Pensions-Pensions and loans? Not Quite Ready for Prime Time (part duex)?

In my last post, I had a typo.  I referenced Mr. Sherrod Brown as a Representative from Ohio.  Mr. Brown is a Senator.  My apologies to Senator Brown and his staff.

Thank you for your corrections.

This post will be a sort of part two addition to yesterday.

Gentle reader, are you scared about your pension?  If so, your greatest enemy is ignorance.  When I watched the IL conference yesterday state Representatives are working on solutions and I was impressed by the earnestness.  But the single largest key was not discussed, interest rates.  What are these, how do they work, and why should I be concerned?

Consider there are two types of interest rates; lending interest rates and investment rates.  As pensions invest money and need for investment returns to help close funding gaps interest rates become very important.

The Federal Reserve controls the Fed Funds rate.  This is the base rate lending interest rate that other lending rates are pegged against.  Other lending rates can be the Prime Rate, LIBOR, etc.

The Federal Reserve (Fed) has influence over the economy with goals of high employment, low inflation, and general economic well-being.  This process is managed under the label of Monetary Policy.

Investment interest rates may be conservative, like Certificates of Deposits and Treasury Bills, or high risk and high yield such as junk bonds.  Investment interest rates can be considered as short term, under a year, and long term or more than a year.

Here is an important question for anyone concerned about a pension to ask.  Does the Fed, in the name of Monetary Policy, have any influence on investment interest rates?


Does any reader have CD’s and wonder why the rates have been so dreadful since about 2010?  Because investment interest rates follow the Fed Funds interest rate, the rate used to effect Monetary Policy.

One writer, Mr. Ronald Ryan, writes on the topic of liabilities and the investment returns.  As investment returns fall, unfunded liabilities rise.

Solutions to the pension crisis include loans.  A problem here is the loans must be repaid, and cost is a primary consideration.  If you get a bond, what is the pricing of the bond?  In the case if Illinois, probably 3.75% or higher, based on past loan pricing.  In the case of a loan from the Treasury, as proposed by Senator Brown (again apologies for my typo), a possible federal loan to states, at 3%.  Since the last bond sold by the State of Illinois was at more than 3.75% Illinois could be said to have a negative arbitrage event, pursuing bonds over Treasury loans.

Gentle reader, it is critical to understand that pensions must invest contributions and have some form of a reasonable investment interest rate return. Interest rates have been very low for close to a decade.  It is reasonable to say that part of the unfunded liability growth has been a direct result from Monetary Policy.

I ask that any reader not lose hope.  We have non-loan, non-taxpayer options on the table.

Please keep your comments and ideas coming.

Tim Alexander



5 responses to this post.

  1. Posted by Tough Love on February 3, 2018 at 4:48 pm

    Quoting ……. “Solutions to the pension crisis include loans.”

    Loans just trade one form of debt (unfunded pensions) for another (gov’t loans). Sure, it’s gives better security to the Plan participants, but with an equal an offsetting increase in costs to the Taxpayers. At the time of the loan, we start off in a negative position because of the significant fees and commissions associated with issuing such loans. Sure, we might earn more than the bond interest rate, but we also might earn less……… and ALL the risk falls to the Taxpayers while all the gains going to the Plan participants (hardly seems fair). And history tells that POBs rarely work out well, and ESPECIALLY when the POB are issued after the stock market has experience significant long-term gains (as is the situation today).

    Quoting …….. “Since the last bond sold by the State of Illinois was at more than 3.75% Illinois could be said to have a negative arbitrage event, pursuing bonds over Treasury loans.”

    First, you make it sound like your 3% option is on the table. I doubt that become an option as the more responsible States have little taste for subsidizing those who have acted so irresponsibly. And second, all of the arbitrage risks ( I described above) remain whether the the loans are through POB’s (at 3.75%) or via a Treasury loan (at 3%).
    P.S., what happened to your promised follow-up article ……”titled, Pensions-Public vs. Private” ? That should be a dozy.


  2. Drowsy and lazy?

    Diagram… “Pensions-Public vs. Private”


    • Posted by Tough Love on February 3, 2018 at 9:38 pm

      Stephen Douglas, Wasn’t it you who asked …..”how much is a cop worth?

      This much ?

      I’ve got a SERIOUS suggestion (likely wouldn’t work for a giant City like LA), but for the MANY others that via financial projections have very little change of NOT becoming insolvent due the their ludicrously excessive (and legally unable to reduce) pension & benefit obligations ………. accept that fact that then work it to your City’s advantage.

      Spend ALL available cash on infrastructure (repair improve roads parks, libraries, etc……. i.e., things that can’t be taken away once done) until there is not a dime left, then file for bankruptcy and come up with a Bankruptcy-Exit Plan that erases ALL retiree healthcare promises, 50% if non-Safety pensions, and 75% of Safety pensions.

      Too bad you probably can’t be individually selective with the biggest offenders (like those in the linked article) and reduce theirs by 95%.


    • Posted by Triune on February 4, 2018 at 9:39 am

      Good morning and your humor is great! While I despise comments not on topic, I bend the rules if I fall down laughing.
      Tim Alexander
      PS:Who are you? Where do you live, working or retired? What is you personal interest and or concern with the crisis? Go back and look at my prior post where I list the average payments between various pensions?
      I recently crossed 50. I am blessed with an amazing family, faith, and career. I would not change any of it. While I am comfortable and not worried about my future, I see unacceptable fear in my fell men.
      I am free now, call or write any time.


      • Posted by Tough Love on February 4, 2018 at 4:14 pm


        My interest is two-fold. First, I am a taxpayer and high-cost expenses (such as those that accompany Public Sector pension and benefit promises) increase taxes. Second, by education/training and years of experience (and while by itself meaning little, professional credentials), while not practicing in this specific field, I have acquired a high level of expertise in pension funding and design.

        I foresaw the “writing on the wall” roughly 20 years ago, with Public Sector pension & benefits much more generous (and hence much more costly) than those granted their Private sector counterparts. Massive increases in Public sector pension & benefit promises since that time (while the Private sector has moved in the opposite direction), together with a volatile equity market and years of very low fixed income returns have only exacerbated the problem. We now face a situation where many Cities/Counties/Municipalities and even States will face VERY dire levels of service-insolvency if these promises are to be met (some not possible to keep under any circumstances) . Yet union-beholden Elected Officials have structured a system of legal protections that in many places pension formulas and provisions cannot be reduced even for FUTURE years of service. Hopefully, you are aware that in Private sector pension Plans it is both legal and quite commonplace for the Plan sponsor to reduce (or completely end) FUTURE service pension accruals. Unknown future financial developments/circumstances make the ability to do so VERY VERY important.

        Quoting ……… “Go back and look at my prior post where I list the average payments between various pensions?”

        I cannot find in your prior posts any comparison of Public/Private Sector comparisons of employer-sponsored pensions (or to DC Plan retirement security often provided by Private Sector employers). The only comparison I found was a specific Public pension to Social Security. I replied to your statement in that instance (pasted below the dashed line), but with nationally 75% of State & Local workers participating in SS (a lower % in CA because, as an outlier, Teachers are not in SS) the comparison should be between Public/Private Sector employer-sponsored pensions (or to DC Plan retirement security often provided by Private Sector employers).

        I’d love to see what you can find/develop. I have studied that relationship quite extensively, and am comfortable stating that for Public /Private workers with 25-30 years of service, retiring at age 60 for non-Safety and 55 for Safety, the “value upon retirement” (and hence cost) of the Public Sector worker’s pension is ROUTINELY 2 to 4 times (4 to 6 times for Safety workers) greater than that of their Private Sector counterpart. “Value upon retirement” encompasses not just the dollar amount of the monthly annuity, but also the very substantial incremental “value” of (A) being able to begin collecting an actuarially unreduced pension at a much younger age than their Private Sector counterpart, and (B) COLA-increases, almost unheard of in Corporate-sponsored Private Sector pensions.

        And yes, as Steven Douglas (a retired CA Public Sector workers) often adds, a comparison of “Pensions” is not a complete picture. We should be comparing “Total Compensation” (wages + pensions + benefits), and to the extent Public Sector “wages” are demonstrably lower (after adjustment for hours workers and “productively” where measurably) than those of their Private Sector counterparts, it is appropriate to grant them greater pensions and/or benefits to offset the amount of such Private Sector wage advantage …. but not more. The only study that I am aware of comparing Public/Private sector wages, pensions, and benefits (primarily retiree healthcare) that shows State-Specific differentials is the AEI study mentioned on this Blog many times in the past. For BOTH your home State of CA and my home State of NJ that study shows a 23% Public Sector “Total Compensation” advantage (33% if the incremental value of the higher Public Sector job security is factored in), and that study excludes Public Sector safety workers which by their exclusion (and knowing that they are compensated far more than non-safety workers) assuredly brought that Public Sector advantage DOWN to the 23% from a percentage which otherwise would have been higher.

        That 23% Public Sector Total Compensation advantage in CA and NJ is the average for ALL workers taken together. While Stephen Douglas correctly points out that a comparison within-income-group-bands shows wide variation, from the perspective of the financial impact upon Taxpayers that is irrelevant.

        I ask you ……… If CA and NJ Private Sector Taxpayers had an ADDITIONAL 23% of wages to save and invest every year, how much more would THEY have accumulated upon retirement …… an extra $500K, $1 Million, perhaps $2 Million for some? Well, those figures are valid estimates of how much Taxpayers are OVER-compensating EACH full-career CA & NJ Public Sector worker.

        Certainly doesn’t seem necessary, reasonable, or fair? And your “model” that supports the use of Fed ( i.e. Taxpayer) funds to “make whole” those now materially-underfunded but ludicrously excessive Public Sector pension & benefit promises, is ALSO anything but necessary, reasonable, or fair.

        Quoting …………

        “Here are some numbers for you. Social Security estimated the max benefit available to be about $32K per year. The above cited CALSTRS average is about $48K, or 50% more.”

        Wow, it’s hard to believe that you made that statement without some very needed clarifications.

        FIRST you are comparing a Maximum to and Average. Think that’s appropriate ?

        SECOND, that $32K MAXIMUM SS benefit is for 2017 retirees while the CalSTIRS average is from ALL Retirees including those with pensions far lower than those granted 2017 retirees because:

        (a) they retired long ago with low wages and lower pension formulas (and less generous provisions)
        (b) they were part-time workers
        (c) they had short careers but qualified for the pension
        (d) they are collecting the 50% survivorship pension from a deceased spouse

        You can’t bullshit the knowledgeable ……… and many readers of this Blog are a lot more knowledgeable than you believe.


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