Bankers and new accounting rules are emboldening governments to borrow-and-bet their way out of pension problems, a strategy that’s backfired in the past.
…..Bet Big, Then Go Short
Governments that borrow money to fund their pensions often pay less into their pension funds in future years than they’re supposed to. Here’s how the 20 biggest pension bonds deals since 1996 have worked out. Explore the app ….
It’s time for American workers to understand the game of private equity, because it’s being played at their expense, thanks to rules put in place by Congress.
Here’s how the game currently works: Workers sell their jobs, pensions and futures, for little to nothing in return. The buyers are those masters of unproductive capital acquisition, private-equity funds.
Their game is short term. Companies are acquired with lots of borrowed money. (Congress incentivizes this by making interest a tax-deductible business expense.) Some of the borrowed money is almost immediately used to repay the general partner and some other investors so they end up with a cost-free stake. If your equity stake costs less than zero, your returns are infinite.
The remaining equity in such deals comes primarily from pension funds — that is, from workers….
…Much of the pension money in private equity comes from public employee pension funds, the ones that politicians in many states have been failing to fund, resulting in not enough assets to pay benefits that the workers earned.
These shortfalls put pressure on pension fund managers to find ways to earn higher rates of return, which of course means taking on more risk. One way to reduce such risk is to get rid of private-sector pension plans because that lowers costs to the owners, though at a huge and delayed cost to private-sector workers. It also adds to the risks of future state welfare costs for destitute older people….
What’s wrong? As the Baby Boom moves into retirement, confidence in our retirement system is waning, for good reason. Plan sponsors, including public and private employers, are rapidly freezing their defined benefit plans—those that promise a guaranteed level of income in retirement—by closing the plans to new hires or stopping current employees from earning additional benefits.
When legally permitted to do so, some plan sponsors are even cutting back benefits employees have already earned. Municipal pension cutbacks growing out of the Detroit bankruptcy offer one recent example where previously earned benefits already have been cut. Congress provided another example late last year when it authorized severely underfunded multiemployer pension plans to reduce previously earned benefits of collectively-bargained employees. Meanwhile, Washington is awash in proposals to cut back, tax away, or means test Social Security old-age benefits whenever a political opening makes that feasible. ….
….. How did this happen? How did we—one of the richest and most financially savvy societies in history—come to this juncture? The answer lies in how our retirement system allocates risk and fails to be creative about new ways to structure retirement plans. ….
….What can we do about it? The extreme bipolar allocation of risk in our retirement system described above has become increasingly dysfunctional. The assumption that plan sponsors must assume either all or none of the major risks of providing retirement benefits is driving many of our largest institutions—both governments and businesses—from assuming any retirement risks at all and causing them to shift those risks entirely onto individual participants. An obvious alternative would be to share those risks rather than shift them….
Detroit’s bankruptcy wasn’t inevitable. Neither is Chicago’s. But the austerity hawks don’t want you to know that. …
….Because conventional wisdom held that bloated pensions had bankrupted Detroit, the conversation revolved around other cities with large pension shortfalls, such as New York, Philadelphia and Jacksonville, Florida. …. All of this uproar rested on a basic falsehood in the dominant public narrative around Detroit: that pensions played a key role in driving the city bankrupt. But those who studied the bankruptcy closely know that the reverse is true: The city filed bankruptcy so that it could cut pensions.
Detroit’s bankruptcy was not borne out of financial necessity and was not a foregone conclusion. It was a political decision made by state officials. Gov. Rick Snyder and the Michigan Legislature chose to push the distressed city over the edge in order to accomplish two otherwise difficult political goals: slashing pensions and regionalizing the Detroit Water and Sewerage Department. It was disaster capitalism at its finest.
Austerity hawks are now hoping to use the Detroit playbook in other cities to force the public to accept extreme measures to fix budget crises. ….
….The $198 million shortfall could have been addressed fairly easily—in part, simply by undoing state actions that had pushed Detroit into bad financial straits in the first place. For example, Detroit had taken a major financial hit over the course of 2011 and 2012, when Snyder and the Michigan Legislature decided to cut annual state revenue sharing with the city by $67 million. Restoring that funding would have filled one-third of the city’s shortfall. Second, there were state-imposed restrictions on the city’s ability to raise local taxes, dating back to the 1990s. Lifting those restrictions would have allowed the city to raise taxes and bring in new revenue. …..
On June 9, 2015, SLGE convened a Retirement Security Summit in order to explore pension and health benefit changes, retirement income trends, the implications of shifting demographics, and the evolving social contract with employees.
Program Moderator – Peter Harkness, Founder and Publisher Emeritus, Governing magazine
Welcome – Elizabeth Kellar, President & CEO, Center for State and Local Government Excellence
Introduction – Robert O’Neill, Executive Director, ICMA and Chair, Board of Directors, Center for State and Local Government Excellence
Keynote Speaker – Dallas Salisbury, President & CEO, Employee Benefit Research Institute [Download a pdf of Mr. Salisbury’s presentation]
Session 1: Retirement Income Trends and Pension Reforms
Neil Reichenberg, Executive Director, International Public Management Association for Human Resources [Download a pdf of Mr. Reichenberg’s presentation]
Steven Kreisberg, Director of Collective Bargaining & Health Care Policy, American Federation of State, County and Municipal Employees
Rebecca Hunter, Commissioner, Tennessee Department of Human Resources
Joshua Franzel, Vice President of Research, Center for State and Local Government Excellence [Download a pdf of Dr. Franzel’s presentation]
from the summary:
This 2015 report of state and local government pension funding finds that most public pension plans have improved their funded status.
• Most plans have improved their funded status in 2014, with the ratio of assets to liabilities increasing from 72 percent in 2013 to 74 percent in 2014.
• According to the analysis, there are two reasons for these improvements: positive stock market performance for the past five years, allowing the 2009 negative equity returns to be replaced in plans that smooth their market gains and losses over five years; and higher payments of the annual required contribution by state and local governments increasing to 88 percent in 2014 as compared to 82 percent in 2013.
• Going forward, assuming plans achieve their expected rate of return, the plans should be 81 percent funded in 2018.
• If returns are lower, as predicted by many investment firms, funding will stabilize at about 77 percent.
From the summary:
Many retirees and workers approaching retirement have limited financial resources. About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA). According to GAO’s analysis of the 2013 Survey of Consumer Finances, many older households without retirement savings have few other resources, such as a defined benefit (DB) plan or nonretirement savings, to draw on in retirement (see figure below). For example, among households age 55 and older, about 29 percent have neither retirement savings nor a DB plan, which typically provides a monthly payment for life. Households that have retirement savings generally have other resources to draw on, such as non-retirement savings and DB plans. Among those with some retirement savings, the median amount of those savings is about $104,000 for households age 55-64 and $148,000 for households age 65-74, equivalent to an inflation-protected annuity of $310 and $649 per month, respectively. Social Security provides most of the income for about half of households age 65 and older….
A battle is brewing in the U.S. between state legislators, like Mark Mullet, and financial services providers over the tens of millions of private sector workers who don’t have access to a workplace saving plan.
New Jersey’s top court this week overturned a lower court’s ruling that Gov. Chris Christie had violated a 2011 pension law. The decision means the state doesn’t have to pay its pension fund the $1.6 billion Christie had promised to pay when employees agreed to contribute more to their retirement accounts.
Tuesday’s ruling is largely hailed as a political victory for the governor, who will announce whether he’s running for president later this month. It’s also a temporary financial victory for New Jersey. But there are many more reasons why the win is fleeting and will ultimately place more pressure on a financially beleaguered state that can ill afford it. Here’s why:
New Jersey still has a really high pension liability. ….
New Jersey could still get downgraded. Again. ….
Retirement security for New Jersey state employees is now in doubt. ….
New Jersey still has other big budget problems. ….
The funded status of public employee defined benefit (DB) retirement plans continues to garner great debate in the industry and press. DB plans are the primary vehicle for ensuring retirement income security for public workers, and Callan believes these plans are viable and necessary in this sector. In 2011, Callan published a report to initiate discussions around what went wrong in the past that left many of these plans woefully underfunded. We suggested ways to nurse them back to health by promoting DB plans and providing them with ongoing support. We revisit the topic in 2014, but now with a more urgent goal of saving public pensions amid persistent low funded levels and a burgeoning movement to disassemble them. The following talking points will help to move the discussion forward around the importance of DB plans. We expand on each point and support our assertions with research, data, and actuarial considerations.
1 DB plans serve many purposes beyond providing constituents with retirement income.
2 DB plans are proven to be extremely cost effective and reliable in delivering basic retirement income security—when the rules of DB finance are followed.
3 Many public DB plans are underfunded today, but not because of paltry long-term returns. It is primarily because plan sponsors’ contributions were neither sufficient nor consistent enough to properly fund the benefits promised.
4 New benefits cannot be funded out of better-than-average investment returns simply because average returns is all one can expect over the life of the plan.
5 DB plan funding surpluses and deficits occur as part of the normal cycle of investment market returns.
6 Plans that implement an actuarially sound funding policy will achieve 100% funded status over the long run. Over the short term, the plan could veer off course because of market cycles.
7 Healthy DB plans are underpinned by a sustainable benefit design, a strong governance process, and the sponsor’s commitment to regularly fund the plan. ….