Tuesday, January 5, 2016

Lessons from Alaska: The switch to defined contribution plans continues the acrimony and financial pain

Change can bring cruel unintended consequences. Such is the case in Alaska right now, as a result of actions taken eight years. Take a look at this recent news story and remember the history of Alaska’s pension fund changes, as provided by the National Institute on Retirement Security. Here’s the quick skinny on the nightmare that has been unleashed as a result converting DB plans to DC plans.

In 2008, the Alaskan state legislature ended the use of defined benefit plans for new state employees and teachers. It retained the program for existing employees, but agreed to pick up the tab for their benefit promises. Usually, a growing base of new employees helps support a shrinking group of retirees with their contributions into the system and the investment returns those contributions create.

Everything was good in 2005, when 9,000 retired teachers and beneficiaries received their payments, and the state collected contributions from 9,700 active teachers. Fast forward to 2013 and the numbers had flipped. Some 11,705 retired teachers and beneficiaries were being supported by contributions from just 6,532 active teachers.

The same thing had happened with state employees. In 2005 nearly 21,000 retired employees were supported by investment assets and contributions from 33,700 active employees. By 2013, there were nearly 30,000 retired employees and beneficiaries with only 21,000 active members.

Both pension funds was roughly 60 percent funded. Not good, but not horrible, and certainly in a position for recovery. The 17,500 employees hired by Alaska who would have helped with that recovery were no longer contributing to the DB plans because they’d been enrolled in defined contribution plans.

Of course, the unfunded liabilities had flipped as well, for both systems, and the state found itself needing a $12.4 billion contribution to meet benefits it had promised to the employees who were still in the defined benefit plan.

The state has since had to:

1) Extend the amortization, or payoff period by 9 years, adding about $2.5 billion to the unfunded liability

2) Notify Alaskan cities and counties that they will be required to pay portions of the outstanding liabilities.

With regards to the latter, the state and its cities will likely now be engaged in years of litigation over the state’s mandated unfunded liability, adding even more costs to the original decision to end defined benefit plans. The state’s failed policy has been pushed to local taxpayers.

We in Texas have been successful at convincing state lawmakers that switching to DC plans is a big fiscal mistake. Nonetheless, there are still many groups trying to force our cities to convert to DC plans for new employees, so it is important to realize that the same unintended consequences can occur at the local level just as it has in Alaska.

Monday, November 23, 2015

Misery loves company, but is that good public policy?

We’ve asked before why the proponents of defined contribution plans, such as 401(k)s, so eagerly want to dismantle defined benefit plans for public employees given the problems we’re seeing with 401(k)s. 

It’s always instructive to refresh our data on just how 401(k)s have failed, even though it can be depressing. 

Here’s some facts and figures about retirement unpreparedness and 401(k)s that were compiled by Bailey Childers, the executive director of the National Public Pension Coalition:
  • The gulf between what Americans have saved and what they actually need to retire is startling. We have only about half of what we need, or $6.8 trillion versus $14 trillion
  • 92% of American household are financially unprepared for retirement, according to the National Institute on Retirement Security.
  • Studies show that the structure of 401(k)s are failing low-income and middle class workers. They don’t contribute like they should, while only people with annual incomes in six-figures contribute adequately, according to the Economic Policy Institute.
  • Individual accounts like 401(k)s yield lower returns in comparison to group accounts because individuals take fewer investment risks as they get closer to retirement to ensure their savings aren’t decimated by a sharp market downturn right before they need them.
  • Group accounts like defined benefit pensions continuously add younger members who can assume greater risks so funds can always be invested in a manner that is likely to yield higher returns in the long term.
These are just some reasons why 401(k)s have failed the American worker. They should not be a policy option for at least one sector which has not been subjected to their havoc.

Monday, October 12, 2015

Houston Chronicle publishes Patterson op-ed on local control

The Houston Chronicle published an op-ed by Max Patterson on the front page of its Sunday Outlook section, on the topic of local control.

They juxtaposed it with an article by Josh McGee of the Laura and John Arnold Foundation.

At the end of the day, it's a matter of definition of "control." In TEXPERS view, the Legislature's history of involvement with local pension funds demonstrates that it only passes changes to statute when all parties are in agreement. McGee would have the general public believe that the Legislature takes a much more active role than they really do.

Here is Patterson's op-ed in full:

Local control would make Houston pension fund problems grow
By Max Patterson
Houston voters would do well to consider the true meaning of “local control” for its three public employee pension funds. Those advocating the radical change of giving city council absolute power over pension system dynamics seem disconnected from reality.
The Greater Houston Partnership and Laura and John Arnold Foundation, along with the Texas Public Policy Foundation in Austin, have been tag-teaming a tale about how 12 pension funds in seven of Texas’ largest cities interact with the Legislature. They claim, misleadingly, that legislators control the pension systems through state laws. Eliminating those laws, they say, would return final decision making authority over benefit calculations, contribution requirements and governance to the city council members and mayors who are directly elected by taxpayers in a given locale.
This narrative is misleading. No Texas legislative committee has ever required its own changes to Houston’s, or other cities’, pension funds. Having such power and exercising it would fall within the normal definition of “control.” If the Legislature truly controlled the 12 pension systems in statute, it could theoretically take over Houston’s entire budget process to fully fund the pension systems or unilaterally make pension benefit adjustments. That has never happened.
The authority needed to alter statutes already lies squarely with city council. The kicker is that a council and mayor has to work collaboratively and constructively with city staff, the pension fund board, current municipal employees, firefighters, police and their retirees, and actuaries to develop proposals that meet fiscal and fiduciary restraints. That’s a lot of work for a city council; usually they defer such time-consuming, detailed effort to the pension board, the mayor’s office, or the city manager. Only then, if the council votes to approve a proposal others have created, will it get to the full Legislature for review and vote.
The honest observer saw this dynamic in February when Mayor Annise Parker and the firefighters’ pension system, after years of acrimonious exchanges, came to an agreement they wanted the Legislature to consider. City council, feeling left out of the discussions, convened a special meeting in March to discuss the proposal. Two council members left the meeting, preventing a quorum from voting. The move worked. The bill died. Legislators want all local stakeholders to be in consensus about a proposed change before it gets anywhere close to a vote.
This occurs by design. Decades ago the 12 pension systems and their city councils agreed that the Legislature would be a good check-and-balance to the contentious process surrounding pension fund changes. The pension funds were concerned about the budget dysfunction that can occur when temporary politicians seek money for constituents’ pet projects. Similarly, city councils wanted to ensure that pension benefits would not break the budget. By placing them in statute, and minimizing the ability of the mayor or council to stack a pension board, they created a push-pull tussle between themselves, with the Legislature as backstop. In contrast to local pension systems in other states, the conservative, common sense safeguards in the Texas design have worked extremely well. 
It would be far more constructive for Houston’s leaders to consider the counsel Moody’s Investor Services offered in July: “A sustainable plan to manage the costs, while balancing the budgets, and meeting full required contributions will be key credit considerations going forward.” That last piece of advice speaks volumes.
If Houston city council had over the past decades provided the entire amount its pension systems needed to generate appropriate investment returns then we would not even be having this discussion. The systems’ unfunded liabilities would be lower by hundreds of millions or even billions given the compounding effects of the pension funds’ historic rates of return. The Houston Municipal Employees Pension System, which administers the pension funds for retiring librarians, 911 operators, budget and legal analysts, sanitation workers and other municipal employees, had a 9.19% average annual rate of return over the last 20-year period, well above their assumed rate of return and one of the highest of all Texas pension systems. The Houston Police Officers Pension System, with an 8.78% average annual return over 20 years, handily beat their assumed rate of return and also performed among Texas’ best local pensions.
Pension systems are complicated. Willfully twisting terms and skewing common understandings to achieve a short term political victory will create unintended consequences. The stakes are high. Houston’s pension funds distribute tens of millions of dollars each month for the retirement benefits earned by tens of thousands of retirees, most of who live in Harris County and Texas. Such change would disrupt the predictable stimulus provided to our economy.

Max Patterson is the executive director of the Texas Association of Public Employee Retirement Systems.

Thursday, October 1, 2015

Texas’s state and local pension funds achieve performance hallmark

In the Texas pension fund battles, the opponents of defined benefit plans regularly manufacture a “sky-is-falling” tale about the aggregate amount of unfunded liabilities, the difference between assets on hand and future benefits owed. They use the UL because all the other measures of pension fund health for Texas’ state and local pensions are pretty darn good.

Take for example a recent finding by the Texas Association of Public Employee Retirement Systems regarding amortization periods. The Texas Pension Review Board has said that amortization periods are the single “most appropriate” measure of public retirement systems’ health and defines them as “the length in time, in years, needed to pay for the unfunded actuarial accrued liability (UAAL) and reflects a system’s ability to pay its normal cost plus UAAL.”

TEXPERS found that the 93 state and local pension funds which submit data to the PRB combined in 2014-2015 to achieve the best overall improvement in financial health in five years.

The most substantial improvement occurred in eight pension systems moving out of the worst, infinite amortization period. That correlated in an increase, to 17 from 13, in the number of pension funds at less than infinite and more than 40 years amortization. Another four systems from the infinite amortization moved into even lower amortization periods below 40.

TEXPERS assessment was based on information requests it made of the PRB for standardized year-over-year comparisons of pension funds' amortization periods, as presented in PRB Actuarial Valuation Reports for the previous five years. This improvement indicated that pension funds are continuing to find good investments and manage their benefits in an appropriate way to secure the retirements of public sector employees.

TEXPERS executive director Max Patterson said: “Our report stands in stark contrast to those which focus on unfunded liabilities in order to produce alarming headlines. Pension fund experts will tell you that amortization trends matter more than accountants’ moment-in-time snapshots of unfunded liabilities when assessing pension fund health.

“The trend toward lower amortization periods across all Texas pensions, in conjunction with the TEXPERS Asset Allocation report showing excellent pension fund investment performance in the 20- and 30-year periods, should provide lawmakers with the confidence to maintain the status quo," Patterson said.

TEXPERS has created seven graphics to describe the PRB data at www.TEXPERS.org/Amortization-report. Please share the report on your Facebook pages so that more people will understand how well Texas pension funds are performing.

Tuesday, September 8, 2015

TEXPERS Comments on Swamped Whitepaper of the Laura and John Arnold Foundation

TEXPERS responded the most recent whitepaper produced by the Laura and John Arnold Foundation via a press release distributed Friday to all Texas journalists. Here is the text of the release:

HOUSTON, Sept. 4, 2015 /PRNewswire/ -- Max Patterson, executive director of the Texas Association of Public Employee Retirement Systems, commented on "Swamped: How Pension Debt is Sinking the Bayou City," a whitepaper released by the Laura and John Arnold Foundation:

"The best I can say about this propaganda is that it is accurate in one regard: the city of Houston has shortchanged, over decades, the actuarially required contribution (ARC) its pension funds needed to function fully to their design. Employee benefits calculations could have been made to rely less on employer and employee contributions if the pension funds had received adequate assets to generate investment returns. By this action, successive Houston city councils have torpedoed the funds' abilities to create those returns and the unfunded liability measure has increased.

"Contrary to the Arnold Foundation's conclusion, why would any lawmaker want to give more control to a city management style that created this situation?

"By contrast, look at San Antonio, where decades ago the city and its employees agreed to increase contributions to fully fund the ARC each year, no matter what, and to place that agreement in state statute. The San Antonio Fire and Police Pension Fund now has the best funded ratio and lowest unfunded liability of Texas pension funds with assets greater than $1 billion. Houston should follow suit.

"The remainder of the Arnold Foundation whitepaper is misinformation endeavoring to confuse the general public and policy makers by creating dire, what-if scenarios for its unfunded liabilities, equating them to debts as if they are due today or next year," Patterson said.

"The truth is that unfunded liabilities are not debts that require the payment of interest, but they are like calculations for a homeowner's mortgage. Does a homeowner have the assets on hand today to pay the purchase price of their home? Of course not. That is why they obligate themselves to pay monthly over 30 years. Through diligent, disciplined effort and aided by career stability and benign inflation, the homeowner can expect their monthly mortgage payment to decrease each year as a percentage of their take-home income.

"The same is analogous to unfunded liabilities. They are snapshots of a city's ability to pay future liabilities today, but they don't have to be paid in full today. They are simply an accounting guidepost that should encourage a city to fully fund its ARC. It's inconceivable how a foundation with a billionaire hedge fund benefactor can misconstrue this fundamental pension accounting concept unless it is trying to effect some backroom agenda," Patterson said.

With specific reference to the Arnold Foundation's call to rescind statutes which govern Houston and other big cities' pension funds, Patterson said:

"A pension fund situated in a steady, healthy city economy whose elected leaders responsibly compensate employees for services they deliver will not have a problem generating investment returns over time. While Houston's leadership should prioritize its budget accordingly, there's little evidence it will do so. Why should pension funds and city employees become completely and absolutely subject to the whimsical, undisciplined behavior of a city council by ending the balancing force of their protection 
in state statute?" Patterson said.

"By placing some factors of their governance in statute, the pension funds can stick to the long-term investing horizons they need to generate the returns for retiree benefits, reducing the contributions required of cities and employees. But whipsaw council budget-making – of which Houston's history is example A – would undermine the pension funds' ability to produce. Why should other big cities' pension funds suffer a similar fate? The Arnold Foundation is advocating for seriously flawed and dangerous public policy with its call for absolute local control," Patterson concluded.

Tuesday, July 28, 2015

Does Good Math Matter to the Opponents of Defined Benefit Plans?

The Texas Public Policy Foundation (TPPF) and others like it have developed a reputation around the state capitol for sometimes playing fast and loose with budget facts. This year, they are doing the same with pension facts.

In 2013, Governor Rick Perry took issue with the TPPF’s assessment of the Texas appropriations bill. The TPPF is an Austin think-tank which is regarded as the leading conservative issue driver in Texas. It had claimed that Texas’ budget was similar to that of California’s in its runaway spending.

Gov. Perry responded to the TPPF report by saying “I did read some of the criticism and I’m not sure that those who were making that criticism have a really good handle on the Texas budgeting process. Frankly, I don’t understand the math.”

In recent months the TPPF has taken the same fuzzy-math approach to assessing the health of Texas’ state and local pensions.

The group’s pension policy analyst has published two op-ed’s in major Texas newspapers making wild claims about “unworkable systems” being in “rough shape, and things are getting rougher.”

People with significant pension experience reviewed the op-eds and came up with a similar conclusion to Gov. Perry’s. It could be restated like this: “We aren’t sure those who are making the criticisms have a really good handle on Texas pensions.”

Max Patterson, the executive director of the Texas Association of Public Employee Retirement Systems, noted how the TPPF op-ed pointed to a $57 billion gap between earned benefits and plans’ assets at pensions across the state.

Of course, Patterson noted, that appears to be a large number, but $32.1 billion was due to the Teachers Retirement System, the largest in the state, with 1.4 million participants. Three other statewide pensions, serving 992,000 participants account for another $14 billion, or $46.1 billion total.

So 80% of the TPPF’s headline number is attributable to four statewide plans with nearly 2.5 million participants. The remaining $11.4 billion gap is spread among roughly 90 local pensions across Texas, and almost half of that amount is due to four pensions in Houston, Dallas and Fort worth, Patterson said in response to the TPPF op-ed.

Tim Lee, executive director of the Texas Retired Teachers Association, also questioned the TPPF assessment: “Last year, TRS’ investments saw an $18 billion return and paid out $8.5 billion in retiree annuities. The average monthly annuity for our retired teachers is $1,995. One out of every 20 Texans is a participant in TRS… Investments account for more than 64 percent of the value of this $130 billion fund, more than three-fifths of the pension fund’s revenue.

“The TRS defined benefit plan is a great bargain for the Texas taxpayers and provides a modest but reliable retirement for our public educators. …We believe [the TPPF analyst’s] time is better spent trying to improve retirement security for all Americans, not robbing dedicated school employees of a benefit they have paid into their entire career,” Lee said.

Thursday, July 2, 2015

401(k)s: “A lousy idea, a financial flop, a rotten repository of our retirement reserves”

Our last blog entry noted how the opponents of defined benefit plans willfully peddle an unwarranted assumption fallacy, that 401(k)s are the only solution to the liabilities that some (not all) pensions are currently experiencing.
But, we continue ask, are 401(k)s really the best alternative in seeking the best outcome for America’s hard working middle class?

There is a growing body of evidence that they are not and the headline of this blog entry is a summation of Stephen Gandel, one financial journalist who is writing on the issue.

We recommend reading Gandel’s entire article, “How easy is it to become a 401(k) millionaire? Here’s the truth,” but we’ve posted his conclusion below:
If you want to end up with $1 million dollars in your 401(k), all you have to do is work for the same employer for more than three decades, save about 40% more than most financial planners dare to recommend, land a job at of the rare companies generous enough to match 5% of your contributions, and totally crush the market, while you go about your normal day job, avoiding all the sudden financial traumas that lead people to borrow against their retirement funds.
Of course Gandel ridicules the possibility for all those components of the perfect world equation that are offered by Fidelity Investments. In sum, 401(k)s are sending many hard-working, hopeful American workers down a rabbit hole of future despair. We would not wish them upon our worst enemies.