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  #1231  
Old 06-24-2019, 10:21 AM
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Mary Pat Campbell
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ILLINOIS
SPIKING

https://www.daily-journal.com/news/l...0.html#new_tab

Quote:
David Giuliani: Big end-of-career raises return

Spoiler:
Most people aren’t counting on big raises in the years before they retire.

On the other hand, teachers and school administrators in many places in Illinois have received sizable, guaranteed, end-of-career salary increases in their last years. Their union contracts sometimes require it for as many as four years.

The other day, I was looking through the approved raises for Kankakee school administrators, and one of those retiring next year is in line for a 6 percent hike. I was told that was the reason she was getting the raise.


That confused me. Just a year ago, the state Legislature passed a law banning the practice of end-of-career spikes for school employees.

Unbeknownst to me, in the flurry of activity at the end of the legislative session last month, lawmakers tucked in a budget provision to bring back the provision allowing 6 percent end-of-career raises. Gov. J.B. Pritzker signed it.

Teachers’ pensions are largely based on their last years of service. Because the state picks up the employer portion of pensions, school districts do not suffer the long-term consequences of handing out big end-of-career raises — a relatively easy concession in union negotiations. The long-term burden is shifted to all the state’s taxpayers.

Why is 6 percent the magic number? Over that amount, a school district must pay penalties to the state’s teachers pension system.

Last year’s decision to curtail end-of-career spiking was a small step to help alleviate the state’s more than $130 billion in public pension liabilities. Yet, one measly year later, the state took it back.

While pension spiking has grabbed many headlines, it’s not one of the major causes of the state’s pension crisis. The biggest driver is the guarantee of 3 percent annual increases in pensions. This great benefit cannot be taken away, thanks to a state constitutional prohibition on diminishing benefits. If you are guaranteed 3 percent pension increases at the beginning of your career, they can never be taken away.

If an employee started collecting a $40,000-per-year pension in 2008, that person’s pay would be almost $54,000 a decade later. At the rate of inflation, the employee’s pension would rise to a hair less than $47,000 — a difference of $7,000.

This growing cost puts more and more pressure on taxpayers. And there are fewer of them. Many are moving to other states as taxes continue to increase.

READERS AS INSIDERS

The other day, a reader questioned our coverage of the dispute between the regional sewer plant board and its former longtime director, Richard Simms.

The board for the Kankakee River Metropolitan Agency paid Simms $700,000 to create software that reportedly does not work. After we started reporting this story last fall, the feds launched an investigation.

“You and the paper keep giving the ‘story’ about Richard Simms and the KRMA board piecemeal, how about getting the whole story and then give it to us,” the reader wrote in an email. “So let’s hear the whole story. The who, the what, the why and the how then, let the chips fall where they may? Let’s see facts and names. Fill in the blanks.”

We would love to get all the facts at once about this controversy. But the KRMA board has been reluctant to unveil the goings-on at the agency. Most of our information has come as the result of open records requests.

Besides, it could take years before KRMA tells the whole story about the software debacle, if ever. Our job is to make our readers insiders. Now.

David Giuliani is a reporter for the Daily Journal. His weekly column “As It Is” expands upon regular news coverage by adding his insight and ideas. He can be reached at 815-431-4041 or dgiuliani@daily-journal.com. Follow him on Twitter at @tt_dgiuliani.

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  #1232  
Old 06-24-2019, 10:22 AM
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Mary Pat Campbell
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TEXAS

https://www.pionline.com/print/texas...57#cci_r=73393
Quote:
Texas to peek over shoulders of public funds

Spoiler:
In what may be a windfall for investment consultants, a new law requires Texas public pension funds with assets greater than $30 million to hire outside firms to evaluate the efficacy of investment activities of the fund and suggest improvements in a report to the Texas Pension Review Board, Austin.

On June 10, Texas Gov. Greg Abbott signed Senate Bill 322, mandating public pension funds to provide "comprehensive analysis of the retirement system's investment process that covers all asset classes," according to the text of the law.

Texas public funds will have until June 1, 2020, to submit their first evaluation reports. Thereafter, evaluation reports must be filed every three years for plans with more than $100 million in assets and every six years for plans with assets between $30 million and $100 million. Plans with less than $30 million are exempt from the reporting requirement.

State Rep. James Murphy said he and bill co-sponsor, Sen. Joan Huffman, introduced the bill to make it easier for the Texas Pension Review Board to make apples-to-apples comparisons of the investment health of the public pension plans it oversees.

Part of their motivation was to make sure that the Pension Review Board has adequate data from each pension fund to identify plans that might be in trouble with regard to investment performance or funded status, Mr. Murphy said.

Mr. Murphy said constituents and taxpayers expressed concern to him about the status of Texas public plans between legislative sessions (Texas has a biennial schedule) after reform legislation was passed in the 2017 session to shore up the $2.1 billion Dallas Police & Fire Pension System and the $4.2 billion Houston Firefighters' Relief and Retirement Fund, the $3 billion Houston Municipal Employees Pension System and the $5.5 billion Houston Police Officers' Pension System.

"Investment performance and benefit structures can become uncoupled leading to problems," Mr. Murphy said, noting that pen- sion funds may be able to "self-correct" deficiencies using the suggestions for improvement provided by the external reviewers negating "the need for big brother to step in."

Observers noted that Texas is home to a high number of small public pension funds and legislators likely are taking a protective stance with the legislation.

Of the 99 public pension funds in the state, 41 have assets of more than $100 million and 24 have assets between $30 million and $100 million.

"Texas has a very large number of very small pension funds, and legislators are making sure these funds are reporting information on their funding and investment policies so action can be taken if there are problems," said Timothy Lee, executive director of the Texas Retired Teachers Association, Austin.

Teeth of the law
"Requiring these plans to submit their evaluation reports to the (Texas) Pension Review Board may help identify potential problems," Mr. Lee said, noting that "the teeth of the law will be in the hands of the decision-makers, including the governor, lieutenant governor and legislators," who act, if necessary, based on the results of fund evaluations.

The review board will compile and summarize the reports of the pension funds before passing the information on to state officials.

Mr. Murphy said the Legislature is "trying to be careful about putting its finger on the scale because it's definitely a gray area" regarding local control of public pension funds and state intervention.

He said the program will be assessed between legislative sessions and legislation may be introduced to codify actions the state might take based on pension fund evaluations.

SB 322 requires Texas public funds to hire external firms experienced in evaluating institutional investment practices to review the system's investment practices, policies and performance in the previous year and to create a report with recommendations for improvement to be submitted to the Texas Pension Review Board no later than June 1 after the fund's prior fiscal year-end.

The law permits a pension system to engage a firm with which it already has a relationship, such as an investment consultant, to prepare the fund evaluation, but it forbids hiring firms that directly or indirectly manage money for the fund.

Some Texas public pension funds, including the Austin-based $145.4 billion Teacher Retirement System of Texas and the $2.7 billion City of Austin Employees' Retirement System, said they might turn to their existing investment consultants to prepare fund evaluation reports.

Among the specific areas for review are the system's strategic investment plan; detailed analysis of the plan's asset allocation, including the process for determining target allocations; expected risk and return; the method for selection and valuation of alternative and illiquid investment strategies; and the appropriateness of investment fees and commissions.

The Texas Pension Review Board "understands the timeline Texas public retirement systems face in meeting the new requirements in SB 322 and will make every effort to finalize guidance for the systems as early as possible," particularly regarding investment performance evaluations and enhanced investment fee disclosures, said Ashley Rendon, a review board management analyst, in an email.

Senate Bill 322 also requires that Texas public pension funds list investment managers and provide direct and indirect investment fees by asset class in their annual financial reports. The law also mandates posting annual investment reports on a pension system's website or another publicly available site.

Sources said Texas is the only state to mandate detailed reporting on the public pension fund investment aside from South Carolina, which enacted a similar law in 2017.

"The general trend is to increase disclosure voluntarily to avoid having it legislated," said Randall W. Miller, principal and chief operating officer at governance consultant Funston Advisory Services LLC, Bloomfield Hills, Mich.

Mr. Miller said funds such as the $210.2 billion New York State Common Retirement Fund, Albany, for example, releases monthly reports detailing investment activity, new manager hires and information about placement agents, but the report lacks disclosure about investment fees.

Other sources agreed that Texas' new law expands the level of disclosure required of public pension systems.

"What makes this law unique is the breadth of the regulation. While many elements were already covered in GASB 67/68, the level of detail required for commissions and fees sets a new level of disclosure standards," said Leon F. "Rocky" Joyner, Atlanta-based vice president and actuary, public-sector retirement practice leader, Segal Consulting.

Already captured
Most of the state's large public retirement systems already capture the investment information mandated by the new law.

Meeting the reporting requirement "won't be a big lift" for Texas Teachers, said Brian Guthrie, executive director, given that most of the required information already is being collected by the pension fund and the system's consultant, Aon Hewitt Investment Consulting Inc., as part of regular reporting.

Mr. Guthrie said fund officials are waiting to hear from the Texas Pension Review Board to get specifics regarding what will be required for the evaluation report.

Keith Yawn, director of the office of strategic initiatives at the $29.1 billion Employees' Retirement System of Texas, also said "there won't be a lot of change" to what the fund already reports in the state evaluation report.

The City of Austin Employees' Retirement System "supports the bill's transparency requirements and the focus on fiduciary standards," but because SB 322 requires plans to pay an evaluation firm, the cost burden on smaller plans may be high, said Christopher Hanson, executive director.

COAERS "already collects the vast majority of what the legislation requires," Mr. Hanson said, but having the fund's investment consultant, RVK Inc., gather required information and evaluate the system's operations will cost about $40,000.

The cost would be even higher if COAERS hired another consultant, which would need more time and labor to study the system.

In other legislative action related to pension issues in the 86th Texas Legislative session, Mr. Abbott signed Senate Bill 2224 on June 4, which requires boards of trustees of public pension funds of all sizes to adopt a written plan for achieving a funding ratio of 100% or higher no later than Jan. 1, 2020.

On June 10, the governor signed SB 12, which will gradually increase contributions to the Texas Teacher Retirement System from the state, school districts and employees to bring the plan to fully funded status in 29 years down from 87 years (Pensions & Investments, May 29).
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  #1233  
Old 06-26-2019, 12:44 PM
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Mary Pat Campbell
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https://www.nationalaffairs.com/publ...dY9X9Q.twitter
Quote:
How to Avert a Public-Pension Crisis

Spoiler:
At the turn of the millennium, public pensions seemed to be riding high. By their own accounting, most such funds were more than fully funded, and public workers' retirement benefits were more generous than ever after a round of enhancements in the 1990s. But the two decades that followed have decimated the finances of many public-pension funds, resulting in steeply rising taxpayer costs and serious negative effects on public workers' salaries, jobs, and benefits.

The great irony is that the retirement systems that were meant to protect public workers, shielding them from the vagaries of the market, have often accentuated the effects of market swings, increasing the threats to public workers' financial well-being. Today's strong economy means policymakers are not under maximal pressure: They can see the problem, but they do not yet truly feel it. That time will come, however, and if public pensions are going to survive over the long term, funding and investment practices must improve, and benefits need to be modernized to flexibly meet the needs of today's public workforce.

There won't be a better time to avert the next pension crisis. And there are a few key steps that every jurisdiction should be taking.

GROWING BENEFITS, GROWING RISKS

To understand what must change, we must first appreciate some of the history of how public pensions got to where they are. Most public-pension systems were established in the first half of the 20th century, and for their first few decades, the value of promised benefits and their annual costs were small relative to the budgets of their sponsoring governments. In those early years, public-pension investment portfolios were also relatively safe because policymakers restricted plans' ability to invest in risky assets. The fact that public-pension plans were small and not very volatile made them easy to manage and meant they presented little or no risk to state and local budgets.

Over time, however, public-pension plans have naturally matured, and their financial situation inevitably grew more complex. As the years passed, more public employees eligible for the programs neared and reached retirement age; as a result, total plan membership grew, and there were fewer active workers for every person drawing a benefit check. Between 1960 and 2017, total public-plan membership more than quadrupled, and the ratio of active workers to retirees fell from just under 7 to 1.4.

But plan maturation was not the only thing driving public-pension membership growth. State and local governments were also adding large numbers of workers to their payrolls. Between 1960 and 2017, the United States population grew by 80%; over the same period, state and local government employment grew by 186%. As governments added more public workers and the membership of public plans aged, the total amount of promised benefits (that is, the plans' liabilities) grew precipitously.

Meanwhile, governments also significantly enhanced benefits beginning in the late 1980s through the 1990s, propelling liabilities even higher. In a recent working paper, the American Enterprise Institute's Andrew Biggs used data from the National Income and Product Accounts to document how public-pension generosity has changed over time. Up until the late 1980s, the taxpayer cost of the retirement benefits earned by public workers in any given year (the so-called "employer normal cost") remained relatively stable, hovering between 8% and 10% of payroll. But from that point forward, public workers began earning much more generous benefits for each year of work. Employer normal cost increased by 76% between 1988 and 2017, growing from 9.6% to 16.9% of payroll.

Together, the maturation of public plans, growing public payrolls, and benefit enhancements have led to a meteoric rise in pension liabilities. The federal government maintains data on public-pension assets and liabilities going back to 1945. Comparing historical data on pension liabilities to the national gross domestic product provides a reasonable measure of the size of promised benefits relative to taxpayers' overall capacity to pay. In 1960, state and local pension liabilities totaled approximately 12.6% of GDP. By 1990, the ratio had nearly doubled to 22.2% of GDP. Then between 1990 and 2017, the ratio nearly doubled again, growing to approximately 42% of GDP. The total value of retirement benefits already earned by public workers is higher today than it has ever been.

Unfortunately, state and local governments did not fully fund benefits as workers earned them. Instead, they used debt to finance a large portion of the last 30 years of pension-liability growth. In each year since 2001, governments have, on average, paid 12% less than the actuarially determined contribution, or the amount that would cover normal cost and pension debt service. Over time, this consistent underpayment adds up. If state and local governments had paid their full pension bill every year since 2001, public-pension funds would be better funded by more than $315 billion.

Responsibility for today's historic levels of pension debt cannot be fully laid at the feet of policymakers, however. Pension plans themselves deserve a hefty share of the blame. Although public-pension plans claimed to be more than 100% funded at the turn of the millennium, in reality they were well short of that benchmark. Arcane accounting practices allow public pensions to discount future benefit payments using their expected investment returns, which, in the irrational exuberance of the late 1990s, were 8% or more for most plans.

This practice creates the opportunity and incentive to understate the cost of benefits. Discounting using a higher rate reduces annual contributions in the near term, by betting that investment returns will cover a greater share of the cost. Plans have taken advantage of this fact by adopting optimistic return assumptions that make benefits look cheaper than they really are. But if returns fall short of expectations, costs can rise quickly because of the power of compounding. And that is exactly what has happened. Since 2001, average annual investment returns have totaled just 6.4%, far below expectations, resulting in growing pension debt and rising cost.

It is more accurate to calculate pension liabilities using a high-grade bond yield, which reflects both the guaranteed nature of benefits and prevailing economic conditions. That's what the United States Bureau of Economic Analysis does when it tabulates public-pension liabilities. Using those data, average state and local public-pension funded ratios (the share of accrued liability that is funded) topped out at just over 83% in 1999 and fell precipitously thereafter. In fact, 1999 was the high-water mark for pension funding, and was the result of decades of progress toward full funding. Today pensions are just 47.5% funded, hardly better than they were in 1983. Pension plans' consistent underestimation of the cost of retirement benefits is a huge reason for this regression.

It is easy to understand why pension plans made such a big bet on their investment performance. The final two decades of the 20th century delivered the best market performance ever recorded. Researchers have been able to estimate the equivalent of the S&P 500 index, a broad measure of United States stock-market performance, going back to 1871. And in that nearly 150-year history, no 20-year period had higher average annual returns than the one that ended in 1999, with a whopping 16.88%. Pension plans had fortuitously positioned themselves to take advantage of that market run-up. As noted previously, in their early years, pensions faced limitations on risky investing. Those restrictions were largely removed in the 1970s and 1980s at the pension plans' behest, following which public pensions shifted out of safer assets like bonds and into riskier assets like stocks. In 1960, approximately 10% of pension investments were in risky assets; today, 72% are.

In the background, as plans reaped the market gains of the 1980s and '90s, the economy was shifting, changing the calculus of pension financing. Interest rates, which had reached new heights in the preceding decade, began to fall consistently through the 1990s and into the 2000s. Meanwhile, pension plans' investment-return assumptions, which had followed interest rates up, did not follow them back down. As a result, plans were expecting the return on their investments to exceed the "risk-free" rate (the return on the relatively safe bet on United States government bonds) by a growing margin over time. To achieve the same return, plans needed to take on more risk or give up some liquidity — and they did both.

Researchers estimate that, to get the same 7.5% to 8% return, pension plans need to take three to four times more risk today than they did 20 to 30 years ago. As risk increases, pension assets become more volatile. As a partial solution to this problem, pension plans began shifting into less liquid, alternative investments like private equity, hedge funds, and real estate. In theory, giving up some liquidity and diversifying will somewhat reduce risk for any given return target. Since 2001, public pensions have tripled the share of their portfolios devoted to alternative investments from 9% to 27%. But based on the available evidence, it's doubtful that this shift into alternatives has delivered on its promise: Returns have fallen well short of targets, fees are up, and volatility is still a problem.

The upshot of this history is that public pensions are bigger and riskier than ever. Pension liabilities and debt have never been so large relative to taxpayers' capacity to pay, and pension investments have never been so uncertain. Public pensions' finances have continued to deteriorate despite a decade-long bull market that has seen the S&P 500 index grow by more than 300% from its bottom in 2009. It's clear that pension plans are not simply going to grow their way back to fiscal health, and that more must be done to reverse the deleterious effects of rising pension debt.

THE COSTS OF DEBT

That debt is itself a major burden. Since 2001, inflation-adjusted annual taxpayer cost for public pensions has more than tripled, and most of that increase is due to increasing debt-service payments. Roughly 70% of current taxpayer contributions go to pay down debt rather than toward new benefits earned by public workers. While pension contributions still make up a relatively small share of total state government own-source revenue (not including federal transfers), that fact is driven largely by the size of state budgets relative to statewide pension plans and the plans' understatement of cost. According to an analysis by J. P. Morgan, half of states would need to devote more than 10% of own-source revenue to retirement costs if liabilities were calculated using a 6% assumed return.

And the problem of rising pension cost is more acute at the local level, in areas like education where teachers' pension costs have grown from $530 per pupil in 2004 to more than $1,300 today. Annual taxpayer contributions to teachers' pensions now represent more than 10% of per-pupil expenditures. Recent reports have shown that the rising cost of teachers' pensions has contributed to stagnant teacher salaries, decreasing benefits, and shortages of funds for important school supplies and programs for low-income students. The rising cost of pension debt more generally leaves less money available to pay for everything else, including the salaries and benefits of the current generation of not only teachers but also police officers, firefighters, and other crucial public workers.

Of course, pension costs can rise only so far. As a pension plan's funded ratio falls, it becomes more dependent on contributions and less reliant on investment returns. The logical extreme is a system that has no assets and whose annual contributions must equal benefit payments plus administrative expenses. Such a system is said to be "pay-as-you-go" or "pay-go." If public pensions were to reach pay-go, taxpayer contributions would need to increase by approximately 80%, or roughly another 15% of payroll. And in addition to requiring much higher contributions, reaching pay-go would also make retirees' benefit checks dependent on annual appropriations by policymakers.

As pension debt-service payments have driven costs higher, some have questioned the wisdom of trying to achieve full funding at all. But these arguments represent short-termism at its worst — seeking to lower costs today at the expense of the future. When benefits do not have to be fully funded as they are earned, there is the potential for large intergenerational inequities because policymakers can commit future taxpayers to paying for current services. Robert Costrell has shown that the degree of intergenerational inequity increases as the discount rate deviates from true returns and the funding target falls below 100%.

In fact, the pension debt that state and local governments are struggling with today is the result of a large cost shift in the late 1980s and 1990s, when benefits were enhanced and discount rates were increased. The current generation of workers and taxpayers is paying more and getting less than the previous generation because past policymakers failed to fully pay for the benefits they promised to public workers. The last 40 years of public-pension history suggests that, instead of effectively sharing risk across generations of workers and taxpayers, pensions have accentuated the effects of economic swings, with those who happen to be around when the economy is good reaping outsized gains and those on the downside paying more than their fair share.

The only way to ensure that pension costs and benefits are distributed equitably across generations of workers and taxpayers is to fully fund benefits as they are earned. And having a strong pension-funding policy is more important now than ever before because pensions are bigger and riskier now than ever before. As noted above, state and local public pensions are 47.5% funded at this point, but even that may be misleading. The last time pension funding was at roughly this level was 1983, when liabilities were approximately 18% of GDP. Today, liabilities are more than twice as large relative to GDP (42%). Because of pensions' increased scale, relatively small misses on the anticipated investment return or other assumptions (like mortality) would have outsized future budgetary implications. And because pension investment portfolios have gotten riskier, uncertainty about future returns has increased.

If state and local governments do not take steps to comprehensively address pension funding shortfalls, managing public pensions will become an increasingly odious challenge, leading to heightened budgetary pressure and more strife between public workers and taxpayers. For a generation now, the people managing pensions have tried to have their cake and eat it too, promising guaranteed benefits and constant taxpayer contributions with professional investing covering the bulk of benefit costs. But it is simply not sustainable to offer fixed benefits and contributions while also relying on risky investments.

There is a better way. Policymakers managing the most resilient and responsibly funded public pensions have not pretended they could hold back the tide of changing economic and demographic conditions, but instead have adapted by realigning benefit costs and contributions before debt piles up.

THE REFORMS THAT MATTER MOST

Much can be learned from the best funded plans, like those in South Dakota, New York, Wisconsin, and Tennessee. Plans in each of these states are better than 90% funded at this point because policymakers have been proactive in adjusting important assumptions, closing funding gaps quickly, and developing risk-sharing mechanisms that can fairly adjust contributions or benefits as needed. These states demonstrate that it is possible to sustainably manage a defined-benefit pension plan.

Unfortunately, the majority of public pensions have been far too slow to adapt, and as a result have seen their funded ratios consistently deteriorate. Many governments face daunting amounts of pension debt that can make full funding appear out of reach. Fixing public-pension funding is not technically difficult, but in most jurisdictions, fully funding pensions at this point would require significantly higher contributions or reduced benefits (or both), making a solution politically challenging to achieve. However, failing to take meaningful action to close the funding gap will only make the problem more challenging and painful to fix in the future. No matter the scale of the problem, governments that work with their plans to craft workable solutions and begin down the path to full funding will be better positioned to weather the next downturn.

The recommendations of the Society of Actuaries Blue Ribbon Panel on Public Pension Plan Funding (SOA BRP) make a great starting point for policymakers who wish to tackle the challenge of pension reform. The SOA BRP's most important recommendations involve investment-return assumptions and pension-debt amortization. The assumption plays a critical role in calculating the current value of promised benefit payments, and thus the adequacy of annual contributions to cover the cost of those benefits. The amortization schedule determines how quickly pension debt is paid off. Together with mortality estimates, the investment-return assumption and amortization policy are the most important elements of pension funding policy. Tightening rules around these three elements would dramatically improve the accuracy of public-pension cost estimates and help ensure the adequacy of annual contributions.

Although public pensions have begun to lower their investment-return assumptions, they continue to assume rates of return that significantly exceed objective projections for likely future investment performance. The median public-plan investment-return assumption has fallen from more than 8% in 2001 to 7.25% today. But using standard capital-market assumptions, Pew has estimated that the median 20-year return for a typical portfolio will be 6.4%, and that there is a one in four chance that public pensions' 20-year returns may not rise above 5%. Using a higher assumed return to calculate liabilities reduces pension cost, but only on paper. If plans' assumed returns exceed realized returns, which is likely, then they are simply delaying necessary payments, making the eventual bill much larger.

Based on Pew's capital-market projections, the median plan is understating its liabilities by between 10% and 15%, depending on duration. Plans that use higher assumed returns are understating liabilities by much more. It will be hard for governments to improve pension funding if the target keeps moving because of predictably inaccurate return assumptions. Pension plans' stubborn maintenance of overly optimistic return assumptions also feeds taxpayer cynicism regarding pensions, potentially undermining the long-term ability of governments to maintain current systems.

Given the importance of these assumptions in calculating plan cost, policymakers should remove as much subjectivity as possible from the choice of the investment-return assumption by explicitly linking it, in statute or ordinance, to the yield on United States Treasury bonds (i.e., the risk-free rate) plus some pre-specified risk premium, as recommended by the SOA BRP. Tightly constraining plans' investment-return assumptions to more closely track economic conditions would eliminate the most significant source of cost underestimation, mirroring improvements that were put in place for private-sector pension plans with the passage of the Pension Protection Act in 2006.

Mortality is the second major factor in determining pension cost, and here too public-pension plans are underestimating. The SOA recently conducted an extensive study of public-employee mortality and found that public plans' assumptions are not keeping up with their actual members' experience. The SOA reported that life-expectancy estimates, based on actual member data from 170 different public-pension systems, exceeded average public-pension estimates for every job category. The biggest deviation was for teachers, which has big cost implications because the teachers' pension plan is generally the largest public-pension system in any given state. To provide a sense of scale, when the California State Teachers' Retirement System updated its mortality assumptions in 2016 by adding just a year or two to average life expectancy, it increased the plan's pension debt by more than $6 billion, or a little less than 10%.

Unlike the investment-return assumption, addressing this problem is not straightforward. While the SOA does routinely release standard mortality tables, the variation in life expectancy across different job categories makes it difficult for public plans to use an off-the-shelf solution. At a minimum, policymakers should require their plans to base mortality assumptions on the most up-to-date SOA tables that incorporate future life-expectancy improvements. They should also require plans to conduct a significant study of member life expectancy every three to five years.

Lowering public pensions' investment-return assumptions to more realistic levels and updating mortality will increase governments' pension debt. The next step in fixing public-pension funding is to determine how the debt will be paid down over time, or amortized. Most public pensions currently spread pension-debt payments over 30 years or more and backload those payments so that they get larger as payroll grows. The result is that government payments often do not reduce the initial pension debt much over the first 10 to 20 years of the payment schedule. And it is actually common for plans to build in periods of negative amortization, where the pension debt grows because expected payments are not large enough to cover the interest on the debt.

In a recent study, Pew found that, between 2014 and 2016, less than half of states made payments large enough to pay down a portion of the pension-debt principal, and only 14 states achieved positive amortization in all three years. Statewide plans would have needed to receive $13.2 billion more in contributions in 2016 to reach the positive amortization benchmark. Governments have been doing the equivalent of paying the minimum on a credit card. So while they eventually expect to pay off the debt, the total cost will be enormous and their finances will be much riskier in the meantime. Negative amortization significantly undermines pension-plan solvency, and policymakers should eliminate the practice.

Policymakers should also consider shortening amortization periods considerably. Here it is useful to separate the past from the future. As discussed above, today's pension debt represents underpayment of benefit costs over the past 30 or more years. Given the size of most governments' pension debt, it is reasonable to spread the cost of paying it down over the next 20 to 30 years. However, for future years, pension plans should adopt more aggressive amortization schedules that ensure that any pension debt is paid off in fewer than 15 years, consistent with the SOA BRP recommendations. Since 1970, the average gap between recessions has been around five years, and to avoid a potential ratcheting up of debt over time, governments should plan to make significant headway in paying down debt between market dips.

Lowering discount rates, extending life expectancy, and tightening amortization schedules will all increase necessary annual pension contributions. For many jurisdictions the increase would be substantial. In order to make the budget math work, governments may need to negotiate with workers and taxpayers to devise a shared-sacrifice solution that balances the contribution of both groups. Over the last two decades, many jurisdictions have made changes to their pension systems, but few have comprehensively fixed pension funding. Many jurisdictions have lowered benefits for new workers, and several have even reduced benefits for current workers and retirees. But benefit reductions alone will not be sufficient to repair public-pension finances. Governments do not generally face a pension-generosity problem but rather an underpayment problem. Benefit reductions without comprehensive reforms to address funding only serve to raise the ire of public workers and doom governments to increasing budgetary pressure and seemingly endless pension-reform debates.

The city of Houston's 2017 pension reforms are the best recent example of a comprehensive approach to the problem. Prior to reform, Houston had racked up more than $8 billion in pension debt owed to its three pension plans for police, firefighters, and municipal employees. As part of the solution, the city lowered the assumed return for all three plans, tightened amortization policy, and committed to putting significantly more money into the plans. In return, the city asked public workers to give a little too to make the increased budgetary cost manageable. And public workers responded by agreeing to higher annual contributions and $2.5 billion in benefit reductions. Since both workers and taxpayers contributed to the negotiated solution, it is likely to be much more durable than reforms where one group or the other bears the bulk of the cost.

Houston's reform legislation also capped future city contributions, and specified clear rules for how benefits and contributions would be brought back into alignment if costs ever increase above the cap. While limiting taxpayers' future pension-cost exposure may not be achievable in every jurisdiction, there is an important lesson in Houston's approach: It is extremely valuable, to the extent possible, to pre-define when and how plan assumptions, contributions, and benefits will be adjusted in the future if benefit costs and contributions should ever get out of alignment. Establishing clear ex ante risk-sharing plans can help ensure that cost is shared in a fair and equitable manner. Other jurisdictions, including Wisconsin and Tennessee, have adopted similar features, which have allowed them to largely avoid significant underfunding.

AVERTING THE CRISIS

No matter how much pension-funding policy is improved, if governments don't pay the bill every year then the problem is sure to get worse. Promising public workers guaranteed retirement benefits and then failing to fully pay for them is utterly irresponsible. It destines future taxpayers to pay more and get less, crowds out governments' ability to provide essential services, and leaves public workers less financially secure. While policymakers cannot fully commit their successors to making full payments, they certainly can increase accountability for doing so by making full funding the default.

Pension-fund investment performance is also very important to the long-term sustainability of public pensions. And yet, there is currently very little discussion between governments and the pension plans they sponsor about investment risk and the resulting cost uncertainty. Pension plans largely make investment allocation and risk decisions with no substantial input from policymakers whose constituents backstop any shortfalls. Given the large potential implications for taxpayers, governments should increase their oversight of pension investing by requiring routine, in-depth stress testing that details projected costs under multiple return scenarios, as recommended by Pew. Policymakers should also find ways to discuss appropriate levels of risk and investment fees, and should consider putting explicit restrictions in place that would limit pension plans' ability to exceed taxpayers' tolerance in either domain.

Finally, policymakers should also realize that funding policy is not the only challenge presented by today's public-pension system. Most public workers participate in retirement plans that base benefits on years of service and salary at the end of their careers, commonly referred to as final-average-salary defined-benefit plans (FAS DB). Such plans are heavily backloaded, meaning that workers do not earn very valuable retirement benefits until nearing retirement eligibility. While FAS DB plans are great for those who work a full career in a single jurisdiction, they can leave public workers insecure through much of their careers. As state and local governments work to address their pension-funding challenges, they should also consider modernizing their retirement benefits to better support all workers. As Marcus Winters and I proposed in this journal in 2015, policy alternatives like guaranteed-return defined-benefit plans (in other words, cash-balance plans) and well-designed defined-contribution plans can be crafted to provide important investment and mortality protections while also offering a benefit that places all workers on the path to retirement security. And such plans are more flexible and more explicitly link benefit costs and contributions, making them easier to manage responsibly.

Public retirement plans face significant challenges in the coming years. They are bigger and riskier than ever before, and their growing annual cost is crowding out spending in important areas like public safety and education. Public workers bear a significant share of increased pension cost through stagnant wages, benefit reductions, and worsening job conditions. And many jurisdictions are not prepared for the next major economic downturn. While some governments have made changes, most have been insufficient to really address the underlying funding issues.

Pensions are not yet in crisis, and there is still time to fix them without too much disruption. To do so, governments must take a more proactive role in managing the pension plans they sponsor. By taking steps to improve the accuracy of pension-cost estimates and to increase accountability for making full payments every year, and by modernizing benefits to help all workers save for a secure retirement, policymakers can leave more sustainable plans for the next generation of workers and taxpayers. But they are running out of time to set things right.

Josh B. McGee is a senior fellow at the Manhattan Institute.


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Old 06-26-2019, 12:45 PM
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Pulling out one bit:

Quote:
The recommendations of the Society of Actuaries Blue Ribbon Panel on Public Pension Plan Funding (SOA BRP) make a great starting point for policymakers who wish to tackle the challenge of pension reform. The SOA BRP's most important recommendations involve investment-return assumptions and pension-debt amortization. The assumption plays a critical role in calculating the current value of promised benefit payments, and thus the adequacy of annual contributions to cover the cost of those benefits. The amortization schedule determines how quickly pension debt is paid off. Together with mortality estimates, the investment-return assumption and amortization policy are the most important elements of pension funding policy. Tightening rules around these three elements would dramatically improve the accuracy of public-pension cost estimates and help ensure the adequacy of annual contributions.
....
Mortality is the second major factor in determining pension cost, and here too public-pension plans are underestimating. The SOA recently conducted an extensive study of public-employee mortality and found that public plans' assumptions are not keeping up with their actual members' experience. The SOA reported that life-expectancy estimates, based on actual member data from 170 different public-pension systems, exceeded average public-pension estimates for every job category. The biggest deviation was for teachers, which has big cost implications because the teachers' pension plan is generally the largest public-pension system in any given state. To provide a sense of scale, when the California State Teachers' Retirement System updated its mortality assumptions in 2016 by adding just a year or two to average life expectancy, it increased the plan's pension debt by more than $6 billion, or a little less than 10%.

Unlike the investment-return assumption, addressing this problem is not straightforward. While the SOA does routinely release standard mortality tables, the variation in life expectancy across different job categories makes it difficult for public plans to use an off-the-shelf solution. At a minimum, policymakers should require their plans to base mortality assumptions on the most up-to-date SOA tables that incorporate future life-expectancy improvements. They should also require plans to conduct a significant study of member life expectancy every three to five years.


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Old 06-26-2019, 02:07 PM
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ILLINOIS

https://www.bettergov.org/news/lates...5-b39abeb6fceb

Quote:
Latest Pension Play Is No Guaranteed Fix
If Illinois’ Constitution prevents lawmakers from curbing rising pension costs, then change the Constitution, advocates say. But experts warn a voter-approved rewrite may lead to a lengthy legal challenge and end, once again, without a permanent solution.


Spoiler:
This story appeared in Crain's Chicago Business as part of its "Crain's Forum" series.

Backers of the latest drive to slash Illinois public pension benefits may want to take note of the fate of a similar effort in San Diego, which won strong voter approval years ago but was nonetheless blocked in the courts and now will not go into effect.

The recent collapse of the 2012 San Diego pension fix is a cautionary tale for Illinois because the fatal flaw cited by California courts — with the U.S. Supreme Court declining to get involved —was the failure of city officials to negotiate with employee unions before putting the proposal to voters.

The growing call in Illinois, from the Civic Federation fiscal watchdog, conservative think tanks and newspaper editorial pages, is to ask voters next year to do away with strong protections for promised pension benefits contained in the state constitution adopted in 1970.

The idea seems simple enough. The 1970 charter has a pension clause that makes it all but impossible to reduce the mounting cost of retiree benefits. So, if those protections are undone, the reasoning goes, lawmakers will be freed to reduce pension costs now consuming close to 25 percent of the state’s general funds spending.

But nothing is simple when it comes to pension reform, with advocates of the amendment bypassing union input in arguing to place it before voters on the November 2020 ballot. What’s more, experts say other federal and state constitutional safeguards, including those protecting contracts and barring the taking of property without just compensation, could make it difficult for an amendment that authorizes pension cutting to pass legal muster.

“Everyone has to agree that it’s the right thing because changing the constitution is not easy,” warned Pete Constant, chief executive officer of the Retirement Security Initiative, a San Jose, California-based pension advocacy group that argues for “fair and sustainable” public pensions.

“If you want to get things fixed, if you don’t want to drag it out another decade,” Constant said, “you need to get some sort of buy-in or a solution that everyone can at least not be happy with but be willing to put up with.”

Constant is no sideline commentator in the national debate over managing public employee pensions. He helped negotiate benefit-reducing retirement amendments for public safety, corrections officers and elected officials in Arizona, which, like Illinois, has a similarly worded pension protection clause in its state constitution. The negotiated Arizona agreement between officials and public worker unions was approved by voters in two steps during 2016 and 2018 elections.

There’s no such chemistry at work in Illinois, yet the constitutional change in Arizona has been seen by some as a potentially hopeful route for Illinois to whittle an unfunded liability for five state-administered pension funds that currently sits at $134 billion.

“It’s unsustainable,” said Laurence Msall, executive director of the Civic Federation, citing mounting financial pressure on not just the state, but also Chicago, which has its own debt-laden municipal worker pension funds, as well as hundreds of other financially fragile retirement funds for suburban and downstate police and firefighters.

“It’s not reasonable to be providing the current retirees 3 percent compounded automatic pay increases when the current employees and the rest of the state are not basically being able to pay their bills,” said Msall, referring to a formula for cost-of-living increases in benefits that has been in effect since 1990 and has driven up pension costs.

In Illinois, the political narrative behind changing the Constitution emphasizes the growing financial burden of pension costs while downplaying the primary cause — decades of significant underfunding by public officials.

The legislature’s bipartisan fiscal forecasting arm says much less than half of the $8.5 billion the state was required to pump into its five big pension funds in the fiscal year that ends June 30 went to cover the costs of benefits actually earned by workers that year. The agency projects the annual price-tag of funding the pay-as-you-go portion of state pension costs has essentially plateaued and will actually be slightly lower 25 years from now than it is today.

However, the costs of making up for the chronic underfunding of the past will continue to soar, the agency projects.

“It’s not a crisis, it’s not bankrupt,” is how state Senate President John Cullerton described the pension underfunding in a recent interview on WTTW-TV. “It’s just that it’s a lot of money we’re having to pay for past mistakes we’ve made by not putting enough in.”

The San Diego pension reform, which voters approved by an almost 2-to-1 margin in 2012, dictated that all new employees, except police officers, hired by the city would be placed in a tax advantaged 401(k)-style plan instead of the pension plan covering veteran workers.

Unlike in Illinois and Arizona, California’s state constitution does not contain specific protections against reducing public pension benefits. But the state’s Supreme Court upheld union objections to the San Diego vote, ruling that the city should have tried to work out a deal with unions representing the affected workers before placing the question on the ballot.

The U.S. Supreme Court declined a request in March to intervene, and San Diego’s city council, effectively waving the white flag of surrender, voted in early June to invalidate the public vote. The courts directed the city to place the newer employees in the pension plan for others.

More than four years have passed since the Illinois Supreme Court unanimously struck down a pension-cutting measure approved by lawmakers over the objections of employee unions in 2013, ruling such actions were barred by the state constitution’s pension protection clause. The court squarely placed blame on lawmakers themselves for leading pension systems into crisis by failing to take steps such as tax hikes or a debt refinancing to remedy a problem “for which the General Assembly itself is largely responsible.”

The year after that ruling, Eric Madiar, the former chief counsel for the Democratic-run state Senate, wrote an analysis that concluded justices had also determined the invalidated pension cutting law was “tantamount to a taking of private property.”

That same argument would likely doom future legislative attempts to cut Illinois pensions, Madiar wrote in a 2016 paper for the Kent College of Law and the University of Illinois School of Labor and Employment.

Embracing that line of reasoning is the Civic Committee of the Commercial Club of Chicago, one of the state’s most influential business groups. The Civic Committee had been a driving force behind the 2013 law, but last February reversed course in advocating a bitter-medicine fix to pay for the state’s pension woes: raising income tax rates, broadening the sales tax to apply to more consumer services and ending a blanket exemption from taxation for retirement income.

“The options to reduce the unfunded liability are limited due to constitutional constraints,” the committee said in a 104-page budget report titled: “Restore Illinois: A Foundation for Growth.”

In a recent press conference, Democratic Gov. J.B. Pritzker said it is “important to me that we address pensions,” but added it is something that will be undertaken “over the next several years.” The top priority for Pritzker is to obtain public approval next year for a different constitutional amendment that would allow lawmakers to replace the state’s current flat rate income tax with a system of graduated rates that charge more to the wealthy.

Pritzker claims the change would bring in an additional $3 billion in revenue for the state, which would ease, but not eliminate, the financial pressure posed to the state by wobbly retirement funds.

The inability to shake that financial pressure is an argument seized on by those advocating for undoing the state’s pension clause. But Jean-Pierre Aubry of Boston College’s Center for Retirement Research said pleading poverty is often questionable when it comes to addressing pension funding shortfalls.

“The thing about ‘Can’t afford it’ is not technically true, in terms of solvency,” explained Aubry, the center’s associate director of state and local research. “Sometimes it is, like we can’t afford the cash flows, like Detroit. But a lot of it is they have an unfunded liability that, in point of fact, is a stream of benefits being paid out over the next 75 years. They don’t need all that money today.”

Illinois, Aubry said, is paying the price for “poor management,” but “in a pure fiscal sense, it’s not as acute as some are trying to make it.”

Constant argues that states have an obligation to step in to fix pensions before they collapse upon themselves. “Voters have the right to change the constitution,” he said, but noted there are other constitutional protections that apply to contracts that represent potentially significant legal hurdles to reducing pension costs.

“Changing the constitution is not a simple fix,” Constant said.


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Old 06-26-2019, 04:39 PM
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PENNSYLVANIA

https://www.pionline.com/pension-fun...9B#cci_r=73393

Quote:
Pennsylvania State Employees returns -4.6% for 2018, below its benchmark

Spoiler:
Pennsylvania State Employees' Retirement System, Harrisburg, returned a net -4.6% for the year ended Dec. 31, said Terrill J. Sanchez, executive director, in an email.

The net return fell below the $27 billion pension fund's custom benchmark of -2.2%, according to SERS' newly released comprehensive annual financial report.

As of Dec. 31, the annualized net three-, five- and 10-year returns were 5.4%, 4.5% and 7.1%, respectively, below their respective custom benchmarks of 6.3%, 5.3% and 8.4%.

The pension fund's one-year net return for the year ended Dec. 31, 2017, was 15.1%.

The best-performing asset class for calendar year 2018 was private equity, which returned a net 11.4% for the year ended Dec. 31, below its benchmark of 16.6%, followed by cash at 2.1%, above its 1.9% benchmark.

Fixed income was next, returning -1% (below its benchmark, which was flat at zero), then multistrategy assets at -1.2% (-5.2%), real estate at -2.3% (7.2%), global public equities at -10.4% (-10.1%) and legacy hedge funds, -13.7% (-6.7%).

As of Dec. 31, the actual allocation was 51.6% global public equities, 14.8% fixed income, 14.5% private equity, 8.8% multistrategy assets, 7.3% real estate, 2.8% cash and 0.2% legacy hedge funds.

The target allocation is 48% global public equities, 16% private equity, 12% real estate, 11% fixed income, 10% multistrategy assets and 3% cash.


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Old 06-26-2019, 04:55 PM
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https://crr.bc.edu/briefs/how-has-th...ed-plan-costs/

Quote:
How Has the Decline in Assumed Returns Affected Plan Costs?
by
Jean-Pierre Aubry
,
Alicia H. Munnell
and
Kevin Wandrei
SLP#66
The brief’s key findings are:

Public pension plans have lowered their investment return assumptions, which generally raises costs by requiring larger contributions to fund promised benefits.

However, the decline in assumed returns is due to lower expected inflation, which should have no effect on costs in an inflation-indexed system.

At the same time, plans have increased their assumed real (i.e., net of inflation) investment returns, which lowers costs.

Thus, plans could have lowered costs with these two assumption changes.

But, public plans are not fully indexed so their real costs actually increase as the inflation assumption falls.

The net effect of these changes has been to increase costs, but the increase is much smaller than if the decline in the assumed return was due to a lower real return.

https://crr.bc.edu/wp-content/uploads/2019/06/SLP66.pdf
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Old 06-27-2019, 05:05 PM
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CALIFORNIA
CALSTRS
ESG
DIVESTMENT

https://www.ai-cio.com/news/calstrs-...limate-action/
Quote:
CalSTRS Teams Up with Pope Francis on Climate Action
Significant strides expected to decelerate climate change consequences as major oil, gas companies join accord.
Spoiler:
The California State Teachers’ Retirement System (CalSTRS) announced last week it is joining an initiative led in part by Pope Francis to combat the effects of climate change. Alongside the investment strength of CalSTRS, a number of high-profile oil and gas companies have also joined the accord, including Royal Dutch Shell, Chevron, ExxonMobil, Repsol, Invesco, and others.
“We recognize that a significant acceleration of the transition to a low-carbon future beyond current projections requires sustained, large-scale action and additional technological solutions to keep global warming below 2C while advancing human and economic prosperity,” the group, called The Energy Transition and Care for our Common Home, said in a statement.
In May, CalSTRS formalized carbon-pricing-friendly language in its investment policy language, by making clear the investment committee “needs to…consider actions we can take to mitigate [climate change] risk and identify related investment opportunities. How we engage companies and vote our proxies will also reflect our understanding of the low carbon economic transition.”
The Vatican-endorsed group collectively acknowledged it understands the necessity for corporate disclosures on emissions-related strategies and results, and the importance of carbon pricing towards the reduction of emissions.
Pope Francis met with CalSTRS and executives from the group to emphasize the need for a “radical energy transition” that tackles the most significant challenges of climate change that they can carry out, given their positions within their respective organizations.
“As the largest educator-only pension fund and a global investor, we have a role to play in promoting the global economy’s transition to a low carbon future,” said Harry Keiley, vice chairman of the CalSTRS board, who also is chair of the CalSTRS investment committee. “The CalSTRS board recognizes that climate change poses significant existential and financial risks, and we are committed to understanding and addressing them as an urgent priority.”
CalSTRS is already held to the requisitions of California’s Public Divestiture of Thermal Coal Companies Act, which requires the pension, alongside the California Public Employees’ Retirement System, to divest their respective holdings of thermal coal power, as one of the state’s broader efforts to decarbonize the California economy and to transition to clean, pollution-free energy resources.
The pension’s investment committee recently approved a policy in support of carbon pricing. Subsequently it is also advancing a $2.5 billion program to invest in the stock of companies with low carbon emissions, while at the same time monitoring its external equity managers to ensure they are incorporating sustainability factors in making investment decisions.
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Old 06-27-2019, 05:10 PM
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COLORADO

https://www.ai-cio.com/news/global-e...ado-pera-2018/

Quote:
Global Equities Crushed Colorado PERA in 2018
Poor returns were expected, but it sets new funding legislation in motion next week.
Spoiler:
The Colorado Public Employees Retirement Association returned a dismal -3.5% in 2018, its latest annual report shows.
That’s not to say the poor returns were a surprise. The Colorado plan’s benchmark was -3.6%. This year’s results bring its 10-year performance average to 8.8%.
The yearly review, published Friday by the $49.2 billion plan, shows it lost most of its money from global equities after last year’s bumpy stock market ride—no thanks to President Donald Trump’s trade war with China and anxiety over the Federal Reserve’s interest rate hikes. The Colorado PERA suffered -9.1% in the global equities asset class.
Bonds also weren’t great, but remained essentially flat, returning -0.1% (the benchmark was 0.1%).
Private markets saved the fund from an even worse showing. Real estate was the big winner, reaping 11.1% as it sped past its 7.9% benchmark. And although private equity also did well, at 7.6%, it fell short of the fund’s benchmark, 10.2%.
Colorado PERA’s opportunity fund also did well with a 5.6% return, beating its 2.2% benchmark, followed by cash and short-term investments, which only beat its 1.9% benchmark by 10 basis points, at 2%.
The rough year also caused the plan to fall behind schedule on its 30-year full funding path, which aims for a 100% funded status by 2047. But under a new law, anytime the plan’s investment results are either ahead or behind the 30-year funding target, employer and employee contributions are adjusted down or up, as well as cost-of-living adjusts. To bring the plan in line, member and employer contributions will automatically rise by 0.5%, but the annual cost-of-living increases for beneficiaries will instead decline by 0.25%.
The automatic adjustment reforms, which the legislature passed last year, will take effect July 1. The plan is currently 59.8% funded, according to its website.
Timothy M. O’Brien, the fund’s board of trustees chairman, said legislative changes “are working as intended” to help with funding. “We understand that the reduction in benefits and increase in contributions are difficult for our members and retirees,” he said, adding that the changes are necessary for the fund’s long-term sustainability.
These reforms mean that the adjustments had to kick in the cover the spotty 2018 returns, which displeases plan members. If things went well for the Colorado pension fund, it would instead be cutting its contributions instead of raising them.
The state contribution is also programmed to increase by up to $20 million under the new law, but the PERA will not be evoking that clause.
The fund’s asset mix was 53.4% global equities, 24% fixed income, 9.6% real estate, 8.8% private equity, 3.6% opportunity fund portfolio, and 0.6% short-term investments and cash at the end of December.
The plan returned 18.1% in 2017.
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ILLINOIS

https://www.ai-cio.com/news/illinois...on-allocation/

Quote:
Illinois SURS Gears Up for Unique Crisis-Prevention Allocation
Report reviews primary risks and potential gains with lofty 20% allotment.
Spoiler:
The State Universities’ Retirement System of Illinois is allocating 20% of its portfolio to an asset class called the Crisis Risk Offset Class (CRO), a new segment dedicated to insulating the pension’s assets to major market swings.
Specifically, it’s supposed to diversify away from growth risk, one of the largest risks for institutional investors, by providing a negative conditional correlation to equities and delivering positive returns when equities decline substantially. It’s a good move for the pension, which was 43% funded last year, with $19.4 billion in assets and $25.9 billion in unfunded actuarially accrued liability.
The new allocation for the educator-funded pension was approved late last year and is expected to sit alongside respective broad growth (66%), inflation sensitive (6%), and principal protection (8%) classes. To make room for CRO in its portfolio, the system trimmed allocations to hedge strategies, emerging markets debt traditional growth, and commodities. Overall, SURS believes it’ll reduce the potential returns of the portfolio in the most favorable market conditions and insulate it from substantial negative drawdowns in the event of a recession or other market turmoil.
The portfolio is essentially expected to consummate investments in 20-30 year US Treasury bonds, to be implemented via passive strategy providers. Another segment is to be comprised of trend-following strategies—essentially buying investments spanning equities, fixed income, currencies, and commodities that are increasing in value and divesting from those with sharp reductions. SURS is expected to use derivatives-based leverage to set strategy volatilities here. Additionally the portfolio is expected to invest in assets that generate alternative risk premia.
Staff at the pension believe that the portfolio has just a few major risks, one of them being its unpredictable behavior during shorter drawdowns. It’s “reasonably probable” that CRO will produce negative returns in equity markets during shorter equity drawdowns. Also, SURS staff believes that a material allocation to CRO could potentially result in the portfolio lagging behind its peers during bull markets.
SURS also found that the new policy will “smooth” projected funding scenarios, bringing expected funded ratios closer to their target, and significantly reducing anomalies in funding ratio scenario simulations.
SURS and its consultant, Pension Consulting Alliance, will develop draft policies for the allocation’s investment policy statements and begin the manager search process for different components of the portfolio, with the expectation of concluding by the end of the year. The pension has its sights set on fulfilling the new allocation by 2021.
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