Federation of Connecticut Taxpayer Organizations

With Christmas just around the corner, here's a column that will surely win me the Pension Grinch of the Year award for 2011. Don't blame me, however, because I'm just the scribe here. This column merely highlights the worrisome implications of a new research report by the prolific scholars at Boston College's Center for Retirement Research, headed by the insightful professor Alicia Munnell.

Munnell's Boston College (BC) team has studied the implications of proposed governmental accounting standards on the reported financial condition and funding status of 126 public pension plans. On the face of it, you'd think this stuff would be about as exciting as a typical actuarial report's demographic assumptions or the accounting-basis footnotes to a municipal financial statement. But it contains an appendix that I predict will have tongues wagging in more than a dozen state capitols. That's because of an innocuous and easily overlooked column called the Run-Out Date. That is the calendar year when the pension trust fund would be projected to literally run out of money under the proposed governmental accounting standards methodology for evaluating the funding condition of public pension plans. GASB kibitzers call it the "depletion date."

Now do I have your attention? Running out of money -- completely -- is a pretty big deal where I come from. That's the pension equivalent of the collapse of a Ponzi scheme. This is far worse than Social Security which can at least pay 75 cents on the dollar to the next generation under its current design.

The BC research study was mostly focused on the implications of the Governmental Accounting Standards Board's (GASB) proposed standards for financial reporting, and especially on the funded ratios (assets/liabilities) of these plans. Their narrative makes it clear they don't really like GASB's proposed method on philosophical grounds. The BC academic researchers apparently don't like the blended discount rate concept, or at least its current form. That said, the BC report's primary focus was the ratio of assets to liabilities -- using what GASB has proposed for a lower discount rate to be used in valuing the underfunded plans' actuarial funding status.

But what caught my eye was the unprecedented column of data showing when the plans are each projected (by the BC researchers, using their methodology and not anything sanctioned specifically by GASB or the pension plans) to run out of money if something doesn't promptly change for the better. Now, that's the kind of information that a whole lot of taxpayer watchdog groups, wary municipal bond investors, bond ratings agencies, bond counsel, the Securities and Exchange Commission, the plaintiffs' bar and a host of pension plan critics would find insightful information.

Don't mistake my reporting for an endorsement. I'm not sure that the BC researchers' methodologies and calculations are entirely correct at this point. Some of my actuarial friends tell me that the depletion test is very hard to flunk if the pension funding policy is properly designed. I don't have the BC researchers' database -- and the formulas described in their footnotes outflank my freshman college math and grad-school statistics, quant methods and econometrics training. But I do know what GASB meant when it published the term "depletion" in its exposure draft for the proposed accounting rules -- and I do know what the words "run out" mean. We're now focusing on the projected (not just potential or possible) exhaustion of plan assets to pay promised benefits.

Before highlighting the bad news, it is important to note that a good number -- at least one-third of the public plans in this study -- will clearly not run out of money under the BC researchers' model and show strong financial capacity beyond the year 2100. So it's very, very important to avoid over-generalization here. To my mind, the level of variation in results is really quite remarkable.

It would be simple to just refer my readers to the report and call it a day. That would be a cop-out, however. Too many readers will quickly become lost in the statistics and miss the point. So I think this column will be more likely to encourage a healthy debate about the need for timely and effective remedies if we list here the major public pension plans cited in this study as having the potential to run out of assets to pay their bills within 25 years. That's about one-fifth of the total group reported. If I were a 45-year-old public employee in one of these plans, an investor in that state's bonds or a taxpayer likely to be handed the bill for these deficits, I would want to know now whether this depletion risk is accurately portrayed by this study. And I would sure want to know what the public officials responsible for funding and running these plans are doing to fix them before "D-day" arrives. Absent a defect in the BC researcher's methods, the burden of proof now empirically resides with the elected officials and these plans' officials to show that they have a strategy in place (or at least underway) to put their house in order. These plans are:

California Teachers; Chicago Teachers; Illinois Teachers; Illinois SERS; Indiana Teachers; Kentucky County; Kentucky ERS; Kentucky Teachers; Louisiana Teachers; Minnesota Teachers; Mississippi PERS; Missouri Local; Montana PERS; Montana Teachers; New Jersey PERS; New Jersey Police and Fire; New Jersey Teachers; New Mexico PERF; New Mexico Teachers; New York City Employees; New York City Teachers; North Carolina Teachers and State Employees; Pennsylvania SERS; Pennsylvania School Employees; South Carolina Police; Texas LECOS; Washington PERS I; Washington Teachers I; Wyoming Public Employees

Without causing a panic, it's clear that the time has come for stakeholders, trustees and plan sponsors in these systems to ask penetrating questions and get to work on solutions -- pronto. That includes the unions whose members must contribute to the solutions and stop playing the "not me" entitlement game. This report should be a giant red flag in those states: This abyss is the result of a decade or more of benign neglect by all parties at the table. Now, I have no doubt that if capital markets resume their historical returns, a dozen or more of the plans listed above can eventually work themselves out of their problems with carefully structured incremental strategies and shared sacrifices to defeat their unfunded liabilities. But until they make public their definitive plans and secure the necessary stabilizing legislation, employer and employee contribution commitments, and benefits adjustments where inevitably required, that's "all talk and no cattle" as we say out West.

And please don't get me started about retiree medical benefits plan (aka OPEB) funding levels. Most OPEB plans have no reserves put aside whatsoever, and no funding plans. I would estimate that about three-quarters of those with above-average benefits would clearly flunk the GASB's proposed depletion tests and any sensible financial analyst's sustainability analysis -- and will take even less time to flunk these tests than the pension funds. If this report is not a wake-up call for retirement plan reform, then I don't know what it will take.

http://www.governing.com/columns/public-money/pension-plans-run-out-money.html

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How Wall Street Bought the Public Employee Unions (CIV FI)

Earlier this week, on December 7th, 2011, as reported by the San Jose Mercury, the �San Jose City Council votes 6-5 to place pension reform on June ballot.�

This plan is drawing fierce resistance, but there are two financial considerations that most critics of pension reform don�t take sufficiently into account when making their arguments:

(1) Pension contributions are very sensitive to how much the fund can earn. A pension that earns 3% per year, i.e., allows someone who works for 30 years to retire with a pension equivalent to 90% of their final salary, will require a 10% increase in annual required contributions (as a percent of pay) for every 1.0% the earnings on the pension fund drop. That is, if the contribution to a firefighter�s pension is currently 35% per year (based on employer and employee contributions combined), and CalPERS lowers their expected rate of annual return by just 1.0%, from 7.75% to 6.75%, then the required annual contribution as a percent of salary goes up to 45% per year.

(2) The rate of return being currently maintained by most pension funds, 7.75% per year, is much higher than can be sustained going forward. A key reason for this is because equity growth over the past 20-30 years, and especially over the last 10-15 years, was fueled by increasing debt. By enabling massive borrowing � consumer, commercial and government � more consumer spending was in-turn enabled, which increased corporate profits which increased equity values. Now global debt has reached its maximum, we are going to deal with slower growth and hence lower rates of return for pension funds. The other key reason for the inevitability of lower pension fund returns is demographic. With baby-boomers now beginning to retire, and with public sector workers now retiring with these far more generous pension plans (they were only raised about 10 years ago), there are more people selling equities than ever before in order to finance retirements. Equity values are a function of supply and demand, and public sector pensions are going to be doing a lot more selling to finance pension payouts than ever before. The chances that the major pension funds in the United States can continue to earn 7.75% year after year are virtually zero.

Pension reforms such as San Jose Mayor Chuck Reed�s proposal should be supported.

The San Jose proposal may actually do enough to restore financial solvency to a public employee pension plan. Eventually raising the employee�s withholding to as much as 25% of their pay begins to contribute enough money to fund these plans, especially when combined with accruing benefits at no more than 2.0% per year, and deferring retirement to age 57 or higher.

Here are a few questions and answers about public sector pensions:

QUESTION: Aren�t pension critics, or �reformers,� if you will, trying to ignore the contractual commitments they made as taxpayers, simply because they become more costly than originally expected?

ANSWER: Nobody �agreed� to these contracts as they have turned out. When pension upgrades were sold to politicians by Wall Street lobbyists they were represented as being nearly free to taxpayers because market based returns would cover the costs. Politicians didn�t understand the financial risks and voters were never told about it. To be fair, even the union leadership had no idea what they were getting themselves into.

Let�s put it this way � if somebody sold you a car, and said the payments would be $250 per month, then five years later said the payments would be raised to $1,000 per month, then five years after that said the payments would be raised to $2,500 per month, would anyone �like� that? And how would the holder of the loan appear � when they say �a deal is a deal� and try to force you to pay up?

In any event, opponents of pension reform should review the two financial points made earlier, because bankruptcy will void these contracts, and bankruptcy is staring every city and county in California in the face.

QUESTION: Everyone agrees that some kind of public pension reform is unavoidable, and that is exactly what is underway now. But can people who want to change public sector pension benefits legitimately claim that Chapter 9 is a magic bullet that will suddenly relieve everyone of the legal obligations that have been made on their behalf by their elected representatives?

Now that the bill for pension obligations is coming due, wouldn�t reneging on these obligations constitute theft?

ANSWER: �Theft� is how public sector unions have stolen our democracy and �negotiated� these unsustainable pensions with politicians they elected. Public sector pensions, on average, are five to ten times better than social security. The arcane and onerous details of pension obligations were buried in the fine print of these �contracts.� To imply that taxpayers are somehow the thieves for wanting to reduce pension costs down to the levels they were originally ignores the sheer scale and generousity of these financially unsustainable pensions. The 2010 annual reports from CalPERS and CalSTRS document that the average pension for a newly retired government worker in California after 30 years of work is nearly $70,000 per year. If every Californian over the age of 55 received that much in retirement it would cost $700 billion per year, nearly 40% of the entire GDP of the state! It�s impossible. It can�t go on. It is oppression and a recipe for economic ruin.

The bottom line is this � public sector unions and Wall Street are now in bed together, betting trillions of dollars in the markets with their pension funds, trying to eke over-market returns through aggressive fund management, with the taxpayers forced to pay up when they can�t hit their numbers.

From the CalSTRS Annual Report, page 135:

CalSTRS participants who retired during the 12 months ending June 30th, 2010 (the most recent data), earned pensions as follows:
25-30 years service, average pension $50,772 per year.
30-35 years service, average pension $67,980 per year.
35-40 years service, average pension $86,736 per year.

From the CalPERS Annual Report, page 151:

CalPERS participants who retired during the 12 months ending December 31st, 2009 (the most recent data), earned pensions as follows:
25-30 years service, average pension $53,182 per year.
30+ years service, average pension $66,828 per year.

QUESTION: Isn�t it true that the longer someone works in any pension system, the higher their eventual benefit is likely to be? Doesn�t it work that way with Social Security, up to the cap?

ANSWER: The social security cap is about $31K per year after 40+ years of full time work, which equates to well less than 20% of the payee�s annual income. There is no cap on public sector pension payments, which are averaging nearly $70K per year, and they are averaging over 66% of the payee�s annual income, after only 30+ years of work.

Nearly everyone in America was purchasing more than they could afford during the internet/housing bubbles, but lobbyists hired by public sector unions, alongside lobbyists hired by Wall Street, are trying to make our politicians enshrine the pension liabilities � sold by Wall Street lobbyists to union-backed politicians � permanently into our tax code. And together, Wall Street and public sector unions have made public sector agencies collection agents for Wall Street. Wall Street hedge funds now bypass brokerages to manipulate market liquidity and asset values, and public sector pension funds are the biggest players on Wall Street. This is a corrupt system and cannot be fixed until taxpayer backed pension funds that can extract by �contract� 7.75% returns � either from investment returns or from taxpayers � are dissolved. And why shouldn�t public sector pension funds be the biggest players on Wall Street? Not only do they control about $4.0 trillion in assets, but they have the full backing of the public sector unions, the politicians they control throughout America�s states, cities and counties, and the taxpayers as the final guarantors.

Public sector pension funds and the social security fund should be all merged into a single fund, and the combined assets should be systematically moved into either cash or treasury bills, eliminating the speculators, eliminating most of the expensive financial bureaucrats of all stripes, and getting the government and Wall Street out of the business of fleecing taxpayers. And one, uniform and financially sustainable retirement incentive formula would be offered to ALL retired American workers, public or private.

For much more on the benefits and the feasibility of merging all public employee pension funds with social security, read �Merge Social Security and Public Pension Funds.�

http://civfi.com/2011/12/10/how-wall-street-bought-the-public-employee-unions/

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Public Employees' Retirement Ages Are Coming Under Greater Scrutiny (Don Thompson and Julie Carr Smyth / ABC News)

By DON THOMPSON and JULIE CARR SMYTH Associated Press

COLUMBUS, Ohio December 10, 2011 (AP)

After nearly 40 years in public education, Patrick Godwin spends his retirement days running a horse farm east of Sacramento, Calif., with his daughter.

His departure from the workaday world is likely to be long and relatively free of financial concerns, after he retired last July at age 59 with a pension paying $174,308 a year for the rest of his life.

Such guaranteed pensions for relatively youthful government retirees � paid in similar fashion to millions nationwide � are contributing to nationwide friction with the public sector workers. They have access to attractive defined-benefit pensions and retiree health care coverage that most private sector workers no longer do.

Experts say eligible retirement ages have fallen over the past two decades for many reasons, including contract agreements between states and government labor unions that lowered retirement ages in lieu of raising pay.

With Americans increasingly likely to live well into their 80s, critics question whether paying lifetime pensions to retirees from age 55 or 60 is financially sustainable. An Associated Press survey earlier this year found the 50 states have a combined $690 billion in unfunded pension liabilities and $418 billion in retiree health care obligations.

Three-quarters of U.S. public retirement systems in 2008 offered some kind of early-retirement option paying partial benefits, according to a 2009 Wisconsin Legislative Council study. Most commonly, the minimum age for those programs was 55, but 15 percent allowed government workers to retire even earlier, the review found. The study is widely regarded as the most comprehensive assessment of the issue.

Police and firefighters often can retire starting even younger � at around age 50 � because of the physically demanding nature of some of those jobs.

Yet with cities, counties and states struggling to pay pension bills, changes are afoot.

In November, San Francisco voters supported a local ballot initiative to hike minimum retirement ages for some city workers. Since that time, laws increasing retirement ages for government workers were signed in Rhode Island and Massachusetts in efforts to address underfunded pension systems.

Earlier in New Jersey, part of a legislative deal struck between Democrats and Republicans raised the normal retirement age from 62 to 65.

An initiative circulating for California's 2012 state ballot seeks to increase the minimum retirement age to 65 for public employees and teachers, and to 58 for sworn public safety officers.

Godwin said all the antagonism toward public retirees is misplaced. His pension payout follows 36 years as an English teacher and school administrator in California, with two years' sick-leave credit added for never being absent.

He said lack of accountability on Wall Street and exorbitant corporate salaries are a more justified target of the public's anger.

"Those things I think are a much larger problem than what a public employee is making as a pension," he said. The AFL-CIO labor coalition's Executive PayWatch project estimates chief executives went from making 42 times the average blue collar worker's salary in 1980 to 343 times as much last year.

http://abcnews.go.com/US/wireStory/public-retirement-ages-greater-scrutiny-15128540#.TuYVeUoxopQ