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Monday, November 11, 2013

TLFFRA Sets Dates for its Annual Conference, Sept. 7-9th, 2014 in Lufkin, Texas


The Texas Local Fire Fighters’ Retirement Act was created as a result of the Texas Legislature created the Office of the Fire Fighters’ Pension Commissioner (FFPC) during the Great Depression so as to protect the pensions of fire fighters throughout Texas.

Every year, TLFFRA hosts an Educational Pension Conference that focuses on strategies for pension fund administration and investments. The organization has set its 2014 dates as Sunday September 7 through Tuesday, September 9 in Lufkin, Texas, about a 2 hour drive northeast of Houston and a three hour drive southeast of Dallas. More information will be coming available at http://texasfirefighterpensionconference.org/.

Please consider attending next year’s conference. – Max Patterson

Thursday, October 31, 2013

Texas’ Biggest Cities Compare Favorably to Others in Pension Costs Per Taxpayer Revenue

Cities have been under fire these last several years because there is the perception that they pay a disproportionate amount of yearly revenues to the retirement benefits of employees.

TEXPERS has been fighting this assertion on many fronts, but it’s nice when a third-party organization undertakes a major research project and adds some perspective to the issue.

The Center for State and Local Government Excellence released a study today, “Gauging the Burden of Public Pensions on Cities,” that asks a simple question: “How much do residents of a city pay for pensions—not just for city pensions, but also for school district and county pensions in their jurisdictions?”

To answer the question, the CSLGE researchers used data from 173 cities around the United States, including 10 of Texas’ biggest cities. Their finding was that, across the nation, pension costs average 7.9% of the total revenue base of those cities.

In Texas, our 10 biggest cities are among the bottom half of CSLGE’s 173 city sample, paying the least amount of taxpayer revenue to their pensions. In fact, the pension costs of the ten Texas cities average 4.2% of their tax revenues, nearly a full 50% below the national average.

The CSLGE study confirms what we’ve been saying over the years:

1)    Texas’ local pensions do not put their cities at financial risk
2)    Locally administered pension plans do a good job of managing a balance of city employee pension benefits with the city’s overall financial goals
3)    Compared to the statistics of pension systems in other states, Texas is head and shoulders above most, if not all, states on many different measures.

We are very pleased to see this study but we know this alone won’t change the minds of those with a bias against public employee pensions. – Max Patterson

Thursday, August 29, 2013

Houston Chronicle Publishes TEXPERS Op-Ed on the Differences between Detroit and Houston

As a service to its membership and the taxpayers of Texas, TEXPERS tries to stay on top of the debates about pensions that occur in its different members’ cities.

Today, we had an article published in the Houston Chronicle in response to one columnist’s assertions that Houston is moving on the path to bankruptcy just as Detroit did recently.

We thought the assertion to be a bit much and had to take it on, which you can read here.

The lesson here is that respected columnists and newspaper folks sometimes just can’t resist the temptation to have knee-jerk reactions to what is occurring in other parts of the country and then to apply it to pensions here in Texas. It’s a dangerous game as it skews and misleads people’s view and opinion on pensions. We’ll continue to set the record straight on these matters whenever we can. – Max Patterson

Monday, August 26, 2013

TEXPERS Informational Video Now on YouTube

The Texas Association of Public Employees Retirement Systems is moving into its 25th year and as such we thought it would be good to provide everyone with a visual overview of who we are and what we do.



Truly, the really remarkable story in the video is the dedication of our members and their staff. Our annual conference and summer forum are no picnics. They require time and attention from attendees. Listening to presentations on alphas, betas and deltas in the investing context is not easy. Neither is completion of our Certified Trustee Training program, for which many give up their weekend to complete. When you see in this video people intently listening to lectures and visiting with their legislators, please know they are taking time away from their real jobs to serve their pension system and, by extension, the taxpayers in their cities and towns, by ensuring the sound operation of a local pension system.


Please take a look. – Max Patterson


Monday, August 12, 2013

TEXPERS Wraps Another Successful Summer Forum

We at TEXPERS are just now getting our feet back under us after the Summer Educational Forum in San Antonio last week. What a great time was had by all! We had 422 registered attendees to the conference, which is about what we’ve been having nearly every summer now.

To get an idea of what they were learning, here’s a thumbnail sketch of the first two days of workshops and presentations:
Get ready for our 25th Annual Conference next year at the Renaissance Worthington hotel in Fort Worth, March 23-26. More information will be made available here as we develop the conference. – Max Patterson

Thursday, July 18, 2013

New Study Demonstrates 401(k)s Better for Higher Income Employees, Pensions for Low Income Workers

The battle over which style of investment plan is best seems to be somewhat dependent upon your income status and whether you work in the private or public sector, according to a researchers at the Employee Benefit Research Institute.

Here are some excerpts from a MSN story, “Which is better: 401(k) or a pension?” that covered the EBRI study.

But if you reduce the assumed rate of return, the traditional pension starts to look better for lower-income people, the study found.

For example, when the rate of return is decreased by 200 basis points, a 25- to 29-year old lower-income worker who is eligible for a plan for 30 to 40 years would see his income replacement rate at retirement with a 401k plan drop to 4 percentage points lower than he would have enjoyed with a pension plan, at the median.

For the next highest income group in the above scenario, their replacement rate with the 401k would be 1 percentage point less than with a traditional pension.

However, for the two highest-income groups, the 401k is still better: that plan provides a 6 percentage point and 15 percentage point replacement-rate benefit over the pension, at the median, even when a lower rate of return is assumed.

And combining the lower-return assumption with a higher-cost annuity assumption (reflecting the current low-interest-rate environment, which is substantially different from recent history), then traditional pensions look even better

The study’s author makes a point we’ve been making all along, that pension plans should be supplemented – not replaced – by 401(k)s:

In an ideal world, [Jack VanDerhei, a research director at EBRI and author of the report] said, workers would have access to both a traditional pension and a 401k or similar defined-contribution plan.
"If you have both," he said, "then obviously you have less employee investment risk, you have less employee longevity risk and you still are giving employees the upside if they choose to participate in the 401k plan."

And finally, you have to read to the bottom of the page to find out that the study really only considered private sector defined benefit plans:

Also, the data looked at private-sector pension plans. It did not include public-sector plans. Doing so would have pushed the data more in favor of pensions.

"I can promise you I would get much different results had I done a public defined-benefit as opposed to a private defined-benefit comparison," VanDerhei said.

Public pension plans -- those offered by government entities -- generally offer more generous benefits than private-sector plans, and usually include cost-of-living adjustments in retirement.


And the reason for those “generous benefits” is that throughout the employees’ working years they probably earned much less than private sector employees. -- Max Patterson

Thursday, June 27, 2013

Media Echo Chamber Doesn’t Apply to Texas, Again

Upon reading the Asset International Chief Investment Officer article “MomentumBuilding Toward DC in US Public Sector,” we paused” to ask ourselves “Is this true in Texas?”

As we’ve said so many times with previous assertions about Texas pension systems, “No, this is not true in Texas!” Not only is the implication untrue, but the facts are wrong as well.

The aiCIO article leads with the anecdote of Arizona Governor Jan Brewer last week signing a law creating defined contribution plans for judges and other elected politicians taking office after January 1, 2014. It goes on to note how problems in Illinois and Kentucky “brought the problems [of pension liabilities] to the forefront of public debate.” Then the story makes this statement:
Pennsylvania, Florida, Washington State, Kentucky, and Texas all have bills or serious proposals to shut or swap open DB pensions for DC schemes that have appeared in legislatures over the past few months.
Did we miss something?

We’ve been here watching the entire Texas legislative session in 2013 and we are completely unaware of any proposals to shut or swap open DB pensions for DC schemes, either for the statewide pension plans or local pension plans. This topic just wasn’t part of the legislative discussion, at all.

Here’s what did happen. The 2011 Legislature required the Texas Employees Retirement System (ERS) and Texas Teachers Retirement Systems (TRS) to report on their funding status, in what is known as an interim report, between Texas the 2011 and 2013 legislative sessions. The pensions included a consideration for switching from DB to DC plans among their options for improving funded status. Members of the legislature reviewed the report and no bills were filed in this regard in the 2013 session.

We gave the reporter the benefit of the doubt and actually went back over all the bills to see whether we missed anything – we didn’t.

So, given all this, we’re scratching our heads about the mention of Texas in this story.

The most significant legislation affecting pensions that did become law was the passage of House Bill 13, the transparency and training bill that was requested by Texas Comptroller Susan Combs. We’ve written about that bill many times on this blog, so we won’t waste your time with a rehash. But, we should note that HB 13 had nothing to do with switching or ending DB to DC plans.


We guess the moral of the story is, “Don’t believe everything you read in the media, even if it is on the internet.” Bonjour! – Max Patterson

Tuesday, June 11, 2013

Federal Reserve Report Shows Troubling Trends in Retirement Plans

Pensions & Investments Online recently reported on the June 6 Federal Reserve’s Financial Accounts report with many interesting findings. We need, in this and subsequent blogs, to unpack some of the facts that were revealed and discuss their meaning.

1) “State and local government pension assets rose 6.81% in the first quarter of 2013.” This is a deceptive statistic in that we don’t know whether this increase was due to market performance, or contributions from employees and public sector employers, or, most likely, a combination of the two. Nonethless, this increase is significant when we compare it to the next fact:
2) “U.S. corporate retirement plans assets rose just 2.78% in the quarter, to $6.82 trillion.” We should probably understand this statistic as some combination of the lack of comparative rate of contributions by employers and employees in addition to some lack of asset performance. The key learning here is that – for whatever reason – public sector pension assets are growing at twice the rate of private sector retirement assets. From a policy perspective, it would appear that people employed by state and local governments would most likely enjoy better retirement benefits at some point in the future.
3) “The real story, according to plan experts, was the level of net asset flows. A modest $4.4 billion in net asset inflows for defined contribution plans was a surprise in light of strong market returns. “I would expect that to be a lot bigger,” said Tim Barron, chief investment officer of investment consultant Segal Rogerscasey, Darien, Conn.” Incredibly interesting statistic here. The net inflows to DC plans – meaning 401(k) plans – were a small percentage of total assets. Private sector employees aren’t contributing to their retirement. Maybe they can’t – meaning that they need all their paychecks’ money being dedicated to current living expenses. Retirement savings are being deferred. Of course, corporate matching contributions are dependent on employees first making their contributions. It does not appear that this is happening.
4) “Comparing the 4.06% increase in defined contribution assets to a typical return of 5% based on a composite portfolio tracked by J.P. Morgan Asset Management (JPM), “it appears that they underperformed the market,” said Mr. Barron. “If that is a trend, it would be disappointing. If defined contribution is going to replace defined benefit, this pattern has to be continuously on the upswing.”” This is evidence of what we’ve been saying for some time now, that individuals are poor decision makers when it comes to investments. Even if they are turning their money over to mutual fund managers who make their investments, they must first decide which sectors in which to deploy money, e.g., small cap stocks versus large cap stocks, corporate bonds versus treasuries, etc.
We’ll have more to say on the P&I report in another blog, but here are yet more statistics that the continuing Siren call to move public employees to the failed defined contribution plan system is a wrong policy prescription that should be avoided. Similarly, something must be done about the failure of defined contribution plans for private sector employees. – Max Patterson

Tuesday, May 28, 2013

Texas Legislature Passes, Governor Signs Pension Transparency and Education Law

Back in December we informed our readers about Texas Comptroller Susan Combs wanting to introduce legislation to make pensions more transparent to the general public. Well, her effort has now become law after Governor Rick Perry signed HB 13 / SB 13 last Friday.

Whenever a major piece of legislation makes it through the process it’s always good to look back at why and how the process worked. Positive experiences deserve close attentions. Here’s our take on what happened.

First, TEXPERS appreciated the opportunity to participate in the bill’s formation from the outset, which was in early December 2012 when Ms. Combs held a press conference to introduce her desire to make Texas government, in general, more transparent. We obviously are in favor of transparency, and there was nothing of immense concern to us in Ms. Combs’ effort. However, we did want the public to know that there should be no inference that Ms. Combs’ was reacting to a total lack of transparency. Local and state pensions already provide the public with plenty of transparency into their operations, their investment returns, their benefits paid at every stage of their processes. We provided several newspapers with an op-ed that provided our view on all the transparency measures already in place, and you can read the op-ed in full at the Austin American Statesman, the San Antonio Express News and the San Antonio Business Journal. Ms. Combs wanted more pensions to use websites to engage in more discussions with their taxpaying constituents.

Second, our members are similarly concerned about the public’s perception of their pension operations. They want legislators and their local elected officials to feel comfortable with how they run their system. In December, we informed our 75+ members about Ms. Combs pending legislation and received very little feedback of concerns. In February, our members took a closer look at the actual legislation when Ms. Combs held a press conference to introduce her bill, named Senate Bill 13 and House Bill 13, through pension committee leaders Senator Robert Duncan and Representative Bill Callegari. We’d had time to see what was coming down and when it finally made its way to the legislature no one was surprised or taken aback by the bills’ contents.

Third, because of the long-lead times, we were able to discuss the legislation with our members with great focus in March and April. We provided the legislators with our input and tweaks along the way, both on behalf of our members and TEXPERS itself. That was because the bills were not solely about transparency. HB 13 / SB 13 also included some directives to the Pension Review Board requiring them to establish some training and education requirements of pension trustees. Of course, TEXPERS has long been the resource which pension trustees use to gain their education. Our Certified Trustee Training program has provided untold numbers of Trustees and pension administrators with education and training over the last 25 years. We’re glad Texas legislators have seen what we’ve known for a long time, that operating a pension is a very complex undertaking that requires tremendous care and concern. Our members have already been endeavoring to keep themselves up to date on the best possible opportunities for investments, and the best practices for managing and administering benefits.

In sum, by the time the bill was voted into law in May we, as a representative of Texas’s local pensions, had been included from the outset and participated in refinements along the way. It was a very positive experience for everyone involved. The process stood in stark contrast to previous years when sweeping statewide pension changes were considered. The success of HB 13 / SB 13 should be viewed as a model for introducing and shepherding any future legislation regarding pensions. – Max Patterson

Wednesday, May 8, 2013

Who Really Wants 401(k)s for Public Employees?

On May 1, future public employees of Florida dodged a bullet, and future residents of the state were given some guarantee of receiving the productive labor of motivated employees. Here’s what happened.

Florida senators voted 22-18 to pull a compromise amendment that would have shut future employees out of the state’s defined benefit plan and enrolled them in a 401(k). Eight Republicans joined all the Democrats to pull the bill from the floor.

As we’ve noted here many times before, public sector employees work for the benefits, not the salary, which are usually very low when compared to private sector employees. That is a significant budget consideration for state and local governments. They would not be able to afford comparable salaries that would retain their trained, experienced employees. Here’s what one Republican Senator said:
"One of the reasons they work for government is not for the salary," said Sen. Jack Latvala, R-Clearwater. "They haven't had raises in six or seven years. It's for the pension and if we want to continue to have the quality of employees that we have, we need to continue to offer that pension."
In essence, the Florida Senate took a very conservative position, preserving the status quo and failing to thrust future workers into the great unknown of 401(k)s.

So why are we paying attention to what happens in Florida?

Well, here in Texas there are many policy groups who are advocating a similar radical policy shift, from defined benefit to defined contribution plans. Thankfully our elected leaders aren’t listening to their mutual fund industry-backed proposals.

We noted in a previous blog how our Texas Comptroller Susan Combs told the media that there aren’t really any big problems at state and local pensions, and how decisions about the types of pensions a city uses are best left to local levels. Here’s what she said:
“Plan design is so individual. You may be able to have a great defined benefit plan depending on what’s going on. We’re agnostic on that [assertion that defined contribution plans should be employed instead]. We simply say ‘Know what you’ve got.’”
It’s evident to us that – because there was no bill advocating the dismantlement of defined benefit plans in this legislative session – most Texas lawmakers are taking the conservative approach advocated by Ms. Combs. Leaving things well enough alone is a good policy prescription. Republican and Democrat legislators see the wisdom of that in Florida. We’re glad they see that in Texas as well. – Max Patterson

Wednesday, April 10, 2013

Don’t Believe Everything Wall Street or Your Professor Tells You


In a previous blog entry, we noted how the Wall Street Journal – the newspaper that is written for stock and bond financiers and investors in New York – recently ran an alarmist but factually empty story that positioned the Teacher Retirement System of Texas as taking inordinate risks with its private equity portfolio. 

We noted how the story’s sky-is-falling “Pensions Bet Big with Private Equity” headline, and some wording in the third paragraph, might lead a reader to believe that “private equity and other non-traditional investments” are aggressive, risky investments when compared to those on Wall Street. In reading the story, it was not hard to infer that there is less risk from traditional stocks and bonds offered by the downtown New York financial companies, you know, the ones that advertise in the Wall Street Journal.

Our worry about the story was its implication that off-Wall Street investments, sometimes referred to as Main Street investments, are inherently more risky and don’t belong in public pension portfolios.

But when we added just a tad of critical thinking, we noticed that the story offered no comparisons of risk factors, or any proof of long-term return superiority of one style of investing. The story only notes how private equity investments play a big part of the TRS portfolio, saying “It now boasts some of the splashiest bets in the industry, having committed about $30 billion to private equity, real estate and other so-called alternatives since early 2008.” (Note the value-laden term “splashiest bets.”)

Even the following paragraph in that WSJ articled noted how the strategy is “averaging returns of 4.8% and 15.6% over the past five-year and three-year periods, respectively.” Not bad, in our view. The story did not include supporting evidence as to how those investments are risky or detrimental to TRS performance. Nor was contrasting evidence presented as to how other pensions’ private equity ‘splashy bets’ played out. Nor was evidence presented as to how “bets” using “traditional” Wall Street investments might have fared over the same time period, or which risk metrics were at play.

Our concerns that this article might negatively influence some people were well-founded, as it turns out.

Professor Elena Farah, senior fellow for public financial sustainability at the University of Houston, began her  recent blog by referencing that WSJ article and posited that the risks taken using private equity are “a perfect example of how misaligned incentives endanger public money. This can only hurt public employees and taxpayers in the long run.” She positioned public pensions as using “risky” private equity to achieve their overly aggressive investment targets.

Professor Farah’s blog article went on to offer one sky-is-falling scenario after the other, all of which supported her premise that private equity offerings are more risky than other types of investments and shouldn’t be used by public pensions.

This just simply isn’t true and her viewpoint is dangerous to taxpayers in many ways.

If anything, private equity components of pension portfolios offer one more element of diversification that help reduce the overall risks of an investment strategy. We’ve previously mentioned how, at one time, the City of Houston’s Treasurer’s strategy for pension investments was limited to U.S. Treasury instruments, which might seem risk-free, except for all the opportunity losses the city’s taxpayers were forced to pay for with higher contributions.

To offer an alternative view of alternative investments, we asked Marcelia Freeman, a director at Invesco Private Capital, to offer their justifications for the use of private equity in pension portfolios. Here’s what she said:

Throughout the Great Recession, we saw that these outsized returns could not be broadly found in public markets, and thus investors were forced to look toward alternative investments like private equity, hedge funds, bank loans, etc. These type of investments not only provide alpha beyond S&P 500 and T-Bill returns, they also provide other benefits like diversification, lower correlation among portfolio investments, etc.

Another major benefit for private equity includes investments in small business around the country, who otherwise were capital starved during the recession. The increase in pension fund investing in the asset class benefits not only pension fund members and beneficiaries, but also communities and economies in which we all must thrive, both in the short and long term. The cost of not investing in ourselves as a nation far outweighs the well-aligned manager fees paid to private capital firms.

“Lack of transparency” in alternative investments and even public securities often indicate inefficiency of markets. Profits are often gathered by skillful managers within inefficient markets, making manager selection paramount in order to produce significant alpha. With the use of consultants, investment committees, and other oversight mechanisms within public pension fund investing, high performing, top quartile managers can be hired, and can thus produce outsized returns for pension fund members and their beneficiaries.

We have more to say about other elements of Ms. Farah’s blog, but that will have to wait for future blog entries.

For now, we hope our readers understand that Texas pension systems seek to balance the risks they take. Wall Street investments are no less risky than Main Street investments, despite what the Wall Street Journal might implicate. And in many cases Main Street investments might be far more less risky, especially if they are more directly under the watch and control of a pension Board. Indeed, the failure to consider ‘alternative investments’ – in Wall Street speak – could actually be a violation of Trustees’ duty as fiduciary.

This subtle shift in orientation that seeks to deem Wall Street investments as “traditional” and alternative investments as “non-traditional” is dangerous to public perceptions about the steady work that pension Boards perform to find the best overall mix of investments for their members and taxpayers.  And this skewing of perception simply isn’t warranted based on performance.

In our view, one of the true shortcomings of the “move all public employees to 401(k) plans” arguments is that they would be limited to stock and bond mutual funds. As an asset class, those have not performed as well as commodities in recent periods, and thus their underperformance risk an entire generation’s opportunity to participate in wealth accumulation for retirement.

We continue to urge readers to view media many news reports and blogs with measured skepticism. Public pension investing is far more complicated, and its practitioners far more sophisticated, than some would have you believe. – Max Patterson

Thursday, February 28, 2013

Conflicting Portrayals of Risk for Pension Portfolios


We like most are steady consumers of media, but it’s important to keep perspective whenever you read anything. And we mean ANYTHING!!

Consider the alarmist headline on the front page of the Wall Street Journal, “Pensions Bet Big with Private Equity” followed by the tone-setting sentences in the third paragraph:

It’s a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other non-traditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.   

Hmm… There’s a lot to argue with in that paragraph:
  • Only people in New York, and on Wall Street might consider Wall Street investments to be “traditional” investments, whereas most people out in greater America still understand the value of investing directly, with up and coming companies, or their local farmer, or prime real estate, or popular restaurateurs, that fulfill the needs of people in regions, sectors, etc.
  • Risk is an acquired taste. Not everyone enjoys the stockmarket roller coaster rides that Wall Street has provided the last 12 years. There are far more conservative investment opportunities that provide steady income out beyond the Hudson river. Only those with a New York, Wall Street perspective might consider Wall Street to be a reducer of risk!
  • And given the track record of Wall Street investments over the last 10 years, which many call the “lost decade,” going off the Street could hardly be labeled “getting aggressive.” Others might term it “getting real” or “adjusting to lackluster results available through Wall Street.”
The story goes on to tell how Teacher Retirement System of Texas has dedicated about $30 billion of its $114 billion under management to “private equity, real estate and other so-called alternatives.”  By the time you get through the article – and you find that the TRS system is doing fine with its funding ratio and that it’s private equity holdings are doing a good job of providing income for retired teachers – you kind of want to say, “So what? If it’s working, why is this on the front page of the Wall Street Journal?”

We’ve been seeing more of these sorts of stories that micromanage and Monday morning quarterback Texas pensions’ investments. The Dallas Morning News had a long story about the Dallas Police and Fire pension’s use of luxury real-estate in its portfolio. We’ve heard of investigations into other pension’s investments. Dallas Police and Fire is one of the strongest performing pensions in the state, so again, at the end of the day, we say “So what?”

To confuse the average media consumer yet again, contrast all that with a Reuters story titled “Local pension plans punished by safe investments: study.”

The report notes how local pensions had, before 2007, invested too conservatively and fallen behind large state-run pensions in their funding ratios. The Boston College study then found that, after 2007, locally administered plans outpaced state-run plans using international stocks and alternative investments. Smaller pensions that didn’t have diverse asset classes fared the worse.

To all the confusion, we say this: Let local pensions do their job. They will find a way to make the money they need to pay their public servants. Texas has a very robust system that allows local pensions to pick investments that make sense and gain good returns. We’ll be releasing a survey soon that shows just how well they do. Don’t get confused by reports in the media that seem to conflict and confuse. Texas’ local pensions are doing well. – Max Patterson

Monday, January 14, 2013

Texas Pensions Respond to Cities’ Circumstances, Face Lawsuits



We admit that the actions of the Laura and John Arnold Foundation sometimes leave us scratching our heads as to what they are trying to achieve.

Take the foundation’s recent release of its “LJAF Policy Perspective: Pension Litigation Summary.”

The report rightfully notes how pensions large and small across the nation frequently initiate reforms to their system, to enable their plan to match contributions and investment returns with expectations for future benefits. The objective, of course, is usually to minimize the contributions needed from taxpayers. A noble pursuit we believe.

The reforms aren’t liked by every one – especially those whose benefits may be impacted in the future. They then typically challenge the reforms in court. The LJAF report says, “Within the past three years, at least 24 jurisdictions have faced lawsuits alleging that pension reform measures are unconstitutional.”
Our response? So what.

Isn’t it still a prerogative of free men and women to understand whether their rights to what they see as their money is in fact theirs? We hope so. As to how the courts decide these cases is still in the process, but what we do know is that there are always efforts to “reform” pensions to the facts at hand. The LJAF says its report fills the information gap, compiling the active cases in one place so that everyone might keep a close eye on them.

At this point it’s important to note how “reform” is a relative word. The LJAF and others view “reform” as leading to the wholesale destruction of defined benefit plans.

By contrast, those who support their existing usefulness and practicality as a tool of city budget management would use the word “reform” as measures that continually adjust plans according to the real world financial situations that cities and their pensions face.

There is no one-size fits all policy panacea that would ‘fix’ all the problems said to exist, especially not a wholesale switch from defined benefit to defined contribution plans, of the sort that the LJAF has previously endorsed. That’s macro-reform, and could be said to be similar to throwing the baby out with the bathwater. The micro-reforms, occurring as they are in sloppy, choppy fashion, respond to particular problems.

Just to save you some time, there are two Texas cases in the LJAF report, both in Fort Worth. The city initiated reforms in response to the expected shortfalls their employees pension expected due to years of the city’s deferring the contributions it owed. The lawsuits were enacted in late 2012.

Again, when considering the larger issue of the health of local defined benefit pensions in Texas, we say “So what?” These aren’t reasons to get alarmed about anything, other than their clear spotlight on the tendency of delayed contributions causing problems down the line and likely to spur lawsuits. In our view, that’s the real lesson we see here.

As an aside, it must be nice to be on the dole of a billionaire’s payroll, to come up with these sorts of alarmist, but less than meaningful reports. – Max Patterson

Tuesday, January 8, 2013

Not Enough Private Sector Workers are Availing Themselves of Non-Government Retirement Plans

One of the complaints we hear about defined benefit plans is about how much money public sector employees are able to retire after 20-30+ years of service.

Of course, it is theirs, the money they have contributed from their salary to their pension account. As to why people begrudge people the use of their own money is beyond us.

But what most people don’t consider is that in most cases, public sector employees don’t have a choice of whether to contribute to their retirement. The money is automatically deducted from each paycheck.

Over 20 years, that money can accumulate and grow at very good rates of return, especially if administrative/investment costs are kept low over that time period. And remember that most public sector employees start their careers at fairly low salaries and raises are usually non-existent or rare in coming, unless the employee progresses through the ranks. Requiring these workers to contribute can be painful to them when considering their monthly take home pay. They do it nonetheless.

We mention all this because a new report from the Bureau of Labor Statistics makes note of a couple of dynamics that occur in the private sector with regard to retirement benefits. These dynamics can provide some insights into why public sector employees have been successful in accumulating, over time, considerable sums for their retirement. And it can also explain why many in the private sector are woefully under-prepared for their retirement.

The September 2012 report “Beyond the Numbers: Who has benefits in private industry in 2012?” says:
Nearly two-thirds of private industry workers had access to some form of retirement plan, typically either a defined-benefit plan (such as a pension) or defined-contribution plan (such as a 401(k)), and 48 percent chose to participate in a retirement benefit plan. (See table 1.) Access to retirement plans varied significantly by major occupational group, full- or part-time status, bargaining status, and wage category. Management, professional, and related occupations had nearly twice the access rate and more than 3 times the participation rate of service occupations. (Some examples of service occupations are healthcare support, protective service, food preparation, maintenance, and personal care workers.) Similarly, full-time workers had nearly twice the access rate and 3 times the participation rate of part-time workers. Union workers showed very high access (92 percent) and participation (85 percent) rates for retirement plans.
The “problem” that manifests here is that low paid service workers, who are also likely to part-time workers, aren’t contributing to their future. It’s difficult for them to do – and they don’t. This dynamic is proven by the next statement in the BLS report:
High-wage workers (those in the top 25 percent of all wage earners, with earnings at or above $24.81 per hour) had significantly higher rates of access and participation in retirement plans than those of low-wage workers (those in the lowest 25 percent of all wage earners, with earnings at or below $10.69 per hour). High-wage workers had access rates of 85 percent and participation rates of 75 percent. In other words, 89 percent of the high-wage workers who were eligible for retirement benefits participated in the plan (known as the take-up rate), a significantly higher share than the take-up rate of 45 percent for low-wage workers. Low-wage workers seem to be at a disadvantage because they may have more difficulty providing employee contributions, which are often required to participate in a retirement plan such as a 401(k).
Of course, the great advantage that public sector employees have is that many don’t have to contribute any portion of their salary to Social Security, whereas private sector employees pay 6.2% of their pay to SS, and their employer matches that amount for them. Many police and fire department employees, and some municipal employees, don’t pay into Social Security (and can’t expect any benefits from SS in retirement). So private sector employees, especially the lower paid, would have their take home pay reduced even further by contributions to non-Social Security retirement accounts. That’s awfully hard for them to do given the cost of living these days and their need to bring as much money home as possible

Can these disparities be addressed? Yes, they can, without impoverishing public sector employees in the same manner that current policies seemingly accomplish for lower paid, part-time private sector employees.