Actuarial Outpost
 
Go Back   Actuarial Outpost > Actuarial Discussion Forum > Pension - Social Security
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

DW Simpson International Actuarial Jobs
Canada  Asia  Australia  Bermuda  Latin America  Europe


Reply
 
Thread Tools Search this Thread Display Modes
  #1841  
Old Yesterday, 07:44 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

KENTUCKY
https://www.ai-cio.com/news/pension-...reform-anyway/


Quote:
If Pension Overturn Sticks, Kentucky GOP Plans to Pass a Reform Anyway
As the state Supreme Court mulls whether to reinstate the new Republican pension law, the party’s lawmakers look for a Plan B if they lose.
Spoiler:
Should the Kentucky Supreme Court strike down a controversial pension reform bill, Republican leaders are saying they will simply pass another one.

The bill seeks to change state employee retirement benefits, denying newly hired teachers enrollment in the traditional defined benefit pension program, and pushing them into a hybrid 401(k)-style plan. The bill also caps the number of sick days public workers can use toward retirement and compels workers hired between 2003 and 2008 to pay healthcare premiums. The measure was originally passed in the spring, tucked into a sewage bill during the last days of the 2018 legislative’s session.

A lower court then negated the reform over the summer, ruling in favor of a lawsuit led by Attorney General Andy Beshear, a Democrat. The Franklin Circuit Court overturned the law on procedural grounds since the bill was passed in a hurry and because it was an appropriations bill, and therefore needed a bigger majority than it gained.

Gov. Matt Bevin, the bill’s proponent and a Republican, appealed the court’s ruling to the state’s highest court.

The Supreme Court’s decision regarding the appeal is expected to come as early as next week, but should the bill stay dead, the legislature should start working on getting a new measure passed.

“If it is something we have to revisit and can be based on procedure, I think we can do that and I think we should because it is a problem that has not gone away,” Senate President Robert Stivers said at a Kentucky Chamber of Commerce event, reported by WVXU.org.

One possible other method of shoring up the state’s underfunded ($37 billion short of meeting obligations) public pension system is to legalize gambling and generate more tax revenue. New Jersey, another badly underfunded state, has been doing something similar with lottery money.

However, Stivers is not impressed with this concept, as he doesn’t think gambling is the “silver bullet.”

“Even if it [gambling] were to pass, it’s still only a drop in the bucket,” he said.

David Osborne, the incoming state House speaker, also thinks the Republican-led legislature would push another reform bill ahead in the event of the appeal’s dismissal, although he is unsure “that we would be passing the exact same piece of legislation this time around.”

“Quite frankly I’m not sure how we’re going to deal with it if it does get overturned,” said Osborne.

The state of Kentucky’s pension is 31% funded.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1842  
Old Yesterday, 07:48 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

OHIO

https://perspective.opers.org/index....sion-provider/


Quote:
OPERS a low-cost pension provider
Benchmarking agency rates your retirement system as effective investor


Spoiler:
Dec. 6, 2018 – Once a year OPERS compares its administrative and investment processes to those of its peers. We want to know if our investment plan and operations are on the right track compared to how other public pension plans execute their roles.

To do so, we contract with CEM Benchmarking, an independent provider of objective benchmarking for institutional investors. CEM is based in Toronto, and we hire the company to see how we’re doing compared to other public pension funds, especially those in our peer group.

At the November OPERS Board of Trustees meeting, CEM presented its comparison of your retirement system’s activities. CEM said OPERS’ total administrative cost was $58 per member. That was $11 per-member below the peer average, and equal to the peer median amount.

We’d like to take a deeper look into CEM’s report on OPERS investments, which states that our net investment risk and return was right on par with those of other public pension funds, and that we were a bit more cost-effective than our peers.

An analysis of our investments must begin with the premise that OPERS is an institutional investor responsible for the retirement security of more than 1 million members. Bearing in mind the fact that our investment outlook is many decades, and not a few months or years, it’s entirely impractical for us to put all of our eggs in one basket.

For the last few years, that basket would be the stock market. We’ve seen comments on our blog that if only we’d invested everything in the stock market, look where we’d be. That will never happen, nor would any institutional investor take that tact. It would be fiscally irresponsible to any fund should another 2008 occur.

Thus, we diversify our assets as any sensible investor would. With that in mind, let’s examine CEM’s report, which looked at our five-year return performance from 2013-17, as well as the total cost of our investment program.

CEM analyzed four factors of our investment program: returns, net value added, costs and risk. We’ll look at all four. In some cases CEM compared us to its database of 126 U.S. pension funds. For other measures, it compared OPERS to its peer group of 15 U.S. public plans with a median asset size of $94 billion.

Returns: OPERS’ 5-year net total return was 8.9 percent, very close to both the U.S public pension return median and peer median of 9.0 percent. CEM split this category into our policy return and our value added.

Policy return refers to money we would have made if we had invested passively according to the asset allocation set by the Board of Trustees. Our 5-year policy return of 8.4 percent was a bit below the U.S. public median of 8.8 percent.

Value added is the component of total return from active management. OPERS actively manages a portion of its portfolio, both internally and by using external managers. Our 5-year net value added of 0.5 percent was favorable to the peer median of 0.1 percent and the U.S. public median of 0.2 percent. In other words, when we actively managed our accounts, we did so better than other funds our size.

Looking at costs, CEM recommended comparing ourselves to the 15-fund peer group. It found that our investment costs in 2017 were $549.8 million, or 57.9 basis points. That was above the peer median of 55.4 basis points.

However, CEM then made a benchmark analysis of our costs. In other words, it compared that cost to an estimate of what our peers would have incurred had they used our exact asset mix. CEM found that our total cost of 57.9 basis points was actually below this benchmark cost of 59.2 basis points. In other words, our savings was 1.3 basis points, or $12.6 million.

Finally, CEM compared our asset risk to other public pension funds. Our risk of 10.7 percent was barely above the U.S. standard of 10.6 percent.

The key takeaways, CEM said, are that OPERS earns about the median net total return of the median U.S. public pension fund. We make more money in active management than other funds while maintaining a similar risk profile.

And while OPERS’ investment costs were a bit above those of our peers, they were lower than our peers had they implemented the same asset mix that we did.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1843  
Old Today, 12:23 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

AMORTIZATION

https://burypensions.wordpress.com/2...ation-methods/


Quote:
NASRA Data (3) Amortization Methods
Spoiler:
High interest rates get the attention, such as it is, when it comes to understating contributions that fund benefits in public sector pension plans but there are also gimmicks to keep payments low on the unfunded liabilities that inevitably develop. Here they are as taken from NASRA data where amortization methods were reported for the first (2001) and last (2017) year.


In the early days of ERISA Defined Benefit plans were supposed to be as close to 100% funded as possible with variations (either gains or losses) amortized over a period of 15 to 30 years. Public plans, always under pressure to keep contributions low, quickly developed unfunded liabilities to be paid off and also methods to extend that payoff period so that it would be future taxpayers or public employees who would bear more of the burden. The most blatant:

Open vs. Closed Amortization: Each year the entire unfunded liability (on a smoothed basis) is calculated anew on an “open” basis and an amortization amount is determined.
Level Percent vs. Level Dollar: The “level percent of payroll” amortization amount is designed to pay off the unfunded liability slower as payments in future years increase in proportion to payroll growth each year.
Here is a comparison of plans using these methods:





All 129 are in this spreadsheet and here are the New Jersey plans:




__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1844  
Old Today, 12:25 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

ILLINOIS

https://www.reuters.com/article/us-i...1O62KC#new_tab


Quote:
Illinois' unfunded pension liability climbs to $133.5 billion
Spoiler:
CHICAGO (Reuters) - Illinois’ already huge unfunded pension liability grew bigger in fiscal 2018, rising to $133.5 billion from $129 billion at the end of fiscal 2017 mainly due to inadequate state funding, according to a legislative report released on Friday.

The state legislature’s Commission on Government Forecasting and Accountability also projected the liability would increase to $136.8 billion when fiscal 2019 ends on June 30 and reach $139 billion in fiscal 2020.

Mostly due to a low pension funded ratio, which stood at just 40.2 percent in fiscal 2018, and a chronic structural budget deficit, Illinois has the worst credit ratings among the U.S. states at a notch or two above the junk level.

J.B. Pritzker, a Democrat who defeated current Republican Governor Bruce Rauner in November’s gubernatorial election, will inherit the pension problem when he takes office in January. He has assembled a 17-member committee to address fiscal issues, including pensions.

The legislative commission said the state continued to short-change its pension funds in fiscal 2018.

SPONSORED


“The primary reason for the (unfunded liability) increase was, again, actuarially insufficient state contributions, which increased the unfunded liability by $3.187 billion, accounting for 66.1 percent of the total increase,” the report said.

Other contributors to the increased liability were demographic factors at Teachers’ Retirement System and State Universities Retirement System’s lowering of its assumed investment rate to 6.75 percent from 7.25 percent, the commission said.


It projected that Illinois’ contribution to its five retirement funds would increase by 8 percent to $9.22 billion in fiscal 2020, which begins on July 1, from $8.54 billion this fiscal year.

A provision in the Illinois Constitution protecting existing retirement benefits for public sector workers has made cost cutting difficult.

While the state has reduced benefits for new workers, implementation of its latest plan to save about $400 million in the current budget through a voluntary buyout of pension benefits has been stalled.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1845  
Old Today, 12:28 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

CALIFORNIA

https://www.desertsun.com/story/news...rm/2260482002/


Quote:
Jerry Brown’s last stand on pension reform

Spoiler:
Six years ago, as California strained to emerge from the Great Recession, Gov. Jerry Brown worked a minor political miracle—a rebalancing of the massive state pension systems for public employees.

Shuttling between unions and the strapped governments on the hook for public sector benefits and paychecks, Brown scaled back some of the rules and perks that have made public sector workers more secure, arguing that the pain would be worth it. Results were mixed: The largest benefit rollback in state history yielded some savings, but not enough to entirely fix a pension commitment that taxpayers are increasingly finding hard to manage.

Now, as Brown prepares to leave office—his own pension at hand, after five decades in public service—even that hard-won modicum of fiscal change could be loosened. In a case that went to oral arguments this week, the California Supreme Court is weighing a key legal precedent that could restore the generous pension formulas Brown worked so hard to tighten.


Brown, who at 80 has already surpassed the average retirement age of state workers by 22 years, predicts that he’ll win. But Wednesday’s proceedings made it clear that workers’ arguments are also compelling.

Whatever the ruling, Brown's successor, Gavin Newsom, will have to cope with the outcome. And—though the state’s unfunded liabilities persist, and economists warn another recession could be just around the corner—Newsom will face a very different political landscape. Should California land in another downturn, Brown’s pension reform miracle could be difficult, if not impossible to repeat.

More: How much did interest groups pay per vote in California? The answer, as we break down the midterms with data

The case heard by the high court on Wednesday involves the California Rule, a legal precedent that requires the state to compensate public employees if their retirement benefits are lessened. In a challenge brought by Cal Fire Local 2881, the firefighters union argues that the ability to purchase additional years of service credit toward retirement, known as “airtime,” is a pension benefit that employees rely on as part of their decision to go into public service.

Brown’s attorneys counter that airtime was never intended by the Legislature to be a vested right and never negotiated through collective bargaining. Therefore, the state can take it away.

Everyone agrees that workers are entitled to the pensions they earn for work that’s already been done. And the argument might seem to be over a procedural technicality on the surface.

But if the court sides with Brown, it could open the possibility of future governors and legislatures modifying current employees’ pensions for prospective work, and perhaps setting a new precedent in which already negotiated benefits are fair game. If the court sides with the union, it would bind the state’s finances and commit taxpayers to paying already expensive retirement benefits.

On a larger scale, the case also could mark the end of a Brown-led era of fiscal reform in Sacramento. A blue-state Democrat with a lifelong tendency against the spending his party was known for, the frugal Brown had the experience and political capital to challenge public employee unions who typically hold powerful sway over Democratic politicians.

Newsom is newer and younger, and won his office in part with strong union backing. In campaign statements, he pledged to unions that he will protect their pensions; in fact, state firefighters cited Newsom’s commitment as one reason for giving the governor-elect their endorsement.

Meanwhile, Democrats, who have been a majority for some time, also with strong backing overall from organized labor, only gained ground in the November election. As the Legislature convened on Monday, they had, not just a supermajority but a “mega-majority” in both chambers.

Both of those developments favor the priorities of public employee unions, as does the seemingly flush economy of the moment. California is projecting a $15 billion surplus this year, compared to a $27 billion deficit when Brown returned for his second stint in the governor’s office. The unemployment rate stood at 4.1 percent in October, compared to 12.1 percent when Brown was sworn in in January 2011.

More: Inside Desert Politics: Ballot harvesting -- the new way to vote

When the Great Recession cratered state finances and the public gained awareness of generous retirement benefits, Brown was able to leverage those issues to successfully champion a package of changes from the Public Employee Pension Reform Act of 2012 with tacit approval from labor leaders.

While Brown did not get key changes needed to slow down the growth in retirement costs, the Legislature did agree to what the governor called the “biggest rollback to public pension benefits in the history of California.” Among other money-saving measures, Brown was able to raise the retirement age for new employees, ban retroactive pension increases, stop practices such as hoarding vacation and sick time to inflate calculations for retirement benefits and ban the purchase of additional years of service, known as “airtime.”

Multiple labor unions sued, arguing that Brown’s 2012 changes infringed on their employer’s contractual obligation to provide retirement benefits at the level that was promised on their first day of work. That premise—the California Rule—left state and local governments with little room for savings.


Prior to Wednesday’s high court hearing, lower courts weighed in on the precedent with mixed messages.

In a 2016 ruling upholding a lower court’s decision, Justice James A. Richman of California's First District Court of Appeal broke from decades of court decisions in finding the Legislature can alter pension formulas for current employees and reduce their anticipated retirement benefits. He wrote that a public employee has a right to a “reasonable” pension, not “the most optimal formula of calculating the pension.”

But another appeals court came to a different conclusion about the “California rule” by deciding in favor of union employees in Alameda, Contra Costa and Merced counties. While the justices agreed there are limits to the California Rule, they said benefit adjustments require “compelling evidence” showing that the changes are necessary to the success of the pension system.

The Supreme Court agreed to take up the issue and is first hearing the firefighters’ case over whether airtime is a vested right. While Adams, for the firefighters union, said he hopes the court will recognize that airtime is earned through service, Brown’s lawyers argue taking away the optional benefit doesn’t mean the employee gets less in pensions.

Brown’s lawyers wrote in a brief that although airtime was thought to be cost neutral, employees could purchase fictional years of credit “often as much as 40 percent below the actual cost.”

Today, the California Public Employees’ Retirement System is carrying $111 billion in unfunded liabilities and the California State Teachers Retirement System faces $76 billion in unfunded liabilities.

During Wednesday’s oral argument in Los Angeles, the justices seemed to be searching for where to draw the line that would protect workers without giving them limitless retirement benefits.

Chief Justice Tani Cantil-Sakauye questioned labor attorney Greg Adam about how airtime is protected by the state Constitution when the employee hasn’t performed the work to earn it. And Justice Goodwin Liu wondered aloud whether pension rights extend to life insurance, health insurance or a sabbatical leave that may be offered during employment.

Gov. Jerry Brown has described pension reform as a “moral obligation.” Here, he outlines his 12-point plan in October 2011.
Gov. Jerry Brown has described pension reform as a “moral obligation.” Here, he outlines his 12-point plan in October 2011. (Photo: The Associated Press)

Then Liu turned to Brown’s attorney, Rei Onishi, to ask if the state has a right to change benefit formulas midstream in a worker’s career, which stikes at the heart of the California rule. Onishi said yes if it applies to prospective work. He reasoned that because a worker hasn’t earned the benefit, it’s not an impairment.

That brought on questions from Justice Leondra Kruger about whether the Legislature could wipe away benefits for a class of existing state employees going forward.

Onishi responded that that wouldn’t be likely because “other cases of this court have said you have a right to a substantial and reasonable pension as soon as you begin employment. I think completely terminating the system going forward, prospectively, would certainly raise questions about that.”

Though the hearing focused on legalities, the realities of Democratic politics weren't far from the courtroom. In an unusual move, the governor had his own attorneys argue the case rather than Attorney General Xavier Becerra—a choice that fueled speculation that Brown hoped to shield his attorney general, a Democratic elected official, from union pressure.

And prior to the hearing, the court dodged a thorny question about whether Brown’s most recent nominee to the bench could be impartial. Last month, Brown nominated long-time aide Joshua Groban, who would have provided him counsel on many legal matters. While it wasn’t known if Groban was involved in the case brought by the firefighters union, there was an open question about whether he would have to recuse himself—a question successfully sidelined when Groban’s confirmation hearing was set for Dec. 21, after this week’s arguments.

Governor-elect Newsom has said he would prefer to stay out of the courts to resolve pension disputes. When CALmatters asked him if the state should be allowed to renegotiate the future benefits of current workers, he suggested a legal fight wasn’t necessary.

“Even with the California rule, we have the tools through collective bargaining to negotiate reforms and commensurate offsets,” Newsom said then.

The economy might change his mind.

Economists have been warning of an inevitable downturn; Wall Street losses translate to deficits here because of California’s reliance on capital gains taxes. That vulnerability, even more than politics, says Jack Pitney, professor of government at Claremont McKenna College, could force Newsom to confront pensions.

“Despite his reputation for being more progressive, the economic reality might end up forcing prudence,” Pitney said. “As he contemplates the governorship, he’s aware of the constraints. He’s a smart guy and he knows how difficult the pension situation is going to be in the years ahead.”


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1846  
Old Today, 12:29 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

IOWA

https://www.dailyiowegian.com/news/l...7c2ea94f0.html


Quote:
Report: Iowa pension fund has $6.8B in unfunded liabilities
Spoiler:
DES MOINES (AP) — Iowa's largest public employee pension fund has stabilized thanks to solid investment returns but still has $6.8 billion in unfunded liabilities, according to a new report.

The study released Thursday by a consulting firm said the Iowa Public Employees' Retirement System's long-term unfunded liabilities will likely grow to $7 billion over the next five years, The Des Moines Register reported. The unfunded liabilities will then begin to gradually decline and fully disappear by 2046, according to the study's predictions.

The system had an annual investment return of nearly 8 percent, about 1 percentage point higher than its goal, the report said.

"What the whole funding policy is designed to do is to make steady progress," said Brent Banister, chief pension actuary at Nebraska-based Cavanaugh Macdonald Consulting LLC, which prepared the report. "You don't turn a big ship around quickly, but when you do you get where you want to go."

The unfunded liability can be traced to a decade of insufficient pension fund contributions, recessions in 2001 and 2009, and changes in mortality tables, state officials said.

Banister said there's no concern that the system's retirees won't get their pension checks.

"You are in the situation where you can weather a lot of things and you are moving in the right direction," he told the system's investment board.

The pension fund has 360,000 members, including current, former and retired employees of state government, cities, counties, school districts and other government agencies.

State Treasurer Michael Fitzgerald, who chairs the investment board, said the report is good news.

"Our pension fund is solid, sound and sustainable," Fitzgerald said. "Iowans should feel very comfortable with the position that IPERS is in."


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1847  
Old Today, 12:53 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

OPEBS

https://www.capitaliq.com/CIQDotNet/...81128-15:58:27




Quote:
Rising U.S. States' OPEB Liabilities Signal Higher Costs Ahead
Nov 28, 2018

Current RatingsView Analyst Contact Information
Table of Contents
Rate This Article
Key Takeaways
Reported unfunded retiree health care liabilities grew significantly for some state plans under new accounting standards that generally include more conservative liability estimates (compared to prior reporting standards).
Retiree health care costs will continue to accelerate as states severely underfund their OPEB plans, assuming no action is taken to reduce benefits.
Plan contributions remain well below levels necessary to materially reduce plan unfunded liability over the long-term.
Funded ratios remain low for the majority of states with established trust funds.
OPEB liabilities are likely to continue to escalate without meaningful funding progress or benefit reductions.

Spoiler:
Other postemployment benefit (OPEB) liabilities, which consist primarily of retiree health care plans, are a growing concern for certain states' credit quality and require attention to control higher future costs. Total unfunded state OPEB liabilities have increased significantly for the third year in a row, according to S&P Global Ratings' latest survey of U.S. states. Overall, total unfunded liabilities across all states increased $63 billion or 10% in fiscal 2017. This growth is larger than the 3.9% growth we reported in our fiscal 2016 survey but below the 12% growth reported in our fiscal 2015 survey. We believe this rise in reported unfunded OPEB liabilities is due primarily to continued extensive underfunding and updated OPEB actuarial studies, but also may be partly due to the implementation of updated accounting standards for OPEB plans.

Notably, the majority of state plans fund these long-term liabilities on a pay-as-you-go (paygo) basis, which defers contributions until the moment benefits are due and is intensified by medical cost trends outpacing inflation. The lack of a funded trust also exposes state budgets to medical claims volatility and demographic risk due to aging active populations. Additionally, the costs associated with a paygo strategy are countercyclical as states tend to incentivize retirement and reduce payroll during market corrections, which causes a counter spike in new OPEB costs at the worst possible time.

Plans that do not address OPEB costs in a timely manner may be exposed to large future swings in contributions and an increased likelihood that rapidly increasing benefits become unaffordable if no other action is taken to reduce costs.

Kicking The Can Down The Road
Most states do not prefund OPEB liabilities or have continued to decidedly underfund their OPEB plans. According to our survey results, plan disclosures under both GASB 74 and prior reporting standards suggest that plan contributions for the majority of states are likely well below levels necessary to materially reduce plan unfunded liability over the long term.

Specifically, just seven states met or exceeded their combined annual OPEB actuarially determined contributions (ADC), according to the most recent data available for our survey (see chart 1). Only five states contributed 90%-100% of their ADC.

Assuming no other action is taken to reduce benefits, we believe the current lack of funding progress for OPEBs will lead to escalating future contributions and additional budgetary pressure for some states. As states continue to juggle competing priorities with limited financial resources, we expect that many will continue to defer definitively addressing OPEB liabilities in favor of spending in other areas, such as pensions and Medicaid (for more information on state general fund expenditures, see "When The Credit Cycle Turns, U.S. States May Be Tested In Unprecedented Ways," published Sept. 17, 2018, on RatingsDirect). States that ultimately decide to take action to subdue these rising contributions might increase funding, amend plan benefits or adopt a plan that incorporates both options.

While legal flexibility in many states may make substantial benefit reform relatively easier compared to pension benefit reform, we believe practical limitations could still make reducing OPEB benefits difficult. Examples of such limitations include political or social implications, union negotiations, and remaining competitive in hiring and retaining workers.

Many plans have already implemented certain cost saving measures such as requiring some retirees to enroll in Medicare when eligible (or imposing a premium surcharge on those under the age of eligibility) and shifting prescription drug benefits to a Medicare Part D plan.

Chart 1 | Download Chart Data
image
Funded Ratios Remain Low As States Continue To Favor Paygo Despite Increasing Exposures
Although retiree health care benefits are typically paygo, many states have established trusts in an effort to build assets and pre-fund these long-term liabilities. According to our survey, more than half of the states report at least some level of asset accumulation in an OPEB trust fund. However, our survey also shows that many of these trust funds do not hold a significant level of assets compared to plan liabilities. According to our survey, only five states have funded more than 50% of their liabilities. One state has a funded ratio between 50% and 30% and 26 states have funded less than 30%.

Chart 2 | Download Chart Data
image
By 2030, all baby boomers will be older than 65, and the size of the older population will be such that one in every five residents will be of retirement age. While this may provide some relief to "bridge" plans which end at Medicare eligibility, plans which provide lifetime benefits may face accelerating costs. In our opinion, those with trust funds and that consistently make actuarially recommended contributions to prefund these liabilities are better positioned to combat rising retiree health care obligations. Those without funded trusts are exposed to volatility in medical claims and risk from demographic trends as the active population for OPEB plans age.

For additional information on demographics for U.S. states, please see "U.S. States Are Showing Their Age: How Demographics Are Affecting Economic Outlooks," published Sept. 25, 2018.

Unfunded OPEB Liabilities Rise
Across the 50 states, combined unfunded OPEB liabilities totaled $678 billion, a 10.2% or $63 billion increase as compared to our most recent survey. This growth is due in part to the adoption of GASB 74 and 75 which we believe generally includes more conservative liability estimates than those under the prior reporting standards. While accounting standard changes increased the reported unfunded liability for some states, we believe they do not affect the actual underlying liability or cost pressures.

In addition, many states continue to severely underfund their OPEB liabilities, failing to make contributions that meet actuarially determined levels. In our opinion, underfunding continues to be prevalent in the state sector. Without action to either prefund OPEB liabilities or reduce benefits, OPEB liabilities will likely escalate, leading to higher future costs.

Chart 3 | Download Chart Data
image
Changes To Accounting Standards And Assumptions Affect Reported Liabilities And Costs
We believe that OPEB liabilities and costs are sensitive to underlying actuarial assumptions, so small changes to actuarial assumptions can have exponential effects on reported liabilities. We have seen this in our current survey as reported OPEB liabilities have significantly risen with new GASB rules that provide specific methodologies (such as the required use of the entry-age normal actuarial cost method) that we believe drive a more conservative liability estimate than those under the prior reporting standards.

Higher assumed medical costs or life expectancy could also increase liabilities across states. Therefore, most states offering OPEB benefits will likely see some trend of cost increase over the next few years. States currently assuming higher ultimate medical trend rates are taking a more conservative approach than those incorporating lower rates, in our opinion.

While the revised reporting standards have lent to a jump in the reported OPEB plan liabilities, we expect that states could report a one-time decline in their unfunded OPEB liabilities based on new disclosure of their proportionate share of the overall OPEB plan liability under GASB 75, similar to trends seen after the implementation of revised GASB 67 and 68 pension reporting standards a few years ago.

OPEBs Remain Important To Credit Quality
Our analysis of OPEB liabilities is an important factor in a state's overall debt and liability profile and state credit quality. We assess a state's relative OPEB liability, proactive liability management, and flexibility to adjust benefits and plan offerings. We have seen many states demonstrate a legal and practical flexibility to reduce OPEB liabilities, and we expect this trend will continue.

In practical terms, however, alterations to benefits are not always straightforward. Adjustments to OPEB benefits can be subject to many challenges such as negotiations with unions, which have resisted reductions to benefits. Other reforms, such as Illinois' attempt to modify its OPEB obligations, were ultimately ruled unconstitutional. Also, state governments have managed a longstanding tradeoff between lower wages than many private sector positions, but stronger benefits. A reduction in benefits while maintaining lower wages could make it more difficult for states to retain skilled workers. For these reasons, many states have not taken further action to reduce benefits, and it is unlikely that operational constraints will subside in the near future.

We believe material improvement in funding long-term obligations requires a sustained effort. While changes to benefit offerings and increases in funding could mitigate the OPEB challenges many states face, successful reform comes from continuing commitment from state policymakers, potentially over many years.

Survey Methodology
We derived our calculation of OPEB liabilities from the most recent state comprehensive annual financial report, benefit plan comprehensive annual financial report, and benefit plan actuarial reports currently available to us. In most cases, this corresponded with the 2017 fiscal year. We have combined multiple OPEB plans for each state into one combined funded figure. Our survey includes those OPEB plans that states disclose as a state obligation, although we use the combined OPEB for multiemployer plans when both state and local governments participate. Some states provide a state general fund contribution to local teacher OPEB plans, and for these we have also included teacher OPEB. In most cases, OPEBs of public university systems are not included, unless a state considers these a direct state responsibility or if they are not reported separately from the states' cost-sharing, multiple-employer plan.

Some states do not perform annual actuarial valuations or OPEB actuarial valuations as often as they perform pension system valuations. We have used the most recent OPEB valuations available; in most cases, these will be for 2017 and 2016, but for a few we have used 2015. In this survey, with some exceptions, we have used the same state OPEB plans that we included in our 2016 survey, validating comparisons we made with the OPEB amounts in that report.

Survey findings include updated GASB accounting standards
According to our survey, 31 states include the majority of their retiree health care liability within plans that report under GASB 74 for postemployment benefit plans with irrevocable trusts (other than pension plans). This statement became effective for the 2017 fiscal year for most plans. States that continue to report under GASB Statement No. 43/45 likely do not have an asset profile that requires them to report under GASB 74.

GASB 75 related to accounting and financial reporting for postemployment benefits, for which employers will begin to report, takes effect for fiscal years that start after June 15, 2017. We expect that our survey next year will reflect reported unfunded OPEB liabilities for most states under the revised GASB 75 standards.

In our opinion, the revised GASB 74 and GASB 75 accounting standards significantly change how OPEB liabilities are accounted and reported in state (and local) governments' financial statements, but we do not anticipate significant rating changes due to the new reporting standards.

For additional information on reporting changes please see our Credit FAQ, "New GASB Statements 74 And 75 Provide Transparency For Assessing Budgetary Stress On U.S. State & Local Government OPEBs," published March 14, 2018.

Download Table
U.S. States' OPEB Liabilities And Ratios
(Mil. $)
State GASB 74 adoption?* Net or unfunded OPEB liability Total OPEB liability Combined funded ratio all OPEB funds (%) Net or unfunded OPEB liability per capita Combined actuarial annual OPEB cost Combined actual annual pmt % annual actuarial cost paid Valuation date
Alabama Yes 10,547 12,064 12.6 2,164 905 323 35.7 9/30/2016
Alaska Yes 1,041 11,143 90.9 1,407 1,128 292 25.9 6/30/2016
Arizona Yes 1,111 3,343 66.8 158 145 34 23.3 6/30/2017
Arkansas No 2,164 2,164 0.0 720 177 63 35.6 7/1/2016
California Yes 92,414 93,002 0.6 2,337 5,852 2,457 42.0 6/30/2017
Colorado Yes 1,300 1,576 17.5 232 84 81 96.1 12/31/2017
Connecticut Yes 20,861 21,467 2.8 5,814 1,210 687 56.8 6/30/2017
Delaware Yes 8,256 8,611 4.1 8,582 543 239 44.0 7/1/2016
Florida No 19,891 20,069 0.9 948 801 248 30.9 7/1/2016
Georgia Yes 17,739 20,077 11.6 1,701 873 250 28.7 6/30/2016
Hawaii No 7,833 8,024 2.4 5,487 699 610 87.3 7/1/2015
Idaho No 44 44 0.0 26 9 5 53.2 7/1/2016
Illinois Yes 41,324 41,324 0.0 3,228 2,617 337 12.9 6/30/2016
Indiana Yes 502 660 23.9 75 36 36 98.9 6/30/2017
Iowa No 192 192 0.0 61 24 11 44.7 7/1/2016
Kansas No 0.2 0.2 0.0 0 1 6 750.6 6/30/2017
Kentucky Yes 6,195 8,760 29.3 1,391 248 349 140.9 6/30/2016
Louisiana No 4,681 4,681 0.0 999 15 4 24.2 7/1/2016
Maine Yes 1,788 2,108 15.2 1,338 110 111 100.5 6/30/2016
Maryland Yes 11,085 11,392 2.7 1,832 818 527 64.4 6/30/2016
Massachusetts Yes 19,776 20,775 4.8 2,883 1,662 546 32.9 1/1/2017
Michigan Yes 13,581 17,345 21.7 1,363 1,108 1,076 97.2 9/30/2016
Minnesota No 617 617 0.0 111 71 33 46.4 7/1/2016
Mississippi No 785 785 0.0 263 45 31 68.5 6/30/2017
Missouri Yes 2,746 2,871 4.4 449 188 97 51.5 6/30/2017
Montana No 458 458 0.0 436 47 13 26.6 1/1/2015
Nebraska N/A N/A N/A N/A N/A N/A N/A N/A N/A
Nevada Yes 1,509 1,511 0.1 503 38 38 100.0 7/1/2015
New Hampshire No 2,740 2,780 7.9 2,041 221 109 49.4 12/31/2016
New Jersey Yes 94,561 94,775 0.2 10,500 6,225 2,014 32.4 7/1/2016
New Mexico Yes 4,532 5,111 11.3 2,170 318 159 50.2 6/30/2017
New York No 87,257 87,257 0.0 4,396 4,429 1,756 39.6 4/1/2016
North Carolina Yes 32,726 34,360 4.8 3,185 2,752 1,012 36.8 12/31/2016
North Dakota Yes 91 209 56.3 121 12 13 106.8 6/30/2017
Ohio Yes 17,899 34,687 48.4 1,535 2,282 1,903 83.4 12/31/2017
Oklahoma No 5 5 0.0 1 0 0 0.0 7/1/2017
Oregon Yes 78 614 87.3 19 68 66 96.3 12/31/2016
Pennsylvania Yes 27,568 27,944 1.3 2,153 1,555 833 53.6 1/1/2017
Rhode Island No 643 770 16.5 607 53 53 100.0 6/30/2016
South Carolina Yes 13,547 14,698 7.8 2,696 810 470 58.0 6/30/2016
South Dakota N/A N/A N/A N/A N/A N/A N/A N/A N/A
Tennessee No 1,380 1,380 0.0 206 134 79 58.5 7/1/2015
Texas Yes 88,692 89,801 1.2 3,133 8,101 1,513 18.7 8/31/2017
Utah Yes 112 379 70.3 36 30 35 114.5 12/31/2016
Vermont Yes 2,394 2,390 (0.2) 3,839 117 57 48.9 6/30/2016
Virginia Yes 5,214 7,299 28.6 616 437 225 51.5 6/30/2016
Washington No 5,480 5,480 0.0 740 530 95 18.0 1/1/2017
West Virginia Yes 2,459 3,283 25.1 1,354 225 205 91.4 6/30/2016
Wisconsin No 942 942 0.0 163 79 38 48.3 1/1/2015
Wyoming Yes 726 726 0.0 1,254 61 18 29.4 7/1/2016
Total 677,487 729,952 85,274
Median 2,743 4,012 1,296
Average 14,114 15,207 1,777
ICR--Issuer credit rating. *The data is noted as "Yes" only if the majority of the state's unfunded retiree health care liability is reported under GASB Statement No. 74. **Data only available for state plans reported under GASB Statement No. 74. Oklahoma does not report implicit subsidy of its retirement plan death and disability benefits as a separate unfunded OPEB. Nebraska and South Dakota do not report its other post employment benefits (OPEB) Florida also reports its state share of liabilities, but for consistency with other states, we have included the sum of total plans.
Addendum: Alaska
In our former survey published in September 2017, Alaska's unfunded OPEB liability was $7.2 billion, or the highest in the nation on a per capita basis at $9,697. In this survey, the state's reported net OPEB liability per capita under revised GASB standards dropped dramatically to $1.0 billion or $1,407 per capita.

We believe the majority of Alaska's decline in unfunded liability stems from a significant increase to the discount rates used for Alaska's Public Employees Retirement System (PERS) and Teachers' Retirement System (TRS) in fiscal 2017. Under GASB 74, plans that project their fiduciary net position to be sufficient to make projected benefit payments are allowed to use a long-term expected rate or return on OPEB plan investments (instead of a specified index rate). In their fiscal 2017 plan CAFRS, PERS and TRS disclosed that they each made such a determination, assuming the plans follow the current funding policies. Therefore, each incorporated an 8.0% discount rate in their reporting (mirroring their defined benefit pension plans)--an increase from prior-year discount rates of 4.55% for PERS and 4.31% for TRS.

Unlike many other states, Alaska's OPEBs are constitutionally protected and the state has a track record of funding its OPEB liability on an actuarial basis. While Alaska maintains a relatively high OPEB funded ratio, due in part to this track record of pre-funding, we consider an 8.0% discount rate for pension and OPEB plans optimistic over the long-run and well above industry standard.

Addendum: GASB 74
Download Table
GASB 74 Glossary
Terminology Definition Related GASB 43 and 45 terminology
Assets
Plan fiduciary net position (PFNP) The market/fair value of the OPEB plan’s assets. Prior assumptions related to smoothing of assets are no longer included when calculating asset value. To the extent that the OPEB plan maintains a trust, this will increase asset volatility Actuarial value of assets (AVA)
Liabilities
Total OPEB liability (TOL) This is the estimated amount of future benefits that actuaries determine are due to work already completed by plan participants. Liabilities are calculated using the plan’s assumed rate of return to the extent that plan assets are expected to be available to pay for benefits; otherwise, a blended discount rate is used. Actuarial accrued liability (AAL)
Unfunded liabilities
Net OPEB liability (NOL) The excess of TOL over PFNP. A negative value indicates a Net OPEB asset. Unfunded actuarial accrued liability (UAAL)
Funded level
PFNP as a proportion of TOL PFNP as a proportion of TOL represents the plan’s GASB-funded ratio.
__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1848  
Old Today, 12:58 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

ILLINOIS

https://www.ilnews.org/news/state_po...social#new_tab

Quote:
Underfunded state government pensions liabilities increase to $133.5 billion

Spoiler:
The tab for the state's unfunded pension liabilities increased by $4.4 billion in the past year and is expected to continue growing through 2028, according to a new report from the bipartisan Commission on Government Forecasting and Accountability.

The new CoGFA report pegs Illinois’ unfunded pension liability for the state's five retirement systems at $133.5 billion, $4.4 billion more than the year before, and the average funded ratio is 40.2 percent. The American Academy of Actuaries recommends that pension systems should plan to attain 100 percent or greater funding ratios.

In 2009, the unfunded liability for Illinois’ five funds was $77.8 billion, or 38.5 percent funded, according to CoGFA. In 2007, before the Great Recession, the unfunded liability was $42.2 billion, or 62.6 percent funded.


“The aggregate unfunded liability has been growing significantly over the past decade. One of the main drivers continues to be actuarially insufficient state contributions determined by the current pension funding policy,” the CoGFA Special Pension Report said. “Other reasons for an increase in unfunded liability would be the results of poor investment performance.”

“It’s more of the same,” said Bill Bergman, research director for Truth In Accounting, a public financing watchdog. “The trend is not your friend, especially since 2009."

The Dow Jones Industrial Average in January 2009 was around 8,000. After peaking at 26,800 in October, the Dow closed Monday at 24,423.

“Effectively, the unfunded liability has been rising significantly for the state pension plans despite the fact that we’ve had a huge rally in the stock market, at least up until recent weeks and that’s the warning sign,” Bergman said.

He said market downturn could make things worse, especially with the state’s pension funds invested in what Bergman characterized as risky investments like special equities.

“We’ve learned in recent weeks that stocks can go down as well as up, and you and I as taxpayers, even if we don’t own stocks, are in the market and on the down side because these [state employee pension] benefits are guaranteed,” Bergman said.

The Illinois Supreme Court shot down a 2011 pension reform measure that would have lowered the state's pension liability by changing future benefits calculations. The court said that violated the state Constitution's diminishment clause.


While some have argued for changing the constitution to allow for pension reforms, Democrats at the statehouse have resisted the idea.

Bergman said there’s a difference of opinion on whether the growing unfunded liability is the result of the state failing to contribute enough money or if the pension benefits are simply too expensive.

“But it’s a combination of both of those things and the reckoning day is coming,” Bergman said.

State Sen. Tom Cullerton, D-Villa Park, blamed previous policymakers for kicking the can down the road with pension holidays.

“In ‘94 they needed a solution, they thought they had a solution,” Cullerton said. “But they were underfunding in the beginning.”

He compared the pension payment ramp implemented years ago to adjustable rate mortgages with balloon payments in later years that often led to foreclosures during the Great Recession.

Gov.-elect J.B. Pritzker said Monday that he plans to introduce a “balanced budget” in February with pensions in mind.


“What’s most important to me is the principle that people who've been promised a pension should get the pension they’ve been promised,” Pritzker said. “That’s the principle we’re going to go by. But there’s no doubt that we’ve got to address the challenge in the budget of the increasing share of the budgeting going into pensions.”

Pritzker supports putting more tax dollars into pensions in earlier years of a pension ramp to lessen how much needs to go toward the funds in later years. One idea is to sell bonds to make those payments in earlier years. Pritzker said everything is on the table.

The CoGFA report projects in fiscal year 2020 the state will pay $9.2 billion into the pension systems – about $700 million more than this year. Total employee contribution will be $1.5 billion. Despite the increased contribution, the unfunded liabilities are projected to increase up to $139.2 billion.

CoGFA projects the unfunded liability to continue to increase to nearly $146 billion by 2028 when the total state contribution will be $11.5 billion while the total state employee contribution will be $1.8 billion.

The pension ramp to get to 90 percent funded, or a projected unfunded liability of $33 billion, by 2045 has taxpayers putting in $19.1 billion annually and total employee contribution at $2.8 billion.

“It’s definitely staggering, it’s something we’ll have to look at,” Cullerton said.

The General Assembly Retirement System for retired lawmakers has the worst funding ratio at 15 percent funded. CoGFA projects taxpayers next year will pay in $25.8 million to GARS while participating lawmakers will put in $1.2 million. Cullerton doesn’t participate and has advocated for GARS to be scrapped.


Asked if employees should put in more, Pritzker said his incoming administration will soon be negotiating with the unions. The state's largest public-sector union, AFSCME Council 31, endorsed Pritzker.

“We’re looking at all the options here because there’s no doubt, we cannot move forward for a long time in this state until we get our arms around how we’re going to manage this increasing amount that’s going into pensions,” Pritzker said.


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


Quote:
Editorial: Goodbye to Illinois’ $130 billion pension hole. Now it’s $133 billion. And getting deeper.

Spoiler:
Sometimes the clearest warning about Illinois’ fiscal crisis can be communicated using numbers, sometimes with a well-chosen phrase. Here we present both, as reminders during the period before a new Democratic governor takes office with a Democratic mega-majority, that the state’s messes will only worsen. Until lawmakers take decisive action.

First, the awful numbers: For several years we’ve cited the figure of $130 billion to represent Illinois’ estimated unfunded pension liability. Never mind that number, it was $133 billion as of June 2018 — and it’s getting worse — according to a new state report. The Commission on Government Forecasting and Accountability estimates the shortfall in commitments to future retirees will deepen to nearly $137 billion in the current July-to-June year, and to $139 billion in fiscal 2020.

ADVERTISING

inRead invented by Teads
Now a choice word or several: Fitch Ratings in a new report says Illinois has exhibited a “lack of coherent fiscal policymaking over many years” and is guilty of “irresolute fiscal decision-making.” Over the years, lawmakers skimped on payments into the retirement kitty, or avoided making payments altogether, rather than being disciplined about putting enough money into the funds to pay for all the benefits they had promised.

Today, Fitch says, Illinois’ net pension liability plus other long-term debt represent 29 percent of the state’s personal income, the highest of any state (our emphasis) and well above the 50-state median of 6 percent. Oh yes, the annual operating budget — an astonishing one-fourth of which goes to pensions — is also a wreck: Fitch reminds us that about $2 billion of the $38 billion budget revenue is either unlikely to be realized or one-time in nature. Irresolute, indeed.

EDITORIAL: Even pension loopholes are protected? Then amend the Illinois Constitution.

The costs of lawmakers’ recklessness are borne in many ways. Springfield raised the state income tax by 32 percent in 2017, and still Illinois can’t keep a balanced budget. The current fiscal year is about $1.2 billion out of whack. And despite issuing bonds to pay some unpaid bills, there’s still a backlog of about $7 billion in, yes, unpaid bills. The state is making payments to the pension system, although not as much as actuaries say is necessary, so the shortfall rises. The pension system, which includes government workers and many of the state’s teachers, should be 90 percent funded. Instead, it’s about 40 percent funded.

Illinois, under such intense financial pressure, has the worst credit rating of all states, which makes borrowing more expensive. Employers and residents who aren’t tethered to Illinois have reason to consider going elsewhere before the reckoning comes, in terms of either much higher taxes to pay off all these debts or serious declines in government services. Or both. We imagine that’s one reason Illinois’ population is declining, and why major employers like Amazon choose to locate elsewhere.

Next month, Gov.-elect J.B. Pritzker will take office alongside the Democratic-controlled General Assembly. Once he’s on the job, we’ll be eager to hear his plans for maneuvering Illinois through the thicket. We’ve heard him talk about raising revenue by shifting the state to a progressive tax rate that can extract more money from higher-income earners. That idea strikes us as no panacea. It’s easy to demand more money from taxpayers. It’s also easy to continue borrowing money. Both would weaken the state, and then weaken it further by driving employers elsewhere.

The solution requires a combination of raising revenues (preferably by increasing the number of private-sector workers), cutting expenses, and introducing regulatory reforms to encourage business owners to invest and hire in Illinois.

If budgets are balanced, tax levies are fair, and employers can anticipate the costs of doing business as well as the benefits, Illinois will prosper. Otherwise, the liabilities will keep rising: $133 billion, $139 billion ... And the standard of living in Illinois will decline.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1849  
Old Today, 01:04 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

IOWA


Quote:
Despite Good Returns, Iowa Public Pension’s Unfunded Liability Likely to Grow Slightly
Lack of contributions are the problem for IPERS, critic says.


Spoiler:
Although solid investment returns have stabilized Iowa’s top public pension fund, the unfunded liabilities are little affected.

A report from the Des Moines Register predicts that the $32.3 billion Iowa Public Employees Retirement System’s $6.8 billion deficit will grow in dollar terms to $7 billion by 2023 before beginning a gradual shrinkage until 2046, when the debt is fully eliminated.

The retirement system returned 7.97% in fiscal 2018, nearly one percentage point above its 7% benchmark, and although its 82.4% funded status is solid, it only grew by one point over the 12-month period. The funding liability only shrank by about two points in the same time.

State Treasurer Michael Fitzgerald, who chairs the IPERS Investment Board, said Iowans “should feel very comfortable with the position that IPERS is in.”

However, Gretchen Tegeler, president of the Taxpayers Association of Central Iowa and a former director of the state’s Department of Management, said the “striking” factor in the report was the lack of progress on the unfunded liability, attributing the minimal change to a lack of contributions.

“This is because the extra payments being made to offset the unfunded obligation are not large enough to prevent the obligation from growing by an even greater amount,” she told the Register, adding that Iowans should hope there’s no downturn in the next five years.

“The system remains vulnerable to another downturn, and anyone who is relying on IPERS should have an interest in exploring alternatives for reducing risk,” Tegeler said.
__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #1850  
Old Today, 01:37 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 85,021
Blog Entries: 6
Default

FIDUCIARY DUTY
ESG

https://www.wsj.com/articles/investi...law-1544396424


Quote:


‘Investing for Good’ Meets the Law
A fiduciary can’t escape the obligation to invest for the client’s best returns.
Spoiler:
Trustees of pensions, university endowments and trust funds are facing renewed pressure to do social good while investing other people's money. It isn't only student activists but the United Nations and even BlackRock CEO Larry Fink who argue that environmental, social and governance investing, or ESG, will do good for the world while improving returns for beneficiaries. Thousands of investment managers have pledged to abide by a U.N.-sponsored statement of ESG principles.

Yet the zealous push for fiduciaries to embrace ESG faces barriers under longstanding American law -- with good reason. In general, the law says little about what people may do with their own money. But it has much to say about what trustees and other investment fiduciaries do with their beneficiaries' money.

By law, a trustee must abide by fiduciary duties of loyalty and prudence, and therefore act for the "exclusive" benefit of the beneficiaries, considering "solely" their interests, without regard for collateral benefits, such as advancing social or environmental causes. A trustee must also invest with risk-and-return objectives reasonably suited to the beneficiaries, adjusting the portfolio as circumstances change. If an investment strategy stops working or a better strategy becomes available, a trustee must change accordingly.

Before the 1990s, proponents of socially responsible investment largely appealed to investors' ethical, moral and social responsibilities to others. But considering collateral benefits to third parties violates the "sole interest" rule under U.S. trust fiduciary law. The fiduciary duty of loyalty rules out this form of socially responsible investing.

Accordingly, proponents of social investing rebranded it around the turn of the century. First, they recast the movement as "ESG" by adding the "G," corporate governance, which had long been considered by profit-seeking active investors. Second, the U.N.-sponsored Principles of Responsible Investing, or PRI, joined proponents in claiming that ESG investing could improve risk-adjusted returns, pointing to a raft of empirical studies.

Instead of avoiding the fossil-fuel industry for environmental benefits, for example, ESG proponents argued that reduced exposure to fossil fuels would improve returns because the market underestimates the litigation and regulatory risks associated with such investments. ESG investing for risk-and-return benefits instead of collateral benefits turned social investing into an active, profit-seeking investment strategy. Thus the PRI declared in 2015 that fiduciaries are under "positive duties . . . to integrate ESG issues."

The PRI's position that a fiduciary must use ESG factors is flawed as a matter of both law and finance. To begin, ESG factors are highly subjective. ESG ratings services disagree, for example, about whether Tesla or Exxon is a better bet. Moreover, fiduciary law doesn't mandate any particular investment strategy. A fiduciary can choose any plausible strategy, active or passive, as long as the fiduciary is motivated solely by a reasonable belief that the strategy will improve risk-adjusted returns.

The same logic that motivates a risk-return ESG strategy could support an anti-ESG investment strategy. If a fiduciary reasonably concludes that ESG factors have become overvalued, perhaps because of the zealous advocacy of PRI and BlackRock, the fiduciary could make the opposite bet, preferring fossil fuels, tobacco and other such "sin stocks." To mandate a fiduciary investment strategy on the theory that companies with high ESG scores will be perpetually undervalued runs contrary to everything we know about capital markets.

There is some empirical support for risk-return ESG investing. But advocates have oversold the evidence. Even if an ESG factor has a relationship to an investment's performance, it doesn't follow that the market has mispriced that relationship. The evidence on the profitability of ESG investing is mixed and contextual, and will likely change, especially as markets adjust to the growing use of ESG factors. Risk-return ESG investing can be consistent with fiduciary duty, but it is not automatically so, and contrary to the PRI, it is certainly not mandatory.

Everyone wants to have his cake and eat it, too. But for a trustee, facts and motives matter. For a pension fiduciary, the Supreme Court says this means focusing exclusively on "financial benefits." A fiduciary needs to have a reasonable factual basis for believing that an investment strategy satisfies that requirement. And the fiduciary may not use other people's money to pursue collateral benefits to third parties, no matter how well-intentioned.

---

Mr. Schanzenbach is a professor at Northwestern Pritzker School of Law. Mr. Sitkoff is a professor at Harvard Law School.
__________________
It's STUMP

LinkedIn Profile
Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off


All times are GMT -4. The time now is 08:14 PM.


Powered by vBulletin®
Copyright ©2000 - 2018, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.22883 seconds with 10 queries