Colorado Treasurer says open data the key to pension solutions

In 2011, Colorado State Treasurer Walker Stapleton asked for access to data regarding his state’s pension fund; as a member of the pension board, he had seen first-hand how unhealthy the system was, and he wanted access to the “financial DNA” of the system—data on the top 20% of beneficiaries, their annual benefits, age of retirement, former job and last 5 years of salary.

His request for the data was denied, so he filed a lawsuit to get it.

Stapleton still hasn’t seen that data, but three years later, he’s still trying to get it. Now his lawsuit sits in the state’s Supreme Court awaiting oral arguments and he’s closer than ever to learning more about the Colorado retirement system, which is only 63% funded.

Stapleton sat down today with Bloomberg to discuss Colorado’s pension system:

Q: You have said that the Colorado Public Employees’ Retirement Association’s return assumption is unrealistic. In November, it lowered the rate to 7.5 percent from 8 percent. Should it be cut further?

A: Absolutely. There’s more opportunity to go lower. States that have conservative assumptions as their rates of return have assumptions in the sixes, and as a result their plans are quote unquote healthy or better-funded than our plan is. Colorado has consistently ranked in the bottom 20 percent of funding ratios for state public-pension programs.

Q: What changes do you recommend to reduce the pension liability?

A: Retirement age is one of the things that we need to look at. We also need to look at increased contribution levels from new employees and current employees in the system for the defined benefits they’ve been getting. If they’re not willing to have increased contribution levels or the retirement age adjusted, then potentially they could have the option of joining a defined-contribution plan.

Stapleton says in the same interview that transparency in retirement systems is the key to making them healthier—obtaining the data about payouts is the only way to construct a plan to reduce the unfunded liabilities that weigh the system down.

Chicago teeters closer to junk bond status under weight of pension costs

Chicago continued its tumultuous trek toward junk bond status today when Moody’s announced it was downgrading the city’s credit rating and delivered a scathing report that didn’t mince words: the city is on the road to financial insolvency, and pensions are driving them there.

Chicago’s credit rating, which previously stood at A3, was downgraded one notch to Baa1. Even with the downgrade, the city’s rating still sits slightly above Detroit’s.

But forgive the city’s residents for not celebrating—Chicago now has the second worst rating of any city in the country.

In it’s report, Moody’s laid out the logic behind the downgrade, and it all came back to one thing: the funding of the city’s pensions, or rather, the lack thereof. From the report:

Challenges:

– Substantially underfunded pension plans carried a Moody’s ANPL of $32 billion (net of enterprise support), equivalent to 8.0 times operating revenue (revenue in the General Fund, Debt Service Funds, and Pension Funds) in fiscal 2012

– Cumulative underfunding of pension payments relative to actuarially annual required contributions (ARCs) exceeded $7 billion in the period of fiscal 2003 through fiscal 2014; continued underfunding provides the city with near term operating flexibility but hastens the plans’ trajectory toward insolvency, which in turn could present extreme budgetary crises for the city

– Despite the prospect for pension cost reductions brought about through state legislation, unfunded liabilities will likely remain large; furthermore, the Illinois Constitution explicitly protects pension benefits, raising the possibility that an attempt to reduce accrued benefits of existing members would face litigation

– City management’s legal ability to increase revenue to fund pensions at actuarially sound levels is offset by practical and political limitations to immediately raising taxes so as to support actuarially sound contributions to pension plans

– Operating budget is constrained by fixed costs, namely debt service and pension contributions, which comprise a growing percentage of the city’s operating budget; annual pension costs are set to increase by $600 million in budget year 2015

– Direct and overall debt and pension burdens are well above average and growing; the substantial funding needs of overlapping governments exacerbate the practical limitations of generating new revenue from a shared tax base

In other words: Chicago maintains a dangerously unhealthy pension system, and state laws handcuff the city’s ability to do anything to fix it.

The city’s previous rating was A3, which indicates a strong capacity to meet financial commitments but a susceptibility to adverse economic conditions.

The new rating, Baa1, indicates an adequate capacity to meet financial commitments, but comes with the anticipation that adverse economic circumstances will likely lead to an inability to pay its commitments.

Illinois Supreme Court consolidates lawsuits against pension reform

It could be a long time before the constitutionality of Illinois’ pension reform law is argued in the halls of the state’s Supreme Court. But now that day might come sooner than previously thought.

The Illinois Supreme Court used its authority today to improve the efficiency of the legal battles surrounding the state’s pension reform law by consolidating all four of the lawsuits into one case.

Four separate lawsuits had been already been filed against the reform law, which was passed in December and goes into effect July 1, 2014 but could be delayed by the lawsuits.

The State Journal Register fills us in on some of the background:

State lawmakers last year approved reforms designed to save the state $160 billion in pension payments over the next 30 years and wipe out the $100 billion pension debt.

The reforms change the 3 percent compounded annual raises in pension benefits, raise the retirement age and limit the salary on which a pension can be earned.

The reform bill also cut by one percentage point the amount of contributions workers must make toward their pensions. Pension reform proponents believe that “consideration” in exchange for lowering benefits makes the reforms constitutional.

Retired teachers, retired state workers and a coalition of public employee unions all filed lawsuits contending the change violates the pension protection clause of the state Constitution. That clause calls pension benefits an “enforceable contractual relationship” between government and workers and says the benefits cannot be “diminished or impaired.”

Attorney Don Craven, who filed one of the consolidated lawsuits on behalf of the Illinois State Employees Association Retirees, told the Journal Star that the consolidation could end up producing a speedier resolution, because cases move more quickly in Sangamon County than in Cook.

Buffett: Public pensions threaten financial health more than we realize

The Oracle of Omaha doled out more of his patented financial wisdom on Saturday, and honed in on the country’s underfunded public pension plans that, according to Buffett, are even unhealthier than we realize.

In a letter to Berkshire Hathaway shareholders, Warren Buffett gave an undeniably gloomy forecast for pension plans’ health down the road:

“Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them.”

….

“During the next decade, you will read a lot of news – bad news – about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist.”

His letter mirrors a similar memo he wrote nearly 40 years ago, to then-chairman of the Washington Post Company Katharine Graham, where he warned of the pitfalls of pension promises.

From the 1975 memo:

“There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs.”

CalPERS votes in favor of rate hikes

Retirees are living longer—and that’s bad news for the many pension funds that are already suffocating under the weight of their unfunded liabilities.

But one of the world’s largest pension funds has taken a step to counteract the soaring expenses that accompany longer life spans: the CalPERS board voted today to incorporate retirees’ longer lives into the formula used to determine taxpayer contributions to their fund.

The result will be higher contribution rates to the fund by the state and local governments of California; the state, starting July 1, will be expected to contribute $5 billion over three years to the fund, an increase from $3.8 billion previously.

Local governments will not see their contribution rates increase until 2016, in an effort curb some stress on the state’s cities, some of which are going through bankruptcy proceedings.

The CalPERS board took into account projections that by 2028, men are expected to live 2.1 years longer and women an average of 1.6 years longer. Such an increase, if not addressed, would lead to the state’s pension expenses ballooning by $1.2 billion, or 32%, annually.

Chicago pushes to change city pensions, but workers push back

Chicago Mayor Rahm Emanuel is pushing to cut costs associated with the city’s pension system, which is among the unhealthiest in the nation. But city workers are pushing back—with the help of a powerful coalition of unions.

Mayor Emanuel is staring at tens of billions of dollars in unfunded pension liabilities, and has warned that deep changes to the pension system or sharp increases in taxes are likely on the horizon.

But We Are One Chicago, a coalition of public unions that represent the city’s teachers, police and firefighters, and other municipal workers, stands in stark opposition to the idea of pension cuts.

The group instead supports various tax measures to help fill the city’s funding shortfall, including expanding the sales tax, raising tax rates for higher earners and closing corporate tax loopholes.

ABC talked to city workers about their grievances:

“I keep saying that I feel that we’ve been robbed that someone is stealing from us,” said retired teacher Patricia Boughton.

“I paid my money into the pension and the employment contract was that I would receive a pension,” said firefighter Tom Ruane.

“It is wrong to blame us for wanting what is due us,” retired nurse Helen Ramirez said.

Chicago currently owes $18, 596 in pension debt for every resident, including children, of the city.


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