STUMP » Articles » 80 Percent Funding Hall of Shame: May 2015 Roundup » 31 May 2015, 18:44

Where Stu & MP spout off about everything.

80 Percent Funding Hall of Shame: May 2015 Roundup  


31 May 2015, 18:44

It never ends.

But before we have the parade of those who “know” something that just ain’t so, let me thank my referrers for the week:

(I can’t read the bit as I’m not a subscriber)

Also thanks to my retweeters, such as @cate_long, @MuniCredit, @munilass, @NancyMathieson, @vermontaigne, and the people I forgot (sorry, y’all…my tracker doesn’t work too well for links.)

So here’s the roundup of the 80 percenters for the past month….


This guy with his oh-so-clever idea of how to “fix” Illinois pensions with a really odd level pay plan gets in here three times this month because of all the Illinois-pension-brou-ha-ha-Chicago-etc. First, from May 14, a piece he wrote on his ‘clever’ idea:

Increase the funded ratio of the pension systems to a healthy point (80 percent, according to the Congressional Budget Office);

And here he is again, in his own words:

In fiscal year 1994, the aggregate unfunded liability across all five state systems was $17 billion. That sounds like peanuts given the size of the problem today, but it meant the systems were only 37 percent funded, a far cry from the 80 percent recognized as healthy.

And since he mentions 1994, I’m going to redo that unfunded liability graph, with a shortened time scale:

That’s starting in 6/30/1994, and I confirm the total was $17 billion that year. I want to note that the funded ratio drastically improved over the next few years, primarily due to two things: good returns on assets (y’all remember the late 90s, right?) and a trick where they switched from smoothed assets to market value, so as to capture that upswing sooner. I bet Martire was one of the people who had advocated making that switch, so that a pensions went from 37% funded to about 70% funded.

By the way, notice that even as the investments are doing well, and they’ve got their “one neat trick”, the unfunded liability continued to grow. The only year it did not grow was when they did another “one neat trick”: pension obligation bonds. Yeah, borrow money from bondholders, and hope it all works out. If not, you can always screw the bondholders, right?

Back to Martire, quoted by someone else.

It’s an idea long advocated for by Ralph Martire of the Center for Tax and Budget Accountability. Loosely, it can be explained by saying that Illinois would treat its unfunded pension liability like someone taking advantage of low-interest rates to refinance the mortgage on a house. Spread out the payment cycle (a law passed in 1995 ramps up payments, so it’s been expensive in recent years); to the certain consternation of actuaries, some have suggested lowering the target to 70 or 80-percent funding, making the funding goal more realistic. At a time to some politicians ““borrowing”“ is a bad word, and with ratings agencies on guard, the re-financing concept thus far hasn’t gotten much legislative attention.

Yeah, there’s a reason for that.

It’s also realistic that people won’t get paid their pensions as promised, if you don’t target fully funding them. The behavior in the late 90s shows that you can’t trust the politicians to take a good run as an opportunity to get to full funding — because they didn’t. The pensions were short-changed deliberately every year, in that they never put in the full “required” contributions.

I will show another time that even systems that do have funding discipline can run into trouble, but for now it is enough to know that always undercontributing to the pension fund makes the problem get worse every year, and if you’re Illinois, even good investment experience doesn’t make up for it.

There is probably going to be a lot of activity in the General Assembly this summer, so we’ll see how much play these clever tricks get this time. I should not underestimate the ability of groups of politicians to make a problem worse.

(by the way, I do not feel consternation over this. I am angry, which is a bit different.)


That’s enough commentary on Martire. Let’s just do a shotgun approach now, shall we?

California’s state and local pension funds are still a bit shy of 80% funded, which is considered the minimum level for a healthy pension system.

A plan is considered sound when it is funded at 80 percent of its total obligations.

Liz Ostendorp, vice president of The Education Association of Morristown

The black clothing is meant to symbolize restoring the pension system to the black, said Ostendorp. She said the state pension system is only 54 percent funded, when it should be at 80 percent.

Karen Pierog, Reuters

Illinois’ five-fund retirement system was just 42.9 percent funded at the end of fiscal 2014, and its funded ratio has lagged the 80 percent benchmark since at least 1972.

Washington Post

Though better funded than Illinois’s, Maryland’s state pensions are still well short of 80 percent funded, a widely accepted benchmark for the public sector.

Martha Stoddard / World-Herald Bureau

In the pension world, 80 percent funding is a benchmark for a healthy plan.

NJ State Treasurer Andrew Sidamon-Eristoff

“That’s not perfect. That’s not 80 percent or more, but it’s certainly well beyond the crisis zone,” Sidamon-Eristoff said.

Orange County Register

Experts like to see a funded status of at least 80 percent, though some say even that’s not enough.

To be sure, some of this are a bit hazier than others, but pretty much the 80% benchmark is parroted as fact, without even attributing it to anybody. It’s just one of those “everybody knows” things, or at least the experts say.

Those experts say a lot.

REMINDER: Why I’m doing the 80 percent hall of shame

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