Chicago Lawyers Predict “Catastrophic Outcome” If City’s Own Pension Reforms Are Eventually Overturned


The City of Chicago submitted a brief to the Supreme Court this month supporting the legality of the state’s pension reform law.

That’s because a court decision against the pension law wouldn’t bode well for the legal standing of the city’s own set of pension reforms. Chicago’s lawyers said in the brief that a “catastrophic outcome” should be anticipated if the city’s reforms are eventually overturned.

From the Chicago Sun-Times:

Chicago faces a $300 million deficit in 2016 with shortfalls continuing “for the forseeable future” — even before piling on $20 billion in pension liabilities that have saddled the city with the “worst credit rating of any major city other than Detroit.”

And if state legislation that saved two of four city employee pension funds is overturned, a “catastrophic outcome” awaits retirees and Chicago taxpayers alike triggered by “further downgrades.”

After putting the state case on a fast-track, the Illinois Supreme Court ruled this week that it won’t have time to hear any friend-of-the court briefs.

But the city’s filing nevertheless paints the bleakest and most accurate picture yet of the financial crisis that awaits the winner of the Feb. 24 mayoral election.

“The Chicago bill should survive, regardless of the outcome of this appeal. If it doesn’t, the city’s liabilities will increase by $2.5 million a day,” Corporation Counsel Stephen Patton wrote in the Jan. 12 filing.

“The city will suffer further [bond rating] downgrades that could materially increase the cost of borrowing money essential to funding basic operations. And it could make the city immediately liable to pay hundreds of millions of dollars as a result of default and early termination of debt-related obligations.”

Chicago’s pension reform measure ended compounded COLAs for some retirees and raised employee contributions by 29 percent.


Photo by bitsorf via Flickr CC LIcense

UK Pension Funding Could Suffer As European Central Bank Begins QE

big ben

The European Central Bank announced on Thursday that it would soon kick off its massive quantitative easing program.

Pension consultants say the move will likely push the funding ratios of UK pensions lower – with one consultant going so far as to say the QE program would be “horrendous” for pensions.

From EFinancialNews:

The steep fall in yields on UK bonds, with more possibly to come, has left unhedged pension funds nursing bigger deficits because actuaries use the yields to calculate pension liabilities. And actuaries’ valuations determine the contributions companies need to make to pension schemes. When interest rates fall to extremely low levels, any changes have a significant impact on the size of liabilities.

Dawid Konotey-Ahulu, co-founder of consultant Redington, said: “The sustained decline in long-term interest rates has had a catastrophic effect on unhedged pension schemes. Prepare for a set of truly horrendous funding levels when some pension schemes run their calculations in March.”

Liabilities have risen 25% in a year, according to consultancy Hymans Robertson. Partner Jon Hatchett said they had risen 2% in the past 10 days alone: “They’re going up by the day. It’s astonishing.”

Mercer partner Alan Baker said liabilities at large UK companies’ pension schemes were up by £93 billion, or 14%, over three months.

Roughly 45% of UK scheme liabilities are protected through interest rate hedges, but other schemes will suffer.

One manager of a large UK pension scheme said: “I just wonder whether real yields can go any lower, so schemes will be exploring other ways to hedge. Just remember the silver lining though – if rates are so low then companies can raise capital cheaply and continue to support their schemes – even though the endgame is probably further out.”

Read the full piece, with more reaction, here.


Photo by  @Doug88888 via Flickr CC License

Pennsylvania’s Municipal Pension Problems Are Isolated, Not Epidemic, Says Township Representative


David Sanko, executive director of the Pennsylvania State Association of Township Supervisors, penned an piece in TribLive on Friday claiming that Pennsylvania has a pension crisis – but it’s at the state level, not the municipal level.

Sanko contends that, aside from a handful of horror stories, most of the state’s municipalities aren’t buried in pension liabilities.

Sanko writes:

A handful of local governments — primarily large and midsize cities like Philadelphia, Pittsburgh and Scranton — have retirement programs that are underwater and have been for quite some time.

But the majority of municipal pension plans are doing just fine and provide a stark contrast to the horror stories. In places like Bethel Township in Berks County, Castanea Township in Clinton County, Connellsville Township in Fayette County, and Great Bend Township in Susquehanna County, employee pension plans are overfunded by as much as 700 percent.

These communities are the rule, not the exception, according to recent data from the Pennsylvania Employee Retirement Commission, which has been documenting the distress level of the 1,448 municipalities that receive state aid to offset mandated retirement benefits.

Despite the small number of severely distressed municipal plans, some are portraying the problems of a few as a statewide epidemic and want everyone, including communities that have kept their pension plans healthy and above water, to swallow the same bad medicine.

They’d like to consolidate all local retirement plans into a single statewide system and let the healthy ones’ assets be used to balance the troubled ones. But bigger isn’t better. All we have to do is look at the state’s behemoth and woefully underfunded system, which accounts for 90 percent of the pension stress in the state, for proof of that.

A report from Pennsylvania’s top auditor released last week found that the majority of the state’s municipal pension funds were not “in distress”.

However, 562 plans were classified as “distressed”.


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 –

Institutional Investors Keeping Close Eye on Oil As Prices Continue To Slide

oil barrels

The price of oil dropped below $45 per barrel on Tuesday, and many Americans are undoubtedly enjoying the price drop – at least when they are filling up at the pump.

But the drop is causing “a lot of concern” for institutional investors, according to a Pensions & Investment report.

From Pensions & Investments:

The impact of low oil prices is mixed, but already are being acknowledged and felt by institutional investors.

“There is a lot of concern from clients,” said Tapan Datta, London-based head of asset allocation at Aon Hewitt. He said discussions are taking place among investors, looking at how to “protect themselves if things go seriously wrong. There is no doubt that it should be considered.”

One of the main concerns for pension funds would be the link between falling oil prices and lower inflation.

Pension fund liabilities are where the oil price drop could “bite,” said Mr. Datta, with falling inflation leading to even lower bond yields, and a subsequent rise in liabilities.

“Everybody is worried that the price (of oil) doesn’t seem to have a floor at the moment,” added Alastair Gunn, U.K. equities portfolio manager at Jupiter Fund Management PLC in London. “It is making equity holders quite jittery about dividends, and is making bondholders jittery about the risk of defaults.”

Pension fund executives are certainly paying attention. Ricardo Duran, spokesman for the $189.7 billion California State Teachers’ Retirement System, West Sacramento, said the bulk of the fund’s oil holdings are in the global equity and fixed-income allocations. As of Dec. 31, the $107.8 billion global equity portfolio invested about 5.9% in the oil and gas sector, covering areas such as exploration and production, refining and marketing, and storage and transportation, he said. That equates to about $7 billion.

Just less than 8%, or about $1 billion, of the $13.4 billion fixed-income credit portfolio is in oil, invested mostly in the independent and integrated energy sectors, in midstream holdings, oil field services and refining, he said.

“(The falling oil price) has exerted a downward pressure on the portfolio,” the spokesman added in an e-mailed comment.

CalSTRS executives are “closely monitoring the situation before determining what, if any, moves to make,” said the pension fund spokesman. “CalSTRS is a long-term investor and, while the drop in oil prices has been a cause for some concern, we have to balance that against growth opportunities the situation may create in other sectors of the economy in which we’re also invested.”

Several pension executives told P&I that, although they are watching oil carefully, they still retain the mindset of long-term investors.


Photo by ezioman via Flickr CC License

Stakeholders Listening for Hints on Pension Reform in Chris Christie’s Annual Address

Chris Christie

Chris Christie will deliver New Jersey’s “State of the State” address on Tuesday. The question on the minds of lawmakers, labor leaders and public workers is: how much will he reveal about his plans for reforming the state’s pension system?

Christie indicated over the summer that a new round of pension reforms are necessary, and they would likely involve benefit cuts.

But new details have been scarce, and the state’s Pension and Benefit Study Commission hasn’t released its recommendations.


When Gov. Chris Christie delivers his 2015 State of the State address Tuesday, lawmakers and public workers will no doubt be listening for remarks on pension reform.

On the eve of that speech, and months after a commission’s report on recommendations for the ailing pension system was expected to be released, legislators, union leaders and lobbyists say they are expecting to hear from the governor on one of the biggest issues facing Trenton. Christie’s office has not yet provided any details about his annual address to the state Legislature.

The governor made mention of the ailing public employee pension system nine times in his 2014 address, proposing to crack down on pension fraud and engage on pension reform.

“If we do not choose to reduce our soaring pension and debt service costs, we will miss the opportunity to improve the lives of every New Jersey citizen, not just a select few,” he said at this time last year.

The debate over pensions heated up again last spring when a budget gap suddenly erupted and Christie cut back on payments that were promised in a highly touted pension reform law he signed in his first term.

Since late summer, recommending ideas about overhauling public worker pensions has been the job of a bipartisan commission Christie designated. The commission issued a report in September laying out the severity of the state’s unfunded pension and health benefit liabilities, but has not released a final report with recommendations. The commission’s chairman Thomas J. Healey did not return calls for comment.

The state is shouldering $83 billion in pension liabilities, as measured by new GASB accounting rules.


Photo By Walter Burns [CC BY 2.0 (], via Wikimedia Commons

Federal Judge Won’t Issue Ruling in Pension Fight Between City, Public Safety Workers


A U.S. District Court Judge has declined to issue a ruling in a decade-long dispute between the city of Annapolis and its retired public safety workers.

The dispute, explained by the Capital Gazette:

A federal judge has declined to wade into a 12-year dispute between the City of Annapolis and retired public safety workers over pension benefits.

Senior U.S. District Court Judge for the District of Maryland William M. Nickerson issued an opinion on Tuesday dismissing the city’s claims for declaratory judgment in its case against some 60 retirees. The city filed the federal action in August, after a 10-year old case filed by the retirees against the city was reopened in Anne Arundel Circuit Court.

The city sought to have changes to its retirement program over the past year declared constitutional and consistent with state law. This was after the retirees filed their own motion for declaratory judgment in Anne Arundel Circuit Court in June in light of the changes to the retirement program.


Former Annapolis police and firefighters are classified under four retirement plans. Individual retirees receive benefits from the plan in place upon their retirement. Two of the plans contain language in the city code tying pension increases to active-duty employee salaries.

“Each retired member’s pension shall be increased by the same percentage as any increase in the pay scale for members of the same rank and years of service who are on active duty,” the code reads.

Retirees sued Annapolis in 2002 seeking retroactive payments dating to 1995. After six years of legal battles, the state’s Court of Appeals ruled in favor of the retirees. The Circuit Court of Anne Arundel County later issued a declaratory judgment for pension increases, despite a premonition from then-Mayor Ellen Moyer that the ruling would bankrupt the city.

The city’s retirement plan liabilities increased by $6.2 million because of the ruling, according to a 2013 report produced for the city.

Annapolis had suspended adjustments to police and fire retiree benefits since 2009. City employees did not receive pay increases during that time period.

In Oct. 2013, the city announced a deal with its four public-sector unions on pay increases. Employees would receive a 10-percent raise over the next three fiscal years. Retirees would receive annual 2-percent increases, regardless of future city pay increases.

“Thus, the Retirees would receive only a 6 percent pension increase while active members would receive a 10 percent increase in pay,” Nickerson’s opinion reads.

The changes funded the retirement plan by 100 percent, according to the city.

The Annapolis City Council says it is deciding how to move forward in light of the ruling.


Photo by Joe Gratz via Flickr CC License

Moody’s: Stockton Ruling Good News For “Financial Profile” of CalPERS


Moody’s released a report Wednesday outlining the credit agency’s thoughts on CalPERS in the wake of the Stockton ruling.

The agency affirmed CalPERS’ rating of Aa2, which is the third-highest rating available. From the report:

Favorable outcomes for CalPERS in the Stockton, CA and San Bernardino, CA bankruptcy proceedings lend further support to CalPERS improving financial profile because it reduces the likelihood that other CalPERS contracting employers will race to declare bankruptcy to reduce growing pension liabilities. The combination of a reduction in the likelihood that other distressed California municipalities will pursue bankruptcy to reduce pension liabilities and contribution rate increases on contracting employers in each of the last three years should improve the CalPERS funded status and its ability to cover the expected longer lives of retirees.

More from the Sacramento Bee:

Stockton’s court-approved plan to continue full contributions to its CalPERS-administered pension program sets a positive course for the retirement system, Moody’s Investors Service said in a Wednesday morning statement.

The firm’s assessment is the other side of what it said shortly after bankruptcy Judge Christopher Klein’s Oct. 1 non-binding comments that pensions aren’t immune to bankruptcy law. Wall Street applauded his statements and Moody’s said the judge’s remarks signaled that bankruptcy could be a new tool for financially-stressed municipalities.

But now that Klein has blessed Stockton’s plan, which cuts payments to debtors but leaves its contributions to CalPERS untouched, Moody’s says the case “likely sets a precedent that pensions will enjoy better treatment than debt in California (municipal bankruptcy) cases.”

Klein said that rejecting Stockton’s plan would irreparably degrade the city’s core services, including police and fire departments already struggling to hire and retain workers. Moody’s said Klein’s decision was “somewhat of a surprise,” given his earlier comments, and would discourage other contracting employers from using bankruptcy to cut their growing pension liabilities.

CalPERS is the nation’s largest public pension fund.


Photo by Stephen Curtin

Funded Status of Corporate Pensions Falls To Lowest Level In 13 Months

Investment Companies sheet

Pension360 focuses on public pensions, but the general landscape of pensions in the U.S. is important, as well.

On that note, an interesting piece of news surfaced Thursday: the funded status of U.S. corporate pensions dropped this month to the lowest level since August 2013. Plans’ funding levels fell from 90.1 percent to 89.9 percent. From MarketWatch:

The funded status of the typical U.S. corporate pension plan in September fell 0.2 percentage points, despite liabilities falling 2.6 percent, according to the BNY Mellon Institutional Scorecard. Assets for the corporate plans fell 2.7 percent, outpacing the fall in liabilities, ISSG said.

This funded status is now down 5.3 percent from the December 2013 high of 95.2 percent, according to the scorecard.

The lower liabilities for corporate plans in September resulted from the Aa corporate discount rate rising 20 basis points to 4.31 percent over the month. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.

“After benefiting from the first monthly decline in liabilities of more than one percent since November 2013, pension plans still failed to improve their funded status,” said Andrew D. Wozniak, head of fiduciary solutions, ISSG. “Although U.S. large cap equities outperformed the liabilities over the month, they were the only major equity class to do so. A sustained divergence between U.S. large cap equity returns and other public equity classes could continue the downward trend in funded status.”

ISSG also noted that public defined benefit plans missed their return targets in September by 3.5 percent, but have hit their return targets for the last twelve months, collectively.


Photo by Andreas Poike via Flickr CC License

Fitch Downgrades Pennsylvania; “Weakened” Pension System Drives Demotion

Tom Corbett

Credit rating agency Fitch has downgraded Pennsylvania’s general obligation bonds one notch, from AA to AA-.

What’s more, Fitch changed the state’s outlook from “stable” to “negative” – meaning another downgrade could be coming if Pennsylvania doesn’t address the structural problems that led to this recent demotion.

The structural problems in question are largely linked with the state’s pension system. From the Fitch report:

CONTINUED FISCAL IMBALANCE DRIVES DOWNGRADE: The downgrade to ‘AA-‘ reflects the commonwealth’s continued inability to address its fiscal challenges with structural and recurring measures. After an unexpected revenue shortfall in fiscal 2014, the current year budget includes a substantial amount of one-time revenue and expense items to achieve balance and continues the deferral of statutory requirements to replenish reserves which were utilized during the recession. The commonwealth’s rapid growth in fixed costs, particularly the escalating pension burden, poses a key ongoing challenge, although Fitch expects budgetary planning and management to mitigate these pressures in a manner consistent with the ‘AA-‘ rating.

PENSION FUNDING DEMANDS: The funding levels of the commonwealth’s pension systems have materially weakened as a result of annual contribution levels that have been well below actuarially determined annual required contribution (ARC) levels. Under current law, contributions are projected to reach the ARC for the two primary pension systems by as soon as fiscal 2017, but the budgetary burden will increase, crowding out other funding priorities.

INCREASING BUT STILL MODERATE LONG-TERM LIABILITIES: The commonwealth’s debt ratios are in line with the median for U.S. states. However, the commonwealth’s combined debt plus Fitch-adjusted pension liabilities is above-average, and will likely continue growing given the current statutory schedule of pension underfunding for at least the next few years. Fitch views Pennsylvania’s long-term liability burden as manageable at the ‘AA-‘ rating so long as the commonwealth adheres to its funding schedule, or enacts reforms that do not materially increase liability or annual funding pressure.


Without structural expense reform, or broad revenue increases, pension costs will consume a larger share of state resources and limit the commonwealth’s overall fiscal flexibility. In fiscal 2015, commonwealth contributions will increase over $600 million from the prior year to $2.7 billion on a $30 billion general fund budget (9.1%). Based on the statutory framework and the pension systems’ historical data and actuarial projections for contributions, Fitch anticipates increases for fiscal 2016 and 2017 will be similar though somewhat lower. While substantial, Fitch views the anticipated increases in annual contributions and unfunded liabilities laid out in the current statutory framework as within the commonwealth’s capacity to absorb at the ‘AA-‘ rating level.

Moody’s downgraded Pennsylvania in July.

Study: Investors Think Pension Liabilities Are “Systematically Undervalued”

Graph With Stacks Of Coins

When it comes pension liabilities, investors are skeptical of the numbers they’re being presented with. That’s according to a study released today by Llewellyn Consulting that examined how investors react to the stated liabilities of corporate defined-benefit plans.

The study comes from the UK, but it has great relevance to the United States, where watchdog groups believe pension liabilities are chronically under-reported.
From Financial Times:

The study, to be published on Monday, found company valuations were being significantly impacted by investors taking a more sceptical view on the risk of defined benefit pension schemes, which remain a large and volatile component of corporate balance sheets.

“The implication is that reported pension liabilities are regarded by markets as being systematically undervalued; that markets give larger weight to pension liabilities than to pension assets; and/or that a higher level of liabilities is viewed as representing a higher risk,” said the report.


The report, conducted by Llewellyn Consulting, a London economics advisory, in conjunction with academics at Queen Mary University, is the first-in depth analysis to quantify the weight that investors put on DB pension scheme risk.

Researchers matched company financial and DB-pension-related data taken from FTSE 100 company statements from 2006-2012 with corresponding stock market performance and company valuation data.

The report found that FTSE 100 companies with the largest DB pension schemes were penalised “most heavily” by the market, even when the scheme was reported as fully funded, and regardless of the stated recovery plan.

The financial watchdog group Truth In Accounting believes that the United States is under-reporting its unfunded pension liabilities by $980 billion.


Photo by www.SeniorLiving.Org

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/ on line 3712