STUMP » Articles » Around the Pension-o-Sphere: Actuaries Testifying, New Standards, Actuary Bloggers, Pew Report, and Connecticut » 20 April 2018, 16:52

Whee.

Because I want you to feel my pain, I’m giving actuaries pride of place.

ACTUARY TESTIFIES TO CONGRESS

This past week, a staff actuary from the American Academy of Actuaries testified in front of the Congressional committee looking about bailing out multiemployer plans. You can watch the recorded testimony here.

The prepared testimony can be seen here.

Here is a piece on the testimony:

Ted Goldman, senior pension fellow with the American Academy of Actuaries, noted these same issues in his testimony. He pointed out that there are fewer unions and fewer young employees joining them, leading a lower proportion of active workers who contribute to their plans than inactive workers who do not contribute. He also noted that many withdrawn employers are bankrupt, meaning they are unable to pay their full withdrawal liability.

Goldman explained that when the Employee Retirement Income Security Act (ERISA) was passed, it protected benefits that plan participants had already accrued, often referred to as the “anti-cutback” rule. In addition, employers contributing to multiemployer plans became responsible not only for their negotiated contributions, but also for any funding shortfalls that developed in the plans. ERISA also introduced minimum funding standards, expanded participant disclosures, and fiduciary standards.

An issue that led to the current state of multiemployer plan crisis was that during the late 1990s, very strong asset returns led many plans to improve benefit levels in order to share the gains with participants and protect the deductibility of the employer contributions, according to Goldman. However, these years were followed by a period of very poor asset returns that erased much of these investment gains. The increased benefit levels were protected by ERISA’s anti-cutback provisions. “This combination of temporary asset gains and permanent benefit improvements is a contributing factor in the challenges facing multiemployer plans today,” he said.

Goldman added that plans have invested in diversified portfolios to try to achieve investment returns that can support higher benefit levels and lower contribution requirements than would be possible if the assets earned risk-free rates of return. However, plans need additional contributions or reduced benefits if the anticipated investment returns are not achieved.

He pointed out that the 2000 dot-com bust left some plans financially weakened and the 2007 to 2009 recession further strained the financial stability of most plans.

John Bury has some pointed words in rebuttal:

It is the actuary who is supposed to set assumptions so that promised benefits can be paid. For multiemployer and public plans actuarial judgment has been compromised to provide the numbers (low numbers) that their clients are looking for. This is what has brought these plans to insolvency.

Had Representative Roe been able (or knowledgeable enough) to follow up on his basic point he may have gotten some response touching on unexpected market drops or unexpected increases in life expectancies. Those lame excuses should not be tolerated. Actuaries are in the business of predicting accurately. To be wrong (either on the high or low side) by a little is understandable. To be this wrong is only understandable if you see the actuarial profession, as currently constituted, as being the problem with Defined Benefit plans.

Part of the issue, of course, is that the actuaries who would give more conservative assumption sets were not hired. Just like the bad pricing on the structured securities in the mid-2000s that led to the credit crisis: the people with a clear view of the risks involved weren’t the ones making those deals. Any modeler giving too-high-a-price should have sought work elsewhere.

It’s related to Gresham’s Law, but more than anything else, the people hiring the actuaries and the actuaries themselves weren’t the people who would get hurt by overly optimistic (and therefore low) valuations.

ACTUARIAL STANDARDS CHANGE

Speaking of… there are three pension-related Actuarial Standards of Practice which have exposure drafts for updates.

ASOP number 4: Measuring Pension Obligations and Determining Pension Plan Costs or Contributions
ASOP 4 exposure draft for comment

ASOP number 27: Selection of Economic Assumptions for Measuring Pension Obligations
ASOP 27 exposure draft for comment

ASOP number 35: Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations
ASOP 35 exposure draft for comment

The email I received made this comment:

The revisions are based on suggestions from the Pension Task Force report issued in 2016 as a result of comments received on a 2014 Request for Comments on ASOPs and Public Pension Plan Funding and Accounting as well as a subsequent 2015 public hearing held on proposed ASOPs applicable to actuarial work regarding public plans. The ASB directed its Pension Committee to draft appropriate modifications to pension ASOPs to implement the Pension Task Force suggestions. The modifications are reflected in the exposure drafts of ASOP Nos. 4, 27, and 35.

The comment deadline for the exposure drafts is July 31, 2018. Information on how to submit comments can be found in the drafts, which can be viewed here.

I have not yet read the ASOP exposure drafts, and I’m unsure that I’ll submit any comments. I said what I wanted to say back in 2014, attended the meeting in 2015, and I don’t necessarily see the point of repeating myself in this case. These people saw what I wrote. They see what’s going on now.

The Actuarial Outpost discussion on these exposures are here. We may create a new thread, but I like keeping things together.

ACTUARY BLOGGERS

There are two primary actuary bloggers I follow: John Bury (aka burypensions) and Elizabeth Bauer (aka Jane the actuary).

In addition to what I linked from Bury above, he has the following:

• Multiemployer Plan Primer and My Free Speech
• EA18 (8) Highway to PBGC Premium Explosion
• Pew Ranks – 2016
• EA18 (7): IRS Hiring and Al Franken
• Actuary Watching NJ Politicians Like a Hawk

He’s got a lot more than that — go to his site.

Bauer blogs in a few places, but the most relevant to this blog are her Forbes pieces:

• Is This Longevity-Annuity Social Security Proposal The (Retirement) Holy Grail?
• Does The Medicare Payroll Tax Still Make Sense?
• 3 Things That Caught My Eye In The Pew Report On Public Pensions

Funny she should mention that Pew report, which I linked to last week.

PEW AND NYT REACTIONS

PEW PEW

via GIPHY

(not sorry)

After the Pew report came out, and the NYTimes piece, reactions also came out.

At Forbes: Public Sector Pensions Are A Problem

The New York Times has a great story on how government pensions are a big problem*that are crowding out spending. The article discusses a retired college president who has a $76,000 a month pension as an example, but the problems go far beyond the top 1% of government employees.

Consider Scranton, PA. This small city has a serious pension funding problem, like a lot of cities in Pennsylvania. Aside from the usual problems like not making enough annual contributions and subpar stock market performance, Scranton illustrates how poorly designed pensions can be. In Scranton 58% of police and firefighters are on a disability pension, which means they were able to retire before the mandatory minimum age. In 2012, the average age of retired Scranton police officers was 44.9 years old. Some of these “disabled” cops go on to get second jobs as cops in nearby areas.

While there should be obvious agreement that retiring at 44 is a problem, it seems like an under-appreciated problem to me that the standard retirement age for many public sector jobs is 55. I understand that we don’t want senior citizens kicking down doors and chasing down robbers, but it’s a big logical jump to go from there to saying that we should just pay them to do nothing.
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Many liberals look around and see schools struggling to pay for books and give teachers raises and they blame conservatives who won’t raise taxes. In many places, however, lucrative and poorly designed pensions that public sector unions have bargained for are crowding out spending in a significant way.

Mother Jones: The Problem With Public Pensions Isn’t Size, It’s the Politics of Funding

The New York Times ran a piece this weekend about the growing burden of paying public pensions. Naturally it features a few examples of outrageously high pensions, but the overall gist is that the cost of pensions is getting so high that it’s crowding out spending on other things. Dean Baker comments:

Workers sign contracts that specify compensation. Most of it is in direct pay, but benefits like pensions are often part of the contract….Taking back pensions for which people worked is like taking back a portion of their pay after the fact.
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The real issue, as everyone knows, isn’t so much the size of public pensions as the fact that they’re almost never fully funded. Politicians, who mostly work on timeframes no further out than the next election, are simply more willing to negotiate generous pensions than they are to negotiate higher salaries that might require tax hikes on their watch. It’s like Wall Street’s IBGYBG: “I’ll be gone, you’ll be gone.” And sure enough, now that the pension bills are coming due, all the politicians who passed the buck—literally—are safely out of office.

Dean Baker at The Center for Economic and Policy Research: The War on Pensions Continues

There has been an ongoing battle in major media outlets against public sector pensions. Papers like The New York Times and The Washington Post have regularly featured pieces telling readers that these pensions are unaffordable.

This crusade, carried on mostly in the news pages, has often taken bizarre twists. Back in 2011 the Washington Post had a front page article complaining about generous pensions that highlighted the story of former employer who was getting a pension of $520,000 a year. People who read through the article discovered that this former employee was a former administrator who was under indictment for fraud at the time, not the typical California employee. [This was Bell, California]

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It is certainly possible that governments pay some of their workers too much. But governments also sometimes pay too much on contracts or sell land or give away various rights for too low a fee. No one suggests retroactively taking back excessive payments on generous contracts or charging an additional fee for land sold fifteen or twenty years ago. For some reason, the pension crusaders feel that workers uniquely should be able to have terms of their contract changed after the fact to their detriment.
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There are several states and cities (such as Illinois and Chicago) where benefits are substantially more generous, often averaging over $30,000 a year. In these jurisdictions, workers do not contribute to Social Security, so their public pension is likely to provide the overwhelming majority of their retirement income. That fact is often left out of reporting on this topic.

Panama City News Herald: OUR VIEW:Public pensions are on an ‘unsustainable’ course

or decades, politicians across the country have blissfully adopted an “If we ignore it, maybe it’ll go away” approach to the public-sector pension crisis. But it’s not going away.

The Pew Charitable Trusts this week released its latest report on the fiscal health of government pensions. The news remains grim — and continues to get worse.

“Many state retirement systems are on an unsustainable course, coming up short on their investment targets and having failed to set aside enough money to fund the pension promises made to public employees,” the study concludes. “Even as contributions from taxpayers over the past decade doubled as a share of state revenue, the total still fell short of what is needed to improve the funding situation.”

Among the findings for the year 2016:

• States had a cumulative deficit of $1.4 trillion, up a whopping 27 percent from 2015. The trend has been ever upward since 2000.
• The average pension system assumes an annual return on investment of 7.5 percent, a number that allows many states to disguise funding shortfalls by projecting overly optimistic gains. The systemwide average return in 2016 was 1 percent.
• States are now taking on higher levels of investment risk in order to try to minimize shortfalls, an approach that could have major long-term consequences in the face of market volatility.
• Only four states — New York, Tennessee, South Dakota and Wisconsin — had at least 90 percent of the assets needed to pay promised benefits. Florida was at 79 percent.

The crisis is directly tied to political decisions dating back decades to curry favor with government unions by increasing retirement payouts and benefits. In return, those same labor organizations donate generously to elected officials — largely Democrats — who support sweetheart pension deals.

Pew Study: Connecticut Near Bottom In Pension Funding

New York and Connecticut have some the best and worst funded state pension plans in the country, respectively. According to the Pew Charitable Trust, New York has enough money to meet 90 percent of its retirement obligations to state workers. Connecticut has only 41 percent of the money needed.

Both pension funds ask state workers to kick in about the same amount. Both funds payout pretty well compared to the private sector. Both have long underfunded the system and assumed an unrealistic rate of return from a volatile stock market to make up for it.

The key difference between Connecticut and New York’s funds is how much the state, i.e., taxpayers, kick in. According to the Pew report, which uses 2016 data, New York taxpayers pay about 9 percent more than necessary and the state is on its way to a fully funded pension plan. Connecticut taxpayers, however, barely contribute enough to cover current obligations, much less make up for past deficits.

The New Yorker in me goes:

via GIPHY

But then I remember I pay a lot to CT in income taxes:

But now that I’m on Connecticut…

PUBLIC FINANCE IDEA FOR CONNECTICUT

The Yankee Institute for Public Policy has put forth proposals to deal with tConnecticut’s dire school financing situation.

Education Savings Accounts: Empowering Kids and Saving Money in Connecticut:

It sounds almost too good to be true – there is a way both to improve opportunity for our state’s children and save money. Education Savings Accounts (ESAs) are an innovative way to increase options for parents and their children, while ensuring that each child in Connecticut has access to a school that will best fit his or her individual needs.

It is clear that we will have to do more with less for Connecticut’s schoolchildren in the coming years. How do we spend taxpayer dollars in a way that is responsible and still helps children achieve to the best of their abilities? ESAs provide an excellent vehicle to increase parent choice, open access and opportunity for more children, and still maintain funding for local schools.
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Challenge #1: Connecticut’s Deficient K-12 Funding Mechanism

In 2005, the Connecticut Coalition for Justice in Education Funding (CCJEF), a consortium of groups including public sector unions and some cities, led suit in Superior Court to challenge the constitutionality of the state’s system for funding public education. It argued that many K-12 schools, especially in the larger cities, are insufficiently financed.
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Challenge #2: Connecticut’s Fiscal Implosion

Amid growing concern over the shaky financial conditions of California, Illinois, and New Jersey, Connecticut is often overlooked. Its size and population are relatively small, and its proximity to New York and Boston makes its challenges easily dismissed. After all, with some of the nation’s wealthiest communities — Darien, New Canaan, and Greenwich — how bad could things really be?

Very bad, according to a 2016 study for the Mercatus Center at George Mason University. It calculated the fiscal health of all fifty states according to their short- and long-term debts, unfunded pensions, and other key fiscal obligations. Connecticut came in the sickest of all.

In recent months, all three of Wall Street’s big credit rating agencies have further downgraded the state’s debt, with Fitch and Moody’s ranking Connecticut’s fiscal soundness as the third worst in the country. S&P was only a little more generous, naming the state fourth worst behind Kentucky.
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Challenge #3: Connecticut’s Loss of Local Control

These fiscal challenges are crowding out resources that could instead be directly targeted to student learning. Between 2000 and 2013, while per- pupil current education expenditures in CT increased by 31 percent, the state’s actuarially determined contributions per student increased by 145 percent. There is no indication that the growth of pension obligations will cease anytime soon. The state is tied to past commitments with high price tags.

Much more at the link, and you can download a PDF version of the report.

They got to testify in March:

But Lewis Andrews, co-author of a 2017 study on the potential effect of ESAs in Connecticut, says education savings accounts could help meet the education needs of underserved kids and save Connecticut money.

“Parents could custom-tailor their children’s education with money not currently available,” Andrews told the committee. But he said the “real surprise” of the study was “the potential to bail out the state of Connecticut from its pressing fiscal problems.”

The study conducted by Andrews and Dr. Marty Leuken of EdChoice found the if only 2 percent of students utilized a $5,000 ESA the state could save $26 million per year and municipalities could save more than $50 million.

Andrews noted that with 10 percent enrollment, the savings roughly equal the amount of money Gov. Malloy tried to get municipalities to contribute toward teacher pension costs.

There is a bill in the CT legislature to study the issue further, and it seems to be progressing currently.

There are some not-so-great situations in Connecticut right now They had a recent credit downgrade:

Connecticut’s high unfunded pension liabilities leads to credit downgrade

S&P Global Ratings lowered its rating on Connecticut’s approximately $18.5 billion of general obligation debt outstanding to A from A+ in part because of its high unfunded pension liabilities.

The ratings agency said in a report that “above-average debt, high unfunded pension liabilities and large unfunded other postemployment benefit liabilities,” have created “significant and growing fixed-cost pressures that restrain Connecticut’s budgetary flexibility.“a report from S&P Global said.

The report added: “Should state tax revenue decline, or grow more slowly than currently projected, these large fixed costs will remain an impediment to solving future potential budget gaps.”

So, they are definitely looking at new solutions to these long-standing (and accruing) problems. Maybe they’d be so wacky as to sell off government buildings and lease them back, maybe they’ll go with these ESAs… we’ll see.

That’s it from me for now – see y’all!