Public plans in trouble

[campbell]

I'm opening this thread so we can document various public pension plans that hit the rocky shoals. Via Instapundit, I saw this story on Cobb County, Georgia's underfunded pension (shout out to my old town Marietta!)

With about $349 million in assets and about $578 million in obligations, the plan is under-funded by about 40 percent, one of the worst ratios in the metro area. To meet acceptable standards, it must cut that rate to 20 percent, bringing assets up to about $464 million.
....
A nearly 4 percent loss on investments in the first seven months of the year and poor performance for three years at the start of the decade, more retirees leaving at an earlier age than anticipated, higher salaries that lead to bigger retirement packages and a longer lifespan for retirees are among factors forcing the changes, said Virgil Moon, the county’s director of support services and pension board chairman.

The industry standard for public employee pensions is a funding rate of 80 percent. Moon said the changes will put Cobb on a track to reach that in 20 years. Accounting standards for governments allow 30 years, he said.

And here's the Instapundit post. I found this reader email interesting:

I teach Public Budgeting (aimed mostly at sub-state level budgeting) and have for the past 9 years in a Masters of Public Administration. You wouldn't believe (well, maybe you specifically would) how many current or would-be local government employees have no idea how much money from the current budget it takes to fund future retirement benefits. It's going to eat entire local budgets alive. I've been preaching this for the past nine years. Even a couple of my colleagues who should know better don't usually address the problem much.

[campbell]

Editorial in WSJ today: San Diego Retirement

Unfunded public employee pensions are a crisis waiting to erupt across the country, so a political brawl in San Diego is worth watching. In a welcome change, a public official is looking out for taxpayers rather than for unionized public workers.

....
The same goes for elsewhere around the country, where politicians have also padded pensions to buy union support, knowing that the bills will come due long after they've left office. In New York state, Albany has been granting expensive retirement benefits for years on the basis of cost estimates prepared by a actuary being paid by the same unions who stand to benefit from the increases. And in New Jersey, state lawmakers shortchanged the public pension funds in the 1990s by rewriting the accounting rules to make it look like they were fully funded.

Ah yes, this sounds familiar.

[campbell]

Another:
http://www.lvrj.com/opinion/28044624.html

Nevada:

Public employee pensions too costly for taxpayers to continue
The state's political establishment should spend less time grumbling about the persistent rain soaking Nevada's economy and more time preparing for the Category 5 hurricane that could wipe it out altogether.

The Las Vegas Chamber of Commerce today released its third analysis on the lavish pay and benefits given to Nevada's government workers at the expense of the taxpaying masses. After previously finding that Nevada public employees are paid an average of 29 percent more than their private-sector counterparts, and that Nevada's local government workers have the eighth-highest public-sector salaries in the country, the chamber put its magnifying glass to the $6.3 billion hole in the state's public employee pension fund.

Even if actuaries were on the up-and-up in all the public pension stuff, and it's the politicians/union bosses (the decisionmakers) truly at fault, you know the profession is going to come in for a beating here.

[Fuzzy]

Mary, I assume you've read at least some of these http://www.actuary.org/events/2008/forum_statements.asp
How can they really say with a straight face that "governments don't go out of business" (so they should be exempt from reporting MVL)? Or that reporting MVL automatically means not investing in equities?

Seems to me that if their actuaries put them up to to those statements, or participating in drafting them, that "the profession" may well deserve the beating that might come.

[campbell]

Well, I posted all these article links before reading those statements. (Quite a few to get through.)

Part of posting these various articles is to dispute that "governments don't go out of business" argument amongst other arguments. There are various degrees of things that undermine that statement - I've seen towns unincorporate before (though usually small), but the failure of a public pension would come far before that. There's no such thing as infinite taxing power. Even if they could tax 100%, there would be a limit on the amount of money that would bring in. But of course, well before that mark, people would just move away. I saw the idiotic "exit tax" idea in California (I would think that's unconstitutional but IANAL), but really towns and states can't keep people from leaving.

I am not a pension actuary. I do not know all the details in doing pension work. I do know theory, but I understand some people disagree with theory. These theory arguments can be futile, when we're dealing with what-ifs that some people dispute could even come into being.

I want to (for now) stick to compiling what is actually happening in real life. What are the actual consequences of the funding decisions made (whether or not actuaries are involved in that), in the valuation of the liabilities (and if certain items are treated as if they were costless)...really nitty-gritty stuff of what the current state of practice has gotten us.

[campbell]

Pennsylvania treasurer calls for municipal pension plan reform (most of the comments sound more like dealing with administration "Most of the state's 3,100 municipal pension plans serve fewer than 10 employees." and wanting to consolidate plans, not funding issues.)

More California:

Pension spiking (e.g., retroactive increases in pension benefits or pre-retirement promotions that qualify workers for bigger pension benefits), has been a major trend in California since our dot-com boom. It has saddled state and local governments with serious fiscal problems ever since (e.g., Orange County has a $2.7 billion pension deficit, and a 2005 review of California's biggest government agencies found pension, health care and workers' comp commitments more than $100 billion under-funded), even leading to bankruptcy by the city of Vallejo.

....
The second rationale is that increased health care and pension commitments, despite costing millions, are essentially "free." All it takes is assuming an implausibly large return to pension fund investments, and by the time the rosy scenario proves false, taxpayers are responsible for any shortfalls.

Ah, yes, costless benefits. I wonder if there's a pony in that pile....

[Chilango]

Roger Lowenstein recenty published a great book on this topic:
While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis http://www.amazon.com/gp/product/1594201676/

[campbell]

That book is reviewed in the current issue of Contingencies.

[Take 2]

Now this news:

Treasury, IRS: Pension Plan Liability Buyouts Illegal
Pension plan liability buyouts are illegal under existing U.S. law, according to the Department of Treasury and the IRS.

“A transfer of a tax-qualified pension plan from an employer to an unrelated taxpayer when the transfer is not connected with a transfer of significant business assets, operations, or employees, is not permissible under current law,” the Treasury Department said Wednesday, August 6, in a news release announcing the IRS revenue ruling.

http://www.workforce.com/section/00/...e/25/69/71.php

I wonder if this extends to public employee pension plans.

Mary Pat - TTIA, thanks for putting all these posts together in one place.