Don’t Let the Facts Get in the Way of a Good Story

ANOTHER TAKE ON THE PENSION FUSS - Inaccuracy and dishonesty may be a fact of life, but it’s particularly disappointing to read the frenzied attacks of those who challenge pension funds for using “inaccurate” funding and reporting numbers – when those very attacks are dependent on numbers and scenarios ginned up by the authors to support their own misleading claims.
Public employee pensions have been under attack since the early part of the past decade. Governor Schwarzenegger advocated eliminating defined-benefit plans and converting all public employees’ pensions to 401(k)/defined contribution-style plans. After City of Bell officials’ pension abuses came to light, public outcry for pension reform grew louder, and soon, local ballot measures were popping up across the state to “fix” what many saw as a broken retirement system.
What followed was a lot of hype and rhetoric on this subject, but the Los Angeles Police Protective League and United Firefighters of Los Angeles nevertheless worked with the City of Los Angeles to pass meaningful pension reform. Our police officers and firefighters have always paid the employee contribution toward their pensions, and they’ve never been allowed to “pension spike.” Still, the new reforms raised the amount employees contributed and based the retirement-pension formula on workers' average salaries during their two highest-paid years, not a 12-month period.
Understanding the answers requires dispelling some pension myths. The overstated alarm and concerns over huge “unfunded liabilities” were based on changes resulting from new rules in the pension accounting system. Governmental Accounting Standards Board (GASB) Rule 45, adopted seven years ago, required that public pension systems publically disclose “their unfunded liabilities.” Before GASB Rule 45, these same “unfunded liabilities” existed; they were just never disclosed. Disclosure does not affect pension systems’ fiscal stability, but many who don’t understand pension systems use it anyway as a means of political attack.
Jack Humphreville’s latest screed against the Los Angeles Police and Fire Pensions plan, “Dirty Deeds Impact the Fire and Police Pension Plans,” is the most recent example of an attack wholly based on the same numbers manipulation of which he accuses others.
Humphreville drags out, for the umpteenth time, the debunked argument that the pension plan uses “phony actuarial gimmicks” to understate the plan’s unfunded liability. He once again bleats the tired refrain that only by using the “market” value of the plan is the true liability known, and that the “smoothing” of gains and losses should be abandoned.
Humphreville may be a very smart man, but this attack exposes his lack of understanding of the way public pension funds are operated and financed. His views have been completely rejected by the GASB, which over the last two years has revisited and rewritten the accounting standards for pension boards. Humphreville, however, charges on because only by using inapplicable standards can he make the pension fund shortfall into the crisis he wishes to portray.
Predictably, he again attacks the long term 7.75 percent return assumption used by the Los Angeles Fire and Police Pensions (LAFPP) fund. Never mind that the 10- or 20-year return is much different. Humphreville claims that over the next 20 years, the fund cannot possibly achieve that rate. He points to CALPERS, which will review a potential change from 7.75 percent to 7.25 percent later this year, and he also cites Warren Buffett’s suggestion that the next 20 years will only yield 6 percent.
The fact is, LAFPP’s fund has handily beaten CALPERS for the past 20 years, something conveniently omitted from Humphreville’s story. And while Buffett is certainly a prodigious investor, he’s not an infallible predictor of future events. He reported in February 2012 that he will lose all of a $2 billion natural gas investment he made five years earlier, admitting he “…totally miscalculated the gain/loss probabilities” when he made the investment, which was predicated on his belief natural gas would rise in price in the future.
However, the most bemusing part of Humphreville’s attack was the suggestion that the City is in crisis because everything is done behind closed doors. LAFPP meetings are public, and members of the public can address the Board of Fire and Police Pension Commissioners; I challenge Humphreville to appear before the Board and share his views and wisdom. Humphreville likely won’t because he knows his diatribes, written behind the “closed doors” of his office, cannot stand the light of day if presented in public to informed persons willing to debate his spurious claims.
(Tyler Izen is President of the Los Angeles Police Protective League.)
Tags: LA Police Protective League, United Firefighters, employee pensions

Participants Look to Plan Sponsors for Inflation Guidance

Inflation is a major concern for plan sponsors and their participants when planning retirement investment portfolios.

During a webcast, Fredrik Axsater, managing director of global defined contribution at State Street Global Advisors (SSgA), and Brent Bell, vice president of the SSgA Multi Asset Class Solutions, discussed how inflation can diminish retirement savings and what plan sponsors can do to help their participants understand the importance of this.

According to Axsater, 70% of plan participants are worried about inflation; however, 44% of participants have no idea what the current inflation rate is.

Inflation rates are also a big concern to plan sponsors. Axsater provides recommendations for plan sponsors to gain exposure to their participants on the topic of inflation. He suggests plan sponsors include real assets in target-date funds. He said that real assets have been used for a long time in portfolios. They provide a 10% to 15% allocation on average, which is a significant allocation.

Another suggestion is to use single asset class strategies, rather than confusing participants with multi-asset class strategies.

Axsater also recommends plan sponsors use a single fund that holds exposure to multiple asset classes. By combining these and other asset classes you have a core holding. It also can be well-diversified and have a meaningful impact.

In order for plan sponsors to take action on the topic of inflation with participants, both Axsater and Bell recommend the following:

1. Define plan objectives in mitigating inflation risk;
2. Assess how current investment menus addresses inflation risk;
3. Consider the specific inflation protection needs of participants;
4. Compare off the shelf vs. custom real assets solutions;
5. Develop ways to communicate with participants to raise awareness around inflation; and
6. Review real assets regularly.

Both Bell and Axsater add that communication with participants is critical. The majority of them are concerned about inflation and how they should take it into account when preparing their portfolios for retirement.

One of the best ways to communicate the importance of preparing retirement portfolios for inflation is to provide participants with examples they can relate to. One example Bell provides is the inflation cost for ice cream.  In 1980, the average cost for a one gallon container of ice cream was $1.78. The cost rose to $4.48 in 2010. With the current inflation, the cost for one gallon of ice cream will be $10.88 in 2040. This example helps participants see what their purchasing power will be when they reach retirement age.

Bell adds that participants are looking to plan sponsors to provide them with guidance on inflation, and they want help through small steps that are easy for them to accomplish.

Tara Cantore

The State and Local Pension Crisis

The State and Local Pension Crisis

By Diana Furchtgott-Roth

WASHINGTON-President Obama's new budget, with its trillion dollar deficit and interest payments of $5.6 trillion on the debt over the next decade, is only part of America's unfunded liability.

The state and local pension crisis is the subject of a new report by the Republican staff of the U.S. Senate Committee on Finance, entitled "State and Local Government Defined Benefit Pension Plans: The Pension Debt Crisis that Threatens America."

Senator Orrin Hatch, a Utah Republican and ranking member of the Senate Finance Committee, said last month, "Today, public pension debt stands at an alarming $4.4 trillion with outstanding state and local municipal debt at nearly $3 trillion. The public pension crisis plaguing our nation demands a real solution."

The Hatch report shows that the unfunded pension liabilities of state and local governments have been rising. Mr. Hatch plans to bring forward a series of proposals to reform public pension plans over the next few weeks.

By law, these pensions will have to be paid over time to the 19 million men and women who work for state, county, school district, and municipal government. The Hatch report warns that if pension fund income is insufficient to cover these obligations, they will have to be paid also by the taxpayers, either of the respective states or-possibly-by all of us, if Congress decides to ride to the rescue.

The latest estimate of unfunded pension and healthcare obligations for state and local government, $4.4 trillion, comes from Josh Rauh, a finance professor at the Kellogg School of Management at Northwestern University.

In 2009, Professor Rauh estimated $3 trillion in unfunded health and pension liabilities, based on Treasury bond yields ranging from 4.4 percent for 30-year bonds to 2.6 percent for 5-year bonds. Now yields are one-and-a-half percentage points lower, implying that liabilities are 23 percent higher, assuming a duration of 15 years. In either case, cities and states will not have adequate revenues to meet their obligations.

For many years a growing economy propelled increases in stock prices, enhancing the coverage of many pension plans, public and private. But stocks have not fully recovered from the market's collapse in 2007-2008. Prudent planning cannot assume that stocks will resume their prior course, and so the problem must be examined, and a prudent mid-course corrections must be devised.

Funding levels of state and local pension plans began deteriorating in 2000 with the popping of the dot-com boom. Now, the Pew Center on the States, a nonpartisan research organization based in Washington, estimates that 31 states have funding levels below 80 percent of full coverage.

An increase in unfunded liabilities could not have come at a worse time for state and local governments already staggering financially. Many states not only face record operating deficits from the recession, but they are looking at a potential expansion of Medicaid obligations when health reform is fully implemented in 2014. And, to balance their budgets, they have been laying off employees, thereby shrinking the number of people paying into their respective pension funds.

There is no tidy approach to resolving these problems. The states are essentially autonomous. Congress does not regulate their pension operations. The Employee Retirement Income Security Act, enacted in 1974, applies only to private-sector pensions.

Rather, state and local pension funds operate under guidelines of the Government Accounting Standards Board. It is essentially a federally-sponsored, private-sector advisory body, without enforcement power.

In the private sector, gains and losses of pension funds must be smoothed over seven years under the Pension Protection Act of 2006-ten years when requested by the plan's administrators. By contrast, in the public sector, gains and losses may be smoothed over 30 years.

This means that public funds can incur greater near-term deficits than private plans, because projected gains 30 years hence can be used to offset near-term losses, at least on paper.

The disparity raises a question as to whether the states and cities need to be held to a stronger discipline, according to the Hatch report.

Even states that are making large contributions to their pension plans find themselves in difficulties. Rhode Island and Utah both contributed the amounts suggested by the Government Accounting Standards Board, yet both have plans that are seriously underfunded.

Although private plans can reduce employee benefits and increase contributions to bring underfunded plans into financial health, many public sector plans have been prohibited by the courts from doing this. New employees can be charged a higher contribution rate for lower benefits, but not current employees who were hired under more favorable terms.

Underfunded public pension plans are legal obligations of the state, and have to be paid either with taxpayers' dollars, or with increased contributions from new state employees, or both. State and local tax rates will have to rise to pay for this.

Some analysts think that the problems are so severe that the federal government will end up bailing out the states. That's one reason, according to Standard and Poor's, why the ratings agency downgraded the U.S. government's debt in August, 2011.

Ratings agencies believe that Uncle Sam will step in because about 5 million state and local government workers are not covered by Social Security. Therefore, if their pension plan goes bust, they would have nothing except their own savings.

What can states do? The Hatch report reviews some options, and will publish more in coming weeks.

One option is to gradually raise the retirement age. Right now, in many states, you can retire at age 50 and start collecting benefits. State could allow workers to retire at the same age but postpone the age at which workers begin to collect benefits. Of course, that would cause some employees to keep working, adding to their eventual retirement benefit.

As it is now, many workers retire, collect benefits, and get another job.

States could also convert pension plans to defined-contribution plans, such as 401(k) plans in the private sector, which have been gradually displacing corporate defined-benefit pensions.

Plans can be closed to new entrants while retaining existing employees. Or, a plan could be closed to new employees, and present workers can be moved to a defined-contribution plan. In either case, the state remains responsible for liabilities of present retirees and the future benefits owed to current workers.

States have a responsibility to workers to disclose the condition of their pension funds, using realistic assumptions. If interest rates are low, it is imprudent to gloss over the weakness of the plan by assuming high, future rates of return.

Of the utmost importance is preventing the state and local pension crisis from becoming a further drag on the federal government. Mr. Obama's budget shows that Uncle Sam is in no position to fund states' liabilities.

Don’t Cut Pensions, Expand Them

March 15, 2012

 

By TERESA GHILARDUCCI

ON Thursday morning the New York State Legislature agreed to a deal limiting pensions for future public employees. The state thus joins 43 others that have recently enacted legislation curtailing public retirement benefits.

Though New York needs to reduce its spending, the cuts come at a particularly bad time: over a third of New York workers, both public and private, approaching retirement age have less than $10,000 in liquid assets. As a result, those workers are projected to be poor or near poor in retirement, with an average budget of about $7 a day for food and approximately $600 a month for housing.

Fortunately, there’s an easy solution. Rather than curtailing public and private pensions, New York and other states could save millions of workers from impending poverty by creating public pensions for everyone.

While the recession bears some blame for the looming retirement crisis, experts agree that the primary cause is more fundamental: Most workers do not have retirement accounts at work. Over half of the workers in New York State, more than four million people in 2010, do not participate in retirement plans with their current employers, while over half of American workers do not have pension plans at work.

Private-sector pensions have been on the retreat for decades. In fact, in the late 1970s and early ’80s, Congress, worried about the dismal rate of pension coverage, tried to remedy the situation by extending 401(k) plans, originally designed for executives, to everyone, while also passing a law to create individual retirement accounts.

The problem is that these steps set up incentives through the tax code, which means that the biggest benefits go to the highest earners — people who, moreover, would probably have saved anyway. Today 79 percent of such tax breaks go to the top 20 percent of workers.

Meanwhile, despite extensive commercial advertising for retirement planning, coverage for ordinary people stalled. And even many of those who do save for retirement fail to consistently put away the 5 to 10 percent of their pay necessary to adequately supplement their Social Security benefits.

In response, in late February California State Senator Kevin De León and Darrell Steinberg, the Senate president pro tempore, introduced legislation that would allow private-sector workers in California to enroll in a modest, state-operated retirement program financed by the workers and their employers — at virtually no cost to taxpayers.

This would increase coverage because employers would put every worker into a plan, either their own or the California plan. In the California version workers could opt out; some will, but most workers once in a plan will stay in.

Also in February, John Liu, the New York City comptroller, called for a similar plan for New York City residents. His program would pool employee and employer contributions into a professionally managed, citywide retirement fund.

Both plans would use the same professional staff and institutional money managers that invest the state and city pension funds to manage contributions made by participating employers and employees in the private sector.

This is a vital step: public pension plans usually outperform 401(k) plans and individual retirement accounts, because instead of a single worker managing a single account, large institutional plans pool workers of all ages, diversify the portfolio over longer time periods, use the best professional managers that aren’t available for retail accounts and have the bargaining power to lower fees and prioritize long-term investment.

By some estimates, costs for public pensions are over 45 percent lower than for individual 401(k) plans. Of course, since these plans would be financed by workers and their employers, there would be no cost to taxpayers.

Saving for retirement is never easy. But finding a safe place to put your money these days is even harder. Opening up public pension options to everyone is a cheap, simple way to help.

Teresa Ghilarducci, a professor of economics at the New School, is the author of “When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them.”

Mississippi Bills Strike Certain Benefits from Public Employee Retirement System's Salary Calculations

Mississippi Bills Strike Certain Benefits from Public Employee Retirement System's Salary Calculations
"A House bill ... and Senate companion bill ... would remove 'maintenance' benefits such as medical and life insurance coverage from salary calculations for retirement benefit levels. The bills also would limit the amount of a pay increase used in retirement benefit calculations to 8 percent if the raise came within 24 months of the employee's retirement. An exception would be granted if the raise came because of a substantial chance in the employee's job duties." (Mississippi Business Journal)