Around the Pension-o-Sphere: Actuarysplaining, Yay for Nebraska, State-Run Private Pensions, and Puerto Rico
by meep
Want some actuarysplaining from Jane the Actuary?
Of course you do:
Why Public Pension Pre-Funding Matters (An Explainer)
Years ago, as an actuarial student, preparing for actuarial exams, I learned the ins and outs of pension plan funding methods and funding requirements, and I have a vague memory of reading about public pensions, which were not a part of my day-to-day work. I remember pretty much two items: first, the eye-popping idea that state constitutions promised state and local employees that they could keep their existing benefits, not just for past service accruals, but for all future years of employment; and, second, the notion that it was generally accepted for public plans to be un- or underfunded because, after all, unlike private employers, whose very real risk of bankruptcy was highlighted by the Studebaker plan failure that was the motivation for the Erisa pension funding legislation of 1974, public employers posed no such risk to their employees since state and local governments would always be around.
Now, that particular reading has long since been consigned to the recycling bin, so I can hardly cite chapter and verse on that statement. Did the author say, “It’s perfectly fine for public pension plans to be unfunded” or maybe just “It’s not as bad a problem as for private employers” or even “Some people might claim that it’s OK”? I don’t know. In any case, the idea seems antiquated in 2018.
But these various recent news items suggest that now is as good a time as any to actuary-splain a bit: Yes, it matters that public pensions are funded, and, no, it’s not just a matter of greedy pension-cutters using underfunding as an excuse to destroy pension benefits.
Read the whole thing — there are two pages, so make sure you make it to the end.
Finally, I titled this article, “Why Public Pension Pre-Funding Matters,” and, in fact, a well-funded plan goes a long way toward remedying the risk of legacy costs — if the funding valuations and asset allocations are based on assumptions that are sufficiently conservative so as to minimize the risk of future adverse experience. But it’s not an easy solution to the problem of a legislature that too easily succumbs to the temptation to defer funding, or local school boards that are too eager to game the system. And pension funds can themselves be at risk of further problems, when the state uses the funds to dole out political favors by means of investment choices or management firms.
It’s a good piece – you should check it out.
Here’s another recent one from Elizabeth Bauer (aka Jane the Actuary): ‘Ubi Est Mea?’ And Social Security Spending
WAY TO GO FOR VOTING DOWN POBS
Let’s hear it for Nebraska!
They were presented with a proposal to issue pension obligation bonds:
OPS seeks $300 million in bonds to shore up pension plan, shield classrooms from cuts
A badly underfunded pension system has blown a sizable hole in the Omaha Public Schools budget, forcing the district to divert tens of millions annually to shore up its retirement fund.
To blunt the impact of that cost-shifting on the classroom, leaders of the district charged with educating more of the state’s poor students than any other are hoping the Nebraska Legislature will advance a bill authorizing OPS to borrow $300 million and issue bonds to help pay down the pension debt.
So-called pension obligation bonds seek to infuse new dollars into struggling pension funds and over time take advantage of the margin between interest rates and the traditional returns on pension investments. OPS officials are hoping the bonds will reduce the extra money they are being forced to put into pensions, an escalating figure that is projected to rise from $18.7 million this year to nearly $27 million by 2022.
“Any cuts all filter down to the kids,” said State Sen. Brett Lindstrom of Omaha, who is helping the district push the bond plan. “We’re in a bad predicament here, and we’re trying to fix it.”
IT’S FOR THE KIDS!
And they voted it down:
The Nebraska Legislature on Wednesday rejected authorizing the Omaha Public Schools to issue $300 million in bonds to shore up its badly underfunded pension fund.
The pension obligation bonds would have sought to take advantage of the margin between interest rates and the traditional return on pension investments to blunt cuts the pension shortfall is now forcing in the district’s budget.
Proponents said the bonds could spare cuts in the classroom while also saving district taxpayers millions.
But they could not overcome concerns that the bonds could prove a risky investment, would limit the district’s financial flexibility and would not have required voter approval. In the end, an amendment including the plan fell three votes short of the 25 needed to advance, failing 22-17.
“There is a huge risk involved,” said Sen. Mark Kolterman of Seward, chairman of the Legislature’s retirement committee. “The last thing we want to do is tie up OPS so they can’t function as a school district.”
Celebrate!
And here was a great remark:
“I don’t think borrowing money to make money is ever a good idea,” said Sen. Lou Ann Linehan of Omaha.
Yes, it’s called leverage, and it can be very destructive.
STATE RUN PRIVATE PENSIONS
Because they run their own finances so well
This is not the first time this idea has bubbled by on the blog:
2015: Government and your money: GIMME GIMME GIMME
2016: Public Pensions and Finance Watch: New York Primary Election Day Round-Up
2017: Friday Trumpery: No Exemptions for State-Run “Private” Pensions [UPDATED]
Let me grab my explanation from 2016:
THE ATTEMPT TO HAVE ‘PRIVATE’ PENSIONS RUN BY THE STATES
This idea has been around for a while. I haven’t covered it much, other than noting the silly attempt in Illinois. The Illinois attempt won’t get anywhere, because they don’t have enough money to administer it. (I will get to Illinois in a minute.)
California has caught this bright idea:
‘Instead of addressing the estimated $600 billion in unfunded liabilities in California’s beleaguered public-employee pension system, Democrats in Sacramento have instead decided to “solve” a growing pension crisis in the private sector. In 2012, Governor Jerry Brown signed a measure that created an investment board and authorized a “feasibility study” of various options for a state-backed private-pension system. That study came out last month, and the legislature is now vetting bills that would put its recommendations into action.
….
‘The state’s public-sector unions backed Brown’s bill. As it turns out, union-friendly politicians hatched the private-sector pension plan a few years ago as a way to deflect attention from the public system’s massive unfunded liabilities. The idea was to give private-sector workers some modest benefit as a way to dampen public support for pension reforms.’I really don’t see that working.
So now you know the set-up, and why it seems that the states with some of the worst public pension problems are hawking this idea.
Here are the recent stories related to this:
- NY Times: New York Envisions a State-Run Retirement Plan for Private Workers
- Blackstone Official Pushes Required Retirement Savings, Backed by Washington
- California: John Chiang joins race to California insolvency with CalSavers – Orange County Register
- Harvard Business Review: Americans Haven’t Saved Enough for Retirement. What Are We Going to Do About It?
- Governing Magazine: Think Income Inequality Is Bad? Retirement Inequality May Be Worse.
- Pew Trusts: Auto-IRAs Could Help Retirees Boost Social Security Payments
- New York: AARP pushes for statewide private pension plan
Some of this re-taking the privatization of Social Security idea, and running with it, with different levels of mandatory or voluntary aspects.
So, some states may be doing this. Some are voluntary (expect these to die) and some supposedly mandatory (these could die, too). But in some of these cases, there’s big problems in trying to get these started just to begin with.
I am very skeptical of these types of things — I used to be pro-privatization of Social Security, but a variety of factors made me change my mind hard.
The main thing came from what I’ve seen with public pensions — any huge pot of money, with the government having a finger directly on it — that’s ripe for lots of corruption.
PUERTO RICO WOULD PREFER NOT TO CUT, THANKS
Let’s close this one out with Puerto Rico.
You may have heard their finances suck (that’s the technical term.)
So, a board told them: you must cut all the cash you’re throwing at public employees and retirees.
Board orders pension cuts, studies Puerto Rico wage increase
A federal control board overseeing the finances of Puerto Rico’s government demanded cuts to the island’s shaky public pension system Wednesday and said it will consider raising the minimum wage only if certain conditions are met.
The demands were outlined in various letters to Gov. Ricardo Rossello, who has repeatedly rejected imposing a 10 percent cut to pensions of more than $1,000 a month and is seeking to increase the minimum wage from $7.25 an hour to $8.25 by 2021.
The board also stated that mandatory vacation and sick leave should be immediately reduced to 14 days a year as opposed to Rossello’s proposed seven days a year. It said a Christmas bonus should be made voluntary by 2019 as part of a proposed labor reform that Puerto Ricans have widely rejected.
The governor of PR said… nah, we’re not doing that.
Puerto Rico Files Fiscal Plan Without Layoffs, Pension Cuts | Business News | US News
Puerto Rico’s government submitted a required fiscal plan on Thursday that excludes pension cuts and layoffs sought by a federal oversight board as legislators in the U.S. territory angered by its demands debate a bill that would withhold payments for board member salaries, among other things.
Gov. Ricardo Rossello told reporters that he hopes his administration and the board can reach an agreement on the fiscal plan so they can move toward restructuring a portion of the island’s more than $70 billion public debt load amid an 11-year recession. He said that if the board certifies a fiscal plan that contains layoffs and a 10 percent cut to a pension system already facing nearly $50 billion in liabilities, his administration will not implement those measures.
“We are asking the board to reconsider their position of trying to impose public policy and let the government of Puerto Rico do its job,” Rossello said.
Here is an NPR piece on the situation
But here’s the deal: the governor essentially can’t do much if the board wants to impose these cuts.
PR Gov. Rossello to Present Rogue Fiscal Plan Thursday [April 5]
“The government opposes these additional measures to reduce pensions because they impose a disproportionate burden on the workers and retirees of Puerto Rico,” Rossello said in the letter, adding that the government believes that the revisions would “significantly depress” economic growth for the island.
However, the board can choose to impose a unilateral fiscal turnaround if Rossello’s defiance continues.
All the governor really has on his side is trying to make the board look bad, because it’s not like he has vast financial resources to draw upon to fulfill all these desires not to cut what essentially unfunded pensions.
That’s it from me!
See ya later!
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