ABSTRACT: The public pension pigeons are coming home to roost. The high profile bankruptcy filing by the City of Detroit, Michigan, has brought to the fore the relationship between pension underfunding and the financial difficulties faced by an increasing number of municipalities and states in the United States.
Detroit’s pension landscape altered after major deal between city, retirees
Detroit, labor unions and the retirees they represent have been locked in federal mediation for months in the wake of the city’s bankruptcy proceedings. The negotiations centered on two competing concepts: pulling the city out of bankruptcy without pushing its pensioners into poverty.
The two sides had long been unable to find common ground, but the urgency of the issue meant something had to give. This weekend, something finally did.
The two sides emerged from mediation last Friday to announce they’d reached a deal in principle that supports Detroit’s restructuring plan but doesn’t gut retirees’ benefits.
USA Today gets into the deal’s details:
Friday’s deal sweetens the stakes for retirees on three major fronts:
• Pension cuts. It would cap total cuts to monthly pension benefits at 20% — critical because some pensioners in the city’s General Retirement System faced huge reductions beyond the base 4.5% cuts to all civilian retiree checks. That’s because Detroit wants to take back what it said were excessive interest payments made to retirees who invested in an annuity savings fund in 2003-2013. The total amount of the so-called annuity “claw back” would be capped at 15.5%, lower than the initial 20% the city had negotiated with the general pension fund.
• Retiree health care. The city agreed to set up a $450 million pot of money for retiree health care, up from less than $300 million previously offered. That additional money would guarantee current retirees monthly stipends for life, instead of eight years, as Detroit had proposed. The stipends vary by worker depending on their income level and whether they were disabled on duty, but the minimum is $125 a month.
• Possible future restoration of money. Detroit and the committee also agreed to firmer targets and goals that would allow retirees’ pension cuts to be reduced if the city’s pension fund investments perform well and other terms are met, Alberts said.
The tentative deal means the retiree committee will recommend that Detroit’s 32,000 pension beneficiaries approve the agreement. Individual retirees still have to vote on the city’s plan before any pension cuts are finalized.
Detroit also reached a separate deal today with 14 of its unions and 3,500 retirees on a five-year collective bargaining agreement.
From the Detroit Free-Press:
The deal includes restoration of some pay for city workers who have faced wage freezes and a 10% pay cut in recent years, although details will vary by union, according to a person familiar with the proposal who wasn’t authorized to discuss it and spoke on condition of anonymity.
Other factors in the deal include work-rules concessions from the unions, the person said.
Detroit’s public safety unions, which have formed a coalition in negotiations with the city, are not part of the deal announced today, said Mark Diaz, president of the Detroit Police Officers Association. The public safety labor coalition also includes the Detroit Fire Fighters Association, the Detroit Police Command Officers Association and the Detroit Police Lieutenants and Sergeants Association.
Diaz said the public safety unions are still open to negotiating with the city, but proposed contract terms so far have been unacceptable. The city has been offering police officers wages starting at $14 an hour, Diaz said.
Union members and federal bankruptcy court will have to ratify the agreement before it goes into effect.
Photo Credit: University of Michigan via Flickr Creative Commons License
Alaska mulls using savings to cover pension-funding shortfall
Alaska is a state far removed geographically from the rest of the country it belongs to. But financially, it may as well be a part of the lower 48—because, unfortunately for Alaska, the United States’ public pension problems know no borders.
The state’s lawmakers have been trying to address the state’s pension funding shortfall—the fund was only 59.2% funded as of 2011, 9th worst in the country—with concrete proposals for months.
Alaska governor Sean Parnell proposed in December that the state move $3 billion from its rainy day fund into its retirement system in an effort to start paying down its $12 billion pension obligation.
The plan went to the state House of Representatives, where it passed with near unanimity, and now the bill has passed the Senate as well—albeit with some changes. In essence, the plan is to use the state’s savings account to infuse its retirement system with $3 billion in additional contributions over the next 25 years.
The Republic has more details:
The Senate Finance Committee’s rewrite of HB385 calls for a contribution rate determined by what’s known as a level percent of pay method for 25 years. While the bill itself does not include dollar amounts, information provided by the Legislative Finance Division and Buck Consultants indicates combined annual payments for the two systems starting at about $345 million in 2016 and slowly building to about $514 million in 2038. It calls for a final payment of about $490 million the following year.
The information shows the Senate Finance approach extending payments by three years beyond Parnell’s plan, which called for annual payments of $500 million between the systems after the infusion, and costing slightly more — about $13 billion total for Parnell’s plan compared with about $13.3 billion under the committee approach.
These are projections, not predictions, Buck and Legislative Finance Division Director David Teal have pointed out.
Though the bill now differs slightly from Gov. Parnell’s original plan, he was happy with the result.
“With this legislation, we are strengthening the state’s AAA bond rating and ensuring future generations are not saddled with this debt,” he said in a press release.
Photo Credit: SalFalko via Flickr Creative Commons License
Judge: Challenges to Rhode Island pension overhaul will move forward
Rhode Island’s 2011 pension overhaul—considered to be the most sweeping pension reform law in the country—has had its fair share of legal challenges.
A number of public sector unions and retiree groups currently have suits pending against the law, and their arguments, as with similar cases in other state, center on provisions in the state constitution that protect pensions as contracts.
Rhode Island was hoping that those arguments wouldn’t hold water and requested to have the cases thrown out. But Superior Court Associate Justice Sarah Taft-Carter ruled today that the unions’ arguments are too strong to simply dismiss.
From the Washington Times:
Unions and retirees have argued that their pension benefits constituted an implied contract, while the state disputes that. Taft-Carter notes in her decision that unlike some other states, Rhode Island’s constitution and law do not explicitly state that public employees have a contractual right to their pension benefits.
But she writes that other factors support it being a contract, such as the fact that workers have served the public for a required number of years and contributed a required percentage of their salaries to the pension system in return for pension benefits.
“A valid contract exists between plaintiffs and the state, entitling plaintiffs to their pension benefits,” she wrote.
Taft-Carter notes that her standard for reviewing the state’s motion to dismiss was not whether the lawsuit is likely to succeed, but rather to assume the allegations are true, and examine the facts in a light favorable to the unions and retirees.
Rhode Island Gov. Lincoln Chafee and Treasurer Gina Raimondo said in a joint statement that they expected the judge’s decision and are now preparing for trial.
Photo Credit: Governor Chafee via Flickr Creative Commons License
Public Pensions: Reconciling Fiscal Sustainability with Intergenerational Equity
ABSTRACT: In many developed countries around the world, public pension schemes have become fiscally unsustainable with rising life expectancies and declining birth rates (i.e., a decreasing old age support ratio). Reforming public pension systems to render them fiscally sustainable in the long-run could in theory entail cuts in benefits, increases in contributions, or increases in the eligibility age
Detroit shifts $100 million to pension funds after bond deal
For Detroit’s bondholders, hope was fading fast—after the city went bankrupt, it was suggested that it could cut bond recoveries to as little as 15 cents on the dollar.
But Detroit agreed yesterday to pay bondholders as much as 74% of what they are owed, in a deal that means as much to bondholders as it does to the city’s retired workers.
That’s because the remaining 26% of bond payments will go straight into the pension system—a cash infusion that will total $100 million.
The deal is part of an effort to keep the city’s pensioners above the poverty line. But they will still face sharp cuts in their benefits, according to Bloomberg:
Under a plan submitted to the court in February and revised last month, pensions for police and firefighters would be cut about 6 percent if they vote for the plan, 14 percent if they don’t. Pensions for other city workers would be cut by about 26 percent if they vote yes and by about one-third if they don’t.
About 20 percent of current pensioners would be pushed below the poverty line by the plan, according to a committee of retirees that has been negotiating with the city.
The deal still requires the approval of Judge Steven Rhodes of the US Bankruptcy Court for the Eastern District of Michigan.
Photo Credit: University of Michigan via Flickr Creative Commons License
New Jersey, facing pension crisis, slapped with credit downgrade
Standard & Poors downgraded New Jersey’s credit rating today, and—surprise, surprise—the state’s pension funds were a major factor.
S&P downgraded New Jersey’s credit rating one notch. It has gone from what S&P considers a “high grade” (A+) to a “medium grade” (AA-).
The downgrade comes despite efforts by lawmakers, including Gov. Chris Christie, to curb the state’s pension woes. Those efforts included mandating higher annual payments by the state, raising retirement ages, freezing cost-of-living-adjustments and increasing employee contributions.
From the New Jersey Spotlight:
In explaining the decision to lower New Jersey’s credit rating from AA- to A+– a rating higher than only California’s A and Illinois’s A- among the 50 states – S&P’s analysis specifically cited a “trend of structurally unbalanced budgets that include only partial funding of pension obligations and the reliance on one-time measures that are contributing to additional pressure on future budgets; a large and growing unfunded pension liability; significant postemployment benefit obligations; and an above-average debt burden.
Notice the bolded statements—that’s a whole lot of ways for S&P to say that pensions are crippling the state’s finances.
And you can’t blame them. New Jersey’s pension fund remains underfunded by about $52 billion.
Photo Credit: Bob Jagendorf via Wikimedia Creative Commons
Consultant rips North Carolina for “over-the-top” pension fund fees
The State Employees Association of North Carolina (SEANC) smelled something fishy going on at the North Carolina Treasurer’s office even before they hired a consultant to investigative the fees paid to the Wall Street money managers who handle the state’s pension funds.
The ensuing investigation found that North Carolina isn’t just paying sky-high fees—the state is hiding them, as well.
According to the hired consultant, North Carolina paid a whopping $416 million in fees to Wall Street last year alone; the fees went primarily to Franklin Street Advisors, the firm that manages much of North Carolina’s pension fund assets.
The consultant hired to investigate, Edward Siedle, provides more details at Forbes:
Indeed, it appears that the massive hidden fees she’s not disclosing dwarf the excessive fees she has. For example, the fee information provided to SEANC indicates that…the pension paid $1.8 million in asset-based fees and $800,000 in incentive fees, or a total of approximately $2.6 million for managing approximately $360 million. This amounts to an apparent 50 basis point asset-based fee and a 5 percent incentive fee. (To date the Treasurer has failed to provide the investment advisory contracts which recite, in part, the fees money managers charge the pension.)
Since Franklin Street is a fund of funds, the underlying hedge fund managers are generally paid a 2 percent asset-based fee and a 20 percent incentive fee. It appears that the Treasurer is not disclosing the significant fees paid to the underlying hedge fund managers actually managing the money—fees which are far greater than Franklin’s fees for simply overseeing them.
It appears that the undisclosed underlying fees related to the Franklin investment alone—just one of the hundreds of funds in which state pension has invested—amount to $7.2 million in asset-based fees and $3.2 million in incentive fees or $10.4 million in 2013.
Since it appears that Franklin has managed this account for approximately 12 years, the undisclosed asset management fees paid to this manager alone appear to exceed $120 million.
However, based upon a review of relevant SEC filings, it appears that there may be additional significant fees, amounting to an estimated $3 million annually, paid to Franklin that are not disclosed.
A spokesman for the state’s Treasurer’s office claimed the consultant, Siedle, drew his conclusions by making assumptions that are “not based on conventional industry standards.”
The spokesman also said the fees paid to its money managers are in line with what other states pay.
A recent study by the Maryland Public Policy Institute examined the relationship between the performance of public pension funds and the investment fees they pay. The study found that, over the last 5 years, the pension funds of the 10 states that paid the least amount of fees all outperformed the funds of the 10 states paying the highest fees.
An Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans
ABSTRACT: This paper presents the first comprehensive study on the determinants of public pension fund investment risk and reports several new important findings.
Curbing the Incentive for Pension Padding: Correcting the Employer Contribution Mismatch
ABSTRACT: An often overlooked issue in the debate over New York‘s runaway pension costs is the practice of pension―padding or spiking, whereby a public employee works overtime during his final years of employment, inflating his total compensation during his peak earning years and, more significantly, distorting his pension calculation.
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