Pension Quick Takes: Bullshit Assumptions and Bad Advice
by meep
Thanks to my top referrers from the past week:
And for those searching, I hope you found what you sought:
Let’s hit it!
KANSAS
The devil goes down to Kansas with his Pension Obligation Bonds
Kansas is expected to issue $1 billion in bonds to bolster its pension system for teachers and government workers after the Legislature authorized the debt.
Some lawmakers see the move as potentially risky, and the votes in the Republican-dominated Legislature were relatively close despite a push from GOP Gov. Sam Brownback.
The Senate approved the bill Thursday on a 23-16 vote, a day after the House passed it, 63-57. Brownback — who had proposed $1.5 billion in bonds — is expected to sign the bill, and supporters said the state should issue the debt starting this summer.
The Kansas Public Employees Retirement System would receive an infusion of cash, immediately narrowing a long-term gap in funding for retirement benefits. The pension system would invest the money and expects its investments to earn significantly more than the state would pay on the 30-year bonds.
“This is a very solid financial decision,” said Republican state Sen. Jim Denning, of Overland Park.
But there’s skepticism — including among teacher, state worker and retiree groups — because the move also is designed to help with the state budget by decreasing state contributions to public pensions by $64 million over the next two years.
A report last year from the Center for Retirement Research at Boston College said bonds decrease financial flexibility, turning pension payments that can be modified into set bond payments. The report also said underfunded plans and financially stressed governments typically issue bonds, often to lower annual costs.
“We’re incurring debt to pay debt,” state Sen. Laura Kelly, a Topeka Democrat who opposed the bill, said after Thursday’s vote. “When things are going well — we wouldn’t have even considered this.”
The bill limits the state to paying 5 percent or less in interest to bond investors, and the pension system expects to earn 8 percent annually on its investments the long-term.
The road to Hell paved with good intentions?
No, just bullshit assumptions.
What say the gamblers?
The state issued $500 million in pension bonds in 2004, paying almost 5.4 percent in interest. The pension system’s investment earnings have averaged 7.7 percent annually since then, even with the Great Recession.
“It worked,” Brownback said during a Statehouse news conference before the Senate vote.
And when it doesn’t work?
I’m sure the taxpayers will be so happy to hear that.
PENNSYLVANIA
Well, they don’t want to leave Kansas by its little lonesome.
They’ve got their own bullshit assumptions:
This transfer of contractually required moneys to non-pension purposes is just one of the major reasons for the pension crisis. A second is underperformance of the pension investment funds.
In Pennsylvania, expectations were that in addition to the contributions made by the employees, an investment return of about 8.5 percent would be needed to keep the pension plan financially stable. That rate of return is quite reasonable.
Over the last 40 years, the Wilshire 5000 index, the broadest market measure, averaged a 12 percent annual rate of return. Over the last 30 years, that return was about 11 percent. Even during the last 20 years, which included the dot-com and housing collapses and the recession, the 9.75 percent return exceeded the target.
Unfortunately, the performance of the pension funds’ private and public financial managers has been, to put it mildly, less than stellar. Thus, while many argue that the benefits are too generous, that’s true only because of disappointing investment returns. It’s hard to blame the victims of lackluster investment management for the lackluster investment management.
Well, part of the issue is that they’re managing funds that have cash coming in and going out, and to do a proper measurement of returns, you have to take that into account.
But that’s for a much longer post another time.
In any case, I’m pretty sure Pennsylvania’s pension fund problem is, like most really strained pension funds, due to undercontributions. hose that make full contributions every year are much less strained.
NEW ORLEANS, LOUISIANA
Nola firefighters pensions are in a really bad shape.
5:50 p.m.: Kapoor is starting out by rehashing the fund’s poor health. He says it’s in the worst shape of any fund he’s ever seen.
It’s funding status is actually worse than previously thought. If you take out money in the fund that is being held in trust for retirees and can’t be spent on benefits for others, it’s funded at only about 5 percent.
In 2007, the fund had more than $200 million in assets. Today it has only about $61 million.
That is 5 percent, not 50.
That’s just awful.
Anyway, the primary driver here is undercontribution, and there’s a lawsuit over it:
The firefighters say that the system would not be so poorly funded if Landrieu had made all of the city’s required payments into the fund since coming into office in 2010. They advocated Monday for a plan that would use a proposed 5 mill property tax increase to fund the sale of bonds, the proceeds of which could be used to fund the system and pay firefighters for two decades worth of back pay they are due after a court judgment in their favor. In exchange, they would agree to some minor changes to make the pension fund less generous.
The city, backed for the most part by business leaders who also sat on the working group board, wants more serious benefit changes and to levy only a 2 mill tax increase. That would create some breathing room, allowing for the potential payment of some of the back pay.
The city says that the pension’s poor health is due to terrible investments and overly generous benefits. The city’s failure to pay its full contributions in recent years is responsible for only a tiny fraction of the fund’s problems, according to the Landrieu administration.
They’re both wrong.
The “overly generous benefits” should be driving how much is put into the fund. I doubt they blew up over 5 years.
Also, I doubt it got to such a horrific state by 5 years of underfunding — it was probably decades of underfunding that got them here.
In any case, that’s my guess based on my experience with assets and liabilities in general. No one knows the “real” answer because:
To date, no one has done an actuarial study to assess what the fund would look like if the city had paid in some $90 million over the last several years as it was originally supposed to.
Okay, then.
More on the New Orleans pensions here.
HOLLYWOOD, FLORIDA
Pension experts for the city’s three unions have a message for City Hall: Don’t believe the doomsayers predicting financial collapse for Hollywood’s retirement plans.
For years, Hollywood officials have fretted over how to reform the city’s F-rated retirement plans. Last month, they heard bone-chilling forecasts for the city’s fire, police and general employees pensions. Altogether, the plans are funded at less than 57 percent, with an unfunded liability of more than $450 million.
But Thursday, they heard a different story from actuaries representing the city’s pension plans.
“I think the importance of the unfunded liability is overrated,” said Jose Fernandez, actuary for Hollywood’s police pension fund. “Is the plan in danger of running out of money tomorrow? No.”
The unfunded liability will eventually be paid off, Fernandez assured commissioners.
By the magic money fairy!
City Hall might want to consider taking out a pension obligation bond to cover the unfunded liability, said Bradley Heinrichs, actuary for the fire pension.
“My number one recommendation would be to do nothing,” Heinrichs said. “My second best recommendation would be to consider a pension obligation bond.”
…..
Both Heinrichs and Fernandez leave me speechless.
I’m really, really hoping they were misquoted by the reporter.
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