“Everybody’s Not Going To Retire At The Same Time”: Actuary Evaluates Former Illinois Governor Edgar’s Pension Comments

 

Illinois map and flag

Last month, former Illinois governor Jim Edgar gave his thoughts on the state’s pension situation. He notably said he didn’t support the state’s pension reform law, and said the following:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it.”

Actuary Mary Pat Campbell, who runs the STUMP blog, weighed in on Edgar’s comments. As you’ll see, she is not a fan of Edgar’s pension knowledge. The full post is below.

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By Mary Pat Campbell, originally published on STUMP

Seems that not all recent Illinois governors end up in prison, (Quinn isn’t out of the woods yet!) but perhaps they should be jailed for this crap:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.”

First off, we do have an appearance of the 80% canard, but there’s a new lie that’s been creeping in that is pissing me off: “Oh, it’s not a problem right now… it would only be a problem if everybody retired at the same time.”

Let me explain, conceptually, what the pension liability is supposed to represent, and what the unfunded portion represents: it is what people have earned for their PAST service, and is using all sorts of assumptions, such as THE AGE THEY WILL PROBABLY RETIRE.

The actuarial value of the pension, under even the craziest approaches, does not assume everybody retires right now.

Let’s consider your pension value for a person still working: each extra year of service, they’ve earned some more. They are also a year closer to retirement. As long as they keep working and are still alive, the value of their pension increases, under most pension benefit design. Sometimes you’ll see a pension value drop at later ages, but that’s getting persnickety (though it has had some repercussions elsewhere).

The pension valuation is supposed to be a snapshot, indicating what has ALREADY BEEN EARNED. There are approaches that try to capture future salary increases, and tries to make accrual less drastic (as one usually does see huge increases in pension value right before retirement under some approaches).

The main time the pension value would be decreasing for a person is when they’re in retirement, as they’re not accruing more benefits, and each year they’re one year closer to death. The time the pension gets paid out is generally getting shorter. If the pension fund cannot cover retiree benefits, it’s in a really bad condition.

And here’s the deal: some pensions are not able to cover just the current retiree portion of the benefits:

Nobody is any more worried now than they were before the New Jersey Pension Study Commission report came out. Yes, “[t]his problem is dire and will only become much worse if meaningful steps are not taken quickly” but what does that really mean to anyone?

…. Scary Conclusions

1. For retirees there may be about $15 billion to cover $40 billion in liabilities and that’s ONLY for retirees leaving absolutely NOTHING for the 151,669 participants who have not yet started receiving monthly benefits except, for now, the refund of their contributions.

2. There is an equally good chance that Conclusion #1 is overly optimistic

I doubt New Jersey is the only state in that situation. As noted earlier, Kentucky is looking really bad.

And in my recent teaser, I showed a set of graphs I am developing for various pension plans. The ones being shown were for Texas Teachers Retirement System. I will explain them in a later post, and start showing you some truly scary information — using the official numbers from the plans themselves.

But shame on Gov. Edgar for mouthing the same bullshit everybody else does in favor of underfunding the pensions. I have looked at over a decades’ worth of Illinois pension valuations, and for all major funds (except one), they deliberately underfunded by substantial amounts, even in “good” years.

If you’re not going to make contributions when times are good, guess what will happen to the pensions when times are bad?

I guess ex-Gov. Edgar wants to cover his own ass for the pensions being underfunded in the go-go 90s, when he was governor (1991 – 1999). Hey! Everybody was doing it! 80% is good enough!

NO, IT’S NOT.

SHAME.

 

Newspaper: Kentucky Pension Officials Have “Forgotten Whom They Work For”

Kentucky flag

Pension360 has covered the push in recent weeks by several Kentucky lawmakers to make the state’s pension system more transparent.

The secrecy surrounding Kentucky’s pension investments is well documented, and the issue has even spurred a lawsuit.

One Kentucky newspaper wrote Tuesday that pension officials have “forgotten whom they work for” – the public.

The Herald-Dispatch editorial board writes:

Apparently, [pension officials] are in sore need of a reminder that they are employed to serve the public and, as such, how they conduct their business should be open to scrutiny by the public.

[…]

Some want to know more about how the pension funds operate. As of now, Kentucky law allows the systems to operate partly shielded from the public. For example, the public is not allowed to know how much is paid out to individual retirees, nor does the systems have to reveal how much they pay out in fees to individual hedge fund managers who are investing the pension money and other external investment advisers. But we do know they are paying out hefty sums, to the tune of $55 million last year to investment management firms.

The public has a right to know both of those aspects of the pension system.

[…]

Private investment companies doing business with governments also must realize who’s paying their fees and that accountability comes with gaining contracts with government-run pension systems. The excuse put forth by Kentucky officials and others about how revealing the investment companies’ contracts would reveal “trade secrets” doesn’t hold up. That argument simply is not sufficient to conceal how much money they are making from taxpayers and the public employees who contribute to the systems. Until that information is revealed, the public has no way to know whether it’s getting its money’s worth from those companies.

A couple of Kentucky lawmakers plan to introduce bills next month that would require the pension systems to use the state’s competitive bidding process, disclosing terms of the deals and the proposed management fees, as well as shed more light on the pension payouts to the state’s lawmakers. All of those requirements would be steps in the right direction and should be put into law.

Read the full piece here.

Kentucky Retirement System Lowers Return Assumption; More State Money On Way

CREDIT: The Center For Retirement Research
CREDIT: The Center For Retirement Research

The Kentucky Retirement System has lowered its assumed rate of return on investments from 7.75 percent to 7.5 percent.

The reduced assumption means the system will experience an uptick in unfunded liabilities, but it also ensures a higher annual payment from the state.

The action took place at a Board of Trustees meeting on Thursday. More details from CN 2:

The changes, presented to trustees earlier this year by actuaries with Cavanaugh Macdonald Consulting based on a five-year experience study, lower assumed returns on investments, price inflation, wage growth and wage inflation.

The new assumptions, KRS Executive Director Bill Thielen said, will cost the state roughly $95 million more per year in contributions for the Kentucky Employees Retirement System for state employees in non-hazardous positions during the next biennial budget, based on current plan valuations and payroll figures. They will not take effect until next year’s year-end plan valuations, he said.

[…]

The updated assumptions would push KRS’s unfunded liabilities to $19.5 billion, up from $17.8 billion currently, according to figures presented by Cavanaugh Macdonald Consulting.

At least one of the KRS trustees voiced concerns about approving the new guidelines at Thursday’s meeting. Personnel Cabinet Secretary Tim Longmeyer suggested delaying a vote until January so the board could meet with the governor’s office, legislators and others affected by the change.

“My concern is we don’t live in a bubble, so $95 million a year is a significant uptick,” said Longmeyer, who abstained from voting on the updated assumptions.

KRS Trustee Randy Overstreet, though, urged the board to move forward with the proposal. Nothing would change between now and January, he said.

“I’m thinking that we almost have the responsibility to follow the experts’ recommendations, and you’re right, it’s not a science, but it’s the best information we have to act on and move forward on since we have for the 20 years I’ve been on this board,” Overstreet said.

More context on KRS’ new assumed rate of return, from the Courier-Journal:

KRS has forecast a 7.75 investment return since 2007. But earnings in KERS non-hazardous averaged only 6.52 percent over the past decade, leading some critics — including lawmakers — to argue for a more cautious outlook.

The National Association of State Retirement Administrators reported that of 126 public retirement plans surveyed in October, 48 assumed a return of 7.5 percent or lower, while 78 assumed a higher rate.

The median rate was 7.75 percent, but more than half have cut their assumption since 2008, the group said.

KRS administers nearly a dozen defined-benefit plans for state workers, including the 21 percent funded KERS non-hazardous plan.

Newspaper: Kentucky Pension System is Public Business

Kentucky flag

Pension360 covered the push last week by several Kentucky lawmakers to make the state’s pension system more transparent.

But at least one lawmaker wasn’t on board with those plans. House State Government Committee Chairman Brent Yonts had this to say about his colleagues’ proposals, which included public disclosure of pension benefits, management fees, and other data:

“Frankly, I don’t think that’s the public’s business,” Yonts said. “They have access to the public payroll and salary information. They can theorize about what we’re going to collect in pensions. But the public is not entitled to know every last little thing about us.”

The Lexington-Herald Leader editorial board weighed in on the issue on Wednesday. The newspaper’s stance: public pensions should be public business. From the editorial:

Rep. Brent Yonts, D-Greenville, is certainly right that the public “is not entitled to know every little thing about us.”

We don’t need to know Yonts’ blood pressure or where he gets his hair done, or which, if any, bourbon he likes to sip of an evening.

But taxpayers are entitled to know how much he and every other state employee will receive from our public pension systems.

Yonts, chairman of the House State Government Committee, made his “every little thing” remark while explaining his opposition to two bills — prefiled for the upcoming session — that would increase transparency in the beleaguered public retirement systems.

Specifically, Yonts thinks the public just doesn’t have the right to know how much retirees are drawing in public pension benefits.

“Frankly, I don’t think that’s the public’s business,” he told reporter John Cheves.

It is all the public’s business: How much people draw and how much the retirement systems pay hedge fund managers and other investment advisers.

Right now the largest of these funds, the Kentucky Employees Retirement System, which covers workers in non-hazardous jobs, is at a perilous 21-percent funding level. That means it has only about one in five of the dollars it is obligated to pay out.

This has happened for several reasons, undoubtedly the most important being that governors and the General Assembly have balanced too many budgets by forgoing the state’s annual match to the money paid in by employees. That’s a breach of promise and an unconscionable slap at state workers.

[…]

And, then there’s the $55 million that the retirement systems paid to investment managers with very little disclosure about what we got for that money.

It’s impossible to fix Kentucky’s public pension mess without laying all the cards on the table. How much do the spikers, double-dippers and well-retired lawmakers cost the system? No one knows, or if they do they’re not telling. How are the investment advisers’ fees set and what do we get for them?

Yonts and public employees who say retirement benefits are none of our business should get over it.

Employees are absolutely right that they took jobs and paid into the retirement system on the belief the money would be there.

But taxpayers funded those salaries and will pay the lion’s share of the bill to solve the pension mess. They have the right to know every little thing.

The full editorial can be read here.

Kentucky Teachers’ Pension Continues to Shield Investment Information From Public View

Kentucky flag

Pension360 covered last month the Kentucky teacher, Randy Wieck, who is suing the Kentucky Teachers’ Retirement System (KTRS) claiming the fund has “failed in their fiduciary duty” by letting the system become one of the worst funded teachers’ plans in the country.

Another component of his lawsuit deals with the lack of transparency surrounding the fund’s investments, a complaint of many stakeholders. Last week, KTRS stoked the flames of that complaint by denying Wieck access to contracts with investment firms.

Reported by the Kentucky Center for Investigative Reporting:

Randolph Wieck, a history teacher at DuPont Manual High School, sent an open records request Oct. 28 to the Kentucky Teachers’ Retirement System, which covers more than 140,000 school system workers statewide. Wieck asked for details of the contracts with some of the investment firms that manage part of KTRS’ $18 billion-plus in assets.

Wieck, who recently filed a lawsuit against the teachers’ pension system, wants to know what his retirement money is being invested in—and how much in fees KTRS is paying to big private equity firms. Among the funds he asked for details on were the Carlyle Global Financial Services Partners II fund and the Blackstone Partners VII L.P. fund.

KTRS denied his request in a Nov. 26 letter. Because KTRS agreed with the investment firms to keep contract details secret, it told Wieck that state law forbade it from disclosing them.

“Disclosure of these trade secrets would permit an unfair commercial advantage to their competitors,” wrote KTRS General Counsel Robert Barnes.

KTRS manages $17.5 billion in assets. The system was 51 percent funded in 2013 — but that ratio could drop to as low as 40 percent once the system begins measuring liabilities according to new GASB standards.

State Funds For Kentucky Pension Systems Could Come With Strings Attached As Lawmakers Push For Pension Transparency

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The Kentucky Teachers’ Retirement System (KTRS) and the Kentucky Employees Retirement System Non-Hazardous Plan (KERS Non-Haz) could both be in line for state money sooner than later.

But there might be some strings to that state funding, as lawmakers push for more transparency around investments and placement agents associated with the pension systems.

One lawmaker wants the pension systems to make the search for investment firms more competitive – and more public. From the Lexington Herald-Leader:

Rep. Jim Wayne, D-Louisville, wants the pension systems to use the state’s competitive bidding process to solicit investment proposals, rather than award the lucrative deals privately. Terms of each deal, including the management fees, would be made public. Wayne also would ban payments to third-party “placement agents,” middlemen who help private investment firms sell their products to pension funds.

“The status quo works for the special interests on Wall Street because it hides what they’re making off our pension system,” Wayne said.

Another lawmaker wants to know the fees paid to placement agents, as well as the pension benefits received by state lawmakers:

Sen. Chris McDaniel, R-Taylor Mill, wants full disclosure of placement agent fees. He also wants the public to see how much money individual members of the General Assembly expect to collect through pensions or how much they do collect if they are retired. Kentucky’s part-time lawmakers not only have awarded themselves state pensions, but they also carefully keep them in a separate system, apart from KRS, that is 62 percent funded.

Last winter, several bills along these lines were ignored by House and Senate leaders, including one that would have required public disclosure of all state retirees’ pensions. This time, McDaniel said, he has narrowed the focus to his fellow lawmakers.

“I’ve told people, 95 percent of state workers don’t receive a very big pension when they retire. But there are a handful of pension abuses, and it would be useful for us to understand how it works. So at the very least, the legislature can lead from the front and require transparency for its own pensions,” McDaniel said.

Not everyone in Kentucky politics agrees with the transparency initiatives. In fact, one powerful lawmaker says he won’t consider either of the aforementioned ideas:

House State Government Committee Chairman Brent Yonts, D-Greenville, said he’s not inclined to consider Wayne’s or McDaniel’s bills this winter.

“I’m reluctant to support a can-opener approach to the pension system without knowing the consequences of that and without knowing why it’s currently done this way,” Yonts said.

Outside investment managers might not want to accept KRS’ and KTRS’ money if they know their fees will be publicly disclosed, Yonts said. And nobody who gets a state pension should have to share that information with the public, he said.

“Frankly, I don’t think that’s the public’s business,” Yonts said. “They have access to the public payroll and salary information. They can theorize about what we’re going to collect in pensions. But the public is not entitled to know every last little thing about us.”

Both of the state’s major pension plans are dangerously underfunded, but the KERS Non-Haz plan is among the unhealthiest in the country, with a funding ratio of 21 percent. KTRS is 52 percent funded.

Kentucky Pension Committee Recommends Measures For Funding Improvement, Other Policy Changes

Kentucky flag

Kentucky’s Public Pension Oversight Board, a panel of lawmakers that “assists the General Assembly with its review, analysis, and oversight” of the Kentucky Retirement Systems (KRS), has made 13 recommendations aimed at improving the health of KRS and altering other KRS policies.

A handful of the key recommendations, from the Courier-Journal:

– The General Assembly should secure additional money to stave off any insolvency problems in KERS non-hazardous — the largest pension plan for state workers, which has only 21 percent of the money it needs to cover benefits.

– The Kentucky Teachers’ Retirement System, along with pension plans for lawmakers and judges, should be reviewed by the oversight board as part of its official duties.

– KRS should better publicize its board meetings, particularly to employee, retiree and interest groups.

– The General Assembly should enact legislation to regulate how agencies withdraw from the pension system — a concern that has emerged amid the bankruptcy of Seven Counties Services, the community mental health center for the Louisville area.

More on the measures related to improving the system’s funding situation, from CN2:

Of 13 recommendations tentatively approved by the oversight board, two dealt directly with securing additional funding for KERS non-hazardous. One, submitted by Sen. Jimmy Higdon, R-Lebanon, would seek financing to maintain the plan’s solvency while the other, filed by Rep. Brent Yonts, D-Greenville, and Sen. Joe Bowen, R-Owensboro, would support increased funding to KRS and particularly KERS non-hazardous to improve its cash flow issues.

One other recommendation seeks to cut down pension “spiking”. Eliminating “spiking” is not likely to have a big effect on the system’s funding situation.

Retiree advocacy group Kentucky Government Retirees released this statement on the proposals dealing specifically with improving funding:

As stakeholders in Kentucky Retirement Systems, we were gratified that the Public Pension Oversight Board today approved a recommendation calling upon the General Assembly to provide additional funding to avert insolvency in the Kentucky Employees Retirement System non-hazardous fund. The nation’s worst-funded state pension fund desperately needs an infusion of funds above the employer contributions. We hope the 2015 General Assembly will make the difficult decision to act on this recommendation.

Kentucky Teachers Pension Presents Bond Proposals To Lawmakers

Kentucky flag

We learned on Wednesday that the Kentucky Teachers’ Retirement System (KTRS), one of the most under-funded education retirement funds in the country, was seeking funding help from the state legislature.

Now, many more details have emerged about the proposals the System has presented to lawmakers. KTRS presented lawmakers with two options. The Courier Journal has the details:

KTRS suggested Wednesday that lawmakers consider two borrowing scenarios in the 2015 legislative session, and supporters say the proposals could reduce taxpayer cost in the long run while helping the system cope with $13.8 billion in unfunded liabilities.

One option involves a $1.9 billion bond to help fully fund the retirement system for the next four years and eventually decrease annual pension costs about $500 million by fiscal year 2026.

A second option includes a $3.3 billion bond that could fully fund the system for eight years and reduce annual costs in 2026 by around $445 million.

Both plans are based on 30-year bonds with interest rates in the range of 4 percent, and either option could be funded by re-purposing debt service and revenue streams that already exist in the state budget, according to KTRS.

Beau Barnes, KTRS general counsel and deputy executive secretary of operations, said the system is not “wild about bonding.” But he argued that liabilities are growing at 7.5 percent a year and compared the proposal to refinancing a home at a lower interest rate.

“We were asked what we could do for the pension fund without requiring additional dollars out of current budgets, and these were the only things we could think of,” Barnes said. “We didn’t really see any other alternative.”

KTRS has at least one lawmaker on their side. House Speaker Greg Stumbo voiced his support for the plan, according to MyCn2 News:

“I think we need to listen very carefully to it and work with them to try to craft some form of a proposal, which hopefully we can get enough support to pass in both chambers because these market rates won’t be favorable much longer in my judgement,” Stumbo, D-Prestonsburg, said in the committee meeting, noting the Federal Reserve will likely get pressure from banks to raise interest rates as the economy improves.

“… What they’re saying is we can’t tarry. If we wait too long, we’ll lose this window of opportunity.”

KTRS manages $18.5 billion in assets.

Kentucky Non-Haz Pension Funding Falls to 21 Percent

KERS funding status
Credit: The Lexington Herald-Leader

The Kentucky Employees Retirement System (KERS-Non-Hazardous) is already notorious for being one of the worst funded pension plans in the United States.

But the situation got worse Wednesday, as KERS revealed the funding status of the plan has fallen from 23 percent to 21 percent over the course of the last fiscal year.

Retiree advocacy group Kentucky Government Retirees issued this statement:

The audit committee of Kentucky Retirement Systems learned today that the funding ratio for the pension plan covering most state employees dropped to an alarming 21 percent in the fiscal year that ended June 30. The funding ratio compares current assets to total long-term liabilities. The KERS non-hazardous fund dropped by 2.1 percentage points over the fiscal year. Meanwhile, the fund continued to lose assets in the first three months of the fiscal year. The fund held only $2.48 billion in assets at the end of September, representing a decline of $95 million. Given these alarming figures, and in view of the commendable efforts of the Kentucky Teachers’ Retirement System to secure funding for its financially challenged pension plan, we as stakeholders urge the KRS board of trustees to actively engage Frankfort decision makers in a funding solution for the nation’s worst-funded state pension plan.

Kentucky Teachers’ Pension Asks Lawmakers For Funding Help; Will Present Bond Proposal

Kentucky flag

The Kentucky Teachers’ Retirement System is seeking help from the state legislature in easing its pension obligations. The plan involves the state issuing bonds.

Details on the proposal are sparse, but KTRS officials will present their plan to lawmakers on Wednesday.

From the Courier Journal:

The Kentucky Teachers’ Retirement System is proposing that the state issue a new bond to help shore up underfunded teacher pensions.

Officials from KTRS will present the proposal to lawmakers on the Interim Joint Committee on State Government on Wednesday afternoon. An official said last week that the plan will center on using existing revenue streams that will soon become available once the state retires debt service on older bonds.

According to the 2013 valuation, KTRS faces more than $13.8 billion in unfunded liabilities and has only 52 percent of the money it needs to pay out pension benefits in coming decades.

The system has asked the state to provide around $400 million in additional funding each year to keep the system solvent.

The plan could well be for the state to issue “pension obligation bonds”. Governing magazine explains the concept of POB’s:

Pension Obligation Bonds (commonly referred to as POBs), allow governments to issue taxable bonds for the purposes of putting money toward or fully paying off the unfunded portion of a pension liability. The proceeds from the bond issue go in the pension fund. The theory is that the rate of return on the investment will be greater than the interest rate the government pays to bond investors so that the transaction is favorable to the government; it makes money off the deal.

KTRS manages $17.5 billion in assets. The system is about 51 percent funded.