Illinois lawmakers announced on the slowest news day of the year that they had come up with (in secret) a plan to fix the state’s underfunded pension system without releasing any details and this somehow qualified as news even though this story did not originate on facebook or twitter (presumably).
Of interest is not the plan itself, which seems to be modeled on what New Jersey tried in 2011 (cut COLAs, lower benefits for new hires, guarantee that contributions will be made), but aspects of the propaganda campaigns being rolled out, some of which are funny without comment:
Buck Consultants (Buck) screwed up again. This time it was the Teachers’ Retirement System of Illinois (TRS) where in May they did a study that projected savings of $130.74 billion from Senate Bill 1 but now they say the savings will really be only $106.25 billion due to “a mechanical error in the spreadsheet summarizing the results.” In a letter to the members of the First Conference Committee on Senate Bill 1 the Executive Director of the TRS threw Buck under the bus:
I sincerely apologize for this error. As noted above Buck has reviewed its other analyses and no change is required to any other information that you have received from TRS. TRS staff is working closely with Buck to ensure adequate quality control on their work, including adding an additional level of review. We value the trust that the General Assembly and this conference committee has placed in TRS to provide sound analysis. We will do everything possible to ensure that we continue to deserve that trust.
But who’s to say that Buck’s original estimate won’t turn out to be closer to reality?
The state of New Jersey was charged by the SEC with committing fraud in its pension disclosures at around 9 am on August 18, 2010. A few hours later the case was settled.
The state of Illinois was charged by the SEC with committing fraud in its pension disclosures at around 9 am on March 11, 2013. A few hours later the case was settled.
And the SEC wonders why investors think its spineless. I’m not an investor but I do wonder what this prosecution-by-kabuki accomplishes. Let’s see how New Jersey panned out.
Illinois public pension plans are in critical financial condition and were benefits valued using reasonable assumptions the picture would be even worse. So what is Illinois doing about this? Last summer the state hired an outside actuarial firm to “review assumptions and valuations prepared by actuaries retained by the boards of trustees of the State-funded retirement systems….and…recommend changes.”
Recently released was their work product, all 190 pages, though only these three pages are likely to be read and only this line likely to be publicized:
“Cheiron reviewed the actuarial assumptions used in each of the five systems’ actuarial valuations and concluded that they were reasonable.”
Which is what they were paid to conclude. However though Cheiron avers that “the interest rate assumptions for each of the five systems were reasonable at this time…..for three of the systems (TRS, SURS, and SERS), Cheiron recommended that the Boards consider lowering the interest rate assumption in the future.”
Those interest rates are: TRS – 8%; SURS – 7.75%; SERS: 7.75%;
The others: JRS: 7%; GARS: 7%
Though most people aren’t qualified (or inclined) to read through the report and argue actuarial concepts, there are some obvious questions that would give even a child* pause:
You really need to be a pension actuary to grasp the full scope of the public pension tsunami about to strike but, even to civilians, the undertow is palpable – so they react.
In the private sector we have Morningstar, Inc., a leading provider of independent investment research, today publishing a report, “The State of State Pension Plans: A Deep Dive into Shortfalls and Surpluses,” analyzing current data for pension plans administered by all 50 states. According to an article in Yahoo Finance:
“Our analysis of the fiscal health of state pension plan systems across the country found that creditworthiness varies greatly and is heavily dependent on the funded ratio and the unfunded liability per capita—we look at both key metrics to evaluate each state’s system. We find the UAAL metric useful because it represents the burden on residents, though it isn’t widely used in the industry as an evaluation tool,” said Rachel Barkley, municipal credit analyst for Morningstar. “Not only do state pension plan systems represent the state’s financial obligations, but they are often structured as umbrella plans that also cover employees in the state’s local government bodies. Because pension liabilities represent significant long-term obligations for government entities, pensions are an important element in determining a municipal entity’s credit quality.”
Jeff Westergaard, Morningstar’s director of municipal analytics, added, “We’ve heard much discourse on the subject of pensions over the last few years, resulting in more confusion than clarity on how to view this important area of municipal finance. Our hope is that Morningstar’s analysis will help cut through the clutter and offer logical, clear analysis for investors to understand each state’s situation and the broader implications of their pension system’s financial status.”
Yes it’s a crisis and this private company takes it seriously and has undertaken a project to gather data and educate stakeholders with the goal of seeking solutions. Contrast that to the public sector where coincidentally the state which Morningstar said has the weakest-funded system, with a 43.4 percent funded ratio and a liability of $6,505 per resident recently came up with their own initiative:
As stupid as this might seem to some:
Squeezy the Pension Python would work if Squeezy were to add some friends to tell the full story. After all, did the Kroft people send H. R. Pufnstuff out alone? No they had Witchiepoo, Freddy the Flute and a coterie of overstuffed rodents to flesh out their plot lines which were not nearly as complicated as the pension situation in Illinois* which can be summed up as:
Spineless innumerate politicians, abetted by malleable actuaries, selling out taxpayers and bribing public workers with future benefits so exorbitant as to allow for no possibility of full payment thus creating a crisis necessitating cutbacks in all government services not directly provided by campaign contributors.
Yes Squeezy relates the crisis part but what about a menagerie to tell the rest of the story? Continue reading