We’ve had a bit much of Illinois and Chicago lately. There’s plenty more pension shenanigans than that!
DETROIT: PENSIONS MAY COST MORE
Detroit picks firm to help fix $195M pension shortfall
Detroit is closer to figuring out how to address a hole in pension funding that is far larger than it had anticipated when it exited from bankruptcy.
The city in March put out requests for proposals seeking national firms with expertise in public pension plans to advise the city on how best to address a $195-million payment to the city’s two pension plans that comes due in 2024, under terms of the city’s exit from the nation’s largest Chapter 9 municipal bankruptcy.
John Naglick, the city’s deputy chief financial officer and finance director, told the Free Press that a committee of top officials in the Duggan administration reduced a pool of proposals to three and recently recommended one firm to the city’s CFO, John Hill, who approved the suggestion.
The city now says that actuarial assumptions used in the bankruptcy were inaccurate and outdated. City officials said that new actuarial reports last year by the Gabriel, Roeder, Smith & Co. firm project Detroit may have to pay $491 million over a 30-year period beginning in 2024, including the $195-million payment the first year.
It’s a serious hit to Detroit’s budget, an increase of $83.4 million that represents about 8% of the city’s annual $1-billion general fund budget. Naglick and Hill say it could mean diverting money that was supposed to be spent on reinvesting in critical city services.
As for who would’ve thunk it — well, there was this during the bankruptcy proceedings:
14. To arrive at the City’s estimated underfunding of approximately $3.5 billion, Milliman used a 7.0% net assumed rate of return for both Systems, rather than the 7.9% and 8.0% assumptions used by GRS and PFRS, respectively.
In addition, Milliman used the estimated market value of assets as of June 30, 2013 rather than the actuarial value of assets. All other assumptions used in the actuarial valuations by the Systems’ actuary remained the same.
GRS’ Amortization Method Is Unreasonable
15. The PFRS and the GRS, respectively, use 29-year and 30-year amortization periods for funding the UAAL. The GRS amortization method is “open,” meaning that the amortization period is applied anew each year to the full amount of unfunded liability. That is akin to annually refinancing a 30-year mortgage, which means that the underfunding in the GRS never gets reduced by City contributions — it simply gets pushed forward with the hope that it will eventually be reduced by exceptional returns or other favorable experience. Use of a 30-year open amortization period is one of the factors used by the actuary in its recommendation to the GRS of the City’s annual contributions. By employing GRS’ open, 30-year amortization methodology, its actuary’s annual recommended contributions to amortize GRS’ UAAL do not even cover the amount of interest accruing on the UAAL. This causes the UAAL to grow rapidly (due to compounding), and essentially “kicks the can” of responsible pension funding “down the road.” Although many governmental plans use long amortization periods to fund liabilities — in part to justify lower current contributions to their pension systems — use of a 30-year amortization period on an open-ended basis simply defers indefinitely the cost to the City of the Systems’ liabilities. This is especially problematic in mature pension funds like GRS and PFRS, in which the number of retirees receiving monthly pension payments far outnumber the active employees, many of whom will not begin to draw a pension for years. Such pension funds have significant annual pension payment obligations, reducing assets and increasing future UAAL. Indeed, the outside actuary for GRS estimated based on its actuarial valuation as of June 30, 2011, that during the ten-year period from July 1, 2011 through June 30, 2021, GRS would pay out roughly $3 billion in pensions. In its draft report, the GRS actuary reported that, as of June 30, 2012, the market value of the GRS assets was approximately $2.159 billion.
16. In addition to determining the System’s underfunding based on more realistic actuarial methods and assumptions, the City also asked Milliman to determine the City’s future contribution obligations using more reasonable amortization periods. Milliman estimated future contributions using shorter, closed amortizations periods — 15 years for the PFRS (to account for the fact that the PFRS is already closed to new hires) and 18 years for the GRS. The 18 year amortization period for GRS was selected to provide for annual contributions toward the UAAL in an amount at least equal to the interest generated on the UAAL, thus preventing the UAAL from growing due to the amortization methodology.
The Legislature is debating bailing out Detroit Public Schools, but there’s been little discussion about how to address the district’s looming pension debt. This represents over a third of the district’s total debt and is in direct control of state lawmakers.
The state can fully forgive all of DPS’ pension debt if it chooses and free them from having to continue to contribute to the state’s underfunded pension system. All it would take are some votes in the Legislature and the governor’s signature.
All school district employees are mandatory participants in the state-run school employee pension system. This is set by state law and employees have no choice about whether they would like to participate. Pensions are paid by essentially taxing a district’s payroll. For every dollar a district pays for an employee’s salary, it also has to send a check for about 36 cents to Lansing to pay for pension benefits.
This pension system is a huge expense — retirement benefits in the private sector typically cost around 5 to 7 percent of payroll.
And most of that 36 cents doesn’t go to benefit current employees. Nearly 90 percent of pension contributions go to pay for the unfunded liabilities and retiree health care payments for benefits already earned by members. In other words, today’s pension payments are largely used to pay the costs of yesterday’s employees.
Older posts on Detroit:
CALPERS: CRIMINAL CEO SENTENCED, AND WILL GET PENSION
He arrived in plain jail clothes, shackles around his ankles, the humbled former leader of America’s largest public pension fund ready to accept his punishment for taking bribes.
He left with a prison term of 4 1/2 years.
Fred Buenrostro, the former chief executive of CalPERS, was sentenced Tuesday by a federal judge who called his actions “a spectacular breach of trust.”
Buenrostro, 66, pleaded guilty to a conspiracy charge nearly two years ago, admitting he took more than $250,000 in cash and other bribes from his friend and former CalPERS board member Alfred Villalobos. Prosecutors said Villalobos, who killed himself last year, was attempting to steer pension fund investments to the private equity firms he represented.
But don’t worry about him. He still has his pension:
Former CalPERS chief executive Fred Buenrostro has surrendered his freedom and agreed to cough up the ill-gotten gains from his bribery scheme.
The one thing Buenrostro won’t forfeit is his CalPERS pension – not most of it, anyway.
Buenrostro, 66, will continue collecting his state retirement benefits while he serves the 4 1/2 -year prison sentence he received Tuesday. He’ll have to have the checks sent to a bank account, as federal regulations prohibit him from actually receiving the money while serving time.
Under state law, Buenrostro is entitled to his pension. But his $201,600 in annual retirement pay has been greatly reduced by his criminal behavior.
Buenrostro has had his retirement benefits slashed since September 2014, shortly after he pleaded guilty to a conspiracy charge, a CalPERS spokeswoman said Wednesday. The reduction was prompted by the “felony forfeiture” provision in the state public employee retirement law, CalPERS spokeswoman Rosanna Westmoreland said.
Westmoreland said Buenrostro didn’t fight CalPERS’ forfeiture determination.
I think he’ll be able to get by on $141k/year.
WHY DO PENSIONS STICK WITH RISKIER ASSETS?
Pension Funds Pile on Risk Just to Get a Reasonable Return
An investor used to get a 7.5% return by holding safe bonds. To earn that now, research finds, takes a more volatile mix
What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns.
Thanks to rock-bottom interest rates in the U.S., negative rates in other parts of the world, and lackluster growth, investors are becoming increasingly creative—and embracing increasing risk—to bolster their performances.
To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments: adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.
In 1995, a portfolio made up wholly of bonds would return 7.5% a year with a likelihood that returns could vary by about 6%, according to research by Callan Associates Inc., which advises large investors. To make a 7.5% return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12% of the portfolio. Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17%.
Nominal returns were used for the projections, but substituting in assumptions about real returns, adjusted for inflation, would have produced similar findings, said Jay Kloepfer, Callan’s head of capital markets research.
The amplified bets carry potential pitfalls and heftier management fees. Global stocks and private equity represent among the riskiest bets investors can make today, Mr. Kloepfer said.
It’s mainly a function of decreasing interest rates.
Of course, if various groups keep asking for divestment from ALL THE EVIL THINGS, they may have trouble getting their target returns.
OKAY, A LITTLE BIT OF ILLINOIS
Because it’s not only Illinois. Here’s a big picture take by Chuck DeVore:
Puerto Rico, Illinois And California: Public Pension Dominoes
The U.S. Commonwealth Puerto Rico is making a lot of news these days, but for the wrong reasons—it’s economy, overburdened by government, can’t generate enough income to cover payments on its $70 billion debt. Measured on a per capita basis, each of the island’s 3.5 million residents owe $20,000, a debt they can avoid by simply moving. Compared to its economy, Puerto Rico’s debt-to-GDP ratio is about 68%.
Congress recently moved to rescue Puerto Rico from its debt crisis. Ironically, this is the same U.S. Congress that has presided over the accumulation of a $19.3 trillion U.S. federal government debt for a U.S. debt-to-GDP ratio of 106%. Throw in the unfunded liabilities for Social Security, Social Security Disability Insurance, Medicare and other obligations, and the debt balloons to about $127 trillion, give or take.
Paying debt service is easier when you can print money and run deficits at will. Local and state governments, in contrast to the federal government, are obligated to balance their books. It’s this level of government where a looming debt crisis is gathering, the likes of which make Puerto Rico seem a minor prelude.
Illinois offers a textbook case of the coming pension fund meltdown with its years-long slow motion fiscal train wreck where on Monday, the Illinois House overrode Gov. Bruce Rauner’s veto of the Chicago police and fire pension bill at the urging of Chicago Mayor Rahm Emanuel. With the Senate’s override vote earlier, the bill becomes law. Without the bill, Mayor Emanuel warned of a “Rauner Tax”—a $300 million property tax hike made necessary by the fiscally-strapped city being unable to borrow $843 million from its pension fund at 7.75% to meet current obligations.
Gov. Rauner said the veto override would put “… an additional $18.6 billion on the backs of taxpayers” warning about “…governments (that) fail to promptly fund pension obligations” and kick the can down the road instead of enacting reforms to “grow our economy, create jobs and enable us live up to the promises we’ve made to police and firefighters.”
Unfortunately, Illinois is far from alone in this fiscal quagmire. Top honors for unfunded public pension debt belongs to The Last Frontier State, Alaska, with per capita pension debt, assuming market rate returns, of $38,251, according to the Stanford Institute for Economic Policy Research at Stanford University. Illinois comes in at second, with $28,880 in unfunded pension liabilities per person. Connecticut, California, Massachusetts and New Jersey round out the top six, each having more debt per capita owed to just their pension systems than Puerto Rico owes on its bond debt.
In good times, lawmakers at the state and local level are more than happy to give raises to government employees along with generous benefit increases. The future costs for higher retirement benefits are assumed to be covered by the booming stock market investments held by pension funds.
This happened in California in 1999 after government union-backed candidates won both the governor’s mansion as well as the state treasurer’s race and then pushed through a massive increase to pension benefits on the financial strength of what turned out to be the ephemeral froth of the ’90s tech boom. After the promises were made and the market returned to more reasonable valuations, the state’s public pension contribution obligations jumped five-fold from $611 million in 2001 to $3.5 billion in 2010. California’s unfunded pension liability totals $25,325 per capita, the fourth-highest in the nation, when assuming a market rate of return.
WASHINGTON—(BUSINESS WIRE)—A decades-long push by fiscal conservatives to dismantle public-employee pensions has backfired by unleashing economic, financial, and revenue volatility, the National Conference on Public Employee Retirement Systems said in a study released today.
Negative pension reforms – such as cutting benefits, increasing employee contributions, and adopting plans that force retirees to shoulder all risk – have contributed to disruptive swings in the economy since the 1980s, according to the new study, “Economic Volatility: Hidden Societal Cost of Prevailing Approaches to Pension Reforms.”
“We know from experience and careful study that the assault on public-employee pensions has come at a great cost to individuals who worked and sacrificed for the promise of a reliable income in retirement,” said Hank H. Kim, Esq., executive director and counsel of NCPERS. “This study, coupled with our previous examination of how pension changes have spawned income inequality, helps to deepen the understanding of how damaging many supposed ‘reforms’ have been for our nation’s economic well-being.”
The economic volatility study draws on empirical data from sources including the U.S. Census Bureau, the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the Tax Policy Center, and analyzes both national and state data.
In one key area of focus, the study looked at the how the percentage of the workforce that is shifted to defined-contribution plans, such as 401(k) plans, impacts volatility. NCPERS found that for each 1% shift to defined-contribution plans:
Economic volatility, as measured by changes in median income, rises 2%.
Financial volatility, as measured by changes in the S&P 500 stock index, rises 8%.
Revenue volatility, as measured by changes in total U.S. revenues, rises 54%.
At the state level, the impact was even more devastating, with economic volatility rising an average of 10.5% for each negative change to defined-benefit plans, and revenue volatility rising 65.1%.
NCPERS Director of Research Michael Kahn unveiled the report at the NCPERS annual convention, which concluded in San Diego on May 19. He urged policy makers to consider the vital role pensions play in promoting stability as they evaluate any future changes to the defined-benefit plans.
“Pension beneficiaries keep receiving their pension checks in good as well as bad economic times,” Kahn said. “Incomes from jobs and investments may decline during hard economic times, but pension checks provide an economic cushion and help local economies thrive.”
Huge assumption in the quotes, that has been disproven by events. They might want to rethink how they try to sell their study.
Connecticut Pensions: Pushing Off Payments Til Later Ain't Reform
Nevada Pensions: Liability Trends
Calpers Myths vs. Facts: Page is Gone But The Internet is Forever