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  #1  
Old 01-01-2020, 12:29 PM
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Mary Pat Campbell
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Default Public Pensions Watch 2020

Fresh year, fresh thread. Woo.

prior years' threads:
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Old 01-01-2020, 12:32 PM
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HUNTINGTON BEACH, CALIFORNIA
PENSION OBLIGATION BONDS

Quote:
Commentary: Huntington Beach’s pension bond proposal feels like déjà vu

Spoiler:
Surf City is risking a fiscal wipeout if it approves a proposal for pension obligation bonds.

According to the Government Finance Officers Assn., POBs are taxable bonds that state and local governments can use “as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt.” However, POBs involve considerable investment risk.

The concept is simple. It is like paying off a flexible credit card balance with a 25-year fixed mortgage. However, there is more than the mere switching of lenders.

On Nov. 18, the Huntington Beach City Council adopted a resolution to use POBs “to refund all or a portion” of its unfunded actuarial accrued liability, or UAL, to CalPERS — the California Public Employees’ Retirement System. The resolution started a judicial validation process for the POBs.


According to the request for City Council action prepared by Dahle Bulosan, acting chief financial officer, the council’s next actions in March or April would “include approval of the preliminary official statement, identifying a not-to-exceed interest rate for the bonds, as well as the underwriting discount.”

According to the city’s analysis, Huntington Beach is choosing to use POBs because it is being charged an interest rate of 7% to service its UAL debt load.

The annual cost to the city budget due to the UAL rose from $4.58 million in fiscal year 2009 to $24.93 million in 2019. It continues to rise and the city’s analysis projects it will double to $46.02 million in 2031.

The city’s analysis warns that, to pay for these costs, Huntington Beach will need another $21.09 million a year by 2031. That could mean drastic cuts.

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We sympathize. As the Daily Pilot reported in June, the city is still recovering from “recession-related cuts.”

Market interest rates are still low. The POB would replace a 7% interest rate with CalPERS, which can be flexible with its annual required contributions. Bondholders would require a maximum interest rate of 3%, requiring a fixed payment schedule. The city could save $8.5 million per year.

On the other hand, the Government Finance Officers Assn. also warns that POBs are very speculative.

In 2012, CalPERS cut its assumed rate of return from 7.75% to 7.5%. CalPERS cut it again in 2016, to 7%.

Warren Buffett recommends using a 6% assumption. Pension expert David Crane of Stanford University says 5% is a more realistic goal for public pensions. In other words, instead of supposedly “saving” 4 percentage points with POBs, Huntington Beach might “save” only 2 percentage points.

In dollar terms, that could mean “saving” $4.25 million a year, instead of $8.5 million.

In addition, making the 7% annual return, with current low inflation and low fixed income yields, means CalPERS is motivated to invest in riskier securities to offset those lower returns in its overall diversified portfolio. With this exposure, if the CalPERS fund were to take a significant market loss, the HB proceeds in the portfolio would suffer the same loss.

Interest payments on the POB debt are not reduced even if the bond proceeds paid into the CalPERS fund have lost value, making this arbitrage strategy a gamble, more so as the equity market is currently at an all-time high.

This scenario is reminiscent of the 1994 Orange County bankruptcy.

Back then, former county treasurer-tax collector Bob Citron used reverse repurchase agreements, a similar arbitrage scheme to POBs, which also “guessed” that short-term interest rates would stay low. As a candidate for office, Moorlach warned in the June 1994 election that this was a dangerous strategy that could bring disaster if short-term interest rates started rising, meaning they inverted.

That is what happened. The rest is a sad chapter in Orange County’s history.

Refinancing a debt should be a prudent strategy, but borrowing to invest brings unforeseen risks for losses. Hoping the CalPERS assumed rate of return is not reduced down to 3%, which it should do over the next 25 years, may not be a reasonable forecast to rely on.

In addition, hoping the Dow Jones market does not drop below 28,000 in the next quarter century may reflect a lack of understanding of economic cycles.

Converting a soft debt into a hard debt, with bondholders unwilling to make payment schedule adjustments, may come to haunt POB issuers in the future.

No wonder the GFOA warned that, “In recent years, local jurisdictions across the country have faced increased financial stress as a result of their reliance on POBs.”

Surf City needs to avoid a potential wipeout, as a few bad economic waves can ruin its future cash flow.

John Moorlach (R-Costa Mesa) represents the 37th district in the state Senate. Shari Freidenrich is Orange County’s treasurer-tax collector.


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Old 01-01-2020, 12:33 PM
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CANADA
FEDERAL
ACCOUNTING

https://www.theepochtimes.com/pensio...m_3189819.html
Quote:
Pension Reform or Deficit Doom?

Spoiler:
How scary are Canada’s federal deficits really? Parliamentary Budget Officer Yves Giroux was alarmed after the recent fiscal update projected a deficit $7 billion higher than the budget announced in March. As it turned out, much of the blame was due to accounting changes on pensions and benefits for federal employees.

Strangely, many observers, including Giroux, want changes to the accounting practice. In reality, the more urgent and necessary policy is to scale back those pension obligations themselves.

Federal employees have the best of all worlds: job security, great pay, and gold-plated pensions. In 2012, the average full-time federal civil servant made $81,353 in salary, and $114,100 if benefits and pensions were included. Defined benefit pension plans pay out 2 percent times the average of the best five years of pay times the years served. This means employees who worked 35 years and made $100,000 at the end of their career will earn $70,000 annually in their government pension.

These pensions are rich enough to ensure that most federal government retirees will make more in their final years doing nothing than most Canadians will during their working years. But that’s not all. The civil servants’ retirement will be augmented by Old Age Security. OAS is not clawed back whatsoever unless someone makes more than $77,580 in their golden years. And if these government employees made other investments during their working years, that’s all gravy too.

The private sector found out long ago that such pension plans are too pricey and risky to maintain. In 2010, General Motors and Chrysler almost sank under the weight of such obligations until the government bailed them out. These days, taxpayers shore up the defined benefit pensions of the federal government’s own workers, plus many provincial and municipal ones.

These pensions are unaffordable now and will only get worse in the future. The retirement of the boomer generation has been called a “grey tsunami” for public finances. Governments will fork out higher payments to those aged 65 and over in pensions and benefit programs just as the percentage of people in the workforce will drop. Even worse, the per-capita cost of health care is 4.4 times higher for a senior than for those aged 15 to 64. The bills will soar.

The trajectory is dismal, if not scary. The Fraser Institute estimated in 2017 that these trends would stretch the shortfall between government expenditures and revenues from 2 percent of GDP up to 7.1 percent by 2045. That means a federal deficit of $143 billion in current dollars. By then Canada’s accumulated federal debt would be about 200 percent of GDP.

That snowball is already growing, as Giroux mentioned in his recent report. The Trudeau Liberals, having abandoned their 2015 promise to balance budgets, had at least committed to lowering the debt-to-GDP ratio. Unfortunately, the fiscal update showed that ratio has already worsened from 30.8 percent last fiscal year to 31.0 percent in this one.

Can anything be done? Absolutely. But political expediency often overshadows long-term considerations. The Harper Conservatives tried to increase the age of eligibility for OAS and cut off the amount of sick days that federal civil servants could accumulate. The Liberals reversed both of those moves.

This government can change course, as can any other. It’s been done before and it can be done again. All it takes is courage.

On the public pension front, Saskatchewan provides an inspiring example. In 1977, the New Democratic Party government led by Allan Blakeney changed the pensions for provincial civil servants and crown employees. New hires would get a defined contribution plan, instead of a defined benefit. Existing employees could stay on the old defined benefit plan or switch to the new.

Under Saskatchewan’s defined contribution plan, employees can contribute up to nine percent of their salary to the pension plan and the government matches it. Fund managers do their best to get a good rate of return, but there are no guarantees. If the stock market loses half of its value, such as the meltdown of 2008, so do the employee pensions. Taxpayers who just lost half the retirement savings in their RRSPs were not handed the additional burden of propping up provincial government employees guaranteed a pension no matter what.

Even though this change was made over 40 years ago, the cash flows required to shore up the old plan are still growing. However, they will soon peak and then decline to zero. No wonder Saskatchewan is one of just two provinces likely to remain solvent in 2041.

The federal government should pass legislation to make defined contribution pensions illegal for public servants at all levels of government. OAS should also be clawed back at a much lower income threshold. The government should not subsidize retirees who make more than working Canadians.

The final option, and the one most likely to occur, is that the federal government maintains the status quo right over the fiscal cliff. After bankruptcy, federal retirees become creditors left with whatever scraps remain. One way or another, these pensions and benefits will diminish.

The sooner the needed adjustments are made, the better and more certain the future for everyone.

Lee Harding is a former political staffer, taxpayer advocate, and think tank researcher. He is now a columnist based in Saskatchewan.


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Old 01-02-2020, 04:00 PM
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DISCOUNT RATE

https://www.ai-cio.com/news/state-pe...paign=CIOAlert
Quote:
State Pension Funds Adjust to ‘New Normal’ of Lower Returns
Some states employ clever tactics to compensate for reduced return on assets.

Spoiler:
State retirement systems are adjusting to a “new normal” of lower expected economic growth over the next 20 years and are lowering their assumed rate of returns en masse, according to a report from Pew Charitable Trusts.

Research by The Pew Charitable Trusts shows that from late 2007 to mid-2009, during the so-called “Great Recession,” public pension plans lowered return targets as a result of changes in the long-term outlook for financial markets. The report said that while the US experienced annual GDP growth of more than 5.5% from 1988 through 2007, the Congressional Budget Office (CBO) now projects only 4% annual growth over the next decade.

Pew’s database includes the 73 largest state-sponsored pension funds, which in aggregate manage 95% of all investments for state retirement systems. The think tank said that more than half of the funds in its database lowered their assumed rates of return in 2017 to an average of 7.3%. That’s down from more than 7.5% in 2016 and 8% in 2007 just before the recession hit.

“These changes reflect a new normal in which forward-looking projections of expected economic growth and yields on bonds are lower than those that state pension funds have historically enjoyed,” said the report.

Although lower assumed rates of return leads to higher plan liabilities and increases required employer contributions “making such changes can ultimately strengthen plans’ financial sustainability by reducing the risk of earnings shortfalls, and thus limiting unexpected costs.”

The research found that despite the decline in assumed rates of returns, pension plan asset allocations have remained largely unchanged. Stocks and alternative investments have stayed relatively stable in recent years at around 50% and 25% of assets, respectively. Pew said that this indicates that most fund managers and policymakers are adjusting assumed rates of return in response to external economic and market forecasts, not on shifts in internal investment policies.

Pew said that many plans are using clever tactics to alleviate the higher required contributions that come from more conservative return assumptions. Some state pension funds have done this by phasing in discount rate reductions. That effectively alters how they calculate future liabilities and allows them to spread out increases in contributions over time.

The report cited policies enacted by retirement systems in California, Wisconsin, and North Carolina that attempt to deal with the problem of a lower return environment.

The California Public Employees Retirement System (CalPERS), for example, announced in 2016 that it would decrease its assumed rate of return incrementally from 7.5% in 2017 to 7% by 2021. Pew said that even such incremental changes can have “a significant impact” over time as a one percentage point drop in the discount rate would increase reported liabilities across US plans by more than $500 billion.

The Wisconsin Retirement System’s (WRS) long-term return assumption for 2017 was 7.2%; however, the plan uses a lower discount rate of 5% to calculate the cost of benefits for workers once they retire. North Carolina effectively uses two discount rates to set contribution policy. The Tar Heel state determines a contribution floor based on the plan’s investment return assumption of 7%. It also has a ceiling using yields on US Treasury bonds as a proxy for what a risk-free investment could return.

“The economy is expected to grow at a modest rate over the next decade, and pension fund investment returns are unlikely to return to historic levels for the foreseeable future,” said the report. “California, North Carolina, and Wisconsin provide examples of alternative approaches that can reduce investment risk for public pension funds and government budgets alike.”


https://www.pewtrusts.org/en/researc...ates-of-return
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Old 01-02-2020, 04:02 PM
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PUBLIC PLAN BOARDS

https://www.ai-cio.com/in-focus/shop...gement-boards/

[just excerpting]

Quote:
CIOs Discuss Overcoming Sector-Based Challenges with Management, Boards
From corporations to endowments, CIOs deal with idiosyncratic matters, depending on the sector.

Certainly, the success of chief investment officers everywhere hinges on relationships with management and the board. But, that’s not to say all the issues that arise are the same everywhere. Investment chiefs in different sectors, from corporations to endowments, deal with matters that are, if not unique to the particular type of institution, at least shared at only some other organizations.

These issues aren’t all bad, of course. While some matters create tricky situations for CIOs, others can make life easier. Here’s a look at three sectors:

......
Public Pension Funds

Spoiler:
Public pension fund board members typically are appointed by elected officials or are elected themselves. That creates a great many headaches for CIOs. For one thing, board members, who likely have no business or finance background, require a good deal of behind-the-scenes education, according to many industry observers. Plus, they likely are under pressure from the plan’s membership to champion specific policies. “They feel they represent their constituents,” says one former CIO. In addition, lacking business expertise, many board members may not be equipped to address the financial pressures plans are expected to experience thanks to a low-return environment, according to some CIOs.

One related problem area: the matter of compensation. Many public pension CIOs face high staff turnover, largely because boards don’t want to approve compensation that can compete with private financial sector companies. “They’re not paying enough to keep good people,” says the former CIO.

Still, some bigger public pensions have stepped, adding performance incentive pay to overall compensation. Take the $250 billion California State Teachers’ Retirement System (CalSTRS), which, since 2006, has paid a compensation package with base salary plus annual incentives based, in part, on investment performance above set benchmarks over a three-year period, according to CalSTRS. “Our incentive pay structure is one way that we can attract the talent necessary to deliver returns and pay benefits to California’s teachers,” said Deputy CIO Scott Chan in an email.

As for who makes the decisions, some public pension funds give their CIOs and investment teams all the authority to choose managers and the like, while many others don’t. In cases where the board is hands-on, the best time for CIOs to try to change the system is when they first come on board, CIOs say. For example, one CIO was able to persuade the board to redraw the investment staff’s responsibilities not long after joining the organization. “It was a honeymoon period,” says the CIO. Another useful tactic: bringing in third-party experts, like outside portfolio asset managers, to reinforce the message. “The board gets tired of hearing the CIO repeating the same thing over and over,” says the CIO.

In some cases, CIOs see a significant appetite for change among boards. “Pension funds are moving from a 20th century government-based model to a 21rst century, more private sector-like model,” says Dominic Garcia, CIO of the $16 billion New Mexico Public Employees Retirement Association.

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Old 01-06-2020, 02:22 PM
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https://www.forbes.com/sites/ebauer/.../#7cf707105dc3

Quote:
Public Pension Funding Crisis: Why Should Today’s Workers And Retirees Pay The Price?
Spoiler:
Here are some excerpts of interest from a May 26, 1965 Chicago Tribune story, “Police, Fire Pensions Tabled”:

“Three important police and firemen’s pension bills appeared defeated today but efforts may be made to revive one which would consolidate 335 pension systems outside of Chicago. . . .

“Robert Erickson, a spokesman for the Civic federation, Chicago taxpayers’ organization, was happy when two tax-increasing bills were tabled by their sponsors.

“One would have required a property tax boost to yield 90 million dollars in the next 10 years to build up reserves for the Chicago police pension fund. Erickson said this fund is in good shape, now 35 per cent of actuarial requirements, and steadily increasing. . . .

“Supporters of the consolidation bill for municipalities with 5,000 to 500,000 population cited figures showing how far these pension funds are lagging behind Chicago’s 35 per cent in relationship to the actuarially sound figures.

Today In: Money
“For police pension funds, in Cicero it is 4 per cent, Decatur 6 per cent, Elgin 3 1/2 per cent, Glencoe 11 per cent, Springfield 7.4 per cent, Forest Park 8 per cent, Rock Island 8 1/2 per cent, Freeport 9 per cent, Galesburg 12 per cent, Moline 4 1/2 per cent, Quincy 5 per cent, Pekin 9 1/2 per cent, Waukegan 8 per cent, and Peoria 10 per cent.”

And the reasons why the bill failed are much the same as why the recent consolidation law only consolidates the pensions’ asset management, not the overall pension administration, that is, the fact that the high expenses of these small local pensions are due to board members, administrators, and lawyers getting generous paychecks for their work.

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But here’s what’s astonishing about this article on the pensions’ funded status: the fact that the 35% funded status for Chicago’s pension plans is treated as being “in good shape” — at least in comparison to cities where there is effectively no advance funding at all, but rather, pensions were run on a pay-as-you-go basis with a nominal reserve fund.

Now, that was 55 years ago, and in the meantime, the city and the state both began to accept the concept that not just private sector but also public sector pension plans should be funded in a proper actuarial manner, that the pension fund should be more than just the single-digit percentage funds listed above. And indeed, by the time the oldest available records are available online for the Firemen's pension fund and the Policemen's plan, the funds had made at least some progress above this 35% (though to what extend this is due to an increase in contribution levels vs. a move to riskier assets and higher investment return assumptions isn’t possible to say).

police + fire funded status
History of police and fire funded statusCHICAGO POLICE AND FIRE ACTUARIAL REPORTS
At the same time, the pension (asset-only) consolidation wasn’t passed after so many years due to a new resolve to fund pensions but in part due to a promise of something-for-nothing (higher asset returns and lower expenses) and due to pressure placed on local communities due to the 2011 “pension intercept” law by which the Illinois comptroller withholds state funds from towns and cities which don’t properly fund their pensions to a “90% in 2040” target.

And here’s the challenge that I am working out for myself and will pose to readers as well:

It will not surprise readers that one of my objectives in writing on this platform is to play a role in making some progress, however small, towards pension reform in those states and cities (Illinois and Chicago, yes, and those others with dreadful funding as well) with atrociously-poorly funded public employee pensions.

Yet the most obvious rejoinder from any worker or retiree at risk of having their pensions cut (COLA or guaranteed fixed increases curtailed, generous early retirement provisions removed, accrual formula reduced for future accruals) is a simple one: public pensions have been underfunded by modern metrics, for generations, essentially since the inception of those pensions. (See here and here for the early history of the Chicago Teachers’ Pension Fund, which was much the same.) Why should this generation be the one to suffer from the obligation to bring the plans up to funded status — either as pensioners or participants with benefit cuts, or as taxpayers?

To be sure, the politicians repeating over and over again “pensions are a promise” don’t explicitly say this. When Mayor Lightfoot acknowledges that the city will be hard-pressed to make its required payments in to the pension funds and still reach her other goals for city services, but can’t voice any solution other than stumbling around various ways of saying, “this is hard” (for instance, back in August), this is surely what’s underlying her statements (or lack of meaningful statements): “it’s unfair that the rating agencies now think pensions should be funded.”

And I’ve written in the past on why it actually does matter to pre-fund pensions, but it is admittedly not easy to persuade, well, anyone, that the right thing to do with whatever tax money you can scrape up is to put it in a pension fund, when you’ve got people clamoring for it to be spent on education or mental health or housing or any number of other items on a wishlist.

Prizker regularly says that there’s no point in expending political capital on a pension reform amendment because it wouldn’t have the public support it needs ot pass, and I regularly complain that his willingness to expend not just political capital but also cold hard cash on his graduated tax amendment shows that it’s really about his priorities, but it also does fall to the rest of us, in those states and cities with these woefully-underfunded pensions, to make the case that it does indeed matter.



https://www.forbes.com/sites/ebauer/...s#3f7d3f1e5814
Quote:
The Public Pension Funding Crisis And The First Law Of Holes

Spoiler:
“If you find yourself in a hole, stop digging.”*

Many politicians in states and cities with severe levels of pension underfunding will assert that they have indeed followed this instruction.

Illinois, after all, implemented “Tier 2” pensions for workers hired in 2011 or later, with cuts so drastic, for teachers, at any rate, that, on the asset-return discount rate basis used in the valuation, new participants pay more in contributions than they receive in benefits — that is, the “employer normal cost” is negative. For state workers and university employees, there is a (positive) employer normal cost, as is also true of City of Chicago workers, but they all face lower (and noncompounded) cost-of-living adjustments, increased retirement eligibility ages, stricter vesting requirements, and pay caps which bite at a lower inflation-adjusted pay level year after year. (Conveniently, the “Tier 2” pensions legislators implemented for new legislators and judges were much more moderate in their cuts, with COLAs based on CPI and continuing to compound and with pay caps increasing at CPI.)

Various other such plans have similar “tiers” — New Jersey’s system, for example, ranges from Tier 1 (hired before July 1, 2007) to Tier 5 (hired after June 28, 2011), with tweaks in benefit accruals, retirement ages, and ancillary benefits, for each tier. Tier 1 employees were able to retire as early as age 60 without reduction (or age 55 with 25 years of service); Tier 5 employees must now wait until age 65, with early retirement of any kind contingent on 30 years of service, and requiring a 3% per year benefit reduction.

Today In: Money
And politicians are quite willing to pat themselves on the back about these changes. Here’s Illinois State Senator Heather Steans (Democrat representing Chicago’s far north side/lakefront) speaking at a City Club of Chicago forum (see my Sept. 11 article for fuller comments):

“I get frustrated when people suggest that the Illinois Senate, the General Assembly in the state have not been doing things, however; in 2011 we implemented a Tier 2 pension system that dramatically changes pensions for employees hired as of 2011 on. That’s already done, so we’ve already made significant changes that upped the retirement age and that really changed the compounded COLA that folks get in the future. That’s been changed. It’s the legacy costs we’re dealing with.”

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But a mere two months after Steans’ confident statement that everything’s been fixed but the legacy costs, the legislature, as a part of their November 2019 asset-management consolidation measure for local police and fire pensions, unwound several elements of the Tier 2 cuts, without any actuarial analysis but instead viewing the projected higher asset returns as “found money.”

Which means that the legislature hasn’t stopped digging at all. There’s simply digging a bit more slowly than before.

What would it take to truly do so?

True not-digging would require that the state of Illinois,

first, begin participating in Social Security with respect to all public employees — currently the lion’s share of direct state employees do so, but not municipal employees, teachers, university employees, or public safety workers (with respect to teachers, this places them among 15 states which are in the minority nationally); and,

second, to move to a defined contribution (401k-equivalent) or risk-sharing pension plan for supplemental benefits, so as to establish the principle that “you get what you get and you don’t throw a fit.” (Let’s call it the YGWYG public pension principle.) This means that if unions don’t approve of the state’s annual appropriation to fund their pension plans, they must fight tooth and nail to boost it, rather than preferring better raises in their here-and-now cash compensation knowing that future generations will be locked into paying their pensions regardless of the state’s efforts, or lack thereof, to fund them at the time they were accrued.

And what does “risk-sharing pension plan” mean? I’ve cited the model of Wisconsin’s public pension system in the past. There, retirement benefits are adjusted up and down as needed to reflect investment returns from year to year. What’s more, employee and employer contributions are recalculated every year based on a fixed formula (but the latter are far lower and far less variable than Illinois’).

There’s another model, too, or at least I hope there will be, soon: the “composite plan.” Never heard of it? I don’t blame you. It’s included in the Senate multiemployer pension plan rescue proposal, and has its origins in a proposal by the NCCMP (a multiemployer pension lobbying group), which aims to create a structure similar to the “Collective DC” plans of the Netherlands, in which participants receive protection against outliving their benefits by joining together, well, collectively, rather than relying on guarantees made by an employer.

How do we get from here to there? It’s not easy, but it involves refusing to accept claims by politicians that they have fixed everything but the legacy costs, unless they have made these changes.

(*See Wikipedia for some brief background on this adage.)


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Old 01-06-2020, 06:28 PM
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ILLINOIS

https://www.chicagotribune.com/opini...outputType=amp
Quote:
Editorial: When taxpayers trust Springfield ... Part 7: Warren Buffett and others warned about pensions. Illinois pols made things worse — and now demand more tax dollars.

Spoiler:
Imagine an Illinois whose state and local officials hadn’t buried taxpayers under layers of pension crises.

The government in Springfield wouldn’t have to spend a fourth of its annual budget just on retirement costs. There’d be more money for education, health care and public safety. And Democrats wouldn’t be hustling even more billions via their misleading graduated income tax pitch.

A century of ignoring fire alarms
That prosperous Illinois might exist if, sometime in the last century, this state’s politicians had tamed their pension monster. Eric Madiar, a Springfield lobbyist and attorney, in a prior life researched Illinois pension history for state lawmakers. A paragraph from his work cited one crucial alert the politicians have foolishly flouted:

.

In 1917, in a report commissioned by the General Assembly, the Illinois Pension Laws Commission described the condition of the State and municipal pension systems as “one of insolvency” and “moving toward crisis” because the “financial provisions (were) entirely inadequate for paying the stipulated pensions when due.” The Commission recommended that the General Assembly adopt a “reserve plan” whereby the amount needed to pay pensions when due “should be set aside at the time service is rendered” by the State and municipalities so “each generation of taxpayers pays its own obligations for services rendered.”

[Most read] Some Illinois marijuana dispensaries halt recreational sales amid product shortages. ‘We knew we were going to run out. It was a matter of when, not if.' »
.

Straightforward advice. Yet a century of Springfield pols have dodged real reforms. Instead they’ve pretended the pension debt they’ve imposed on taxpayers is a nasty surprise that just happened to Illinois, a natural disaster for which they bear no blame.

In truth it’s a debacle they’ve created, tolerated and made worse. State government admits to a $137 billion unfunded pension liability owed by Illinois taxpayers. But the independent Moody’s Investors Service says the true number is $240 billion.

The Oracle of Omaha foresaw fiascoes like Illinois'
Throughout these 100-plus years of Illinois pension fiascoes, economists and finance experts have alerted politicians — the stewards of taxpayer dollars ― that their mismanagement of pensions invited disaster.

Today we focus on perhaps the most succinct of these pension prophets. Almost a half-century ago, investment manager Warren Buffett, aka the Oracle of Omaha, drafted a 19-page memo to Katharine Graham, head of The Washington Post Co., on whose board he served. Buffett distilled decades of lessons about pension follies into a classic document that for decades has been universally available — and respected for its prescience.

Easier to promise than to pay
Buffett has given the Tribune Editorial Board permission to quote his document’s warnings — many of which, like those of other finance specialists, foreshadowed the crises that Illinois state and local pols foisted on taxpayers:

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The first thing to recognize, with every pension benefit decision, is that you almost certainly are playing for keeps and won’t be able to reverse your decision subsequently ... So rule number one regarding pension costs has to be to know what you are getting into before signing up. Look before you leap. There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. ... The lexicon is arcane, the numbers seem unreal, and making promises never quite triggers the visceral response evoked by writing a check.

A passage that screams, ‘Wake up, Illinois!’
Buffett also explained the risks created by public officials who doomed the taxpayers they should have protected. They happily expanded pension benefits for their public union allies while failing to invest enough money to meet all those fast-inflating obligations.

Decade after decade, voters who didn’t understand all the risks trusted state and local politicians to look out for their interests:

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And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs. In no other managerial area can such huge aggregate liabilities — which will be reflected in progressively increasing annual costs and cash requirements — be created so quickly and with so little immediate financial pain.

The folly of trusting Springfield ...
You might think this century of failure would humble today’s Illinois politicians. Wrong. The current crop of Democrats who run Springfield want voters in November to approve switching the state from a flat income tax to a progressive tax. Their scheme at first would hit only the top 3% of income tax filers.

For how long? They don’t say. Here’s why.

Soaking this small group can’t produce enough new revenue to pay for the Democrats’ costly agenda and to meaningfully reduce their vast pension shortfall. Soon enough the pols will stick millions of middle-class taxpayers, too, with higher income tax rates.

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In a smarter Illinois, the Dems would “Let the people vote,” in Gov. J.B. Pritzker’s memorable refrain, to permit reduction of public pension benefits earned in future years. But in the Illinois we have, a century of failure to rein in runaway pensions becomes an argument for higher tax rates. As if to tell taxpayers, Gosh, who knew this could happen? We didn’t think about runaway pension costs. Too bad — now give us more billions of tax dollars.

As Buffett warned:

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... (M)ost managements I know — and virtually all elected officials in the case of governmental plans — simply never fully grasp the magnitude of the liabilities they are incurring by relatively painless current promises. In many cases in the public area the bill in large part will be handed to the next generation, to be paid by increased taxes or by accelerated use of the printing press.

‘Will they gouge my company? My employees?’
Half a century after his pension warnings, Buffett has seen many of them come true. Pension costs are the tail that wags governments. In Illinois and other sloppily managed high-tax states, politicians haven’t suffered consequences — yet — for chasing off taxpayers and deterring potential employers:

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· With rising pension burdens and rising taxes, Illinois has seen big drops in population for six straight years. New census estimates say that in the last year alone, Illinois contracted by another 51,250 people. The six-year total exceeds 223,000.

· In an early 2019 interview with CNBC, Buffett explained why many employers steer clear of states where, as in Illinois, politicians have doomed taxpayers: “If I were relocating into some state that had a huge unfunded pension plan, I’m walking into liabilities. Who knows whether they’re going to get it from the corporate income tax or my employees — you know, with personal income taxes. ... And when you see what they would have to do, I say to myself, ‘Why do I want to build a plant there that has to sit there for 30 or 40 years? ’Cause I’ll be here for the life of the pension plan, and they will come after corporations, they’ll come after individuals. They — just — they’re gonna have to raise a lot of money.”

Vote down the graduated-tax amendment
The alternative to trusting Illinois politicians with more billions in taxes is that voters in November reject Pritzker’s constitutional amendment to allow graduated income tax rates.

If you missed this point we offered in the hubbub before the holidays:

Illinois politicians won’t reinvent and reform government until voters force them to reinvent and reform. Make your 2020 resolution now: I’ve looked at Springfield’s record — and I’m voting “No.”

Editorial: When taxpayers trust Springfield ... Part 5: How many Illinois pols would return this money to taxpayers? »

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ARIZONA

https://www.ai-cio.com/news/arizona-...paign=CIOAlert

Quote:
Arizona State Pension Is Headed for ‘Complete Desperation,’ Research Group Warns
Pension’s unfunded liabilities making it difficult to hire, retain teachers.


Spoiler:
The Arizona Chamber Foundation (ACF), a research group, decries the Arizona State Retirement System’s (ASRS) dwindling funded ratio, which it claims is trending toward “complete desperation.”

As a direct result of the ASRS’ situation, the state’s educational environment degraded in an effort to help cover the pension’s unfunded liabilities. The ASRS quadrupled state teachers’ contributions to help mitigate their dwindling funded ratio, subsequently hampering the state’s ability to attract and retain teachers.

The pension used to have a $1 billion funding surplus in 2002,the group’s report contended, but since its issues began, it looked to teachers’ paychecks for help.

“By 2002, ASRS…had 104.% funds needed to fund beneficiaries, despite taking a modest 3% of payroll from ASRS participants,” the ACF said in its “Modernizing Teachers Pensions for the 21st Century” report. “Starting in July 2019, the system will have increased the burden on classroom teachers, taking 12.11% directly from teachers and other contributors and another 12.11% from teachers’ schools.”

Additionally, the ASRS increased contributions from the schools themselves to 12.11%. The school contribution has a compound effect on teachers’ salaries, the ACF explained, meaning they have less room in their budget to provide pay raises for staff.

Despite schools and teachers paying four times more than they used to, the solvency of the system has continued to decline. “Arizona’s pension system for teachers has not yet reached the precipice of complete desperation, but it is trending in that direction,” the report reads.

One of the major consequences is lessened attraction of Arizona’s educational market to prospective teachers.

“By reducing take-home pay, the pension system can deter teacher recruitment efforts even if prospective teachers lack awareness of details regarding factors constraining take-home pay. In other words, prospective teachers don’t need to understand that pensions absorbing a large portion of payrolls contributes to a lower teacher pay—they may be deterred simply because they believe it is low,” the AFC report said.

Also, the structure of the ASRS’ payment scheme is duly antiquated. Currently, teachers must pay out contributions but won’t be completely vested in the system until they spend five years working under the system – a benchmark that only 30% of workers reach. As a result, the average teacher forgoes pay, but doesn’t receive the corresponding pension benefit.

“ASRS, in short, is built for an era in which people signed on with an employer, worked in a multi-decade career with the same organization, and then retired. This does not typify the modern American labor market in general, nor the current teaching profession,” the report said.

“ASRS, in short, requires modernization.” The AFC did not propose any solutions and said that is better to be suggested and coordinated by the pension’s staff.


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NEW YORK CITY

https://reason.org/commentary/new-yo...s-100-billion/
Quote:
New York City’s Unfunded OPEB Liability Surpasses $100 Billion
The city’s unfunded other post-employment benefits liability exceeds that of any other local government in the country, as well as that of most states.
Spoiler:
A recent actuarial report issued by New York City’s controller shows the city’s unfunded other post-employment benefits (OPEB) liability rose by $9.3 billion to $107.8 billion during the 2019 fiscal year.

Due to a recent federal tax change, this amount should be trimmed slightly before it appears on New York City’s Comprehensive Annual Financial Report next year but will likely remain well above $100 billion.

The city’s unfunded OPEB liability exceeds that of any other local government in the country, as well as that of most states. New York City’s large pool of OPEB red ink is attributable to several causes, including its large number of participating employees and retirees, its cost of benefits per retiree, and a lack of pre-funding.

The actuarial report shows a total plan membership of 583,645 individuals. Most of these members are either currently on the city’s payroll or retirees currently receiving benefits. A smaller number have left city employment, but are eligible for the plan and have yet to begin receiving benefits. The large membership base is reflective of the city’s relative size (far larger than every other city and all but one US county) and the centralized nature of the local government. In New York, a unified government executes all municipal and county functions and also has educational responsibilities, which are often handled by independent school districts in other cities.

Various categories of city employees vest in the OPEBs after five, 10 or 15 years of service. Benefit eligibility typically begins at retirement. Spouses and children up to the age of 26 are also covered, but dependent coverage normally terminates after a member’s death.

The city pays the full health insurance premium for beneficiaries who enroll in “basic coverage,” which includes hospital and physician networks but not prescription drugs. For younger retirees who are not yet eligible for Medicare, the city’s cost for basic coverage ranges up to $20,000 annually for individuals, and more when family members are also covered. Additionally, the city makes an annual contribution of about $1,800 to union-administered “welfare funds” that provide various forms of supplemental coverage including prescription drugs.

During the debate over Obamacare, policy experts advocated disincentives for high-cost plans such as the one offered by New York City. As a result, the Affordable Care Act included an excise tax on high-cost employer-sponsored health coverage, at a rate of 40 percent of per-member benefit costs above a certain threshold. This so-called “Cadillac tax” was originally slated to take effect in 2018 but Congress later postponed its imposition to 2022. New York City’s actuaries estimated the present value of future Cadillac tax payments at $1.8 billion, which is included in the city’s OPEB liability.

But the Cadillac tax was repealed in the most recent $1.4 trillion federal appropriations budget bill, HR 1865, signed by President Trump in December 2019. As a result, the city should be able to reduce its reported net OPEB liability by $1.8 billion, leaving its net OPEB liability at around $106 billion.

As of June 30, 2019, the city’s OPEB plan had a fiduciary net position of just $4.7 billion, which was little changed from previous years. Most of the assets are invested in short-term fixed-income instruments that are generating minimal interest.

With a funded ratio of just 4 percent and no plans to ramp up pre-funding, New York is obliged by Governmental Accounting Standards Board (GASB) regulations to use a low discount rate for its OPEB liabilities. In 2019, it used a rate of 2.82 percent down from 3.01 percent the previous year. This compares to a 7 percent discount rate applied to the city’s pensions, which—according to the latest valuation—are about 70 percent funded.

For these reasons, the city’s net OPEB liability is about double the amount of its net pension liability. Retiree medical costs are the largest contributor to New York’s negative net position. This OPEB liability is also putting negative pressure on the city’s bond ratings. While the federal repeal of the Cadillac tax will help the city’s financial position slightly, policy changes will be needed to make a major dent in unfunded OPEB liabilities.

Options the city might consider include pre-funding benefits, tightening eligibility requirements and increasing contributions that retirees are asked to pay towards the cost of their coverage.


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FORFEITURE

https://www.latimes.com/california/s...on-guilty-plea

Quote:
Duncan Hunter will probably get his congressional pension despite guilty plea

Spoiler:

SAN DIEGO — Last month, Rep. Duncan Hunter pleaded guilty to felony conspiracy for converting campaign funds to personal use, but that doesn’t mean taxpayers will be off the hook for supporting the congressman after he retires.
Hunter, an Alpine Republican who was sworn into office Jan. 3, 2009, has garnered at least 11 years of service toward the congressional portion of his pension, meaning he’ll still probably receive thousands of dollars in retirement benefits related to that service in addition to benefits from prior military service.

The amount of money in Hunter’s congressional pension is not publicly known, and the Congressional Research Service and the Office of Personnel Management declined to provide information regarding his benefits. Hunter remains in Congress, although he said he would step down “shortly after the holidays.” He is to be sentenced March 17.

Based on formulas outlined in a paper released by the research service, it is estimated that Hunter, 43, would receive an annual payment of at least $32,538 from his congressional pension, which he can begin accessing when he turns 62.


“I do not have any information to provide regarding Congressman Hunter’s personal finances, including the status of his retirement or pension,” said Michael Harrison, a spokesman for Hunter.

Legal and policy experts said Hunter would probably keep his taxpayer-funded pension even though he violated the public’s trust.

“Corrupt members of Congress deserve time in prison, not taxpayer-funded federal pensions,” said Adam Andrzejewski, chief executive of OpenTheBooks.com, a project of the open government group American Transparency. “However, the rules are so lax, no member has ever been stripped of their congressional pension.”

Andrzejewski provided an Oct. 9, 2019, email in which an official with the U.S. Office of Personnel Management stated that no members of Congress had been stripped of their retirement benefits because of a conviction.

For example, former Rep. Corrine Brown, a Florida Democrat convicted in 2017 on 18 of 22 corruption charges including mail fraud and filing a false federal tax return, is collecting pension benefits from prison, as is former Pennsylvania Rep. Chaka Fattah, who was convicted in 2016 on 23 counts of racketeering, fraud and other corruption charges.

Former San Diego Rep. Randy “Duke” Cunningham, a 78-year-old Republican who was convicted on federal charges of tax evasion and conspiracy to commit bribery, mail fraud and wire fraud in 2005, is also reportedly still eligible for or is currently receiving his congressional pension.

Legal and policy experts said Hunter was unlikely to be the first member of Congress to have his congressional retirement benefits stripped away because, although conspiracy is among the crimes that can cause lawmakers to lose their pension, the law covers only conspiracy to commit 29 specific types of acts — and all of them relate to conduct as an officeholder or involving the federal government, federal employees or public property.

Hunter’s conspiracy crime was related to campaign finance activity that is not among the specified types of acts.

“He pleaded to a single felony but not one that is specifically included in the Honest Leadership and Open Government Act,” said Beth A. Rotman, an attorney who is the money in politics and ethics program director for the good government group Common Cause.

That 2007 law, which was sponsored by Democratic Nevada Sen. Harry Reid in the Senate and by Democratic Michigan Rep. John Conyers in the House, amended parts of the Lobbying Disclosure Act of 1995 in an attempt to reduce how frequently lawmakers and staff shuffled between federal jobs and the private sector. Hunter’s father, Rep. Duncan L. Hunter, voted in favor of the law before retiring from Congress the following year.

Rotman said the law includes many more crimes than it did 20 years ago, but “it’s not everything. In cases like this, the desire to keep the pension could be one of the reasons someone accepts a plea that is only a portion of the charges.”

Of the 59 counts prosecutors dropped as part of Duncan and Margaret Hunter’s respective plea deals, dozens of counts are for felony wire fraud, allegedly committed after the federal law governing stripping of pensions was updated in 2012 with the passage of the Stop Trading on Congressional Knowledge Act. Felony wire fraud is among the specific crimes listed in the law as offenses for which a conviction would cost members of Congress their pension.

Hunter’s vote was among 417 in favor of the STOCK Act, which passed in the House in February 2012 with two members voting in opposition and 14 abstaining, according to the website for the clerk of the House.

Rotman said the guilty pleas could still cost the Hunters if their sentences included the maximum $250,000 fine, for example, or if they did not declare as income on tax returns the $150,000 to $200,000 they admitted to using for personal expenses and the Internal Revenue Service came calling to collect back taxes.

Hunter was indicted in August 2018 on 60 federal charges that he stole $250,000 of campaign money and used it for family vacations, groceries, extramarital affairs and other non-campaign uses dating back to at least 2010.

In a signed plea agreement filed Dec. 3 in federal District Court, Hunter declared that he understood that by pleading guilty to the single count, he “may be giving up, and rendered ineligible to receive, valuable government benefits and civil rights, such as the right to vote, the right to possess a firearm, the right to hold office, and the right to serve on a jury.”

The agreement contains no mention of pensions.

Hunter and former Rep. Chris Collins of New York were the first two Republican members of Congress to support Donald Trump’s presidential bid in 2016. Collins resigned from Congress on Oct. 1 and pleaded guilty to insider trading charges. Because of the specific counts he agreed to, Collins is reportedly more likely to lose his pension benefits than Hunter.
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