STUMP » Articles » Around the Pension-o-Sphere: State-Run Private Pensions, Vermonters as Insurers, and More » 1 June 2018, 17:10

Where Stu & MP spout off about everything.

Around the Pension-o-Sphere: State-Run Private Pensions, Vermonters as Insurers, and More  


1 June 2018, 17:10

Let’s hit it!


LA Times: California created a savings program for workers without retirement benefits. A group is suing to kill it

A California anti-tax group is suing California Treasurer John Chiang as it tries to put the kibosh on a program that would provide retirement savings accounts to millions of California workers whose employers don’t offer a pension or 401(k).

In a lawsuit filed Thursday in federal court in Sacramento, the Howard Jarvis Taxpayers Assn. — which championed the landmark property tax law Proposition 13 and continues to fight tax measures — argues that the retirement savings program is illegal under federal law and should be stopped before workers start signing up for accounts next year.

This shouldn’t surprise at all.

I wrote about this back in March 2017: Friday Trumpery: No Exemptions for State-Run “Private” Pensions [UPDATED]

If you’re a Californian with your taxes going up due to the need to cover higher Calpers/Calstrs contributions, you’re not going to be that happy with a certain percentage also being taken out of your paycheck for a mandatory forced retirement savings, being managed by the same state that got the public pensions in a mess.
[GAO Report]“State and national stakeholders reported potential challenges with uncertainty created by the Employee Retirement Income Security Act of 1974 (ERISA) and agency regulations that could delay or deter state efforts to expand coverage. Generally, ERISA preempts, or invalidates, any state law relating to “employee benefit plans” for private sector workers, but different areas of uncertainty arise based on the details of each state effort. For example, four of the six states GAO reviewed intend to create payroll deduction individual retirement account (IRA) programs that would not be considered employee benefit plans. However, due to uncertainty created by ERISA, it is unclear whether a state can offer such programs or whether some of the program features would lead a court to find that they are, or relate to, employee benefit plans. Stakeholders also noted uncertainty caused by regulations from the Departments of Labor (DOL) and the Treasury meant to assist workers and employers. For example, DOL’s regulation on payroll deduction IRAs was written before these state efforts were proposed and omits detail that, if included, could help reduce uncertainty. Given these uncertainties, states may face litigation and stakeholders noted that state programs could lose tax preferences if they were ruled preempted by ERISA.

I go on to mention that the Obama administration waited around til August 2016 to put something out there… but you know that whole “pen and phone” thing. And Trump has the pen, phone, and Twitter account now.

I had a couple earlier posts on this idea as well.

But here is my general opinion:

I think these state-run plans are a bad idea, mainly because the money will be a political football. I have little trust that these DC plans would have been well run at all. And all the divestment crap and other asset shenanigans would come into play, as well as rewarding cronies by giving them a piece of the pie for managing the funds.

And it doesn’t help that the states with some of the shittiest public pension practices are the ones that are putting these plans out there.

Here’s how that post ended:


After I posted this, I was sent the following piece:

Retirement savings for all? California vows to proceed despite new D.C. obstacle

I guess California doesn’t care if it gets sued over this.

After all, they’ve not run out of Other People’s Money yet.

Well, they can’t say they weren’t warned.

Additional coverage:


This is from Vermont, but it applies broadly.

Did you know that you are an insurance company?

If you pay income or real estate taxes in Vermont, you are like an insurance company. You are insuring, with your taxes, the retirement pension and health care benefit promises made to state employees and public school teachers.

Here are the risks you are insuring: investment risk, longevity risk and economic growth risks.

Like all insurance companies, you are on the hook only if there is a big loss that has not been saved for. But here is the problem — our state retirement and health care plans are currently on an unsustainable path. Without changes, it’s likely that in the future Vermonters will be hit with big tax increases to pay for these promises.

So here’s the difference: insurers have reserves, which are supposed to be the expected value of the promises (with a little cushion)… and insurers do have to cover big, unexpected losses.

But the way they cover those unexpected losses is capital. That’s extra on top of the reserves.

Since 2001, Vermont’s pension obligations have grown much faster than the assets held in the pension plans. In 2001, the funded ratio (the ratio of the actuarial value of assets to actuarial accrued liability) for the state employees’ and state teachers’ retirement plans was 93 percent and 89 percent, respectively, and in 2017 was 71 percent and 54 percent, respectively.

Vermont has no funds set aside to pay for the expensive and growing health care retirement benefits.

Vermont hasn’t even covered the expected promises, much less additional stuff on top of that.

But nice try at an analogy.

We’re more like a 19th century insurance company, where they didn’t have great regulation about how much $$ insurers needed to have on hand to pay for the losses. And the insurers would fail, quite a bit. There was a real trust issue with insurers in the U.S. back then, which is why so many of the older insurers are mutual companies, but that story is for another time.

Some of the old insurer failures were simply due to them not being all that great at quantifying the risk involved.

So, like a 19th century insurance company, sometimes the taxpayers won’t be able to fill the hole when it’s not extreme losses, but just expected experience. That’s what the decreasing funded ratios are telling me.

I see that Bill Bergman commented on this in his Beer with Bill segment:

I actually agree with Bill — it’s a good op-ed. I’m just being a nit-picky actuary. :)


So, there’s a mess of a budget bill out from Illinois. One part of it contains a buyout idea – and I’ve seen buyouts before, some which were well-crafted…. and this doesn’t sound like that.

Savings from Illinois’ pension buyout plan could fall short

CHICAGO (Reuters) – Illinois might not be able to bank on all of the $423 million in much-needed pension savings from a buyout plan included in a fiscal 2019 budget that received final approval in the state legislature on Thursday, government finance experts said.

The budget for the fiscal year that begins on July 1 calls for bond-financed buyouts of pension benefits after past attempts to cut retirement benefits were tossed out by courts on constitutional grounds.

The fact that buyouts would be voluntary raised concerns about the feasibility of the projected savings.

Illinois is struggling with an unfunded pension liability that has climbed to $129 billion after years of skipped or actuarially inadequate annual state contributions to its five retirement systems. Those contributions are projected to grow from $8.43 billion in fiscal 2019 to just over $10 billion by fiscal 2023, according to a state legislative commission report.

Under the buyout plan, current workers could cash in the 3 percent compounded cost of living adjustment (COLA) owed them in retirement for 70 percent of the value and a reduced 1.5 percent COLA. The state would also offer vested former workers 60 percent of the value of their pensions if they choose to end them.

Steve Malanga, George M. Yeager Fellow at the Manhattan Institute, a conservative think tank, called the savings from the buyouts “speculative.”

“Often these buyouts don’t attract as many participants in the public sector as they might in the private sector because of how good the benefits are for government employees,” he said in an interview.

He added that given the “especially generous” compounded 3 percent COLA, only workers urgently in need of money may opt for a buyout of that benefit.

And then, the main thing: who’s going to opt in for the lump sum of cash — The person in very poor health, who will likely die before life expectancy? Or the person who has a great chance of compounding those COLAs for decades to come?

Usually, these buyouts are for vested participants who no longer work for the specific employer, and generally isn’t seen as a cost reducer, but a risk reducer (and an expense reducer if the point is to get rid of a bunch of itty-bitty benefits, relative to the core lifelong employee).

People may not be great at estimating their actual life expectancy, but they probably have a good idea if they are in extremely poor health or if their grandparents lived past 100.


Actually, it’s more than just baseline — it’s a near certainty.

PBGC: Over 90% Chance Union Pension Insurance Program Will Run Out Of Money By 2025

Chances the union pension guarantee program covering 10 million participants will run out of money by 2025 have risen to over 90%, the Pension Benefit Guaranty Corporation warned today in its annual report.

At the same time, the agency said its single employer program covering about 28 million participants continues to improve and is likely to emerge from deficit sooner than previously anticipated.

“Recent increases in asset returns and decreases in expected future claims increase the likelihood that the (single employer) program will reach net surplus a few years earlier than previously projected,” the PBGC forecast.

The PBGC said the likelihood the multi-employer insurance program covering millions of union workers primarily in transportation, mining, construction and hospitality will remain solvent after 2026 has declined to 1% as the health of troubled plans has worsened.

This is all for a run-up to a bailout bill this fall, and you need to keep in mind that the union pension guarantees are super low.

There are two bits for the bailout idea:

- the PBGC itself, which really is going to run out of cash for the union plan guarantees
- the specific union plans themselves, like Central States of the Teamsters

Not all the union plans out there are doing poorly.

But the whole reason the PBGC will run out of money is that some of these plans will run out of money and the PBGC has to pay the guaranteed benefits…and it’s projected than more than 100 of these plans, covering 1.4 million people, will run out of money in the next 20 years.

It doesn’t matter than the guarantees are very low. If you have enough people getting paid relatively small amounts of money…say, 1.4 million people getting $5,000 per year each — that’s $7 billion.

That’s a lot of money.


This is all I have right now:

Exclusive: New Connecticut CIO Leaves after 10 Days

There have been more changes at the chief investment officer helm in Connecticut. Sean Crawford is “no longer there,” according to state employees, “he departed last Wednesday” after only 10 days, CIO has learned.

Crawford, who left his post as New York Metropolitan Transit Authority’s first and only CIO on May 4 to take the CIO job for Connecticut’s Retirement Plans and Trust Funds on May 14, left May 23.

A source at the state said the reason of his departure has not yet been filed with human resources, and that “it is between the Treasurer and Mr. Crawford.”

Who the hell knows.

It would be fun to speculate, but this is somebody’s real job, and we have no idea what happened.

So, ponder that for your weekend.



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