In trumpeting his record in Ohio John Kasich mentioned:
Last year the Mercatus Center ranked states by fiscal condition. Ohio came in at 7. By comparison New Jersey was 49.
But are Ohio public pensions really secure?
A Wall Street Journal story linked General Electric Co.’s planned move to Boston to worries over Connecticut’s woeful funded ratio for its public pension system.
So Connecticut has a plan and it would not change what union members would receive when they retire nor would it add or cut pension benefits. All it would do is raise the funded ratio just like Pension Obligation Bonds (POBs) have been doing.
Here is how it would work…..
Pensions and Investments editorialized about public plans needing to use lower interest rates for valuing their liabilities noting that:
Robert Novy-Marx, professor of business administration at the Simon Business School, University of Rochester, N.Y., in a September 2013 research paper, explained why risk-free benefits should be discounted in value at risk-free rates.
“Payment streams should be valued using discount rates that reflect the cash flows’ risks,” Mr. Novy-Marx wrote. The research paper was written for the Pension Research Council of the Wharton School and posted on the website of the Pension Benefit Guaranty Corp.
The economic concept is not new, even if it has been ignored by public pension systems.
Donald L. Kohn, then-vice chairman of the Federal Reserve Board of Governors, said in a 2008 speech to the National Conference on Public Employee Retirement Systems, that “public pension benefits are essentially bullet-proof promises to pay.” In the public sector, unlike in the private sector, “accrued benefits have turned out to be riskless obligations,” Mr. Kohn said. Among economists, the “only appropriate way to calculate the present value of a very-low-risk liability is to use a very-low-risk discount rate.”
Of course liability values for the vast majority of public pension systems in this country are severely understated (for political reasons) but the idea that these benefits are ‘bullet-proof’ is ridiculous. Retirees in Prichard, Central Falls, Detroit , and soon San Bernardino know about benefits being arbitrarily cut and it seems every state is targeting cost-of-living-adjustments, regardless of what any employee handbook (or law) might say.
There is a real reason for using lower earnings assumptions and it has to do with the math.
Future Forsaken by John D. McGinnis makes several salient points on the scam being pulled on taxpayers (and eventually public employees) in Pennsylvania (and eventually everyplace) by public pension systems perverted by the political and actuarial establishment. Amazingly, it was written by a politician.
All public pension valuations severely understate liability values and contribution ‘requirements’ to cater to the government/client’s whims so when reviewing the actuarial reports for the Connecticut State Employees Retirement System (SERS) you have to ignore most of the numbers and concentrate on deposits and payouts to tell you the real story: