Defined Benefit plans in the public sector are a disaster as the actuarial/political cabal has consistently undervalued their costs to the point now where defaults are inevitable – which is something unions representing public employees do not want to hear so they use a good chunk of their members’ dues to create an alternative reality.
Archive for the ‘Public Pensions – General’ Category
Pension Obligation Bonds (POB) are a stupid idea sold to desperate governments looking to camouflage debt for a few years rather than dealing with it. They are not solutions to but rather portents of either public pension defaults or government bankruptcies.
The ProPublica website has a handy chart on the 20 largest POB issues since 1996 with the warning:
Governments that borrow money to fund their pensions often pay less into their pension funds in future years than they’re supposed to. That can leave the funds in a worse shape than they were when the debt was sold, even if the pensions earn more on the borrowed money than taxpayers owe in interest.
It is no coincidence that the worst funded public pension systems (NJ, IL, CT, PR) all tried the POB gambit not because it made any fiscal sense but because they chose not to look at immediately unpleasant alternatives (i.e. cutting benefits or affording honest contribution amounts).
The POB money suddenly appeared in trust assets making the plans seem better funded which would theoretically reduce future contributions. In practice, in New Jersey at least, future contributions were reduced anyway as politicians simply chose to pick their contribution numbers with expediency as the primary determinate.
A look at the 1997 Official Statement for New Jersey’s POB sale lists the costs:
After doing the blog on the hypocrisy of the National Conference on Public Employee Retirement Systems (NCPERS) advocating for Defined Benefit plans in the public sector while they themselves provide their employees most of their pension benefits through a 401(k) plan I got to wondering how other think tanks were compensating their employees. Augmenting the hit list provided by NCPERS I researched 24 think tanks on http://www.guidestar.org for their 990 forms and http://www.efast.dol.org for their 5500 forms for a comparison (all forms are here).
Two things stand out.
1) these places pay pretty well judging by the salary of the highest paid official from each:
Kill Defined Benefit plans. They do not work when run by governments:
The main reason being that there are no funding rules so these plans all morph into pay-as-you-go arrangements at a level of benefits that taxpayers cannot possibly afford to pay so the participants suffer.
This handy chart links to websites and papers (all worth a read) from 28 think tanks that basically agree with that assessment.The chart was put together by the National Conference on Public Employee Retirement Systems (NCPERS) “The Voice for Public Pensions” which is supported by corporations and, according to Union Watch, run by unions:
Connecticut Governor Dannel P. Malloy and state employee unions announced an agreement Friday to restructure (i.e. reduce) pension payments:
The deal was reached after months of behind-the-scenes talks regarding the funding calculations as the state was facing potentially huge future pension payments and tried to “help avoid the fiscal cliff the state would otherwise face in the coming years,” the administration said.
The agreement, which still requires approval by the state legislature, was not designed to change any benefits for current or retired state employees. Instead, it was crafted to make sure that the state could have more predictability in funding the pension system in the coming years — by restructuring the system and extending some payments over an additional 14 years.
“It was incumbent upon us to reform this system before facing the fiscal crisis that could have resulted from $4 [billion] to $6 billion annual payments,” Malloy said. “This agreement does not alter employee benefits or employee contributions in any way. It simply allows the state to fully fund its obligations at realistic amounts that will end with Connecticut resolving the unfunded liability and emerging with a system that is fully funded. We are holding true to the ideal of improving the financial landscape for future generations.”
Where would they get the idea that reducing contributions while making no changes in underlying benefits leads to long-term solvency?