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  #261  
Old 02-14-2018, 02:26 PM
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http://www.jacobinmag.com/2018/02/pe...ocial-security

Quote:
There Is No Pension Crisis
BY
MAX B. SAWICKY
Warnings of looming pension bankruptcy aren’t just overblown. They’re politically dangerous.


Spoiler:
early seventy million American workers and their families rely on defined-benefit (DB) pension plans for retirement income. In 2011, twenty-eight million worked in state and local government, and another forty million were in the private sector.

They are the lucky ones. About half of the workforce has no pension at all.

Employers are trying to slash compensation, and pension benefits represent one component of this package. Enemies of the working class often couch their attacks on pay in practical terms: a worker hurts her company and herself by expecting a high salary, for example. When it comes to pensions, they argue that the funds are bankrupt, implying that the funds should be closed and the benefits terminated.

The bankruptcy charge becomes a special problem for public sector workers, since politicians — who control their pay packages — are influenced by these perceptions. Moreover, politicians and corporate managers can seize on the predicted bankruptcy to do what they wanted to do all along. Senator Daniel Moynihan once pointed out that if people think Social Security is broke, it’s easier to shut it down.

No matter who makes it, the bankruptcy charge is a direct political threat to workers’ retirement security, and no one on the Left should succumb to such predictions.


Two Versus Seven
In a recent article, Doug Henwood and Liza Featherstone posed a legitimate question: do DB plans overestimate their future returns? I don’t think they made the case. (You can read an initial critique from me, and the authors’ rebuttal, here and here.) Their chief error, in my view, was contrasting a possibly high estimate with an undoubtedly low estimate based on relying only on supposedly risk-less assets (US Treasury bonds) with correspondingly low returns.

The pair then segued into tales of Wall Street villainy, describing investments that are not simply risks but outright scams. After reading this, we could be forgiven for believing that investments in sketchy private equity, hedge funds, and whatnot have endangered DB plans. But that is simply inaccurate.

The fundamental controversy is whether or not DB plans are solvent, a question that has two dimensions. One is how the plans report their condition and how others might evaluate it. The other is what policies will ensure that benefit commitments are fulfilled.

Henwood and Featherstone insist that assumptions of excessively high rates of return are being used to mask the funds’ insolvency. They call estimates in the range of 7 or 8 percent annual returns unrealistic and suggest that 2 or 3 percent — which reflects returns on risk-free government bonds rather than stock market projections — would be preferable.

The issue here is really not seven versus two. It is whether it is better to assume returns to equity (stock) or returns to Treasury bonds. The implications are twofold: for reporting practice and for the fund’s investment policy.

Answering the second question helps us understand the first. Remember, the relevant time horizon for these investments is thirty to forty years — the length of a worker’s career. Investing today with money you need tomorrow is foolish, as a lot of unhappy people learned in the first week of February. But if you don’t need the money for a few decades, you’ll leave money on the table by limiting yourself to bonds and ordinary savings accounts.

Henwood and Featherstone are surely correct that money invested today will not earn 7 percent or more on an annual basis. But their example is loaded. We’re in the ninth year of an economic and stock market recovery. At least until January 29, observers thought stocks were relatively expensive — that is, their prices too high relative to the underlying companies’ earnings. Some people believe the declines still have a way to go. (Henwood just published the best current round-up of the market.)

Since 2008, the stock market (going by the S&P Index) increased from about 890 to as high as 2,865. Where you mark your time period can make a huge difference: if you only look at the past few weeks, relying on the stock market seems risky indeed. But over very long periods, returns to equity will far exceed those of risk-free bonds. Why shouldn’t a pension fund undertake such investments? And if it does, why shouldn’t it report its future condition based on assumptions of those returns?

Further, funds that refuse to invest in the stock market are more expensive than their riskier counterparts. If you only buy Treasury bonds, you must set aside much more to cover retirement. This fact directly affects workers’ ability to bargain for and accrue pension benefits. An assumption of low returns means a promise of low benefits, and the only remedy would be to trade away current pay for future rewards.

Yes, stock prices are more volatile than bonds. Prices rise and fall. A fund manager might choose an excessively risky mix of stocks. Once workers begin to retire, it would be costly for the fund to sell some stock at a loss in order to cover benefit payments. So funds need to maintain portfolios with a mix of assets, some less volatile than others. People with the requisite expertise get paid a lot to do exactly that.

Finally, Henwood and Featherstone cite my former employer, the Government Accountability Office (GAO), to bolster their claim of overestimation: “GAO itself finds the use of historical returns statistically problematic.” My name appears on that report, but the phrase “statistically problematic” does not.

The word “finding” has a specific meaning in GAO reports: it signifies a well-supported conclusion that is afforded headline weight. This particular report has no such finding. The actual finding was much more anodyne: some folks think the 7 or 8 percent prediction is too high, and others don’t. (The GAO doesn’t do drama.)

The relevant statement to which Henwood and Featherstone allude is equally mundane, a paraphrase of (maybe) Yogi Berra: “Predictions are hard, especially about the future.”

Some plans are in very bad shape, but that doesn’t mean the whole system is in danger. Henwood and Featherstone cite another GAO report, as follows: “A 2012 GAO study of state pension funds found increased underfunding.” An increase on an unspecified base does not mean that most plans are facing insolvency. The former is an incremental change of unknown magnitude; the latter is a statement of overall ill health. My knees are getting worse all the time, but I’m still fully ambulatory.

Here’s the GAO language from that report:

Despite the recent economic downturn, most large state and local government pension plans have assets sufficient to cover benefit payments to retirees for a decade or more. However, pension plans still face challenges over the long term due to the gap between assets and liabilities.

Not quite apocalyptic, is it?

Real Versus Ideal
Henwood and Featherstone’s attention to hedge funds and private equity is a red herring. Such investments tend to be a small proportion of pension fund assets, often in the single-digit range. The worst mistakes — like selling bonds and using the proceeds to buy stock — take place when funds have already gotten behind the eight ball.

The real danger to public pensions comes from elected officials’ inability to ensure that adequate contributions are maintained, as New Jersey so clearly shows. Governors from both parties, beginning with Christine Todd Whitman, diverted pension payments to other purposes, including holding the line on tax increases. The execrable Chris Christie justified withholding contributions on the grounds that the plans were — you guessed it — bankrupt.

Of course, fund managers can do lousy jobs or be corrupt. This raises the question of alternatives. DB plans are clearly superior to individual IRAs and 401(k) plans, because individuals are less successful at managing personal investment portfolios. As far as saving for retirement goes, the worker’s worst enemy is himself.

The Henwood and Featherstone alternative — more Social Security — is fanciful. I’m all for more Social Security, but they do a lot of handwaving regarding how such a transition would work. In 2017, the maximum Social Security payout was $3,538 a month, or about $42,456 a year. That’s quite a bit less than many DB plan benefits.

The simple fact is that switching to an assumption of low returns would blow up a lot of plans. Workers’ savings would likely be channeled into some kind of IRA — which Henwood and Featherstone also condemn — and workers would have to renegotiate employer contributions in the current, relatively unfriendly environment. That’s what would happen, not an expansion of Social Security.

Suppose that bankruptcy is indeed looming. Whom should we hold responsible? (Remember that by the GAO’s lights there is some time for remedies to be implemented.) Labor should demand that the employer be held accountable, either for investment mismanagement or for failure to maintain what are called actuarially determined contributions.

In this case, the employer is state and local government, which everyone knows are under severe fiscal stress. This crunch — and the concomitant need for a larger, stronger, more ample state and local public sector — is but one front in the full-spectrum political struggle for social welfare. In this context, Henwood and Featherstone’s Social Security alternative is a political distraction. Hard-won benefits wrested from recalcitrant employers are not well defended by pointing to nonexistent public alternatives.

Compare Henwood and Featherstone’s proposal to the movement for Medicare for All. The public option has received the benefit of considerable preparation and now enjoys incredible support. But we are still some distance from a full-blown public substitute for the current hodgepodge of individual retirement benefits. In the meantime, the best offense is a good defense.


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ABOUT THE AUTHOR
Max B. Sawicky is an economist and writer in the wilds of Virginia. He has worked at the Government Accountability Office and the Economic Policy Institute.
Before you open up the spoiler, let me point out that this piece is running on a site that is running a gift subscription sale today with the slogan: "Socialism is Love".

here is that sales campaign:
https://www.jacobinmag.com/2018/02/s...-subscriptions
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  #262  
Old 02-14-2018, 02:59 PM
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CALIFORNIA

http://www.latimes.com/socal/daily-p...212-story.html

Quote:
Political Landscape: State Sen. Moorlach proposes cost-of-living limit on state pension systems
Spoiler:
State Sen. John Moorlach (R-Costa Mesa) has introduced a bill he contends will reduce the future taxpayer burden to fund the state system while also protecting pensioners' vested funds.

Senate Bill 1031, introduced Thursday, would limit the pension system from making any cost-of-living (COLA) adjustments after Jan. 1, 2019, if the unfunded actuarial liability of the system is greater than 20%.

"It would protect the solvency of public-employee pensions by making sure each yearly COLA ... isn't so large it tips the underlying fund into insolvency," Moorlach said in a statement. "If a pension system is funded at less than 80%, then the COLA would be suspended until the funding status recovers.

"The requirement would prod pension boards and policymakers to ensure pensions are adequately funded and don't end up being cut sharply in an emergency, as happened recently to Detroit's pensions. Not just taxpayers, but state employees and retirees should be the biggest supporters of Senate Bill 1031."

Gov. Jerry Brown's budget proposal for fiscal year 2018-19 sets aside $9.3 billion for pensions, with $6.2 billion toward the California Public Employees' Retirement System and nearly $3.1 billion to the California State Teachers' Retirement System.

The CalPERS funding is $389 million more than last year.
https://www.bloomberg.com/news/artic...n-calpers-move

Quote:
California Cities' Pension Bills May Rise With Calpers Move
By Romy Varghese
February 13, 2018, 11:03 AM EST Updated on February 13, 2018, 6:49 PM EST
Calpers to review shortening amortization to 20 years
"Death knell" for some cities in down markets, official says
Spoiler:
California cities may see their annual pension costs rise under a new policy from the state’s retirement system, threatening to foist added financial pressure on those already struggling to pay for promises to public employees.


The California Public Employees’ Retirement System is advancing a staff recommendation that would shorten the amortization period for new pension liabilities from 30 years to 20. That would boost the system’s funded ratio, require localities to pay off the debt sooner and allow the pension to recover faster from market downturns, according to a staff report. Approved by a Calpers committee Tuesday, the full board is set to vote on the changes Wednesday.

The ramped up schedule, while positive for the solvency of the pension system by letting it book gains faster, would make market losses felt more swiftly by local governments and require them to pay more into the retirement fund in at least the first few years.


The shorter period reduces the possibility that the system, which currently has about 68 cents for every dollar in liabilities, falls below 50 percent funding, board member Bill Slaton said during the meeting.

"That is not a great position to be in," said Slaton. "All it takes is another movement or two, and we could find ourselves in a position where we cannot recover."

The shorter amortization period would be effective in June 2019 and would affect contributions by local governments in fiscal 2022.


While many cities would welcome paying off the debt more quickly to rack up less interest, others that are already struggling with high fixed costs would find it difficult to meet the stepped-up pace, said Dane Hutchings, lobbyist for the League of California Cities. And in the event of poor market performance, municipal contributions to make up the difference would be even higher than projected, compounding the burden.

Such an outcome, when combined with other pressure facing cities, could push a few into bankruptcy, Hutchings said. “It would be their death knell” for some, he said.

California municipalities are already absorbing the effect of the board’s decision in December 2016 to lower the assumed rate of return to 7 percent from 7.50 percent by fiscal 2020, which will also require them to increase their contributions to cover the gap.

The system’s 3,000 cities, counties, school districts and other public agencies have also seen costs rise from several factors, including investment losses and perks granted in boom times. A report this month by the League of California Cities found that under current assumptions, cities in fiscal 2025 would pay Calpers more than 50 percent the amount expected to pay in fiscal 2019.

"Cities are struggling to keep up," Mike Futrell, city manager for South San Francisco, told the committee before the vote Tuesday in a request to delay changes. The municipality had already been considering whether to ask voters in November to approve a tax increase to help pay its obligations, he said.

Calpers’s review comes as the system is likely to experience more market volatility in 2018 than it had over the past couple of years, Chief Investment Officer Ted Eliopoulos told the board Monday. Meanwhile, the fund’s 20-year return is lagging at 6.7 percent, according to a Calpers’s estimate.

A survey of 164 public pensions by the National Conference on Public Employee Retirement Systems, a trade association, showed that the average amortization period in 2017 was 23.8 years.


http://www.pionline.com/article/2018...14#cci_r=73393

Quote:
CalPERS returns 15.7% in 2017, outperforming its benchmark
Spoiler:
alPERS earned a 15.7% net return in 2017, besting its benchmark by 25 basis points, Chief Investment Officer Theodore Eliopoulos said at Monday's investment committee meeting.

Global equity, with a 24% net return, was the strongest performer for the $356.6 billion California Public Employees' Retirement System, Sacramento. The worst-performing asset class was the liquidity portfolio, which returned 1.2%.

For the longer term, CalPERS' portfolio earned an annualized 9% net return for the five years ended Dec. 31, outperforming its benchmark by 19 basis points; for the 10-year period, the pension fund returned an annualized net 4.9%, underperforming its benchmark by 114 basis points.

RELATED COVERAGE
CalPERS allocates $2.5 billion to alternatives, fixed income6 firms bid to partner on CalPERS' private equity portfolioCalPERS adopts new asset allocation increasing equity exposure to 50%CalPERS staff wants minor tweaks to asset allocation to keep 7% rate of returnThink tank blames sustainable investing for CalPERS' falling investment performance
The best-performing asset class for the 10-year period was private equity with a 9.1% annualized net return. The worst-performing asset class for the 10-year period ended Dec. 31 was the liquidity portfolio, which returned an annualized net 1.1%.

During his presentation to the investment committee, Mr. Eliopoulos acknowledged the recent market volatility that could signal "the beginnings of a market environment that may be shifting."

"But experiencing a 10% drop in the stock market is something that we should expect to see from time to time," he added.

CalPERS' investment portfolio going into 2018 presents "a mixed picture, both positives and challenges looking at attaining our investment objectives," Mr. Eliopoulos said.

The pension fund is 70% funded, and CalPERS officials are projecting lower future returns.

Even so, due to CalPERS' Dec. 21, 2016, decision to lower its discount rate to 7% from 7.5% over three years, pension fund officials are forecasting neutral to positive cash flows from contributions and investment income, which will help the pension fund weather volatile periods, Mr. Eliopoulos noted.

Separately, CalPERS is winding down a corporate governance investment program that is part of the pension fund's $176.4 billion equity portfolio. CalPERS has $100 million in the corporate governance program, and pension fund officials are winding down the portfolio due to concentrated risk and fees, said Dan Bienvenue, CalPERS managing investment director of global equity, in response to a question from Betty T. Yee, who is the California state controller and a CalPERS board member.

"So that is actually one existing partnership with one security. ... We're very patient in finding liquidity events," Mr. Bienvenue said.

CalPERS officials have been able to liquidate the "vast majority" of the portfolio since the end of the year, he said.

Mr. Bienvenue did not identify the remaining manager. Spokeswoman Megan White declined to provide further details beyond the information provided during the investment committee meeting.

In other action, consultant Meketa Investment Group also reviewed CalPERS' $26.7 billion private equity portfolio. The vast majority, 67%, of CalPERS' private equity portfolio is in funds, with 14% in customized separate accounts, 11% in funds of funds and secondaries, and 8% in co-investments and direct investments.

CalPERS' overall private equity portfolio lagged its benchmark in all time periods ended Dec. 31, with an 18% internal rate of return for one year, an annualized 12.6% for five years and an annualized 9.1% for 10 years.

"It's normal for private equity to lag public markets when markets go way up; 2017 can be characterized as a way-up market," said Steven Hartt, principal at Meketa, explaining CalPERS' private equity performance.

CalPERS' private equity investments that are in funds had an 18.7% internal rate of return for the year, while co-investments and direct investments gained 50.4% IRR, custom separate accounts returned 9.6% IRR, and funds of funds and secondaries earned 6.3% IRR for the year ended Dec. 31. For the 10-years ended Dec. 31, private equity invested in co-investments and direct investments earned a 9.7% internal rate of return, funds earned 9.6% IRR, separate accounts gained 8% IRR, and funds of funds and secondaries returned 6.4% IRR. All 10-year returns are annualized.

However, Mr. Hartt said co-investment returns "tend to be lumpy," and 2017 was a strong year for co-investments.

The investment committee also elected Henry Jones to be its chairman and Richard Costigan, vice chairman. In January, CalPERS' board had elected its first female president, Priya Mathur, and chose Rob Feckner as vice president. Mr. Feckner had been board president.
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Old 02-14-2018, 03:21 PM
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OREGON

https://www.opb.org/news/article/cor...n-debt-oregon/

Quote:
Potential Corporate Tax Windfall Could Help With Oregon Pension Debt
Spoiler:
Oregon could be in line for a one-time windfall of $140 million in additional corporate taxes.

The state Senate on Tuesday unanimously approved a bill aimed at capturing additional tax money from profits kept overseas by corporations that do business in Oregon.

Senators from both parties suggested the money could be used to help trim the state’s multibillion-dollar deficit in the Oregon Public Employees Retirement System.

The money — if it materializes — could help Gov. Kate Brown in her efforts to provide financial incentives to public agencies if they agree to move more quickly to pay down their PERS debt.

This bill “is on the governor’s radar screen,” said Chris Pair, Brown’s communications director, adding that she supports using the potential new revenue for her proposed incentive fund.

RELATED COVERAGE

Federal Tax Cut Leaves Oregon With Its Own Budget Hole
The additional corporate taxes could come as the result of the sweeping new federal tax law approved by Congress late last year.

It included a repatriation tax on corporate profits held in foreign countries. The Legislature’s tax experts say that through a quirk in state law, those federal provisions could actually lower some corporate taxes in Oregon.

“That creates a counter-intuitive revenue loss of more than $100 million if we do nothing,” Senate Finance Chairman Mark Hass, D-Beaverton, told his colleagues.

Hass said he and other legislative officials talked with corporate officials and found no opposition to changing state law to pick up some taxes on the overseas profits.

As the bill is worded now, the Legislative Revenue Office estimates it could generate $140 million in the current budget cycle.

Sen. Brian Boquist, the top Republican on the finance committee, called the estimate “overly highly speculative” and said the state really doesn’t know how much it might collect from major corporations like Nike.

In any case, Boquist added, several corporate officials thought the state was wrong in how they were interpreting the new federal law and that “they thought they were supposed to pay.”

RELATED COVERAGE

How Oregon Could Raise $5 Billion To Shrink Its Pension Debt
The bill now calls for any revenue from the repatriation tax to go into savings. Republicans moved to have the bill changed so the money would go toward paying down the PERS debt.

But Democrats defeated that move. Hass said he likes the idea of using the money for PERS. But he said the bill could be amended later, once the Legislature has acted on the governor’s plan to set up an incentive fund on PERS. The retirement system now has a deficit officially pegged at about $25 billion, but experts say last year’s strong stock market helped cut it by around $3 billion.

The Senate put off action on another bill dealing with the fallout from the federal tax law. Among other things, that measure would greatly reduce the size of tax breaks for many business owners who pay personal income taxes on their profits.

That’s faced strong business opposition, and Democrats were concerned about having enough votes to pass it because one of their members, Sen. Chuck Riley of Hillsboro, was absent Tuesday because of illness.
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  #264  
Old 02-14-2018, 03:23 PM
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KENTUCKY

http://wkyufm.org/post/kentucky-demo...etter#stream/0

Quote:
Kentucky Democratic Party Responds to Pension Letter
Spoiler:
The Kentucky Democratic Party says pension reform shouldn’t come from a demand letter by wealthy Republican activists.

The Lexington Herald-Leader first reported that in the letter to members of the General Assembly, the state GOP chairman said any pension changes must include moving future teachers and state workers from a defined benefits system to a defined contribution plan. The letter was also signed by national anti-tax activist Grover Norquist and Bill Samuels, Jr., chairman emeritus of Makers Mark, among others.

Kentucky Democratic Party Spokesman Brad Bowman says Democrats who are opposed to moving public workers to a 401k-style plan have offered suggestions on tax reform and new sources of revenue to shore up the pension systems.

"There's been amicable, meaningful conversation from constituents all across Kentucky about what needs to happen with pension reform, but the Republican majority has chosen to not pay attention to that," Bowman told WKU Public Radio.

The letter, posted on Facebook by Democratic State Senator Robin Webb, stated that not moving future public employees to a 401k-style retirement system would be ignoring the “structure problems at the heart of the crisis.” Opponents argue that switching future hires to a defined contribution plan would be more costly and result in less financial security for retirees.

http://kentuckytoday.com/stories/wai...thursday,11825
Quote:
Waiting game: Pension reform bill on deck by end of week
Spoiler:
FRANKFORT, Ky. (KT) – The wait may finally be over. Lawmakers said the much-anticipated public pension reform bill would be introduced by the end of the week.


House Speaker Pro Tem David Osborne, R-Prospect, said the process has been “frustrating” as lawmakers looked at every option to shore up state pension systems for government employees and teachers.


“We made a commitment that we were going to proceed with caution and with as much information as we possibly could,” said Osbourne. “So, while frustrating, it’s been a process that we feel we have to go through.”


Osborne and Senate President Robert Stivers, R-Manchester, said on Tuesday they believe the pension bill will be introduced no later than Thursday. The legislative session will be at the halfway point on Wednesday.


“We have worked to find the best possible solution for this issue that will both insure long-term viability to the systems and, also be something that we can pass,” Osborne said.


On the topic of moving teachers from the current defined benefits plan to a hybrid defined contributions plan, Osborne said, the issue often spurs a “healthy debate.”


“There are some who feel very, very strongly about a pure defined contribution,” Osborne said, “There are some who feel very strongly about a pure benefit.”


He said legislators are committed to fully funding the Actuarial Required Contribution, or ARC, during the two-year budget cycle starting in July, and sees nothing to change that stance.


“Certainly, everything becomes a policy decision at that point in time, but we feel like it is important that we make that commitment and show that we honor that commitment as we go forward,” Osborne said.



http://wkms.org/post/state-lawmakers...ll-coming-week
Quote:
State Lawmakers Say New Pension Bill Is Coming This Week
Spoiler:
Republican leaders of the state legislature say a new proposal to overhaul the state’s public retirement systems will be unveiled later this week.

Listen Listening...1:00
Kentucky’s pension systems are among the worst-funded in the nation and Gov. Matt Bevin, along with many in the Republican-led legislature, wants to change how much state workers earn in benefits in order to reduce the state’s pension liability in the future.

It’s unclear what will be in the new proposal, but lawmakers have hinted that it won’t have some of the unpopular policies that were included in a previous version.

Senate President Robert Stivers said the new bill won’t move workers out of the current pension program that guarantees payments from when a state worker retires until death.

“If you’re in a defined benefit system, you’re going to continue to be in a defined benefit system,” Stivers said on Tuesday.

A previous version of the Republican proposal unveiled by Stivers, Bevin and former House Speaker Jeff Hoover last October would have capped benefits and moved state employees to 401k-style retirement plans after 27 years of service.

Nearly all future state workers would also be moved to 401k-style plans under the previous proposal.

Lawmakers — especially in the 100-member state House of Representatives — have expressed concern about phasing out the state’s defined benefit systems, which rely on new employees to contribute to the system as older employees retire.

House Speaker Pro Tem David Osborne said Republicans in his chamber are divided over whether to keep the current defined benefit program or move to 401ks.

“It’s something that has created a lot of conversation and a lot of disagreement, but again one that I think we put a lot of thought and study into,” Osborne said.

The previous pension proposal was widely opposed by state workers and some representatives from rural areas, many of which rely on state government as their largest employer.

Both Osborne and Stivers hinted that the new pension bill might include a “hybrid” cash-balance plan — which, like 401ks, require workers and employers to make contributions to an individual retirement fund that relies on the stock market.

However, unlike conventional 401ks, the state guarantees a 4 percent annual return on investment under the “hybrid” plans.

Most new state employees in Kentucky were enrolled in cash-balance plans since the last round of pension reforms went into effect in 2014.

However, that didn’t apply to teachers, who still receive more-generous defined-benefit plans that rely on how long an employee has worked in state government, how much they made and how old they are.

Stivers hinted that the new bill might move future teachers into the hybrid plans.

“It could,” he said.

Republican leaders have said a few other unpopular parts of the old pension bill would be scaled back — including a provision that would have required workers to pay 3 percent of their salaries for retiree health and the suspension of cost of living adjustments for retired teachers for five years.



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Old 02-14-2018, 03:36 PM
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CALIFORNIA

http://www.sacbee.com/news/politics-...tolState_Alert

Quote:
New pension plan will squeeze California cities
Spoiler:
California cities struggling with recent hikes in their pension fees will see another one in 2021 because of a decision CalPERS made on Tuesday to speed up the rate of their debt payments.

The change will save cities money over time, but it could squeeze local government budgets over the next few years because it requires them to shore up investment losses on a 20-year schedule instead of 30 years.

The difference probably would be a few hundred thousand dollars a year for small cities and counties, according to a CalPERS presentation describing the change.

Executives at the California Public Employees’ Retirement System have advocated for faster debt payments over the past several months, arguing the speedier schedule decreases risk and saves money.

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A parade of city government officials in November, however, asked the CalPERS Board of Administration to stick to the current schedule. They said they were having trouble swallowing successive CalPERS rate hikes since 2013 that they said jeopardized their ability to fund public services.

“Each new approach only adds to the costs of cities and therefore to the taxpayers,” Hayward City Councilwoman Sara Lamnin told the CalPERS board in November.

The remarks from Lamnin and dozens of other city government leaders appeared to make an impression on the CalPERS board that month. Members of the board sounded reluctant to speed up the debt payments when they first looked at the proposal three months ago.

“I understand that we need to get here, but I also understand that we need to not put our fund at risk,” CalPERS board member Theresa Taylor said in November. “If we put our employers in a position where they have to terminate (because they can’t afford CalPERS), then you’re putting our fund at risk.”

This week, members of the CalPERS board reversed course and opted for the faster debt payments. They described their decision as a move to stabilize the $345 billion pension fund. The change is set to take effect in 2019, with the first payments on the new schedule due in 2021.

“By making this change we can’t be accused of accounting gimmicks and hiding our obligations,” said Margaret Brown, a newly elected CalPERS board member.

CalPERS is considered underfunded because it has about 70 percent of the assets it would need to pay all of the benefits it owes to its 1.9 million retirees and public workers.

“That is not a great position to be in, and all it takes is another movement or two and we find ourselves in a position where we cannot recover,” CalPERS board member Bill Slaton said.

Other large pension plans in California tend to pay off their debts on 15- to 20-year schedules, according to CalPERS. Accelerating the debt payments to a 20-year plan saves about $700,000 in interest on a $1 million loss, according to CalPERS’ November presentation.

Some local government leaders endorsed CalPERS’s decision to accelerate debt payments. Newport Beach Finance Director Dan Matusiewicz, for instance, likened CalPERS 30-year debt schedule to swelling federal deficits. “In the long run, it really hurts folks,” he said.

But others again repeated their worries about funding public services. “When you have a city that is already on the brink, applying a 20-year amortization policy will put them over the edge,” said Dane Hutchings, a lobbyist for the League of California Cities.

https://www.hoover.org/research/cali...st-food-budget

Quote:
Can California Save Itself From A Pension Disaster?
by Joshua D. Rauh
Spoiler:
The California Public Employees’ Retirement System (CalPERS) and other pension systems in the Golden State might be celebrating their recent investment returns, but don’t be fooled. Their problems are nowhere close to solved — and those problems are taxpayers’ problems.

Unfunded pension liabilities continue to represent a colossal fiscal burden for both the state government and local governments within California. They’re the reason that taxes are higher than ever, crowding out the services that the state and cities deliver.

And it’s getting worse.

At the state level, pension contributions have grown from 2.1% of the budget in 2002–2003 to 6.5% in 2016–2017. They’re set to grow even more in the current fiscal year and into the future. Cities such as Los Angeles and San Jose are now contributing well over 10% of their budgets to pensions, and CalPERS is charging smaller cities amounts that are north of 15% of their general fund revenue.

At the same time as all these contribution hikes, the stock market has roared to record highs. Investors that participated in the S&P 500 since the end of 2002 would have started 2018 with a four-times return on their money, or around 10.5% per year. So of course, with all this extra contribution money and massive windfalls from the stock market, the pension funds must now be in pretty good shape, right?

Wrong.

Take CalPERS, for example. At the end of FY 2002 it had a (mere) $22 billion unfunded liability when assets are valued on a market basis. As of the last full report for FY 2016, its reported unfunded liability was $139 billion. Even with the stock market’s burst upward in 2017 and early 2018, the unfunded liability would currently be around $110 billion. More bad news: the situation is only that “good” if CalPERS can achieve its 7% return target forever, as it and other pension funds, such as the California State Teachers’ Retirement System (CalSTRS), assume will happen with certainty every year when they craft their budgets.

Maybe they will achieve those returns, but maybe they won’t. Combining all the pension funds in California and recalculating their liabilities based on the principles of finance, as opposed to governmental accounting magic, I find that the collective debts that California taxpayers owe public pension funds is $769 billion — over $60,000 per California household.

If things have gotten so bad during a time when the stock market was rocketing forward and municipal governments were shoveling piles of cash into pension funds at the expense of bridges, roads, and libraries, what’s going to happen when financial markets inevitably cool off? California cities risk insolvency, and the crisis threatens the state’s ability to deliver on key budgetary priorities.

California Governor Jerry Brown knows that pensions are a 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 committing to share costs with you in advance of your taking me out to dinner at a very fine restaurant — but my contribution is only based on the expected cost of a hamburger at a fast-food joint. The bulk of the true costs only shows up later when the actual bill arrives. In the time that it takes even those minimal savings to be realized (remember, these changes are only for new hires), pensions will wreak considerably more havoc on the budget.

Other points in Gov. 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. They 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 taken up the issue. Gov. Brown is now staking his reputation on what he called his “hunch” that the Supreme Court will agree with him and stop the odious practice of spiking. Furthermore, he is hoping that this will open the floodgates to allow the governor in the next recession to “have the option of considering pension cutbacks for the first time.” The Supreme Court may or may not eliminate spiking, but wagering that their decision will be broad enough to allow more general cutbacks–or eliminate the California Rule entirely–is certainly optimistic thinking.

Gov. Brown can rightly say that the legislature didn’t do everything he proposed, including the introduction of a hybrid plan (for new employees) that would mix a 401(k)-type component with a defined benefit component. Indeed, this approach was taken by the federal government for its workers in 1986. And while federal pension legacy liabilities have continued to balloon, the newer part of the program is reasonably well funded. There’s a big difference though: the federal plan uses a 5.25% budgeting rate—still high, but not as insane as the 7% rate to which CalPERS and CalSTRS are desperately clinging. As a result, Gov. Brown’s hybrid plan would at best have had the effect of slightly reducing the explosive rate of growth of new unfunded liabilities for new employees.

State and local governments simply refuse to recognize the true cost of providing annuity benefits to workers. Giving employees pensions is akin to promising them payments from government bonds. And while one can fund those with risky assets and hope for the best, that strategy destabilizes public finances. The debts keep growing as the bills come due.

What are the alternatives?

Some states and cities have considered the idea of introducing defined contribution 401(k) plans, as US companies have done in large number. According to one study, 24% of Fortune 500 companies started bringing new employees into 401(k) plans instead of traditional pensions between 1998 and 2015, and 39% had “hard frozen” their plans. In a hard freeze, no earned pension benefits are taken away, but employees earn no new pension rights in the future and instead receive contributions to a 401(k). This practice is commonplace and perfectly legal in the private sector; but under the California Rule, it is a non-starter for public employees.

While such transitions may be motivated by a desire to avoid insolvency, they’re beneficial to many types of employees as well. A study last year by authors from a nonprofit partnership focused on changing education and life outcomes for underserved children found that most teachers get a bad deal on pensions because they suffer great financial losses if they change jobs or states. The study concludes that better teachers could be attracted with fewer very expensive traditional pensions that give the longest-tenured teachers the jackpot, and more 401(k)s whose fruits are portable.

Efforts to introduce 401(k) plans in the public sector often fail because public employees (or their unions) look at typical 401(k) contribution rates in the private sector and laugh. Private sector 401(k) plans on average offer a maximum employer contribution rate of 5% of pay. A public-sector defined-contribution plan pays promised income for life. Cities and states can ask public employees to accept a much less generous benefit, but you can’t blame those public employees for saying “no.”

A better approach to transitioning to 401(k)-type plans would be to entice employees to recognize the benefits of a defined-contribution arrangement by offering more generous contribution rates in those plans than is common in the private sector. The reality is that the great many public employees who are unsure whether they want to follow the lifetime civil servant model would be much better served by a portable 401(k) plan with, say, a substantial 10% annual contribution rate from their employer — a level private-sector employees can only dream of.

Real pension reform would recognize that moving away from defined-benefit pensions is essential to rescuing state finances, as well as benefiting many public-sector workers if structured correctly. The state and cities should press the issue with changes that transition from traditional pension plans toward 401(k)-like plans, even if the contribution rates are ultimately more generous than in private sector counterparts. The Federal Thrift Savings Plan, a 401(k)-like defined contribution plan with rock-bottom costs and sensible investment options offered to federal employees, provides a sound governance model.

Even at these higher contribution rates, the introduction of well-governed defined-contribution plans would be a vast improvement over the current system. Indeed, such a model is the only one that can save the state of California and its cities from pension disaster.

http://pensionpulse.blogspot.ca/2018...milestone.html
Quote:
CalPERS Hits a Milestone?
Spoiler:

Adam Ashton of The Sacramento Bee reports, Pension fund hits milestone: It’s earning more money than it’s paying out:
.....
Laila Kearney of Reuters also reports, CalPERS loses 4.6 pct in recent market maelstrom:
.....
It wasn't just CalPERS that got hit last week, every major pension fund that invests in public equities got hit.

But astute readers of my blog know that pensions are all about managing assets and liabilities. Stocks got clobbered over the last two weeks but interest rates have risen over the last six months, and it's the rise in rates which matters most because pensions have long-dated liabilities so if rates rise, pension liabilities go down significantly, more than offsetting the plunge in assets like stocks.

The problem is when rates stop rising and start falling -- my macro call going into year-end -- and assets get hit. That's the perfect storm for pensions, the double-whammy on assets and liabilities.

CalPERS did a good move to raise its contribution rate, it should raise it some more in my humble opinion but they use a long-term forecast on inflation based on the last twenty years so I doubt they will raise the contribution rate again anytime soon.

Go back to read some comments of mine on CalPERS doubling its allocation to bonds, big bonuses at CalPERS and CalSTRS and why CalPERS is rejigging its asset allocation.

There has been a lot of negative press on CalPERS recently but I think they're taking the right steps to address funding concerns and its long-term sustainability.

As usual, don't believe everything you read in the newspapers, they sensationalize stories to sell papers.

Below, California's two major public pension systems are underfunded and are asking local governments to pay more. Critics want to reduce benefits, while others say policymakers should allow time for recent changes to take hold.

Update: A wise actuary shared this with me after reading this comment:
Positive cash flow is better than negative cash flow but it's nothing of which a pension plan should be proud.

Saying that contributions plus investment income (which I assume includes capital gains and losses) exceeds benefits and expenses over the next 20 years means only that, if things go according to plan, the pension fund will be at least as big 20 years from now as it is today.

But what about the liabilities? If CalPERS is a mature pension plan, the liabilities should grow at the same rate as the members' payroll. Let's say this is 4% per annum (3% salary increases plus 1% population growth). Over 20 years the liabilities could grow from $500 billion to more than $1 trillion. If the pension fund stays the same ($350 billion) the funded ratio will decline from 70% to 35%.

The bottom line: CalPERS better hope that contributions plus investment income is significantly greater than benefits. Otherwise, its problems are far from solved. CalPERS should focus on whether the funded ratio, using reasonable assumptions, is rising or falling. If it is rising the problems are being addressed. If not, they are being ignored.
He also added this:
As to your question, if interest rates plunge the pension liabilities will soar (if the discount rate moves down with market interest rates). Typically, public sector plans will not reduce their discount rates because they don't want to admit that the funding situation is deteriorating, even though it is. US public sector plans stuck with an 8% discount rate for 15 years while long Treasury rates dropped by 300 basis points. This helped the optics while harming the financial condition of the plans.
I thank him for sharing his insights with my readers and I agree, more needs to be done to bolster CalPERS' funded status but I think this is a long process and I like what they've done so far.
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Old 02-15-2018, 06:04 PM
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HEDGE FUNDS

https://www.bloomberg.com/view/artic...ion-fund-money

Quote:
Hedge-Fund Mediocrity Is the Best Magic Trick
Never have so many investors paid so much for such uninspiring returns.
Spoiler:
Hedge funds have accumulated $3 trillion, with a substantial portion of it coming from public pensions. That these funds don't deliver outperformance is almost beside the point. What they are selling is an inflated estimate of expected returns. This serves a crucial purpose for elected officials, letting them lower the annual contributions states and municipalities must make to the pension plans for government employees.

It is a dodge that everyone goes along with. When the bill comes due in a few decades, this will cost taxpayers a bundle.

It really is one of the more astounding market inefficiencies that so much money has been allocated to hedge funds. I have no issue with those funds that have consistently beaten a simple investment mix of 60 percent broad equity indexes and 40 percent in bond funds. It’s the rest of group that is so problematic. In much the same way that the world’s worst index fund manages to stay in business, it is a challenge to explain why so much money has found its way to so much mediocre performance. Behavioral explanations can only go so far.


A recent Bloomberg Businessweek column looked at this issue. The conclusion: The investment managers often share their lofty fees (traditionally 2 percent of assets under management plus 20 percent of any gains) with placement agents who hawk the hedge funds, especially to pension funds. Some states have banned their pension plans from using the agents, but not enough of them have done so.

But this only explains why some people are motivated to go out and sell an underperforming investment product. It doesn't answer the core question of why so many investors buy them.

As the Businessweek article noted: "Hedge funds that invest in stocks returned 7.2 percent annually from 2009 to 2017, which was less than half the S&P 500’s return, according to data from Hedge Fund Research.” Even if you don't like the Standard & Poor's 500 Index as the benchmark, it's worth noting that hedge funds have also underperformed pretty much every other benchmark out there.

If this were small change we were talking about, it wouldn't be such a big deal and I'd have an easier time keeping my outrage in check. But the scale of the assets allocated to hedge funds is large, and getting larger. According to Fortune, “Since 2005, state and local pension plans have sharply increased their exposure to alternative investments, including private equity, real estate and hedge funds, from 9% of portfolios, on average, to 24%.” Other estimates put the figure even higher: According to Leland Faust, founder of CSI Capital Management, “More than half of the $3 trillion held in hedge funds nationwide is pension fund and retirement plan investments.”

Whether it's trillions of dollars or merely hundreds of billions of dollars, it is still a lot of money not being put to the best use. This only exacerbates the underfunding crisis facing U.S. pension plans. The Economist magazine noted that the average U.S. public-sector pension was only 68 percent funded, according data compiled by the Center for Retirement Research at Boston College.

The continuing puzzle is why hedge funds continue to be so successful in selling their underperforming products, especially to public-pension plans. We have looked at the issue before, and have considered the principal-agent problem -- in other words, those with no skin in the game make the investing decisions for those who do. Pondering that puzzle has led to a few surprising conclusions.

The best explanation I can find is this: Those who manage pension plans and pools of assets put money into hedge funds based on expected returns, not actual performance. The likely expected rates of return for hedge funds have proven to be works of fiction, fantasies made up out of whole cloth. There simply is no rational basis for making the claim that hedge funds will deliver an expected return higher than equities.

Future expected returns should be estimated by looking at historical returns of an asset class, then applying a probable estimate of outcomes. 1 This is done for stocks, bonds, cash, real estate and so on. Hedge funds, however, are not a discrete asset class. Calculating expected returns doesn't generate a reliable or real number. Instead, it is an exercise in making assumptions -- about the skill of the manager, the process employed to make decisions and how replicable past above-market returns might be.

It is at best a guessing game.

This is the heart of the problem. Pension-plan managers aren't dumb; but as I noted at the start, there is an obvious reason they intentionally buy a false promise of higher returns.


In the end, taxpayers loses in three different ways: First, they pay much higher investment fees than they would via other available options -- and those fees act as a drag on returns. Second, there's the outright underperformance mentioned above. And third, the public is on the hook for making up the unfulfilled promises made to state employees, including teachers, fire fighters, police and other government workers.

The result is a ticking time bomb that will go off at some point that can only be dealt with through either unimaginable tax increases or stiffing government employees who worked hard in the expectation they would have enough money for a secure retirement.

In the past, I've summed up the bargain that hedge funds offer investors thusly: Come for the high fees, stay for the underperformance. It is funny because it was true, though I'd add one other element: Taxpayers and pension funds get duped in the process. There is no other explanation for why there is so much money parked in so many expensive funds with subpar returns.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
This can be calculated by multiplying potential outcomes by the chances of them occurring.

To contact the author of this story:
Barry Ritholtz at britholtz3@bloomberg.net
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Old 02-15-2018, 06:20 PM
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CALIFORNIA

https://californiapolicycenter.org/e...blic-pensions/

Quote:
How to Restore Financial Sustainability to Public Pensions
Spoiler:
Last month the League of California Cities released a “Retirement System Sustainability Study and Findings.” The findings were not surprising.

“Key Findings” were (1) City pension costs will dramatically increase to unsustainable levels, (2) Rising pension costs will require cities to nearly double the percentage of their general fund dollars they pay to CalPERS, and (3) Cities have few options to address growing pension liabilities.

These findings corroborate the California Policy Center’s concurrent recent updates on the pension situation in California. In the January 31st update “California Government Pension Contributions Required to Double by 2024 – Best Case,” and the January 10th update “How Much More Will Cities and Counties Pay CalPERS?,” using CalPERS own “Public Agency Actuarial Valuation Reports,” it is shown that over the next six years, participating cities will need to increase their payments to CalPERS by 87%, from $3.1 billion in the 2017-18 fiscal year to $5.8 billion by the 2024-25 fiscal year.

This 87% rise in pension payments, officially announced by CalPERS, is definitely a best case. The report from the League of California Cities offers the following footnote on page 1 that underscores this fact: “Bartel Associates used the existing CalPERS’ discount rate and projections for local revenue growth. To the extent CalPERS market return performance and local revenue growth do not achieve those estimates, impacts to local agencies will increase. Additionally, the data does not take into account action pending before the CalPERS Board of Administration to prospectively reduce the employer amortization schedule from its current 30 year term to a 20 year term. Should the Board adopt staff’s recommendation, employer contributions are likely to increase.”

The report from the League of California Cities includes a section entitled “What Cities Can Do Today.” This section merits a read between the lines:

ANALYSIS OF RECOMMENDATIONS TO CITIES CONFRONTING UNSUSTAINABLE PENSIONS

1 – “Develop and implement a plan to pay down the city’s Unfunded Actuarial Liability (UAL): Possible methods include shorter amortization periods and pre-payment of cities UAL. This option may only work for cities in a better financial condition.”

1 (reading between the lines) – PAY CALPERS MORE. Reduce the unfunded liability by making your annual catch-up payment even more than CalPERS is instructing you to pay in their “Public Agency Actuarial Valuation Reports.” Doing this will save money over several years. But only if you can afford it.

2 – “Consider local ballot measures to enhance revenues: Some cities have been successful in passing a measure to increase revenues. Others have been unsuccessful. Given that these are voter approved measures, success varies depending on location.”

2 (reading between the lines) – RAISE TAXES. Do what you’ve been doing incessantly ever since pension benefits were enhanced right before the financial crisis of 2000 wiped out the pension fund surplus. Raise taxes. Say it’s “for the children” and to “protect seniors,” and based on the last several years of data, there is an 80% chance voters will approve the new tax.

3 – “Create a Pension Rate Stabilization Program (PRSP): Establishing and funding a local Section 115 Trust Fund can help offset unanticipated spikes in employer contributions. Initial funds still must be identified. Again, this is an option that may work for cities that are in a better financial condition.”

3 (reading between the lines) – PAY CALPERS MORE. Make payments into a separate investment fund, over and above your annual pension payments, earmarked for CalPERS. Then draw on those funds when the annual pension payments increase. But only if you can afford it.

4 – “Change service delivery methods and levels of certain public services: Many cities have already consolidated and cut local services during the Great Recession and have not been able to restore those service levels. Often, revenue growth from the improved economy has been absorbed by pension costs. The next round of service cuts will be even harder.”

4 (reading between the lines) – CUT SERVICES.

5. “Use procedures and transparent bargaining to increase employee pension contributions: Many local agencies and their employee organizations have already entered into such agreements.”

5 (reading between the lines) – MAKE BENEFICIARIES PAY MORE. Good idea. The League of California Cities might expand on the feasibility of this recommendation and provide examples of where it actually happened (cases where employees agreed to pay more towards their pension benefits but received an equivalent pay increase do not count).

6 – “Issue a pension obligation bond (POB): However, financial experts including the Government Finance Officers Association (GFOA) strongly discourage local agencies from issuing POBs. Moreover, this approach only delays and compounds the inevitable financial impacts.”

6 (reading between the lines) – GO INTO DEBT TO PAY OFF DEBT. Pension obligation bonds are at best a dangerous gamble, at worst a deceptive scam. The recommendation itself (above) dismisses itself in the final sentence, where it states “this approach only delays and compounds the inevitable financial impacts.”

WHAT CAN LOCAL ELECTED OFFICIALS DO ABOUT UNSUSTAINABLE PENSIONS?

1 – Learn what really happened and communicate it to everyone – employees, elected officials, journalists, citizens. CalPERS, an independent entity largely controlled by public employee unions, joined with powerful union lobbyists to push through pension benefit enhancements beginning in 1999. Despite a sobering and ongoing stock market correction that began only a year later in 2000, over the next several years these two special interests successfully lobbied to roll these financially unsustainable benefit enhancements through nearly every state and local agency in California.

Then, for years, whether intentionally or via a culture that encouraged wishful thinking, CalPERS obfuscated the deepening financial challenges from local officials and the public, deferring the day of reckoning. For more on this, read “Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?”

2 – Support legislation that will make it easier to take steps to reduce financially unsustainable pension benefits. For example, state senator John Moorlach – the only actual CPA currently serving in California’s state legislature – has just introduced Senate Bill 1031. According to Moorlach’s recent press release, this bill “would protect the solvency of public-employee pensions by making sure each yearly COLA – cost-of-living-adjustment – isn’t so large it tips the underlying fund into insolvency. If a pension system is funded at less than 80 percent, then the COLA would be suspended until the funding status recovers.” Great idea.

3 – Fight for either legislation or a citizen initiative to implement the “Pension Sustainability Principles” that the California League of Cities’ Board of Directors adopted in June 2017. In particular, “converting all currently deemed ‘Classic’ employees to the same provisions (benefits and employee contributions) currently in place for ‘PEPRA’ employees for all future years of service.”

4 – Understand that public employee unions are likely to fight any substantive revisions to their pension benefits, and be prepared to incur their wrath. When they fund candidates to challenge you and destroy you in the next election, own the pension issue. Make it the centerpiece of your campaign and challenge your union-funded opponent on the basis of financial reality.

5 – Thoroughly familiarize yourself with the dynamics of pension finance and the underlying concepts. A good place to start is the CPC primer “How to Assess Impact of a Market Correction on Pension Payments.” Quoting from that article – “Any policymaker who is required to negotiate over pension benefits, explain pension benefits, consider changes to pensions, or understand the impact of pensions on current and future budgets, or for that matter, contemplate any sort of increase to local taxes and fees, needs to understand the basic financial concepts that govern pensions. They should understand the difference between the total pension liability and the unfunded pension liability. They should understand the difference between the normal payment and the unfunded payment. They should understand the difference between unfunded payment schedules that use the “percent of payroll” method vs. the “level payment” method. They should know what “smoothing” is. They should thoroughly understand these concepts and related concepts.”

6 – Local elected officials might consider ways to exit CalPERS. The option of leaving CalPERS should not be dismissed merely because the terms of departure require a large payment. While the buyout terms CalPERS imposes on agencies that want to leave the system are onerous, the funds a city must muster for the buyout are still retained as funds reserved to service their pension liability. This is one situation where financing scenarios might make sense, because once an agency leaves CalPERS, they are no longer subject to many of the restrictions CalPERS places on the ability of agencies to modify pension benefits. The savings realized by having the latitude to make more substantive changes to benefit formulas could mitigate the financing risk.

7 – Finally, remind the members of public employee unions that merely opposing their leadership on pension policies does not automatically make you their enemy. Defined benefit pensions are superior to individual 401K plans, because they do not carry the market risk nor the mortality risk that is inherent in anyone’s individual 401K. But defined benefit plans must be fair to taxpayers, they must be financially sustainable, and the participants must pay their fair share. Appeal not only to their desire to see their pension funds stabilized so they don’t face draconian cuts in the future instead of measured cuts today, but also to the reasons they entered public service, their altruism, their civic pride, their patriotism, their desire to make a contribution to society.
http://www.pionline.com/article/2018...15#cci_r=73393

Quote:
CalPERS shortens amortization period to 20 years
Spoiler:
he CalPERS board voted Wednesday to shorten the period over which actuarial gains and losses are amortized to 20 years from 30 years for new pension liabilities.

The new policy will become effective as of the June 30, 2019, actuarial valuations.

The $356.6 billion California Public Employees' Retirement System, Sacramento, last revised its amortization policy in April 2013 when it added a five-year "direct rate smoothing" for certain unfunded liability bases. Staff recommended the policy change because it was concerned that the prior amortization policy could result in negative amortization, which is when the payments on the liabilities are not sufficient to cover the interest accrual.

RELATED COVERAGE
CalPERS returns 15.7% in 2017, outperforming its benchmarkCalPERS allocates $2.5 billion to alternatives, fixed incomeCalifornia governor raises prospect of pension cuts in downturnCalPERS adopts new asset allocation increasing equity exposure to 50%
Reducing the amortization period for certain sources of unfunded liability is expected to increase average funding ratios and provide faster recovery of funded status in a market downturn, according to a staff report to the finance and administration committee, which on Tuesday approved passing the change to the board for a final decision. CalPERS was 68% funded as of June 30.

The downside of the shorter amortization period is that it could increase the contributions of the cities that participate in CalPERS.

Marcie Frost, CalPERS CEO, said that the amortization policy change is "an important step in strengthening the fund for generations to come."

"It will save employers money over the long term and will reduce their unfunded liability balances sooner, but we know that these decisions are difficult ones to make for the board, difficult for the team to bring to the board to make the decision and the impacts to the employers are not easy," she said before the board's vote.

Officials from the city of South San Francisco in public comment told the board that the city would have no trouble paying the additional $2 million the change would cost the city, but that CalPERS' board should consider that this change follows other policy modifications including the amortization smoothing that taken together created a huge burden for the employers.
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Old 02-15-2018, 06:23 PM
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DALLAS, TEXAS

https://www.dallasnews.com/opinion/c...un-bureaucrats

Quote:
Public pensions are bad for employees but such fun for bureaucrats

Spoiler:
In the course of the Dallas pension crisis we were surprised and shocked to learn that public pension fund managers can somehow go into the office every day, drink coffee and chat with colleagues, attend a parade of meetings and investment presentations, all the while knowing that the pension fund they oversee is an underfunded and underperforming disaster in the making.

But surprise and shock is the name of the game when it comes to public pensions. Dozens of pension systems are in even worse shape than Dallas' because the derelictions of management have not been discovered, or because politicians have been unwilling to do the heavy lifting to fix things.

According to the actuarial firm Milliman Inc., the 100 largest public pension funds are under 75 percent funded to meet their projected liabilities. This is a taxpayer catastrophe in the making, since for most public pensions, taxpayers are required to make up any gaps or shortfalls in benefits to public retirees. That's why Warren Buffett calls public pensions "gigantic financial tapeworms;" they're going to end up eating everything while their municipalities wither.

The private sector has wisely transitioned away from pensions toward defined contribution systems such as 401ks and 403bs because of the benefits to both workers and employers. Workers gain from having direct control and ownership of their retirement savings, while employers avoid the liability of not sufficiently funding their pension obligations.


So why have governments not done the same? The cynic in me thinks it's because retaining the pension model creates enormous opportunities for governments and the bureaucrats who run them. After all, who doesn't like having control over gigantic pools of money? It gets you invited to fancy parties and investment conferences, and it gives you the power to award management fees to friends and cronies, who will then owe you favors.

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This kind of corruption between government officials and pension management companies turns out to be common. Former Pennsylvania Treasurer Barbara Hafer is now a convicted felon because she steered $700,000 in pension management fees to Richard Ireland, who then made six-figure contributions to Hafer's campaign accounts. And, of course, the FBI and the Texas Rangers are still investigating the Dallas pension disaster.

But the greatest temptation to mischief is the opportunity pension management gives bureaucrats to push their political agenda. Increasingly, public pension managers "divest" from politically (or bureaucratically) incorrect industries. CalPERS, the nation's largest public pension system, seems to use political correctness as a primary criteria, divesting from tobacco, gun manufacturers, oil and gas companies, nuclear, private prison operators, any company involved in the building of a border wall, and any company that might compete against a state government service. A 2015 report commissioned by CalPERS found that its various divestments had cost the funds $8 billion.

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Similarly, New York City pension funds have just announced they are divesting from fossil fuels, which is projected to cost the funds $3 billion in lost returns over 20 years. This while four out of every five taxpayer dollars collected by New York City are spent paying down the city's public pension liabilities, according to the American Council for Capital Formation.

Is it too quaint to suggest that fiduciary duty requires the management of public pension funds to maximize returns instead of pursuing their own political agenda?

Putting politics before returns may explain why, despite paying higher-than-average investment management fees, public pensions consistently underperform stock and bond markets. In 2016, public pension funds averaged a third of the returns of their private counterparts — again, even while paying out higher management fees. Short of moving completely to a 401k model, most public pensions would be better off firing all their investment managers and simply investing in S&P 500 or Russell 2000 index funds. Fees would go way down, returns would go up, and opportunities for corruption would vanish.

The politicization, cronyism and bureaucracy of public pension management is a recipe for disaster. If governments really want to keep their promises to their first responders and other civil employees while avoiding calamity, wresting control away from bureaucrats and turning pension management completely over to the private sector should be a priority.

Tom Giovanetti is president of the Institute for Policy Innovation in Irving. He wrote this column for The Dallas Morning News. Website: ipi.org


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Old 02-15-2018, 06:34 PM
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ILLINOIS

http://www.daily-chronicle.com/2018/...duaad/#new_tab

Quote:
Superintendents react to proposed pension obligations in Rauner's budget address

Spoiler:
DeKALB – Jamie Craven, DeKalb District 428 superintendent, said he understands from a state budget standpoint that pensions are a major concern.

Therefore, he was not that surprised when Gov. Bruce Rauner announced a four-year phase-in proposal to shift pension obligations from the state level to the local level, requiring school districts to cover their own pension costs, during Wednesday’s budget address.


“If it’s a phase-in plan and the state will come through with the funding to offset the costs, then I understand and appreciate what they’re doing,” Craven said.

But with DeKalb owing a little more than $3 million annually in Teacher Retirement System payments and the district yet to see the extra funds it was supposed to get from the revised funding formula, things might get tough after the first year.

In a budget address delivered Wednesday in Springfield, Rauner said the shifts will come in 25 percent increments a year. He also promised schools and local governments would have the tools they need to offset the costs, including increased education funding, the power to dissolve or consolidate units of local government and more flexibility in contracting, bidding and sharing services.

Rauner’s plan also calls for state universities, including Northern Illinois University, to cover their own pension and health care costs under a phase-in plan, which would be offset with an additional $205 million for fiscal 2019. Rauner estimates these cost shifts could save state government $696 million in the next fiscal year.

Sycamore School District 427 Superintendent Kathy Countryman said pension costs are something the district has paid close attention to and has even started budgeting toward at half a percent. But without the extra money from the new funding model and categorical payments that are still owed, Countryman said she does not know how confident she is in the plan.
State Sen. Dave Syverson, R-Rockford, said with increased education funding being budgeted, school districts shouldn’t feel any significant harm this year.

“The goal is that if local school districts or universities have to pay some of those costs, then they’ll keep that in consideration when budgeting,” Syverson said. “If you don’t ever pay it, you don’t have to think about it.”

State Rep. Bob Pritchard, R-Hinckley said he expects the next four years will be a good, but difficult period of adjustment for school districts and universities as they assume their own pension liability.

“I looked at the budget address as a call to take ownership and come up with solutions that we can live with,” Pritchard said. “We needed to consider some form of pension responsibility for districts, and how we do that is part of the debate.”

The overall pension revamp would save $1 billion a year, Rauner said. Although he wouldn’t count on that money in the fiscal 2019 budget that begins July 1, it ultimately would allow him to drop the income tax rate from 4.95 percent to 4.7 percent, he said.

The plan also is likely to face a court challenge as past proposals have because the state constitution prohibits promised pensions from being “diminished or impaired.”

Reassigning responsibility for the employer portion of teacher pensions to school districts would reverse a years-long practice of the state picking up the tab for all districts outside Chicago, and it was even extended to that city as a matter of fairness in last summer’s education-funding package. A sponsor of that plan, Sen. Andy Manar, D-Bunker Hill, said the shift would reverse the entire reason for the funding-formula changes – more equity in how the state pays for education.

Rauner proposed his $37.96 billion blueprint, which he claims would leave a surplus to be put toward billions of dollars in overdue bills. However, all require approval from Democratic legislators with whom he’s feuded for years. A two-year stalemate without a budget – which created the huge bill backlog – finally broke last year when Republican lawmakers crossed over to override Rauner’s budget veto and implement an income tax hike from 3.75 percent to 4.95 percent.

• The Associated Press contributed to this report.

Rauner’s fiscal 2019 budget address goals:

1. $1 billion tax cut as a priority during legislative session

2. School districts and universities covering their pension costs in a four-year phase-in plan

3. Reduce workers’ compensation rates and manage employee health insurance plans.

4. Capital grant to the University of Illinois for its Illinois Innovation Network and Discovery Partners Institute, to leverage billions of dollars in private donations to the university and spur enterprise formation

5. Sale of the Thompson Center




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Old 02-16-2018, 03:43 PM
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https://www.plansponsor.com/case-stu...-db-public-dc/

Quote:
Case Study Warns of Effect of Move From Public DB to Public DC
The NIRS studied the case of Palm Beach, Florida, which it says offers “an important cautionary tale on the detrimental impacts of switching public employees from DB pensions to DC accounts.”
Spoiler:
Since 2009, nearly every state modified its retirement systems to ensure long-term sustainability, most often by increasing employee contributions, reducing benefits or both, according to the National Institute on Retirement Security (NIRS).

During these deliberations, some retirement systems faced pressure to move from defined benefit (DB) pension plans to defined contribution (DC) 401(k)-type individual accounts, in part or whole. Advocates of switching from DB to DC plans position the change as reducing employer costs for unfunded liabilities, but the move to DC accounts does nothing to reduce plan liabilities on its own. At the same time, significantly reduced retirement benefits under the DC savings plan create other workforce challenges, such as difficulty in recruiting and retaining public employees, NIRS says.

The NIRS studied the case of Palm Beach, Florida, which it says offers “an important cautionary tale on the detrimental impacts of switching public employees from DB pensions to DC accounts.” In 2012, the Palm Beach Town Council closed its existing DB pension systems for all employees, including police and fire. Going forward “combined” retirement systems offered police officers and firefighters dramatically lower DB pensions and new individual DC retirement accounts. The move was made because financial markets experienced severe investment losses during 2001 to 2002 and 2008 to 2009. For the DB pensions of Palm Beach, this caused a dramatic increase in the town’s costs for its employee pension funds, which increased by over 600%, from $1.1 million in FY02 to $7.5 million in FY10, the NIRS explains.

According to the NIRS’ report, from the town’s budget perspective, the changes to the pension plan cut costs about 45%. According to a report by the Palm Beach Civic Association, which supported the changes, the pension reforms were anticipated to save taxpayers $6.6 million in 2012, and the annual savings would grow to $10.2 million in 2020. While the Civic Association’s study concluded that employees still would have a meaningful retirement plan, many public safety employees felt differently.

The police union calculated based on the pension reform proposal that the amount of pension income paid to future police officers would be $20,094 compared to the average benefit provided under the existing plan of $56,263.

The NIRS reports that the reaction of existing protective service officers to seeing their pension benefits frozen was swift. Retirements accelerated dramatically. Because the only way younger public safety officers could obtain a better pension was to leave the town’s police and fire departments, those existing employees who did not retire looked for opportunities in nearby local jurisdictions. The town’s two public safety pensions had covered 120 employees at the end of 2011. In addition to the 20% of the town’s workforce that retired after the change, 109 other protective officers left before retirement in the next four years. Mid-career public safety officers departed the forces in unprecedented numbers, with 53 vested police officers and firefighters departing Palm Beach’s forces from 2012 to 2015, compared to just two such experienced employees in the four years from 2008 to 2011.

The town did not anticipate the financial impact of the high attrition. For example, the NIRS firefighters had to work extremely high levels of overtime to fill staffing gaps. Also, the unprecedented loss of new and experienced public safety officers caused the town’s training cost to soar likely reaching upwards of $20 million, based on an “all in” cost estimate of $240,000 per officer to bring a new police officer through the rookie period in Florida.

The Town Council voted in 2016 to abandon the DC plans and improve the DB pensions for police officers and firefighters by raising benefits substantially and lowering the retirement age. The Council offset the cost of the police and fire DB pension improvements by increasing employee contributions and eliminating the DC plan with its employer match.

A previous report from the NIRS showed how three states’ switch from a defined benefit pension to a defined contribution plan exacerbated pension underfunding.
Tagged: public DB plans, public DC plans, public defined benefit plans, public defined contribution plans, public pensions
NIRS report:
https://www.nirsonline.org/reports/r...fety-pensions/

Quote:
Retirement Reform Lessons: The Experience of Palm Beach Public Safety Pensions

A new case study examines the impacts of the actions of the Town of Palm Beach when substantial changes were made to the retirement plans offered to the town’s employees. The case study details the 2012 decision by the Palm Beach Town Council to close its existing defined benefit (DB) pension systems for its employees, including police officers and firefighters.

Retirement Reform Lessons: The Experience of Palm Beach Public Safety Pensions outlines how the “combined” retirement plans offered dramatically lower DB pension benefits and new individual 401(k)-style defined contribution (DC) retirement accounts. Following a large, swift exodus of public safety employees to neighboring employers that increased costs in human resource areas, the town reconsidered the changes. In 2016, the Town Council voted to abandon the DC plans and to improve the pension plan.

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