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
Under new GASB accounting standards, public pension funds are required to calculate their “depletion date” – or, the date where benefit payouts become larger than assets.
The dates help give context to the funding situations at the pension funds, says Fitch Ratings. For some of the country’s most underfunded plans, the depletion dates are startlingly close.
From Reuters:
New accounting rules for public pensions are exposing the damage done by U.S. states, including New Jersey, that have failed to adequately fund their retirement systems, according to a report to be released by Fitch Ratings on Friday.
With the first wave of pensions beginning to issue financial statements under the new rules, the impact of underfunding becomes clearer, the Fitch report shows.
[…]
Some retirement systems already known for their fiscal struggles reported depletion dates.
Six of New Jersey’s seven funds, for example, disclosed depletion dates as of their June 30, 2014 valuations. The two largest – covering retired state employees and teachers – said their tipping points would come in 2024 and 2027, respectively.
Under the previous actuarial methods, those plans were funded at 49.1 percent and 51.5 percent, a distressed level far off the minimum 80 percent generally considered healthy. Under the new calculations, which included a lower blended rate of return, those levels look even worse, at 27.9 percent and 28.5 percent.
Even Illinois, with among the worst-funded state retirement systems in the U.S., doesn’t have depletion dates until 2065 for two of its three biggest funds and is able to use higher blended rates. It has no depletion date for the third fund, Fitch Senior Director Douglas Offerman told Reuters in an email.
The nation’s most underfunded plan –the Kentucky Employee Retirement System – did not report a depletion date because recent reforms complicated the calculation.
Photo by Paul Becker via Flickr CC License
Here’s an interview with John Oliphant, principle executive of the Government Employees Pension Fund.
The GEPF is the largest institutional investor in Africa; it manages $114 billion in pension assets for over a million workers.
Oliphant talks about the fund’s investment strategy, performance and funding progress.
Here’s Kansas Treasurer Ron Estes talking about the condition of the state’s Public Employees Retirement System, the state’s 2012 reform law and his support for Gov. Brownback’s new proposal to issue $1.5 billion in bonds to go toward pension funding.
Photo credit: “Seal of Kansas” by [[User:Sagredo|<b><font color =”#009933″>Sagredo</font></b>]]<sup>[[User talk:Sagredo|<font color =”#8FD35D”>⊙☿♀♁♂♃♄</font>]]</sup> – http://www.governor.ks.gov/Facts/kansasseal.htm. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Seal_of_Kansas.svg#mediaviewer/File:Seal_of_Kansas.svg
When it comes to pension funding, an 80 percent funded ratio is the benchmark for a “healthy plan”.
But over at the STUMP blog, actuary Mary Pat Campbell has penned a post taking issue with the 80 percent “rule”. According to Campbell, 80 percent isn’t a magic number that makes pensions “okay”.
The post is published below:
______________________
By Mary Pat Campbell, originally published at STUMP
I have just about had it with the 80 percent.
Unlike the commonplace idiocies of ‘You only use 10% of your brain’ or ‘The Great Wall of China is the only manmade object visible from space’, the 80 percent myth is dangerous.
I speak, of course, of the supposed percent fundedness level at which public pensions are “okay”.
The American Academy of Actuaries has a brief on the 80% pension funding myth, and I will give loads of examples of how even “100% funded” plans have been shown to be shaky.
But that’s not for today.
Today, I have decided to keep track of every idiot who refers to this 80% funding level (or something even worse) as proof that a pension plan is or is not okay. Generally, reporters fall afoul of this, and this is not necessarily concerning. People don’t think of reporters, as a group, as expert in anything.
But when there are politicians directly making decisions about public pensions, union leaders arguing about their public pensions, and dear lord, public plan TRUSTEES putting this bilge forth, that is super dangerous.
If you want to follow yourself, just create a google news alert on ‘80 percent pension’ — google news alerts don’t necessarily work the same for everybody, so feel free to email me at marypat.campbell@gmail.com if I missed any good (or, rather, horrible) examples.
So here goes:
Congrats, New Jersey Senate President Steven Sweeney — you are the inaugural member of my 80 Percent Pension Funding Hall of Shame!
TRENTON — State Senate President Stephen Sweeney is floating an idea to move the goal posts for funding public workers’ pensions in order to take pressure off the state budget.
Sweeney (D-Gloucester) said today the state — which by law is supposed to fund the pension system 100 percent by 2018 — should instead focus on getting the pension system 85 percent funded to put it in line with private sector plans that are considered healthy.
New Jersey’s pension funds are currently funded at about 54 percent, in part because the state skipped or made only partial payments for a decade. Under a 2011 law pushed by Sweeney and signed by Gov. Chris Christie that included cuts to workers’ pension and health benefits, the state is required to ramp up its payments to once again fully fund the system. However, Christie cut the payments by more than $2 billion for this budget year and the previous one.
Yes, yes, he picked 85 percent, but anything less than 100 percent is questionable. Especially with New Jersey math.
Here’s a nice kicker:
“The governor paints a very bleak picture by saying ‘look at what a big hole we’re in,’” said Sweeney. “The governor’s focus is basing everything on us being fully-funded. That’s not a realistic number. And a lot of pension systems live being 85 percent funded, or in the 80s.”
Yeah, they live right up until they don’t.
Ask the Detroit retirees what they think of their supposedly almost-100-percent-funded pension – pension benefits that got cut (note: it was not as fully funded as they thought, but that’s for another time.)
NEWS ALERT SENATOR SWEENEY: lots of public pensions aren’t doing well. While 85% funded would be a lot better than where NJ pensions are right now, that is not a laudable end goal.
I’ve already got THREE OTHER EXAMPLES for my new Hall of Shame from just this week, so this Hall of Shame is going to be filling up rapidly.
With respect to politicians, or union leaders, or other such, there is no cure (that is, I, personally, can’t do much about it other than mock them on the blog).
But at least with regards to reporters, I will be writing them and/or their organizations with links to the Academy’s brief. And maybe the blog posts where I call them idiots. We’ll see.
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After a two year audit, Pennsylvania’s Auditor General announced today that Scranton’s pension system could become broke in 3 to 5 years—and forcefully indicated that Scranton was symbolic of larger, state-wide pension funding issues.
On Scranton, the Times-Tribune reports:
That dire prediction [3-5 years] could be optimistic, as the pension funds face paying out as much as $10.5 million owed to retired police and firefighters because of the $21 million back pay court award to active members. The auditor general’s office did not evaluate the impact of the award in its audit released Wednesday.
With a funding ratio of just 16.7 percent, the city’s firefighters fund is in the worst condition of any plan in the state, Mr. DePasquale said, and will be unable to pay benefits in less than 2½ years. The non-uniform fund isn’t much better, projected to be insolvent in 2.6 years, while the police fund has less than five years.
The sobering news, presented at a press conference at City Hall, is contained in an audit Mr. DePasquale’s office conducted of the funds’ condition from January 2011 to January 2013.
The Auditor General said the only fiscally sustainable way forward was to reform the state’s pension system. From the Times-Tribune:
He’s called for several measures, including consolidating plans into a statewide system and increasing funding to municipalities with distressed plans.
“We don’t see any way this can be fixed by Scranton alone,” Mr. DePasquale said. “I believe strongly that a statewide solution is needed.”
While Gov. Tom Corbett and the state Legislature debated state pension system reform this summer, it has yet to address the pension crisis some municipalities face. When Mr. Corbett visited Scranton earlier this month and a reporter asked about the city’s pension crisis, he declined to weigh in.
But that reform doesn’t seem likely to come.
Pension360 covered this week Corbett’s futile efforts to kickstart pension reform. Polls have indicated the voters aren’t as engaged by pension issues as they are other issues.
Back in 2009, Kansas was preparing to issue $127 million worth of bonds to investors who probably knew that the state’s pension system wasn’t the healthiest in the country.
What investors didn’t know, however, was just how bad the system really was—it was the 2nd most underfunded in the nation at the time.
But don’t blame the investors for their ignorance. They didn’t know because Kansas didn’t tell them.
That lack of disclosure is the reason the SEC today announced they are charging Kansas with fraud for misleading investors about the health of the state’s finance and, by extension, the risk associated with buying its bonds.
From Bloomberg:
The U.S. Securities and Exchange Commission charged Kansas with failing to disclose a “multibillion-dollar” pension liability to bond investors.
“Kansas failed to adequately disclose its multibillion-dollar pension liability in bond offering documents, leaving investors with an incomplete picture of the state’s finances and its ability to repay the bonds amid competing strains on the state budget,” LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Securities and Public Pension Unit, said in a statement from Washington.
A draft actuarial report provided to Kansas’s public pension found that the gap between its liabilities and assets had grown to $8.3 billion in 2008, from $5.6 billion the previous year, lowering the pension’s funding level to 59 percent, the SEC said.
The gap was the result of years of insufficient contributions by the state and school districts to cover the cost of benefits earned by public employees and their accumulated liabilities, the SEC said.
Only Illinois had a lower pension funding status than Kansas, according to a 2010 report by the Pew Center on the States.
Neither the finance authority nor the Kansas Department of Administration, which advised the authority of material changes to state finances, determined that additional disclosure regarding the pension fund in the bond offering statement was necessary, the SEC said.
The SEC has been investigating this charge for four years.
The SEC also announced today that Kansas has agreed to settle the case without admitting or denying the allegations.
No financial sanctions were imposed on Kansas as a result of the charges.
It’s likely the SEC was content with the settlement due to recent efforts by Kansas to increase the state’s compliance with federal regulations.
In addition, the state has attempted to increase the sustainability of its retirement system—the state boosted contribution rates for workers and employers in 2012, and new hires are now entered into a “cash balance” plan.
Photo by CatDancing via Flickr CC License
Pension reform has been the talk of Pennsylvania politics these last few months, and the reasons are equally political and practical: if retirement costs keep rising, the state’s fiscal handcuffs will keep tightening—and they are already uncomfortably snug. That leads eventually to budget-cutting maneuvers, many of which are sure to be politically unpalatable.
But a recent analysis from the actuaries for the state’s Public Employee Retirement Commission presents a policy tool to save the state money. The tool: pension obligation bonds (POBs), the controversial bonds that carry big risks and big rewards for the states that issue them.
The actuarial analysis stated that the state could save $24.5 billion over the next 30 years if they issued just $9 billion in POBs. The state’s PSERS system could reduce costs by $19.8 billion with POBs, according to the analysis.
More from the Pittsburg Post-Gazette:
The analysis does not account for the cost of the bonds, and the actuarial consulting firm, Cheiron, notes: “While the special funding provides a savings to the Systems, there is the potential for there to be a net cost to the Commonwealth.”
The governor’s budget office offered one analysis, from Public Financial Management, Inc., that projected borrowing $9 billion would require the state to pay $10.4 billion in interest over 30 years.
State and school district payments are scheduled to rise sharply in coming years, and policymakers face the prospect of searching for significant new revenues or exacerbating the estimated $50 billion unfunded liabilities of the retirement systems for state and public school workers.
Gov. Tom Corbett, who is touring the state to promote another pension plan, has said he does not support borrowing to pay down the state’s pension liabilities, and House Republican leadership has not embraced the approach.
But Senate Democrats back refinancing the pension debt with $9 billion in bonds, and Tom Wolf, the Democratic candidate for governor, says he would explore funding mechanisms like pension obligation bonds. Mr. Wolf’s campaign said he favors following the payment schedule set in 2010.
The risks of POBs are well-known, and not everyone is on board with even considering this policy option.
One man, who says he has worked in the bond market for 50 years, wrote into the Post-Gazette to express his displeasure with the proposal. From the letter:
Issuing bonds provides elected officials a way to pay back the banks, investment houses and attorneys for their ongoing contributions to their election campaigns. Instead of having the courage to take steps to solve the current problems they will attempt to borrow their way out of the problem. It’s analogous to amassing large debt on your credit card, borrowing at high rates to pay off the debt and then continuing to use the card for new debt.
Colin McNickle, the editorial page director at Trib Total Media, weighed in on the issue as well this week:
First off, such bonds currently are not legal in the commonwealth. The state Legislature would have to reverse course. But, second, pension obligation bonds have a horrible history of failure because of their questionable application.
Such bonds are taxable general obligation bonds sold to investors. Governments see it as a reasonable way to shore up underfunded pension plans now while off-loading the costs to the future. And if that sounds financially hinky, you’re right.
“While POBs may seem like a way to alleviate fiscal distress or reduce pension costs, they pose considerable risks,” wrote scholars at Boston College’s Center for Retirement Research in a 2010 white paper. “After the recent financial crisis, most POBs issued since 1992 are in the red.”
Just last February, a panel commissioned by the Society of Actuaries warned that public pensions should not be funded with risk or if it delays cash funding: “Plans are not funded in the broad budgetary sense when debt is issued by the plan sponsor to fund the plan.”
As the Center For Retirement Research has previously pointed out, POBs often get a bad rap because they are “issued by the wrong governments at the wrong time.” Meaning, the states that issue POBs are often in states of fiscal distress and aren’t in a position to take on the risk posed by the bonds—even if they’re in the perfect position to benefit if the bonds work out.
So the question remains: Is Pennsylvania the right state? And is the right time now?
The Treasury Department announced the opening today of a new office, and chief among its responsibilities will be examining state and local pensions. Though the specific mandates of the office are unclear, the State and Local Finance Office will examine the problems facing state and local pension systems and serve as a “resource for retirement planning”, according to its Director.
From Reuters:
State and Local Finance Office Director Kent Hiteshew told a meeting of the Council of State Governments that he had appointed the chief investment officer of Maryland’s pension fund as a special adviser who “will substantially strengthen our office’s understanding of the critical challenges facing a system upon which approximately 23 million Americans depend … for their retirement security.”
Saying that state and local pensions now have enough money to cover only 72 percent of their costs, in comparison to nearly 100 percent in 2000, Hiteshew added that very few pensions are well-funded.
“While the current underfunding started prior to the Great Recession, this was exacerbated by both market forces and trying fiscal times during the last few years,” he added.
Hiteshew’s office will study the state of public pensions and help retirement systems evaluate their financial conditions, and it will look into the growing costs of retiree healthcare.
Public pension systems in the US are, on average, 72 percent funded. In 2000, nearly all systems were 100 percent funded, according to Hiteshew.
