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  #71  
Old 02-10-2012, 07:23 PM
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Funding ratio is a pretty simple concept to me.

Are the assets sufficient right now to cover the expected benefits already earned?

An alternative suggestion is this:

What return on assets will allow the current assets to cover expected benefits already earned? This could also be expressed in terms of the probability that assets will meet current liabilities at a specified rate of return.

Each year's expected additions to the fund can be measured against that year's expected benefits to be earned.

The name for this is Traditional Unit Credit.

If you do not have a reasonable (greater than 50%) chance that assets are adequate, then you have not funded the obligations already earned. That will require that future payments be made to cover employment activity that has already occurred.

Now there are lots of clever mathematical ways to state that your funding method will cover those costs with future payments, including the Illinois open-group method, EAN, UEAN, individual or group spreadgain methods, etc.

But the truth is simple. If you don't pay for today's liability today, you are either lying about the costs or gambling that you can make it up with good luck in the future.
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  #72  
Old 02-10-2012, 10:35 PM
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Originally Posted by Duffer View Post
But the truth is simple. If you don't pay for today's liability today, with sufficient money to invest to ensure that sufficient money will be there when you need to pay the benefit, you are either lying about the costs or gambling that you can make it up with good luck in the future.
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  #73  
Old 02-12-2012, 12:01 PM
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NEW JERSEY


John Bury on the asset/liability situation
http://burypensions.wordpress.com/20...d-the-plateau/



Quote:
According to this chart the New Jersey state pension plans had $67 billion in assets in 1998 and, after a few peaks and troughs, they still have $67 billion in assets now. So what’s the problem?



The problem is this is a pension plan with liabilities to cover and those liabilities have doubled over 15 years to $124 billion officially*. Benefit payouts that were $2 billion are now $8 billion annually. There was a 9% bump-up in benefits in 2001 and another 250,000 participants entered the plans.

Plans that started out with no money and no liabilities gradually built up and, if an the asset chart were to go back to 1955 it would start at $0 and show a diagonal line going up until it hit 1998 where it plateaued. But plateaus end and when they do:
[WILE E COYOTE CARTOON CLIP]
Which is about where New Jersey is headed

.

.

.

* Though I put the real liabilities at $232 billion.
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  #74  
Old 02-12-2012, 07:36 PM
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ARIZONA

http://www.azcentral.com/arizonarepu...itutional.html

Quote:
A Maricopa County Superior Court judge has ruled that a law changing the contribution that state employees make to their pension funds is unconstitutional.

Senate Bill 1614 went into effect July 1, increasing the percentage of employees' contributions to the Arizona State Retirement System from 50 percent to 53 percent.

It was a cost-cutting move, intended to cut $60 million from the state budget. But seven schoolteachers sued.
Judge Eileen Willett noted in her ruling that the state Constitution describes the public retirement system as a contractual relationship between the state and its employees and that state statutes forbid laws "impairing the obligation of a contract."

"When the plaintiffs were hired as teachers, they entered a contractual relationship with the State regarding the public retirement system of which they became members," Willett wrote. "Their retirement benefits were a valuable part of the consideration offered by their employers upon which the teachers relied when accepting employment."

Nice that one can have something locked in at hire that could hold for 60+ years.

Well, by law.

The law isn't that good at willing money into being.

So maybe that contract won't be around decades later.
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  #75  
Old 02-13-2012, 10:42 AM
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"When the plaintiffs were hired as teachers, they entered a contractual relationship with the State regarding the public retirement system of which they became members," Willett wrote. "Their retirement benefits were a valuable part of the consideration offered by their employers upon which the teachers relied when accepting employment."
OK, (debatable, but) fine. But the law didn't touch their retirement benefits. The only thing it changed (slightly) was the relative burden of employer and employee contributions.

I hate judicial logical non-sequitors.
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  #76  
Old 02-13-2012, 11:51 AM
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Originally Posted by Dan Moore View Post
OK, (debatable, but) fine. But the law didn't touch their retirement benefits. The only thing it changed (slightly) was the relative burden of employer and employee contributions.

I hate judicial logical non-sequitors.
I suppose one could argue that the "contract" covered both the future benefits promised and the future contributions required.
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  #77  
Old 02-13-2012, 11:59 AM
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Quote:
Originally Posted by Duffer View Post
Funding ratio is a pretty simple concept to me.

Are the assets sufficient right now to cover the expected benefits already earned?

An alternative suggestion is this:

What return on assets will allow the current assets to cover expected benefits already earned? This could also be expressed in terms of the probability that assets will meet current liabilities at a specified rate of return.

Each year's expected additions to the fund can be measured against that year's expected benefits to be earned.

The name for this is Traditional Unit Credit.

If you do not have a reasonable (greater than 50%) chance that assets are adequate, then you have not funded the obligations already earned. That will require that future payments be made to cover employment activity that has already occurred.

Now there are lots of clever mathematical ways to state that your funding method will cover those costs with future payments, including the Illinois open-group method, EAN, UEAN, individual or group spreadgain methods, etc.

But the truth is simple. If you don't pay for today's liability today, you are either lying about the costs or gambling that you can make it up with good luck in the future.
I think it is not as simple as this, at least in the public sector.

It seems so factual to talk about the "benefit already earned", but what is already earned by a public sector employee mid-career. It is not simply his accrued benefit. It's not. He is in a final average pay plan, and he has a right to future accruals at the current accrual rate, unlike private sector employees. His benefit for the service he already worked will not depend on his current salary, it will depend on his future salary.
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  #78  
Old 02-13-2012, 01:05 PM
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Originally Posted by echo View Post
I suppose one could argue that the "contract" covered both the future benefits promised and the future contributions required.
I suppose they did argue that, but I don't see how the Constitutional language supports the argument. In particular, the last paragraph below is pure judicial legislation.

(Spoilered for length)

Spoiler:
Quote:
The material facts of this case are undisputed. Plaintiffs are teachers who have been participating members of the ASRS pension benefit system prior to and at the time the legislature enacted S.B. 1614. At their dates of hire as part of their pension benefit package as public employees, Plaintiffs became “members” of ASRS. A.R.S. § 38-711(23). ASRS pension benefits are funded by combined contributions from both participating employers and member employees. Pursuant to statute, however, and since the inception of the ASRS, the proportionate share of the annual contributions paid between an employer and its employee into the plan has been set at 50% employer and 50% employee. A.R.S. §§ 38-736 and 38-737. S.B. 1614 changed that formula to provide a 47% proportionate share contributed by employers and a 53% proportionate share contributed by employees. The proportionate share an employee and employer pay toward the total contributions into ASRS has no effect on the actual solvency of ASRS. ASRS remains funded by a yearly calculation of total contributions needed. At issue in this case is the percentage share each member must pay toward meeting the yearly contribution required.

In 1998, the people of Arizona passed an amendment to our State Constitution: A.R.S. Const. Art. 29 § 1. Article 29 § 1 states:

Membership in a public retirement system is a contractual relationship that is subject to Article II, § 25, and public retirement system benefits shall not be diminished or impaired.

Our State Constitution confers unique protections to public retirement system benefits. That our Constitution specifically mandates such benefits neither be diminished nor impaired is legally significant. Public retirement system benefits are treated differently as a matter of law than other employee benefits in the State of Arizona.

A.R.S. Const. Art. II § 25 is the contract clause of the Arizona Constitution. This clause is contained both in the Federal Constitution as well as in our State Constitution. Art. II § 25 states: “No bill of attainder, ex-post-facto law or law impairing the obligation of a contract, shall ever be enacted.”

When Plaintiffs were hired as teachers, they entered a contractual elationship with the State regarding the public retirement system of which they became members. Their retirement benefits were a valuable part of the consideration offered by their employers upon which the teachers relied when accepting employment. Even prior to the existence of Art. 29 § 1, Arizona courts recognized the special contractual relationship that arises from an employee’s public pension benefits. See Yeazell v. Copins, 98 Ariz. 109, 402 P.2d 541 (1965); City of Phoenix v. Boerger, 5 Ariz. App. 445, 427 P.2d 937 (1967). Since Art. 29 § 1 was passed by the voters, our Arizona Supreme Court has continued to recognize the special contractual relationship surrounding pension benefits. The Court found:

. . . These cases adopted what we have characterized as “the contract theory of retirement benefits.” Under that theory, the State’s promise to pay retirement benefits is part of its contract with the employee; by accepting the job and continuing work, the employee has accepted the State’s offer of retirement benefits, and the State may not impair or abrogate that contract without offering consideration and obtaining the consent of the employee.

Proksa v. Arizona State Schools for the Deaf and the Blind, 205 Ariz. 627, 74 P.3d 939 (2003).

Under their contract, Plaintiffs received retirement benefits for which they agreed to share 50% of the cost with their employers. The Court finds that an increase in Plaintiffs’ proportionate share of the contribution payment to their ASRS pension benefits plan is a breach of that contract and infringes upon the Plaintiffs’ contractual relationship with the State. By including in its scope teachers who were ASRS members at the time of enactment, S.B. 1614
retroactively and unilaterally seeks to substantially change terms of a contract previously agreed to by the parties. The impairment to the contract is substantial, and no significant and legitimate public purpose exists for the breach. Because S.B. 1614 is a cost-saving measure for employers, heightened judicial scrutiny is required. The State has impaired its own contract. The Court is not required to give deference to the legislature where the State’s self-interest is at stake. See U.S. Trust Co. of NY v. NJ, 431 U.S. 1 (1977).

The Court finds that such an interference with the Plaintiffs’ contractual relationship is unconstitutional pursuant to the contract clause of the Arizona and U.S. Constitution. The unilateral contract modification effectuated by S.B. 1614 not only violates the U.S. and Arizona Constitutions, but also runs afoul of well-established legal precedent unique to our State.

The Court further finds that S.B. 1614 as applied to these Plaintiffs, existing members of ASRS at the time S.B. 1614 was enacted, diminishes Plaintiffs’ public retirement benefits. Increasing an employee’s proportionate share of payment toward pension benefits necessarily operates to reduce the overall value of that benefit to the employee. Simply put, the percentage rate an employee pays toward the contribution results in a cost to the employee. Increased costs incurred over Plaintiffs’ length of employment for receipt of the same benefit negatively impacts the value of the benefit the Plaintiffs ultimately receive. By paying a higher proportionate share for their pension benefits than they had been required to pay when hired, Plaintiffs are forced to pay additional consideration for a benefit which has remained the same. Art. 29 § 1 of our Constitution expressly prohibits the type of diminution or impairment of Plaintiffs’ existing public retirement system benefits that S.B. 1614 exacts.
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  #79  
Old 02-13-2012, 01:21 PM
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I think it is not as simple as this, at least in the public sector.

It seems so factual to talk about the "benefit already earned", but what is already earned by a public sector employee mid-career. It is not simply his accrued benefit. It's not. He is in a final average pay plan, and he has a right to future accruals at the current accrual rate, unlike private sector employees. His benefit for the service he already worked will not depend on his current salary, it will depend on his future salary.
No doubt. So measure the liability at the end of each period, compared to the prior period, and make sure that the funds are sufficient for it. If the contributions and asset growth have not achieved that level, then you are not paying your bill on time, i.e., you are borrowing against the future.

Now you can and should prepare a more sophisticated analysis of future values, reflecting the potential that compensation growth and future benefits will be payable. If you want to produce some type of level pay method for funding it, that is also a nice level of sophistication, one that I have done many times for many plans.

But I still feel strongly that the most direct and simple problem is that we have lots of pension promises that depend on future payments for benefits already earned. And that is just a lie to the parties who fund the promises made.
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  #80  
Old 02-13-2012, 01:38 PM
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Originally Posted by Duffer View Post
No doubt. So measure the liability at the end of each period, compared to the prior period, and make sure that the funds are sufficient for it. If the contributions and asset growth have not achieved that level, then you are not paying your bill on time, i.e., you are borrowing against the future.

Now you can and should prepare a more sophisticated analysis of future values, reflecting the potential that compensation growth and future benefits will be payable. If you want to produce some type of level pay method for funding it, that is also a nice level of sophistication, one that I have done many times for many plans.

But I still feel strongly that the most direct and simple problem is that we have lots of pension promises that depend on future payments for benefits already earned. And that is just a lie to the parties who fund the promises made.
So, everyone just needs to fund more. If the funded ratio is less than 100%, then they aren't funding enough. What should they do when the funded ratio is 101%? They have taken too many tax dollars and are hoarding them in a tax qualified trust. Is that OK? Sure, you can look at Illinois or New Jersey and say that won't happen in our lifetimes, but if mainstream thinking was that the plans should be 100% funded, then most could achieve it in 10 or 20 years. The fact is, there are many good reasons for a public sector plan not to be 100% funded. It is not simply a means of burdening future generations.
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