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CALIFORNIA

https://calpensions.com/2018/02/19/s...s-debt-reform/

Quote:
Small CalPERS rate hike continues debt reform

Spoiler:
CalPERS is speeding up payment of new pension debt, a step toward reforming a policy that pushes current worker pension costs to future generations and helped delay a recovery from a huge investment loss a decade ago.

The adoption of a new actuarial policy last week, which shortens the payment of new debt from 30 to 20 years, shows how CalPERS has a built-in conflict between the need to quickly repay debt while keeping an eye on the ability of governments to pay pension costs.

A large rate increase that suddenly takes a big bite out of government budgets could create a funding crisis, fueling a drive for pension reform. Delaying debt payment allows time for the normalization of high pension costs that once might have been shocking.

But delaying debt payment, as happened after the CalPERS investment fund lost $100 billion a decade ago, costs more in the long run. It also can fail to raise the funding level to the traditional 80 percent or more, high enough to provide some protection against a crippling investment loss.

Despite a lengthy bull market, CalPERS only has about 70 percent of the projected assets needed to pay promised pensions. The fear now is that another market plunge could drop funding below 50 percent, a red line experts say makes recovery difficult if not impossible.

CalPERS has taken some small protective steps — a temporary shift toward bonds, less risky but lower yielding, and a longer-term “risk mitigation” shift that could, over two decades, lower the current investment earnings forecast from 7 percent to 6 percent.

The conflict facing CalPERS as it applies a one-size-fits-all rate increase to its 3,000 government employers, half of them school districts, was on display last week when the board shortened the payment period for new debt from 30 to 20 years.

“What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” Dane Hutchings of the League of California Cities told the CalPERS board.

On the other hand, some counties have expressed “a strong desire to start earlier (than June 30, 2019) to take advantage of possible strong market returns,” said Dorothy Johnson of the California State Association of Counties.

The CalPERS finance chairwoman, Theresa Taylor, asked if the staff could work with some employers on a “hardship” exemption, presumably avoiding a rate increase by delaying payments, and with others on an “opt-in” beginning 20-year payments earlier than 2019.

“We will try to work with employers as they contact us,” said Scott Terando, CalPERS chief actuary.

The rate increase, which could be avoided if investment returns remain strong, is the fifth and likely smallest of five rate increases since 2012. The fourth and largest increase dropped the earnings forecast from 7.5 to 7 percent and won’t be fully phased in until 2024.

“Our members have expressed frustration that you keep coming to them asking for more while at the same time not providing a lot of other options and assistance for them,” Dillon Gibbons of the California Special Districts Association told the board.

Last September the CalPERS board rejected a city-backed request to analyze the cost savings of cost-of-living adjustments and of switching all employees to the lower pension given those hired after a reform took effect on Jan. 1, 2013.

Last week the board agreed, as urged by the city and special districts representatives, to take another look at legislation for an optional low-cost CalPERS trust for local governments that want to set aside money to help manage future rate increases.


New York state retirement systems are an example of pension funds that, when required by law to pay down debt quickly, rebounded quickly from heavy losses during the financial crisis and stock market crash a decade ago.

The California Public Employees Retirement System, with sole control of the power to set employer rates and pay down debt, is an example of the failure to recover quickly from losses that dropped funding from 100 percent in 2007 to 61 percent in 2009.

The first CalPERS rate increase after the investment fund plunged from $260 billion to $160 billion was in 2012 when the earnings forecast used to discount future pension costs was lowered from 7.5 to 7 percent. The fund is now up to $353 billion but not keeping up with debt growth.

Critics contend the earnings forecast is still too optimistic and conceals massive debt. Consultants expect the CalPERS investment portfolio to earn 6.1 percent next decade, offset by higher earnings in following decades that bring the average to 7 percent.

Last December the CalPERS board, as urged by local governments, adopted a new investment allocation that kept the earnings forecast at 7 percent, avoiding the rate increase from options expected to earn 6.75 or 6.5 percent.

The second post-crash rate increase was a major actuarial reform in 2013. CalPERS had been “smoothing” rate changes, and delaying debt payment, by spreading investment gains and losses over 15 years, far beyond the 3 to 5 years used by most pension systems.

CalPERS also had been using what actuaries call “open” or “rolling” amortization that refinances pension debt or “unfunded liability” every year — debt payment delay on steroids that theoretically may never pay off the debt.

The reform switched payment of investment gains and losses to 30 years and payment of actuarial assumption changes to 20 years, like a rate increase in 2014 for the longer expected life spans of retirees.

Both payment periods for debt “bases” calculated annually began with five years of a step-by-step increase or “ramp up” to the full rate, smoothing the impact on employer budgets but delaying debt payment, and ended with a five-year ramp down also delaying debt payment.

The reform adopted by CalPERS last week, as requested by local governments, retains the five-year ramp up for the new 20-year payment of debts and losses but not for new assumption changes. There is no ramp down for either payment period.

Under the old 30-year payment policy, the debt continues to grow for the first nine years. The payment is not large enough to cover the “interest,” the amount that could have been earned if the debt were invested and yielded the earnings forecast.

Actuaries call that “negative amortization.” The 30-year payment policy did not begin reducing the original debt amount until year 18, more than halfway through the period.

“So, you make 18 years of worth of payments and you are right where you started from,” Terando told the CalPERS board last November. “That’s kind of the reason our funding status has remained flat while our assets have grown.”

The new reform ends “negative amortization” for new debt. The debt payment is a fixed or “level dollar” amount that doesn’t change, replacing a “level percentage” of pay that began too low to cover the interest and slowly grew with the payroll.

Speeding up debt payment also moves CalPERS closer to its goal of “intergenerational equity,” the fairness principle that each generation should pay for the services it receives, rather than force the unborn and the young to pay for its golden years.



Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 19 Feb 18


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http://www.cobrown.org/blog/2018/02/...k-finds-a-way/

Quote:
Public Pensions: Risk Finds A Way
Spoiler:
What’s missing from almost all discussions about pension reform is the idea that every time the market goes down, taxpayers are on the hook. Unfortunately, given the current structure of state pensions, that outcome is unavoidable and likely to be repeated.

The case for keeping public pensions in their current form hinges on, among other things, the idea that a portfolio weighted heavily in stocks provides something of a “free lunch” to taxpayers and it makes some sense. Taxpayers pay a relatively small amount into pension funds for each government worker, the market will very likely go up over that worker’s career, and taxpayers don’t have to pay the difference between their contribution and the benefits paid to the worker.

But there ain’t no such thing as a free lunch.

What has happened in Kentucky and other states is this: Lawmakers watched as markets boomed in the 1990s and chose to pare back contributions in order to fund more immediate spending desires. Lawmakers also found small ways to boost benefits for public workers because, after all, look at all the money in that fund! When markets tanked, as they inevitably sometimes do, taxpayers suddenly found themselves in the position of responsibility for the gap. The money that should have gone to maintain pension funding levels had already been spent elsewhere.

This kind of grasshopper thinking might not be much of a problem if that retirement plan were owned and funded by the same single individual. If you choose not to contribute to your own retirement fund, that’s your choice and I wish you the best of luck. No one else should be on the hook for your shortsightedness. But that’s very different from how public pensions operate. In short, the pensioners must be paid as a matter of contractual obligation.

Commentators and would-be reformers are almost entirely focused on getting that funding back to the exclusion of changing the system. The problem is that this time, decades later, the costs can be absorbed by precisely two groups: taxpayers and pensioners.

The Wall Street Journal notes that public pensions are still heavily weighted in stocks, and at least one of the biggest funds in Kentucky is more heavily into stocks than most pension funds.

The $19.9 billion Teachers’ Retirement System of Kentucky now has 62% of its assets in equities, close to the 64% it had in 2007. It sold $303 million in stocks Jan. 19-20 to rebalance its portfolio following gains. From Feb. 6-8, as U.S. markets plunged, the fund bought another $103.5 million of stocks.

“We are definitely a long-term investor and look to volatility as an investing opportunity,” said Beau Barnes, the system’s deputy executive secretary and general counsel.

Lawmakers are giving precious little attention to the idea that getting taxpayers out of the public employee retirement business should be the overriding goal.



https://www.zerohedge.com/news/ 2018-02-22/spot-sentence-dooms-pension-funds-dont-worry-we-highlighted-it#new_tab

Quote:
Spot The Sentence That Dooms Pension Funds (Don't Worry, We Highlighted It)

Spoiler:
Authored by John Rubino via DollarCollapse.com,

The “pension crisis” is one of those things - like electric cars and nuclear fusion - that’s definitely coming but never seems to actually arrive.

Authored by John Rubino via DollarCollapse.com,

The “pension crisis” is one of those things - like electric cars and nuclear fusion - that’s definitely coming but never seems to actually arrive.




Sponsored By Stansberry Research
Exposed: Biggest Scam Against The American People
The man who predicted the collapse of GM, Fannie, and Freddie says the next big bankruptcy is going to catch everyone by surprise. Learn more here.


However, for pension funds the reason a crisis hasn’t yet happened is also the reason that it will happen, and soon:


The Risk Pension Funds Can’t Escape
(Wall Street Journal) – Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks.

That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9, according to figures provided by the system.

The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017. It gained back $8.1 billion through last Friday as markets recovered.

“It looks like 2018 is likely to be more turbulent than what we have experienced the last couple of years,” the fund’s chief investment officer, Ted Eliopoulos, told his board last Monday at a public meeting.

Retirement systems that manage money for firefighters, police officers, teachers and other public workers are increasingly reliant on stocks for returns as the bull market nears its ninth year. By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier, according to figures released earlier this month by the Wilshire Trust Universe Comparison Service.

Those average holdings were the highest on a percentage basis since 2010, according to the Wilshire Trust Universe Comparison Service data, and near the 54.6% average these funds held at the end of 2007.

One reason public pensions are so willing to bet on stocks is because of aggressive investment targets designed to fulfill mounting obligations to millions of government workers. The goal of most pension funds is to pay for those future benefits by earning 7% to 8% a year.

“Equities always take up a disproportionate share of the risk budget that any plan has,” said Wilshire Consulting President Andrew Junkin, who advises public pension funds. “You can never get away from it.”

That stance paid off during 2017’s market rally as public pensions had one of their best years of the past decade. They earned 12.4% in the 2017 fiscal year ended June 30, according to Wilshire Trust Universe Comparison Service.

But the risks are sizable losses during market downturns, which then can lead to deeper funding problems. The two largest public pensions in the U.S.—California Public Employees’ Retirement System, known by its abbreviation Calpers, and the California State Teachers’ Retirement System—lost nearly $100 billion in value during the fiscal year ended June 30, 2009. Nearly a decade later, neither fund has enough assets on hand to meet all future obligations to their workers and retirees.



Many funds burned by the 2008-2009 downturn tried to diversify their investment mix. They lowered their holdings of bonds as interest rates dropped and turned to real estate, commodities, hedge funds and private-equity holdings. These so-called alternative investments rose to 26% of holdings at about 150 of the biggest U.S. funds in 2016, according to the Public Plans Database, compared with 7% more than a decade earlier.

At the same time, the amount invested in stocks crept upward as markets roared back—and equities remain the single largest holding among all funds. The $209.1 billion New York State Common Retirement Fund increased its equity holdings to 58.1% as of Dec. 31 as compared with 56% as of June 30. That allocation is now higher than the 54% held as of March 31, 2008.

The $19.9 billion Teachers’ Retirement System of Kentucky now has 62% of its assets in equities, close to the 64% it had in 2007. It sold $303 million in stocks Jan. 19-20 to rebalance its portfolio following gains. From Feb. 6-8, as U.S. markets plunged, the fund bought another $103.5 million of stocks.

“We are definitely a long-term investor and look to volatility as an investing opportunity,” said Beau Barnes, the system’s deputy executive secretary and general counsel.

Calpers had a chance to pull back on stocks in December and decided against it. Directors considered a 34% allocation to equities, down from 50%. They also considered a higher allocation.

In the end, the fund opted to raise its equities target to 50% from 46% as of July 1 and its fixed-income target to 28% from 20%. It had 49.8% of its portfolio in equities as of Oct. 31, according to the fund’s website. That is close to the 51.6% it had in stocks for the fiscal year ended June 30, 2008.

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To put the above in historical context:

Thirty or so years ago, state and local politicians and the leaders of their public employee unions had a shared epiphany: If they offered workers hyper-generous pensions they could buy labor peace without having to grant eye-popping and headline-grabbing wage increases. And if they made unrealistically high assumptions about the returns they could generate on pension plan assets they could keep required contributions nice and low, thus making both workers and taxpayers happy. The result: job security for politicians and union leaders and a false sense of affluence for workers and taxpayers.

This scam worked beautifully for as long as it needed to – which is to say until the architects of the over-generous benefits and unrealistic assumptions retired rich and happy.

But now the unworkable math is coming to light and pension funds are responding with two strategies:

1) Roll the dice by loading up on equities – the most volatile asset class available – along with “real estate, commodities, hedge funds and private-equity holdings.”

2) Buy the dips. As the above highlighted quote illustrates, stocks have been going up so steadily for so long that pension fund managers now see “volatility as an investing opportunity.” When the next downturn hits they’ll throw good money after bad, magnifying their losses.

Eventually a real bear market will shred the duct tape and chewing gum that’s holding the public pension machine together. And several trillion dollars of obligations will migrate from state and local governments to Washington, which is to say taxpayers in general, at a time when federal debts are already soaring.
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KENTUCKY

http://www.kentucky.com/news/politic...201770059.html
Quote:
Changes coming to pension bill, but cuts for retired teachers staying, lawmaker says

Spoiler:
Senate Republican leaders are considering possible changes to the public pension overhaul bill filed this week but it appears they will not alter one of the most controversial parts of the bill — cutting retired teachers’ cost-of-living adjustments.

A proposal to cut the cost-of-living adjustment for retired teachers from 1.5 percent a year to 0.75 percent for the next 12 years has generated much criticism, said Sen. Joe Bowen, the bill’s sponsor.

Bowen, R-Owensboro, would not say Friday what might be changed in a planned committee substitute for Senate Bill 1, but Senate Majority Leader Damon Thayer, R-Georgetown, said he thinks the cost-of-living adjustment will not change.

“It’s appropriate just the way it is,” Thayer said.

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The cut “saves a couple of billions of dollars over the next several years,” said Thayer.

Republican leaders have said the pension bill will save the state $4.8 billion over 30 years while eliminating the state’s unfunded public pension liabilities — estimated at $40 billion to $60 billion. Lawmakers, though, have released only one portion of a financial analysis of the bill, which showed $4.07 billion of those savings would come by cutting retirement benefits for teachers and shifting some of the state’s costs onto local school districts.

Thayer noted that a proposal by Republican legislative leaders and Gov. Matt Bevin unveiled last October took retired teachers’ COLAs “to zero,” suspending them for five years.

The financial impact of either proposed cut, though, is about the same, legislative leaders and independent analysts have said. The plan to halve COLAs for 12 years would cost a 59-year-old teacher getting the average pension about $73,000 over the remainder of her life, which is slightly more than the original proposal to suspend COLAs for five years, according to the Kentucky Center for Economic Policy.

Thayer said state employees have not received a COLA since 2013. “These are an important part of the savings that we will achieve over the long term of the bill,” he said.

House Speaker Pro Tempore David Osborne, R-Prospect, said Friday he thinks any changes to the pension bill will “be relatively minor.”

Thayer was asked if cutting teachers’ benefits will be politically risky in a year when all 100 state House seats and 19 of the Senate’s 38 seats are up for grabs.

“There are a lot of things here that are politically risky,” said Thayer. “I would argue that in 1776 when our Founding Fathers met in Philadelphia what they did was politically risky. We are elected to make difficult decisions.”

Thayer said he hopes the legislature will approve the pension bill and send it to the governor for his consideration within the next three weeks.

Bowen said he expects some changes to the bill, as usually occurs with large, complex bills. He called the likely committee substitute “a work in progress.”

The bill is tentatively scheduled to be heard in the Senate State and Local Government Committee next Wednesday, he said.

Bowen said many people are overlooking the fact that legislators are committed to fully funding the pension systems and getting them back to solvency.

“We are finally going to stop kicking the can down the road and get to full funding in these systems — something that hasn’t been done in this body in years and years and years,” he said.



http://wkms.org/post/kentucky-politi...w-pension-bill


Quote:
Kentucky Politics Distilled: The New Pension Bill

Spoiler:
This week at the state legislature, a new bill overhauling the public pension system was finally filed and it’s a lot different from the proposal made by Gov. Matt Bevin last fall. It still reduces benefits to many current and most future state employees while promising massive infusions of cash into the pension systems.

Bevin’s plan to overhaul the pension system would have moved most future and some current state employees onto 401k-style retirement plans. That meant the state would’ve still made contributions to employees’ retirement accounts that would grow with the stock market, but it wouldn’t be on the hook for paying out monthly payments from when workers retire until they die.

Listen Listening...3:56
House Speaker Pro Tem David Osborne said Bevin’s 401k plan would have been too costly, especially when the state’s already considering big budget cuts.

“It was just more costly. There were some people who felt very strongly from an ideological standpoint that we needed to transition to a defined contribution plan. But when the data came back, it just didn’t support financially our ability to do that,” said Osborne.

By moving almost all future workers into 401ks, there would be no new employees to make their own payments into the state retirement system—a very important source of funds for the pensions of people who are already retired or in the system. Instead, lawmakers have proposed moving most future workers into what’s called “hybrid cash-balance” retirement plans.

These are like 401ks, in that the state and employees contribute a little bit every month towards retirement. The state would manage a retirement fund that’s invested in stocks and bonds. When an employee retires, they’d have a lump sum of money that could be divided into monthly payments.

Osborne said the new bill will offer more stability for those being moved onto the new plan.

“It does offer that stability. It offers guarantees, it offers the ability for upside in good markets, protects it during down-markets,” said Osborne.

However, the state already offers a cash-balance plan. Most state employees hired since 2014 have been put into it. And this new version is less generous than that.

Under the current system, the state guarantees that employees will get a 4% return on their retirement investments. Under the proposed one, the state will only guarantee that employees won’t lose money.

Jason Bailey with the Kentucky Center for Economic Policy said the new plan is way less generous for future teachers, who would no longer receive a defined benefit pension plan that guarantees payments until death.

“It’s a lesser benefit for sure. One of the big issues is just the predictability and security of knowing what you’re going to get at the end of the day, which is what they have now. This is more dependent on the markets,” said Bailey.

Cost of living adjustments for teachers who have already retired would be cut in half for the next 12 years. For future retirees, the cost of living adjustments would be cut in half for the first 12 years of their retirements.

Employees would no longer be able to accumulate sick days to help them retire early. Future teachers’ pensions would no longer be subject to the so-called “inviolable contract,” meaning lawmakers could vote to reduce benefits at any time.

Sen. Joe Bowen, a Republican from Owensboro, said he thought state workers would support the new bill.

“I can’t imagine there being a lot of pushback on this. We made, I don’t want to call them concessions, because they’re sound decisions we made. They’re fiscally responsible decisions. They’re not concessions, they’re the right decisions,” said Bowen.

Lawmakers estimate the proposal would save the state $4.8 billion and pay off the state’s pension debt in 30 years. It would require the state to set aside massive contributions to the system and lawmakers are still non-committal about reforming the tax code so the state can bring in more money.

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CALIFORNIA

https://medium.com/@DavidGCrane/more...h-bf08caa1041c

Quote:
More Pension Math
Asset recovery isn’t enough.

Spoiler:
Let’s say your house was worth $251,000 in 2007. Then came the Great Recession. By 2009 your house’s value had dropped to $179,000. But prices climbed and by 2016 your house was worth $298,000. Would you say your house had recovered its pre-Great Recession value? Of course you would.

If you add six zeroes to those dollar values you would have CalPERS’s asset values for 2007, 2009 and 2016:
[img]https://cdn-images-1.medium.com/max/800/1*ADAlC3l_VLB3cIITKnSihg.png[/img] - go to the link for the images


Page 120, CalPERS 2016–17 Comprehensive Annual Financial Report, MVA basis, dollars in millions
As you can see, CalPERS’s assets were $251 billion in 2007, $179 billion in 2009, and $298 billion in 2016. Would you say that pre-Great Recession asset values had been recovered by 2016? Of course you would. In fact, assets in 2016 exceeded pre-Great Recession assets by 20 percent. But now look at the growth over the same period in CalPERS’s unfunded liability, which is the difference between pension liabilities and those assets:
[img]https://cdn-images-1.medium.com/max/800/1*pMF51uvlICreFM0qO6Xnhw.png[img]

Unfunded Liability, MVA Basis, dollars in millions
CalPERS’s assets exceeded liabilities by $2.9 billion in 2007 but by 2016 liabilities exceeded assets by $139 billion. That unfunded liability developed even though assets in 2016 were 20 percent higher than before the Great Recession. The reason: CalPERS’s pension liabilities exploded, for reasons explained here. An unfunded liability would’ve developed even without a Great Recession, as explained here. Other pension plans that went through the same recession didn’t have explosions in unfunded liabilities for reasons explained here.

CalPERS’s liabilities will continue exploding. The consequences are falling on our state’s most vulnerable citizens and institutions — students and young teachers, the needy, courts and more — and tax increases are being diverted to pension debts rather than new services. Those consequences will worsen. Legislators will be called upon to make very difficult choices. Students, citizens and taxpayers who did nothing wrong have already had to make sacrifices. Current and future public employee retirees who did nothing wrong will be called upon to make sacrifices.

Pension accounting abuse by CalPERS and other public pension plans in California has created a serious threat to civil order. The more that legislators and journalists understand how we got here and where — in the absence of reform — we are headed, the better.


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PROVIDENCE, RHODE ISLAND

http://wpri.com/2018/02/23/report-sk...ion-fund-300m/

Quote:
Study: Skipped payments cost Providence pension fund $300 million

Spoiler:
PROVIDENCE, R.I. (WPRI) – Providence’s failure to make adequate annual contributions to its pension system throughout the late 1990s and early 2000s cost the retirement fund more than $300 million, according to an analysis released by the city’s investment advisor.

Wainwright Investment Counsel LLC projects the beleaguered fund would have an additional $305 million today if city leaders made the correct yearly payments between 1996 and 2006 and again in 2010 and 2012, an amount that would bring the city’s current pension funding level close to 50%.

The firm calculated the amount that city leaders failed to contribute to the system – $111 million – and the monthly returns the actual money in the retirement fund saw between July 1996 and June 2016. Between 1998 and 2002, Wainwright estimates the city shorted the fund by $76.8 million.

“Although the best time to have made these payments was decades ago, it’s on us to take action today,” Mayor Jorge Elorza, a Democrat, told Target 12. “That is why I have been focused on monetizing the Providence Water Supply Board, a transaction that would be a once-and-for-all solution to our pension problem. We cannot kick the can down the road any longer and we have to address this challenge now.”

Read: The full report
Related: How Buddy Cianci made the pension problem worst
Also: Everything you should know about Providence’s finances
Follow: Providence politics on Facebook
The city asked Wainwright to calculate how much money the pension fund should have after a Target 12 investigation last October revealed former Mayor Vincent A. “Buddy” Cianci Jr. knew in the 1990s that the city’s unfunded pension liability was spiraling out of control, but none of the ideas his administration had for rescuing the system ever materialized.

“I think the unions ought to be made aware of this,” Cianci, an independent, told the city’s Board of Investment Commissioners at a meeting in 1996. “I mean, the city will no longer exist if we have to come up with this kind of money.”

Providence is still solvent, but its pension system was just 25.8% funded as of June 30, 2017, with an unfunded liability that exceeds $1 billion. In the current fiscal year, more than 10% of city spending – approximately $78 million – will go to the pension fund. That figure is expected to grow to $100 million by 2025.

The majority of the missed contributions were skipped during the Cianci administration, but Wainwright’s review shows full payments weren’t always made during the tenures of his successors David Cicilline ($22.5 million) and Angel Taveras ($10.4 million), two Democrats.

Under Taveras, the city negotiated an agreement with the municipal unions and retirees that suspended 3% COLAs for 10 years, eliminated 5% and 6% COLAs forever and placed a cap on how much retirees could earn from their pensions.

The deal also required the city to make at least 95% of its actuary’s recommended pension payment, effectively prohibiting future mayors from shorting the fund. The city’s annual pension payment is projected to grow by at least 3.5% a year over the next two decades, with the funding level reaching 100% by 2041.

Elorza has warned that the city still has more work to do and has vowed to pursue the sale or lease of the city’s water system, which was valued at $404 million last year. The mayor has also said he would like to “strike a grand bargain” with the city’s retirees, although he’s never publicly disclosed the types on concession he’ll seek.

Continue the discussion on Facebook

Dan McGowan (dmcgowan@wpri.com) covers politics, education and the city of Providence for WPRI.com. Follow him on Facebook and Twitter: @danmcgowan


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https://pro.creditwritedowns.com/201...on-crisis.html

Quote:
The Great American Pension Crisis

Spoiler:
This morning a commentary on pensions caught my eye. I learned that Steve Westly, a former voting member of public pension fund CalPERS’ board, was concerned about a pension crisis. And he was tweeting about it. Westly was also the California state Controller from 2003 to 2007. So he knows a thing or two about the state’s finances.

This is something that has been off my radar for a while. But it becomes relevant if we are anywhere close to the end of this business cycle. And a pension crisis would have wide-ranging consequences.

Detroit, Puerto Rico and Meredith Whitney
Remember Meredith Whitney? She was a Wall Street bank analyst who rose to fame during the Great Financial Crisis. Her prescient warnings about the vulnerability of the bank sector made her a media darling back in 2008 and 2009. But in 2010, she veered off into coverage of municipal finance. She warned the next shoe to drop was in municipal bonds. And it was all about state and local public pensions. That caused a huge uproar in the muni space. Muni veterans defended their market as safe for investors, and took Whitney to task again and again.

Eventually her warnings proved wrong. And she faded from view. But the gist of Whitney’s muni forecast was valid. That’s what Alice Schroeder told Bloomberg in early 2011. Schroeder, the author of the only approved biography of Warren Buffet, is also a former Wall Street analyst.

I covered the municipal issue back then. And I said “my takeaway is that recovery means no crisis.” The problems were there. However, the economic and market recovery put them off for most US states and municipalities. Nevertheless, I warned to “wait for the next downturn and then we’ll see a lot of defaults.”



After Whitney’s call, there weren’t a lot of municipal problems. Again, that owes to the economic recovery. We had the Detroit bankruptcy and that was very difficult. The Detroit experience left emotional scars that probably helped Donald Trump win Michigan in 2016’s Presidential election. But that’s just one city. Later, there was the meltdown in Puerto Rico too. The devastation from natural disaster makes the fiscal crisis there all the more heartbreaking. However, the issues in Puerto Rico are idiosyncratic. And Puerto Rico is not a systemic risk.

But what about California’s pensions?
California is the biggest state in the country. It has an economy bigger than all but a handful of countries. This is where a municipal crisis would be systemic. Enter Dan Walters:

The essence of California’s pension crisis was on display last week when the California Public Employees Retirement System made a relatively small change in its amortization policy.

The CalPERS board voted to change the period for recouping future investment losses from 30 years to 20 years.



The bottom line is that it will require the state government and thousands of local government agencies and school districts to ramp up their mandatory contributions to the huge trust fund.

Client agencies – cities, particularly – were already complaining that double-digit annual increases in CalPERS payments are driving some of them towards insolvency and the new policy, which will kick in next year, will raise those payments even more.

“What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” a representative of the League of California Cities, Dane Hutchings, told the CalPERS board before its vote.

But CalPERS itself may be on the brink, and the policy change is one of several steps it has taken to avoid a complete meltdown.

The system, once more than 100 percent funded, now has scarcely two-thirds of what it would need to fully cover all of the pension promises to current and future retirees – and that assumes it will hit an investment earnings target (7 percent per year) that many authorities criticize as being too optimistic.

Walters’s view: “So on one hand, CalPERS is doing what it has to do to remain financially solvent, but on the other hand its self-protective steps threaten local government solvency. That’s the crisis in a nutshell.”

Pension crisis in the next downturn?
Walters is talking about dire state and municipal finances during the best economic conditions of this business cycle. What happens when the economy turns down? And what happens in the next tough bear market in equities or bonds? The seven percent annual return assumption will look ridiculously optimistic then.

And California’s problems will be repeated throughout the country in places like Illinois and New Jersey. Those are two of the biggest states that have precarious municipal finances. And have you seen what’s happening in Oklahoma, with teachers working at Walmart on Mondays? That’s not the future that other states want to reckon with.



No one’s talking about this – at least not in my circles. I don’t hear it on the news or read about it in the paper. For me, the potential for a state and municipal fiscal and public pension crisis is a defining issue for the next downturn. Problems in this arena are guaranteed given the underfunding of public pensions throughout the United States. The question is whether the downturn in the economy and in financial markets crystallizes a crisis.

If we do have a pension crisis, it will be a systemic issue, both economically and politically. The issue with CalPERS tells you that.

Editor’s note: This article initially attributed the article quotation to Steve Westly instead of Dan Walters.


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DIVESTMENT
GUNS

https://www.cbsnews.com/news/should-...-in-gunmakers/

Quote:
Should state pension plans invest in gunmakers?

Spoiler:
Even as New York Governor Andrew Cuomo pledges to fight gun violence, the state's pension plan for teachers remains invested in Sturm Ruger (RGR), a major manufacturer of firearms. The company's models include AR-15-style rifles, the weapon of choice for mass shootings, including this month's massacre at a Parkland, Florida, high school.

John Cordillo, a spokesman for the New York State Teachers Retirement System, told CBS MoneyWatch that no decision has been made about whether to liquidate its Ruger holdings. A Cuomo spokesperson didn't respond to a request for comment.

But New York, which this month joined forces with three other northeastern states to create a task force to combat the illegal trafficking of guns, isn't the only state where retired teachers and other public workers are effectively helping to bankroll the firearms industry.


Pensions in at least a dozen states own gun stocks, although those holdings are a sliver of their overall investments. Some of those plans are in states, such as Florida and Colorado, that have been the scene of school shootings, according to Bloomberg. The news service reports that Florida's State Board of Administration (SBA), which manages the Florida Retirement System Pension Plan, has rejected a request from Florida's Education Association (FEA) to liquidate its gun stock holdings following the Parkland shooting.

An SBA spokesman said Florida officials need to focus on actions to make schools safer and not put "limitations on investments that increase plan costs, potentially lower returns and consistently fail to produce desired social changes."

As of December 31, public pension plans in Arizona, Louisiana, Michigan and Texas also held shares in Sturm Ruger, according to data from S&P Capital IQ. Two of the funds that own the company's stock -- The Teacher Retirement System of Texas and the Public Employees Retirement Association of Colorado (PERA) -- also have invested in American Outdoor Brands (AOBC). PERA, which has $48 billion management, reports holdings of $1.3 million in the firearms sector.

American Outdoor Brands, which until 2016 was known as Smith & Wesson, made the weapon that accused Florida shooter Nikolas Cruz used to murder 17 people at Marjory Stoneman Douglas High School.


Another pension fund with a stake in American Outdoor Brands is the Ohio Public Employees Retirement System. Ohio Governor John Kasich has reportedly angered gun-rights groups by hinting that he would be amenable to restrictions on the public's right to own AR-15s. Spokespersons for the fund and Kasich didn't respond to requests for comment.

New Jersey lawmakers this week introduced a bill that would prohibit the state from investing any pension or annuity fund assets in manufacturers of firearms or ammunition. According to State Investment Council chairman Tom Byrne, New Jersey doesn't currently hold any shares in the sector.

Despite the furor over gun control, however, exiting gun stocks isn't necessarily straightforward for retirement plans. For one thing, most pension funds own such shares as part of funds that mimic benchmarks like the S&P 500 or Russell 3000, acquiring every stock in the index. The investments are typically handled by outside fund managers, such as BlackRock or Vanguard.


Pension plans and fund managers also are required by law to follow a fiduciary legal standard in how they operate. That means investing on behalf of plan participants in companies that net the highest possible investment returns.

"These pension funds are tax-exempt partly on the basis that they operate as trust funds," said Keith Brainard, director of research at the National Association of State Retirement Plan Administrators. "Those who administer trust funds have a fiduciary obligation … to make decisions that are solely in the interest of plan participants."

BlackRock, the world's biggest money manager with $200 billion in assets, has said it plans to "engage" with gunmakers about their response to recent events, without providing any specifics. Vanguard argues that it strikes a balance between its fiduciary responsibility and its wider corporate responsibilities.

"That said, I cannot give details on any engagements with specific companies," said Carolyn Wegemann, a spokeswoman for Vanguard, by email. "We take a 'quiet diplomacy focused on results' approach to engagement -- providing constructive input that will, in our view, better position companies to deliver sustainable value over the long term."

BlackRock didn't respond to a request for comment.

A 2016 analysis by Boston College's Center for Retirement Research, looking at plan data between 2001 and 2015, found that funds in states with divestiture requirements -- because of issues ranging from the Iran nuclear deal to concerns about fossil fuel consumption -- underperformed their peers by 40 basis points.

Yet that view is disputed by social investing advocacy groups like the Forum for Sustainable and Responsible Investment, which says studies show that most companies benefit financially by engaging in sustainable practices.


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NEW JERSEY

https://burypensions.wordpress.com/2.../s5-and-colas/

Quote:
S5 and COLAs
Spoiler:
An anonymous commenter suggested that S5, a bill transferring management of the New Jersey Police and Firemen’s Retirement System (PFRS) from the Division of Pensions and Benefits in the Department of the Treasury to the Board of Trustees of the PFRS, which is scheduled to be approved by the state Senate on Monday is primarily about restoring cost-of-living adjustments (COLAs) for retirees.

Looking over the language of the bill, the commenter may be right.


The board may, in its discretion and at such time and in such manner as the board determines, enhance any benefit set forth in P.L.1944, c.255 (C.43:16A-1 et seq.) as the board determines to be reasonable and appropriate or modify any such benefit as an alternative to an increase in the member contribution rate, which increase the board determines to be reasonable, necessary, and appropriate, or reinstate, when appropriate, such reduced benefit to the statutory level without an additional contribution by the member. The board shall act exclusively on behalf of the contributing employers, active members of the retirement system, and retired members as the fiduciary of the system. The primary obligation of the board shall be to direct policies and investments to achieve and maintain the full funding and continuation of the retirement system for the exclusive benefit of its members. (page 16)
The board shall consist of 12 trustees as follows (pages 16-18):
Three active policemen
Three active firemen
One retiree from the system
Five trustees, to be appointed by the Governor
At least eight votes of the authorized membership of the board shall be required to approve any enhancement or reduction of a member benefit, other than for the activation of the application of the “Pension Adjustment Act,” P.L.1958, c.143 (C.43:3B-1 et seq.), for retirees, or to approve any increase or decrease in the employer contribution that is more than what is recommended by the actuary for the system for the purpose of the annual funding requirements of the system. (page 25)
The Board of Trustees of the Police and Firemen’s Retirement System may adjust the monthly retirement allowance or pension of its retired members in accordance with subsection b. of section 13 of P.L.1944, c.255 (C.43:16A-13). (cf: P.L.2011, c.78, s.25) (pages 2 -3)
That last excerpt refers to the law that took away COLAs and that section reads:
Commencing with the effective date of P.L.2011, c.78 and thereafter, no further adjustments to the monthly retirement allowance or pension originally granted to any retirant and the pension or survivorship benefit granted to any beneficiary shall be made in accordance with the provisions of P.L.1958, c.143 (C.43:3B-1 et seq.), unless the adjustment is reactivated as permitted by law. This provision shall not reduce the monthly retirement benefit that a retirant or a beneficiary is receiving on the effective date of P.L.2011, c.78 when the benefit includes an adjustment granted prior to that effective date. (page 41)
The method of reinstating COLAs under the 2011 law, as explained on the Division of Pensions website:
Chapter 78 also provides for the establishment of Pension Committees which may consider reinstating the COLA when the retirement systems reach “target funded ratios” established by the law. At that time, the Pension Committees are to give the reactivation of the COLA priority consideration.
Since COLA restoration is exempt from the requirement to get 8 out of 12 votes, will the 2011 rules (when there were eleven trustees) then apply?
Each trustee shall be entitled to one vote in the board. A majority vote of all trustees shall be necessary for any decision by the trustees at any meeting of said board. (page 13)
Does that mean seven votes are needed when there are six participants and one retiree on the board?
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