The New York Times reported today that a “blue-ribbon panel of the Society of Actuaries — the entity responsible for education, testing and licensing in the profession — says that more precise, meaningful information about the health of all public pension funds would give citizens the facts they need to make informed decisions.”
Basically the report made four very sensible recommendations that most citizens would be amazed had to even be recommended. Anyone without ulterior motives should have no problem agreeing with three of them:
- a plan’s funding goal should always be 100 percent
- disclosure of a “standardized plan contribution” that would be calculated by all plans using the same discount rate and funding methodology
- not using funding instruments that delay cash contributions (i.e. Pension Obligation Bonds)
Then there is the tricky, though no less valid, recommendation:
According to a story in the Detroit Free Press:
Orr proposed 34% cuts to the pension checks of general city retirees and 10% to police and fire retirees.
But those cuts would be reduced to 26% and 4%, respectively, if the city’s two independently controlled pension boards agree to support the plan of adjustment.
The difference is probably because retirees in the General City plan likely get Social Security benefits.
The bottom line:
- Benefit accruals under the current formulas cease as of June 30, 2014
- GRS benefits cut 34% for retirees and beneficiaries with the July, 2014 check, 34% (and maybe more) for those still working, and no mention of vested terminees
- PFRS benefits cut 10% for retirees and beneficiaries with the July, 2014 check, 10% (and maybe more) for those still working, and no mention of vested terminees
- Hybrid plans to be set up for workers to accrue benefits after July 1, 2014 as part of a “hybrid program that will contain rules to shift funding risk to participants in the event of underfunding of hybrid pensions”
- A bizarre carrot allowing for an undefined “restoration payment” in 2023 if a plan is 80% funded but requiring the interest rate used for valuing liabilities to be 6.25% for GRS and 6.5% for PFRS.
The full text of the plan is out and here are the excerpts relevant to the Detroit GRS and PFRS:
It seems every actuarial report prepared for a public pension plan is by an actuary claiming as their qualification for providing such report membership in the American Academy of Actuaries (AAA). So when the AAA came out with an issue brief titled “Objectives and Principles for Funding Public Sector Pension Plans” one would expect it would have some influence……except when it’s this lame.
The Public Broadcasting Service (PBS) has recently been doing a series on public pensions in peril which seems to have kicked off around the time that Fox Business began their Pension Crisis: The Gathering Storm series. PBS put up an infographic, looked at a global perspective, and focused on Illinois and California providing valuable coverage of the next major bust (which will be on a scale that will dwarf the predatory lending fiasco of the last decade). However the series will end because the funder has been linked to an agenda (which presumably anyone who funds or advertises on public media needs to be devoid of).
Rhode Island appears to have reached a settlement agreement with some public employees who are suing them over reforms, including a COLA cutback:
Under the settlement, the state’s unfunded pension liability would fall to $5.05 billion, down from an unfunded liability that approached $9 billion before reform action was taken from 2009 to 2011. The state’s reform had originally called for paring the unfunded liability to about $4.8 billion.
How do we know that these billions of dollars in savings will materialize and Rhode Island pensions will be saved?
Because some actuaries said so in a report using methods consistent with industry standards including the three big lies of public pension actuarial prognostication:
Politicians are willfully ignorant and actuarial opinions can be bought.
This should be the starting point for every discussion of the public pension crisis in the United States. It’s not in the recently released Blinken Report and, as useful as the report might be for providing some general background, its misguided emphasis on a risk-free rate of return for valuing liabilities dooms it to irrelevancy. Boyd and Kiernan on page 3 argue:
Amounts that are extremely likely to be paid will have lower risk, and therefore a lower discount rate, than amounts that are less likely to be paid— just as lenders charge more to risky borrowers than to creditworthy ones. And the higher the discount rate, the lower the estimated liability. If the government has a firm commitment to pay you $1,000 in fifteen years, you will use a lower discount rate to determine the value of that promise today than if your shiftless brother-in-law promises to pay you the same amount. The former, if discounted at a 3 percent rate, would be worth about $642 today, while the latter, discounted at 8 percent, would be worth about $315— less than half as much. This makes sense — if you could sell the right to receive these payments, purchasers would gladly pay more for the right to receive a guaranteed payment from the government than to receive an uncertain payment from your brother-in-law.
But when it comes to public pensions who is really the shiftless brother-in-law?
Representatives for Detroit public workers are fighting to keep pension cuts to a minimum and they are unleashing the big gun: guilt. How dare these bankers/brokers/lawyers slash the pensions of the widows and orphans of dead police officers and firefighters!
Of course there is an easy fix. Why not maintain survivor pensions on a case-by-case basis (maybe even increase some) while reducing the pensions of the political class leeching off the system even more (or completely)? But that is not the goal of this propaganda campaign and a reading of David and Goliath by Malcolm Gladwell offered a similar example but with a better cause.
United States Trustee Daniel McDermott named five creditors to a committee that is supposed to represent interests of the unsecured creditors: Detroit’s two pension funds, which are its largest unsecured creditors, bond insurer Financial Guaranty Insurance Company, contract administrator Wilmington Trust Company and an individual creditor, Jessie Payne.
The plan to slash pensions is supposed to be released in early January and according to today’s story:
The committee was created in order to ensure all unsecured creditors are ably represented.
“Its primary power… is to have a stronger voice than an individual creditor, while actively participating in the negotiation of a plan for the adjustment of the debtor’s financial obligations,” said a Dec. 6 letter sent to all prospective committee members by the U.S. Trustee.
Let’s take a look at how ably this committee will be able to represent Detroit pensioners.
The public pension crisis is getting a lot of attention but unfortunately some of it is from those using it to push their predetermined agendas. For example, Alicia Munnell at the Center for State & Local Government Excellence came out with an issue brief posing the questions:
Are City Fiscal Woes Widespread?
Are Pensions the Cause?
In short, troubled cities do exist but not as wide-spread as some commentators suggest. And pensions do play a role, but they are not the major factor
The story line had been that Prichard, AL and Central Falls, RI were aberrations and if some public plans were in trouble governments were doing something (however comically otiose). But the Detroit situation (i.e. plans reformed in 2011 and reported to be 91.4% funded in 2012) calls for subtler arguments – though still easily deflected – to becalm the populace.
The public pension crisis is getting a lot of attention but unfortunately some of it is from those using it to push their predetermined agendas. For example, Steven Rosenfeld at AlterNet came out with an article this week regurgitating four of the falsehoods that have been making the rounds: