U.S. Pension Crisis

I missed this 2013 book when it came out but my Amazon order came yesterday and here are some excerpts starting with a seminal flaw in the valuation of underfunded plans that I also note:

If there is a deficit, then even if the assets grow at the Return On Asset (ROA) assumption, contribution costs will go up! If a deficit exists, assets must outgrow liabilities in order to reduce contribution costs and reach full funding. For example, given assets of $60 and liabilities of $100, there is a 40% shortfall. Obviously, if they both grow at an ROA of 8%, since 8% of $60 is less than 8% of $100, a greater dollar deficit results, while the funded ratio remains at 60%. Such a growing dollar deficit requires a higher contribution to reach full funding….In fact, in this example, assets have to outgrow liabilities by 5.33% per year (equal to 13.33% ROA, 67% higher than an 8% ROA) for contribution costs to remain level, although at a high rate.  (pages 39-40)

One of the great difficulties in managing pensions is understanding the accounting and actuarial rule jabberwocky that seems to plague this industry….Solving a financial problem is difficult if you do not know what the problem truly is. (page 26)

When used to calculate the funded ratio and contributions, smoothing exaggerated the funding ratio and reduced contribution costs inappropriately. (page 28)

The New York City Employees’ Retirement System (NYCERS) provides eight different funded ratio calculations, which might confuse most trustees unless they are sophisticated or well-taught*….A public pension board of trustees needs to be astute as to what is being reported here. The differences in valuations are alarming, as the 6/30/10 fiscal year shows a funded ratio based on market value (MVA/MVABO) at 48% vs. the 93% reported using actuarial values (AAV/ABO).  (pages 35-7)

Such an erroneous and overstated funded ratio is common among public pension plan sponsors and misled many to increase benefits and reduce contributions when they couldn’t afford either one….Indeed, GASB accounting rules were established to avoid volatility in contribution costs by smoothing assets and keeping liability growth a constant (i.e., static ROA discount rate). However, in the end, these accounting rules created erroneous funded ratios, volatile and spiking contribution costs, added benefit costs, and inappropriate asset allocation by misleading pensions as to the proper economic valuation of their funded ratios and the needed target asset return. (pages 38-9)

The Board of Trustees for public pension funds were given reports that communicated their funded ratio based on GASB accounting and actuarial valuations and not on economic reality (i.e., market values). Such GASB accounting overstated assets by over 16% due to smoothing, and undervalued liabilities by 24% to 70% by using the ROA as the discount rate instead of market rates, since 1999. (page 43)

Amazingly, most state lotteries mandate that all assets be in Treasury coupon bonds matched to their liabilities. Thanks to this asset/liability matching requirement, we never hear of a problem with state lotteries. (page 46)

Isn’t it amazing how many public plans show a fully funded or near fully funded plan, while contributions have increased dramatically in this decade? (See New York city employees.) How could you be fully funded, and have your contribution costs go up significantly every year? Pensions are misled about their true economic conditions and unfortunately behave accordingly. If you are told you are fully funded, you may decide to increase benefits or decrease contributions at a time when you cannot afford to do so. This is a common malady facing most public pension funds. (pages 46-7)

.

.

.

* This was in 2011 and apparently those NYCERS trustees were not sophisticated enough as determined by the next actuary.

 

51 responses to this post.

  1. Posted by skip3house on June 18, 2017 at 2:06 pm

    ‘…which might confuse most trustees unless they are sophisticated or well-taught*…’
    Our NJ people sure need my 8th grade problem solving teacher of too many years ago.

    Reply

  2. Posted by Anonymous on June 18, 2017 at 3:22 pm

    The clearlest PROOF of this valuation SCAM is shown by what California’s CalPERS system does when a City choses to terminate it’s relationship with CalPERS (CA’s Plan administrator).

    All of a sudden, instead of valuing liabilities (and hence contribution requirements) using the Asset return assumption, it changes the discount rate to a Treasury/high-grade Bond rate (of about 3%).

    Why ? Becuase post-termination, they can no longer demand ADDITIONAL funds from the City …….. or stated more clearly the Taxpayers, being the decades-long “sucker” in the equation, have left the room. When it THEIR OWN (CalPERS) money at stake, the valuation uses appropriately CONSERVATIVE assumptions.

    Reply

    • Posted by Anonymous on June 18, 2017 at 3:39 pm

      I should have added …………

      When a City terminates it’s Pension Plan with CalPERS, CalPERS uses that (FAR LOWER) interest rate (about 3% as described above) to calculate a “termination fee”, (essentially the present value of expected future annuity payments) USING that much lower rate. The “termination fee” so calculated, is typically 2 to 3 times what it would have been if the expected future annuity payments were discounted using the asset return assumption that CalPERS routinely uses in it’s regular Plan valuations.

      The rip-off of Taxpayers EVERYWHERE is palpable.

      Reply

  3. Posted by Anonymous on June 18, 2017 at 3:55 pm

    Quoting …. “The New York City Employees’ Retirement System (NYCERS) provides eight different funded ratio calculations, which might confuse most trustees unless they are sophisticated or well-taught*….A public pension board of trustees needs to be astute as to what is being reported here.”

    Above, I described CalPERS pension valuation SCAM via CalPER procedure upon a Plan termination. Rob Feckler is CalPERS President. Below is his background. Does THAT sound like the financially “astute” individual needed to oversee such financially HUGE enterprise?

    How about an MBA from Harvard, Wharton, the Stern School of Business, or the London School of Economics ….. with 20 years of demonstrated executive skills in effectively managing such an enterprise.? No, a bus driver and “glazing specialist” will be just fine !

    ***********************************************************
    “Rob Feckner is serving his fifth term on the CalPERS Board of Administration, and his 13th one-year term as president.

    He has worked for the Napa Valley Unified School District for the past 40 years, where he is currently employed as a glazing specialist. He has also worked as a school bus driver and instructional assistant for special needs students.

    Rob has successfully completed the certificate programs from the International Foundation of Employee Benefit Plans, including the Certificate of Achievement in Public Plan Policy for both pension and health administration, and is a graduate of the Trustees Masters Program.”

    Reply

    • Posted by dentss dunnigan on June 18, 2017 at 4:45 pm

      LOL…. a pension fund run by Ralph Kramden ….is Ed Norton the compliance officer …?

      Reply

    • Posted by Anonymous on June 18, 2017 at 7:44 pm

      Hey SMD,

      You should apply for an executive position at CalPERS. Given their over-the-top hiring standards (a bus-drive/glazing-specialist as President), you, as a light-bulb-changer should fit right in.

      Reply

  4. Posted by Anonymous on June 18, 2017 at 6:15 pm

    The title of this post leaves the discussion wide open to include Federal pay as you go pensions including Military but, I know, there this thing called a printing press.

    Reply

    • Posted by Anonymous on June 18, 2017 at 6:32 pm

      You’re STILL looking to direct attention from the GROSSLY EXCESSIVE* and materially underfunded State & Local Public Sector pensions ……. much of which will lead to massive increases in local property Taxes.

      * The ROOT CAUSE of the pension mess.

      Reply

      • Posted by Anonymous on June 18, 2017 at 7:21 pm

        No you’re just trying to sidestep the issue I’m bringing to light, as a result of yours and others self interest. The ability to print money and (John) bury Federal pension costs in the budget isn’t justification for them to continue! No deflection, just your facts applied to Federal pension. Like Comey said in his testimony, can’t have it both ways – sorry for brining the putz up again!

        Reply

        • Posted by Anonymous on June 18, 2017 at 7:40 pm

          And what “self-interest” do I have other than as a well-informed, financially-educated Taxpayer fed-up with the ENORMOUS financial ripoff perpetrated upon us by the Insatiably GREEDY Public Sector Unions/workers and the Elected Official whose favorable votes (on Public Sector Union pay, pensions, and benefits) have been BOUGHT by these Unions with Bribes disguised as Campaign contribution and election support ?

          Reply

  5. Posted by S Moderation Douglas on June 18, 2017 at 10:14 pm

    If only it were that simple.

    “The New York state systems had 98 percent of the projected assets needed to pay future pension obligations in 2015, said the Pew report, and the California state systems had 74 percent.”

    “Much of the pension funding debate in California has been about whether investment earnings can hit the target over the long run. The California-New York gap shows how quickly raising employer rates, when earnings fall below the target, can keep a lid on pension debt.”

    https://calpensions.com/2017/05/01/new-york-pension-systems-outperform-california/

    CalPERS has plenary authority, but they do not have, as apparently New York does, a state law requiring them to more quickly pay down the debt or “unfunded liability” mainly created when pension fund investments earn less than expected.

    It may be very simple mathematically to increase employer contributions​ to a level needed to quickly bring the system to full funding, (even a glazier could do it) but very difficult politically without the backing of state law. I don’t know how New York state did it. Surely they had the same constraints of reduced revenues and increased costs that plagued California in 2008-20012.

    It apparently paid off for NY to get money back in the funds quickly to take advantage of the market rebound, ultimately costing taxpayers much less in the long run.

    What is the “root cause” of underfunding? New York state has relatively higher total compensation than either California or New Jersey (or Illinois), yet is fully funded.

    https://ibhuluimcom-a.akamaihd.net/ib.huluim.com/video/50009415?region=US&size=600×400

    Reply

    • Posted by George on June 19, 2017 at 2:31 pm

      New York State and New York City are not the same. It seems they each have their own pension schemes.

      How NY State might have achieved 100% funding? Assuming it is true, mass immigration has raised the down state population a lot, while the New York City economy is booming. UpState NY, which at this point is basically a Great Lakes rust belt state probably shares in the Downstate tax revenues. So with improved revenue produced Downstate, and a declining population, Upstate is currently solvent. In my opinion, they have high property taxes in comparison to what a property is worth.

      For example:

      New York saves 500 Upstate ALCOA jobs by giving away electricity.

      http://www.syracuse.com/state/index.ssf/2015/11/cuomo_schumer_500_alcoa_jobs_saved_plant_to_remain_open.html

      Reply

  6. Posted by Anonymous on June 19, 2017 at 12:00 am

    Quoting SMD ……………. “What is the “root cause” of underfunding? ”

    Wrong question. The correct question is …”What is the “root cause” of pension mess?

    Answer …………. because “funding” FOLLOWS in lock-step with pension “generosity”, the “root cause” of pension mess is the ludicrously excessive Public Sector pension promises ……. by EVERY reasonable metric when compared to those typically granted similarly situated Private Sector workers.

    Reply

  7. Posted by Anonymous on June 19, 2017 at 11:21 am

    Lordy, now the “well-informed, finally-educated, and fed-up* NJ Taxpayer” is telling us what questions we can ask. Is there no end to your hubris?

    Reply

    • Posted by Anonymous on June 19, 2017 at 11:50 am

      Like a little baby regurgitating, putzatively!

      Reply

    • Posted by Anonymous on June 19, 2017 at 1:16 pm

      Actually, I think it’s that you don’t like my directing the readers to the PRPPER question that needs to be asked, as well as it’s obvious answer ……… …………. because “funding” FOLLOWS in lock-step with pension “generosity”, the “root cause” of pension mess is the ludicrously excessive Public Sector pension promises, by EVERY reasonable metric when compared to those typically granted similarly situated Private Sector workers.

      Reply

  8. Posted by Anonymous on June 19, 2017 at 6:41 pm

    “brake my bones”

    I saw what you did there.

    Reply

    • Posted by Anonymous on June 19, 2017 at 6:56 pm

      So you are one of the best and brightest NJ and/or US taxpayers are paying for after all! Bread crumbs and baby steps, it takes some time but eventually we get there.

      Reply

  9. Posted by Anonymous on June 19, 2017 at 7:27 pm

    Can’t tell the players without a program…

    Too many anonymice…

    TL could end up accidentally insulting herself.

    Reply

    • Posted by Anonymous on June 19, 2017 at 7:41 pm

      Then by all means we should stop, wouldn’t want to scare TL into hiding again, LOL…..

      Reply

  10. Posted by Anonymous on June 19, 2017 at 8:14 pm

    You sound like the “porker” that wrote THIS:
    **********************************************

    Posted by Anonymous on May 29, 2017 at 10:48 pm

    To hell with “private sector workers” comparisons. They often do much better (or much worse) than the market. If the elected politicians had contributed the ARC then this would not be an issue. More to the point… nobody would get reelected. I want my pension promise! I put my life on the line and now it’s time to pay. I gambled….I did not die. PAY ME!

    Reply

    • Posted by PS Drone on June 19, 2017 at 10:44 pm

      Yeah…I was promised that I would make more retired after my seemingly never ending 30-year career than I made while I was “working”. I need the cash to bankroll my landscaping, snow removal, plumbing, electrician business (that I learned how to do while I was ostensibly “working”). Oh, and I want my free “retiree” medical care at age 55 too. None of this Obamacare or Medicare BS for me!!

      Reply

      • Posted by Anonymous on June 20, 2017 at 12:53 am

        You forget their “boat check” paid for with accumulated sick leave payouts that areall but unheard of in the PRIVATE Sector.

        Private Sector employers aren’t stupid enough to spend the company’s money this way. This happens only in the PUBLIC Sector, because Elected Officials …BOUGHT by the Public Sector Unions …… will always favor THEM over the low-voting/uninvolved Taxpayers.

        Reply

        • Posted by Anonymous on June 20, 2017 at 6:28 am

          No their about screwing their employees at the expense of executive and upper management bonuses – no free market BS, get your house sale ready and choose to live somewhere else!

          Reply

      • Posted by Anonymous on June 20, 2017 at 6:24 am

        Heck with that give me Trumputin care, nothing but the best for this #MAGA…..

        Reply

    • Posted by Anonymous on June 20, 2017 at 6:29 am

      Sorry no, maybe an IP address check can verify and if not I’ve been hacked by the Russians.

      Reply

  11. Posted by S Moderation Douglas on June 19, 2017 at 11:16 pm

    If only it were that simple.

    If you can’t or don’t want to read Ronald Ryan’s “The U.S. Pension Crisis”, this may be the Reader’s Digest version… (free PDF)

    “The Global Pension Cliff: Myths,
    Realities, and Courses of Action”
    Ronald J. Ryan, CFA,. 2014

    If you’re looking for recommendations to cut pay or benefits, this isn’t it.

    It is about proper pension funding.

    “Had they done that in the 1990s,
    most pension plans would have been 100% beta
    with surplus portfolios and there would be no
    pension crisis.”

    No, putz*, I am not trying to mislead or divert. It’s a long paper and I can’t copy/paste the whole thing. Get out of it what you will… or don’t. It may be, even if his suggestions are solid, it may be too late for some states and cities anyway.

    *Anonymous putz. I’m not sure which one is which.

    Reply

    • Posted by Anonymous on June 20, 2017 at 12:47 am

      No it’s NOT about proper pension funding. Funding FOLLOWS generosity.

      It’s about NOT promising grossly excessive pensions ….. as is the case in almost EVERY Public Sector Final Average Salary DB pension Plan.

      Excessive “promises” become REALLY REALLY difficult to fully fund………. because they require tax levels that are incredibly unjust & unfair.

      Reply

      • Posted by S Moderation Douglas on June 20, 2017 at 7:08 am

        The …article… is about properly funding pensions.

        Reply

        • Posted by Anonymous on June 20, 2017 at 1:57 pm

          Yeah, And they got it wrong, as do all such articles that discuss the “lack of full funding” WITHOUT discussing the primary determinant of the contributions necessary to achieve full funding …… the generosity of the underlying pension plan.

          Reply

          • Posted by S Moderation Douglas on June 20, 2017 at 4:08 pm

            It is two separate questions (and we still are allowed to ask our own questions).

            Proper pension funding is important no matter what the level of benefits. If, as some* suggest, we were able to reduce accrual going forward by fifty percent (more for safety workers) with no changes in the …manner… of funding, we could still end up underfunded.

            Conversely, if, for political, or constitutional reasons, we can not reduce benefits, but through better funding methods, can produce the same level of benefits at a (much) lower cost, doesn’t it make sense to do so?

            Taxpayers, what could YOU do with $5 trillion?
            (And without reducing compensation one whit.)

            I think Mr. Ryan’s views are similar to the SOA Blue Ribbon Panel on pension plan funding, although their report also does not address the level of funding.

            https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.soa.org/Files/Newsroom/brp-report.pdf&ved=0ahUKEwiUyNP38szUAhVE_4MKHQwdBVwQFgg3MAE&usg=AFQjCNEDr5-vj8WfVf9S2GMtsgoxXcx6uA&sig2=jGrbHZUBvUzcMrMELhPibQ

            Seems to me, this would be actual pension reform, as opposed to pension reduction. Don’t let the perfect be the enemy of the good.

          • Posted by Anonymous on June 20, 2017 at 5:17 pm

            Quoting …………… “Proper pension funding is important no matter what the level of benefits.”

            Indeed it is, but Public Sector Unions/worker/retirees like to blanketly state (without qualification) that the “lack of full funding” is the CAUSE of the pension mess. Doing so WITHOUT examining the generosity of the pension’s promised level of benefits, and hence the level of contributions necessary to fully fund it, is EXTREMELY misleading ……… and YOU KNOW IT.

            **********************

            And no, not ………. “NEVER GIVE AN INCH”……….. just never let a self-interested, retired Public Sector worker with an oversized sense of entitlement (such as yourself) BS the readers.

          • Posted by Anonymous on June 20, 2017 at 5:49 pm

            We appreciate your one sided close minded opinion on this topic and others I’m sure, not. We will follow you off the cliff no questions asked unless you direct to do so.

          • Posted by Anonymous on June 20, 2017 at 6:19 pm

            Quoting ……

            “Conversely, if, for political, or constitutional reasons, we can not reduce benefits, but through better funding methods, can produce the same level of benefits at a (much) lower cost, doesn’t it make sense to do so?”

            That statement, particularly THIS …… “but through better funding methods, can produce the same level of benefits at a (much) lower costs” ……. is like the Elected Officials’ classic BS statement…….. “we’ll fund it by eliminating waste”.

            The existing deficit (liabilities for ALREADY ACCRUED PAST service in excess of existing assets) are WAY WAT WAY WAY WAY too large for THAT to work, or likely to shave even 5% off of that HUGE shortfall.

            Notwithstanding contract guarantees, Constitutional guarantees, Case Law, “California Rules”, etc, there are ZERO REAL solutions that do not include materially reducing (by AT LEAST 50%), the value of FUTURE Service pension accruals for all CURRENT workers. While doing so doesn’t decrease the existing unfunded liability, it’s STOPS digging the financial hole deeper every day that we continue to grant accruals that are neither necessary, just, fair to Taxpayers, or affordable. And, a continuation of pension contributions at current levels (perhaps more than the TRUE normal cost of a 50% less generous pension) would slowly help pay down that PAST service unfunded liability.

            Of course doing so would mean that the Taxpayers are accepting of the HUGE PAST service rip-off that has been perpetrated upon them ……………MUCH of which traces back to the RETROACTIVELY enhanced pensions in the 2000’s.

            Should they accept that? NOT if they can find ANY legal way to reverse those RETROACTIVELY granted pension increases.

          • Posted by Anonymous on June 20, 2017 at 6:25 pm

            And eliminating those RETROACTIVELY granted pension enhancements via a Bankruptcy proceeding (where available) is CERTAINLY an appropriate thing to do.

          • Posted by S Moderation Anonymous on June 20, 2017 at 7:24 pm

            Quoting S Moderation Douglas…

            ” It may be, even if his suggestions are solid, it may be too late for some states and cities anyway.”

            Why?

            “DON’T PAY THE BILLS, THE DEBT GETS LARGER”

          • Posted by Anonymous on June 20, 2017 at 7:34 pm

            And when those bills (for the undeniably grossly excessive Public Sector pension AND benefits) become too much of a burden……….. declare Bankruptcy where that’s an option, or where it’s not, simply don’t pay them.

            What are they going to do to a town (or it’s Officials) that amply shows that these bills are simply affordable ?.

          • Posted by Anonymous on June 20, 2017 at 7:36 pm

            Oooophs ………….”affordable” should be “unaffordable”.

  12. Posted by S Moderation Douglas on June 19, 2017 at 11:19 pm

    Ronald Ryan…

    “Whenever I make presentations, I ask my
    audiences if they think interest rates will be
    lower in five years. Nobody ever thinks interest
    rates will go lower, which means that everyone
    assumes—with good reason—that interest rates
    will likely be higher in five years. If interest rates
    go up, liabilities go down. If interest rates go up
    from 50 bps to 60 bps a year for five years, the
    growth of a 10-year duration liability could be
    negative.
    Imagine now that a plan’s average liability
    growth is –2% a year for five years. Imagine that
    the ROA is 8% but that a plan’s assets earn only
    5%—not an unreasonable assumption. But accord-
    ing to our calculations, with liabilities growing at
    –2% and assets growing at +5%, the plan will earn
    alpha of 7%. Within five years, the plan will prob-
    ably be funded or close to it. Yet at no time will the
    plan have earned the projected ROA.”

    Reply

  13. Posted by S Moderation Douglas on June 20, 2017 at 1:39 am

    Ronald Ryan…

    “In the late 1990s, pension plans did not use their big surpluses to immunize their liabilities. They believed that weighting equity investments and achieving a return-on-assets objective would ensure a fully funded plan. Pensions are now running critical deficits.”

    “As the funded ratio improves, the pension
    plan should move its winnings from alpha assets
    to beta assets. Had they done that in the 1990s,
    most pension plans would have been 100% beta
    with surplus portfolios and there would be no
    pension crisis. Failing to do so has proven to be a
    $5 trillion mistake in the United States.”

    Taxpayers, what could YOU do with $5 trillion?
    (And without reducing compensation one whit.)

    PS Drone could keep his pension AND medical care.

    Reply

    • Posted by Anonymous on June 20, 2017 at 1:49 am

      It’s called sarcasm………….

      PS Drone was mockign the insatiably greedy Public Sector workers.

      Reply

  14. Posted by S Moderation Douglas on June 20, 2017 at 3:58 am

    I was mockign PS D.

    Among others.

    Reply

  15. Posted by Anonymous on June 20, 2017 at 8:25 am

    Time to blog on, this one is DOA!

    Reply

  16. Posted by Anonymous on June 20, 2017 at 10:52 am

    John could give us a new topic, but who ever sticks to the topic anyway?

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: