Tuesday, November 20, 2012

News You’ll Never See: State and Local Pensions Grow Their Investments Well in 2011

If you’ve read this blog for awhile now you’ve noticed how we draw attention to the selective alarm-ism of certain policy analysts, anti-defined benefit activists and certain policy groups.

The meme they promote is that public employee pension systems can’t perform to expectations, are underfunded, and are always about to fail. Their pitch attempts to motivate overburdened taxpayers and their elected representatives to change defined benefit plans to defined contribution plans, for the purported purpose of lessening future expectations of tax increases. The problem with this meme, as we’ve discussed here, is that it is not happening in Texas. Pensions are doing well. And as some latest news indicates, it may not be happening in other states either.

The news story we’re referring to is “State, local pension funds rose in 2011,” from the UPI. The story indicates state and local pension plans were worth $3 trillion in 2011, compared to $2.7 trillion in 2010, indicating a 13.2% growth rate.

Let’s remember that this increase is coming at a time when many ‘reformists’ are calling on pension systems to lower their assumed rates of return, an assumption that affects the amount of money that cities and states contribute to their actuarially required contributions. Many pensions have 8% assumed rates of return and are considering reducing that to 7.5% or some such, which might require some nominal increases of taxpayer contributions. However, growing your assets at a 13% rate will go a long way toward reducing pensions’ need to reduce their assumed rates of growth, and hence their expectations for taxes.

A TEXPERS report earlier this year confirmed that returns over the 10- and 20-year period for Texas state and local pensions average 8.9% returns. Shorter reporting periods have lower rates of average return, but all pension systems are by definition long-term investments.

We continue to believe that the ‘sky is falling’ crowd is looking at facts all their own, because they aren’t applicable to Texas pension funds – or many others across the nation for that matter it seems. – Max Patterson

Saturday, November 10, 2012

Show-Me State Pension Observer Confirms Our View on Wall Street Battles

Those close followers of this blog know that we have been asking questions of the opponents of defined benefit plans for public employees. There are others asking the same questions, with somewhat similar conclusions to ours.

Take for example an opinion piece in Plan Sponsor by Gary Findlay, the executive director for the Missouri State Employee’s Retirement System (MOSERS).

As any good Show-Me stater would, Findlay asks the question “Who is paying for all this ‘research’?” And by that he means all the claims that defined benefit plans are failed public policy, according to its opponents. Here’s what he says:

For those who are financially or philosophically interested in facilitating the demise of public sector defined benefit plans, the credit crisis of 2008 was made to order. It was a crisis that was just too good to pass up.  While there have always been isolated cases, the volume of anti-defined benefit plan literature that has been generated since 2008 has been staggering.  A good deal of it has been long on hype and short on substance.  The claims being made obviously do not have to be supported by facts and the marching orders seem to be “the more outrageous the better.”  All that is needed is a credible name behind it such as a prestigious university or a think tank with broad name recognition.   

Findlay says the proponents of transparency for public employee retirement systems aren’t very good at practicing it themselves. Indeed, he’s very right on that point.

We know that ALEC, the Heritage Foundation, the American Enterprise Institute and the John and Laura Arnold Foundation are all big proponents of defined contribution plans. Could their backers be those that want the investment management fee income from all those new 401(k) investments that would necessarily be placed in mutual funds? We don’t know because they don’t tell us. There is no transparency on that matter.

It could be that they are the tip of the spear of a clash of titans. Those Wall Street companies with large mutual fund offerings see the assets under management at American public employee pensions and want their slice of the pie. The investment managers can’t have all the fun, in their view. In fact, earlier in his article, Findlay recalls a Wall Street Journal article in 2000:

For years there have been sporadic initiatives to replace defined benefit pension plans with defined contribution plans, but why?  I can offer three trillion reasons – the dollars held in trust by public sector defined benefit plans.  Those responsible for the investment of these assets have done a reasonably good job of keeping management fees down.  If shifted to individual accounts it will be much easier for service providers to increase their fees.  In 2000 there was a major push in Florida to give plan participants the option to participate in an individual account defined contribution plan.  According to an article in the May 5, 2000, edition of the Wall Street Journal, the financial services industry had between 50 and 75 lobbyists lined up Gucci to Gucci prowling the halls of government making their case for the defined contribution option. Does anyone think they were doing this in the interest of the plan participants?  

In the same Wall Street Journal article mentioned, a representative of the American Legislative Exchange Council was quoted as having said the following about public employees: “They see their friends in the private sector doing well in their 401(k)s, and they want the same opportunity.”  That was then but the tides have shifted substantially since the turn of the century.  Now we are hearing that private sector employees have seen their 401(k) balances decimated by the bursting of the tech bubble and the great recession.  Accordingly, public sector employees should be stripped of their defined benefit plans so they can be just as financially ill prepared for retirement as are their private sector counterparts.   Face it – when a private sector employee retires, the employer typically prefers having no further obligation for that employee.  If the retiree runs out of money, it’s not the employer’s problem – it’s the government’s problem.  We have many rules and regulations that prohibit pollution of the physical environment. It’s interesting that corporate pollution of the financial environment has not been addressed in this area.   

In our view, Findlay really does a great job of explaining the dynamics at work. Different, well-heeled portions of Wall Street are battling for market share. Their battle is spilling over in places where it shouldn’t. Like Texas. – Max Patterson

Wednesday, November 7, 2012

Ivory Tower Folks Continue to Misunderstand Public Employee Pensions

Last month, two academics penned an article that appeared as an op-ed in the Washington Post, with the usual ‘sky is falling’ static analysis of public employee pensions. If only the zaniness would stop.

The article, titled “The Looming Shortfall in Public Pensions” is much the same fare as what we’ve been writing about the last few years. The authors imitate so-called research from the Pew Center, the Heartland Institute, the American Enterprise Institute and the Heritage Foundation, to name but a few. Their conclusion is predictable:
Systems could consider introducing mixed defined-benefit and defined-contribution plans for all employees, not just new hires, a method used by Rhode Island. Most public workers in that state are now in hybrid plans with a smaller defined-benefit component, contributions to individual accounts and higher retirement ages. Combined with a temporary suspension of cost-of-living adjustments, Rhode Island’s reforms reduced the unfunded liability by more than 40 percent.

Of course they don’t say why that will work to balance budgets, or even if 401(k)s would offer a secure retirement to public employees. They just throw it out there, like all the rest. And as we’ve said, states like Alaska and others have no empirical proof that defined contribution plans work to achieve the goals of cities or their employees.

Nonetheless, we’re tired of beating our heads against the walls with these ‘conclusions’ and we thought you might like to hear the voice of Diane Oakley, the Executive Director of the National Institute for Retirement Security, who battles these sorts of ‘think-pieces’ when they pop up in national newspapers. Here’s what she wrote to the Washington Post editors, but we don’t think they’ve run it yet. This is the entire article she submitted:

Letters to the Editor
The Washington Post
1150 15th Street, NW
Washington, DC 20071 
To the Editor, 
The opinion piece [The looming shortfall in public pension costs; Oct 21] misinforms the public about pension funding costs. The authors' ivory tower exercise that values public pension liabilities at a "riskless" investment rate raises false alarms, and bears no relationship to real world decisions to fund retirement benefits for state and local first responders, teachers and other employees. 
Pension funds are invested by professionals in a diverse portfolio to defray costs to taxpayers. The investment return assumption matters because investment earnings account for a large portion of pension revenues. Set too low, the rate will overstate liabilities; a rate set too high will understate liabilities. An assumption that is wrong in either direction will result in a misallocation of funds. 
So, it's clear that determining funding costs based on a "riskless" rate that is far below expected investment returns would distort funding policy decisions and waste government dollars by over-funding pensions. Data show that over rolling 30 year periods between 1926 and 2010, covering multiple market downturns, public pensions have meet or exceed the eight percent investment rate of return used by most funds. 
It's also important to note that the Governmental Accounting Standards Board earlier this month indicated a "definitive separation" between financial reporting of pension liabilities and funding decisions. The responsibility for developing stable and sustainable pension funding policy sits with government officials using sound data and information. As a result of the financial crisis, forty-six states have responded by enacting changes to ensure the long-term sustainability of their pension systems. Moving to fund public pensions based on a riskless rate has not been a policy consideration. 
Finally, it's perplexing that the authors suggest that switching from pensions to 401(k) accounts is a solution. Last week, TIAA-CREF president and former vice chairman of the U.S. Federal Reserve Roger Ferguson wrote about the retirement crisis, and indicated that 401(k) accounts were intended to supplement pensions, not to serve as the primary retirement vehicle. Moreover, the median balance of such accounts is $44,000 according to recent Federal Reserve data - nowhere near what any American needs to remain self-sufficient today. Perhaps an economic analysis of the real retirement crisis facing Americans lacking pensions would better serve your readers? 
Diane Oakley
Executive Director 
Well said, Diane. And we’d like to bring your attention to one more point.

We’ve been impressed recently with the statistic that public employee pensions in Texas have increased the value of employee and employer contrbutions by 63 percent. This comes from a fact sheet created by NIRS to discuss the entire financial benefit of pension results. The NIRS Fact Sheet on Texas says this:
Between 1993 and 2009, 19.91% of Texas’ pension fund receipts came from employer contributions, 17.05% from employee contributions, and 63.04% from investment earnings.* Earnings on investments and employee contributions—not taxpayer contributions—have historically made up the bulk of pension fund receipts.
This means that Texas, its cities and its public employees are able to dedicate their funds to things other than pensions because the retirement system investors do such a great job earning money from investments. Gaining 63% on employer and employee contributions means more potholes can be filled, more crime can be fought and more fires responded to quicker. Gaining 63% on employer and employee contributions also provides a safety factor to employees foregoing opportunities in the private sector for the more mundane, lower paid jobs in the public sector, with steady retirement allowances.

There are several more points we need to raise about the op-ed in the WAPO, but this will do for now. More later. – Max Patterson