[CAF Note: The leaders of the financial coup are now waging war on state and local pension funds. They want to lower the boom on retirees, direct the flow of these assets and related fees and make privatization of state and local functions easier and more profitable. Don’t believe what you read. When in doubt, trust reliable state and local officials. This is not to deny that the back door drain on pension funds through a variety of methods has not been going on for years – particularly through the sale of mortgage back securities and long treasury bonds to the pension funds as the currency was debased]
By a group of experts whom Catherine and the Solari team invited to comment.
An effective government services delivery requires quality people with an adequate budget to delivery the services and operate the functions of the state and local governance for the citizens.
Like any service oriented organization, our governments can’t do a good job without sufficient resources of human capital, the people that serve us. Remove the dignity of adequate benefits and you can rest assured, ineffective service may be a result. Cities, counties, districts and state employers compete in the employment market for people. Show me a well run and effective agency, and I’ll beat the benefits are adequate to at least average.
To adjust to the 2008-2009 economic downturn, some agencies cut pay, not just staff. Some don’t provide any cost of living change for a years old pay scale.
Lie #1: Plans are in crisis:
1. Fact: “While plans were thrown seriously off course by the twin market downturns of the past decade, their finances have begun to stabilize, and most now face a manageable challenge.”- Alicia H. Munnell, Director of Boston College Center for Retirement Research and author of the 2012 book State and Local Pensions: What Now?
2. Based on the most recent information provided by the U.S. Census Bureau, pension costs since 1980 have been reliably stable, declining from around four percent in the 1980s to three percent in the 1990s and in the last decade between two and three percent of the state and local government spending.
Lie #2: Pensions are similar across the nation so the debate can generalize effectively:
Pension plan design, features, and benefits vary considerable across states and municipalities. Broad federal regulation applies to the plans, but state law differentiates the plans significantly. Plans originated to serve a place based human resources need. They have evolved over decades as their place has evolved. State wide plans are statutorily defined and larger states have pension review boards. Local plans are approved locally with some state oversight. Change requires political and fiduciary care. Trustees serve by appointment and plan directors are typically hired by the plan trustees or appointed.
Public Employee Pension Plans in U.S. and U.S Statewide State Pension Directory
Lie #3: We can’t trust state, county and city officials to do their job of pension benefit oversight:
Truth: Excellent local and state representatives are available to stakeholders.
Pension review boards, state comptrollers, pension plans provide materials for public education and financial reporting. Transparency is available but financial experience is helpful. A plan’s GASB reports the current liability. It’s a snapshot in time of liability.
The Governement Accounting Standards Board (GASB explanation) is an easy and quick review of current and recent years funded status. Confusing government accounting with personal or corporate accounting is just what the liars want.
The CAFR is a good second step that includes financial information and also strategic project progress and plan risk review.
Take Texas for example. For years, the Pension Review Committee has not forwarded bills designed to flip the state employee or the teacher plans from a defined benefit to a defined contribution plan that wloud cost as much but provide a lower benefit to members. During 2013, an ALEC member, state representative, proposed lowering an interest credit rate but the chair of the county judges association said the counties can manage their own plans. The Rep. let the bill die.
[House Bill 958 Sponsor: Rep. Rob Orr , ALEC member, Texas County plan: Bill would reduce the interest crediting on all plan funds from 7% to 5%. Rep. Orr decided not to pursue this bill’s passage, according to the San Antonio Express-News. ]
Contrary: Illinois’ governor vetoed the Legislators’ salary and stipends bill seeking pension system funding. Governor vetos legislative salaries bill seeking pension action
Lie #4 : We need a federal pension solution to save the public plans and provide an options for individuals to participate in to secure their retirement safety.
Truth: The debate is long lasting. Pensions have been delivery lifetime benefit to participants effectively.
1. U.S. Senator Orrin Hatch (R-UT), Ranking Member of the Senate Finance Committee, formally introduced the Secure Annuities for Employees (SAFE) Act (S. 1270). While the bill includes provisions aimed at both public and private pensions, the Senator’s press release and floor statement highlighted his new proposal for state and local governments, stating “America cannot continue sleepwalking into the financial disaster that awaits us if we do not get the public pension debt crisis under control.” The bill would provide for a new public DB plan consisting of individual deferred fixed income annuity contracts, which would be purchased by governmental employers from annuity providers whose contracts are fully guaranteed by a State guaranty association.
Perhaps there is little explanation needed to suggest that the current Senate and Congress can not solve the retirement safety issue.
2. The National Institute on Retirement Security studied Defined Benefit pension in 2012:
DB pension plans provide a critical source of reliable income for 18.9 million Americans. These plans are cost effective way to provide broad-based coverage, secure money for retirement, a lifetime income, and economic protections for retired Americans and their beneficiaries after a lifetime of work.
Lie #5: The state and local pension liability is huge:
How this measure is being debated provides clues.
Truth: The Society of Actuaries has maintained an effective culture of truthful and trustworthy service to the industry.
1. Yes, there is a strong movement to push a lower valuation method but it could be a poison pill. Look to recent developments. How this measure is being studied provides clues:
National Assoc. of State Retirement Administrators: Inv Return Assumptions
Robert Novy-Marx is an assistant professor of finance at the University of Rochester’s Simon Graduate School of Business. Joshua D. Rauh is a professor of finance at the Stanford University Graduate School of Business and a senior fellow at the Hoover Institution.
NASRA critiques Rauh-Marx new paper
National Assoc. of State Retirement Administrators: Inv Return Assumptions
The Arnold Foundation enlisted a former advisor to Governor Mitt Romney to write against Teachers benefits. The Professor is now at the Univ. of Arkansas.
The New Science of Giving
Most famously, in 2005 after Hurricane Katrina, while rival fund Amaranth Advisors built a huge position gambling that gas prices would jump due to more storms, Arnold disagreed and took the other side of the trade. It paid off with a profit of more than $1 billion when he turned out to be right (Amaranth collapsed as a result). Explains the hit by JP Morgan.
Government Finance background for the public: Why Governmental Accounting Differs
1. Governments such as cities, states and services-taxing districts don’t typically end so 100% prefunding of future obligations may not be reasonable…hence the Actuary industry has evolved over decades. The math is too complex for most of us to follow so the future liability amount seems unreasonable to the average citizen.
2. Richard Ravitch, the fixer, is on the Blue Ribbon Panel of the Society of Actuaries. Mister Work Out brings up morals! Richard Ravitch had a bracing message for munical-bond underwriters, investors, and advisers at a Bond Buyer conference yesterday. “It’s troublesome to think there’s a moral distinction between obligations” such as municipal bonds and pension commitments, he said.
3. 42 Pension Plan Directors signed a letter expressing their concern about the Blue Ribbon Panel. “As chief executive officers of state and local governmental plans providing retirement security to millions of public employees, retirees, and their beneficiaries, we are writing to express our serious concerns regarding the Society of Actuaries’ (SOA) Blue Ribbon Panel on Public Pension Plan Underfunding. The adequate funding of public pension plans is central to all of our organizations. However, we are concerned that SOA’s press release announcing the formation of your panel mischaracterizes many facts. In addition, to our knowledge, no public pension plan director or practicing public actuary had significant input regarding the panel’s make-up. We strongly recommend that the panel be expanded to include a significant number of actuaries who have experience and expertise advising public fund clients, particularly those who can provide insight to level cost approaches to funding. We also find the structure of the survey associated with this study to be both leading and onerous. We have therefore chosen to instead jointly respond through this letter to both share our collective concerns and to provide salient facts regarding state and local government retirement systems.” .
4. “As a company that works with hundreds of public pension plans across the country, we are appalled at how this process has been compromised, and we are convinced it has been designed to reach very specific and preconceived conclusions. “-Cathie GEitelberg-SVP Segal Company Segal Actuary Services Letter about Panel
5. NCTR is very concerned with the SOA’s project for several reasons. First, to my knowledge, no public pension plan director was consulted regarding the panel’s make-up, and, as announced, no public plan director is a member. Second, in explaining the panel’s charge, the SOA states that past decisions about benefit design, funding and investing “have led to widespread and persistent underfunding of public sector plans.” I do not agree with this statement, and I think that beginning a project based on this basic premise is very problematic. Third, several of the panel members, including its co-vice chair, Andrew Biggs with the American Enterprise Institute, and David Crane, former advisor to Governor Arnold Schwarzenegger of California, are well-known, vocal opponents of public sector defined benefit plans and staunch proponents of the use of the market value of liabilities and a so-called “risk-free” rate of return.
The private pension industry experience is not applicable to government pensions because corporations change over time. A look at the private plans issues indicates they have been manipulated as well.
Bradley Belt, former executive director of the PBGC (the Pension Benefit Guaranty Corporation, the federal agency that insures private-sector defined-benefit pension plans in the event of bankruptcy), testified before a Congressional hearing in October 2004, “I am particularly concerned with the temptation, and indeed, growing tendency, to use the pension insurance fund as a means to obtain an interest-free and risk-free loan to enable companies to restructure. Unfortunately, the current calculation appears to be that shifting pension liabilities onto other premium payers or potentially taxpayers is the path of least resistance rather than a last resort.” from section Current Challenges.
Their conclusions: The old practice of monitoring public pension data largely consisted of understanding GASB standards. These standards provided insight into a public pension plan’s funding condition and annual cost, which the bond-ratings agencies also factored into their assessment of an issuer’s credit worthiness. The new world of public pension data contains different factors and methods for different groups and purposes. While policymakers should continue to use an actuarial calculation to determine the necessary pension contribution to put in their budget, the net pension liability will be a different and separate computation on the employer’s financial statement. A completely separate estimate may be made by credit rating agencies to determine how pension commitments affect a municipal bond issuer’s ability to meet their obligations. Users of public retirement system information will need to understand that each calculation has a distinct intended purpose.