business, a fund of funds with $21.5 billion in assets under management.
High future returns in doubt

Mr. Eliopoulos' plan to find an alternative to the traditional private equity model comes at a time when high future investment returns are in doubt for most institutional investors including CalPERS, which had an estimated funding ratio of 68% for the fiscal year ended June 30.

Consultants and CalPERS investment staff expect a 6.2% annualized return for the entire fund over the next decade, below its assumed 7% rate of return.

Erik Gordon, clinical assistant professor at the University of Michigan's Stephen M. Ross School of Business, said in an interview it's understandable that Mr. Eliopoulos would want to find a way to lower private equity fees by starting a direct investment program. But Mr. Gordon, who consults with institutional investors on private equity, said even if Cal- PERS could pay the higher salaries necessary to assemble a top-notch investment staff, it could take time to garner strong investment results.
CalPERS Illegally Trying to Hide Its Scheming to Hand Over Private Equity to BlackRock
CalPERS continues to thumb its nose at the law. The latest example involves its plan to give enormous power and profit to BlackRock, a financial firm that damaged CalPERS in the past by putting it in the Stuyvesant Town real estate deal, in which CalPERS lost its entire $500 million investment.1

It’s astonishing to see an organization refuse to allow for open discussion of fundamentally important policy decisions, as required by the Bagely-Keene Open Meeting Act. That intransigence is made even worse by the fact that CalPERS is seriously considering implementing a strategy that would harm its beneficiaries and California taxpayer. CalPERS plans to introducing another middleman into its most expensive investment strategy, private equity. That would increase already high private equity costs and lower returns.

Mind you, this is the antithesis of the approach CalPERS uses for every other investment strategy, where it correctly fixates on cost reduction, to the degree that CalPERS has misrepresented data to exaggerate how much it has lowered costs.

Later in the post, we reproduce an e-mail by board candidate Margaret Brown to the members of the CalPERS board, along with its CEO Marcie Frost and general counsel, Matt Jacobs, vigorously objecting to how staff intends to discuss this and other agenda items impermissibly in secret.

CalPERS makes no pretense that it has any legal justification for this move. Note that the default position of Bagley-Keene is that all deliberations of governmental bodies are to be held in public; private discussions must be put on the agenda with a citation of the section of law that allows for the discussion to be in secret.
Needless to say, PR considerations are not a legally valid basis for discussing a major policy item, which is what this proposal amounts to, in secret.

The reason this item is scheduled for this Monday’s Investment Committee meeting is apparently because Bloomberg reported on CalPERS’ interest in outsourcing its private equity operations to BlackRock. The board is not supposed to find out about major plans like that in the press.
Even if you were to accept the premise that this outsourcing scheme is a good idea, it is also remarkable to see CalPERS considering only one vendor for it, when many firms would likely be interested in managing the program, and on top of that, a firm that has treated CalPERS badly in the past. The Stuy Town deal was controversial internally when it was under consideration, and there were multiple parties who argued that it was a bad deal .Some people directly involved say that BlackRock had made misleading representations in marketing the deal and also treated CalPERS unfairly as it unravelled. Unless BlackRock has somehow made up to CalPERS for the loss, which seems impossible given its magnitude, it is hard to fathom why CalPERS would be willing to do business with an organization that has dealt with them in bad faith in the past.

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Malloy says GOP plan would underfund state pensions
HARTFORD — Gov. Dannel P. Malloy on Tuesday told Republican leaders that their pending budget proposal, which he plans to veto, would drastically underfund state employee pension programs that have rebounded since he took office in January 2011.
In a letter to GOP leaders that was released to reporters, he warned that since the employee retirement system was created in 1939, it has consistently been underfunded, to the point where it is behind by billions of dollars.
“ Rather than adding to the state’s crippling pension liabilities, my administration has had the courage to face this challenge, and deposited more than $500 million into the pension fund in addition to the cost for current employees,” Malloy wrote, adding that an analysis of the GOP budget that passed Friday and Saturday.
“It is worth noting that this analysis also reveals that your proposal to reduce pension contributions by $144 million and $177 million respectively over the two years of the biennium is even more aggressive than similar ill-fated decisions by former Governors Rowland and Rell,” he wrote. “Please understand that returning to the days of underfunding our state employee pension obligation is not something I can, or will, ever condone.”
With 5 More Democrat Votes, House Forwards GOP Budget to Malloy; Veto Expected
HARTFORD, CT — Feeding off momentum created by three Senate Democrats who surprised their leadership Friday by voting for the Republican budget, five House Democrats also crossed the aisle in support of the GOP plan early Saturday.
The House voted 77-73 in favor of the minority party’s two-year, $40.7 billion budget, which is expected to be vetoed by Gov. Dannel P. Malloy. According to the Office of Fiscal Analysis, both the Republican and Democratic budget proposals are projected to yield multi-billion dollar deficits in 2020, 2021, and 2022.

The Republican budget says the cost-of-living increases for retired state employees won’t be funded until the state employee pension fund is funded at 80 percent. Further, no overtime pay would be included in calculations for pension payouts for current state employees, and they would ask that employee contributions to the pensions go up to 7 percent.

Senate Republican President Len Fasano, R-North Haven, has said that that change would generate savings in 2018 and 2019 because it means the state would not have to contribute as much in those years to the pensions.

Rep. Michael D’Agostino, D-Hamden, questioned the one-page actuarial report used to put together Republican projections for how the changes in 2027 will help save $144 million in the first year and $177 million in the second year.

D’Agostino said he believes the language included in the budget will land them in court because they can’t make the necessary changes outside of collective bargaining.

AFL-CIO President Lori Pelletier said the Republican budget proposal attempts to “take away our freedom to negotiate our health care and our retirement security.”

She said Connecticut state employees gave back more than $1 billion to help shore up the state’s finances, and “Republicans not only demanded more blood, they refused to ask for anything from corporate CEOs and the ultra-wealthy.”

It was clear, maybe for the first time for some, that the partisan dynamics in the House chamber had changed.
New CT budget could shift teacher pension costs onto future taxpayers
If legislators vote on a new state budget Thursday, it may include a complex proposal from Gov. Dannel P. Malloy to restructure skyrocketing contributions to the teachers’ pension program — potentially inflating and then shifting billions of dollars in expenses onto a future generation.

But if the plan is incorporated into the budget, that would mark the first time many legislators hear about it.

The Malloy administration has been warning for years that Connecticut must address massive unfunded liabilities caused by more than seven decades of inadequate savings, and says there is no reason to delay.

But the proposal was not raised in bills, public hearings or budget proposals during the 2017 session or earlier this summer.

But given that, the fact that the proposed cost-shift would not happen immediately, and that billions of dollars are at stake, Republican legislators say lawmakers shouldn’t be rushed into voting on the Democratic governor’s plan.

Malloy spokeswoman Kelly Donnelly confirmed Wednesday that the administration wants to change a schedule that has the state’s annual pension contribution skyrocketing — according to one report — by more than 500 percent over the next 15 years.

Connecticut’s annual payment, which stood at $1 billion last year, could top $6.2 billion by 2032, unless adjustments are made.

Full details of the proposal were not available Wednesday [September 13], but Donnelly said the administration’s goal is to change the scheduled payments while preserving rules established in 2008 to prevent further short-changing of the teachers’ pension.
The $1 billion contribution the state made to the pension fund last year is slated — according to a study prepared for the state in 2014 by the Center for Retirement Research at Boston College — to skyrocket over the next 15 years, potentially topping $6.2 billion by 2032.
According to a 2015 study Malloy commissioned from the Center for Retirement Research at Boston College, annual contributions to state employees’ and teachers’ pensions were at risk to more than quadruple by the early 2030s because of decades of poor savings by governors and legislatures dating back to 1939.

State employee unions, Malloy and the legislature agreed in early February to reduce total payments into the state employees’ pension between now and 2032 to mitigate a projected spike. Annual contributions into that fund also were expected to top $6 billion in the early 2030s.

But that shift came with a cost.

When the state contributes less, that limits the treasurer’s ability to invest pension resources and grow the fund.
CT pledged not to short teacher pension fund

Connecticut doesn’t have the same legal flexibility, though, to restructure payments into the teachers pension.

That’s because the state borrowed $2 billion in 2008 to shore up the teachers’ pension and pledged to its bond investors not to short-change pension contributions for the life of the 25-year bond issuance.

In other words, if the state wants to pay less into the teachers’ pension than fund actuaries recommend — with a very limited exception — it needs to pay off the bonds first.
Malloy did strike a concessions deal with unions that the legislature ratified in July. But Fasano and other Republicans offered that benefit reductions in that deal were not sufficient, especially given that it locked Connecticut into providing those benefits through mid-2027.

A handful of House and Senate Democrats also complained privately that the pension restructuring should be discussed publicly during the regular 2018 legislative session, which begins in early February.

Legislators are not the only ones still studying the challenge posed by the teachers’ pension fund.

Nappier said Wednesday that her office began researching options several months ago on how to to retire the pension bonds and to give the state more flexibility to deal with rising pension contributions.

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Illinois lawmakers quitting before voters get to fire them
Sometimes chickens come home to roost. Sometimes they fly the coop.

There are 25 Illinois state lawmakers getting out, and 19 of them voted for saddling taxpayers with the 32-percent income tax increase that no one believes really fixed anything.

Between when Gov. Bruce Rauner was inaugurated and by the time the next legislature takes office, 36 percent of the Illinois House and 25 percent of the Illinois Senate will have turned over.

The upside of dysfunction seems to be that if you allow a two-year budget impasse, if you let your deadbeat pile of bills grow from $6.6 billion in 2014 to $16 billion today, and if you ignore pension obligations until they are in a $130 billion hole, then all that will lead to frustration. In fact, it leads to enough frustration to make you want to get out.
Trouble is, mostly the wrong folks are getting out. The King of Illinois will remain. State Sen. Kyle McCarter, R-Lebanon, is one of those leaving.

To the good, Signal Hill Elementary’s favorite parent, state Sen. James Clayborne, is quitting. The No. 2 Democrat in the Illinois Senate decided it is time to go, leaving behind a history of “no comments,” state jobs for close female friends, constituent disdain and head-nodding votes including for that tax hike. (Kiss. Kiss. Miss ya, James!)

McCarter says the exodus is another argument for term limits. Those 25 departees on average hit the 9-year minimum for a legislative pension.
Lawmakers know 2018 elections will be tough. When 15 House Republicans crossed over to vote for the income tax hike, Illinois Republican chairman Tim Schneider said he was “confident voters will hold those politicians accountable for choosing Mike Madigan over the people of Illinois.”

Very likely, but they seem to be eliminating themselves before voters do.

Column: Lawrence Wyllie’s federal fraud charges and the ‘Lake Wobegon effect’
There's a scholarly theory in finance known as the "Lake Wobegon Effect."

When it comes to CEO pay, the theory goes, no board wants to admit its chief executive is below average. Corporate boards are thus inclined to reward CEOs with compensation above the median.
As a result, pay for top executives across the spectrum continues to spiral ever upward, regardless of performance.

I believe in the "Lake Wobegon Effect," and I think it has bearing on the situation that led to federal felony fraud charges announced Thursday against former Lincoln-Way Community High School District 210 Superintendent Lawrence Wyllie, 79, of Naperville.

I think some school districts, municipalities and other taxing bodies reward "rock star" executives with reputations for getting results and proven track records for creating improvements.

Sometimes it's about status. Everyone likes to score well on "best of" lists. Schools and towns are no different. Reputation-building produces actual benefits in the form of increased property values that enhance the wealth of stakeholders.
Prosecutors allege Wyllie used at least $50,000 of school money to build and operate a dog obedience school known as Superdog and paid himself at least another $30,000 in retirement and vacation benefits that weren't in his contract.

Federal authorities also accuse Wyllie of misrepresenting the district's financial health and causing the district to assume at least $7 million in debt. Wyllie faces five counts of wire fraud and one count of embezzlement.
There's another consequence if the federal allegations against Wyllie are proven true. He could lose his pension.
Wyllie this year is receiving a pension of $321,444. That, according to a Better Government Association analysis, is the highest amount paid to a beneficiary of the Teachers' Retirement System — one of several state pension funds for public-sector employees.

State law is crystal clear when it comes to pension recipients convicted of felonies related to their job performance.

"None of the benefits herein provided for shall be paid to any person who is convicted of any felony relating to or arising out of or in connection with his or her service as a member," the Illinois Pension Code states.

Every year, pensions are revoked for retired public servants convicted of felonies, TRS spokesman Dave Urbanek told me on Friday. He said he was unable to readily provide comprehensive figures on the number of felons who have lost their pensions. There are more than 100,000 active TRS retirees.

"It's not uncommon," Urbanek said. "We do have every year a number of members who lose their pensions related to felony convictions. The felony has to pertain to their job performance."
In politics, it's easy to incite suburban and downstate voters to rail against a "bailout" for Chicago pensions. I've often wondered why more Chicagoans don't publicly express their outrage at having to pay the generous pension benefits for suburban school retirees.

You know, those school CEOs who are considered financial wizards because of their ability to produce results. The beneficiaries of the "Lake Wobegon Effect" who impress their boards into rewarding them with compensation packages the average person in Chicago could only dream about.

I wonder what people who scrape by on fixed incomes of $1,000 a month think about public sector retirees collecting pensions of nearly $1,000 a day.

Illinois pension liabilities still loom large on its balance sheet
CHICAGO – A warning from Illinois’ largest public pension fund offers a stark reminder of the state’s most daunting fiscal threat – its $126.5 billion unfunded pension tab.
The Teachers Retirement System said changes that reduce the state's contribution in the current fiscal year will only make things worse later.
Significant pension changes that some believe could pass state constitutional muster were proposed during the regular session and enjoyed bipartisan support but they took a backseat as efforts built -- successfully -- to break a two-year-old budget impasse and stave off a cut to junk bond status.
“The 2018 budget may have stopped the bleeding, but Illinois faces significant structural headwinds that are not going away,” said Thomas Schuette, co-head of investment research & strategy, at Gurtin Municipal Bond Management. “Pensions remain the elephant in the room.”
The budget package included several “reform” measures first pitched by Gov. Bruce Rauner with projected budgetary savings of about $1.5 billion.
They limit end-of-career pension spiking, shift the cost of higher paid employers to local districts, and phase-in the impact of actuarial changes. The package also creates a Tier 3 defined benefit and defined contribution pension plan for some current employees.
The Teachers Retirement System late last month revised the state’s fiscal 2018 contribution that had been certified last fall, lowering it by $531 million to $4.034 billion from $4.564 billion to reflect the changes in law.
That includes the retroactive application of the law smoothing over five years the impact of actuarial changes since 2012. The fund has reduced its assumed investment return rates several times. The smoothing measure is expected to generate overall state budget relief of $800 million.
“The changes enacted this year in the pension funding formula move TRS further away from financial stability and continue to kick the can down the road. Period,” the fund’s executive director Dick Ingram said in a statement. “Cutting the state’s contribution only increases our concern that TRS will eventually become insolvent.”
The fund accounts for $71 billion of the state’s $126.5 billion in unfunded pension liabilities, which TRS called one of the largest in the country and said is a direct result of decades of underfunding by the state. In fiscal 2018, the state’s contribution will fall $2.839 billion short of what the system’s actuaries say is a sound actuarial funding level.
“For every dollar that the state cuts from the TRS contribution now, they will have to spend $3 down the road to replace that revenue because of the interest costs,” Ingram said. “A $530 million funding cut today just puts off the inevitable and will create a payment of $1.6 billion in the future.”

In February, Gov. Bruce Rauner proposed a state budget that included creation of a 401k style savings plan for newer teachers and public workers that he said would save $500 million in the 2018 fiscal year that began July 1.

In July, the Democratic controlled legislature enacted its own budget over the objections of Rauner that nonetheless incorporated his pension overhaul. The governor quickly attacked that budget as unbalanced, in part because it counted on the very savings that he earlier had estimated would be reaped from the 401k-style initiative, commonly referred to as Tier 3.

Now, administrators at the state pension systems that must operate Tier 3 are scratching their heads over how exactly the $500 million estimate came to be, while also raising doubts that any savings might materialize for close to two years.

“Right now, my operating thesis is that July 1 of 2019 would be the earliest possible effective date (for Tier 3),” said Richard Ingram, executive director of the Teachers’ Retirement System which administers pension funds for hundreds of thousands of current and retired suburban and downstate teachers. “There is absolutely no way we can do it by July 1 of next year."

To recap, if Tier 3 does eventually prove a money saver for Illinois – whatever the amount – it’s unlikely to be this year or even next.

So how did this critical calculation creep into the current budget-making process? That, too, is a bit of a mystery.
Jason Schaumburg, a Rauner spokesman, said savings estimates were developed by the governor’s staff in consultation with the big state-run retirement systems for teachers, public university workers and general state employees.

But officials of some of those pension plans say they have yet to develop savings estimates because details of Tier 3 are still in flux. Meanwhile, legislative Democrats say they lifted their savings number straight from Rauner because it was his plan and they presumed he knew what he was talking about.
At its core, Tier 3 aims to induce a portion of public workers into shifting their retirement benefits away from traditional pension plans and into more portable retirement investment accounts similar to those in vogue in private industry. Instead of browbeating workers into joining, participation would be voluntary and available only to those hired in 2011 or later, a distinct minority of the current public workforce.

Tier 3 beneficiaries would still get a traditional pension, though one smaller than they would otherwise receive. The upside for them would be a separate retirement account that is portable regardless of career track and one that can grow — or shrink — depending on investment choices.

Workers would contribute up to 6.2 percent of their pay toward the pension benefit. However, an additional 4 percent of their pay would also be deducted to help fund an individual retirement account. Employers like local school districts would then kick in a match for the retirement account ranging between 2 percent and 6 percent of pay.
Ingram, TRS’s executive director, explained that one challenge to get Tier 3 up-and-running is that, as written, the new law requires pension fund administrators to create retirement accounts for each worker that qualifies. Such an action requires approval from the Internal Revenue Service, Ingram said.

He said a workaround would be for lawmakers in their fall veto session to pass additional legislation to authorize pension systems to hire investment firms that already have obtained IRS approval to do the retirement account work. Such legislation, he said, would also need to spell out the mechanics of transitioning existing workers into Tier 3 and how to account for pension benefits they have already accrued.

“We can’t really start serious work until we know exactly what it is that we are implementing,” Ingram said.
About that 'whodunit' on apparently false pension savings in new Illinois budget
The Better Government Association has a “Whodunit” article this week questioning the supposed savings of $500 million dollars per year from adoption of the “Tier 3” changes in the state pension system. Nobody can prove up that number, and it appears very clear only part of whatever savings there are can be realized this year because the changes will take time to implement.

First, here’s the real answer on “whodunit,” which you might not conclude from the article: Somebody on Rauner’s former staff who just made up the numbers — for which Rauner deserves blame. But the General Assembly is just as guilty.

Rauner put out the Tier 3 proposal and the $500 million claim in February, as the BGA points out. Rauner changed out most of his staff in July and August. Think maybe the former staff person responsible is “former” because of things like this? Yup.

The BGA is right to question the numbers. If the claimed savings are near correct it’s just luck because nobody has professionally scored how the changes will work out. I doubt the numbers are right. We’ve written about other surprises, smoke and mirrors in the budget few in the General Assembly understood and this is just another.

Democrats in the General Assembly and some in the press were quick to blame Rauner, saying they just copied Rauner’s proposal and his numbers.” This was adopted at the recommendation of the governor,” said Rep. Greg Harris, the Chicago Democrat who is the party’s chief budget negotiator in the House. Crain’s put their own headline on the BGA story to focus the blame on Rauner: “This Rauner pension stopgap doesn’t add up.”

Oh, come on. The budget with the Tier 3 changes was passed six days after the new fiscal year had already started. It takes no pension expert to know that complex changes can’t be implemented immediately. And did anybody ask whether an actuary had looked at the proposal or if somebody else qualified had scored it? Did they ask to see any analysis? No, not that anybody has identified.
Blame Rauner’s former staff and therefore Rauner because the buck stops with him. But blame all in the General Assembly who voted for it, too.

The biggest lesson here is one you should already know: Don’t believe anything about savings from a pension reform proposal until some credible professional analyzes and scores it.

We’ve been similarly snowed before by both parties. Most recently, Rauner and many Democrats have claimed almost $1 billion per year can be saved from the “consideration” approach to pension reform. The press repeats that unchallenged. But nobody has ever produced an actuarial analysis or anything else credible. I’m extremely doubtful something even close to $1 billion could be saved under that approach.

School Board OKs 100% Teacher Pension Pick-Up; Board President Is Leading Union Activist – Wirepoints Guest
Usually, people think of a portion as part of a whole or a piece of something, like a slice of pie or your roommate’s share of the rent. Sometimes it can be considered as a single unit, such as “The portions at the Cheesecake Factory are huuuge.”

As reported in the Wednesday Oak Park/River Forest Journal, District 90 in River Forest agreed to a new three year contract with the teachers union, a contract containing what seems to be an innocuous clause regarding portions: “The Board will pick up a portion of each teacher’s required contributions to the TRS (Teachers’ Retirement System) in the same manner as it did in the 2016-17 school year…” This is what is commonly referred to as the “pension pick-up” whereby taxpayers pay some “portion” of a teacher’s 9% pension contribution. D90 is not alone in offering this benefit as other school districts also pick-up a “portion”. As you might recall, the Chicago Teachers Union blew a gasket last year when CPS wanted to end their 7% pension pick-up, a relic of a benefit from 35 years ago that ceased serving its intended purpose – originally given in exchange for a wage freeze – long ago.

So, what “portion” of the employees’ 9% pension contribution will D90 and its taxpayers pay this contract? 9%. The whole portion. Portions usually imply a small percentage of the whole. The contract doesn’t even say “significant portion”. In fact, this new contract merely references the old contract which is equally as vague (I had to submit a FOIA request to get the exact amount). Why not just come out and say taxpayers are paying the entire amount of their teachers’ pensions? Great marketing tool to attract new teachers, right?

Because as with most government contracts, transparency is not the goal. It is easy to hide the true cost of something when you don’t specify numbers. The state’s $120 billion pension liability is unmitigated proof of that. To give you an idea of how significant D90’s benefit is: A private sector worker, having to deduct from his paycheck 7.65% for social security and medicare and 9% for a 401(k) contribution, would have to gross $100,000 just to equal the take home pay of a D90 teacher with a gross salary of $80,000 and no such deductions, a whopping 25% premium. In a time of meager retirement savings and Social Security approaching insolvency, it’s easy to see why a school district would be a bit obscure with such a benefit. The optics of a “free” retirement – one that will easily top most taxpayers – probably wouldn’t go over well in school board meetings.

What makes this contractual vagueness even more concerning is that it was signed under the tenure of D90 school board president Ralph Martire, executive director of the Center for Tax and Budget Accountability. That organization is essentially a union advocacy shop, as I described in an earlier article.

Put aside, for the moment, the deeply concerning fact that a board member representing the taxpayers on one side of the bargaining table earns his living from the dues money collected from the union members of the other side of the bargaining table. Why would he agree to such ambiguous wording in a legally binding contract, or anyone else on the board for that matter? Is this proper representation of the working families in the district?

The 100% pension pick-up in River Forest does predate Martire’s tenure there, but renewing it now, so opaquely, during the pension crisis we have, is the issue.
Huh? Martire is president of a school board that gives 100% pension pick-up -- and hides it?
The thing about writing about Illinois government, particularly pensions, is that you’re forever discovering new things that make your jaw drop.

I only recently learned that the people of River Forest saw fit to make Ralph Martire president of their school board. He runs the Center for Tax and Budget Accountability. The CTBA is a union propaganda shop we’ve often criticized for distortions and half-truths.

I was truly skeptical when I reviewed today’s guest piece by Nick Binotti about that school board hiding a 100% teacher pension pick-up in their new school contract, so I looked at the contract and Nick’s FOIA answer. Good work, Nick. Read his article linked here.

It’s not like River Forest has the cash for such a thing. Their firefighter and police pensions are only 58% and 56% funded, respectively. (That’s from the most recent state report, which is 2014 numbers, so it’s probably much worse today.) Their firefighters and cops should be furious.
In the midst of Illinois’ pension crisis, River Forest District 90 has agreed to pay 100 percent of teacher contributions to the Teachers' Retirement System – and it did so secretly.

In Illinois, negotiations between local governments and government workers are done in secret. That’s a problem for taxpayers.

It means residents can be saddled with expensive contract provisions and can’t react until the contract is a done deal. And by then, it’s too late.

The latest example: River Forest District 90. That school district just renewed an agreement to pay 100 percent of teachers’ pensions contributions – the share the teachers are supposed to pay – as an additional benefit.
A big problem is the secrecy of District 90’s negotiations. Bargaining between the union and school district happened away from public scrutiny. And that means taxpayers couldn’t find out the details of the deal until it was too late.

What’s more, the contract was negotiated under the leadership of School Board President Ralph Martire – whose own organization, the Center for Tax and Budget Accountability, or CTBA, is heavily funded by government unions.

That means taxpayers in District 90 were essentially left without true representation in the negotiation process.
Taxpayers need real representation in contract negotiations

It’s also nothing out of the ordinary to have a school board representative who has intimate ties with the union.

Of course, that leaves taxpayers without real representation at the bargaining table.

District 90’s school board president, Ralph Martire, is executive director of the CTBA.

CTBA has strong union ties. Its board members include the executives of the Illinois Teachers Federation, Illinois AFL-CIO and the Illinois Education Association – to name a few. A large portion of the group’s funding is derived from the American Federation of State, County and Municipal Employees, the Service Employees International Union, the Illinois Education Association, and the American Federation of Teachers. These unions or their affiliates gave hundreds of thousands of dollars to CTBA from 2012 to 2016, according to the U.S Department of Labor.

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Governor’s page

Unfunded Pension Liability
per consultants

Unfunded Health Care Liability

Liability for each Kentuckian

Negative cash flow from FY 2006 through FY 2016
Stephen Byars: Why everyone should care that Kentucky’s public pensions are a disaster
I understand a discussion about pensions is about as welcome as Lyme disease. But, while much has been written about who is to blame for Kentucky’s pension crisis and what the impact might be to participants in the various retirement systems, very little has been written about why those of us who don’t have pensions should care.

Here is why we should care: because if this is not fixed, Kentucky will slide back rather than be able to invest for our economic future.

Enjoy the state parks? You might have to take the kids to Opryland instead. Appreciate the opportunities that our public schools and public universities offer? Well, get ready to sell more wrapping paper and explain to your student that history didn’t end in 2002, despite when the textbook was published.

As financial planners, my firm and I often work with young clients who have high debts, usually student loans. The first step toward their financial freedom is to create a plan to pay off their debt. Only then can they pay themselves first and invest in their future selves. Kentucky must develop a plan for this massive pension debt so we can start investing in our future.

A quick review of the problem:

$36 Billion is the total of the pension systems’ unfunded liability.
The Governor is expected to call a special session of the legislature later this fall to address this pension problem.

Here is a secret: at best, whatever changes they make to the retirement plans will only stop the hole – the $36 Billion – from getting deeper. It won’t fill the hole.

The hole won’t get addressed until the 2018 regular session when the legislature will write the budget. That’s when they will have to figure out how to fund that $36 Billion. The preliminary estimate of how much additional state money is needed to get us on the right path is $600 Million — each and every year for a very long time.

Here are the legislature’s three broad options:

1. Do nothing, always a viable option in Frankfort, and hope the changes they make in the special session will not only stop the hole from getting deeper but will eventually help fill the hole too.
This option is not only irresponsible but it has consequences too – such as a lower credit rating. Similar to a personal credit score, that will increase borrowing costs for things like schools and infrastructure. Doing nothing will not only not solve the problem, it will make things worse.
2. Cut roughly $600 million from the state budget each year and redirect that money to pay pensions. There is absolutely no way that can happen without cutting investments in our future. In fact, finding dollars of this magnitude would even require cuts to the main funding formula of K-12 education that, until now, has always been off the table. Senator Chris McDaniel, chair of the Senate budget committee, was recently quoted by the Courier as saying all areas of government would have to be cut 12%, including K-12 education, to fill the hole. A 12% cut to K-12 is the equivalent of cutting roughly $350 per child in every school district in the state. Think if they have to cut K-12 that your favorite item in the state budget – such as higher education, state parks or healthcare for the poor, etc. – will be spared, think again. Not a viable option.

3. Comprehensive tax reform. Adding 1 penny to the state sales tax will raise approximately $570M each year. If the base on which sales tax is charged expands, it would raise more.
Kentucky's pension crisis: You're on the hook, and this is what you need to know
For hundreds of thousands of Kentucky public employees and retirees, and for the elected officials responsible for dealing with the state's pension crisis, the moment is nearly at hand.

Gov. Matt Bevin has promised to call a special legislative session this fall to tame the state's pension debt — which he estimates at a whopping $15,000 for each of Kentucky's more than 4 million residents.

Anticipation is building because the governor is still developing — and has not revealed — his proposals.

The stakeholders include more than public retirees or current teachers and government workers who may be nervous about their benefits.

You are a stakeholder. That's because any solution will have a profound effect on funding for the services you receive.
How big is Kentucky’s pension problem?

Big. It can be fairly called a crisis.

The latest official reports put Kentucky’s pension debt at $33 billion, plus $6 billion for retiree health plans. That means Kentucky is at least $39 billion short of what it needs to pay off pension and health care obligations for retirees over the next 30 years.

That number will go up to at least $43 billion because of new, more conservative assumptions adopted for Kentucky Retirement Systems plans this year.

The Bevin administration says the debt is actually much worse. Its new website puts the debt figure at more than $64 billion for pensions plus the $6 billion for the retiree health plans.
What is the "inviolable contract," and does it mean my benefits are safe?

Pension recipients and employees say they are protected by an “inviolable contract” – language within state law that guarantees they get the benefits promised when they were hired.

But others — the fiscally conservative Bluegrass Institute, for instance — have different opinions of exactly what is protected by the inviolable contract. And then there are a few important parts of current benefits for teachers that all sides agree are not protected, such as a benefit that lets teachers accumulate unused sick days over their careers to enhance their benefits.

This question will be a lot easier to answer after the Bevin administration consultant (PFM Consulting Group) issues a report on Monday with options on how the pension crisis can be addressed.

Is Kentucky’s pension problem the worst of any state?

Kentucky is clearly among the worst.

Last September, Standard & Poor’s ranked Kentucky’s pension funds as the worst-funded of any state, with just 37.4 percent of the money it needs to pay obligations to retirees. Moody’s has ranked Kentucky as having the third-highest pension debt when measured against a state’s capacity to pay it off.
One of Kentucky’s pension plans — the one that funds pensions of most state government retirees — is the worst-funded public pension plan in America with less than 16 percent of the money it needs to pay obligations.
Are Kentucky’s pension benefits too generous?

The benefits in Kentucky Retirement System plans compare “highly favorably” to those offered by Kentucky’s 12 largest private employers, according to PFM Consulting Group, a consultant retained by the Bevin administration to look at the pension problem.
PFM noted that private-sector employers have largely shifted to 401(k)-style retirement plans and rarely offer retiree health care benefits.

PFM reports teachers also get a "comparatively generous overall benefit." The consultant reported that teachers can retire at any age with 27 years of service or at age 55 with 10 years of service. "As a result, according to actuarial reports, the average age at retirement of a TRS member is 55 - below the age when teachers in many other states are even eligible for full benefits," PFM reported.

Kentucky public employees and retirees say that they make, or made, much lower salaries than their private-sector counterparts and their total compensation of wages plus benefits is lower overall. The promised benefits, many say, are why they took a lower paying job. They note they've given up some benefits in reform efforts of the last decade. And they warn a reduction in benefits to current workers and teachers will trigger an exodus that will drive up pension costs and hurt the quality of public services.
How did we get into such a big mess?

For the past 20 years or so, the state did not put in nearly enough money.

For most plans over that time, governors did not propose, and the legislature did not appropriate, as much into the plans as was needed. These governors and legislatures were frequently struggling to fund schools and other needs amid recession economies.

Also, in the 1990s when the pension plans were fully funded, the General Assembly approved benefit increases without funding them — including an expensive cost of living benefit increase for Kentucky Retirement System members in place between 1996 and 2012.
Immediate pension action needed; Kentucky's economic stability at risk | Kent Oyler
Kentucky’s public pension systems are in crisis. The issue is sprawling and complicated for sure, but we simply cannot afford to defer action. Do not believe those that say this is a matter of differing opinions. This is a math problem and the numbers are ominous. Our elected leaders must enact realistic solutions quickly if we are to maintain our state’s economic stability.

It is an understatement to say that Kentucky’s eight pensions systems are severely underfunded. Current estimates suggest that the commonwealth’s taxpayers must come up with an extra $1 billion each year for the next 30 years just to make up for the shortfall. To put that into perspective, Kentucky’s entire state budget is only $10.6 billion. The accumulated liabilities associated with public retirement systems affect every aspect of our state’s financial security.

If our commonwealth’s bond rating continues to plummet in the face of all of this debt, we will see less economic activity and even higher borrowing costs. Necessary spending cuts will significantly reduce funding of vital public services including K-12 schools, colleges and public safety. We cannot continue to bury our heads in the sand. We must act in 2017 to save these troubled systems, or we will find pensions consuming a greater and greater share of our budgets.

The first thing legislators must do is to pass a long-term plan to ensure the longevity of the retirement system. Other states have taken steps to pay down their unfunded pension liabilities by using a level dollar approach, similar to how most of us pay down our home mortgages. The current method of paying a percentage of payrolls is, according to the PFM report, the largest contributing factor of the unfunded liabilities.
Kent Oyler is president and CEO of Greater Louisville Inc.
Kentucky pension crisis: Retirees ask board to protect their benefits
FRANKFORT, Ky. — The Kentucky Retirement Systems board deferred action Thursday on requests that it urge Gov. Matt Bevin and lawmakers to protect current benefits of public workers and retirees when they consider pension reform later this year.

Bevin appointed most of the board's members including its chairman, John Farris, who anticipated the requests and remarked at the outset of the meeting that the board oversaw the systems and managed its investments, but did not "set pension policy."

During the public comment portion of the meeting Jim Carroll, president of the advocacy group Kentucky Government Retirees, asked the board to pass a resolution announcing its intention to defend the constitutional rights of retirees and employees — even if it meant going to court.

While Carroll's request produced no action, later in the meeting one of the board members, Jerry Powell, who was not appointed by Bevin but elected to the board by members of the County Employees Retirement System, made a motion that the board urge Bevin and the legislature to honor the contractual rights of all public employees.
Among those recommendations are some that advocates for retirees and employees say violate the so-called "inviolable contract" within state law that assures benefits granted an employee at the time of his or her employment will not be diminished.

Carroll said after the meeting that past retirement system boards, and similar boards in other states, have taken such positions advocating rights of their members.

"We either have contract rights or we don't. This board either has a duty to enforce those rights, or it doesn't," Carroll said. "If it has taken a position that it doesn't have that duty, I would like for them to transparently explain why they don't believe they have that duty."
Lawmakers Tell Public Employees 'Don't Do Anything Rash' at Pension Town Hall
Some Kentucky lawmakers say drastic recommendations issued to pay down the state’s pension debt have no legislative support.

Legislators from south central Kentucky addressed a packed room last night of public workers and retirees in Bowling Green concerned about how pension reforms will change their benefits. Among them was Terry Eidson who retired from state government in 2006.

"Employees and retirees are feeling a little devalued and demeaned in all this, and it just doesn't sit well," Eidson told WKU Public Radio.

Kentucky has a pension deficit of at least $30 billion, threatening the state’s ability to pay retirement benefits for current and future retirees. In order to return the pension plans to solvency, consultants have recommended an end to defined-benefit pensions for public employees in favor of less generous defined-contribution accounts and a raise in the retirement age to 65 for most workers.
Special Report: Ky. pension obligations loom in the Tri-State
ASHLAND The Kentucky pension crisis will shred the budgets of this region's Kentucky counties and cities in two years if profound changes aren't made to the system, according to a memo recently sent to government leaders throughout Kentucky.

On Sept. 7, the office of Kentucky State Budget Director John Chilton sent a lengthy correspondence to all Kentucky governments enrolled in the County Employees Retirement System. The memo projects staggering pension payment increases across the state along with huge cost increases for Boyd, Carter and Greenup counties — and local municipalities — over the next two years in the CERS system.

Chilton wrote in the memo that rates for pension contributions are expected to be "substantially higher" starting in the 2018-2019 fiscal year. Chilton's memo goes on to break down stagggering cost increases for just the CERS system.

In this region, the city of Ashland faces combined payment increases of nearly $2 million for just one year to pay pension obligations for hazardous and non-hazardous employees in the CERS starting in Fiscal Year 2018-2019. In Fiscal year 2017, the city's contributions to the CERS system were a combined $3.3 million. By fiscal year 2019 that number is projected to jump to a combined $5.3 million for one year.

The city of Flatwoods faces a nearly $100,000 increase, or 50 percent spike, in just one year to meet its pension obligations for non-hazardous employees. The city of Morehead is looking at nearly $300,000 in increased costs for a single year to fund its pension obligation for hazardous and non hazardous employees. In Greenup and Carter counties, public institutions are looking at the same types of numbers -- the Greenup County Board of Education faces a $400,000 increase in pension obligations in just one year. The Carter County Board of Education is looking at a $583,000 increase in just one year.

And, perhaps most importantly, those projected increased costs are just for the CERS system, meaning actual cost increases when contemplating all of Kentucky's retirement systems will be exponentially higher. In regards to school boards, for example, the CERS enrollment usually pertains to bus drivers, teachers aides, etc. It does not represent the costs associated with certified personnel, meaning the increased pension costs to school boards will likely be profoundly higher than what is represented in the CERS numbers.
Kentucky’s pension problem stems from defined benefits system
There are two types of pension systems: the defined benefits program and the defined contributions program. It is telling that private employers totally abandoned defined benefits pensions in the 70’s and 80’s, while almost all public-sector employers still rely on defined benefits pensions. Private sector employers pay for pensions with their own money, while public-sector employers pay for pensions with someone else’s money.

The mountain of unfunded pension liabilities is entirely due to Kentucky’s addiction to defined benefits pension programs. On a per capita basis, Kentucky holds the seventh highest unfunded liability of all states. The state cannot begin to recover until it eliminates defined contributions.

A defined benefits pension system is one that promises to pay the retiree, say, 80 percent of their highest real salary and complete medical care until they pass, while a defined contributions system promises to pay the retiree whatever was paid into his retirement and matched by the retiree before retirement.

There are two brutal facts faced by employers under defined benefits. The employer has absolutely no control over the future cost of healthcare or the retiree’s future cost of living. On the other hand, the employer is not responsible for future healthcare cost nor the cost of living under defined contributions retirement systems.

Some readers may be concerned that the typical retirees are in no better position to judge these future costs than are their employers. This is true, but there are cheap and sophisticated, highly diversified investment funds designed to provide for secure retirement. Every reputable private money management firm has access to these products.

Why does something with such adverse consequences have such a lasting grip on our state government? The answer is because defined benefits pension systems give rise to a multitude of opportunities for corruption — like the five pension fund managers in the Kentucky system who had no experience or qualifications in managing investment funds. Management of those funds allows the manager to direct the funds to his cronies, lowering the yield on the fund and weakening the pension system. In some states, members of the legislature can pass special bills that make their friends eligible for the defined benefits pension system. Their access is typically unfunded by the bill.

By far and away the most corrupting feature of the defined benefits pension system is the role it plays in state budgeting. Under the established budgeting system, the state budgeters must estimate the return they will earn on the pension funds and estimate how much the pension liabilities will grow. The difference between the growth in liabilities and what they will earn on current pension funds is the amount they must withdraw from general revenues and add to the fund. For year after year, they under estimate the amount to be deducted, so the unfunded pension liabilities grow and the state spends more than it is entitled to spend.
This steady hemorrhage of pension funds will not be stopped until the state abandons defined benefits retirement systems. This eventually would be achieved if all new hires were given defined contribution retirements.

Furthermore, defined benefits retirement systems are a cancer on the state’s creditworthiness. The mountain of unfunded liabilities will cause a significant downgrade in the state’s bonds and that will cause significant reductions in state services across the board. This is the dreaded “Greek solution.” Note, this cannot happen under a defined contributions retirement system because the state is required by law to make the necessary payments to third parties who manage the retiree’s funds — there is no “fudge factor” in the system.

Bob Martin is Emeritus Boles Professor of Economics at Centre College.
Local governments, schools would be hit hard by pension hike
A substantial proposed increase in mandated employer funding to shore up the state retirement system could have a large impact locally. The increase and other cuts already have Warren County Public Schools looking at a potential tax increase.

Last week, the state budget office sent a letter to employers in the County Employees Retirement System outlining proposed increases in the employer contribution for the coming fiscal year.

The city of Bowling Green would be hit hardest by the hike, costing it an additional $3.6 million a year; followed by WCPS, $1.6 million; Warren County government, $743,000; and the Bowling Green Independent School District, $651,000.

The percentage increase varies by classification of employee. Currently, agencies contribute 19.18 percent of an employee’s salary for jobs classified as nonhazardous, a figure proposed to be increased to 28.86 percent. For employees in the hazardous job category, the proposed increase is from 31.55 percent of an employee’s salary to 56.17 percent.

For school districts, the hike comes on top of expected budget cuts, as Gov. Matt Bevin ordered state departments last week to cut their budgets about 17 percent.
The large hike is being proposed as a way to shore up the troubled Kentucky Retirement System, of which the CERS is a part.

Bowling Green Assistant City Manager Katie Schaller-Ward said the city had inclinations the proposed hike was coming, so city officials “will review the budget and determine where we can extract” the extra funds.

“We were expecting a number like this,” she said, adding that the legislature could modify that proposed increase. “We’re hoping for a compromise,” she said.

There has been repeated discussions of a possible special legislative session to deal with the state’s pension crisis, but no session has been scheduled.

Warren County Treasurer Greg Burrell estimated the increase to the county from the pension funding hike would be about $743,000, adding that the county had not yet formulated a plan to deal with the increase.

The long-discussed CERS hike prompted Bowling Green city commissioners in August to pass a nonbinding resolution seeking a split of the CERS from the KRS.

The state retirement system, which administers the CERS as well as other public employee retirement systems, has a reported $26 billion or more in unfunded liabilities. The CERS is the most solvent of all the retirement funds under KRS and has about $12 billion in assets – 73 percent of the total assets in the KRS.

The Kentucky League of Cities, which represents city and county governments, has been pushing for years for a separation of the CERS from the KRS.

The state legislature would have to approve a CERS split from the KRS.

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Kentucky pension crisis: Plan calls for Louisville workers to exit troubled state system
Metro Council plans to take up a bipartisan measure this week calling for local public workers to be separated from a woefully underfunded state pension plan, a move that would fly in the face of a consultant's recommendations to Gov. Matt Bevin.

Under the nonbinding proposal that will be voted on Thursday, city and Jefferson County Public Schools employees would leave Kentucky Retirement Systems, an umbrella system that includes the County Employment Retirement System under which they are covered. (The move would not include teachers at JCPS, who are covered by the Kentucky Teachers Retirement System.)

"Cities and counties have always paid what was asked of them," said Councilman Bill Hollander, a Democrat who is sponsoring the measure along with Republican leader Robin Engel. The county employees system "is much better funded than any of the other systems, and it's on an upward trajectory. Changes may need to be made, but they should be made by people who are interested in local retirement funds."
Kentucky pension crisis: Metro panel supports splitting local workers from state system
After back-to-back hearings Thursday, a Metro Council committee advanced a measure that supports getting most local workers out of the troubled Kentucky Retirement Systems.

The largely symbolic vote comes as public employees, city leaders and state lawmakers wait anxiously for Gov. Matt Bevin to call a special session that will tackle pension reform.

Bevin's administration says the state's pension debt is at least $64 billion. The city's retirement costs are expected to skyrocket from $76.5 million this year to $120 million next year, and Jefferson County Public Schools' cost would go from $36.4 million this year to $54.8 million.

By a voice vote, the council's government accountability committee approved a resolution that calls on the state legislature to take city and most Jefferson County Public Schools workers who are under the County Employment Retirement System away from the state system.

Council Republican leader Robin Engel, who co-sponsored the resolution with Democratic leader Bill Hollander, said he was pleased with the information about the need to separate CERS. But he urged the committee to slow down and get more input, particularly from any opposition.
"It could be weeks before the governor calls a special session," he said. "Why push this in a quick fashion without getting more dialogue out there?"

But Hollander said it is important to push the measure through quickly to convey the city's message.
"At some point in the near future, none of us know exactly when, the governor will put out a call for a special session," he said. "And I think it's important that the potential separation of CERS be on that call. I would hate for us to be considering something and the governor to put out a call and we haven't had our voice heard."

An hour earlier, Kentucky League of Cities officials made an impassioned case to the council's Budget Committee arguing that CERS plans are far more solvent than other retirement plans within Kentucky Retirement Systems.

401(k) s
Jason Bailey: Proposed 401Ks cost most than Kentucky’s existing defined benefit pension plans
The 401k-type defined contribution (DC) plans proposed by PFM in their final report would cost more than Kentucky’s existing defined benefit (DB) plans, according to data from PFM itself and the systems’ actuaries.

Under a switch, the state would pay more for a plan that reduces the retirement security of its workers.

PFM’s proposed DC plan would require employees to make a minimum three percent contribution to their accounts and employers to make a minimum two percent contribution. The employer would then be required to match 50 percent of employee contributions up to an additional 6 percent, and there would be vesting requirements for employees to access what employers contribute. For workers in the Kentucky Employees Retirement System (KERS) and County Employees Retirement System (CERS) non-hazardous plans (along with the judicial and legislative systems), PFM projects the average employee will put in 6.5 percent of salary in total with a net employer contribution of 3.2 percent.

The DC plan would replace the existing hybrid cash balance plan for new employees in those systems, which the state put in place in 2013 (and is known as Tier 3). However, the cost for employers of the cash balance plan is very low already. The price tag for a pension plan is known as the normal cost, which is what actuaries say must be contributed each year so enough money is in the systems to pay workers’ benefits when they reach retirement (the other part of pension costs are catch-up payments when past contributions are not made and/or assumptions not met).

For workers in the KERS non-hazardous plan, the employers’ normal cost is only 2.24 percent of a worker’s pay, according to Kentucky Retirement Systems (KRS), with employees contributing 5 percent (employers’ normal cost is 1.27 percent of pay for CERS non-hazardous). That number is lower than the 3.2 percent employer contribution described above for the proposed DC plan, as shown in the graph below.

PFM’s plan would also put new teachers in a DC plan, which would necessitate moving them into Social Security (that’s because their DB plan is a Social Security replacement plan but a 401k-type plan is not). The employee and employer cost for the DC plan is similar to the cost for other state employees, but both employers and employees would also each need to make the required 6.2 percent contribution to Social Security.

However, Social Security in itself is more expensive than the employer normal cost of the existing DB plan for teachers, which is estimated at 5.84 percent of pay, and the total cost of the new plan is much higher, as shown in the graph below. PFM admits to this additional cost in their report, but says already-strapped school districts rather than the state could pick up the cost of Social Security contributions.
[img] [/img]
In both cases, then, moving to a 401k plan would increase costs to fund retirement benefits for new employees rather than reducing them. And of course any change for new employees does nothing to reduce Kentucky’s substantial unfunded liability from the past, which is the major challenge the state faces.

But the added cost of switching to 401ks is even higher than that, because a switch involves closing the existing defined benefit plans to new entrants. As we note in our recent report, that will make it more expensive to pay off the closed plan’s liabilities over the coming decades. The added cost comes from the closed plan no longer being balanced by workers of different ages, which means it must take on a more conservative investment portfolio that will earn lower returns.

Studies from 14 states have shown that closing a plan makes it more expensive to pay off legacy debts.

What’s more, these added costs would result in substantially lower retirement benefits for employees. As the graph below shows and as we describe here, it costs 42 to 93 percent more to provide the same benefit through a DC plan that an employee receives through a DB plan. DC plans are inefficient, earning lower investment returns and, unlike DB plans, not allowing workers the protection of insuring against each other about how long they will live.

Kentucky needs ideas that work to reduce its unfunded pension liabilities. Moving employees into 401k-type DC plans is actually more expensive, increases the cost of paying off existing liabilities and harms retirees while making it much more difficult to attract and retain a skilled workforce.

Jason Bailey is founder and Executive Director of the Kentucky Center for Economic Policy. He is the author of numerous reports and analyses of economic and fiscal issues facing the Commonwealth
Pension crisis: 401(k) factor
FRANKFORT, Ky. - To the taxpayer, the solution to Kentucky’s pension crisis may seem simple: Just move those public employees from pensions to a 401(k).

Indeed, Kentucky’s pension consultant — PFM Group — recommended that very thing when it released a report in August calling for moving state and local government employees in non-hazardous jobs to a 401(k)type benefit plan — as well as teachers hired in the future.

The move, PFM says, would stabilize costs and significantly reduce the state’s risks — particularly the risk that pension plan investments will not perform as expected. Reducing risk, PFM said, is a “particularly critical” goal given the severe funding shortages in a pension system that’s saddled with debts of at least $40 billion by official estimates but that the Bevin administration says actually exceed $64 billion.

“I’m hoping public pension reform is not the kind of easy solution of, ‘Oh, the private sector does it, why don’t we?’ ” said J.P. Aubry, associate director of state and local research at the Center for Retirement Research at Boston College. “We want to encourage retirement security, and the current model for retirement in the private sector has made retirement more precarious.”

Keith Brainard, research director for the National Association of State Retirement Administrators, said risk doesn’t disappear under a 401(k) plan.

“These proposals shift that risk from the state and its public employers and taxpayers and put it all on the workers. In fact, there’s going to be more risk because they are no longer in a group that can manage the risk much better,” he said.

Whether the moves actually will save the state money is a question being hotly debated.

Jason Bailey, executive director of the Kentucky Center for Economic Policy, of Berea, said, “Moving employees into 401(k)-type plans is actually more expensive … and harms retirees while making it much more difficult to attract and retain a skilled workforce.”

Not so, says Bevin administration Budget Director John Chilton.

“The narrative that it costs more to enroll new employees and new teachers in a defined contribution retirement plan is false. The truth is, switching doesn’t cost any more taxpayer dollars,” Chilton said in a short statement. “The PFM report shows it will also provide a generous retirement benefit for future teachers and state workers.”
Aubry, of the Center for Retirement Research, said reducing risk to the state is important, though he said it will do little if anything to reduce the current large debt. And he warns that there are “serious potential issues with retirement security” under the design of most current defined contribution plans.

“The biggest concern is that employees and employers very often do not contribute enough” to a 401(k) plan, Aubry said.

He said the average balance for people age 55 to 64 in a 401(k) or individual retirement account is $111,000. “That’s far less than needed for a secure retirement,” he said.

Brainard, of the National Association of State Retirement Administrators, said only three states (Alaska, Michigan, Oklahoma) and the District of Columbia use a 401(k)- style approach as their only or primary benefit plan, though several others offer optional or supplemental employee savings plans.

Brainard said in designing a 401(k)type plan, Kentucky policy makers need to keep in mind one principle.
“There are reasons for providing a retirement benefit and they all really revolve around the ability of the state and its political subdivisions to attract and retain the talent that it needs,” Brainard said. “... One risk that needs to be considered is the risk that services will not be able to be delivered in a costeffective and timely manner.”
Dorsey Ridley: Kentucky’s public pension faces very real challenges not met by switching to 401Ks
While I appreciate the Governor’s efforts to address Kentucky’s pension challenges, I fear the proposals would only enhance our problems further. Kentucky’s public pensions face very real challenges, but imploding the pension systems that provide benefits promised, and legally protected, to our current and retired public employees — city, county, state, teachers and other school staff — is not the way to solve the crisis.

Some Philadelphia consultants hired at $556,300 and paid nearly $1.2 million in Kentucky taxpayer money (You literally cannot make this stuff up.) recently recommended switching most public employees to a 401(k)-type retirement plan as a way to “save” public pensions.

It’s as if anti-pension ideologues are using the smoke screen of a “crisis” to get rid what they’ve long sought – the dismantling of public pensions in Kentucky. Pensions aren’t the enemy. It is the retirement plan 14 percent of Kentuckians depend on, according to The Lexington-Herald Leader.
The average pension benefit in Kentucky is $1,983 a month, or $23,791 per year, according to the National Institute on Retirement Security. A less secure retirement from a 401(k)-type retirement plan would cause an increase in public welfare spending as more workers retire into poverty. Pensions also support local economies and help Kentucky communities thrive. The institute found that each $1 paid out in pension benefits supports $1.43 in total economic activates in communities like Henderson.
Shifting public employees to a 401(k)-type retirement plan would not reduce the liabilities but will make the funding challenge worse, according to a report by the Kentucky Center for Economic Policy. It would also undermine the Commonwealth’s ability to attract a skilled workforce and would weaken local economies. Kentucky public employees already make less in total compensation than comparable workers do in the private sector, according to the report.
A switch to 401(k)-type retirement plans would close the existing pension plans to new members, which would lower investment returns on the existing plans’ assets over time, according to the report. That would increase the costs to pay down the unfunded liabilities – exactly the opposite of the goal I thought we were trying to achieve.
One needs to look no further than the states that have closed their pension systems to learn of the costly ramifications that follow. In 1997, the Michigan State Employees’ Retirement System pension plan was closed and new hires were placed in a 401(k)-type retirement plan, like the one those Philadelphia consultants recommended for Kentucky. At the time of the closure, the pension was funded at 109 percent, according to the National Public Pension Coalition. With no new employees paying into the pension and an aging demographic, plan costs soared and the funding level dropped. By 2012, the plan was severely underfunded at 60.3 percent, according to the coalition. After 20 years under the 401(k)-type retirement plan, the state’s Office of Retirement Services found that the median balance in these accounts was just $37,260.
Governor Bevin has promised that he is going to call us into a special session to address the pension issue. Thus far, I have not seen a proposal from the Governor or the Republican leadership, but be assured, I will keep you up-to-date on any developments.
We will return to Frankfort January 2, 2018 for the budget session. I encourage you to stay in touch to share your input on the issues facing our Commonwealth. You may leave me a message by calling the toll-free Legislative Message Line at 800-372-7181. You can also e-mail me directly at Dorsey.Ridley@LRC.KY.GOV.

Dorsey Ridley is a Senator from the District 4 that includes Caldwell, Crittenden, Henderson, Livingston, Union and Webster counties. He is Minority Caucus Chair.
Despite the smaller relative size of its burden, Kentucky is considering making far more comprehensive changes to its public sector retirement systems than Illinois ever has.

Kentucky’s state pension crisis is bad – one of the worst in the nation. But it isn’t as dire as that of Illinois, and the governor of the Bluegrass State wants to keep it that way.

Kentucky Gov. Matt Bevin is promoting 401(k)s as the main solution to the state’s crisis going forward, even though Kentucky’s retirement debt burden per household is just half of what Illinoisans face.

Kenucky’s pension debt has grown significantly over the past decade. The state’s pension systems were almost fully funded in 2000, but have been declining ever since. Now, lawmakers are looking for solutions so retirement costs for government workers don’t get worse.

“The net result…[is] something more like a 401(k)-type, defined contribution type, with matching, with the ability to be portable. And that’s in line with what’s happening everywhere else in the real world, and frankly it’s what will have to happen,” Bevin said.

Each Kentucky household is on the hook for $22,600 in pension and retiree health insurance debt. That amount, by any measure, is already at crisis levels. Illinois’ pension crisis, by comparison, is about double that, with households burdened with over $43,000 in retirement debt.

Kentucky pension crisis could force dedicated teachers out of classroom
MARSHALL COUNTY, KY – How will Kentucky’s pension crisis affect your child’s education?

The recommendation from consultants that some state retirees convert to 401Ks instead of a state pension plan has left some state workers desperate for answers.

Public school systems across the state have asked for help. Tuesday’s is one of several forums where state leaders are meeting with local teachers to answer their questions and address their concerns.

State leaders are hoping they’ll inspire teachers to talk to their legislators, while teachers say they feel the state broke a promise.
Right now, 13,500 teachers are eligible for retirement in Kentucky. That’s why state education leaders say if we don’t fix the pension problem, your child’s education could be at risk.
Kentucky Education Association President Stephanie Winkler says that’s why they’re helping host the forums, hoping they can ease fears in the teaching community. They also encourage teachers to contact their lawmakers.
Winkler says if the state went to a 401K plan for teachers, most teachers would walk away with $30,000 to $40,000 for the rest of their retirement.
Kentucky pension crisis: Are 401(k) plans the solution?
Save money, or cost more?

McNeeley said the recommendations on shifting to 401(k)-style plans would lead to reduced spending for each plan in the short and long term.

He pointed to tables in PFM's recent report that show the recommendations would save $123.8 million in 2018-19 — savings that would grow to $212 million in 2028-29.

But Bailey, of the Kentucky Center for Economic Policy, said his study of the PFM report does not show how the consultant arrives at those savings, or whether they account for additional costs such as the cost for either the state or local school boards to cover Social Security payments for new teachers.

Consider this: Hey, the stock market is up. Doesn’t that help?

Last month Bailey and groups representing public workers released a report concluding that the move to 401(k)s would cost more. That's because shutting down existing plans that still must pay off accumulated liabilities would no longer have new employees joining them.

"The added cost comes from the closed plan no longer being balanced by workers of different ages, which means it must take on a more conservative investment portfolio that will earn lower returns," Bailey said.

Bailey emphasizes that pension reforms of 2013 already put new hires into a hybrid plan that combines features of a traditional pension and a 401(k). The state and local government costs for new workers under this plan is already very low.

Bailey said his analysis of the PFM report and Kentucky Retirement System's data shows the government's costs would be slightly higher under the proposed 401(k) approach for future hires.

Reporter Tom Loftus can be reached at 502-875-5136 or

Consultant ideas on Ky. pensions violate law

Kentucky has the strongest public-pension contract protection of any state in the country. The legislature long ago created the “inviolable contract” for all the major plans, and the Kentucky and U.S. Constitutions prohibit any legislative impairment of contracts.

According to Kentucky statutes, employee benefits are “not subject to reduction or impairment by alteration, amendment or repeal.”

Kentucky, in contrast to every other state, has spelled out in statutes exactly what the pension contract consists of, leaving no room for judicial interpretation. Virtually all the significant recommendations for pension reform made by PFM, Gov. Matt Bevin’s consultant, require amending those inviolable contracts.

In fact, only a few of PFM’s recommendations specifically suggest rolling back provisions “not subject to the inviolable contract.”

What if the lawyers all reached the same conclusion we have about the inviolable contract, but didn’t want to acknowledge it?

Let’s examine what happened in Illinois. Gov. Pat Quinn averaged one bond rating downgrade every 181 days, with the ratings agencies always citing the unfunded pension liabilities. Desperate to stop the hemorrhaging, he pushed pension reform through the legislature in 2013, despite abundant warnings of the obstacle in the Illinois Constitution.

A major Chicago law firm, which today boasts over 1,700 lawyers, produced a memorandum supporting the governor’s position, and the legislature bought it.

Two years later, the Illinois Supreme Court unanimously rejected that giant firm’s arguments.

When the Illinois Supreme Court struck down the pension law, Illinois wound up with embittered state employees (who concluded their elected representatives did not care about them) and frustrated taxpayers (who concluded their elected representatives were incompetent, or worse). Today, businesses and individuals are migrating out of Illinois, making a bad situation worse.

What happened to Illinois’ bond ratings? In June 2013, before the pension reforms, Moody’s cut Illinois to an A3 rating. In July 2017, again citing the unfunded pension liabilities, Moody’s downgraded Illinois again, this time to Baa3, one notch above junk status.

In July 2017, Moody’s downgraded Kentucky to Aa3, barely above where Illinois was in 2013.
Kentucky could do the same if it transitioned its defined benefit pensions to the Canadian model, sharing risks among employees, retirees and taxpayers.

In addition, Kentucky could expand the size of its fund by creating a savings system for the 50 percent of Kentuckians without a retirement plan. One possible model could be based on the Pension Fund for the Christian Church.

Churches contribute 14 percent of ministers’ salaries and housing allowances, liabilities (money owed to retirees) are calculated with a 4.5 percent discount rate, benefits can be enhanced if the plan is more than 120 percent funded, and ministers generally begin drawing at age 65. Pension credits accrue at 1.5 percent of salary annually.

One could imagine different contribution levels for a Kentucky plan, perhaps at 5 percent, 10 percent and 15 percent, with accruals reduced accordingly.

Options exist, but are not being considered. Kentucky can choose to be world class or last in class. Go ask the local Christian Church minister what he or she thinks about the pension fund.

Fred Cowan is a former attorney general of Kentucky and retired circuit judge. Gordon Hamlin is president of Pro Bono Public Pensions.
They’re called Save Our Pensions. Here’s why many Kentucky retirees don’t trust them.
It took less than 24 hours after a government-paid consultant offered radical recommendations to fix Kentucky’s ailing pension systems for a shadowy group called Save Our Pensions to launch its first online video ad.

The ad, like the recommendations, was drab and drastic, threatening millions in cuts to education and health care if the legislature does not solve the pension crisis, presumably by slashing pension benefits for public workers and retirees.

“Save our pensions,” the ad concluded. “Save education and health care. Urge your representative and senator to support pension reform.”

It’s the “our” in Save Our Pensions that some government workers and retirees take issue with.
The group is run by three longtime conservative activists — Bridget Bush, Karen Sellers and John Triplett — according to filings with the Secretary of State’s Office. All three ran the Kentucky Opportunity Coalition, a non-profit group that supports conservative polices and paid for ads in support of Senate Majority Leader Mitch McConnell during his 2014 re-election campaign.

A message left for Bush at her office went unanswered, but around the same time as the call, her husband was being honored by McConnell and sworn in as a federal judge.

The Kentucky Education Association, the Fraternal Order of Police and retiree advocacy groups have all said they do not agree with the tactics of Save Our Pensions.

“My thing is, when they say ‘save our pensions’ I would like to know who they mean by ‘our,’” said Nicolai Jilek, the legislative representative for the Kentucky Fraternal Order of Police.

The group pushes a message that highlights the severity of Kentucky’s pension crisis and stresses the possibility that lawmakers will have to drastically cut other vital services to pay for the pensions they have promised public workers.

“It’s a divide and conquer thing where they’re pitting us against children and people that need Medicaid services,” said Larry Totten, the president of Kentucky Public Retirees. “We think that’s unfair.”

Kentucky’s pension system is one of the worst funded in the nation, with an unfunded liability of $40 billion or more. Bevin has promised to call a special legislative session this year to deal with pension reform.
Kentucky pension crisis: Save Our Pensions group secretive but mirrors Bevin's reform message
FRANKFORT, Ky. — The nonprofit organization called Save Our Pensions, Inc. declined this week to disclose the names of its donors or answer other questions about its relationship with the Bevin administration or its advertising plans as an apparent special legislative session on pension reform draws near.

But its limited disclosures and activities to date show Save Our Pensions is a conservative pro-business organization that is advertising a message that is similar, if not identical, to that of Gov. Matt Bevin.

And it shares the same chair and directors as another conservative non-profit group called Kentucky Opportunity Coalition, which has been operating for a decade and ran a big advertising campaign for the re-election of U.S. Sen. Mitch McConnell in 2014.

The chairwoman, Karen Sellers, a Paintsville healthcare executive, asked in a brief telephone interview this week that questions about the organization be emailed to her. But in response to an email from the Courier-Journal asking 10 questions about the organization — including a question asking to identify its donors, Sellers answered none.
By law, it is the type of organization not required to disclose its donors.
It established itself as a “social welfare” organization under section 501(c)(4) of the Internal Revenue Service code. Such organizations have become popular in recent years to launch advertising campaigns to promote public causes and issues.

As long as they do not have a primary purpose of engaging in political campaigns, they can accept contributions of unlimited amounts and not disclose their donors. And if they do not hire a lobbyist to lobby lawmakers, they do not have to register and disclose their expenses to the Legislative Ethics Commission.

All three directors listed in the Save Our Pensions articles of incorporation are registered Republicans. Besides Sellers, other directors are Bridget Bush, a Louisville attorney who is the founder of the Elephants in the Bluegrass blog, and John Triplett, an Inez attorney.

Kentucky Lawmakers Turn to Casinos to Fix $33 Billion Pension Shortfall Crisis

Kentucky is facing a pension deficit of alarming proportions. By the latest conservative estimates, the Bluegrass State is some $33 billion short of the funds it needs to pay retired public employees over the next 30 years. And now, two State House Democrats believe that casino expansion should be at least a part of the solution to that shortfall.
On Monday, representatives Dennis Keene (D-Wilder) and Rick Rand (D-Bedford) pre-filed Bill Request 149, legislation that proposes the legalization of casino gaming via a constitutional amendment, to be decided by public referendum.
If successful, the bill would authorize up to 10 facilities across the state, which, once up and running, would generate as much as $500 million in taxes every two years, according to the two lawmakers.
Betting on Casinos

In a joint statement on Monday, Keene and Rand said that it would at least be a “step in the right direction” towards addressing the pension deficiency.
“Casinos are already located along all of Kentucky’s borders and those states are reaping the benefits of additional tax revenues,” said Keene and Rand in a statement. “Kentucky’s lottery gambling is highly successful and by expanding existing gaming venues to allow for casino-type games, we will grow a new revenue source to help us catch up on the pension shortfall.”

NKY lawmaker: Pay off pension debt with casino revenues
Casinos in Kentucky might seem less likely than ever with Republicans in complete control of state government.

But that hasn't discouraged Northern Kentucky Rep. Dennis Keene, D-Wilder, from floating the idea of using gambling revenue as a way to pay the state's $40 billion pension debt.

"This is the start of the discussion," Keene said. "I'm refusing to look at that and say 'You can't do that.' At least this is something positive."

Keene and state Rep. Rick Rand, D-Bedford, introduced a constitutional amendment Monday to allow casinos in Kentucky. It would generate $325 million in one-time fees and an estimated $236 million in annual revenue.

The idea has at least one powerful opponent, Republican Gov. Matt Bevin.

Bevin said earlier this month in an interview with WHAS radio in Louisville that he won't allow expanded gambling while he's governor. The benefits of expanded gambling don't outweigh the "societal costs," Bevin said in the interview with host Leland Conway.

Even when Democrats controlled the House and the governor's mansion under Gov. Steve Beshear, casino legislation failed. Many Republicans and conservative Democrats opposed the expanded gambling on moral grounds, despite efforts by the Beshear administration to get it passed.

But Keene said he hopes the desperate fiscal situation in Kentucky will sway minds. He put the onus on Republicans.

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Process begins to revoke Corliss’ pension
The now-retired police lieutenant is convicted of stealing more than $8,000 from the city.

QUINCY – The retirement board is beginning proceedings to revoke the pension of Thomas Corliss, the former police lieutenant convicted of stealing thousands of dollars from the city of Quincy.

The hearing likely will start at the board’s Nov. 19 meeting, said chairman George McCray.

In June, a jury in U.S. District Court in Boston convicted Corliss of 10 federal felony counts of mail fraud and one of embezzlement. Corliss soon retired from his position as police lieutenant after the city began termination proceedings against him.

Corliss, a Hanover resident who at one point commanded the city’s SWAT team and special-operation motorcycle unit, was sentenced earlier this month to a year and a day of federal prison time starting Oct. 17.
The convictions stemmed from instances of “double dipping” – illegally gaming the payment systems such that he was paid for overlapping shifts of work, training and comp time. In total, he was convicted of stealing $8,211 in this way.
Corliss, who was the city’s top earner for a couple of years, bringing home $265,000 in 2015, retired shortly after his conviction when the city began termination proceedings against him.

He has been collecting his pension since his retirement. When they retire, police officers can receive annual pensions of up to 80 percent of the average of their best three years of base pay. In 2015, the last full year he worked for the department, Corliss made $161,071 in base pay, according to city documents. The rest came from overtime and details.

McCray said that the retirement board will begin to receive court documents about the retired lieutenant. McCray said that there’s two main questions that have to be answered when considering revoking someone’s pension: Did the person commit a crime, and, if so, was the crime in connection with the person’s official duties.

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Public pensions: Minnesota's systems seek legislative action on proposed reforms
The complexity of the systems makes it easy to underestimate their value and for opponents to use data selectively.
Those who seek to privatize Social Security and state retirement plans covering public employees like to characterize these earned retirement programs as “Ponzi schemes” or “pyramid schemes.” This is the kind of hyperbole that substitutes for fact for those who are philosophically or ideologically opposed to defined-benefit pension programs. There’s something about the efficiency of pensions that irritates our detractors.

Public-pension plans are an ongoing and very long-term proposition. Teachers, public-safety officers, snowplow drivers and road-repair workers pay into their pension plans when they begin their careers, which might span 40 years, and receive retirement benefits until they die. This is why we manage public-pension funds with an indefinite horizon in mind. We continually monitor projections and regularly propose benefit and contribution changes to the Legislature to keep the plans on sound financial footing well into the future.

In response to an increase in liabilities due to longer member life spans and lower expected future investment returns, the Teachers Retirement Association (TRA) has proposed $1.6 billion in benefit reductions and $92 million in annual contribution increases, and the Minnesota State Retirement System (MSRS) has proposed $1 billion in benefit cuts and $37.5 million in annual contribution increases. The Public Employees Retirement Association (PERA) board is currently considering options to pursue in 2018.

Critics of public pensions respond that states and their taxpayers can’t afford these plans. In fact, Minnesota pensions are efficient: Government spending on pensions is only 2.3 percent of total state and local spending here, compared with 4.5 percent nationally. In addition, Minnesota’s pensions are prefunded, meaning the systems have more than $64 billion in the bank. That money is invested by the State Board of Investment and earns more money. For the year ending June 30, 2017, we earned 15.1 percent on investments. SBI’s average return is 10.2 percent over 35 years.

This successful investment program keeps taxpayer cost low, since the majority (73 cents of every dollar) of what is needed to pay benefits comes from investment gains. Well-funded plans reduce the reliance on future contributions.

In an August paper, the National Conference on Public Employees Retirement Systems said that public pensions are “beneficial to taxpayers in a variety of ways that are both underreported and poorly understood.” Indeed, Minnesota taxpayers pay only about 14 cents on the dollar for public pensions and benefit from millions of dollars in pension fund assets invested in our economy. And retirees typically spend their pension checks locally, supporting businesses and job creation.

But the complexity of public-pension finance makes it easy to mischaracterize or cherry-pick data. For example, we are required by the Governmental Accounting Standards Board (GASB) to report certain data annually using accounting methodology. Financial results using this method are simply a snapshot in time and do not anticipate any future course corrections or adjustments.

Long-standing actuarial methods of projecting funding status progress are more useful for plan administrators and policymakers because they are future-focused. The year-to-year GASB numbers will fluctuate wildly due to market swings and do not provide appropriate guidance for oversight of pension funding, which is best viewed through a long-term lens.
Public-pension opponents use data selectively to lobby for switching public employees to 401(k)-style retirement accounts. In 2011, the retirement systems conducted a study and found that closing the pension plans and switching to a 401(k)-type system would cost the state $3 billion. Benefits would still be paid to those in the legacy plan even as contributions were diverted to private accounts. Studies have shown that the U.S. has a retirement crisis as workers reach retirement age without adequate savings. Switching public employees to a wholly private savings system would be bad for Minnesota.

The state’s pension funds are not in crisis. Minnesota has a long history of taking appropriate corrective action when necessary, and now is one of those times. We urge lawmakers and the governor to act on our proposed reforms. With their help, Minnesota’s public-pension plans will be financially sound for many years to come.

Doug Anderson, Erin Leonard and Jay Stoffel are the executive directors, respectively, of the Public Employees Retirement Association, the Minnesota State Retirement System and the Teachers Retirement Association.

An Annotated Rebuttal to State Pension Plan Directors’ Star Tribune Commentary
Minnesota’s public pension plans recently made not-so-pleasant national headlines when Bloomberg News reported that under new government accounting standards Minnesota’s public pension health took the biggest hit in the nation. In that article the executive director of Minnesota’s Legislative Commission on Pensions and Retirement declared our current situation “a crisis.” Unsurprisingly, this prompted state pension plan directors to go to DEFCON 1 in a Star Tribune commentary to reassure its members and the general public that the state is on top of things and all is well.
The arguments presented in the Strib commentary are ones we have heard and commented on for many years, but the stakes surrounding this issue are simply too important to let this message go without a response.
“Those who seek to privatize Social Security and state retirement plans covering public employees like to characterize these earned retirement programs as “Ponzi schemes” or “pyramid schemes.” This is the kind of hyperbole that substitutes for fact for those who are philosophically or ideologically opposed to defined-benefit pension programs. There’s something about the efficiency of pensions that irritates our detractors."
Many staunch supporters of defined benefit pension plans, including pension actuaries and defined benefit plan experts, are critical of the types of certain policies Minnesota pension systems (and public pension systems generally) employ. It’s an effective rhetorical gambit to suggest everyone who objects to the status quo is politically and ideologically driven. However, these critics are not bothered by “efficiency,” but rather by the risk and exposure faulty accounting practices and other pension system policies create.
“Public-pension plans are an ongoing and very long-term proposition. Teachers, public-safety officers, snowplow drivers and road-repair workers pay into their pension plans when they begin their careers, which might span 40 years, and receive retirement benefits until they die. This is why we manage public-pension funds with an indefinite horizon in mind.”
Having an “indefinite time horizon” doesn’t eliminate the risk of running out of money – we can point to a few places in the U.S. where this is currently unfolding. Nor does it excuse the irresponsible current practice of transferring large current obligations onto future taxpayers. Should current taxpayers be paying for the retirement benefits of both the snowplow drivers and road workers of today and their predecessors? Should future generations of taxpayers be on the hook for both the employees of today and the employees that are providing service to them in the future? Because that is exactly what we are now doing, and based on our current path, we’ll being doing a lot more of in the future.
“We continually monitor projections and regularly propose benefit and contribution changes to the Legislature to keep the plans on sound financial footing well into the future.”
Then why, according the latest valuation reports, are we collectively $20 billion short based on market value of assets?
“In response to an increase in liabilities due to longer member life spans and lower expected future investment returns, the Teachers Retirement Association (TRA) has proposed $1.6 billion in benefit reductions and $92 million in annual contribution increases, and the Minnesota State Retirement System (MSRS) has proposed $1 billion in benefit cuts and $37.5 million in annual contribution increases. The Public Employees Retirement Association (PERA) board is currently considering options to pursue in 2018.”
That may sound like a lot of money but those numbers need to be put in perspective. Since 2002 (about the last time Minnesota pension plans were fully funded) policymakers’ failure to make the necessary required contributions has created over $6 billion of growth in our unfunded obligations. The $2.6-plus billion in benefit reductions is swimming against $17.3 billion in unfunded liabilities created by a failure to achieve targeted investment returns. The phrase “a day late and a dollar short” has never been more apropos.
“Critics of public pensions respond that states and their taxpayers can’t afford these plans. In fact, Minnesota pensions are efficient: Government spending on pensions is only 2.3 percent of total state and local spending here, compared with 4.5 percent nationally.“
There is a mammoth difference in what we DO spend and what we NEED TO spend to fund the current system responsibly. See those numbers above. It’s not a badge of honor to chronically underfund the system with help from accounting conveniences. But this is certainly a new way to define “efficiency.” It’s like your kids saying, “Mom, I cleaned half my bedroom. It was more efficient than cleaning the whole room like I was supposed to.”
“In addition, Minnesota’s pensions are prefunded, meaning the systems have more than $64 billion in the bank.”
A not-so-minor problem: we should have about $20 billion more “in the bank” right now just to pay for (*ahem*) prefunded benefits that have already been earned.
“That money is invested by the State Board of Investment and earns more money.”
Except for the money that goes out the door to actually pay retirement benefits, administrative expenses, and money owed to people who leave public service before retirement. In the 2016 fiscal year, the state’s public pensions paid out $4.5 billion or about $2.2 billion more than the contributions that went into the system.
“For the year ending June 30, 2017, we earned 15.1 percent on investments. SBI’s average return is 10.2 percent over 35 years.”
Well done. But since we’ve been assuming pension investments would “only” return 8 - 8.5% per year how in the world can we be $20 billion in the hole with that amazing track record – especially since as stated earlier, “we continually monitor projections and regularly propose benefit and contribution changes to the Legislature to keep the plans on sound financial footing well into the future.”
Something else must be going on. And one of many “somethings” is this: you only get investment returns on the assets you have to invest. If a pension plan is significantly underfunded, a 15.1% annual return generates far fewer investment dollars overall than if it was 100% funded.
“This successful investment program keeps taxpayer cost low, since the majority (73 cents of every dollar) of what is needed to pay benefits comes from investment gains. Well-funded plans reduce the reliance on future contributions. In an August paper, the National Conference on Public Employees Retirement Systems said that public pensions are “beneficial to taxpayers in a variety of ways that are both underreported and poorly understood.” Indeed, Minnesota taxpayers pay only about 14 cents on the dollar for public pensions and benefit from millions of dollars in pension fund assets invested in our economy.”
What is the source of capital behind pension plans’ investment gains? Magic beans? It’s employer and employee contributions and money from the state general fund. And if those investment gains don’t materialize as expected, who will make up the shortfall? Will our investment advisors and private equity firms say, “Sorry, we didn’t meet your expectations. Here’s the difference”?
“And retirees typically spend their pension checks locally, supporting businesses and job creation.”
And tax dollars that don’t go to increased pension support are put in a pile and incinerated.
“But the complexity of public-pension finance makes it easy to mischaracterize or cherry-pick data. For example, we are required by the Governmental Accounting Standards Board (GASB) to report certain data annually using accounting methodology. Financial results using this method are simply a snapshot in time and do not anticipate any future course corrections or adjustments.”
Exactly how is one ever supposed to “establish proper course corrections and adjustments” without proper accounting? It’s the foundation for making crucial decisions on how to repair these pension plans. Imagine a business making the same argument on their financials. “Just ignore our current balance sheet and income statement, what really matters is what we expect they will look like a few years from now.”
“Long-standing actuarial methods of projecting funding status progress are more useful for plan administrators and policymakers because they are future-focused. The year-to-year GASB numbers will fluctuate wildly due to market swings and do not provide appropriate guidance for oversight of pension funding, which is best viewed through a long-term lens.”
“Long-standing actuarial methods of projecting funding status” = using the expected investment return as the discount rate to calculate liabilities – a practice which keeps current contribution requirements low and allows pension liabilities to compound just as fast as investment return expectations. Or to put it more succinctly:

"The use of the expected return assumption as the discount rate virtually guarantees the eventual failure of any plan using it.” -- Barton Waring, former Chief Investment Officer of Barclays Global Investors and author of Pension Finance: Putting the Risks and Costs of Defined Benefit Plans Back Under Your Control, in testimony to the Government Accounting Standards Board
“Public-pension opponents use data selectively to lobby for switching public employees to 401(k)-style retirement accounts.“
The defined benefit versus defined contribution debate is a false choice. There are many reform options to explore.
“In 2011, the retirement systems conducted a study and found that closing the pension plans and switching to a 401(k)-type system would cost the state $3 billion. Benefits would still be paid to those in the legacy plan even as contributions were diverted to private accounts.”
Closing a pension plan doesn’t create new costs. That $3 billion “cost” estimates what would be needed upfront to speed up the payoff of unfunded liabilities so the can isn’t kicked to future taxpayers. It’s a timing issue of when the $3 billion would be needed, not if it would be needed.
But the way our pension plans are currently designed is already transferring billions in current pension obligations to future taxpayers. It’s tough to square up concerns about pension reform saddling future taxpayers with today’s pension costs when current pension practices are already doing an exceptional job of doing just that.
“Studies have shown that the U.S. has a retirement crisis as workers reach retirement age without adequate savings. Switching public employees to a wholly private savings system would be bad for Minnesota.”
Failing to fund pension obligations responsibly and properly is a lot worse for Minnesota.
“The state’s pension funds are not in crisis. Minnesota has a long history of taking appropriate corrective action when necessary, and now is one of those times. We urge lawmakers and the governor to act on our proposed reforms. With their help, Minnesota’s public-pension plans will be financially sound for many years to come.”
We urge lawmakers and the governor to cease and desist with the increasingly frequent “half measure” tweaks and repairs that are constrained by political and biennial budget circumstances rather than grounded in economic realities. It is time for full measure reform – and the extent to which that can or should be done within a traditional defined benefits system structure needs to be carefully examined. We do not serve the interests of present and future taxpayers or public sector workers, or ensure the continuing provision of high quality public goods and services by failing to acknowledge the seriousness and the magnitude of the challenge before us.


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Missouri State Employees tops benchmark with net 3.52% for fiscal year
Missouri State Employees’ Retirement System, Jefferson City, returned a net 3.52% in the fiscal year ended June 30, said a report posted on the pension fund's website.

The $8.1 billion pension fund exceeded its policy benchmark of 1.64%.

For the three years ended June 30, the pension fund returned an annualized net 0.36%, below the benchmark of 2.35%; for the 10-year period, the pension fund returned an annualized net 4.45%, above the 4.22% benchmark return.
For the 12 months ended June 30, 2016, the fund returned a net 0.29%, below its 7.36% policy benchmark.

Missouri has launched a limited pension buyout
CHICAGO – Missouri’s launch of a buyout program represents a new avenue to reduce pension liabilities and depending on its outcome could provide an option nationally for local and state governments, says Moody’s Investors Service.

Gov. Eric Greitens signed legislation authorizing the Missouri State Employees Retirement System to implement the buyout program for former state employees who are fully vested but not yet retired. The fund launched the program on Sept. 5 so it’s unclear how many former employees will participate by a Nov. 30 deadline and how much the state stands to save.
MOSERS buyout plan calls for half of eligible members to take offer, saving $100 million
The voluntary buyouts being rolled out by the Missouri State Employees' Retirement System is being offered in hopes of saving $100 million, a spokeswoman for the pension plan says.

MOSERS is sending out letters offering lump sums averaging $18,450 to about 17,500 former state employees who have not yet retired. Eligible members of the public pension plan in the Springfield area will see letters arrive after Sept. 18 and will have until the end of November to decide whether to cash out.

"The plan was modeled on a reduction of approximately $100 million in net plan liability," said Candy Smith, a MOSERS spokeswoman, in an email. "The plan was modeled on 50% of eligible members taking the buyout."

Asked about the likelihood of the buyout negatively affecting MOSERS by depleting its funds, Smith referred to her response about "decreasing net plan liability."

In exchange for a check, MOSERS members who accept the buyout agree to "forfeit all such member's creditable or credited service and future rights to receive retirement annuity benefits from the system ... and shall not be eligible to receive any long-term disability benefit," the News-Leader previously reported.

MOSERS has seen its percentage of funded liabilities — a barometer for pension plans' fiscal health — sink over the past several years.

Pension buyouts are not new; places with troubled retirement systems including Illinois and Philadelphia have considered offering lump sums in exchange for reducing their future liabilities.

In 2015, the Internal Revenue Service barred pension plans from offering buyouts in some cases. The IRS guidance covers vested retirees and does not appear to apply to the MOSERS' buyouts, which are being offered to vested employees who have not yet retired.

MOSERS Board Approves New State Budget Contribution Percentages
Actuaries debunk treasurer’s “crisis” warning.
Following criticism from Republican Treasurer Eric Schmitt, the Missouri State Employees Retirement System’s (MOSERS) board approved asking lawmakers for a 20.21 percent-of-payroll contribution in the state budget for 2018-19.

Of the 11 board members present, only one voted “no” on the decision.

The money is the state government’s “employer contribution” to the MOSERS board, which covers most past and present state government employees. The exact dollar amount will be decided during the budget-writing process.

Missouri’s current contribution in the 2017-18 budget is 19.45%, with more than $393.3 million for all funds—including $234.5 million in state revenue funds were listed in the budget bills. The total contribution, however, is a small chunk of the state budget.

The new contribution rate for the 2018-19 state budget was suggested by the Cavanaugh MacDonald actuarial firm, which began running the MOSERS account in May.

The vote comes just a day after Schmitt warned lawmakers of a state pension crisis, which he reiterated at Thursday’s meeting, referencing MOSERS missing earnings assumptions in “16 of the past 17 years.” To address the issue, he suggested MOSERS lower expectations for earnings as well as lower its investment fees.

However, Joseph A. Nichols and Patrice A. Beckham—consulting actuaries from Cavanaugh MacDonald—informed the MOSERS board things were not as bad as Schmitt claimed, citing reductions to the system’s estimated income from investments.

“A lot of changes have been made that are pushing us in [the] right direction,” Nichols said at the meeting. “We talk about a crisis—[but] it’s not.”

Beckham, who is also a principal at the firm, noted that the board had previously lowered its rate from 8.5% to 7.5%. By 2020, the board will reduce the expectation to 7.05%.
New report on state pension plan shows continued struggles, state treasurer says
Lawmakers were jolted Wednesday morning when Missouri Treasurer Eric Schmitt told them that a large state pension plan has continued to weaken financially.

Ten years ago, the Missouri State Employees' Retirement System (MOSERS) reported that it had enough money to cover about 79 percent of the future benefits it has promised to pay. Schmitt and others consider 80 percent to be a sign of a stable pension, though 100 percent funded is obviously an even better place to be.

As of July 2016, MOSERS had dropped to about 69.6 percent funded. And over the last fiscal year, the news has worsened.

Schmitt said Wednesday before the Joint Committee on Public Employee Retirement that MOSERS' status has continued to sink. He said the funded ratio had dropped to 60 percent — although that number could be misleading.

In citing the 60 percent funding level, Schmitt was referring to the market value of the pension plan's assets, what they would be worth today.

In previous annual reports, MOSERS — like many other pension plans — has used a different figure, called the actuarial value, a "smoothed" number used for long-term planning to account for stock market volatility.

The most recent actuarial value of MOSERS assets, which allows an apples-to-apples comparison to previous performance, also shows a drop, though to a less-severe ratio of 67.5 percent funded.
At any rate, the data shows MOSERS continues to see its liabilities outpace its assets and continually fails to realize its investment projections. As a result, state-supported MOSERS is staring at an unfunded liability of more than $4 billion.

Schmitt's message to state lawmakers on the pension committee was that drastic change was needed to right the ship and prevent MOSERS' problems from affecting the state's credit rating.

He blamed unnamed officials from years past with consistently overestimating the revenue MOSERS would reap from its investment portfolio, which allowed the state to kick in less money to fund pensions for state employees.

"Past administrations have tried to keep the MOSERS contribution rate low by artificially inflating the MOSERS assumptions," Schmitt said. "The time for sugar coating this problem is over."
Missouri’s State Pension In Crisis
Missouri State Treasurer, Eric Schmitt, told a panel of lawmakers on Wednesday that Missouri’s State pension deficit exceeded $5.2 billion. He went on to explain,

“The future of the state’s finances are at stake…Five billion dollars means we are thousands of dollars in debt for every single Missouri taxpayer. This liability is the number one liability for our state—a problem that, without action, will only get worse and worse every year.”
The Missouri State Employees’ Retirement System (MOSERS) has missed 16 projections in the past 17 years. The pension fund is only 60% funded, under the 80% or higher that is considered healthy funding status.

Schmitt explains, “So 60% is alarming, but even more alarming is the trajectory.” “In the early 2000s, we were nearly 100% funded. Now, just a few years later, we’re at 60% and falling.”

Missouri’s State Pension deficit is said to be the result of past administrations having unrealistic expectations regarding projected investment returns. In addition, expensive investment fees paid by the state also is considered a culprit in eroding the fund’s returns. Calling the situation “the number one threat to the state’s AAA credit rating,” Mr. Schmitt contends that pension funding shortfalls could have a devastating affect on funding for schools, roads as well as health services.

Mr. Schmitt recommends that MOSERS adjust its earnings expectations to be in line with market environment and the fund should seek to lower its investment fees.

“This crisis is no longer on the horizon, it is at our doorstep,” Schmitt said. “The future of Missouri’s finances are at stake, and this is a conversation that we need to have.
MOSERS' Officials React to Concern over Pensions
SPRINGFIELD, Mo. -- Thursday, State Treasurer Eric Schmitt's expressed concern over the Missouri State Employees' Retirement System's pension system's long-term health.

MOSERS spokesperson Candy Smith acknowledged the pension fund's financial challenges but wants viewers to hear the answer to a very important question.

"Is MOSERS going to be able to pay my retirement benefits? And the answer to that is yes, that promised benefits are secure," Smith said.

This week, Schmitt flagged a decline in MOSERS' funding ratio - which is the amount of assets the pension has versus its liabilities - to 60 percent.

But this doesn't mean that MOSERS is out of money. The 60 percent figure is a reflection of what MOSERS owes beneficiaries over time.

In real dollars, MOSERS has short-term solvency.

"We do have in the MOSERS pension trust fund right now $8 billion," Smith said.

The question now for policymakers is what to do to get the funding ratio higher - 80 percent is a rule of thumb.

Getting there will likely require more state funding and increased contributions from beneficiaries. MOSERS recipients joining after 2010 have to contribute to their pensions.

Schmitt has also raised concern that MOSERS spends too much on fees given consistent misses on projected investment returns.

Smith says the MOSERS Board is committed to getting the system on the right financial track and offers some perspective.

"A pension system like MOSERS have a very long-term time horizon," Smith said.

But, time is money, so fixing the pension funding problem soon will pay dividends later.
Missouri’s $5B pension shortfall is ‘at our doorstep’
Missouri Treasurer Eric Schmitt warns that the state’s employee retirement plan faces a $5 billion underfunding shortfall that will make it unable to pay all the benefits it might owe.

The Columbia Daily Tribune reports that Schmitt said the Missouri State Employees Retirement System is funded at only 60 percent, with an 80 percent funding rate considered healthy. Even then, he said, 60 percent might be overly generous because it’s based on unrealistic rates of return and because people are living longer.
Missouri employees’ pension plan underfunded by $5 billion
JEFFERSON CITY — Missouri’s treasurer on Wednesday told a panel of lawmakers the state employee retirement pension plan is only 60 percent funded and warned that action is needed to prevent damage to state finances.

Treasurer Eric Schmitt told the Legislature’s Committee on Public Retirement that the pension plan is underfunded by more than $5 billion. He cited an 80-percent funding mark as being healthy, although that would still leave the state below the amount needed to pay all the retirement benefits it potentially owes.

“This crisis is no longer on the horizon, it is at our doorstep,” Schmitt said. “The future of Missouri’s finances are at stake, and this is a conversation that we need to have.”

Schmitt added that 60 percent might be too generous. He said that’s based on a higher rate-of-return on investments than he said is realistic and outdated death rates that he said need to be updated because of longer life expectancies. Schmitt said considering those two factors, the public pension system might be less than 50 percent funded.

The treasurer placed blame on the retirement issue on past administrations for what he said were unreasonably high expectations of investment earnings. Schmitt said returns have been below predictions for 16 of the past 17 years.

According to data from the Missouri State Employees’ Retirement System, investment returns have averaged close to 7 percent over the past 20 years. Returns have been lower in recent years, averaging close to 4.5 percent over the past 10 years and less than one percent over the past 3 years.

Schmitt also complained that the state is paying too much in investment fees.
Missouri's $5 Billion State Pension Underfunding Shows Results of Faulty Accounting

Yesterday, Missouri State Treasurer Eric Schmitt announced that the state’s public employee pension plan was underfunded by $5 billion. That is an eye-popping amount, but the story is a sadly familiar one:

For politicians, such rosy projections mean more taxpayer dollars to spend elsewhere, as they create the illusion of the state’s pension contribution obligation being lower than it actually is.

But the can only be kicked down the road so far. Schmitt told state lawmakers that the state will need to increase its employer contribution by $15 million to $30 million in the next year to help get the pension system back on its feet.

However, the state catching up to its pension contribution now doesn’t mean that taxpayers won’t be on the hook again in the future. Pension managers should calculate the state contribution using a discount rate based on a more conservative investment return projects, such as the 4.5 percent Missouri has achieved recently.

Furthermore, they should look for ways to shift away from a defined benefit system, which can translate into high liabilities for state taxpayers, and enroll new employees in either a defined contribution or hybrid system.

Finally, lawmakers should require state pension managers to focus solely on increasing returns and maintaining pension plans’ financial health, and not use pension funds to advance political agendas that have nothing to do with securing public employees’ retirement.

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