Pensions Aren't Bankrupting (Most) States

[Toro]

But then don't you believe that the article's caveat:

.


is even more significant? They aren't necessarily looking at decades, but instead, years.

That passage is there to demonstrate that even under extreme assumptions, most pensions have many years worth of assets to pay off liabilities. It's not a forecast.

No I agree with you, but wonder about the reality of "frozen plans," when in fact the "projected" assets decline, even a small amount.

Plans aren't frozen though. They continue to grow.

It does matter. The Japanese national pension fund is about to see a decline in contributing members, which is going to make a very interesting scenario in Japan.

 

[Pepe]

In the private Sector, millions have taken losses in their 401k's, IRAs, SEPs and in their Company's Defined Benefit Plans.

The Private Sector pays what is possible.

The Public Sector, through sheer bribery and coercion of the Unions, negotiated "Sweetheart Deals" at the expense of the taxpayers.

Without Union "money" the Dem Party fades into history.

There was NO ONE on the other side of the table negotiating on behalf of Joe Sixpack and Mary Valium.

There is the Law of Unintended Consequences which is now coming into play.

The taxpayers are saying "ENOUGH."

Kansas bill encourages outsourcing of government jobs

TOPEKA — After a lengthy floor debate, the House passed a bill Friday establishing an 11-member commission to study ways to outsource public jobs to private-sector companies and nonprofit groups.

The group would be called the Kansas Advisory Council on Privatization and Public-Private Partnerships.

According to House Bill 2194, the council's main responsibility would be to "review and evaluate the possibility of outsourcing goods or services provided by a state agency to a private business or not-for-profit organization that is able to provide the same type of good or service, and whether such action would result in cost savings to the state."

The council would also identify areas where government services compete with private business, "to determine ways to eliminate such competition."

Outnumbered Democrats taunted conservative Republicans, saying that in creating another commission, they are expanding government in order to shrink it.

Rep. Nile Dillmore, D-Wichita, pointed out that the Republicans cheered 44 days ago when newly elected Gov. Sam Brownback, in his State of the State address, repeatedly said "The days of ever-expanding government are over."

"What's our response?" Dillmore said. "Let's create a commission for this. Let's create a commission for that. Let's grow some government."

A Democratic amendment that would have specified that funding to pay for the council's expenses come out of the governor's office budget was turned aside.

Rep. Marvin Kleeb, R-Overland Park, who carried the bill on the floor, said the costs of the council would be minuscule compared to potential savings from privatization.

"This is not about growing government, it's quite to the contrary," he said.

The council would include:

* Three members appointed by the governor, one of whom must be either the lieutenant governor or the head of a state agency.

* Six members appointed by the speaker of the House and president of the Senate.

* Two members appointed by the minority leaders in the House and Senate.

Ten of the 11 members "shall be engaged in private business," according to the bill.

Democrats objected that the Republicans can appoint two legislators to the committee while they'd be barred from appointing any.

"That is just not done up here," said Rep. Janice Pauls, D-Hutchinson. "It would hurt my feelings if I let it."

The bill passed 68-51. It now goes to the Senate for consideration.

Wichita Eagle

 

[william the wie]

Well if this turns out to be anywhere near a lost decade for the US (less than 1% annual per capita GDP growth) obviously the US as a whole is in trouble. What is less obvious is that the states in the Washington-Boston corridor, the left coast and especially the Democratic strongholds of the industrial Mid-west have already gone through lost decades. This also happens to be the likely outcome of this decade that started two months ago. So no matter what happens the Democratic party is losing influence as a result of this crisis.

 

[Pepe]

Well if this turns out to be anywhere near a lost decade for the US (less than 1% annual per capita GDP growth) obviously the US as a whole is in trouble. What is less obvious is that the states in the Washington-Boston corridor, the left coast and especially the Democratic strongholds of the industrial Mid-west have already gone through lost decades. This also happens to be the likely outcome of this decade that started two months ago. So no matter what happens the Democratic party is losing influence as a result of this crisis.

As so many have correctly written over the last several years, without Union money, especially Public Sector Union money, the Dems go the way of the Whigs.

It will come to pass and likely sooner rather than later although as you and many others have seen by my writings, I expect even the densest of Neocons and Liberals will be able to discern the signs of coming "Balkanization" within 36-60 months.

 

[Foxfyre]

You can believe what you will but if you wish on one hand and shiite on the other, which is the most likely outcome?

Five years of continued future requirements and five years of lower return on Investments simply digs a deeper hole.

The Union Leadership is screwing its own members over the long term.

It's not about what I believe but what I know. What I know is that continuously changing a pensions assumed return based on five years worth of data leads to enormous volatility in plan asst values and an inaccurate understanding of the true economic condition of a pension. That's why professionals who calculate actuarial returns don't do it.

The other thing that I know is listening to what economists expect asset markets to do over anything other than the very long-term is an absolute fools game. Forecasting the weather or the Super Bowl winners over the next five years is about as accurate.

Do you really think the Union give a tinkers dam about what the market does or what the value of the pension fund will be one years, five years, or fifty years from now? Do you think the union members care about that?

What the union promises and what the union members care about is a) How much raise are they getting this year and b) what can they look forward to getting on down the road. And to sweeten the pot in collective bargaining, the union accepts a 3% raise "this year" when money is extra tight but to make up for it, there will be an extra 10% added to their pension fund.

That there is only money enough for the 3% raise is immaterial. The 10% promised in the pension fund doesn't have to be paid this year so we'll just let the next administration or two or three or more worry about that.

A corrupt politician may be all too eager to make a deal like that to get approval for the 3% raise AND a lucrative contribution for his next campaign. He can brag about his balanced budget this year and figures he won't get the blame when the pension problem he has created blows up five or ten or more years down the road.

Collective bargaining in the public sector is a bad deal.

 

[Toro]

Do you really think the Union give a tinkers dam about what the market does or what the value of the pension fund will be one years, five years, or fifty years from now? Do you think the union members care about that?

Yes.

 

[william the wie]

Do you really think the Union give a tinkers dam about what the market does or what the value of the pension fund will be one years, five years, or fifty years from now? Do you think the union members care about that?

Yes.

This is the problem Toro. The Democratic party is making two assumptions that can and is destroying its base:

Even in states that currently are run by the GOP but are in fiscal trouble such as WI and NJ the rest of the country sees them as Blue states, this is hurting the D brand in other states. This leads to attrition in other states as the Democratic party is ever more associated with fiscal incompetence not a radical change from its traditional image I'll grant you. But not even competing on the state level in the latest redistricting elections in 09 and 10 was politically incompetent and will 20-30 years to recover from.

The Ds have assumed that the GOP can and will clean up their fiscal incompetence without destroying D base. This has proven to be an error. When the post redistricting elections hit on some state levels later this year and nationwide next year the national D base will be so radicalized. In much of the south winning the Democratic primary will require far left candidates in safe D seats who will win the general election by margins that Stalin would be envious of. To a lesser extent this will be true west of the Mississippi and that gives a free pass to attacking the D base in those states.

IMHO this fiscal problem is a purely partisan problem.

 

[skeptic]

Pensions don't look ahead 5 years. They look ahead 5 decades. Five years is irrelevant.

While this is true it is also the problem. Nobody has the remotest clue in the world what investment portfolios will be worth 50 years from now. And the last crop of predictions have already been proven dead due to our recession.

The truth is that any layman with a high IQ and a reasonable exposure to market data knew for a certainty that 401K investments would collapse in value before they ever served their intended purpose, because the system itself is without integrity. It's a den of thieves.

Pensions and individual investment accounts stand no chance over 50 years against the thieves of Wall Street.

All projections of 50 year returns are idiotic. Hell, empires only last 50 years anymore.

 

[skeptic]

Do you really think the Union give a tinkers dam about what the market does or what the value of the pension fund will be one years, five years, or fifty years from now? Do you think the union members care about that?

Yes.

This is the problem Toro. The Democratic party is making two assumptions that can and is destroying its base:

Even in states that currently are run by the GOP but are in fiscal trouble such as WI and NJ the rest of the country sees them as Blue states, this is hurting the D brand in other states. This leads to attrition in other states as the Democratic party is ever more associated with fiscal incompetence not a radical change from its traditional image I'll grant you. But not even competing on the state level in the latest redistricting elections in 09 and 10 was politically incompetent and will 20-30 years to recover from.

The Ds have assumed that the GOP can and will clean up their fiscal incompetence without destroying D base. This has proven to be an error. When the post redistricting elections hit on some state levels later this year and nationwide next year the national D base will be so radicalized. In much of the south winning the Democratic primary will require far left candidates in safe D seats who will win the general election by margins that Stalin would be envious of. To a lesser extent this will be true west of the Mississippi and that gives a free pass to attacking the D base in those states.

IMHO this fiscal problem is a purely partisan problem.

While I am not sure that you even have a point to make I will say that GOP gains could be as fleeting as they were dramatic. If you said that the GOP might be irrelevant in two years and have no power whatsoever in 4 I would say, odds are 1:2 against that.

If you said that the Dems might be irrelevant in two years and have no power whatsoever in 4 I would say, odds are 1:2 against that.

But both are possible, even both at once. The parties are just shells. They don't represent power, or money, or ideology, or values, or even the people. They are just figureheads that can be overthrown by the military or a facebook revolution.

 

[Foxfyre]

The one factor that you may not figure is people like me who are in a growing and increasingly vocal and politically and socially active group. We don't care whether it's the D's or R's or about whether there is any dynasty at all. We do want fiscal sanity and the concept of a government of the people and by the people and for the people restored meaning we want the kings and dictators removed and replaced with public servants.

What they choose to call themselves really doesn't matter.

 

[Toro]

CalPERS generated a bit of controversy recently by choosing not to lower its discount rate from 7.75% to 7.5%. However, over the past 20 years, CalPERS has beaten that rate.

In leaving its rate unchanged, Calpers cited the fact that, over 20 years, it has posted an average annual return of 7.9%, before administrative and investment expenses. And the system said it based its future outlook on an analysis of 10,000 investment scenarios over 60 years. These resulted in an expected average annual return of 7.95%.

California Still Dreamin' on Pensions - WSJ.com

The past 20 years has been one in which we have experienced the last half of a raging bull market (the 90s) and the first half of a brutal bear market (the 00s). Oddly, this enormous bull and bear market has generated an average return would would expect for two decades. In fact, given CalPERS asset allocation, ~8% is about the average return over the past century.

 

[Trajan]

Toro, can you give me your opinion no this article?

* MARCH 23, 2011

Public Pension-Fund Squeeze
It Is Actuaries vs. Local Governments Over Return Rates; 'We Cannot Afford This'

Some public pension funds are finding themselves caught in a squeeze between actuaries worried about future benefit costs and local governments worried about immediate budgets strains.

The tension was on display last week, when California pension fund Calpers decided to hold its expected annual return rate steady. The fund's actuary had recommended that the California Public Employees' Retirement System adopt a more-conservative long-term investment expectation; nearly a dozen local officials attended a meeting last week to urge Calpers not to change the rate.

Calpers agreed to the status quo, which will help the governments avoid higher-contribution payments near term. But if Calpers over time fails to hit its investment target, it eventually will come up short of its goals—potentially causing a burden that will fall on governments in the future.

The issue highlights a debate that has caught fire in recent months: whether the underfunding at many public pension funds is partly a result of unrealistic investment expectations as well as accounting methods that underestimate the true size of liabilities. Pension funds say their rates are prudent in the long run, pointing to returns that over the past two decades met or exceeded expectations.

In deciding to keep its assumed investment return rate at 7.75%, the board of the $227 billion fund cited hardships that a lower rate would inflict on local governments. Calpers also said it thought the return was achievable.

The fund's decision is drawing criticism from some who contend it was made for the wrong reasons.

rest at-

Public Pension Funds Caught in a Squeeze - WSJ.com

 

[whitehall]

Anybody can make up a graph that seems to indicate that "benefits" for state workers have no impact when compared to mandatory state spending but it's a lie. You can't compare union benefits to mandatory spending. The governors have to get a handle on all taxpayer funded spending and NJ Gov Christie is my new hero.

 

[Toro]

Toro, can you give me your opinion no this article?

I don't know what the "right" discount rate is. Is it 7.75%? 7.5%? 7%? 8%? I don't know. But I know that it isn't 4% or 5% like some economists want. I can't tell you how stupid I think that is. I've spent 17 years in the investment business, mostly with large institutions, and I can't tell you how many extraordinarily bad investment decisions have been made on the recommendation of some clueless economist with no real world understanding of how the investment markets work. I've seen it right up close. As I understand it, Joe Dear, the CalPERS CIO, just ripped the AEI economist at the hearing. Good for him.

What would happen is that if the discount rate was lowered to 4%, plans would start managing to it, which means that pensions would start selling equities and buying bonds. Never mind that after 50 years, $1 invested at 4% would generate 1/10th the money invested at 8%, CalPERS would be investing at the top of a 30 year bull market in bonds! That's tantamount to CalPERS dramatically increasing its investments in equities in 1999 or 2001. It is unbelievably stupid IMHO. Especially if you think inflation is coming back. There is nothing worse to own than bonds when there is inflation. Yet that is what these clueless economists are recommending.

But stuff like that happened in the 90s. Politicians - and other clueless economists - thought that stock markets would go up 18% forever, and wanted to increase discount rates and give contribution holidays, which is what some plans did. Some plans raised discount rates to 8.5%, and politicians decreased or lowered contribution rates altogether so they could crow that they were giving voters "tax cuts." But anyone with any understanding of economic and financial history knew that was wrong because we were living in the midst of a raging bull market.

Most people don't understand that markets are cyclical. They go through periods of very high returns followed by periods of very low returns. These periods typically last 10 to 20 years. And during those periods, people extrapolate the present into the future. So now, people assume that because returns have been low for the past 10 years, they will be low forever, just like people 10 years ago thought returns would be high forever.

As particularly to CalPERS, I can tell you that the decision was heavily influenced by politics. But that's fine IMHO. The counties and cities lobbied hard during the hearings not to lower the discount rate. Even if they are wrong that it shouldn't be lowered, they are right that it shouldn't be lowered now. It is enormously bad policy to lower it now if it elicits a policy response because it is pro-cyclical when policy should be anti-cyclical. It's pro-cyclical because it would require either taxpayers contributing more, which is a tax hike on everyone, or employees contributing more, which is the same as a tax hike only more severe on a limited number of people. Either way, it is a tax hike on somebody, and there shouldn't be tax hikes when the economy is weak. If they are going to lower the discount rate, they should do it when the economy is strong.

 

[Trajan]

Toro, can you give me your opinion no this article?

I don't know what the "right" discount rate is. Is it 7.75%? 7.5%? 7%? 8%? I don't know. But I know that it isn't 4% or 5% like some economists want. I can't tell you how stupid I think that is. I've spent 17 years in the investment business, mostly with large institutions, and I can't tell you how many extraordinarily bad investment decisions have been made on the recommendation of some clueless economist with no real world understanding of how the investment markets work. I've seen it right up close. As I understand it, Joe Dear, the CalPERS CIO, just ripped the AEI economist at the hearing. Good for him.

What would happen is that if the discount rate was lowered to 4%, plans would start managing to it, which means that pensions would start selling equities and buying bonds. Never mind that after 50 years, $1 invested at 4% would generate 1/10th the money invested at 8%, CalPERS would be investing at the top of a 30 year bull market in bonds! That's tantamount to CalPERS dramatically increasing its investments in equities in 1999 or 2001. It is unbelievably stupid IMHO. Especially if you think inflation is coming back. There is nothing worse to own than bonds when there is inflation. Yet that is what these clueless economists are recommending.

But stuff like that happened in the 90s. Politicians - and other clueless economists - thought that stock markets would go up 18% forever, and wanted to increase discount rates and give contribution holidays, which is what some plans did. Some plans raised discount rates to 8.5%, and politicians decreased or lowered contribution rates altogether so they could crow that they were giving voters "tax cuts." But anyone with any understanding of economic and financial history knew that was wrong because we were living in the midst of a raging bull market.

Most people don't understand that markets are cyclical. They go through periods of very high returns followed by periods of very low returns. These periods typically last 10 to 20 years. And during those periods, people extrapolate the present into the future. So now, people assume that because returns have been low for the past 10 years, they will be low forever, just like people 10 years ago thought returns would be high forever.

As particularly to CalPERS, I can tell you that the decision was heavily influenced by politics. But that's fine IMHO. The counties and cities lobbied hard during the hearings not to lower the discount rate. Even if they are wrong that it shouldn't be lowered, they are right that it shouldn't be lowered now. It is enormously bad policy to lower it now if it elicits a policy response because it is pro-cyclical when policy should be anti-cyclical. It's pro-cyclical because it would require either taxpayers contributing more, which is a tax hike on everyone, or employees contributing more, which is the same as a tax hike only more severe on a limited number of people. Either way, it is a tax hike on somebody, and there shouldn't be tax hikes when the economy is weak. If they are going to lower the discount rate, they should do it when the economy is strong.

thank you for taking the time to respond.

I think I understand pretty much your explanation.

so let me ask a few of my amateurish Q’s to ensure I do-

if I have this right, we count on returns of the fund money put in already and in an ongoing basis, to buttress the growth of the funds we will pay the pensioners.

We add money into the pension fund IF it under performs and/or they see an added burden ahead due to retiree rates, more employees using a defined pension plan etc. because it = future liabilities etc….OR if they foresee OR are caught up in a bad economy they ask the state to input more funds…..is this correct?

And- does the state owe a payment as a matter of course as a set schedule or…?

this is a clarity summation thx.

 

[Toro]

if I have this right, we count on returns of the fund money put in already and in an ongoing basis, to buttress the growth of the funds we will pay the pensioners.

Correct.

We add money into the pension fund IF it under performs and/or they see an added burden ahead due to retiree rates, more employees using a defined pension plan etc. because it = future liabilities etc….OR if they foresee OR are caught up in a bad economy they ask the state to input more funds…..is this correct?

It depends on the plan. Generally plans are managed to a long-term rate of return. Some plans have a fixed rate of contribution, some plans will vary contribution rates depending on the level of assets in the fund. The time frames are generally over years, i.e. if plan assets are high for a number of years, contributions will be lowered. Usually, plans aren't "topped up" when the economy is bad but sometimes they are.

And- does the state owe a payment as a matter of course as a set schedule or…?

this is a clarity summation thx.

States owe payments as a matter of course. Payments are dependent upon the rate of retirement, the number of years put in by the retiree, etc.

 

[Trajan]

if I have this right, we count on returns of the fund money put in already and in an ongoing basis, to buttress the growth of the funds we will pay the pensioners.

Correct.

thank you...

We add money into the pension fund IF it under performs and/or they see an added burden ahead due to retiree rates, more employees using a defined pension plan etc. because it = future liabilities etc….OR if they foresee OR are caught up in a bad economy they ask the state to input more funds…..is this correct?

It depends on the plan. Generally plans are managed to a long-term rate of return. Some plans have a fixed rate of contribution, some plans will vary contribution rates depending on the level of assets in the fund. The time frames are generally over years, i.e. if plan assets are high for a number of years, contributions will be lowered. Usually, plans aren't "topped up" when the economy is bad but sometimes they are.

humm, so, as to mgt.- they I assume do the usual, they lend, buy bonds across the spectrum as to returns, high at high risk, low at low risk etc etc...

And- does the state owe a payment as a matter of course as a set schedule or…?

this is a clarity summation thx.

States owe payments as a matter of course. Payments are dependent upon the rate of retirement, the number of years put in by the retiree, etc.

I read a blurb this week that says there has been something of a rush on retirements ( aside from the usual baby boomer influx) to beat the clock where in beneficiaries don't want to be around to endure any erosion of their benes..this accelerates the request for funds then?

so, if a state is strapped and cannot make the payments required or requested , what then? They draw down the funds ahead of time, pulling future possible earnings away from whatever they have set up..?

 

[Toro]

humm, so, as to mgt.- they I assume do the usual, they lend, buy bonds across the spectrum as to returns, high at high risk, low at low risk etc etc...

Yes. Generally, pension plans will then manage to a level of risk. The level of risk is dependent upon factors such as the age of the workforce, vesting, etc.

I read a blurb this week that says there has been something of a rush on retirements ( aside from the usual baby boomer influx) to beat the clock where in beneficiaries don't want to be around to endure any erosion of their benes..this accelerates the request for funds then?

Yes, but this shouldn't be over-stated. Generally, only a small percentage of the workforce at any given time retires, so even if the rate of retirement doubles, it is still a small percentage. But it is higher and does increase the demand for funds from the pension.

I read that article as well.

so, if a state is strapped and cannot make the payments required or requested , what then? They draw down the funds ahead of time, pulling future possible earnings away from whatever they have set up..?

Practically, that doesn't happen. It would only threaten the fund if there was a very large increase in retirements, say from 3% of the workforce to 23%. But if there was a very large increase in retirement, then yes, it would require a significant increase in contributions.

 

[william the wie]

Toro not being an actuary I won't comment on that directly but there is another trendline or two that is screwing the pooch.

CA is probably at its maximum population share of the US right now and is going into relative decline right now. The Northeast everything north of the Ohio-Potomac line east of the Rockies has generally been losing population share since about 1900. Between automation, better logistics, AC/energy costs and the availability of potable water the south is growing relative to the rest of the country. United van lines put out some video on this for CNN/money the other day. This is one trendline and relative energy costs are driving it; a heat pump costs less to run than a heater but it only works below about 38 degrees latitude.

State and local pensioners, most of whom get a pension of less than $20K despite the horror stories in the news, are often forced to move to where living costs are low in order to survive. That takes money out of the state and local economies.

Those two trends are scaring the crap out of local politicians.

 

[Trajan]

humm, so, as to mgt.- they I assume do the usual, they lend, buy bonds across the spectrum as to returns, high at high risk, low at low risk etc etc...

Yes. Generally, pension plans will then manage to a level of risk. The level of risk is dependent upon factors such as the age of the workforce, vesting, etc.

I read a blurb this week that says there has been something of a rush on retirements ( aside from the usual baby boomer influx) to beat the clock where in beneficiaries don't want to be around to endure any erosion of their benes..this accelerates the request for funds then?

Yes, but this shouldn't be over-stated. Generally, only a small percentage of the workforce at any given time retires, so even if the rate of retirement doubles, it is still a small percentage. But it is higher and does increase the demand for funds from the pension.

I read that article as well.

so, if a state is strapped and cannot make the payments required or requested , what then? They draw down the funds ahead of time, pulling future possible earnings away from whatever they have set up..?

Practically, that doesn't happen. It would only threaten the fund if there was a very large increase in retirements, say from 3% of the workforce to 23%. But if there was a very large increase in retirement, then yes, it would require a significant increase in contributions.

alright, so I have to ask, where or what is the risk then? IS there a pension bomb or not?