80% Fundedness: An Excellent Example and The Usual Disappointments
by meep
It’s been a couple of months since I last did an 80% fundedness myth round-up.
For those new to this feature here’s what’s going on:
- One often sees something of the nature saying that having a greater than 80% funded ratio for public pensions indicates the plan is “healthy”
- This is not true.
- There are different dimensions to the offense – the aforementioned use of the word “healthy”; even worse: calling 80% fundedness “ideal”; making this assertion without pointing to any particular authority on the matter; using a “they say” or “experts say” formulation
There are many reasons I hate the 80% Funding Myth, including sloppy journalism.
The biggest problem I have is that people start thinking 80% is the appropriate level…. and if one is at 80% fundedness at the height of market values, guess what happens when the market falls?
LINKER LOVE
But first thanks to my link-buddies:
- Pension Tsunami – concentrating on public pensions
- Wirepoints – concentrating on Illinois & Chicago politics and finance
- Truth in Accounting – which specializes in public finance and accounting – who linked via their State Data Lab as well
- The Other McCain – an eclectic mix of conservative politics
Howdy to my fellow Actuarial Outpost denizens, twitter followers, etc.! And thanks to my unknown facebook linkers!
SOMETHING HAPPY: A WELL-REPORTED PIECE
This has nothing to do with 80% fundedness at all, but before I get into the depressing usual problems, I want to point out a well-reported article. I will give you a little flavor, pulling out the items that really stood out to me.
OC [Ocean City, Maryland] Pension Fund Changes Eyed For Long-Term Stability
OCEAN CITY — The Ocean City Mayor and Council learned the town’s combined employee pension plans are in healthy shape at nearly 90 percent funded, but made some recommended adjustments in the calculations to help ensure they continue to move in the right direction.
The council on Tuesday got a lengthy review of the status of the town’s two employee pension funds, including one fund for general employees and another for public safety employees. The presentation was long and detailed, but boiled down to its simplest terms, Ocean City’s two pension funds are generally in good shape at roughly 90 percent funded, but small changes were recommended to move the funds to 100 percent funded or better.
…..
Ed Koebel of Cavanaugh MacDonald Consulting presented the town’s five-year pension review to the council on Tuesday. Koebel said the funds were generally healthy at about 90 percent funded, but recommended a combination of small changes in the town’s pension policy to ensure they keep heading in the right direction. There are certain assumptions made in regards to employee contributions through salaries, anticipated retirement rates for current employees and even expected mortality rates for retired employees who are aging and still in the plans.
…..
Koebel explained Ocean City has always made its state contributions to its employee pension funds even during times of economic peril, such as the recession about eight or nine years ago. He said other jurisdictions and even private companies were not always able to do so. As a result, Ocean City’s pension plans are funded at around 90 percent while some neighboring jurisdictions had dropped to as low as 70 percent.
…..
Another key indicator is employee salaries and Koebel said Cavanaugh MacDonald was recommending Ocean City officials resist the temptation to keep increasing salaries other than step increases in an effort to reduce the long-term impact on the pension plans.“Part of salary growth is inflation, but there is also merit-based growth and we’re recommending a drop in those rates pretty significantly,” he said. “We like to think each year an active employee is going to get a pay raise and we have to make certain assumptions on that. There will be gains and losses each year and we just try to smooth out those losses and gains.”
Councilman Wayne Hartman pointed out the proposed policy adjustments appeared to be an attempt to accelerate the effort to get the town’s pension funds at 100 percent at the risk of shorter-term impacts on the plans.
“It seems like we’re taking assumptions that lessen our liability,” he said. “We’ve lessened our risk by assuming the blue-collar mortality table. We’ve lessened our risk and taken every step possible to lower our liability and it concerns me. I wouldn’t want to put this liability on future generations.”
Mayor Rick Meehan pointed out the town’s long-standing policy of continually contributing to the pension plans has positioned it to reach the 100 percent goal quickly while others are scuffling along at 70 percent.
…..
Koebel said whatever policy adjustments were made, it wouldn’t change the town’s obligation to make annual contributions to the funds.“Even if you were at 110 percent funded, you couldn’t take an off-year,” he said. “You still have to put in a contribution from the town every year. That’s built into this. It’s your funding policy and it has allowed you to have a healthy pension fund balance.”
The reporter detailed who said what, laid out the issues fairly accurately re: assumption-setting and contribution policies.
The mayor and the town councilmembers really get it, too. It sounds like prior valuation assumptions were so as to get a smaller measured liability, but there’s a risk in that — and sounds like they recognize that danger.
But most of all – NO CONTRIBUTION HOLIDAYS.
This has been the problem with some of the worst pension situations —and for some, when the pension got to be over 100% funded by their assumption set, they went back and boosted pension benefits, saying it would cost nothing.
California, I’m looking at you.
YAYS ALL AROUND FOR THE OCEAN CITY CREW!
I cast a very wide net when I trawl for public pension stories, and sometimes I’m pleasantly surprised.
Unfortunately, I’m rarely pleased by what I find.
SAME AS IT EVER WAS
Here we go:
Tom Mooney of the Providence Journal:
Currently 116 local pension funds make up Rhode Island’s Municipal Employees Retirement System, which enjoys a healthy funding status of 83 percent. (Any plan 80 percent or more funded is considered healthy.)
Indiana Public Retirement System Summary Annual Report:
A fund is considered healthy when it achieves 80 percent funded status.
Debby Woodin at the Joplin Globe:
Accountants describe a fund as being in good condition if it has a funding ratio of 80 percent or more.
Accountants?
Sounds about right to me.
Deb Sellmeyer at St. Louis Post-Dispatch:
Missouri’s PSRS has consistently been at or above the healthy 80 percent funding level, which reflects how solvent our teacher pension fund has been.
Jessica Williams, The Advocate:
Few municipal systems in the country are fully funded, and 80 percent funding, a threshold private plans are required to meet, has long been used as a benchmark for a healthy plan.
The pension fund currently has enough money to meet 58 percent of its long-term obligations to retirees, a level that already is below the 60 percent threshold many in the industry use to judge a pension system’s health.
Jared Rutecki, Better Government Association:
As a rule of thumb, pension experts generally consider a pension fund healthy if it has on hand at least 80 percent of the financial resources it needs to cover future obligations to retirees. There are some exceptions, but most big pension funds in Illinois are nowhere close to meeting that benchmark, with many in the sub 40 percent category.
On that last one.
This is not the first time the Better Government Association people have made my list. Judith Crown made it there January 2016,
There are other aspects of that piece that also makes me suspicious of where they’ve been going with their analysis of Illinois pensions.
But my point is that anybody who points to the 80% as some kind of measuring stick (as opposed to comparing against 100%), makes me immediately suspicious of the soundness of their reasoning re: pension solvency.
80% is completely arbitrary; 100% is not.
If you move the goalposts to 80%, then it makes it easier to move them again… perhaps even down to 50%.
THE LUKEWARM OR CONFUSING
Well, in some of these cases, it’s definitely not Hall of Shame contenders – they’re just doing straight reporting in that somebody used the 80% comparison, and the reporter conveyed the information.
Jonathan Handel, The Hollywood Reporter:
Combined with the existing downward trend, that adjusted figure could portend the WGA Plan funding level moving closer towards the 80 percent mark, below which it could be considered an “endangered” plan in the so-called yellow zone. The result could be benefit cuts and/or increased employer contributions.
…..
Adjusting the discount rate assumptions to 7.25 percent would put the SAG and AFTRA plans at the 80 percent threshold of the yellow zone, and the IATSE plan well into dangerous territory at about 74 percent.
Actually, the “yellow zone” has meaning for these pensions — they’re multiemployer private pensions (MEPs), and dropping below 80% mark has meaning in regulation. Certain actions occur if a MEP drops into lower fundedness zones.
Unlike with public pensions, where if they drop below 80%, politicians generally point to how close to 80% they are. As opposed to how far from 100% they are.
The state now defines a “healthy” pension plan as one that is 80 percent funded.
I have no idea of the state of Rhode Island really put this into law, in those terms. Maybe the reporter is correct about this.
Ashly McGlone, Voice of San Diego:
If public pensions were treated like pensions in the private sector, some local agencies would have to take extra steps to boost funding above 80 percent.
The federal Pension Protection Act of 2006 classified certain large private pensions with less than 80 percent funding “endangered,” or in the yellow zone, and deemed some of those with less than 65 percent funding “critical,” or in the red zone.
….
Even at 80 percent though, Kiernan said people assume that’s good enough.“It’s an urban myth,” Kiernan said. “That just isn’t true.” Postponing extra payments further into the future can also cause intergenerational equity problems, which is just “bad public policy,” he said.
This is pretty straight reporting, but not exactly good enough to merit a hero ranking. (I have no new heroes for this post — like in real life, heroes come very infrequently.)
Richard Ciccarone and Jeffrey L Garceau, MuniNet Guide:
Below 70% funding has been considered a warning zone, while well funded pension plans are expected to have funded at least 90% of their liabilities.
I don’t know…maybe I should push this into the hall of shame.
Jim McConnell, Chesterfield Observer:
While the county’s SRP funded ratio is 80 percent – the threshold for a fiscally healthy pension plan as cited in the federal Pension Protection Act of 2006 – the schools’ SRP currently is less than 20 percent funded.
That standard is only for private pensions, not a public plan. The PPA of 2006 doesn’t apply to public plans at all.
If it did… well, public pensions would be screaming like stuck pigs because of what they’d be required to use for valuing the pensions.
Related Posts
At the Half: Updating the 80 Percent Funding Hall of Shame
The End of an Era: Where are the 80% funding myths of yesteryear?
Lunchtime Pension Post: Around the Web in 20 Minutes
