STUMP » Articles » Pension Quick Takes: Anything But Chicago Edition » 22 May 2015, 06:56

Where Stu & MP spout off about everything.

Pension Quick Takes: Anything But Chicago Edition  


22 May 2015, 06:56

I’m a bit Chicago’d out right now, but if you missed the prior posts, here ya go:

I figure, what with Chicago delaying their bond offering, I’ve got a little breathing room. Or maybe not.

So first, thanks to my main referrers this past week:

And my tracker doesn’t track referrals by tweets so well, but let me thank my retweeters:

Thanks, Cate!


Plenty of doings in California.

One can consider the long-term disaster that was the retroactive pension increases after a long bull run…. followed by the internet bubble bursting. This was not a unique move by California – while I have been trying to develop histories of unfunded liability development, I saw many cases of a pension boost in 2000. I think we remember what happened then.

Oh look, California public employee unions pull in a billion dollars a year. Sweet gig.

Amusingly (to me), unlike with private employee unions, the leaders of public employee unions tend to have the same pensions as the rank-and-file. So they can’t really sock away all that cash to make sure they’re covered even if the regular pension plan goes kaput. I suppose they could have IRAs.


Okay, John Bury almost has me convinced that NJ pensions will go kerflooey before Illinois pensions do:

But there is no context. Fortunately, we have 15 years of TPAF valuation reports on the state website and it is fairly easy to make up a spreadsheet to check the numbers. Projecting out, state and local contributions look to have been closer to $5 billion than $3 billion while member contributions would come in at $9 billion instead of $10 billion over the last 20 years but there is one number conspicuously absent from the NJEA story.

Over $40 billion in payouts with the amounts steadily escalating. A plan that for the year ended June 30, 2000 had $36 billion in assets and was paying out $1.15 billion annually (3,2% of assets) had as of June 30, 2014 $27.6 billion and was paying out $3.8 billion annually (13.8% of assets).
Consider also that

- a substantial portion of those remaining assets ($10 billion?) consist of employee contributions that would need to be returned to participants upon plan termination;
-about 25% of the assets are invested in alternative investments (i.e junk);
-there is no revenue source willing or able to come up with anywhere near the $7 billion annually that this plan as currently constituted requires now; and

you have a zombie plan.

Dude, that zombie already has two limbs hacked off and a couple shotgun slugs to the skull.

And yet it still walks.

Hmmm, he has a point.

And it sounds like some investors in NJ debt were listening to me (among others) as they’re dumping NJ debt:

Ten-year New Jersey debt yields 3.2 percent, or almost 0.9 percentage point above AAA munis, the widest gap since Bloomberg began compiling the data in January 2013. The state carries an A grade from Standard & Poor’s, sandwiched between California’s A+, and Illinois at A-. The three are the lowest-rated U.S. states.
Eaton Vance Management is reducing New Jersey holdings and expects the state’s spreads may keep increasing whichever way the ruling goes, said Tom Metzold, senior portfolio adviser in Boston at the firm, which oversees $28.6 billion in munis. Unlike Illinois, as a high-tax state New Jersey has less room to raise levies even if Christie agreed to that step, Metzold said.

Wait, I has had. The muni buyers are requiring higher yield, but that’s not “dumping debt” per se. 90 bps ain’t no thang.

Maybe the original headline was “Investors Dumping On New Jersey Debt”, and the editor thought that a bit unseemly.

Anyway, one of the reasons they’re skeptical is that NJ can’t make its ‘required’ pension payment

Barring a successful appeal, New Jersey will be forced by the courts to make its full pension contribution this year, which will total $1.6 billion.

But that payment hasn’t been budgeted for – and since Gov. Chris Christie has vowed not to raise taxes, the bulk of the money must come from spending cuts.

But budget and treasury officials testified on Tuesday that it might be “fiscally and physically” impossible for the state to come up with the money required to make the full payment.

By the way, NJ spent several years not contributing to the state pensions at all. Isn’t that pleasant?

In any case, NJ had a little bright news recently: extra revenue! What a pity it’s all going to the pension funds.


I’m not the only person asking – how did we get here? Someone else is asking it of Pennsylvania’s pensions, and unsurprisingly, the answer is about the same for Pennsylvania as it is for Illinois: undercontributions.

And if you’re looking for the single biggest reason for the dire straits the state currently faces, this is it: “You can’t operate a pension plan like the payments are optional,” said Steve Herzenberg, executive director of the Keystone Research Center, a progressive-minded Harrisburg think-tank.

“They’re not. And we acted like they were optional for 12 years, giving corporations tax cuts, funding education more generously,” he said. “So if you don’t pay your credit card, at some point your bill comes due.”

Compounding the issue, many school districts used the state’s influx in classroom spending to boost employee salaries, which, because pension payouts are based on a percentage of an employee’s final pay, drove up the state’s debt.

Let’s take a look at what was “required” and what was actually contributed.


Looks like it fell apart starting in 2005.

And now what?

No amount of political rhetoric can alter the fact that years of hefty benefit increases, fund losses and negligent underfunding have left the state’s two largest pension funds—covering both teachers and other state workers—in a huge budget hole.

The $27 billion Pennsylvania State Employees’ Retirement System and $51.7 billion Pennsylvania Pubic School Retirement System are more than $50 billion dollars in the red.

Although candidate Tom Wolf denied there was a pension crisis, the reality of governing has Gov. Tom Wolf and his administration at least talking about it.

Talk won’t solve the problem, however.

Last week the Senate of Pennsylvania took action.

The chamber voted, largely along party lines, to approve a pension reform package that was marked Senate Bill 1.

The Senate plan shifts new state and school employees into 401(k)-type plans (defined contribution as opposed to the current defined benefit) as well as in a cash balance plan.

Current retirees’ benefits aren’t affected by the Senate plan, nor are benefits already accrued to current employees.

Unfortunately the partisan rhetoric ramped up quickly. Sen. Vincent Hughes of Philadelphia went so far as to claim, “It is the destruction of the middle class…” Really?

Ninety percent of Pennsylvania’s workers are already enrolled in 401(k) plans. They are what younger workers expect and want.
There’s plenty of blame to go around. The pension crisis was largely created in the closing days of the 20th century and the early days of the new century. Prior to that the pension funds generally enjoyed surpluses.

But then the state used those surpluses for program funding and lawmakers on both sides of the aisle, along with then-Gov. Tom Ridge, dramatically raised benefits for themselves and the judiciary together with teachers and other state employees.

At the same time they pared down the commonwealth’s contributions to the two big public pension funds. Ed Rendell continued the underfunding of the pension funds, contributing to the unfunded liability.

In any case, it’s nice to have a respite from Illinois and Chicago from time to time.

I will be returning to how the unfunded liability developed in various funds next week, and we’ll see if Chicago actually issues more bonds.

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