STUMP » Articles » Reading the News with Meep: Waiting for a bailout, NYC pension reform, Illinois finance, and more » 2 November 2020, 18:35

Where Stu & MP spout off about everything.

Reading the News with Meep: Waiting for a bailout, NYC pension reform, Illinois finance, and more  

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2 November 2020, 18:35

The Actuarial Outpost, as it was, is finally dead. For actuarial chatter, join us at Go Actuary. I’m meep there.

For those who used to keep up with my “watch” threads on the AO, I will be sharing the links on my blogs for now. I’m looking for a content management solution for what I want to do with that stuff. [I prefer my memory to be external to me and my computers.]

I apologize for the delay on the rate-based follow-up to this: Mortality with Meep: Comparing COVID-19 with Historical Mortality and Prior Pandemics. That will be the next post after this one; just need to check the numbers carefully, as rates can be tricky.

Waiting for the election, to see if there’s a bailout

There was no stimulus/bailout bill before the election, and everybody is waiting to see the composition of White House/House of Reps/Senate to figure on the odds of getting a lame duck session stimulus/bailout, wait for January 2021, or realize that the various financial profligates had best learn to deal without more bailout dough.

Still, some are commenting on the bailout bills that had already passed and were signed, and Pelosi’s wishlist from the HEROES Act [passed the House, not going anywhere in Senate].

New York City pension reform proposal… for somebody in the future

The Manhattan Institute has put together a proposal for reform of the New York City pensions.

Let’s use their NY Post op-ed as the jumping off point: How to start defusing NYC’s pension bomb

Gotham’s public-health crisis risks becoming a financial crisis — including by ravaging the underfunded retirement systems promised to public workers. Four essential steps could avert catastrophe.

Even before the crisis, the city had set aside just 2 percent of the savings needed to cover retiree health benefits for city workers, while its pension funds contained only 79 cents for every dollar needed to cover projected benefits. These fringe benefits consumed one-third of the city’s municipal payroll and one-tenth of the city’s budget.

I want to note: even with a near-80% funded system, the annual costs of employee benefits are gobbling up the budget. Heck, a fully-funded system could still be too costly to maintain.

However, it’s even worse the more underfunded the pensions are… and this funded ratio and these costs come from FY2019, which ended June 30, 2019. That’s well before the current financial crunch for the city.

Let’s go through the recommendations:

Start with management. The current system wastes a surprising amount on overhead by running five parallel retirement systems, all with their own real estate, redundant staff and extra audits. The IBO estimates that by consolidating them into three funds, “the city could save $20 mill­­ion in the first years, with the savings growing to $41 million by the second year.”

I don’t want to make fun of these amounts. But let’s just put that up against NYC ERS contributions.

The required contribution is 25% of payroll. The Most recent CAFR shows an employer contribution amount of $3.7 billion for the fiscal year ending June 30, 2019.

Even if I go with the $40 million savings, that’s 1% of the contribution amount. That’s just for one of the pension plans. If I combined the five and compared, it will be much, much lower than 1%.

If I compare these savings up against the assets, this “improvement” is even punier.

So, this may be a good idea from a management point of view, but this is not really anything that substantially helps the city.

Second, health care. New York City’s liabilities total $132,464 per employee, the highest of any major city in the country. Gotham is also the only city in the country to pay for Medicare Part B premiums, and it’s one of the few employers anywhere to provide full and fully subsidized health coverage for retirees under the age of 65.

Lax enforcement of eligibility rules could mean that many people covered under a spouse’s health plan still receive gold-plated subsidies. Eliminating Medicare Part B subsidies, requiring a half contribution to premiums and making sure retirees take alternative plans when they’re on offer would save more than $1 billion dollars a year, while still ensuring high-quality coverage to municipal retirees.

Yes, this would be substantial savings. $40 million is a pittance compared to $1 billion, and this is the order of magnitude of savings needed to make the NYC retirement systems sustainable.

Then there are New York City’s retirement plans, which should vest faster and have more portability to help the city attract a high-quality workforce, rather than short-changing younger and more mobile talent. The city should transition to a cash-balance system as in Rhode Island, a way to offer affordable benefits to all employees, no matter how long they stay in city government.

The issue here is that having the new employees on this plan only prevents the DB promises from getting worse.

The main problem is the unfunded liabilities already accrued from past service.

This is not a bad idea, but it doesn’t help to fix the legacy pension problem.

For more immediate savings, the city should consider paring back supplemental benefits, which are not constitutionally protected. Each year the city spends more than $1.7 billion giving uniformed retirees a $12,000 bonus, contributing to union annuity funds and guaranteeing a 7 percent return for teachers’ voluntary contributions. All three of these programs should be scaled back or eliminated.

Get rid of the 7% guarantee, holy crap. That sort of thing brought down Dallas.

The full report at the Manhattan Institute: Reforming New York City’s Public Retirement System. They’ve got tables at the end showing their estimates of savings of each option.

The current NYC admin isn’t going to move on any of this, but if there were something they’d move on, it would likely be consolidating management. This is one of the things an ineffective leadership likes to do: if things are centralized, de-centralize it; if it’s de-centralized, consolidate it.

It basically does nothing for the essential problem and makes it look like you’re doing something. Huzzah.

Related: Conservative Think Tank Calls for NYC Pension Reform

Changing pension investments via the courts

Bloomberg: The World’s Courtrooms Could Unleash the Next Wave of Green Investing

The legal risk for pension funds that fail to account for climate change in portfolio investments is about to become a little clearer.

While activists and investors around the world are using courts to push government officials and company executives to cut emissions, a trial set to start Monday in Australia offers an early test of whether money managers have a fiduciary duty to help combat the ravages of a warmer planet.

The case was brought by a 25-year-old environmental scientist, Mark McVeigh, who sued his A$57 billion (U.S. $41 billion) pension fund for not adequately disclosing or assessing the impact of climate change on its investments. His claim is part of a surge in global lawsuits — from the U.S. to the Philippines to the Netherlands — seeking to force changes intended to slow the pace of natural disasters including wildfires, floods, typhoons and droughts.

“Litigation has become a transnational movement,” said Joana Setzer, an assistant professorial research fellow at the London School of Economics and Political Science. For many, cases are “driven by frustration, by realizing that so many other routes to address climate change, especially international negotiations and national legislation, have been insufficient,” she said.

Yes, litigation when you can’t get to your goals via legislation. That sounds familiar.

If the returns aren’t up to snuff, the retirees will just absorb the losses, right?

Related:

Illinois finance containment area: you know the drill

One of the biggest “waiting for a bailout” offenders is Chicago and, of course, the legislature of Illinois. They’ve never made a difficult decision, and they’re waiting to see if the suckers, um, I mean, voters, take the bait and vote in the “we’ll keep defining ‘rich’ down til we get enough dough” state constitutional amendment.

I think the credit rating agencies are also waiting to see what falls out of the election for potential of at least a teeny-weeny bailout for places like Illinois and Chicago.

It doesn’t fix their long-term problems. The borrowing they’ve been doing from TALF barely makes a drop in their huge unfunded liabilities.

Public pension stories

Yes, pension obligation bonds are a bad idea.

Other Public Finance Stories

Other stories

I’m annoyed at the shade choices in this graph:

First, I bet you assume the darker the color, the more negative the growth [before looking at the legend] – nope, you need to look at the lightest colors for that [what pisspoor choices]

Also, because they’re using a physical map, you visually get much bigger views of, say, California and Texas, compared to a key state like Massachusetts. Finally, I just plain object to two places past the decimal point — come on, this isn’t interest rates.

I am curious to see where the Q3 numbers come in.

Movember campaign: do it for Stu!

It’s November, which means it’s my fundraising month for the Movember Foundation.

Stu is the first part of STUMP, and we’ve been married for 20 years. You can read a little more about my Movember fund-raising, and I will be doing some Mortality with Meep posts related to the cause. The sex gap in mortality is huge, and the Movember Foundation is one group focusing on improving the situation by looking at male-specific mortality problems: prostate cancer, testicular cancer, and men’s mental health.

I will be addressing this more this month, and for this post, I do the bald ask: please donate to the cause!


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