80 Percent Funding Myth Recent Round-Up
by meep
I need to clear these out every so often, or it piles up.
First, thanks to my top referrers:
- PSPRS Pension Watch – Information and analysis of the Arizona Public Safety Personnel Retirement System (PSPRS) and issues that affect public defined benefit pensions.
- Pension Tsunami
- The Other McCain
I’ve been infrequently posting recently because I’m super-busy, getting ready to do an Excel for Actuaries webinar on Wednesday, dealing with my writing class at UConn, and trying to do a bunch of other writing things (for money).
Sorry, the money-making comes first.
ONE HERO
This morning I saw the following from the Idaho Reporter:
Records from PERSI’s September board meeting show the fund is about 78 percent funded, below the 80 percent some regard as the low bar for a healthy pension fund. The American Academy of Actuaries disputes the 80 percent figure, though, and says no single figure at a singular point in time can accurately describe a pension fund’s health.
“All plans should have the objective of accumulating assets equal to 100% of a relevant pension obligation, unless reasons for a different target have been clearly identified and the consequences of that target are well understood,” the 17,000-member group wrote in a 2012 policy memo.
To make my heroes list, by the way, one doesn’t need to agree with the American Academy of Actuaries. I just want an acknowledgement that there is a dispute as to the 80% = healthy claim, and that there is a group of very relevant experts who disagree about 80% = healthy.
Yay Dustin!
TOEING THE EDGE
I’m going to point out something I’ve noticed recently that doesn’t quite make my Hall of Shame: mentioning or using the 80% funded status as some kind of threshhold.
WOONSOCKET – In February of 2013, Woonsocket’s former firefighters and police officers gathered for a meeting with state finance officials at Woonsocket High School.
The city’s pension system, they were told, would dry up in eight years unless major changes were made.
As part of a plan to restore the city’s financial stability, the retirees would need to give up their cost of living adjustment, a solution presented as the group’s share in sacrifices that had to be made to right the fiscal ship. In the negotiations that followed, police and fire retirees were able to retain a small portion of their COLA, with the promise that full benefits would be restored once the pension account was funded at 80 percent, a benchmark the city was expected to reach in 22 years.
…..
According to an actuarial report by USI Consulting Group delivered to the city on October 26, “The approved contribution schedule will no longer fully fund the plan within the targeted 22 year period. Furthermore, this schedule is no longer expected to allow for the attainment of an 80 percent funded status during the projection period and therefore the 3 percent COLA is not expected to take effect.”
I am a bit confused by this language. Do they mean “fully fund” in terms of making 100% “required” contributions? It obviously doesn’t mean a 100% funded ratio.
Anyway, this is using 80% as a target. To be sure, one needs to pick a realizable goal, but they need to think what it means that the pensions are only 80% funded. For that to be sustainable requires a growing tax base, at the very least. Otherwise pension benefits start eating up the operational budget.
In any case, at least they’re not claiming that target is “healthy”.
This one is sneakier, from Riverside County, California:
Ashley reported that county pension plans are funded above the 80 percent threshold; unemployment is 6.3 percent, down from a high of 15.2 percent at the height of the most recent recession; and “county staff has been diligently pursuing the refinancing of our debt to take advantage of the low interest rates for the general fund and our former redevelopment agency,” saving the county over $100 million in savings over time.
So we have this 80% threshold without any explanation of what it’s a threshold for.
Again, at least they’re not explicitly stating it’s healthy.
STATE LAW
The 80% threshold does have specific meaning in certain states. It doesn’t deal with health per se, but does restrict the pensions once the funded ratio falls below that level.
For example, in Rhode Island, if the funded ratio is below 80%, there is a reduced COLA:
If your plan is less than 80% funded, there may be a COLA calculation every 4 years until the plan reaches 80%. The first COLA year will commence 01/01/17. This interim COLA will be paid on the first $31,026 (indexed for inflation as of 07/01/12) to those who retired before 07/01/15 and $25,855 (indexed) for those retired on and after 07/01/15.
Pennsylvania just passed a law where the 80% is also a trigger:
State Rep. Keith Greiner (R-Lancaster) played a crucial role in the enactment of House Bill 239 — now Act 63 of 2015 — to provide new fiscal controls for county pension law this week in Harrisburg.
Presently, commonwealth counties are required by law to perform a review pertaining to a cost-of-living adjustment (COLA) for retired county employees on a tri-annual basis. The existing law does not specify how COLAs would be applied to benefits nor indicate what inflation index is appropriate to use.
……
Act 63 now mandates that COLA may not be applied retroactively and that the Consumer Price Index for Urban Consumers is to be the official benchmark for any COLA. The index is the level of inflation calculated for use in northeastern states.It also establishes a minimum level of required funding. This consists of a funding ratio of at least 80 percent and obligates counties to use best management practices when creating actuarial notes.
Hmmm, it’s not clear to me what exactly the 80% does. Let’s check the text of Act 63 of 2015:
16 (2) Before approving any cost-of-living adjustment, the
17 board shall have an actuarial note prepared regarding the
18 proposed adjustment. A cost-of-living adjustment shall only be
19 provided if the county retirement system calculates a funded
20 ratio based upon an entry age normal methodology of eighty per
21 cent or higher after the actuarial cost of the adjustment is
22 determined. Any county retirement system that utilizes an
23 accounting method that does not determine a funded ratio based
24 upon an entry age normal methodology shall, each year, use an
25 entry age normal actuarial cost methodology to calculate a
26 funded ratio in order to determine if the fund meets the eighty
27 per cent or higher funding level. The funding level calculation
28 shall be reported to the Public Employee Retirement Commission
29 in conjunction with established reporting requirements.
Okay, another COLA restriction is the funded ratio is less than 80%. I think it’s fine to have these triggers — don’t want to make a bad situation worse by boosting benefits.
One could claim (me! me!) that this should be the case if the pension is less than 100% funded, instead of 80%. But some restriction is better than none.
SAME OLD SAME OLD
Let’s go to the regular round-up.
More than $20 billion is needed just to raise all state retirement plans to the 80-percent funding level actuaries claim is healthy.
State economists say Florida has one of the nation’s healthiest retirement systems, currently able to cover 86.6 percent of future obligations. A fund is considered healthy once it is able to cover over 80 percent of its liabilities.
Meh. Same old, same old.
The analysis showed the state system has about $138.6 billion to cover active and retired employees, and would need another $21.5 billion to be fully funded. Florida’s pension system is funded at about 86.6 percent, above the 80 percent level state economists have defined as a healthy fund.
Well, I wouldn’t put it past economists to say that. They have no standards.
Michael Bond, a senior lecturer of the University of Arizona’s Eller College of Management:
As a rule of thumb, an agency should have roughly 80 percent of its pension liabilities in some type of investment assets, said Michael Bond, a senior lecturer of the University of Arizona’s Eller College of Management.
DAMMIT THEY SHOULD HAVE “ROUGHLY” 100 PERCENT!!!!
When you say they should have 80%, you are putting the pensioners in danger of not getting their benefits.
To be sure, 80% would be a hell of a lot better than how South Tucson Police pensions are doing:
Of South Tucson’s nearly $8 million in estimated police pension liabilities over the next two decades, it has $176,000 invested — 2.2 percent of what it will need.
That’s worse than Puerto Rico.
I assume they just never funded this pension. When you are at 2% fundedness (that extra 0.2% is just silly), you are essentially pay-as-you-go. Now, this might be supportable. It really depends on whether the tax base can support this as pay-as-you-go… but that really provides the participants of the South Tucson Police pension plan little security.
If the taxes dry up, if the taxpayers go away, they can’t force anybody else to pay for the benefits.
This is what happened in Prichard, Alabama — and why the pension plan there ran out of funds, and the pensioners didn’t get paid anything for more than a year. The county couldn’t be forced to pay. The state couldn’t be forced to pay. It wasn’t their debt. It was the debt of a de facto bankrupt town.
The reason to target 100% is because that’s what was promised.
If you target only 80%, then you’re saying you plan to keep only 80% of your promise.
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