STUMP » Articles » Around the Pension-o-Sphere: MEPs, Illinois, and Divestment » 16 June 2018, 09:39

Where Stu & MP spout off about everything.

Around the Pension-o-Sphere: MEPs, Illinois, and Divestment  


16 June 2018, 09:39

I let myself take Thursday and Friday off, as I am under a crunch for multiple projects, but also on last Wednesday morning, I got to attend a really interesting meeting, and I am still digesting some of what I heard. It’s more of the political strategy to implement change that I’m thinking about, and less about the specific details. All is negotiable… if you can just get people to be able to negotiate.

I’m no Trump (he works by words… I work by numbers and animated GIFs.)


But maybe one day I’ll learn to persuade people to act, even if I have to use words to do it.

But today… I’m mainly linking. Because I’m tired.


Before I give you the “juicy” stuff, I will give you the actuarial stuff:

Society of Actuaries U.S. Multiemployer Pension Plan Pending Insolvencies Study. I may have linked it before, but it deserves linking again.

Let me give you their key findings, with my own emphasis.

This study explores the projected impact of pending insolvency on 115 “Critical and Declining” multiemployer pension plans, their participants and contributing employers. The estimates result from publicly available plan-level information and a model developed by the authors, with the advice of several deeply experienced multiemployer actuaries.

Here are a few key highlights of the analysis:

The authors project that 107 plans will run out of assets over the next 20 years, affecting over 11,000 contributing employers and roughly 875,000 participants. These projections assume future annual investment returns of 6%; this assumption was developed from several recently published capital market outlook reports and surveys of various investment advisors, and therefore differs from the long-term expected rates of return typically used for minimum funding purposes. Projections that use more detailed plan-specific data may render somewhat different results, although the general outcomes would likely be similar.

The estimated 2018 unfunded liability for these 115 plans, as measured on a minimum funding basis, is $57 billion. When measured at 2.90%, it is $108 billion. The discount rate of 2.90% represents a liability-weighted average of Treasury rates in April 2018. When Treasury rates are used to discount only the plan’s unreduced benefit obligations after the point of projected plan insolvency, and the minimum funding basis discount rate is used otherwise, these plans’ total unfunded liability is $76 billion. Note that these liabilities reflect full plan benefits without regard to PBGC guarantee limits.

The timing of solvency can be sensitive to investment returns. In general, plans that are closer to insolvency are less sensitive to investment returns than plans that have more time for investment returns to compound, either in their favor or against it. Even with extraordinarily optimistic investment returns of 10% per year for 20 years, 68 of the 115 plans would be projected to become insolvent within 20 years.

Optimistic investment returns have limited impact on insolvency among these plans primarily because their net cash flow positions tend to be severely negative. In 2018, 81 of the plans have annual negative net cash flow that is 10% or more of their assets. In other words, unless these plans’ assets earn at least 10% per year, the assets will decline. Twenty-seven (27) of the plans have negative net cash flow that is 20% or more of their assets.

Pending insolvencies are largely a function of existing liabilities for benefits that have already been accrued. While freezing or reducing benefit accruals would limit the growth of new unfunded liabilities, it would have little effect on the timing of insolvency among these plans over the next 10 years. However, when there are fewer active employees on whose behalf contributions are made, contributions may fall, hence hastening insolvency.

Let’s start with the bottom: almost all of the pensions that are failing are because of already accrued benefits — it doesn’t even require future accruals of current employees. For both MEPs and public pensions, the worst-funded plans can’t even cover the people already retired.

So this is not a surprise.

But let’s check out that first paragraph: 115 plans are flagged as “Critical and Declining”, covering 1.4 million participants, about 719K of them already retired.

What about MEPs as a whole? That’s about 1200 plans, covering 10 million participants, and 4 million retirees. So these 115 plans actually are a pretty substantial percentage — about 14% of MEP participants, and about 18% of MEP retirees.

Maybe there will be a bailout of MEPs, but only if they can actually sell it as a non-bailout (“we’re just lending money til they can improve….”). As long as they ignore the reality that the primary ones running out of money are vastly underfunded and the retirees vastly outnumber the active employees, maybe they can convince somebody through funky math that it’s not a bailout.

But this number of people is a substantial political force – yes, 1 million people ain’t a lot in this huge country, but they’re not evenly distributed across all states – they are in some very key electoral states, i.e., states that had been pretty solidly Democratic for a while, voting for Obama…. and then voting for Trump.

The people with the prospect of losing their benefits have a LOT more skin in the game than the individual taxpayer, as a bailout is just a drop in the bucket compared to the huge abyss of Social Security/Medicare/paying old federal debts.

Central States has a targeted congressional campaign. Incumbents in states with heavy union representation – not just Central States –
have been making a lot of noise on this matter. It would probably help them if they made a direct appeal to Trump as well — but the year is yet young.

There is a committee holding hearings, so let’s see what will come of it.

Here’s coverage just from the past few weeks:

I forget the supposed timing of the committee’s recommendation: whether right before the election… or right after.

That is going to be key.


I have one item to highlight, and then just dumping the rest.

I was so appalled by the following, I just… well, you read it.

Streator looks at issuing bonds to curb pension crisis

Council continues to assess strategies to ensure fire and police retirees receive their pension benefits and reduce future obligations. Their latest idea is issuing municipal bonds.

The issuance of the bonds would help the city come closer to funding 90 percent of all pension funds by 2040, as required by the state.

City Manager Scot Wrighton described the possible solution to the City Council on Tuesday that involves the city issuing general obligation bonds to make a large advance payment to its public safety pension funds.

If the large payment is made, next year’s actuarial funding calculation would decrease. The city would then add the cost of serving the bonds’ principal and interest payments to the annual tax levy.
Councilman Joe Scarbeary, also an active member of the Streator Fire Department, gave a presentation explaining the plan to council members and explained the mayor of Berwyn spoke highly of the strategy.

“He said if you’re not doing it, you’re crazy. It’s free money,” Scarbeary said.

No, it’s not free money, any more than doing a credit balance rollover to a new credit card is free money. Yes, you may be able to get a lower interest rate, which means it’s not totally bogus, but only if you start behaving better and actually making your full payments.

A few reminders: Pension Obligations Bonds ARE OF THE DEVIL and Why are Pension Obligation Bonds OF THE DEVIL?

Here is just an info dump from the past week:

Illinois is a mess, okay?


You know my take on divestment, if you regularly read my blog. Sorry, I’m sucking at tags right now, which is yet another project I need to work on. A lot of old blog stuff needs cleaning up.

But here’s the nutshell:

  • If you want to divest from eeeeeevil companies (however you define it) with your own money, go for it.
  • If it’s not your money, but somebody else’s, there are all sorts of legal problems
  • Public pension funds aren’t even really the participants’ — what if y’all underperform? You take it out of the hide of taxpayers and bondholders… so you are playing with their money as well
  • Finally, there’s no end to the divestment arguments that can be made

Anyway: stupid divestment crap I haven’t blogged yet (plus a few sane comments):

They can eschew returns, of course, but they need to reflect that in their valuations — want to discount at 4% instead of 7.5%?


There may not be a Mornings with Meep on Sunday (aka Father’s Day), but we’ll see. I’ve been getting farther into Skin in the Game, which I recommend, just for spurring thought, if nothing else. I think it’s providing me some really helpful ideas in terms of my goals.

I’m done for today. See y’all!


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