STUMP » Articles » Public Pensions Watch: Miscellany (but mostly Illinois) » 24 August 2014, 17:53

Where Stu & MP spout off about everything.

Public Pensions Watch: Miscellany (but mostly Illinois)  

by

24 August 2014, 17:53

I have mentioned before about my health condition and I have decided to just do some re-broadcasting of pension-related stories I think are important, and do less commentary for a little bit.

In this one, just a “random” sampling of recent stories.

Ted Seidle on ‘pay-to-go-away’

Let me introduce a new term and concept—one which is particularly apt for today’s world of complex investment decisions with long term financial impacts.

“Pay-to-go-away” is a strategy I have suggested repeatedly over the years to pensions beginning in the 1990s. The strategy makes more sense than ever for public pensions due to the proliferation of slow-ticking alternative investment timebombs. Unfortunately, no pension I’ve advised has actually employed this recommended strategy, despite the obvious financial benefits.

“Pay-to-go-away” refers to the calculated decision to pay an individual to no longer provide services—i.e., render no opinions, advice or decision-making—just go and stay far, far away. Sure, some progressive corporations are paying their workers to go away on vacation. Very nice. I’m not talking about that.

The “pay-to-go-away” I’m advocating means to rationally conclude that the services provided by an individual are so destructive that it is preferable (assuming that for some reason they can’t simply be fired) to pay them a substantial, albeit lesser amount, to walk and keep walking. Relocate to a tropical paradise perhaps.

As I alluded to earlier, I originally recommended the strategy to the Chicago Teachers Pension Fund in the 1990s. The question then was whether the pension should continue to retain a certain Illinois-based money manager who had consistently underperformed. For political reasons, the pension wanted to support the firm but the underperformance was both significant and obvious. I said, “Support the firm if you want—just don’t let them handle your pension. Instead of paying a million in asset-based fees annually, simply give the firm $1 million not to manage your money. You’ll save millions more.”

Awkward silence.

Elected officials overseeing state pensions are also prime candidates for “pay-to-go-away.”

If only it were that easy.

I guess one is not supposed to be that blatant with the feather-bedding.

Illinois gets a very small amount of good news

Attorney General Lisa Madigan says the state will receive $300 million as part of a national settlement with Bank of America as a result of the “bank’s misconduct in its marketing and sale of risky residential mortgage-based securities” leading up to the 2008 economic collapse.

Madigan’s office said the settlement with Bank of America stems from an investigation which revealed that between 2006 and 2008 the bank failed to disclose the true risk of these mortgage-backed securities to Illinois’ pension systems. Therefore, government officials were misled when they invested in the market.

“This $300 million settlement will fully recover losses for Illinois’ pension system,” Madigan said during a stop at the Williamson County Regional Airport.

The settlement means about $200 million for losses incurred by Illinois’ pension system, in addition to another $100 million in consumer relief, including assistance for homeowners as well as blight reduction.

It’s not clear at all to me that the amount being given actually makes Illinois whole, but it makes for a good story.

Speaking of Illinois, someone points out some really questionable actuarial work

Inadequate Actuarial Work meets Underfunded Pensions and Poor Journalism – WP Guest

Tia Goss Sawhney, DrPH, FSA, MAAA

This article is in response to a recent article in the Forest Park Review, Police and fire pensions in the healthy zone, BGA report: Relative to neighbors, Forest Park funding above average [1] and the rebuttal article in WirePoints, Bad Pensions Meet Bad Journalism: An Example and a Lesson [2]. With one minor exception, discussed below, the WirePoints article presented a good analysis of the health of Forest Park’s pensions using the information readily available to the public. Unfortunately the information readily available to the public is limited with respect to both quantity and quality and actuaries, my professional organizations and peers, are responsible for a portion of the inadequacy. Unfortunately, the outlook for too many pensions only worsens with better actuarial work and more transparency.

…..
There is reason to believe that Illinois pension assumptions are biased. Let’s start with the Forest Park Police Plan. In order to calculate the tax levy (“bill”) for fiscal year 2013, Forest Park’s actuary assumed a 7.5% asset return and a mortality rate equal to the 1971 Group Mortality Table with no allowance for the mortality improvements observed since 1971 or the improvements likely for the future. Furthermore, he made no apparent assumptions for service related deaths or disabilities, even though there are distinct benefits associated with service related deaths and disabilities [5],6. In evaluating the 7.5% assumed asset return, consider that, by law, Forest Park can only invest 55% in non-cash and bond investments [7].

…..
In all fairness, Forest Park is an extreme example of questionable actuarial work (though its reported unfunded liabilities on a percentage basis are pretty typical for Illinois municipal pensions). Based on a review of his work for seven Illinois police funds I filed an Actuarial Board of Counseling and Discipline (ABCD) report against their actuary, Mr. Timothy Sharpe [8]. My complaint is with respect to both assumptions and the overall quality of his actuarial communication. The complaint, filed in March, remains under investigation.

The general issue with assumptions, however, is common to many public pension plans and actuaries. Only in the last few months have Illinois’ biggest state plans TRS, SERS, and SURS reduced their assumed returns to 7.5%, and 7.25% respectively. Until then each plan was 0.5% higher [9]. I reviewed the work submitted by the SERS actuaries in making their recommendations for new assumptions. Based on future projections provided to them by unnamed sources, the actuaries calculated that the plan has a 42% chance of obtaining a 7.25% return over the next 30 years. Contrary to popular notion all things do not necessarily work out in the long term, even with respect to a large, diversified portfolio. The SERS actuaries also claimed that there was no need to incorporate both mortality improvements and margin into their recommended mortality assumptions [10].

When I am able, I will come back to show just how bad a mortality assumption that is.

And lastly, for example of really poor persuasive abilities, check out this public defender in Peoria

PEORIA — The former public defender of Peoria County sued his old boss Friday, claiming the county didn’t contribute to his state pension for the past 30 years.

Thomas J. Penn Jr., whose job as the county’s chief public defender ended in May after decades in that role, now states he should receive a pension from the state’s Illinois Municipal Retirement Fund because he worked more than 1,000 hours in a year as defined by the state’s Pension Code.

That assertion comes despite the different nature of public defenders in Peoria County, which uses an independent contractor model for its roughly 30 assistant public defenders. They are not considered county employees and are paid a monthly fee to do their job.

The model has been lauded for saving taxpayers money over the years because the attorneys do not receive benefits as county employees.

The suit states Penn, whose contract was terminated May 1, asked Assistant County Administrator Kate Van Beek to enroll him in the pension fund. The county refused, the suit alleges.

I hope this lawsuit is thrown out. This is pretty stupid even in the public pensions realm. The person was told he was not an official government employee, no money was ever set aside for the government pensions (unsurprisingly), and he’s bitching now?

Yeah, good luck with that.

Compilation of Illinois posts


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