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  #101  
Old 01-17-2019, 10:39 AM
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Mary Pat Campbell
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CALIFORNIA

https://medium.com/@DavidGCrane/accr...t-ddc7c2cbac3c

Quote:
Accretion of Discount

Spoiler:
Those of you interested in state, local and school district pension obligations should add an esoteric phrase to your vocabularies: “Accretion of Discount.”

As explained by Investopedia: “Accretion of discount is the increase in the value of a discounted instrument as time passes and the maturity date looms closer. The value of the instrument will accrete (grow) at the interest rate implied by the discounted issuance price, the value at maturity and the term to maturity.”

In the case of public pensions, “discounted instrument” = pension liabilities. Eg, assume a government obligates itself to make a $100 pension payment in 20 years. To report a present value of that obligation when created, the future payment of $100 must be “discounted.” Once established, the obligation will grow at the discount rate. The higher the discount rate, the greater the discount. The greater the discount, the greater the accretion.

Let’s say the government chooses a 7.5 percent discount rate. Discounted at that rate, $100 due in 20 years has a present value of $24. The discount — $100 minus $24, or $76 — will accrete over the succeeding 20 years. One year later, the liability will accrete to $25. After five years, $34. After ten years, $49. After 15 years, $70. Finally, at 20 years, the liability has fully accreted to $100. That growth is automatic. It’s built in up front by the discount. Also, changing the discount rate during the 20 year period wouldn’t change the end result — that must always be $100. It would just change the pace at which the $100 is accreted.

To see accretion in action, take a look at these figures from CalPERS:



Liabilities (second column) grew an astounding 76 percent in nine years, from $248 billion to $436 billion. That translates into a compounded annual growth rate of 8.11 percent, close to CalPERS’s discount rates during that period. Lengthening life spans also contribute to liability growth but nothing compared to the growth from accreting a huge discount.

CalPERS is slowly lowering its discount rate to 7 percent but it doesn’t make much difference at this stage. That’s because its plan is increasingly mature and its assets are so much smaller than liabilities. Assets of $298 billion cannot keep up with liabilities of $436 billion accreting at 7 percent, much less 8 percent. Even if $436 billion of liabilities accrete at “only” 7 percent, $298 billion of assets must grow at more than 10 percent just to keep the unfunded liability (the difference between liabilities and assets) from growing.


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  #102  
Old 01-18-2019, 11:55 AM
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CALIFORNIA

https://www.hoover.org/news/reforms-...-pension-costs

Quote:
Reforms Urged To Control Exploding California Pension Costs

Spoiler:
The public pension nightmare for California will only worsen unless serious reforms are adopted, a Hoover scholar says.

Joshua Rauh, a senior fellow at the Hoover Institution and a professor of finance at the Stanford Graduate School of Business, suggests that governments in California need to either offer more modest pension benefits—and fund those much more conservatively—or start putting public employees into defined contribution plans.

An economist, Rauh studies corporate investment, business taxation, government pension liabilities, and investment management. He recently wrote about California’s pension situation for a Hoover Institution white paper and discussed the subject in a PolicyEd video.

Rauh was recently interviewed about the issue.

How critical is the pension situation in California?

Rauh: The gap between what public pension funds in California have saved up for public employee pensions and the value of what is owed to public employees is $769 billion, or more than $60,000 per California household [see our Interactive Map].

It is as though each household is carrying around a credit card balance of $60,000 that is growing each year. At some point in the future, the government will make us pay, because the public employee pensions must be paid. How will the government make us pay? Either through higher taxes or through the cutting of core public services.

Think about the essential public services that citizens pay for through taxes and fees—like safety and education. Going forward, we'll have fewer resources available to pay for those actual services, because taxpayer money will increasingly be burdened with paying the pensions of the people who performed those jobs in the past.

Another way to see the problem is that as of now, around 10 percent of all public revenue generated in the state of California and its municipalities goes to fund public employee pensions. That sounds like a lot, but the real problem is that even this amount is not adequate to stabilize the $60,000-per-household debt to the public employees! A contribution rate that would keep the debt from rising would amount to more than 21 percent of every dollar of public revenue generated within the state of California.

Why are assumptions about future pension returns often highly uncertain?

Rauh: They used to be much more certain, because pension funds used to invest primarily in safe securities such as government bonds. US Treasury bonds in the 1990s could generate 6–7 percent per year returns with a high degree of safety. Now they generate less than 3 percent per year. State and local governments have responded to this change over time by shifting their asset allocation increasingly to riskier securities—the stock market for one, but also alternative assets such as private equity, venture capital, real estate, and hedge funds. Overall, around 75 percent of every dollar in public pension fund portfolios is invested in one of these risky asset classes. While the pension funds typically assume they're going to earn around 7.5 percent per year in these investments, the fact is that the returns that might be earned on these securities are highly uncertain, even over long periods of time.

Some people say, "Everything will be fine—the stock market and professional investors always do well enough over the long term." That's not what the principles of finance say. We know that in eras where the stock market has done well, it is because those returns were compensation for risk—for the possibility of bad outcomes that we got lucky and avoided. Right now, pension funds are taking a great deal of risk in order to keep their return targets up. There's no guarantee that it will go well, and in fact the funds are more likely to fall substantially short of their targets than to achieve them.

What should the state and other entities in California do to realistically solve and reform their pension problems?

Rauh: "Realistically" is a difficult word because this problem is so blocked by political special interests and public employee unions. That said, I like to think about what I would advise a friend who has racked up $60,000 of credit card debt that keeps growing every year because he's investing in risky assets that aren't generating the returns he's hoping for. I would tell my friend that the first thing he needs to do is stop the behavior that is leading to the growth in the credit card debt. In this case, that behavior is promising public employees pensions without setting aside sufficient funds to pay for them, and hoping that the stock market or private equity investments will bail everyone out. That has to stop.

So, on a forward-looking basis, governments need to either begin promising more modest pension benefits that they fund much more conservatively or, failing that, they need to put public employees into defined contribution plans, which are more like the benefits private economy employees have. This won't make the $769 billion debt go away, but it will stop it from growing, and for a state like California it is the explosive growth of this debt that should be more frightening than its absolute level.

Is pension reform under way or being considered in California?

Rauh: Our previous governor, Jerry Brown, knew that pensions were a big problem. In 2011, the first year of his second turn as governor, he proposed a 12-point pension overhaul. The California State Legislature passed some of these points, particularly those that affect new hires. These new members of the workforce will face higher retirement ages, and there will be more sharing of costs between them and their municipal employers. Unfortunately, the true pension costs are far higher than the costs as reflected in current budgets, which is the part that would be shared. It’s like my offering to share costs with you in advance of your taking me out to dinner at a very fine restaurant—but my contribution is based only on the expected cost of a hamburger at a fast-food joint.

Other points in Governor Brown’s plan were passed but are currently being litigated, such as the limitations against pension spiking—the practice under which some public employees artificially inflate compensation in the years before retirement in order to set themselves up for a higher lifetime payment on the taxpayer dime. Believe it or not, many public employees assert that they have a right to such practices.

These employees contend that the body of precedent informally called the California Rule gives public employees a right to whatever benefit was available to them on their initial day of employment, including the right to manipulate the compensation that determines their lifetime pension benefit. Recent appeals court decisions have upheld employees’ right to spike, but the California Supreme Court has now taken up the issue.

While these attempts are better than nothing, they fall far short of what is needed to stop the looming fiscal crisis that faces the state.


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  #103  
Old 01-18-2019, 12:29 PM
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CHICAGO, ILLINOIS

https://budgetblog.ctbaonline.org/ch...t-cab30326b9c8

Quote:
Chicago’s pension crisis isn’t really about pensions — it’s about debt
Four out of five dollars of the city’s 2019 contribution are for benefits earned, but not paid for, in prior years

Spoiler:
No matter who the next mayor of Chicago is, one thing is certain: Before they can increase spending on neighborhood investments, public transit, schools, or any other priority, they will have to address the city’s pension debt.

As it stands, the city owes some $28 billion to the systems that pay retirement benefits to school teachers, police officers, firefighters, and other city workers — and its required contributions to those systems are scheduled to increase by over a billion dollars over the next four years, taking up more than twenty percent of the entire city budget. What can be done? And what’s to blame for this problem to begin with?


Source: Actuarial valuation reports
Borrowing, not benefit levels, makes the current path dangerous
One theory suggests that public retirement benefits are just too generous to be sustainable. In particular, many observers and elected officials have called out a decades-old decision to grant retired public employees a three percent annual increase in their retirement benefits in order to keep up with inflation. (In 2010, the state changed this rule, so that all public workers hired since 2011 receive a cost of living adjustment of one-half the rate of inflation, capped at three percent.) In a December speech, outgoing Chicago mayor Rahm Emanuel proposed the city reduce its payments by passing a constitutional amendment roll back the three percent cost of living adjustment and cut retirement benefits.

But a closer look reveals that benefits themselves are not the driving force behind Chicago’s pension debt crisis. Rather, pension borrowing — a failure to fully pay for benefits earned in prior years — has led to a situation in which the city is not only paying for newly earned benefits in each year, but billions of dollars of benefits earned but not paid for in prior years, as well as the interest on those unpaid-for benefits.

The scale of the debt problem is so severe that it accounts for over a billion dollars in 2019, or nearly 10 percent of the entire city budget. In other words, if Chicago were only paying for newly earned benefits in 2019, it would be able to roll back all of the $589 million in property tax increases enacted over the past four years, then cut property taxes by another $400 million — and still balance the budget.

The chart below shows just how dramatic the pension debt issue is. Like the one above, it shows how much Chicago is projected to have to pay to its retirements funds. But this one divides those payments into two parts: the “normal cost,” the estimated cost of retirement benefits earned in that year; and debt payments, which represent money the city owes the pension systems for benefits earned in previous years.


Source: Actuarial valuation reports
If Chicago’s pension payments were unsustainably high because its benefit levels were unsustainably high, you would expect the city to have a very high normal cost. Debt payments might make things worse, but a benefits-driven crisis would lead to normal costs so high they could not be accommodated without painful tax increases or deep spending cuts.

But that is not what we see. In 2019, Chicago’s pension payments added up to about $1.3 billion. Just $250 million of that, however, is the normal cost — the cost of new pension benefits earned this year. The rest, over $1 billion, is a debt payment on benefits earned in prior years. Just as importantly, the city’s normal cost is hardly projected to increase at all over the coming decades. In other words, without the debt payments, there is no crisis.

How did Chicago become so indebted?
By far the largest reason for Chicago’s level of pension debt is that the city has simply failed to pay what it owes.


Source: Commission on Government Forecasting and Accountability
Between 2007 and 2016, the most recent year for which data is available from the state Commission on Government Forecasting and Accountability, Chicago’s pension funds’ “unfunded liability” — the difference between the amount of money the funds need to pay all of the retirement benefits that have already been earned and the amount of money they actually have — has grown from about $12 billion to over $28 billion. Of that $16 billion in new debt, fully 58 percent of it, or $9.3 billion, is a direct result of city underfunding. The second largest category, at 23 percent or $3.7 billion, is poor investment returns, largely from the Great Recession. Another 20 percent, or $3.2 billion, is a result of changes in the assumptions the pension funds make in calculating how much money they need. (The most important of these changes have been reductions in the assumed rate of investment returns.)

Changes to salary and benefits levels, on the other hand, have actually reduced the unfunded liability by nearly $500 million, or about three percent.

You can see the extent to which Chicago has underfunded its pensions in the chart below, which compares the city’s actual payments to payments based on actuarial math. As in the projected payments chart above, the vast majority of that actuarial requirement is debt service on previously earned benefits.


Source: Chicago Annual Financial Analysis, 2017 and 2018
Why would the city so dramatically underfund its pensions? The answer is that “borrowing” from pension funds can appeal to elected officials for the same reason borrowing from other sources does: It allows the city to spend more money without asking residents to pay higher taxes. Essentially, Chicago has been borrowing from pension funds in order to pay for other priorities while keeping taxes artificially low. But as the debt payments on that pension borrowing have grown, the city has historically proven unwilling to pay them in full either, creating a spiral of rising costs. (Full actuarially based payments are scheduled to begin in 2020 for the Police and Fire pension systems, and in 2022 for the Municipal and Laborers pension systems.)

Ways ahead
How to deal with the debt the city has accumulated is a difficult question. But it must be dealt with. The state Supreme Court has made clear that already-earned pension benefits cannot be cut under the Illinois Constitution, nor should policymakers look to solve the issue by threatening the retirement security of workers. Other ways for the city to address the backlog, including pension obligation bonds, may have merit if done carefully and responsibly. And at the state level, CTBA has suggested a reamortization plan that would bump up payments today to save tens of billions in debt interest payments in future years. CTBA will continue to look at the City of Chicago’s pension situation, but recognizing the nature of the problem is an important first step.


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  #104  
Old 01-18-2019, 06:16 PM
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CHICAGO, ILLINOIS

https://www.chicagotribune.com/news/...y.html#new_tab

Quote:
Editorial: Mayoral forum, Part 2: Taming Chicago’s pension beast

Spoiler:
If you’re the mayor of cash-strapped Chicago and need $270 million ASAP to fill a city pension hole, where do you find the money? There’s no one right answer to that math problem, but among the candidates seeking office on Feb. 26, there’s one politically unpopular response: further raising property taxes.

On Wednesday, five more mayoral hopefuls met with the Tribune Editorial Board in a livestreamed forum: Dorothy Brown, Bob Fioretti, John Kozlar, Susana Mendoza and Paul Vallas.



We put our pension question to each, knowing how pols on the campaign trail in Illinois hate to discuss the bleak state of pensions because it’s a no-happy-talk zone. Raising additional revenue is hard. That’s why previous administrations in Springfield and City Hall took “pension holidays,” which sound lovely but involved recklessly skipping annual contributions. They were costly short-term fixes that explain why Illinois, Chicago and so many other local governments are in such deep trouble today.

WATCH: Stream the second mayoral endorsement session.

All the Wednesday candidates acknowledged Chicago’s precarious situation by offering a variety of ideas for new sources of quick revenue. They couldn’t suggest money from a Chicago casino because it wouldn’t be open soon enough. Interestingly, none of the candidates mentioned an immediate residential property tax increase, apparently recognizing homeowners are taxed out. We’ll see what the next mayor does after he or she takes office.

Here’s a summary of the candidates’ responses:

Former Ald. Bob Fioretti: A commuter tax, involving a 1 percent payroll levy on non-residents who work in Chicago, would yield about $300 million, he said. “It’s people from Indiana, Wisconsin, the suburbs, who come in here and make their money here and spend it in their community,” Fioretti explained. He acknowledged a commuter tax got a razzing from this page after it was mentioned as a potential revenue source by Bill Daley. (We said it would drive away businesses.) Fioretti said ending the ban on video poker would bring in $70 million. He could get to $400 million by cutting $25 million from the budget. Fioretti does not support the city extending its indebtedness by doing another huge bond deal.

John Kozlar: He doesn’t want to sell bonds or raise taxes. “I’m a believer in the reallocation of resources,” he said. He suggests cutting overtime pay and bonuses for workers. He said he could take about $380 million out of that $481 million expense. “Have everybody work together,” he said.

Illinois Comptroller Susana Mendoza: “Anyone who says that the bonding deal is completely off the table is just not being realistic,” she said. The details of such a deal, proposed last year by Mayor Rahm Emanuel, aren’t clear. The idea: Raise $10 billion by selling bonds to help shore up the pension funds. In theory, investment returns from the funds would be large and steady enough to pay the interest on the bonds. Among the known risks: What happens if markets tank and the city struggles to pay bondholders?

Cook County Circuit Court Clerk Dorothy Brown: A financial transaction tax would involve taking a small cut on the buying and selling of financial assets including stocks, bonds and derivatives via the Chicago markets. “It’s time to have a discussion with the Chicago Mercantile Exchange as well as the Chicago Board Options Exchange about how can they can become good corporate citizens,” Brown said. She also wants to see Chicago create its own lottery.

Former Chicago Public Schools CEO Paul Vallas: There are ways to make city operations more efficient and, for example, make sure city departments secure all the revenue they are entitled to, Vallas said. His bigger idea is to identify expiring TIF districts and use property tax money from those sources to fund a bond sale. “You would be cashing in on the TIF windfall early,” he said.

Take it as a good sign that candidates are willing to talk about how to raise revenue. Not all of these proposals are feasible, legal and likely to produce the money Chicago will require for its pensions. The mayor who has to come up with an extra $270 million in 2020 will have to come up with nearly $1 billion in extra pension funding by 2023.

The pension beast threatens the stability of city government — and the resources of city taxpayers. How Chicago’s next mayor attacks the beast will, for better or worse, help shape Chicago’s livability and its people’s prosperity.

Voters, it will be on you to decide which of more than a dozen candidates you’ll entrust with Chicago’s shaky finances.


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Old 01-18-2019, 06:16 PM
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SAN DIEGO, CALIFORNIA

https://www.sandiegouniontribune.com...117-story.html
Quote:
‘13th check’ bonus for retired city employees hits record again

Spoiler:
More than $6.7 million went to retired San Diego city employees at the end of November in the form of a “13th check,” setting yet another record for the holiday bonus program.

The payments, which go beyond city pensioners’ usual 12 monthly payments, ranged from $17 to $2,023 each.

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The San Diego City Employees’ Retirement System, or SDCERS, reports that more than 9,700 eligible recipients — another record high for the three-decade-old benefit— received a check that averaged $687 per person.


The “13th check” program was launched in 1980, when pension fund investments were doing well and city retirees had struggled through years of inflation. It has become a source of conflict as the city’s pension system faces a $3.1 billion shortfall in promised payments, which remains a taxpayer burden and has led to City Hall budget crises in the past.

According to Susan Youngflesh, associate general counsel, 13th-check payments are made only when pension fund investments meet certain earnings thresholds compared to agency expenses.

“When there’s sufficient earnings, members get this calculated benefit,” said Jim Baross, president of the City of San Diego Retired Employees Association. “It’s certainly helpful around the holidays. Some years we don’t get it, and that’s a hardship for folks.”

Checks have gone out every year since 1984 except for 2003, 2009 and 2012.

Daniel Kronemyer, an attorney and property manager in Carmel Valley who has followed the city’s pension deficit and other problems closely, said employee retirement costs are at the center of most problems in San Diego.

“It hobbles everything. San Diego cannot build schools and fix infrastructure because most of the money is going into the pension system,” Kronemyer said. “It sucks up every resource, every extra bit of money that our local government has.”

According to a 2004 review by the city’s Pension Reform Committee, the 13th check policy was awarding bonuses that were higher than some recipients’ benefits over the course of an entire year. City officials scrambled to place a cap on how much each person could receive, and the change resulted in a legal battle and subsequent settlement of nearly $10 million.

For those members who retired sometime after June 30, 1985, the cap on the 13th check is $30 for every year of service, so someone with 30 years of service would get a 13th check for $900. The cap goes up to $75 per year of service for workers who retired earlier and therefore have less generous monthly benefits.

Along with the 11-figure payout, the settlement nixed the 13th check — and several other costly benefits — for workers hired after June 30, 2005, but the total payout has continued to climb in recent years, as more people hired before that date retire and live longer.

“Life expectancy is going up. The liability stretches further and further as our population increases in age and longevity,” Kronemyer said. “This is not something that is going to go away.”

According to a review of city pension data, the total cost of this year’s 13th check is nearly a 30 percent increase from payouts in 2010.

Critics have said the money spent on 13th checks should have been reinvested to help offset the city’s pension obligation.

As of 2011, a total of $73.5 million had been spent cumulatively on the 13th-check program. A U-T Watchdog analysis at the time found the sum would have grown to $200 million if it were invested, based on the fund’s investment returns over the 30-year period.

As of today, some $115.3 million has been spent on the program.

SDCERS’ actuarial reports show the pension system’s deficit has grown by more than $1 billion in the past five years, though some increase can be attributed to recent changes in how pension debt is calculated.

In an effort to more accurately project the city’s pension debt, the San Diego pension board in 2016 and 2017 adjusted the life expectancy assumptions for pension-eligible employees and made the pension system’s projected investment returns less optimistic.

The new policies are part of a comprehensive plan to avoid repeating the pension under-funding schemes from the early 2000’s that earned San Diego the nickname of “Enron by the Sea.”

Advocates of the program say the bonus helps a lot of older retirees who struggle to make ends meet.

“There are [city retirees] who are not getting enough to live off of,” Baross said. “For those members, this supplemental amount is a real benefit. They need it and, in a sense, they earned it.”

Former San Diego fire captain Norman Roy received one of the largest 13th checks last year. According to Transparent California, an open-government group that publishes salary and pension data online, Roy’s pension payments in 2017 totaled $30,600. He worked for the city for 28 years and retired in 1980.

Roy did not return calls and messages seeking comment.

Another large check went to Ramiro Castorena, a former police sergeant who served the city for nearly three decades. Data show his total pension was $43,100 in 2017. According to an obituary, published by the San Diego Union-Tribune, Castorena passed away in October.

Melanie Peter, a senior paralegal at SDCERS, said 13th check payments are made in November to all living members on the payroll in October. Castorena was not paid directly, Peter said in an email; his beneficiary received the bonus.

At the same time, data show several retirees make $300,000 or more in pensions, and dozens make $100,000-plus.


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