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  #11  
Old 01-07-2020, 09:42 PM
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Mary Pat Campbell
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https://finance.yahoo.com/news/publi...110035067.html

Quote:
Public Pensions Throw Their Weight Around in Private Debt

Spoiler:
(Bloomberg Opinion) -- Pension funds are the ocean liners of global markets. In the U.S. alone, state and local retirement funds have $4.57 trillion in assets. Across the developed world, the pool of money is close to $30 trillion. That means any change in their investment allocation, no matter how incremental, can create a seismic shift in certain corners of finance.

The hedge-fund industry, for example, swelled over the past two decades in no small part because of eager pension managers. Local officials banked on star investors delivering outsized gains to help the retirement funds meet their lofty annual return benchmarks, which in some cases exceeded 7%. According to data from Pew Charitable Trusts, U.S. state pension funds had a 26% allocation to alternative investments in 2016, up from just 11% in 2006.

Of course, with more hedge funds came fewer ways for them to profit — and pensions took notice. In September 2014, the California Public Employees’ Retirement System rocked Wall Street by announcing that it would divest the entire $4 billion it had across 24 hedge funds and six hedge funds of funds. In 2016, New Jersey’s pension fund cut its $9 billion hedge-fund allocation in half and New York City’s retirement fund for civil employees exited its $1.5 billion portfolio. More than 4,000 hedge funds have been liquidated in the past five years. With even some of the most well-known managers calling it quits, hedge funds are clearly in retreat.

The market for private debt and direct lending is trending in precisely the opposite direction. Managers are raising money hand over fist, as they have in each of the past few years. Assets in private-credit strategies now total more than $800 billion — doubling from 2012 and up from less than $100 billion in 2005. By and large, it’s been simply too hard to pass up yields that sometimes crack double digits when typical junk bonds offer just 5%.

Not surprisingly, public pension funds want in on the action. An overwhelming majority of private-credit investors expect them to pour money into the asset class in the next three years. While that may sound like good news for the industry in the short-term, it could be an early indication that it’s game over for the booming market as we know it.

Bloomberg News’s Fola Akinnibi and Kelsey Butler talked to Al Alaimo, who oversees credit investments for Arizona’s $41 billion State Retirement System. He’s aiming to boost direct lending to 17% of the portfolio from about 13.6%. They also noted that the Ohio Police & Fire Pension Fund and the Teachers’ Retirement System of the State of Illinois are increasing their private-debt exposure. More broadly, 281 U.S. public pensions were involved with private credit in 2019, up from 186 in 2015, according to Preqin data. And they’ve increased their median allocation to 2.9% from 2.1%.

Now, that’s far from a huge stake. And pensions are something of an ideal candidate to invest in illiquid private debt, given that they have long time horizons and aren’t vulnerable to investor withdrawals, in contrast to Neil Woodford’s flagship fund and Natixis SA’s H2O Asset Management.

That doesn’t mean that they can’t get into trouble, though. As I wrote in August, Alabama’s pension funds got caught up in the bankruptcy of luxury movie and dining chain iPic Entertainment Inc. The state’s pensioners now own and operate the theaters, for better or worse. Marc Green, the pension’s chief investment officer, recently told The Wall Street Journal that working through distressed investments has paid off before and iPic may yet be a winner for the Retirement Systems of Alabama.

It’s worth heeding the lesson from the struggles of hedge funds: What worked before might not continue to work in the future, especially if more money is chasing the same strategy. “We wish there were fewer people in the marketplace,” Alaimo said about private debt.

Of course, that’s true for any market. But it’s especially risky for private credit and direct lending because handing all the power to borrowers gives them an opening to lower yields and weaken creditor protections. If that sounds familiar, it’s because that’s also what happened in the leveraged-loan market as investors flocked to the floating-rate securities during the Federal Reserve’s tightening cycle. For now, looser covenants aren’t necessarily deal-breakers, but without some balance, they could lead to steeper losses in an economic slowdown.

A survey of more than 60 private-credit managers by the industry trade group Alternative Credit Council revealed expectations for the market to further expand and deliver strong returns. Curiously, just 23% said they expected recovery rates to be lower than historical averages over the next three years, while 42% predict they’ll be higher. That might be the case if the economy ramps back up, or slows down but avoids an actual recession. But it seems naive to think private debt will fare better than before when managers are fighting one another for deals and sitting on hundreds of billions of dollars, just waiting for a chance to invest.

That dynamic isn’t likely to change soon, especially now that pension-fund behemoths are setting their sights squarely on private debt. For those that have been in the market for years, like the Arizona retirement system, it just means keeping tabs on existing managers to make sure they don’t veer into weaker deals.

For those trying to catch what might be the back end of the wave, it’s not so simple. Without proper caution and foresight, they might find themselves quickly navigating troubled waters.

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  #12  
Old 01-07-2020, 09:43 PM
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Mary Pat Campbell
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KANSAS

https://www.sacbee.com/news/business...239015943.html

Quote:
Kansas governor turns to pensions for budget breathing room

Spoiler:
Democratic Gov. Laura Kelly proposed Monday that Kansas give itself more breathing room in its budget by slashing annual payments to its pension system for teachers and government workers, offering a new version of a plan that the Republican-controlled Legislature spiked last year.

Kelly's proposal would give the state an extra 10 years longer to close a long-term gap in funding for the state pension system. The move would free up tens of millions of dollars each year for more than a decade, money that could be used for schools and social services.

But it's not clear if her new plan will fare any better than last year's proposal — which was dead from almost the moment she presented it to lawmakers. The Kansas Public Employee Retirement System projects Kelly's proposal would increase the cost of closing the gap by a total of $4.4 billion — comparing it to extending the length of a home mortgage.

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“It is kind of like refinancing the mortgage on your house — you know, lower payments, but you've got to pay them longer,” said Alan Conroy, the pension system's executive director.

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Kelly contends giving the state more time to close the funding gap stabilizes the pension system by making the state's annual payments more affordable. The state skipped payments when it faced budget shortfalls in recent years and still is trying to make up $268 million in missed payments, plus interest.

The governor's office provided few details in announcing her proposal. Its statement emphasized that current retirees' benefits are not in danger and said the plan would “restore fiscal responsibility.”

“I look forward to working across the aisle in pursuit of our common goal to get Kansas' fiscal house in order,” Kelly said in her statement.

Conroy said Kelly's plan would lower the regular annual payments to KPERS by nearly 27% during the 2021 budget year that begins July 1, saving $187 million. The annual dollar savings would grow after that.

Legislators have wrestled with public pension costs for decades, and the KPERS system remains 68% funded, with a long-term gap between its funding and promised benefits still projected at $9.2 billion. A 2012 law committed the state to aggressive increases in annual payments to close the gap by July 2033, allowing payments to drop steeply after that.

But Kelly's Republican predecessors struggled to keep up with the promises during tough budget times. Kelly proposes to allow the state to close the gap by July 2043, Conroy said.

Conroy said Kelly's plan includes a one-time payment to KPERS to catch up on the $268 million in missed payments at once, rather than repaying that amount over two decades with interest.

Kansas finished its 2019 budget year on June 30 with $1.1 billion in cash reserves — money that could tapped for a big, one-time pension payment.

Legislators expected the state to tap its cash reserves over the next five years to sustain spending, and they are projected to dwindle to nearly zero by mid-2024. While Kelly's plan taps those reserves more aggressively this year, it would also lower the state's regular annual pension payments each of the next 15 years.

But lawmakers and pension system trustees balked last year at extra long-term costs.

They've also long treated 80% funding as a key marker of the system's financial health and don't want to take longer to get there. The pension system now expects to be 80% funded in 2029, while Kelly's new plan would delay the milestone for seven years, until 2036.

The pension system's trustees expect to review Kelly's plan at the end of next week, but Conroy said they believe the system will be better able to whether an economic downturn the he more quickly the system is fully funded.


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  #13  
Old 01-07-2020, 09:44 PM
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JACKSONVILLE, FLORIDA

https://www.jacksonville.com/news/20...ead-john-keane

Quote:
City of Jacksonville sues former pension fund head John Keane

Spoiler:
City of Jacksonville filed a countersuit against former Police and Fire Pension Fund director John Keane.

In the latest salvo of a protracted, nearly five-year-long battle with former Jacksonville Police and Fire Pension Fund executive director John Keane, the city and the pension fund filed their own lawsuit asking Keane to pay back decades worth of pension payments.

Keane, who led the city’s Police and Fire Pension Fund from 1990 to 2015, was once one of the more well-known figures in Jacksonville politics. As the pension fund suffered from an economic recession, Keane drew ire for his $309,000 salary and his own special pension fund that would pay out an additional $235,508 per year, on top of his fighter pension and his social security.

The city first sued Keane in 2015, but dropped it a year later after Mayor Lenny Curry ordered the pension fund to stop paying Keane’s special pension and instead pay a general pension that was about $187,000 the first year.

RELATED | Read more Jacksonville-area news

Keane then sued the city in 2016, seeking to restore that special fund. That lawsuit failed in federal court, and an appeal failed as well.

Then in 2018, Keane filed suit in state court. Last month, the city finally responded, with a countersuit.

“I am at a complete loss about all this,” Keane said Monday. “I don’t think it’s right for them to take my pension.”

The city and the pension fund are jointly asking Keane to pay back 25 years of firefighter pension payments, nearly four years of general employee pension payments, nearly a year of his special pension payments and “retroactive pay raises” that the city says were illegally given to Keane.

The city didn’t provide a dollar figure for the four types of repayment it’s seeking, but Keane’s lawyer, Jesse Wilkison, said it’s “quite a bit.”


Police and Fire Pension Fund executive director Timothy Johnson said in an email that “the PFPF board does not have a public position on the lawsuit or the city’s countersuit at this time,” despite the countersuit being filed jointly by the pension fund and the city.

Pension fund board trustee Michael Lynch replied to Johnson’s statement, and included the Times-Union, sharply disagreeing. “I believe the board’s stance is that they have not done anything illegal; this is obvious by the fact that they approved the benefits in the first place. Furthermore it was the city who took the action that prompted this suit because the board would not ‘agree’ with them. We have discussed this at length and I am growing quite tired of being misrepresented by our attorneys.”

He said he is requesting a meeting before the next board meeting to stop attorneys from making official responses without the board’s consent. “If the OGC refuses to navigate this very simple matter in a way we see fit I suggest we begin looking into hiring new council for this case.”

While the city’s Office of General Counsel declined to comment, senior assistant general counsel Loree French said of Lynch’s email, “please be advised that an individual board member cannot and does not represent the position of the board.”

As you’d imagine for a nearly five-year-long lawsuit, the issues are complex and can seem like they rest on peculiar definitions. Much of the legal back-and-forth is over the question of whether the pension fund is a city agency or if it’s independent of the city.

For example, Keane was hired in 1990. He’d spent his earlier career as a firefighter and police officer and was collecting a pension from that career. By 2015, he was collecting about $65,000-a-year from that pension. If he was hired for a city job, then he potentially couldn’t have collected that pension. But if the pension fund is independent of the city, then perhaps he could.

The city’s lawsuit agrees the pension fund is an “independent agency of the city,” but it disagrees that the agency is independent from the city.


The city wants him to pay back every police pension payment he received from 1990 to 2015.

Keane’s lawyer, Jesse Wilkison, said the fund was created by state law to administer a pension also created by state law, and therefore, the fund is completely independent of the city.

“It’s hard to speculate how much they [the city and pension fund] think they’re going to win on the counterclaim versus whether it’s settlement posturing,” Wilkison said, “but we don’t think very much of the legal merits of that counterclaim. If I had to speculate, I’d say it’s a posturing move.”

In 2016, the city warned it would sue Keane for back-payment if he sought to restore his old pension.

The special pension for Keane and two others was created in 2000, and for the next 12 years city officials knew nothing of it, they later said. The city came up with the reduced pension payment — about $187,000 annually — by figuring out what Keane would have gotten had he been enrolled in the city’s general employees pension plan.

Now the city is saying it wants those general pension payments back, too.

Wilkison, Keane’s lawyer, said he hopes one benefit of the protracted legal battle is that both sides have already done their investigations and the lawsuit should begin to speed up. The next status hearing is later this month, and Wilkison said he will try to set up a hearing for Keane’s motion to dismiss the city’s lawsuit.


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  #14  
Old 01-07-2020, 09:46 PM
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NEW MEXICO

https://reason.org/commentary/propos...in-new-mexico/
Quote:
Proposed PERA Reform an Important Step Toward Pension Solvency in New Mexico
New bill would address the Public Employees Retirement Association's systemic issues by improving funding policy and adopting a more sustainable benefit adjustment mechanism.
Spoiler:
After years of watching New Mexico’s largest public pension system, the Public Employees Retirement Association (PERA), report growing unfunded liabilities nearing $7 billion and funding levels dropping below 70 percent, the state’s elected leaders appear to have recognized the challenges facing the system’s long term financial integrity and are taking action.

Following endorsements from Gov. Michelle Lujan Grisham, labor leaders and other stakeholders, a key legislative committee recently endorsed proposed legislation—a bill based largely on a prudent set of recommendations developed this year by a gubernatorial task force—that would constitute a solid first phase of policy reforms needed to ensure long-term pension solvency for PERA.

As discussed in a recent analysis by Reason Foundation’s Pension Integrity Project and Rio Grande Foundation, these important first steps directly address some of PERA’s most systemic issues by improving funding policy and adopting a more sustainable benefit adjustment mechanism for retirees. Rooted in a belief in “shared sacrifice,” the stakeholder-generated reforms are estimated to eliminate over $6 billion in unfunded liabilities over the next 25 years. Even more importantly, the process created to arrive at the recommendation has established a model for how to collaborate around the shared goal of protecting taxpayers and providing a secure retirement to New Mexico’s public servants, which could prove to be extremely valuable in the coming years.

“Change is never easy when you are faced with serious bond rating concerns, when you are faced with the collapse of a retirement system so many New Mexicans depend on if the economy faces a downturn” said State Sen. George Muņoz, chair of the Investment and Pensions Oversight Committee, referring to the drafted PERA pension proposal. “Everybody has to step up.”

To their credit, public pension administrators appear to understand the concerns. Both PERA Executive Director Wayne Propst and Educational Retirement Board Executive Director Jan Goodwin applauded the task force’s approach to engaging stakeholders with a goal of responsibly funding New Mexico’s retirement systems.

Proposed 2020 PERA Legislation Summary

In order to address the charges laid out by Gov. Lujan Grisham’s fifth executive order after being elected overwhelmingly by voters last year, the proposed legislation:

Permanently increases employer and employee contributions to PERA by 2 percent each over four years;
Transitions from a static, fixed cost-of-living adjustment (COLA) to a profit-sharing COLA for retirees up to 3 percent such that members directly share in plan investment gains in good times but that benefit accrual moderates in times of underperforming markets;
Removes the 90 percent salary cap on pensionable compensation.
To soften the transition, state police and adult correctional officers would be exempt from contribution increases, while municipal and county workers would benefit from a two-year delay in contribution hikes. Employer contributions would be slated to decrease over time as PERA’s funding status improves over the long-term.

In the transition to a profit-sharing-based COLA, the proposed reform offers a fixed—and temporarily non-compounding—2 percent COLA for three years and decreases the waiting time for retirees to receive the annual increase from seven years to two years.

Retirees over 75, disability retirees, and retirees with 25 years of service who receive less than $25,000 in annual benefits were all exempted from the proposed COLA changes.

The bill’s drafters deviated from the original task force’s proposal by bumping the 2 percent COLA up to 2.5 percent for retirees over the age of 75 and allowing return-to-work employees to receive a COLA going forward.

Overall, these changes would exclude roughly 31 percent of retirees from the proposed COLA reforms, per PERA managers, and would require a $76 million appropriation to fund the three-year, 2 percent fixed COLA—a so-called “13th check”—for all other COLA eligible retirees.

“Reforming our pension system, making sure it remains one of the best in the United States, requires backbone and shared sacrifice,” said Gov. Lujan Grisham upon the introduction of the proposed 2020 legislation. “Left unattended, that shortfall [the multibillion-dollar PERA unfunded liability] will, sooner than later, obligate painful cuts and wreak havoc on future generations of retirees — if we do not come together and act now.”

Effects of the Proposed 2020 PERA Legislation

The state’s $6.7 billion unfunded pension liability (see Figure 1) was explicitly noted as a cause for concern by Moody’s Credit Service in its June credit analysis of New Mexico.

Figure 1. PERA Historical Solvency, 1990-2019



Source: Pension Integrity Project analysis of PERA valuation reports and CAFRs.

In fiscal year 2019 alone, PERA’s pension debt increased by $600 million due mostly to underperforming investments relative to targets and amortization payments coming up short of covering the interest that accrued on carried pension debt.

The proposed reform bill would infuse the system with a much-needed increase in annual contributions, reducing PERA’s unfunded liability by roughly $700 million immediately upon passage and setting them on a corrected course back to long-term solvency, according to the Solvency Task Force. This would be a welcome development given that in 10 of the past 15 years inadequate statutorily-set employer and employee contributions have starved PERA of the funding plan actuaries estimated would be required to fully fund promised benefits, as shown in Figure 2.

Figure 2. PERA Actual vs. Actuarially Determined Employer Contributions, 2005-2019



Source: Pension Integrity Project analysis of PERA valuation reports and CAFRs.

The task force’s recommendation to first shift to a non-compounding COLA and then to a profit-sharing model is intended to regulate the new COLA to be between 0.5 percent and 3 percent each year. Members would receive increases above the minimum equal to certain excess gains multiplied by PERA’s funded status that year. All in all, the proposed shift would result in an estimated 1.64 percent average annual COLA through 2049—compared to the current fixed 2.0 percent annual COLA. This more sustainable cost structure slows the growth in actuarial liabilities and should improve PERA’s funded status. According to PERA’s revised projections (Figure 3), under the proposed legislation the system would have a 47 percent chance of reaching or surpassing the 100 percent funded threshold by 2043.

Figure 3: Funded Ratio by Percentile Rank of Outcomes



Source: Current PERA Actuarial Open-Group Stochastic (ALM) Projections

Opportunities to Build on the Proposed PERA Reform

For 2019, the total contribution rate (employee and employer contributions combined for all divisions) set in statute for PERA was 26.84 percent of payroll, a rate 5.73 percent below the level plan actuaries calculated was needed that year to move the plan toward full long-term funding. This corresponds to a difference of roughly $130 million in contributions not made. (Figure 2)

That gap is slated to grow up to 6.27 percent in 2020 and continue its trajectory without additional steps to adopt reforms that directly address the inadequacy of statutory contribution rates relative to actuarially determined employer contribution rates needed for long-term solvency.

Even with the proposed 4 percent increase in contributions across both members and employers, relying on a law—and ultimately elected officials—to determine what pension contributions are made each year incentivizes short-sighted fiscal thinking that predictably leads to underfunding that then becomes exacerbated in volatile or down markets.

With most financial advisors predicting a “new normal” low-yield investment environment for the next 10-to-15 years, PERA may lack the investment revenue it needs to properly grow assets and adequately fund benefit payouts over time.

The Pension Integrity Project’s analysis of PERA’s asset allocation relative to various industry capital market forecasts suggests that hitting a 7.25 percent assumed rate of investment return may be overly optimistic (see Figure 4), at least over the next 10-to-15 years, and forecasts beyond that suggesting a return to historic levels of investment performance and forecasting beyond that near-term window becomes very difficult given increased volatility in market returns.

Moving to adopt or phase-in investment return assumptions below 7 percent—like those recently adopted for major plans in states like Michigan and New York—could help moderate the effects of volatile returns and reduce future turbulence in a low-yield environment. Additionally, moving to an actuarially determined employer contribution (ADEC) policy would directly address the rigidity created by statutorily-set contributions and provide PERA managers and employers the opportunity to better maintain assets and stay on the path to fully funding member and retiree benefits.

Figure 4: PERA Investment Return Probability Analysis



Source: Pension Integrity Project’s Monte Carlo model is based on PERA asset allocation and reported expected returns by asset class. Forecasts of returns by asset class generally by BNYM, JPMC, BlackRock, Research Affiliates, and Horizon Actuarial Services were matched to the specific asset class of PERA. Probability estimates are approximate as they are based on the aggregated return by asset class. For complete methodology contact Reason Foundation’s Pension Integrity Project at pensionhelpdesk@reason.org.

Lowering the investment return assumption and moving to an ADEC contribution policy would also help ease the current negative cash flow situation PERA’s administrators have raised as a serious concern, helping drive the current reform effort. Mature state-level pension plans are expected to experience negative net cash flows (before investment revenue) as the amount of benefit payouts outstrip the total annual contributions; it’s the growth rate and timing of increasing cash flow demands put on plan assets that matter.

As seen in Figure 5, PERA’s cash flow grew from just negative $18 million in 2003 to negative $640 million in 2019. The latter is equivalent to roughly 4.13 percent of the market value of assets at the beginning of 2019, a level that has moved uncomfortably close to the 5 percent of asset market value threshold PERA administrators have warned may be a tipping point for that plan’s long-term solvency.

Rapid growth in negative cash flow means that mature pension plans like PERA will need to pay out a significant amount of pension benefits over the next decade or so and thus will not have a large portion of their current assets around in the years beyond that to make up for the lower earnings anticipated in the short- to mid-term, “new normal,” low-yield investment climate.

Figure 5: PERA Net Cash Flow, 1995-2019



Source: Pension Integrity Project analysis of PERA valuation reports and CAFRs.

The current PERA reform proposal, although certainly a positive step to improve the current cash flow situation, does not address some key problems. Most notably, the bill does not reform PERA’s flawed contribution rate policy, nor does it require changes to what may be overly optimistic actuarial assumptions.

Further, policymakers should consider adopting pension stress testing requirements such that elected officials and taxpayers would have a way to gauge potential financial risks to long-term PERA solvency vis-a-vis market volatility and deviations from actuarial assumptions.

The proposed PERA reform also does little to address high rates of attrition among new hires for PERA employers. Eliminating the current 90 percent cap on an employee’s maximum salary used to calculate their pension benefits is likely to mostly affect mid- to late-career employees who are closer to retirement. By offering more portable retirement plan options to new hires (such as a hybrid or cash balance plan)—as has been an outcome of recent reforms in neighboring states like Utah, Colorado and Arizona—policymakers could expand retirement security to shorter-tenured public employees.

Though the current PERA reform proposal does not cover the full range of needed changes to ensure pension sustainability, the inclusive process used to develop the proposal landed on a substantive, meaningful set of policy changes and, even more importantly, established agreement among a wide variety of stakeholder groups.

To date, the proposed PERA reform legislation has received endorsements from Gov. Lujan Grisham, AFSCME Council 18, Communication Workers of America, New Mexico Professional Firefighters Association, the Fraternal Order of Police, National Association of Police Officers, and the Albuquerque Fire Department Retirees’ Association.

Such bi-partisan support speaks to the effectiveness of the shared sacrifice principle the original Solvency Task Force’s recommendation adhered to. Eliminating some unfunded liability, increasing contributions and modernizing the COLA structure would all strengthen PERA’s solvency outlook and ability to keep the pension promises that have been made to PERA members.

To further these positive developments legislators should also consider more fundamental changes such as revisiting the plan’s actuarial assumptions and methods, improving retirement security by providing portable retirement options to the more mobile modern workforce, and aligning actual PERA employer contributions with what plan actuaries have determined need to be made each year.

The governor’s Public Employees Retirement Association Pension Solvency Task Force’s recommendations and subsequent reform legislation aimed at returning PERA to actuarial soundness represent an important and positive first step toward securing the retirement of New Mexico’s public employees by improving funding policy and adopting a more financially sustainable COLA structure.

However, the proposed PERA reform legislation’s success would rely heavily on the pension fund’s ability to achieve expected investment returns over a long period of time, which is likely to be a major challenge unless additional reforms are made that build upon this important first step.

Below we present a breakdown of how well the proposed PERA reform meets the Reason Foundation Pension Integrity Project’s reform objectives:






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Old 01-07-2020, 10:02 PM
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TEXAS

https://www.statesman.com/news/20200...-state-workers
Quote:
Lawmakers warned on pension fund for retired state workers

Spoiler:
State lawmakers have been given the starkest warning to date about the health of the pension system for state government employees: The fund faces a "strong possibility" of running out of money in 30 to 40 years if left unchanged, according to the [url= “https://ers.texas.gov/About-ERS/Reports-and-Studies/ERS-Actuarial-Valuation-Reports/2019-ERS-Pension-Valuation-Reports-December-2019.pdf”>latest annual evaluation of the fund's health[/url].

The report, authored by third-party consultants and released last month, determined that the financial outlook for the Employees Retirement System of Texas pension is “very poor.”

A comparable report in 2018 had concluded the fund could become insolvent — having obligations greater than assets — by 2096 if contributions were to remain the same. But the new report moved that date up to 2075, but warned the fund's depletion could come sooner.
There are 257,000 nonretired and retired state employees and beneficiaries receiving pension benefits or paying into the system. About 18,000 of the retirees live in the Austin area.
“In the most recent actuarial valuation presentation, our consulting actuaries have made it clear that the failure to address the unfunded liability is not an option,” Employees Retirement System of Texas spokeswoman Mary Jane Wardlow said. “Addressing the pension liabilities now will cost the state much less than if it waits to do it later.”
Wardlow attributes “past market volatility and insufficient contributions to the fund” for the pension system's declining health.
The report comes as state lawmakers and retirees have been [url= “https://www.statesman.com/news/20190905/retired-state-workers-urge-state-leaders-to-hike-pensions”>asking the Legislative Budget Board[/url] to intervene with emergency funding to shore up the pension system. The sooner the state adds money to the pension fund, the sooner it can be invested and generate returns to whittle away at the pension liabilities, proponents say. (About two thirds of retirees' pension checks are funded by investment earnings.)
The board, of which Lt. Gov. Dan Patrick and House Speaker Dennis Bonnen, R-Lake Jackson, are members, has not responded. However, Bonnen has asked a House panel to examine the fund ahead of next year's legislative session.
“We do think that they need to fund it as soon as possible, even if they were able to do it with emergency appropriations,” said Tyler Sheldon, legislative director for the Texas State Employees Union. “It can be more expensive to taxpayers the longer they wait.”
Unfunded liability
The Texas House last year proposed injecting $150 million into the retired state employee pension system, but the money was removed during bill negotiations with the Senate. The Legislature instead prioritized new spending for public education, property tax relief, Hurricane Harvey relief and the much larger Teacher Retirement System.
The state contributes 9.5% of gross payroll, agencies contribute 0.5%, and system members contribute 9.5% of their salaries toward the Employees Retirement System of Texas pension.
If contributions remain the same, liabilities will grow by $1 billion over the two-year budget cycle. The unfunded liability was $11.7 billion as of Aug. 31, the latest data available.
Upon depletion of the fund, the state would “pay-as-you-go” — a very expensive worst-case scenario in which pension checks are funded from the state's general revenue.
Rod Bordelon, senior fellow with the conservative Texas Public Policy Foundation, said it's important that state lawmakers address the pension fund sooner than later. The group long has supported a policy in which state employees are no longer promised a pension, but instead have the option to contribute to a 401(k) fund, as is common in the private sector.
“The fairest way to do that would perhaps be for new employees, or, at the very least, employees that have not been vested yet ... set up a defined contribution plan for them,” Bordelon said. “A defined contribution plan like a 401(k) would be better because there would be obviously less risk or no risk for the state.”
Sheldon said he would not support a 401(k) because it places too much risk on the employee.
Lawmakers last year shored up the Teacher Retirement System partly by not only increasing contributions by the state and school districts but also the employees' contributions.
Sheldon said current state employees would not support an increase to their contributions.
“Employees are also putting into Social Security ... so you're talking about, once taxes are taken out, 15% to 20% of their check is immediately coming out,” Sheldon said. “When they already are working with a base salary that's not as much as the private sector, take-home pay will not be enough for them to stay employees of the state.”
High turnover
The turnover rate of state employees was 19.3% in 2018, the highest in at least a dozen years. The most common reason nonretiring employees cite for leaving is seeking better pay and benefits, according to the State Auditor's Office.
Diana Spain, a retired social worker who lives in Central Austin, fears the pension system's lackluster condition will deter people from working for the state government. During her 26-year career mainly working at state psychiatric hospitals, she had tried a higher paying private sector job but returned to the state hospital largely for the pension, she said.
“You can't get people to work at these incredibly difficult, often heart-wrenching jobs without at least promising them that at the end of it, they are going to have some stability — a comfortable, stable, safe retirement,” Spain said. “If you can't get people to work in these jobs, those services are going to go away.” She also would like the state to boost spending on the pension because state law requires the pension system to be fully funded within a 31-year period — considered actuarially sound — for lawmakers to give retirees a monthly pension check increase. Retirees haven't seen an increase to their pension payments since 2001. The average monthly pension check was $1,690 last year, according to the retirement system.
Spain earned about $40,000 a year by the end of her career and her pension check is about three-fourths of what she brought home while working. She periodically works part time to pad her savings. “Those of us who have already retired are worried about the fact that our pensions could be taken away or could at least stagnate to the point that we can't survive with dignity anymore,” Spain said.

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Old 01-07-2020, 10:07 PM
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CALIFORNIA

https://www.vcstar.com/story/opinion...te/2797589001/
Quote:
Simi Valley Pension Obligation Bonds: A risky financing maneuver without a public vote

Spoiler:
Inheriting a predecessor’s underfunded public pension debts is never fun, but the need to address them is unavoidable. The question before Simi Valley City Council was how — and there is both a right way and a wrong way.

The right way is to adopt policies that keep the pension debt from growing, help pay it down, and avoid it growing out of control. The wrong way is to kick the can down the road.

Unfortunately, council opted for the latter route. They voted to borrow $150 million in the form of Pension Obligation Bonds which just converts one type of debt to another and makes no effort at reform.

Pension obligation bonds, or POBs, are a financial mechanism that allows state and local governments to reduce their current unfunded liabilities by borrowing against future tax revenue.

In California, cities can borrow up to the amount they owe without voter approval. All that was needed was a simple majority of Simi Valley City Council to authorize millions of taxpayer backed debt.


The simplest way to think about POBs is this: The money borrowed is then invested by CalPERS into various investments where, hopefully, returns on those investments will exceed the interest on the bonds, therefore earning money for the pension fund.

Since higher yielding investments often come with more risk, these bonds are inherently precarious. And when they go bad, they go very bad.

The attraction of POBs — an idea Interim Simi Valley City Manager Gabler has floated — is that they can superficially look like “refinancing,” but they’re not. The city can use POBs to lower its current payments into its pension plans, but long-term savings are illusory.


Whether a 7% rate or another rate is chosen by CalPERS to determine the present value of pension benefits for financial reporting purposes will not change the future benefit payments. And issuing a POB and reducing the expense reported, in total, because of a lower interest rate, does not impact the ultimate cost of those benefit payments.

The liabilities are still out there. The bonds have to be paid back. The taxpayers gain only if the actual return on the money invested with those POBs exceeds the interest rate the city pays to bondholders.

Although Simi Valley risks big losses from POBs, they carry profits with almost no risks for the consultants, law firms and banks that help arrange them. They aggressively market deals in which they get their fees up front, no matter what happens in the long term.

Their sales pitch is that borrowing at today’s low interest rates all but guarantees a profit for the city because they can invest the proceeds in their CalPERS pension funds and for decades earn returns higher than the 4% or so in interest that they will pay on the bonds.

But there's a catch: If the timing is wrong, these POBs could clobber the finances of Simi Valley. Pension funds and beneficiaries will be better off because pensions will be more soundly financed. But taxpayers — present and future — might be considerably worse off. They will be running huge risks and could get stuck with a massive tab.

Ultimately, Simi Valley taxpayers end up assuming 100% of the risk, and that makes this city finance tactic the least taxpayer friendly.

In recent years, academics and analysts, including the Government Finance Officers Association (GFOA), have strongly advised against pension bonds, suggesting that the instruments constitute an overt act of gambling with taxpayers dollars. In a blunt statement, the GFOA says it “recommends that state and local governments do not issue POBs.” This approach only delays and compounds the financial impacts by paying potentially additional debt costs on what is effectively already debt.

The GFOA’s warning cannot be more clear. We hope this warning will deter fiscally sound cities like Simi Valley from ever considering or issuing pension obligation bonds.

Our Taxpayers Association has always maintained a position to oppose bonds that are issued by government agencies without an affirmative public vote prior to their funding.

If the Simi Valley City Council wishes to issue pension bonds to reduce their current unfunded liabilities by borrowing against future tax revenue, then it should place that Advisory Question before voters on the November 2020 ballot.


David Grau is the President of the Ventura County Taxpayers Association.
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Old 01-08-2020, 07:31 AM
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ARIZONA

https://www.azcentral.com/story/opin...on/2809177001/
Quote:
Pension costs could erase the impact of Arizona's teacher raises. What will we do about it?
Joanna Allhands, Arizona RepublicPublished 6:00 a.m. MT Jan. 7, 2020

CLOSE
Opinion: There's a quiet culprit eating into teacher raises – one that could erase the impact of the Arizona's $600 million-plus investment.

Spoiler:
We’re entering the final year of Gov. Doug Ducey’s #20by2020 plan, which aims to raise teacher salaries by 20%.

Some lawmakers are convinced that the state’s job is done. Teacher salaries are finally moving in the right direction.

But there’s a difference between what teachers make and what they take home.

And there’s a quiet culprit eating into those raises – one that, if the economy goes south, could quickly erase the impact of the state’s $600 million-plus investment.

It’s teacher pensions.

Contributions have quadrupled
Teachers are part of the Arizona State Retirement System (ASRS), which also includes municipal, state and higher-education workers. Of the state’s pension systems, it’s the largest and the one that, on paper, seems to be doing the best.

But teachers and school districts are now paying four times what they did in 2002, while the plan’s unfunded liability has grown (the plan is 71% funded now, though it was fully funded in 2002).

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Teachers and schools must each contribute 12% of their salaries this year – which dips into take-home pay and ties up limited funds that could be used elsewhere, like giving teachers additional pay raises.

That’s still better than the Arizona’s Public Safety Personnel Retirement System (PSPRS), which is about 46% funded and costs its newest employees 14% of their base salary.

ASRS also projects that it will be fully funded by 2044 without a marked increase in contribution rates – provided that its projected rate of return on investments holds.


Left and right say costs could go higher
But the left-leaning Urban Institute and the right-leaning Reason Foundation contend that the fund’s assumptions remain too optimistic, and that teacher and school costs could markedly increase if the economy tanks.

In fact, the Urban Institute predicts that teacher contributions could climb to 20% of their salaries or more, depending on how pension investments play out over time.


The Arizona Chamber Foundation recently raised these concerns in a policy briefing but didn’t offer solutions, hoping educators would step in with measures that non-educators covered by the plan also could support.

Just don’t hold your breath for that to happen this year. No major education players are pushing for pension reform. And they have far bigger fish to fry in 2020 – namely, deciding which education funding measure should go before voters.

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Is there a better way?
But give the chamber props for raising the issue.

Nearly a quarter of Arizona teachers are nearing retirement age, while more than 40% of new teachers leave the profession within three years – long before they are fully vested in the plan.

In other words, many younger teachers, who already are on the low end of the salary scale, are paying increasingly more for benefits that they will likely never see.

It’s something to think about if our goal is to recruit and retain talent, and finally make some headway on the state’s acute teacher shortage.

Because while few people say rising pension costs are why they leave or won’t consider the profession, many more cite low pay for their reluctance to teach.

DIG DEEPER
Moving the needle on education
What would move the needle most for Arizona schools? Let's recap
Priority 1: Retain the teachers we have
Priority 2: Recruit more teachers
Priority 3: Don't ignore what's happening at home
Priority 4: Don't overlook what principals do

We can and should pump more money into salaries. But the effect is muted if other costs are siphoning that cash away from teachers before it reaches their pockets.

I know. It’s not in our nature to proactively address problems. We tend to wait for a crisis and then step in with whatever will work at the time.

But a diverse coalition stepped in a few years ago to put PSPRS on a better trajectory.

It would be smart to do the same thing for ASRS – or at least talk about the assumptions behind the pension and how we can lower its costs for teachers and schools – before the economy takes a turn and we’re in a far worse position to address them.


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Old 01-08-2020, 07:32 AM
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KANSAS CITY, MISSOURI

https://www.pionline.com/investing/k...estments-watch
Quote:
Kansas City school pension fund puts Fisher Investments on watch

Spoiler:
Kansas City (Mo.) Public School Retirement System formally placed Fisher Investments on watch following offensive remarks made in the fall by Kenneth L. Fisher, the firm's founder, executive chairman and co-chief investment officer, confirmed Christine Gierer, executive director of the pension fund, Tuesday.

Fisher Investments manages an $83 million international equity portfolio for KCPSRS, which has total assets of about $645 million, Ms. Gierer said in an email.

So far, fallout from sexist comments made by Mr. Fisher during an Oct. 8 presentation at a San Francisco conference has resulted in several institutional investor clients pulling nearly $4 billion in assets from the firm in recent months.

Mr. Fisher talked about genitalia and compared the process of winning money management clients to "trying to get into a girl's pants" during the conference, an attendee told Bloomberg at the time.

Regarding the mandate with Kansas City, a spokesman at Fisher Investments said Tuesday the firm does comment on client relationships.

But in an emailed statement the spokesman said Mr. Fisher's comments had been "twisted" by the media.

"At the investment conference, Mr. Fisher compared the sales approach of some asset managers to a lewd and inappropriate proposition in a bar. While he has since apologized for his choice of words, the intent and meaning of those words have been twisted beyond comprehension by the media," the spokesman wrote.

On Monday, the Kansas City Public School Retirement System's board of trustees voted to formally put the firm on watch in light of Mr. Fisher's comments, Ms. Gierer said.

According to Ms. Gierer, the board sent a letter to Fisher Investments that stated: "Our fiduciary duty is to prudently invest the KCPSRS assets for the purpose of providing retirement benefits to our plan participants. As fiduciaries, we must act in the best interest of the system and our members. Following Mr. Fisher's recent public comments, we had to question whether the firm, Fisher Investments, has the cultural respect and diversity we look for when hiring investment managers."

The board has also asked Fisher Investments to provide monthly updates on its assets under management and any personnel changes at the firm, as well as regular updates on its newly created task force to address diversity and inclusion at the firm, Ms. Gierer said.

When asked whether the pension fund's investment consultant Segal Marco Advisors recommended the watchlist status for Fisher Investments, Ms. Gierer wrote, "the KCPSRS Board made (this) decision on its own."

Fisher Investments had more than $121 billion in assets under management as of Dec. 31, up from $112 billion as of Sept. 30.


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ILLINOIS

https://www.forbes.com/sites/ebauer/...0#473f4c493666

Quote:
What the Illinois Supreme Court Said About Pensions - And Why It Matters

Spoiler:
Earlier this week, I griped that an Illinois State Senator, Heather Steans, had claimed that the state had solved its pension problem except for the pesky issue of legacy costs. Governor JB Pritzker, too, has claimed that there’s nothing to be done except to find more money, and Chicago Mayor Lori Lightfoot’s vaguely worded statements about the matter don’t amount to anything more, either.

But it seems about time for a deep dive into a narrow question: what did the Illinois Supreme Court have to say about pensions? It’s the sort of thing that seems very nit-picky but is actually very relevant to the situation in Illinois.

As a refresher, Illinois’ 1970 constitution is one of only in two in the nation which explicitly guarantee that state and local employees have a right to pension benefits based on the formula in effect at hire, without reduction, until retirement. (The other is New York.) This is via the “pension protection clause,” Article XIII, General Provisions, Section 5,


Today In: Money
“Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

This is not a part of some grand principle, but tossed in as a miscellaneous item among the text of the oath of office, the authorization of state funding of public transportation, and the requirement of a supermajority for the authorization of branch banking by the General Assembly.

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In 2013, Illinois passed legislation which aimed to reduce pension liabilities, but various groups representing the affected employees filed suit, and the Supreme Court overturned the legislation in a 2015 decision. This decision recapped not merely the 2013 decision, but included more extensive commentary on Illinois pensions, citing, for example, 1917 and 1957 reports characterizing state and local pension plans as in a condition of insolvency, and a 1969 overall funded status of 41.8%.

The first thing that the Court makes clear in its decision is that the 1970 constitution bound Illinoisians to provide undiminished and unimpaired pensions to every state or local worker ever hired with such a promise, with no room for any changes whatsoever. Yes, it uses the language, technically true, that it was the people of Illinois who, in voting for the constitution, restricted the General Assembly from making any such changes, rather than acknowledging that those people were rather powerless to evaluate any such individual provision agreed to by the delegates drafting the constitution once it was put up for a vote. (In fact, on only four topics were voters given the ability to vote individually, vs. an all-or-nothing up-or-down vote: cumulative voting for the legislature, election of judges, capital punishment, and the vote for 18 year olds. The constitution itself was ratified by vote of 57%, with a turnout of 37% of voters in a special election in December, which all makes it a bit insulting for the Court to proclaim that it was the People of Illinois who asserted their will in this manner.)

The decision asserts, in short, that the delegates knew full well that pensions were not properly funded, and intentionally made the choice to guarantee pensions by means of obliging future generations to pay, no matter what, rather than funding them as they are accrued.

In fact, the text cites multiple attempts to provide some alternate language to the constitution’s blanket statement, which did not succeed:

“We note, moreover, that after the drafters of the 1970 Constitution initially approved the pension protection clause, a proposal was submitted to Delegate Green by the chairperson of the Illinois Public Employees Pension Laws Commission, an organization established by the General Assembly to, inter alia, offer recommendations regarding the impact of proposed pension legislation. . . . It recommended that additional introductory language be added specifying that the rights conferred thereunder were ‘[s]ubject to the authority of the General Assembly to enact reasonable modifications in employee rates of contribution, minimum service requirements and the provisions pertaining to the fiscal soundness of the retirement systems.’

“Delegate Green subsequently advised the chairman that he would not offer it because ‘he could get no additional delegate support for the proposed amendment.’ . . . Shortly thereafter, a member of the Pension Laws Commission sent a follow-up letter to Delegate Green requesting that he read a statement into the convention record expressing the view that the new provision should not be interpreted as reflecting an intent to withdraw from the legislature ‘the authority to make reasonable adjustments or modifications in respect to employee and employer rates of contribution, qualifying service and benefit conditions, and other changes designed to assure the financial stability of pension and retirement funds’ and that ‘[i]f the provision is interpreted to preclude any legislative changes which may in some incidental way ‘diminish or impair’ pension benefits it would unnecessarily interfere with a desirable measure of legislative discretion to adopt necessary amendments occasioned by changing economic conditions or other sound reasons.’ . . . . This effort also proved unsuccessful. The statement was not read and no action was taken during the convention to include language allowing a reasonable power of legislative modification” (p 21 - 22).

The Court also rejected the use of the state’s “police power” to reduce pensions, that is, the notion that the greater need to provide basic services could justify reducing pensions, noting that other provisions in the constitution included wording qualifying the promises made as subject to affordability, but that the pension protection wording was absolute. In addition, the 1970 constitution, and its drafters, cared not in the least for pension funding, only that the benefits are paid out to retirees; and the legislature, in its 2013 benefits-reduction legislation, was not making the case that it could not pay benefits which were due, but that the burden placed on the state budget of prefunding those benefits was too great. In fact, the Court even proposed that a reamortization schedule would have been sufficient to avoid a funding burden (p. 20) — that is, rejecting the notion that there is any particular urgency to funding pension liabilities at any particular level at any particular point in time.

It’s all, I suppose, a trick of assuming that there is a singular People of Illinois who, through their ratification of the constitution, promised to pay future benefits when they come due, rather than recognizing that the People of 1970 (presumably quite unknowingly) restricted future generations of Illinoisians by forcing them to make these payments without limitation.

But here’s some good news:

The Court’s decision emphasizes over and over again that what binds the General Assembly and the people of Illinois are the key words of Article 13, Section 5, “ the benefits of which shall not be diminished or impaired.” It’s a simple ruling: you can’t do anything which has the effect of reducing existing or future benefits (and the guarantee of a future Cost of Living Adjustment is included in such promises) so long as this phrase exists in the Illinois constitution.

This is a much narrower claim than some have made, including Gov. JB Pritzker himself, that those future accruals are guaranteed under the contracts clause of the United States Constitution, or by applying basic principles of justice and fairness, so that an amendment could never actually accomplish its purpose. Rather, the Illinois Supreme Court says that the constitution-writers intentionally gave pensions an elevated level of protection beyond what the U.S. Constitution requires via this clause. Here’s the key text:

“The pension protection clause clearly states: ‘[m]embership in any pension or retirement system of the State *** shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.’ (Emphasis added [in the decision text].) Ill. Const. 1970, art. XIII, § 5. This clause has been construed by our court on numerous occasions, most recently in Kanerva v. Weems, 2014 IL 115811. We held in that case that the clause means precisely what it says: ‘if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired’” (p. 14).

In other words, the key words that the Court emphasizes are “diminished or impaired,” not “enforceable contractual relationship.”

In the end, my reading of this decision says that the Court gave Illinois voters a roadmap to pension reform: there is only one path forward, that of an amendment, but it is at the same time, it is a travelable path, achievable if there is sufficient political will or grassroots support. Unfortunately, we know there is no political will, on the part of those currently in power. What the grassroots Illinoisians think about it is another question.




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Old 01-08-2020, 09:11 PM
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TEXAS

https://www.ai-cio.com/news/texas-er...paign=CIOAlert
Quote:
Texas ERS Could Become Insolvent 20 Years Earlier than Previously Anticipated
An actuarial valuation report cites the plan’s risk of going insolvent by 2075.

Spoiler:
The Texas Employees Retirement System (ERS) faces a “strong possibility” of becoming completely insolvent in 40 years if it does not work to correct issues facing the fund, according to an actuarial valuation report commissioned with reviewing the system’s health.

“The current financial outlook for ERS is very poor. It is important to understand that the currently scheduled contributions are not expected to accumulate sufficient assets in order to pay all of the currently scheduled benefits when due. Based on current expectations and assumptions, ERS is projected to remain solvent until the year 2075,” the report, prepared by GRS Retirement Consulting, stated.

“However, based on volatility in the financial markets, there is a strong possibility that ERS will become insolvent in a 30- to 40-year timeframe, which is within the current generation of members. Contributions must materially increase in the next legislative session to secure the benefits for current members.”

The report studied the volatile effects of the market and concluded that given current volatility projections, there is a 40% chance that the pension can become insolvent by 2060, and a 25% chance of becoming insolvent by 2050.

“Given this outlook, we recommend the legislature increase the contribution rates to ERS,” the report said. “Each successive biennium that ERS receives the currently scheduled contribution rates, the unfunded actuarial accrued liability is projected to increase by approximately $1.0 billion.” The state contributes 9.5% of gross payroll, agencies contribute 0.5%, and system members contribute 9.5% of their salaries towards the pension.

The legislature was considering appropriating $150 million to ERS in a previous session, but the funds were used for other priorities, such as public education spending and property tax relief.

“Addressing the pension liabilities now will cost the state much less than if it waits to do it later,” ERS spokeswoman Mary Jane Wardlow said, according to the Statesman. She attributed “past market volatility and insufficient contributions to the fund” for the pension’s declining health. The pension’s assets are expected to return 7.5% per year.

If the pension goes bust, the ERS’ funding will have to revert to a “pay-as-you-go” status, which would mandate the legislative appropriation for ERS to immediately quadruple, the report warns.

The fund earlier this year took initiative to configure its strategic asset allocation, altering the parameters under which many of its private markets allocations must adhere to.


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