Ask The Experts: State and local pension reform

With special guest Andrew Biggs, a resident scholar at the American Enterprise Institute, Truth in Accounting last month held this webinar:
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Familiar stuff to most of you here but a couple of interesting excerpts on actuaries setting assumptions and political hacks as trustees of public plans.

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39 responses to this post.

  1. Quoting Andrew Biggs…

    “It’s complicated.”

    U. S. would be justified in not bailing out bad actors, but the result would be increased federal costs for social services, out migration from the worst states, and general economic chaos. Too big to fail. I believe Joshua Rauh said something similar a few years ago.

    If ERISA like restrictions had been put in place twenty, or even ten years ago, we would not be in the hole we are now in. “ERISA lite”; public pensions are still inherently different from private.

    “Do it right or don’t do it at all.” Under Biggs/Weinberg plan, in exchange for bailout, some states would almost certainly be forced into DC pensions. Probably more than just the big five which just blatantly shirked even their already understated ARCs.

    California Rule. Everyone (almost) agrees that credit for past service is sacrosanct (Yay Me!), but reductions going forward should be allowed.
    1. Good in theory, but some states don’t even have enough assets to cover existing debts, and never will (without a bailout). To be somewhat fair, they would need to cut existing pensions, just like the MPRA deals do.

    2. “Everyone” seems to believe voiding the Rule would be a panacea. As if, without that rule, any city or state could reduce formulas going forward, for more immediate savings. As if.

    a. If it weren’t logically clear already, a Calfornia judge spelled out that, even though one can’t legally reduce benefits per se, they can achieve the same goal by freezing, or reducing wages. Two birds, one stone. Why has that not been done? Some people don’t like to hear “attract and retain”, but it is what it is.

    Reply

    • Posted by Tough Love on September 8, 2020 at 11:21 pm

      Quoting Dr. Andrew Biggs in the 2-nd video starting at 3:33 minutes in……..

      “Fewer (Private Sector) employers offer Defined Benefits Plans than in the past partly because ERISA requires them to actually fund the Plan, but if you have pensions out their that still exist, they’re very well funded compared to Public Sector Plans”

      Yes, the few Private Sector Plans still accruing benefit today are (per Dr. Biggs) very well funded …………. and ALSO because they are often 1/2 as generous (in formula and provisions) as those granted NON-safety Public Sector workers, and often 1/4 (or less) as generous as Safety worker pensions.
      ———————

      Kinda seems that I may be onto something when I say …………..

      The ROOT CAUSE of the Public Sector pension mess is grossly excessive pension generosity, and the lack of full funding is not the CAUSE of the problem, but a CONSEQUENCE of that real ROOT CAUSE.

      Reply

    • That’s a stretch, sir.
      In the one hour video, I saw mostly that, in exchange for short term financial assistance (bailout) states should be required to meet the same conservative rules as private plans. Only one comment (9:00) where Biggs says ” they promised too much” (AND “they often short change their contributions”…and “they fund too little”)

      This, like ERISA, is about ensuring pension promises will be fulfilled. –And– pension costs will be reduced.
      _______________

      https://www.forbes.com/sites/andrewbiggs/2020/07/24/a-potential-deal-for-state-pension-reform/#211c8df02d69

      ” Back in 2001, the average employer contribution was only around seven percent of pay.” *

      ” Looking at the full universe of public plans, the Center for Retirement Research projected that average annual government contributions will rise from 19.7 percent of employee wages today to 29.1 percent of pay in 2025.”

      That kind of increase is not from ” grossly excessive pension generosity,”… Actual pension formulas have been decreasing. That is from negative amortization. Pension reform, assisted by and enforced by Federal government, can ensure sustainability.

      * If you recall, Wisconsin’s employer contribution has consistently been, and still is, around seven percent of pay.

      Reply

      • Posted by Tough Love on September 9, 2020 at 12:40 pm

        Yup, been saying that for a long time ……….. “they promised too much”.

        And THAT is the ROOT CAUSE of the pension mess (difficulty/inability to fully fund those excessive promises).

        There are no “solutions” that do not include AT A MINIMUM ……. and this being JUST to stop digging the financial hole we are now in even deeper ……. is a 50+% reduction in the pension accrual rate (i.e., formula factor) for Future service.

        AND a rapid grade OUT of ALL retiree healthcare subsidies ……… that VERY VERY few in the Private Sector get from their employers any longer.

        Public Sector workers aren’t “special” and deserving of a better deal ….. on the Taxpayers’ dime. It’s WAY past time to put an end to this financial ABUSE of the Taxpayers.

        Reply

        • Ugh. Here you go again. 🤷‍♂️😉

          Reply

          • Posted by Tough Love on September 9, 2020 at 4:08 pm

            Ok ok, those a VERY few years from retirement get grandfathered.

            But no pass on an end to retiree healthcare subsidies. If we in the Private Sector don’t get it as an employer-sponsored benefit (and we VERY rarely do), neither should you at Taxpayer expense.

            🙂

          • Posted by Anonymous on September 9, 2020 at 5:28 pm

            Who needs healthcare? Trump got that covered. Two weeks.

          • We’re getting there. 😉

          • Maybe, just maybe, if I keep being TL’s cheerleader (and well deserved for her comebacks—lol) she will also grandfather (seeing as how it is increasingly rare in the public sector now too to get retiree healthcare) a very, very small percentage of cops—maybe just this one. Lol. After all, there are a few outliers left in the private sector that still have it. Haha
            Surely, she can make the El Gaupo exception as her own force may already not have it and state employees also don’t get it without paying for it. Maybe just for her virtual pension bestie?

          • Posted by Tough Love on September 9, 2020 at 8:34 pm

            Lol ……….. I should only have such power.

            But no, Public Sector workers do not deserve taxpayer paid-for retiree healthcare subsidies ANY greater than the average of what THEY typically get from their own employers …………. which in the vast majority of cases is NOTHING.

          • E, good to know that TL is willing to grandfather you in as “very near retirement “.

            According to the way back machine, I, too have been grandfathered…

            Posted by Tough Love on March 8, 2014 at 11:43 pm

            If you read my recent comment in a prior post from Mr. Bury’s, a quick “proposal” I came up with suggested a ZERO reduction for retirees with a pension up to $50K annually.

            Perhaps the cutoff should (or will simply have to) be lower.

        • Posted by Anonymous on September 9, 2020 at 3:02 pm

          LOL!!!

          Hair trigger.

          Reply

      • Posted by Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴 on September 9, 2020 at 5:47 pm

        That kind of increase is not from ” grossly excessive pension generosity,”… Actual pension formulas have been decreasing.
        ==
        BULLSHIT. No. Nope. Not really. And the FEW formulas that have decreased did so only by a few micro degrees. And while those few formulas have decreased the COSTS for ALL public pensions have INCREASED by multiples of that 7% discount rate, which was an under funded contribution since GO Baby Einstein. In fact the true cost to fund a 3%@50 pension, back in 1999 and more so today, is more than 100% of base salary using a legit discount rate of 3%-5%.

        Reply

      • Posted by Anonymous on September 9, 2020 at 6:17 pm

        BULLSHIT. No. Nope. Not really.

        Reply

    • ” New York state pension systems are better funded than California state pension systems, currently take a smaller bite out of state and local government budgets, and still provide pension benefits well above the national average.”

      Calpensions.com. Posted 1 May 17

      “grossly excessive pension generosity” is in the eye of the jaundiced beholder.

      Reply

      • Posted by Tough Love on September 9, 2020 at 8:41 pm

        Quoting ………………

        “New York state pension systems are better funded ……….”

        ONLY because they have been more successful in forcing their taxpayers to pay the huge amounts necessary to fully fund the grossly excessive pensions promised their Public Sector workers.

        I’ve stated it many times ………………….. ANY pension (no matter how great) CAN be fully funded if you throw enough money at it. But doing so certainly isn’t FAIR to those forced to pay for it.

        There’s that darn “FAIR” concept again ………… as though YOU Stephen Douglas give a Sh** about being “fair” to the Taxpayers.

        Reply

      • “… forcing their taxpayers to pay the huge amounts necessary to fully fund…”?

        New York state “… currently take a smaller bite out of state and local government budgets…”

        They are throwing —less—- money at it, sir.

        “…and still provide pension benefits well above the national average.”

        You did not finish the quote.

        That’s not fair.

        Reply

        • Posted by Tough Love on September 10, 2020 at 10:36 am

          Sure, maybe less than California because CA has richer pensions …….. their COLA-increased 90% of pay after 30 years is still in place and most CA Police are still accruing pensions under that formula.

          Reply

      • There is a separate pension system for New York City employees that is about as large as the state system for local employees in the rest of the state and state workers, and it is one of the most underfunded in the country.

        This despite NYC residents paying more for pensions over the decades than anyone else. What are we talking about at this point? Teachers, 40 percent of payroll. Police, 70 percent of payroll. Fire, 100 percent of payroll. And likely to rise from there.

        In the distribution of guilt between past taxpayers not putting enough in and greedy unions getting retroactive increases, there is no place like New York.

        Reply

      • If they are paying that much, and I don’t doubt they are, it’s typical, that is negative amortization, like most other pension systems. Normal costs are likely less than half of that. Their unfunded liability is probably still increasing. The further you go, the behinder you get.

        Reply

        • Posted by Tough Love on September 12, 2020 at 11:33 am

          lol…. “normal costs less than half of that”

          So half ………… 20%, 35%, and 50% of pay taxpayer pension contributions would be OK (and “fair”) to taxpayers who rarely get more than about 4%-of-pay into a 401K plan from their employers?

          Reply

        • Posted by Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴 on September 15, 2020 at 11:26 pm

          If they are paying that much, and I don’t doubt they are, it’s typical, that is negative amortization, like most other pension systems.
          No it’s not ass clown, it is retroactive pension increases of 50 fucking % (or close to it).

          Reply

    • Posted by Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴 on September 9, 2020 at 5:42 pm

      Dougie, the BEST TIME to shut the &%#$ up is RIGHT NOW.
      .
      Old Chinese proverb say: When in hole, stop digging!” 🙂
      🐕 🐕 🐕

      Reply

  2. Posted by geo8rge on September 8, 2020 at 7:53 pm

    They should discuss a financial control board, which is the most likely end game.

    Reply

  3. Posted by Anonymous on September 8, 2020 at 7:59 pm

    I’m new here, was that sarchasm?

    Reply

  4. TL, not only were the over promised and promised waaaay too much with overly generous pensions and benefits but according to the ruling by the NJSC they don’t have to fund them……..it’s almost funny 🙂

    Go figure

    Reply

    • Posted by Tough Love on September 9, 2020 at 8:47 pm

      It was kind of odd. I’d guess that they were balancing the law (which indeed gives the appropriation of money to the Legislature), with their desire to make sure that THEY get the full (OUTRAGEOUSLY RICH ….. even more so than Police) pensions that THEY have been promised.

      If only we had Bankruptcy at the State level. We (the betrayed and beleaguered Taxpayers) could then screw all of them out of their ludicrously excessive pensions and benefits. Still CAN be done at the local level ………. and we should use it !

      Reply

      • Lol. I’m sure you’re wealthy suburb like mine, would have a hard time declaring bankruptcy. Although it worked for Trump.

        Reply

  5. Posted by NJ2AZ on September 9, 2020 at 4:07 pm

    high single/low double digit inflation for about a decade, and all the pain that goes with it, would clear up a lot of this, and i think thats the most likely outcome.

    these people will get the notional value of their pensions, they just won’t go nearly as far as they hoped.

    Reply

    • Posted by Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴 on September 9, 2020 at 5:52 pm

      high single/low double digit inflation for about a decade, and all the pain that goes with it, would clear up a lot of this, and i think thats the most likely outcome.
      ==
      I don’t think so. I think that the public and multi-employer plans that are underfunded will not cut rates until they file BK r run out of $$$, which ever comes first. And when they get to a “pay as you go” system, and the income is not sufficient to pay Full pensions then you will be cuts of 25%, 50%, 75%, whatever cuts are needed to continue making de minimis payments. Think Prichard Alabama. The trough feeding public employee leeches, and the Teamsters, think that the gov is going to cover their grossly underfunded, and over benefited, pension plans. Not happening.

      Reply

      • Posted by NJ2AZ on September 9, 2020 at 6:08 pm

        we’ll see. inflation is the only way they can “keep doing something” without officially raising taxes or cutting spending. Considering everyone in this country wants desert for breakfast , lunch and dinner and never wants vegetables, i feel like its the only way.

        inflation, the hidden tax!

        Reply

        • Posted by PS Drone on September 9, 2020 at 9:39 pm

          You are correct; the US fisc has only two choices: default or debase (the currency that is). Too much money printing now and in rhe future to avoid 20% – 30% annual inflation. This will happen at the same time that assets – homes, stocks, bonds, autos will be declining in value. A perfect storm.

          Reply

  6. John

    Totally off topic but what was the name of that book about health care you were reading?

    You had posted excerpts from it awhile back but I can’t seem to locate it.

    Thanks

    Reply

    • “Pharma” is what I was reading and got to about 150 pages of a very long book and then found the audiobook at the Cranford Library so I finished listening to it which did not allow for excerpting. I did buy the hard copy so I may finish reading it after October 15.

      Reply

      • Thank you

        I plan on possibly using it for a project and presentation. I’ll also try for the audio version at my library.

        Reply

        • I wouldn’t recommend the audio version. Only listened in the car and kept tuning out (mentally). Reading is a lot better as you go at your own pace. Basically what I got out of the rest of the book was that it’s all the fault of the Sacklers.

          Reply

  7. Posted by Anonymous on September 13, 2020 at 9:18 am

    At what point is it all a scam?—Average taxpayer funds a generous government worker pension system but has nothing defined/guaranteed from society in return other than a 401k which is probably about worth ~1/2 what a pension payout would be over a full retirement—–talk about unfair—-If the youth of this country had a grasp on this they would vote someone in office that would make Trump look like a boy scout–

    Reply

    • Posted by Tough Love on September 13, 2020 at 9:58 pm

      Your ~1/2 est is WAY too high.

      It’s not just the DB FORMULA being MUCH more “valuable” than the accumulated (4% typical) employer contributions into a 401K Plan, but also the HUGE added value of many PUBLIC Sector DB plan participants (especially Safety workers …. Police, Fire, Corrections, etc.) being allowed to being collecting an unreduced pension at ages MUCH MUCH lower than those at which 401K Plan participants typically retire and begin taking withdrawals.

      In fact, if Public Sector DB Plans had to (as they SHOULD) be fully funded over the working careers of the employees (and using the IDENTICAL assumptions & methodology required by the US Gov’t of Private Sector DB Plans in their pension valuations), NON-Safety Public Sector DB Plans typically have a “value” about 5 TIMES than of the typical 4% Private Sector employer contribution into a 401K Plan, and with that 5 TIMES rising to about 10 TIMES for the MUCH richer Safety-worker pensions.

      Reply

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