STUMP » Articles » Public DB Pension Fund Managers: Hey, Don't Close the Plans Just Because They're Ever-More-Expensive! » 20 November 2017, 04:54

Where Stu & MP spout off about everything.

Public DB Pension Fund Managers: Hey, Don't Close the Plans Just Because They're Ever-More-Expensive!  


20 November 2017, 04:54

Oh wait, that’s not the title of this press release and paper.

But it’s the meaning.


Before I rip into a very misleading paper, let me address my blogging frequency/pattern.

I will likely be sparser and sparser with my blogging. I am too tired to do much during the week blog-wise. I may be writing stuff on the weekend to post later – as of right now, I have about 10 posts in draft, and I’m writing this in bits as it is. I may chop up things… I may just put out what I have and let future development go hang in the wind.

I’m basically letting a lot of stupid stuff go.

I had fun with the Cook County soda tax, which was really easy to put together, and I may or may not be doing additional posts now that they’re having to deal with fiscal reality there. But that’s boring wrangling, and I can put up with only so much WON’T ANYBODY THINK OF THE CHILDREN wailing from politicians.


If you come across stories that are in my wheelhouse, especially anything saying less than full funding is okey-dokey for pensions, please tweet it at me @meepbobeep or email me: I do appreciate tips sent to me, even if I can’t blog about it right now. I save everything.

Speaking of, I came across a press release and paper intimating this very thing last week (sent by a few people… thanks, I may have missed this particular bit of stupidity.)


Today, I will lay out the paper’s arguments. And hint at things to come. I do have at least one additional post to make from this.

To give you a flavor:


On Friday, I saw a press release from NCPERS, which is a non-profit org representing public pension funds. I have had run-ins with them before. (Or, rather, they put out something stupid, I say something about it, and they ignore me.)

This is the press release: NCPERS Analysis Shows Public Pension Plans Consistently Meet Obligations

It’s a press release, so they want it quoted. Fine, here is the subtitle plus the meat of the release:

Bids to Dismantle Plans are Misguided, NCPERS Says

WASHINGTON—(BUSINESS WIRE)—State and local pension plans have consistently been able to meet their benefit and other payment obligations over the past quarter century, according to a data analysis published November 16 by the National Conference on Public Employee Retirement Systems.

Between 1993 and 2016, contributions and investment earnings by 6,000 public pension plans exceeded benefit obligations in all but four years. And during those four years – 2002, 2008, 2009, and 2012 – all plans met their obligations in the aftermath of recessions because they had built up cushions during normal times, according to the analysis conducted by Michael Kahn, director of research for NCPERS.

The findings offer a striking counterpoint to initiatives under way in some states and municipalities to dismantle public pensions because they are considered under-funded, said Hank H. Kim, NCPERS’ executive director and counsel. “Our analysis demonstrates that pension plans can tolerate ups and downs in the markets and still meet their current obligations,” Kim added. “While funding ratios are an important actuarial tool, they are not a proxy for a plan’s ability to pay benefits here and now.”

Critics of public pensions often cite funding ratios of less than 100% as evidence of pressing financial problems, but this is faulty logic, Kim said. Contributions and earnings continue to flow into plans even as benefits are being paid out, he noted. “Shutting down a pension plan because it is not fully funded is like turning in the keys to your home because you can’t pay off the entire mortgage balance this month,” Kim said. “It is an incredibly short-sighted action that destabilizes workers and their communities, and we want it to stop.”

Kahn found that individual states – regardless of whether their pension plans were underfunded or fully funded – had between five and eight years in which income fell short of obligations, and had to draw on their cushion to pay benefits. Far from being a cause for concern, “this is exactly what public pensions are designed to do – to provide a steady income over the long haul,” Kahn noted. “Pension assets typically are invested over a 30-year time horizon, so plans aren’t blown off course by short-term market shifts.”

NCPERS offered four recommendations for public pension plans:

-Stop dismantling plans on grounds that they are not fully funded.

-Improve funding by determining the appropriate levels of required employer contributions.

-Establish a pension stabilization fund that can set aside money from a certain revenue stream to be used in special circumstances such as a recession.

-Implement a mechanism to ensure that full employer contributions are made on a timely basis, perhaps by making employer contributions a nondiscretionary part of the budget.



That said, I actually agree with the first point — that public pensions should not be dismantled on the grounds that they’re not fully funded.

Thing is, that’s not the real objection. The real objection is the expense.

But hey, that’s just a summary. What about the full paper?


Well, in most places. Ignore Greece, please. Ignore Detroit. Ignore Rhode Island. Ignore Prichard, Alabama.

Here’s the paper.

Don’t Dismantle Public Pensions Because They Aren’t 100 Percent Funded

Have you ever heard that policymakers want to close participation in a pension plan to all new hires? How about cutting benefits and increasing employee contributions, or converting defined-benefit pensions into do-it-yourself defined-contribution plans?

In the last decade or so, state and local policymakers have been doing exactly these things. In essence, they have been slowly dismantling public pensions. Why? Because, they argue, pension plans are underfunded and cannot be sustained. They also argue that taxpayers cannot afford public pensions. These are misguided arguments and actions. Ability to pay depends on whether an entity can meet its cash flow needs and whether the total assets of the entity – the public employer – are a reasonable fraction of its total liabilities.

Hmmmm. Is 80% creeping in from somewhere? Oh, if only it were that innocent.

….New research shows that funding status has little correlation with a pension fund’s ability to pay the promised benefits. Building on Tom Sgouros’s recent work, John Mctighe et al. argue that full funding of public pensions is not only a misguided goal but also waste of taxpayer money.



Let us take a preview of what I’ll be critiquing in a later post or posts.


Data and Methodology

We have used data from the annual survey of public pensions by the U.S. Census Bureau for 1993–2016. We extracted variables such as total employee and employer contributions, investment earnings, total benefit and other payments, and assets. We have also extracted pension obligations for 2016 to examine the current funding status of state pension plans. Unfortunately, the Census data do not provide pension obligations information for local plans.

The ability to pay benefits during 1993–2016 is measured by the difference between income from contributions and investment earnings and expenses to pay benefits. To examine the ability to pay at the state and local level, we compare the four states with the highest levels of public pension funding with the four states with the lowest levels of pension funding. In cases where expenditures exceeded income, we examine whether the pension funds had enough cushion to meet the shortfall. (By “cushion” we mean the sum of money that is accumulated when income exceeds expenses.)

The analysis is based on past cash flows. Fair enough, that’s reality. Oh, and the Census data do cover local plans. At least some local plans. I will give info later.

Look at this key graph from the paper:

It forms the core of their empirical argument: only rarely do the incoming cash flows of investments and contributions fail to cover the outgoing pension benefits.

I want you to think about the three lines on that graph: assets, benefits paid out, and contributions + investment earnings.

Isn’t it interesting that contributions & investment earnings aren’t separated from each other? I’ve downloaded the data, and that’s not how it’s presented – it’s separated out into state contributions, local contributions, employee contributions, and investment income.

What would you like to bet that certain items are growing inexorably, while other bits are not quite so reliable?


In addition, they invent this concept called “cushion” — which is, basically, drawing down the assets. Basically, because the crap years they didn’t have zero assets, and therefore could pay for benefits… that’s not exactly a winner argument.

The assets are supposed to be covering the benefits. That’s what’s expected.

The contributions are supposed to be generating bigger assets to cover future benefits. Not pay for current benefits. The contributions are supposed to be for current employees, not current retirees.


I love how they’ve dropped the 80% farce. Now they’re going with “If it’s not totally pay-as-you-go, it’s just fine!”

Ultimately, it will be: “We can still cover this pay-as-you-go!”

Forgetting what “pre-funding” means and why pay-as-you-go is an extremely fragile way to “plan” for public employee benefits.

In my next post, I will be drawing from the Census pension data and providing some alternative graphs.

Maybe we’ll see the real reason there have been calls to switch to DC plans… not that that switch will necessarily help much.