Pennsylvania Gov. Tom Wolf sat down with PennLive this week to discuss the state’s pension system.
The first topic of discussion is a possible transition to a 401(k) system – an option favored by the state’s Republican lawmaker but opposed by Wolf.
Wolf also discusses the long-term funding of the system and comments on the state making its full actuarially required contribution.
Video Credit: PennLive
Last week, Pennsylvania Gov. Tom Wolf released his first budget proposal.
Wolf has said many times that he doesn’t support a full overhaul of the state’s pension system. But his budget did contain some pension-related changes.
Wolf is calling for the state’s pension funds to take a more passive approach to investing and to cut down the fees it pays to managers. The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”
PhillyDeals columnist Joseph N. DiStefano talked to spokesman for the state’s two pension funds – SERS and PSERS – and got their official reactions to the budget proposal.
SERS reaction:
“We are working to gather details on the Governor’s plan, so I can’t speak to it specifically,” SERS spokeswoman Pamela Hile told me. “What I can tell you is that last year, a little more than 0.5% of the total fund value went to management fees. This, in the view of the Board, does not represent an excessive amount.”
“Looking at the issue from a long-term perspective, over the past decade, SERS paid $2.4 billion in fees, while earning $19.7 billion net of fees and expenses AND paying out $23.2 billion in retirement benefits.
“Compare that performance to an industry standard 60% equity/40% bond index fund, SERS’ performance added $4.9 billion of value to the fund with 0.5% less volatility.
“To further illustrate this value, our alternative investment program, built with top-tier investment managers, outperformed the U.S. public market equities return by 5% net of all fees over the decade ended 2013… Over the past five years, we reduced fees 30%. We get good value for the fees we pay…
“In 2013, SERS earned $3.7 billion, after all investment management fees and expenses of $175 million were paid. From a basic dollar perspective, that’s like paying $175 over the year to net $3,700 in your pocket at the end of the year.”
The PSERS spokesperson told DiStefano:
“We are not aware of the details of the Governor’s proposal on investment management fees. We have not met with him,” and won’t comment on details of the proposal until they are available.
“Our investment management fees are not excessive relative to the incremental value generated. PSERS paid $482 million in investment expenses for the fiscal year ended June 30, 2014. This amounts to 0.93% of our fund.
“By spending those fees, we earned an additional $1.27 billion (net of fees) ABOVE the index return,” Williams added in an email. “We would not have that additional $1.27 billion or 2.8% in additional investment performance if we did not use active managers.
“Looking longer term for the past 15 fiscal years (2000-2014), PSERS incurred $4.96 billion in investment management fees. In exchange for those fees, the Fund received the index returns plus an additional $16.42 billion in excess performance gross of the fees incurred. So, net of fees, PSERS generated $11.46 billion of incremental performance above the applicable index returns.
Read more of their remarks, including reaction to Wolf’s pension bond proposal, here.
Photo by c_ambler via Flickr CC License
Pennsylvania Gov. Tom Wolf released his first budget proposal last week, and there were several items of interest related to pensions.
On Wednesday, Pension360 covered Wolf’s proposal for issuing $3 billion in pension bonds to attempt to shore up the funding of the state’s two major pension systems.
But Wolf is also proposing an overhaul of the systems’ investment strategy.
Specifically, Wolf is calling for the systems to take a more passive approach to investing and to cut down the fees it pays to managers.
The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”
More from ai-cio.com:
The “commonsense reforms” mean its two state pension plans would have to “seek less costly passive investment approaches where appropriate,” according to the budget.
Pennsylvania’s employee and teachers’ pensions together have upwards of $50 billion in unfunded pension liabilities. Wolf’s budget blamed the growing gap primarily on “repeated decisions by policy makers to delay making the required contribution to fund our future pension obligations.”
The state has not paid its full pension bill for more than 15 years, the budget document noted.
While the proposal was light on specifics for reforming pension investment strategy, the outcome would “significantly reduce taxpayer costs for professional fund managers,” it claimed.
The state largest plan, the $52 billion Public School Employees’ Retirement System, already managed roughly a quarter of its assets in-house, as of June 2014. Its portfolio included relatively standard allocations to fee-heavy asset classes, such as private equity (16.3%) and real estate (13.8%).
Net-of-fees, the teachers’ pension returned an annualized 10.3% over the last five years.
The executive director of the state’s Public School Employees Retirement System defended the fund’s investment strategy in a newspaper piece last year.
Photo by Governor Tom Wolf via Flickr CC License
Pennsylvania Gov. Tom Wolf unveiled his budget proposal on Tuesday, and it contained a number of pension-related items.
The biggest was undoubtedly the proposed issuance of $3 billion in pension bonds, to be used to pay down the liability of the Public School Employees Retirement System (PSERS).
As is always the case with pension bonds, the state runs the risk of worsening its financial position. But if PSERS’ investment returns exceed the bonds’ interest rates, the state will come out on top.
More from Philly.com:
“A portion of the current unfunded liability for PSERS would be refinanced to take advantage of historically low interest rates, with all savings reinvested to reduce that liability.” Wolf wants to borrow $3 billion and give it to PSERS so it can reduce the recent increase in pension subsidies by school districts and the state treasury.
[…]
Given recent bond prices and Pennsylvania’s bond rating (third-worst of U.S. states after Illinois and New Jersey), rates for taxable Pennsylvania pension bonds “would be about 3.25% (for 10-year bonds) and maybe 4% in 30 years,” Alan Shanckel, municipal bond strategist for Janney Capital Markets in Philadelphia, told me. Pennsylvania would have to pay that percentage and beat its self-imposed 7.5% investment return target each year to make the bond pay.
Pennsylvania’s state-level pension plans are about 62 percent funded, collectively.
Pennsylvania Gov. Tom Wolf, in stark contrast to his predecessor Tom Corbett, has been adamant that he is not on board with any sweeping changes to the state’s pension system – particularly the switch to a 401(k)-style system favored by many of the state’s Republican lawmakers.
But House Republicans re-iterated last week that pension reform remains their “No. 1 issue” going forward.
More from the Citizen’s Voice:
State Rep. Mike Tobash, R-Pottsville, who drafted pension reform legislation in the last House session, said he thinks both houses of the Legislature are ready to deal with the estimated $47 billion to $60 billion debt in the state pension fund.
“The senate has come out and said it is their No. 1 issue,” Tobash said. “I think House Republican leadership feels exactly the same way. This $50 billion-plus debt is crippling us in a number of ways. It is crushing our school districts. If we properly dissect it, and we come forward with a number of bills, we will be better able to answer the problem in the minds of the different stakeholders and really get something accomplished.”
[…]
Tobash said the Legislature is attacking this issue from its multiple points.
“A series of bills being presented attack it from different areas,” he said. “One bill is a straight shift from defined benefit to defined contribution, which is more like the private sector. I think it is an optimum plan we are going to bring to the fore. We also have to look at the expense side.”
[…]
Tobash said legislators are looking at four areas: Existing member concessions, “to help work our way out of this debt, like increasing employee contributions;” the way the state delivers benefits “that are enhanced. Maybe we can ratchet them back a little bit;” early buyouts. “These are people who are vested but not collecting. Maybe we can buy them out and realize some long-term savings,” and finally, dedicated revenue. “I think it is important for analysts to take a look at Pennsylvania and see we have a commitment to pay down this debt.”
Rep. Tobash is the author of legislation, introduced in the last session, that would shift new hires into a 401(k)-style system.
Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg
Pennsylvania State Rep. Warren Kampf says he will be reintroducing a bill that would significantly alter the states pension system.
The bill would create two new defined-contribution plans: one for state employees and one for school district employees.
All future state hires would be funneled into these 401(k)-style plans. In other words, the bill would block off the current defined-benefit pension system to all new hires.
More from Pennsylvania Business Daily:
Included in Kampf’s legislation would be a 4 percent employer match and a mandatory employee contribution.
“These are the types of retirement plans the vast majority of our constituents have in their own lives,” Kampf said. “These are plans that businesses across our country use in their budgets to avoid financial obligations that cannot be planned. We are simply asking public employees to follow the same plans used by those in the private sector as a way to stop the growing havoc public pension systems have created for taxpayers all across the country.”
“We must act now,” Kampf said. “Our public pension crisis only deepens as the days go by.”
If the bill were to pass the state’s legislative chambers, it likely wouldn’t get past the desk of new Governor Tom Wolf.
Wolf has said he opposed big changes to the state’s pension system and wants to give previous reforms time to take effect.
Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg
Pennsylvania Gov. Elect Tom Wolf will take office on January 20, and sooner than later he’ll be inundated with pushes from lawmakers to re-design the state pension plan.
What should the city’s public sector workers expect under Wolf’s watch?
In this video, he talks in-depth about his plans for the pension system.
Videos of Wolf’s plans for education funding and other major policy issues can be viewed here.
Video credit: LancasterOnline
New Pennsylvania Gov. Tom Wolf has already said he’ll be taking a hands-off, wait-and-see approach to pension reform.
He acknowledges that the system needs to improve its funding, but said he doesn’t think a switch to a 401(k)-type system is the correct way to approach reform.
A Wolf spokesperson, however, revealed this week that the Governor may be open to issuing pension obligation bonds to help pay down the state’s pension debt.
From the Daily Item:
As Gov.-elect Tom Wolf gets ready to wrestle a $2 billion budget deficit, some at the Capitol say the state should borrow money to relieve one of its biggest financial burdens — cash-strapped pensions.
Lawmakers on both sides of aisle have proposed using bonds to shore up the state’s retirement plans. Wolf is open to the idea, as well, said spokesman Jeff Sheridan, but is also willing to listen to alternatives.
It’s a concept that comes with risks — and controversy. Even advocates for the idea seem to embrace it only because no one has come up with a better one.
Annual costs tied to the state’s public employee pensions are expected to increase by more than $500 million in the coming fiscal year.
At least one lawmaker – Republican Rep. Glen Grell has proposed a plan for issuing bonds to fund the pension system.
But many other Republican lawmakers likely won’t be on board with the bond idea. A switch to a 401(k)-type system is still on the mind of many of those legislators.
Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg