Pension Quick Takes: Nerd Edition (and Rhode Island)
by meep
First, thanks to this week’s top referrers:
And a sampling of the searches that got to STUMP:
- What if you don’t have the money to pay back the Obamacare subsidies oooh, tough luck, buddy
- Charlie Baker cap existing pensions
- “80 percent pension enough” NO IT’S NOT But given they landed here, I guess they know that.
- “crunching during sex” ooooh, I’m thinking this number-crunching post was not what you were looking for. I suppose I understand why people use “gender” instead of “sex” for these types of things now….
Nah, I’m not going to change.
So I’ve been at the 2015 Investment Symposium the past couple days (I give a talk this morning… no, not on pensions. I’m not a pension actuary.) For the actuarial/technical minded, this session on Financial Economics Principles Applied to Public Pension Plans (warning: it downloads a PDF…only an 18 page slide deck). It’s based on a draft paper that attendees got a copy of.
Here are a few excerpts from that document I highlighted for myself:
Valuation of cash flows — the price (value) of cash flows is determined by the properties (amount, timing, and likelihood of payment) of those cash flows and not by how those cash flows may be financed [i.e., GO SCREW WORK OF THE DEVIL]
….
Underfunded pension plans force employees to become nondiversified lenders to the plan sponsors.
…..
[On intergenerational equity] Basing measurements on the properties of other cash flows (e.g. tax revenues, debt service, expected investment returns) necessarily misstates (over or under) the value of currently earned deferred compensation, violating this fundamental public finance principle.
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Operating budget stability is a practical public finance objective rather than a financial economics principle.
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The periodic cost of a pension plan is the market value of the benefits earned in a period.
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[On financial reporting] The Governmental Accounting Standards Board (GASB) states that public sector financial reporting objectives include accountability, decision usefulness, and assessment of interperiod equity
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Additionally, the default-free value of the accrued benefits and current costs should be disclosed.
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Full funding of benefits accrued to date, consistent with the traditional unit credit actuarial cost method, discounted using default free rates, is necessary to achieve full benefit security and intergenerational equity. All other actuarial cost methods fail to meet these objectives.
[mic drop]
If you want a little light reading on the above, I will point you to:
- Bader and Gold, 2003, Reinventing Pension Actuarial Science
- Bader and Gold, 2004, The Case Against Stock in Public Pension Plans
- Jeremy Gold’s papers
- The site Pension Finance (though it looks like it hasn’t had a refresh in a decade…yeah, a lot of the links don’t work, because the websites they’re pointing to have changed in the years since this was put up…guys! I can hook you up with real web design/admin! Email me!)
Jeremy Gold was one of the presenters in the session (the other two were Ed Bartholomew and Larry Pollack), and he made a remark in the Q&A session that was… in a way, heartbreaking to me. He mentioned that if he had written some of those papers in the mid-80s, when public pension liabilities were overvalued (as opposed to what we have now) — when the discount rate of 8% was modest compared to the market default free rates of 10% (or more!) — these ideas on pension valuation would have been implemented immediately.
It reminded me of many of the path-dependent arguments Megan McArdle has made. The timing of the realization of proper valuation has come a bit late…. and governments have severely underfunded plans using current undervaluation methods as it is.
Shifting a little in the actuarial vein….Someone made a remark re: a pay-for-play article I posted at the Actuarial Outpost that many of the problems I was posting about were not actuarial in nature.
If you notice, most of the problems in this (and the five or whatever other threads) are not actuarial in nature.
It has been this way since the beginning, because I got into the argument re: public pensions because I heard “governments don’t go out of business” and “the pensions will be made whole.”
That’s why we can have a bit of leeway on the public pension valuation assumptions, you see.
Everybody knows insurance companies can go out of business, so of course annuities have to be discounted at current, low interest rates; insurers must be penalized for holding too much risky assets in their General Account; insurers must hold 100% of what’s promised (using conservative valuation assumptions), plus a little extra for safety. And should the cushion over 100% get too low, the insurer can be taken over, and the liabilities somewhat protected via the state guaranty funds.
But government doesn’t go out of business, so we don’t need that extra safety on public pensions. And besides, the taxpayers will always be there to make the pensions whole if it doesn’t work out.
I thought that if I watched what happened over time we could see if this underlying philosophy held. Because I figured I was young (not even 35 when I started the first public pensions watch thread), I would most likely be around to see those assumptions sorely tested.
So here we are.
I knew there would likely be some bad behavior stuff popping up (asset side example: pay-for-play; on liability side, backDROP).
I’m throwing it all in.
Indeed. I’m not throwing in all my pension stories from the last week, but highlighting a really important string of stories out of Rhode Island.
RHODE ISLAND
The big news in Rhode Island is that a settlement of some sort has been proposed re: their public pension reform lawsuit, but, well, you’ll see.
Politicians hopeful settlement can be reached:
PROVIDENCE, R.I. — House Speaker Nicholas Mattiello is “cautiously optimistic’’ that the state will reach a settlement of the legal fight over the constitutionality of the state’s 2009, 2010 and — even more sweeping — 2011 pension-benefit cuts before the trial is scheduled to begin on April 20.
Mattiello, who is not a party to the litigation, confirmed most of the settlement proposals under discussion in union halls across the state, after a personal briefing Wednesday by the special master in the case, former Supreme Court Chief Justice Frank Williams.
The Providence Journal independently obtained a copy of the latest settlement proposal that has emerged from Williams’ shuttle-diplomacy, that has been distributed in recent days to some — though not all — of the public employees and retirees who could be affected.
……
The suggested terms include:
— Two, one-time $500 stipends to current retirees, with the first payment a month after enactment, and the second paid a year later.— A once-every-four years increase in the pensions paid current retirees on their first $30,000 in retirement benefits, as opposed to the first $25,000.
— A tweak in the retirement age to allow workers to retire with full benefits at age 65 after 30 years of service; age 64 (31 years): age 63 (32 years) and age 62 (33 years).
Also under discussion: a proposal to allow police officers and firefighters to retire with full benefits at age 50, after 25 years of service, and at any age, after 27 years of service.
I am not checking how this compares to the reform legislation passed back in 2011 that is the subject of litigation.
This is obviously a better deal for current retirees, as they voted to approve this:
LINCOLN, R.I. – With the trial over the state’s 2011 overhaul of the public pension system looming, retired public employees suing the state overwhelmingly accepted a proposed settlement Monday.
Leaders of the coalition representing the retirees urged them to accept the deal before the vote at Twin River Casino, saying a trial would be too risky and the case could drag on for years on appeal.
Roger Boudreau, who leads the Rhode Island Public Employees’ Retiree Coalition, told the group he understands their anger and frustrations but asked them not to base their decision on those emotions. Retirees voted 1,168 in favor and 332 against the proposal.
Current employees, though, are not as enthusiastic:
PROVIDENCE, R.I. (WPRI) – At least one public-sector union has reportedly rejected a proposed settlement that would end their lawsuit challenging Rhode Island’s 2011 pension overhaul.
Two people familiar with the result told Eyewitness News that members of Local 400 of the International Federation of Professional and Technical Engineers voted Monday to reject the proposed settlement. One of the people said the vote was 79 against to 53 in favor.
Local 400 represents workers at the R.I. Departments of Transportation and Environmental Management and is one of 205 plaintiffs suing to overturn the pension law. The union did not respond to an email request for comment about the vote or answer a phone call on Tuesday.
All the parties involved in the pension lawsuit have been placed under a gag order by R.I. Superior Court Judge Sarah Taft-Carter, who is overseeing the case. The order bars them from speaking with reporters about the settlement process. The deadline for current employees to finish voting on the settlement is Friday.
Interesting how much info a reporter can get, even if a judge institutes a gag order.
This is in spite of a union leader telling the people to take the deal:
PROVIDENCE, R.I. (WPRI) – One of Rhode Island’s most influential labor leaders is making a forceful case to his current and former members that they should accept a proposed settlement and end their lawsuit against the state’s 2011 pension overhaul.
Robert Walsh, executive director of the National Education Association Rhode Island teachers’ union, sent a private email Monday to the union’s mailing list laying out why his organization supports the settlement and answering some frequently asked questions about it.
“I would vote for the settlement agreement,” he wrote. “While it would certainly be politically easier to let a judge, jury or the Supreme Court to take the blame for a worse outcome, it would be negligent not to recommend settlement based on everything that I have learned.”
You mean, learning something like the money really can run out?
That the pensions can’t always be paid as originally promised?
Let’s go back to the article to see his reasoning:
And the “ugly,” in Walsh’s analysis, is Taft-Carter’s decision just last week that the union side has the burden of proof to prove – beyond a reasonable doubt – that the state could have found more reasonable ways to change the pension system.
“Since the rate of return and actuarial changes will in all likelihood easily pass the reasonableness standard, the fight would likely center around two ways to pay for member improvements – re-amortizing the plan (which the media has already reported is the likely mechanism for covering the costs of the current settlement proposal) or tax increases,” he continued.
….And he made a case that union members and retirees should take whatever steps are necessary to avoid a final judicial decision that upholds state lawmakers’ power to cut pension benefits. All sides expect the jury’s decision would get appealed to the R.I. Supreme Court.
Reaching a settlement “at this point means there is no contrary court ruling in place,” Walsh wrote. “So, if changes occur again, we could still sue with no court decision to prevent it.”
Yeah, and what would happen if the exact same circumstance are in place?
I think I understand why some current employees might not be swayed by this reasoning. The pensions likely will get changed again… and there will be nothing much different about the next time the state legislators go back to whack.
So I’m still watching Rhode Island — obviously the one union vote that leaked out is just one of many in the state. I’m not sure about the timing to see if enough took the settlement.
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