Headlines Paint Different Pictures of Nuanced Thought Regarding Pensions

We at TEXPERS have been concerned the last few years that negative news headlines alerting the informed about pension problems in other states might rub off on folks here in Texas. Failures in Illinois, New York, California and other places tend to dominate the headlines of national newspapers like the New York Times, Wall Street Journal and LA Times and then all the TV media that tend to feed off issues that start in print. They have caused people to raise questions about what is going on here in Texas.

We have been contending all along – with facts and figures – that Texas cities have not had the same degree of pension problems, with most of our cities being able to handle any underfunding issues that may have occurred due to previous failures to contribute. But nonetheless, we’ve been very concerned about the headlines that may influence public opinion about pensions in general.

Now, closer to home, there’s a lesson to be learned about headlines from news coverage here in Texas.

Two weeks ago Texas Comptroller Susan Combs held a press conference to issue a very balanced report educating taxpayers about the conditions of public employee pensions in Texas. The main thrust of her report was to encourage greater transparency at the local levels of government, pensions included. But the pensions’ performances merited very balanced comments from Ms. Combs.

In her words, the two biggest pension plans in Texas, the Employee Retirement System and Teacher Retirement System are in "pretty doggone good shape.” She noted that “there are some warning signs in Texas” for other public employee pension obligations but she didn’t call any particular system out. 

Overall, Combs issued a very moderate report, refusing to advocate for or against defined benefit plans, saying “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.’”

TEXPERS greatly appreciates Ms. Combs realistic and fact-based stance, as it indicates a top state official’s informed position that the status quo is working. Texas allows cities to determine how they compensate their employees with current payments for salaries – typically low – and future payments for retirement using investment returns. Ms. Combs’ position reflects the conditions here in Texas, that most pensions are sound, with only a few needing some attention and concern. In those cases, remediation is already occurring because neither the sponsoring cities nor their employees can abide by failure. They don’t require, nor are they requesting any state intervention.

So that being said, it’s interesting how news outlets headlined their coverage of Ms. Combs press conference, with the headers often giving a different impressions of the content beneath. This is a very typical dynamic in public issue coverage, of the media trying to draw attention to these fairly boring-by-comparison policy matters. To make our point, here’s a sampling of some of the coverage Ms. Combs’ presser received, with our assessment of their tone above them:

ALARMIST:

Combs: Warning signs with some Texas pensions

Combs Sees red flags in state pensions

Texas Comptroller report: Public pensions a critical concern for taxpayers

MODERATE:

Combs calls for tweaks to improve pension oversight

SOOTHING:

Susan Combs Throws Cold Water on Texas Public Pensions “Crisis”

Of course, the goal of every headline is to attract attention to the story, to gain eyeballs and keep viewing audiences. We never begrudge the media’s need to make a living in a competitive environment. We just thought it was an interesting comparison for your consideration. – Max Patterson

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

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

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? 

Sincerely, 

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

Independent Company Study Contrasts with Pew Research

We have noted in the past how the Pew Center on the States has used worst-case numbers from the 2008-09 market collapse to inflate anxieties in its series of Widening Gap reports on pension funding. The Pew Center sometimes has its own political agenda for the factoring included in its studies.

Now comes another study from a private sector actuarial firm, ostensibly one without a political agenda. The study, from Milliman, is worth a look.

First, you should know that Milliman is very different from Pew, a think tank. Milliman is among the world’s largest providers of actuarial and related products and services. They offer consulting services for employee benefits, healthcare, investment, life insurance and financial services. The firm does not get into political debates about the types of pension plans that public employers should use, and therefore provide another view of pensions.

In Milliman’s recently released “2012 Public Pension Funding Study,” the company measured the aggregate funded status of the 100 largest U.S. Public Pension plans using basic actuarial principles and reported plan liabilities and assets. Milliman used a uniform approach to accrued liabilities with respect to interest rate assumptions, an approach that Milliman believes unique among studies.

What it found was that the plans, in aggregate, have a funded ratio of 67.8% and typically have very conservative interest rate assumptions:

On the whole, we conclude that there are only a small number of plans whose interest rate assumptions are causing a sizeable underreporting of liability relative to what would be calculated based on current forecasts of future investment returns. 

What does this mean?

Simply that some plans have overly optimistic assessments of what they can earn through investments. This is a significant problem because investment returns achieve as much as 60% of a retiree’s eventual monthly income. Overly optimistic assumptions mean that future benefits will need to be made up by employer’s, e.g. taxpayers’, contributions. From an actuarial standpoint, it’s better to have more conservative, less optimistic assumptions baked in. And, the good news according to the study is that:

…in fact, there are a surprising number of plans whose interest rate assumptions and accrued liability reporting are conservative in light of current forecasts. 

That means most plans are continuing to make adjustments that will narrow the new market norms with future expectations for benefits that will need to be funded.

Milliman poses that we can get a clearer picture of future liabilities by using a single inflation rate across all the systems. They used a 2.75% inflation rate figure and determined that, using that rate, the actuarially determined interest rate for the aggregate assets of all the plans in their study is 7.32%. This is nearly a full 3/4s percentage point below the 8% return used by Pew. Using that rate, the systems in the Milliman study would have a 65.9% funded ratio.

This ratio continues to be well within shooting distance of the 80% funded ratio to which most plans aspire. And we should note that funded ratios are only one indicator of system health. As long as the trend of funded ratios continues to be positive over time, this ratio should be considered to be healthy. The problem occurs when funded status takes a hit, say due to downward market fluctuations, and continues downward. As long as the trend reverses to an upward or stabilized course, systems with this level of ratio are in good shape. – Max Patterson

San Antonio Newspaper Article Focuses on Sizzle, Misses Steak about TEXPERS Educational Conference

We here at TEXPERS know that the media live on controversy, confrontation, and schism wherever they can find it. It’s called “making headlines” and that is how they create a product that sells to an audience, that then can be turned into advertising dollars.

We understand that dynamic and we appreciate the work that the media does in bringing issues and events to our attention. We, as free citizens, need the media telling us all what is going on around us. And we realize that, without the sizzle of a sexy headline, people wouldn’t read the newspaper and so there wouldn’t be any newspaper. The headline “20,000 planes took off and landed again safely today” would get boring day after day, which is why the media only focuses on the one that might, unfortunately, crash every year and a half or so.

Such is the case with a story that featured TEXPERS’ activities on its members’ behalf at our summer conference which concluded this week.

The story, “Groups defend public pensions,” provided a summary of my and another TEXPERS’ member comments about special interest groups – all with funding coming from outside of Texas – who have as their defining purpose the dissolution of defined benefit plans for public employees. There’s no ‘give’ in their position: No matter how well DB plans perform in Texas for police, firefighters and municipal employees and the cities they work in, they must be replaced by DC plans, they say. There’s no rational debate or discussion about the matter. Just because some systems have not fared well in other parts of the country, they must be dismantled here, our opponents say.

So, yes, we advised our members about these threats and the reporter dutifully came to the one presentation where some hint of controversy drew him to our conference. We’re not blaming him for doing that. It is his line of work.

But what you should know is that, for the previous three days, more than 500 trustees of pension systems from around the state came to San Antonio to further their education about investments and pension administration so that the burdens on taxpayers for their employees pensions would be as low as possible. They heard from money managers, lawyers, and other pensions, to learn how to operate the best possible pension, on their city’s taxpayers behalf. Dedicated men and women took time from their personal lives to devote their efforts to their colleagues at fire houses, police stations and city halls across our great state. They came to invest their and their fellow’s money as best they can so that after 20 or 30 years of service, at very minimal rates of pay, the public employee could retire securely at least possible burden to their fellow taxpayer.

In our view, this was the equivalent of the 20,000 planes that cross our skies safely each day. It won’t make headlines, but it’s the truth of what really happens with local pensions in Texas. -- Max Patterson

Where’s Texas?

The doom-and-gloom naysayers of public employee pensions got more ink last week in the Wall Street Journal.  The story was “Hard Times Spread for Cities: Rising health, pension costs top the list as municipalities struggle to recover from the recession,” and was written by three WSJ staffers, Kris Maher, Bobby White and Valerie Bauerlein.

Do a search for the word “Texas” and once again you’ll find our great state is nowhere mentioned in the story.

Now, we have no doubt the journalists did their job in thoroughly investigating situations they recount in California, Pennsylvania, Michigan, North Carolina, Illinois, Rhode Island, Massachusetts, Ohio, and Missouri, where cities are struggling with pension costs or looking to raise taxes to support other services.

But these trouble cases have been all the media rage over the last few years. They usually follow mismanagement by politicians over years and decades. And they seem to be more the exception the rule.

It’s been our wish over the years that every story like this would include a quote from someone that knew about the overall health of the public employee pension system in Texas. If they would, the story might include a paragraph that would say something like “‘We’re not having the same problems in Texas, where a system of checks and balances tend to keep pension contributions in balance over time,’ said Max Patterson, the executive director of an association of local pensions across Texas.”

Somehow, I don’t think we ever will, but it is the truth, and it would add some fairness and balance to every story like the one that appeared in the WSJ. – Max Patterson

Policy Observers Starting to Address Core Causes of Pension Envy

We have for several years now been noting the “pension envy” phenomenon, where people in the private sector want the same defined benefit plans that public sector employees have. We have said that we agree with them completely – that ERISA laws placing onerous burdens on private sector companies need some revision. We agree that new thinking is in order. We don’t agree with their position that because most private sector employees don’t have DB plans, then public sector employees can’t have them either. Public policy should be guided by what works, not some sense of class fairness determined by where you work.

This pension envy, in our view, also has its origins in the failure of 401(k) plans to adequately generate the returns most Americans need for retirement. There is some irony in this development, as we remember how, in the 1990s when stock markets were booming, we would read about the imminent death of antiquated defined benefit plans. Why would anyone in the public sector agree to meager 5 percent returns when mutual funds in the 401(k)s were making 20 percent each year? That was the argument then. 

The 401(k) disaster is beginning to be recognized. We’ve noted how the annual Deloitte study of 401(k) plans shows increasing discomfort on the part of employers for the retirement status of their employees. We’ve seen studies from the Center for Retirement Research indicating severe funding shortages for retirees.

Now we have another academic making some of the same observations, that 401(k)s aren’t getting the job done. Here’s a few paragraphs from a story, “Our Ridiculous Approach to Retirement,” appearing recently in the New York Times, by economics professor Teresa Ghilarducci:

The current model for retirement savings, which forces individuals to figure out a plan for their retirement years, whether through a “guy” or by individual decision making, will always fall short. My friends are afraid, and they are not alone. In March, according to the Employee Benefit Research Institute, only 52 percent of Americans expressed confidence that they will be comfortable in retirement. Twenty years ago, that number was close to 75 percent.

I hope that fear can make us all get real. The coming retirement income security crisis is a shared problem; it is not caused by a set of isolated individual behaviors. My plan calls for a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities. This is a sensible way to get people to prepare for the future. You don’t like mandates? Get real. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster.

It is now more than 30 years since the 401(k)/Individual Retirement Account model appeared on the scene. This do-it-yourself pension system has failed. It has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers. What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?

Defined benefit plans work in part because employees are required to make contributions to their individual retirement account, and they sacrifice some of their current income for future, delayed gratification. They rely on the professional decision making of their Board and the money managers they hire. The same dynamic does not exist with 401(k)s and it is a serious flaw. We don’t like mandates either, but there needs to be some fundamental change in how all policy makers view individuals savings capabilities.

You might also want to see Ms. Ghilarducci interviewed on this subject on a Web interview, available here. – Max Patterson

Have DC Plans Delivered in States that Try Them? No One Knows

In a previous blog featuring responses to questions from Ron Snell, senior fellow at the National Conference of State Legislatures, we learned that Alaska’s switch from a defined benefit to defined contribution plan for public employees was caused by concerns that actuarial projections were wrong, and healthcare benefit costs exploded.

We weren’t satisfied with our question though because it left too much wiggle room for the true-believers of DC plans. So we asked Mr. Snell the following: “…the question [we have now] is whether the DB plan was the core problem or a poor actuary and exploding health care costs. If those were extracted from the equation, would the DB plan have needed to be closed to future participants?” Our reason for asking this is fairly simple: was the performance of the DB plan to blame? Sure, a plan can have bad assumptions. Sure, the people can overpromise benefits – in this case healthcare benefits. But when it comes down to it, is the performance of the DB plan to blame? Here’s what Mr. Snell said:

I understand your question, but I don’t know what the answer is. The situation at the time was that the funding ratio of the plan, which was well above 100 percent in FY 2000, and had been there for several years preceding FY 2000, fell to less than 66 percent in FY 2005 because of investment losses in the recession of 2000 and growing liabilities. A broadly-shared sense by the middle of the decade was that the plan was too expensive for the state. Many other states in that situation have chosen alternatives short of fundamental plan redesign, so one answer to your question would be that there might have alternatives to the one the Legislature adopted. I’m not in a position to critique the Legislature’s decision. Opinion in Alaska remains sharply divided as to the wisdom of the change, and most sessions since the change was adopted have seen proposals to reverse it.

So I don’t know.

It’s very refreshing to see someone so honest in public policy debates. Unlike many others who blindly advocate for DC plans, Mr. Snell realizes, like us, that there are many considerations about developments around public employee pensions and the options to remedy them. As we responded to Mr. Snell, it seems that the Alaska legislature threw the baby out with the bathwater in response to what was going on.

Which led us to our final question to Mr. Snell: “Is there any analysis available as to how the employees have done on their own using the DC plans?” Here was his response:

…there’s not a lot of evidence because most of the public DC plans are too new.

Indiana has a DC component in its hybrid plan (which goes back to the 1960’s) but I am told (having asked several times) that the state has never studied the question of the adequacy of returns from the DC plans.

When around 2000 Nebraska looked at the issue of the adequacy of benefits from its long-term DC plan for state employees (which also was begun in the 1960’s), the conclusion was that benefits were not comparable to those that Nebraska teachers received from their DB plan or that similarly-situated state employees received in DB plans in the surrounding states. That was attributed in large part to members’ tendency to invest very conservatively, relying on money market funds and fixed-income securities in the hope of avoiding investment losses. Nebraska therefore closed that plan to new members, and enrolls them in a cash-balance plan with a guaranteed rate of return.

Much is made of the low earnings of the now-closed West Virginia DC plan for teachers, but my own feeling is that there were so many complicating factors in the West Virginia situation, no generalizations should be based on it.

Michigan of course began a DC plan for state employees in the mid-1990s, but so far appears not to have studied the adequacy of retirement benefits.

A study that attempts to provide a general answer is a paper Roderick Crane and others of TIAA-CREF published a few years ago, “Designing Public-Sector Pensions for the 21^st Century,” that discusses that issue among many others.

Crane makes the point that wealth-accumulation instruments and pension plans are different, and that defined contribution and cash-balance plans may be constructed to be one or the other, but not both. Key elements of a design intended to provide adequate salary replacement are mandatory participation (not true of all public DC plans, when they are a component of a hybrid plan), adequate contribution levels, and conversion to annuities at retirement.

Crane looks at the long-term record of DC plans in higher education, and concludes that when combined employer and employee contributions are at least 10%, and have a substantial investment in equities, from 40% to 60% over a lifetime, such plans can produce income replacement ratios of 43% to 49%. The addition of Social Security benefits would result in replacement ratios of 70% or more. He also indicates that a combined contribution rate of 15% can produce a replacement ratio of 70% before Social Security benefits are taken into consideration.

Crane notes (p. 48) that contribution levels should be substantially more than 10% to provide salary replacement for plans whose members do not participate in Social Security.

Below is a link to Crane’s paper. I have taken the salary-replacement figures above from page 50.

http://www.tiaa-crefinstitute.org/ucm/groups/content/@ap_ucm_p_tcp_docs/documents/document/tiaa02029353.pdf

Again, we appreciate Mr. Snell’s candor. We will dig into the Crane study and let you know our thoughts. – Max Patterson

Public Employee Pension Opponents Continue Use of Selective Facts

We noted in February how analysts at the American Enterprise Institute and the Heritage Foundation used bottom-of-the-2008-market statistics to anchor their report “States of Bankruptcy: The Coming State Pensions Crisis.” Now we have a fresh example of another organization taking a similar tack. This from the National Council on Teacher Retirement blog:

On June 18, 2012, the Pew Center on the States released an update to their report, "The Widening Gap," which addresses state liabilities and costs for pensions and retiree health care benefits. The report asserts that States “continue to lose ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care,” and that in fiscal year 2010, states were $1.38 trillion short of having saved enough to pay their “retirement bills,” a nine percent increase from the year before, according to Pew.

However, the Pew report’s analysis uses old data that fails to reflect recent market gains. As Keith Brainard, NASRA’s Director of Research, points out, by relying on FY 2010 data, “the dates the Pew study is using to measure the condition of many public pension plans are near the low point of the recent investment market decline.” Nearly one-half of plans in the NCTR/NASRA Public Fund Survey have an actuarial valuation date that pre-dates their fiscal year-end date, usually by one year, Keith notes.

Also, in order to arrive at the $1.38 trillion figure, Pew once again combines pensions with retiree healthcare. As NCTR and NASRA have noted in the past, retiree healthcare cost containment options, financing structures and benefit protections are entirely different from those of pensions. Pew’s decision to couple retiree healthcare with pension liabilities distracts from the issues States face with these very different benefits.

It’s our hope that readers will understand there are two sides to every coin and that it’s important for the sake of progress to have above-board discussions about what is happening in the world of pensions. Our recent blog about Alaska and their lumping of healthcare costs into pension dynamics is very similar to Pew’s treatment of the issue. And of course using old data at market lows is tantamount to all-out political propaganda and not worthy of serious debate. We wish it weren’t so. – Max Patterson

Alaska’s DC Experience Revealed – Our Question Still Stands

We have been writing in this blog that proponents of defined contribution plans for public employees derive their position from a very cheery assessment of the ability of those plans to achieve public employers’ fiscal goals, as though they are a silver bullet cure-all for the problems faced by a city or state.

We aren’t so easily convinced.

And the more questions we ask about the reasons for their faith in DC plans the more our skepticism is increased.

Take for example some exchanges we had recently with Ron Snell, a Senior Fellow at the National Conference of State Legislatures, after a recent joint webinar with the Pew Center on the States, “Recent State Pension Developments: Are We Gaining Any Ground?” During the webinar, one of our TEXPERS associates asked the presenters about Alaska and it’s 6-year track record of using defined contribution plans. He asked, “How has that worked in terms of reducing or increasing [Alaska’s] underfunded status?” The presenters noted that the switch had been successful in transferring the risk of investment returns from the employer to the employees, but they had little more knowledge of the situation at the time. A few days after the webinar Mr. Snell responded with more information about Alaska:

Alaska closed its defined benefit plans to new state and local government employees and teachers statewide on July 1, 2006. People hired on and after that date are enrolled in defined contribution plans. Employer contribution rates have grown sharply to amounts other states might consider unsustainable. [emphasis added] However, this appears more attributable to the state’s unique commitment to health care benefits for the retired members of its defined benefit plan and to failures to make actuarially-required contributions to the closed plans in the past decade, than to the restructuring of the plan.

It is clear that required contributions to the Alaska defined benefit plan have grown sharply in recent years. [emphasis added] From June 30, 2005 to June 30, 2009, the annually required contribution for the defined benefit plan increased from $337 million to $557 million. (Figures for June 30, 2010, are available but are not comparable to previous-year numbers because they include proceeds from the settlement of a lawsuit). The increase over those five years was 48 percent.

Another measure of the cost of the plans is that the projected employer contribution rate for the Public Employee Retirement System is 35.84 percent of payroll for FY 2013. For the Teachers’ Retirement System, the comparable requirement is 52.67 percent of payroll. Employer contributions are capped at 22 percent for PERS and 12.56 percent for TRS, and the State of Alaska contributes the difference. A recent report on the unfunded liabilities of the Alaska plans estimates the state share of the employer contributions will be $610 million in FY 2013 and will rise to $1.2 billion by FY 2030.

However, it is questionable whether closing the defined benefit plans has been the principal cause of the very high contribution requirements.

· The author of the report, David Teal, director of the Alaska Legislative Finance Division, points out that a distinctive trait of the Alaska defined benefit plans is the inclusion of the cost of health care for retired members in plan funding requirements. Health care costs seem to be the driver of the increase in the required annual contribution for the plans. According to the retirement plans’ Consolidated Annual Financial Report (CAFR) for June 30, 2011, the required annual contribution for retirement annuities actually fell from 2005 through 2009, while the contribution requirement for health care almost tripled over the same period.

· Mr. Teal also points out that flawed actuarial analyses in the years before 2005 led to lower levels of contributions than the funding level of the retirement plans required, when viewed in retrospect with updated actuarial assumptions. The inadequate contributions led to the shifting of costs to the present and future. In part the current and forecasted contribution rates are compensating for past errors of calculation

· In addition, according to Mr. Teal’s report, a statutory limit on employer contribution rate increases in effect for FY 2005 through FY 2007 also led to growth in the unfunded actuarial accrued liabilities of the plans, and shifted contribution requirements to the future.

· Finally, investment losses in the 2007-2009 recession have added to the pressure on contribution rates.

We will have more to say about this and a few other very informative email exchanges we had with Mr. Snell, and we really appreciate his time in helping us understand how these systemic failures occur in places other than Texas. But as you can see, the underfunding crisis that occurred in Alaska was primarily caused by flawed actuarial information and healthcare benefit cost escalations. It wasn’t fund performance. It wasn’t extravagant retirement benefits. It wasn’t poor administrative handling of defined benefit programs.

You should know that, in Texas, healthcare benefits are handled exclusively by the cities at the local levels. Local pension plans have nothing to do with these health care costs or their administration. In fact, many small cities don’t even offer health care to their retirees.

This is a very notable difference and it is one of those details that usually must be dug out to have a fair comparison of apples-to-apples when talking about DB vs DC plans. Again, we bring your attention to the fact that Texas is different than most other states and we encourage serious students of pension dynamics to make sure they don’t make the mistake of comparing apples to oranges.

We’ll take a look at a few more notes with Mr. Snell in future blog posts. – Max Patterson

Carrot and Stick Treatments of Pension Sponsors Not Working, Analyst Says

We have been contending that many of the pension systems in an underfunded condition are so because their city or state sponsor did not make their contributions in a complete and timely fashion. Their sponsor’s delays have reached their day of reckoning in many places.

The State of Texas has been pretty good at setting aside enough money to fund its employees’ pensions, but not perfect. For example, over the last six years Texas has fully funded the actuarial required contributions (ARC) for its Teacher’s Retirement Systems twice, and contributed 85% of its requirement in the other four years. Clearly, this puts the pension in jeopardy of achieving comfortable rates for its funded status, but it’s much better than other states that tend to only contribute half – or less. Other states’ pensions with funded status in the 20-40 range are increasingly becoming a national wake-up call for make-up contributions that need to be made diligently, and fast. The sad thing is that the politicians who had engineered the shortfalls don’t suffer because of it. They used the money that was available to them to pay for other constituency services, the type that gets them re-elected. But the retirees who contributed their life to public service and promises of a secure retirement (many without Social Security) suffer anxiety in seeing the topics of their retirement benefits get bandied about as a political football.

Well, it’s time the engineers of the shortfalls had their comeuppance too, according to an actuary who follows these matters closely.

Pension analyst Chris Tobes has an interesting take on the reasons that public pensions have experienced underfunding, as well as the serious shortcoming of the current systems of “checks and balances” as they could be said to exist in the pension world. Here’s a couple of paragraphs from his most recent paper, “Did the SEC and S&P let 14 states destroy their Pensions?”:

14 States have broken balanced budget clauses of their own constitutions in addition to defying the rules of pension mathematics. According to data from the Center for Retirement Studies at Boston College: Illinois, Kentucky, Oklahoma, Rhode Island, Connecticut, Colorado, Alaska, Minnesota, New Jersey, Kansas, New Mexico, Pennsylvania, Maryland, and Missouri have made partial payments over the past 7 years. In my attachment you will see how they have made the equivalent of half the mortgage payment for 10 years which has been the main driver taking their funding ratios into the 20,30s and 40s, and proves these are self-inflicted wounds. Even in bull markets some of these funds shrink in assets because of negative cash flows.

I contend that ratings agencies (S&P and Moody’s and Fitch) and the SEC are enablers by allowing this partial payment culture to exist and not punishing states and localities enough for not making their ARC. If States had paid half their municipal coupons the rating agencies would have downgraded them, but they looked the other way with pensions. The SEC caught New Jersey red-handed in 2010 but only gave them a slap on the wrist.

First, note that Texas is not among the states Tobes mentions.

Next, note that Tobes makes the case that those other states’ credit agency assigned ratings should have suffered when the state sponsors put their pension obligations on a non-existent credit card – and didn’t disclose that to investors. If a state only pays half of what is needed to keep a system sound, there will be a day of reckoning, and those half-payments weren’t appropriately calculated into the rating that affects a state’s ability to borrow money. Credit ratings affect borrowing costs. If the credit agencies had done their job in adjusting their ratings to the unfunded liabilities, the sponsors may have more diligently balanced their pension obligations with expenditures for current services. If the credit ratings had been downgraded appropriately, the markets would have been able to send signals to investors about the risks involved and appropriate bond pricing that continues to go higher may have likely woken sleeping taxpayers.

Tobes’ analysis is interesting because it demonstrates the disparities between private and public sector pensions. Private sector pension sponsors would have suffered immensely under ERISA laws designed to monitor their ongoing funding. No such monitoring exists for public sector sponsors, except through the credit rating agencies. They need to do their job so that more responsible behavior can be achieved throughout the system, even by politicians. – Max Patterson

NCPERS Confirms: Change Happens at Public Sector Employee Pensions

A few weeks back we received a phone call from a Texas newspaper journalist doing his work on a budget battle kicking up on his city council beat. The city had notified its public employees’ pension that it would be tinkering around the edges with a few changes needed to help its budget balance. The changes would mostly affect the benefits of future employees who might receive slightly less of a promised benefit. It seemed apparent to us that the reporter was sensing a dust-up that could get ugly. The uglier the better of course, so that the story might gain front page billing.

We felt bad about it, but we felt that we rained on his parade a bit when we told him that the situation in his city is not uncommon. This type of city budget balancing dance occurs in one form or another, in one city or another, at different times of every year across the state of Texas.

From our statewide viewpoint, as the representative of pensions across Texas, we see these sorts of processes happen all the time. Fundamentally they are all the same: the system is set up so that all cities in Texas collaborate in one way or another with their public employee pensions to make things work from a budget balancing viewpoint. The only thing that makes them different is the degree of acrimony that one or two people typically bring to that process.

This is the Texas system, where decisions about cities’ abilities to fund their employees retirement are continually adjusted at the local level so that they don’t break the budget, or absorb funding for other city services. We don’t want to appear Pollyannaish here though: some cities do get out of balance for different reasons and that causes acrimony. But by and large cities try to buy the highest quality employees they can afford, with differing levels of current and future benefits, within their budgets and workable, collaborative processes. That’s the Texas system.

Which brings us to the main point of this blog. The same thing seems to be happening across the United States according to a recent study conducted by the National Conference on Public Employee Retirement Systems and Cobalt Community Research. The NCPERS 2012 Fund Membership Study tabulated responses from 146 state and local pensions administering 7.5 million retired memberships and managing assets of more than $1.2 trillion.

The study’s respondents indicate that they are continuing to respond to a slow economy with changes that seek “to ensure long-term sustainability for their stakeholders,” meaning the retirees and the cities that sponsor their retirements. Here’s the tell-tale paragraph:

Several areas that showed increased activity over the 2011 study include: increased employee contributions, increased age/service requirements, reduced wage inflation assumption, tightened use of overtime in the calculation of a benefit, made benefit enhancements more difficult, reduced the multiplier, shortened the amortization period...

If you believe the critics of defined benefit plans, and you shouldn’t, you would think that public employees are hell-bent on keeping their current levels of benefits at all costs, even if they drive their city to the poorhouse.

Sure, there may be a few places in the country and in Texas where certain dynamics have evolved to put cities and their employees at odds over expected benefits. But those are the exceptions and not the rule. They get the headlines.

Most plans seek mutually beneficial ground to mete out benefits according to a city’s ability to pay them – and to allow a city’s residents to enjoy the longevity of qualified, experiences professionals working mostly thankless jobs. – Max Patterson

Analysts at American Enterprise Institute, Heritage Foundation Still Selling Skewed Statistics

We’ve written previously about Andrew Biggs, an analyst at the American Enterprise Institute, and Jason Richwine, an analyst at the Heritage Foundation, who cover public employee pension issues. Their position is basically this: if taxpayers can’t have defined benefit plans from their private sector employers, then public employees shouldn’t either, damn the consequences of having employees in both sectors retiring without adequate nest eggs.

Our previous blog focused on how they used the historic market tumult in 2008-09 to negatively position pension systems’ funded status. Their “sky is falling” approach to public policy issues is unbecoming and counter-productive to good-faith debate, to say the least. But nonetheless they were back at it recently, utilizing their “pension envy” tactic in this way:

For example, a typical Illinois school teacher who worked for 30 to 34 years would retire with a guaranteed pension benefit of $60,756 a year, an income higher than 95 percent of Illinois retirees. To achieve the same level of guaranteed retirement benefits, a private sector worker with the same salary would need to save roughly 45 percent of his salary in a 401(k). The difference in pension benefits is more than enough to push public sector compensation above private levels.

For one thing, the example they use is Illinois, not Texas. Average defined benefit plans for Texas’ retired teachers, like most other public employees, is more typically in the $20-30,000 range. Illinois is Illinois. National analysts need to keep that in perspective. But they like to use the anomaly and the exception as example of the rule.

Then, in the next paragraph, they point out exactly what we have been saying, in the bold emphasis:

Our own work simply points out that a guaranteed benefit is more valuable than a risky one. Public employees with traditional pensions receive guaranteed benefits. Private sector workers with 401(k) plans, if they wish to receive benefits at around the same dollar level as public employees, have to take significant investment risk.

We agree with Biggs and Richwine on this point: private employees should not have to be their own investment managers in 401(k)s. It’s too risky and it’s not working for them. We disagree with them on the point that if 401(k)s are bad fror private sector employees then they should be forced onto public sector employees.

The correct policy debate would be one that addresses the causes of that situation, that defined benefit plans have become impractical for private sector employers to use. The wrong policy debate is the one that Biggs and Richwine want, to force public employees into bad retirement vehicles that already exist for private sector employees.

Biggs and Richwine really fly off the handle with this paragraph:

Public sector pensions generally assume 8 percent returns on investments, and they calculate pension contributions based on that assumption. However, benefits to public employees are guaranteed even if the plan's investments fall short of 8 percent. What this means is that public employees as a group effectively are guaranteed 8 percent annual returns on both their own contributions and those made by their employer -- at a time when the guaranteed return on Treasury securities available to workers with 401(k) plans is only 2 percent to 3 percent. The difference in benefits payable at retirement can be huge.

This may be news to them, but public employees are not “guaranteed” 8 percent annual returns on contributions to their pension plan.

Instead, the actuaries for a pension system might use an 8 percent return to calculate the amounts that both the employer and employees would need to contribute to achieve a certain defined benefit once they retire.

Obviously that’s considerably different from a “guaranteed” amount. It’s telling that they don’t seem to draw this distinction.

Many systems aren’t generating 8 percent returns right now due to sluggish economies and difficult investing environments. As such, in Texas at least, it is increasingly common to see plan sponsors, their actuaries, and employees going back to the drawing board and define what makes the most sense for an assumed rate of return for a certain level of benefits. That is happening nearly everyday somewhere in Texas at local and state pensions for public employees. Together, the pension system participants work to agree on some level of benefit that is achievable and attractive for every one involved.This is the way things are supposed to work.

Once again, we’d ask you to view any analysis that come from Mr. Biggs and Mr. Richwine with a high degree of skepticism as they are often wrong on facts, or they skew sitautions to create a false sense of alarm to make their arguments. Regardless, they continue to fail to address or encourage discussion around the more meaningful reforms that should be occuring in private sector employees pensions. – Max Patterson

Sky Continues Not To Fall on Public Employee Pensions Around the Nation

The typical newspaper headline over the last few years has been about the failure of public employee pensions in certain cities and states to match their assets with their liabilities, meaning the benefits due to retirees. The doom-and-gloom headline would likely focus on one or two city or state plans that weren’t disciplined in funding their pensions on yearly basis, only to find themselves at some point potentially owing huge amounts for future retirement obligations they had made to people who’d dedicated their life to providing a public service.

The good news today is that we may see fewer of those sorts of headlines as cities and states do what they should to balance their books. And we are likely to see even fewer.

This week the Center for State & Local Government Excellence released a new report, “The Funding of State and Local Pensions: 2011-2015,” showing that public pension plans funded ratios slipped a modest 1 percent in 2011, to 75%, reflecting actuarial smoothing caused by a reduction in the growth rate of liabilities. In other words, as cities and states have cut back on hiring, and reformulated their plans to match income with outlays, the decline in funded ratio has declined at systems around the nation.

They didn’t say this, but I will: the system is working in terms of people across the nation coming to the realization that adjustments needed to be made to reflect a slow growth economy.

The study projects continued steadiness, and then improvements in funded status, as the economy and stock markets return to more ‘normal’ growth. Here’s the conclusion from their report:

The funded status of state and local pensions has been front page news since the collapse of financial markets in 2008. At the time, it was clear that the funded ratios of public plans would continue to decline as actuaries gradually averaged in the losses. Indeed, the funded status for 2011 was 75 percent compared to 76 percent in 2010. The decline was mitigated somewhat by much slower liability growth.

The reason that the growth in liabilities has slowed is that states and localities have laid off some workers, frozen salaries, and reduced or suspended COLAs. Because many of these changes are one-shot, liability growth is likely to pick up somewhat in coming years. Even if the liability growth rate picks up, however, phasing out years of low returns in the actuarial averaging process should lead to an increase in assets under our “most likely” stock market scenario. Specifically, if the stock market increases at about its historical rate over the next four years, the funded ratio for state and local plans should increase gradually to 82 percent in 2015.

The critics of defined benefit plans like to use scare tactics in their campaigns against public employee pensions, but the general public should see this report as continuing evidence that the “crisis” is whipped up and manufactured. Leave the system to work itself out. 

The chart below shows the funded status of Texas’ biggest state pension systems, and is available on page 12 of the report. --- Max Patterson

NIRS Study: Pensions' Benefits Create Economic Activity

Just like there are two sides to every coin there are two sides to every pension dollar. All too often we get caught up in the details of one side of the pension equation – the contributions that the taxpayer-as-employer makes to their city’s public employees’ retirement plan – and we lose sight of the other side.

If you are asking, “What other side?” you’ve demonstrated the point.

The other side is that the pension benefits are distributed to millions of people across the United States, and they do things with that money. For most pension recipients, it’s not much, probably averaging in the $1,500-3,000 per month range, but when spread out over millions of people it adds up to a significant additive to our economy.

To prove this, the National Institute on Retirement Security conducted a major study of the after-effects of pensions, when the benefits are distributed to retirees. The NIRS study offers some very significant findings that most people wouldn’t think about or know because of their focus on one side of the coin.

As such, I strongly recommend reading the NIRS report, Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures, which offers these findings for Texas:

• In 2009, 478,767 residents of Texas received a total of $10.2 billion in pension benefits from state and local pension plans.
• Their average pension benefit was $1,776 per month or a modest $21,318 per year. These benefits were for retired teachers, public safety personnel, and others who served the public during their working careers.
• 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. [emphasis added].
• Retiree expenditures stemming from state and local pension plan benefits supported 128,204 jobs in the state. This represents 1.1 % of Texas’ labor force.
• The total income to state residents supported by pension expenditures was $6.0 billion.
• Retirees’ expenditures from these benefits supported a total of $20.2 billion in total economic output in and $11.2 billion in value added in the state.
• Nationally, state and local pensions support 2.9 million jobs and $443 billion in economic activity.

We highlighted the 63.04% of pension benefits that come from investment earnings because that really speaks to the success of the hardworking pension board trustees, many of whom are TEXPERS members, who have played a part in growing those investment earnings over the years across our great state. Their contribution to that phenomenal statistic should not go unnoticed. Every dollar of investment return is a dollar that taxpayers or public employees need not provide.

It is our hope that TEXPERS played a part in that equation, having fulfilled our mission over 23 years to provide pension investment and benefits administration education to our members. – Max Patterson

ALEC Model Legislation for Pension Benefits is Already Mostly in Place in Texas

The American Legislative Exchange Council has been identified as an organization that creates ‘model’ legislation on behalf of its corporate sponsors, to help them pursue their business goals. That’s a standard operating procedure in our system of government, but it’s always nice to know the origin of such proposals. We suggest you see our earlier blog on this topic, where we posit that Wall Street companies are likely sponsors of ALEC, encouraging them to support and promote defined contribution plans, like 401(k)s, as the best retirement system for employees. They would benefit from the fees associated with money management. Those fees are now ‘saved’ by local pensions that elect volunteers to manage their members funds, with the help of consultants and various money managers.

Of great interest to us are the ‘model’ principles ALEC is alleged to have crafted to “solve the funding crises in state and local defined benefit pension and other post-employment benefit plans for public employees.” The solution, according to ALEC, is that “defined benefit plans be replaced by defined contribution plans.”

[You can find this on www.AlecExposed.org, a site that collects all the legislation pushed by ALEC. On the home page, click “Worker and Consumer Rights,” and then the link for the zip file for “Worker’s rights, trade, pension and privatization bills.” When you do that, you will find some 110+ bills that relate to those areas, including the ALEC statement of principles on benefits.]

A few observations about this ALEC ‘statement of principles’:

1) The statement is based on the premise that all cities and states face ‘funding crises.’ This simply isn’t true of all government entities. Many run themselves well, without accumulating a lot of debt. Others don’t.

2) The Texas Pension Review Board requires Texas systems to provide several measures of their health, including their funded ratios and their amortization periods. Unfunded liabilities are not debts. That would be like considering the car you want to buy five years from now a part of your current debt load. A lot of things can happen in five years. You may change the type of car you want, you may get a better job with more disposable income available to you, or you may decide to postpone buying. There’s a reason that the pension liabilities aren’t considered part of a city’s debt structure.

3) In many Texas cities, like the case in Houston, debt obligations to fund pension liabilities already are presented to voters.

4) The approval of the Texas state legislature is required to approve any changes to the retirement benefits of each local systems plans.

5) Most Texas systems provide for sharing arrangements of contributions to the retirement systems.

All of the above address the principles suggested by ALEC in their statement of principles. In one sense, Texas is already in compliance with the ALEC principles.

However, none of these principles prove the need for defined contribution plans as the better option for taxpayers.

In fact, our studies show that taxpayers receive the most bang for their buck by continuing to support defined benefit plans in their cities. Our studies used actual data and did not even incorporate the additional training costs that are involved with staff turnover. Defined benefit plans are the most effective in attracting and retaining great employees over time. We shudder to think what would happen to budgets if young firefighters and policemen become enticed to pursue higher paying jobs as they grow into their 30s and 40s, with families to feed and tend. The only reason most forgo opportunities for more pay is their pension plan. Their defined benefit pension plan, that is. We wish we would see ALEC consider more of those concerns in their statements of principles.

In sum, many of the ALEC principles are already in use in Texas, but their core proposal, that DC plans replace DB plans, just simply isn’t supported by any facts. It’s like saying that 2+2=4, but we then need to divide by 0. We don’t. – Max Patterson

Is ALEC Behind Efforts to Disrupt Defined Benefit Pensions on Behalf of its Wall Street Sponsors?

As the years have passed we couldn’t help but notice how all the organizations against Defined Benefit plans for public employees use arguments that closely resemble each other. The arguments don’t usually attach any specific empirical evidence, only generalized ‘good for the goose, good for the gander’ or ‘governments spend too much’ arguments. After a little digging, we now think we know why.

Our break in the case came with recent article by Bloomberg about the American Legislative Exchange Council and how it operates.

The article tells how ALEC creates ‘model’ bills on behalf of its industry-backers and pushes those legislative efforts out to other like-minded organizations for various insertions into law at local, state and federal levels. In itself, this mode of operations is not uncommon. It’s surely a tactic used by other groups that push their agendas through various legislative means.

But in this case it’s good to know where the legislation is coming from, especially because the ultimate benefactors of a move from defined benefit to defined contribution plans would be the Wall Street firms that would administer the assets of public sector employees’ retirement accounts. They would be the ones collecting the management fees that are typically calculated yearly, as part of an assets under management calculation for mutual funds. Indeed, every mutual fund investor knows to look at their selected funds’ admin fees, which ranges from 0.25-2 percent of their invested assets. That’s the yearly fee that the manager takes off the top, so to say, regardless of whether the mutual fund makes or losses money. A 10 percent return that you see may actually have been 11 percent without a 1 percent fee. A 10 percent loss would have been a 9 percent loss, except for the 1 percent fee.

The Bloomberg article noted that a few large corporations have been pulling back from their sponsorship of ALEC, but the full list of corporate sponsors is closely kept by the organization. It’s entirely possible – and indeed likely – that Wall Street corporations are sponsors of legislation to convert Defined Benefit plans to Defined Contribution plans. We can only speculate, but the combination of facts certainly lead us in that direction. – Max Patterson

Pension Review Board Recognizes Funding Achievement of Fire and Police Pension Fund of San Antonio

Regular readers of this blog are familiar with all the alarmist propaganda that the opponents of defined benefit plans gin up regarding the alleged underfunded status of pension systems. When a system and its city sponsors achieves above average funding levels, the opponents are silent.

Allow me to draw your attention to a San Antonio Business Journal article noting a recent finding of the Texas Pension Review Board about the Fire and Police Pension Fund of San Antonio.

In the SABJ story, the Fire and Police Pension Fund of San Antonio is recognized for its projected amortization period of 9.09 years, the second lowest among public pension funds in Texas, and the lowest among Texas pensions with more than $1 billion under management. An amortization period is also known as a funding period as it represents the length of time likely needed to eliminate a system’s unfunded liability based on current contributions from employees and active members. The state of Texas’ Pension Review Board guidelines say that funding periods should never exceed 40 years and suggest that healthy ranges are 25-30 years.

I know the Executive Director and Board members at the Fire and Police Pension Fund of San Antonio and I have nothing but the highest of praise for the dedicated effort that they exert to maintain a healthy pension fund on behalf of their active and retired members, and the taxpayers of their city.

The news story also correctly notes that police and fire fighters do not contribute to Social Security and don’t receive those benefits. That means the city of San Antonio contributes only to the pension system, not to Social Security “accounts” for those public sector employees. – Max Patterson

Good Article on Dallas Pension Fund; Realistic Article on Teachers’ System

There have been two really excellent articles in the news recently and we thought our blog readers would be interested in knowing about them.

First, please take a moment to read a story in CIO (Chief Investment Officers) magazine about Cheryl Alston, the executive director of the Employees Retirement Fund of the City of Dallas, Texas. The story provides information on the superb investment returns that system has achieved over the last three years through wise stewardship of employees’ and taxpayers’ contributions to defined benefit pensions for municipal employees in Dallas. The story recounts how Cheryl works with her board to find conservative and contrarian investments to maintain their history of great returns:

Perhaps not surprising for a public plan is the size of Dallas’ investment staff. If there are two things that are almost universally true about public pensions in America, they are this: the sponsoring entity doesn’t pay what it has promised, and there are too few people managing the assets. Indeed, the Dallas investment staff can sit around a small table with room to spare. It doesn’t seem to bother the ever-sunny Alston, however. “For the $3 billion we do have, I lead an investment staff of three people—myself and two others,” she says. “We do all asset classes, and the knowledge of all asset classes is extremely helpful in the allocation process. We conduct all of our manager due diligence, along with Wilshire,”—the fund’s investment consulting firm—“but in the end it’s the staff kicking the tires ourselves to evaluate managers. It’s a quality staff accountable for results.”

The ERF in Dallas is certainly not an exception or anomaly in terms of great investment management achieved at systems across Texas, but we certainly want to recognize and give a shout-out to Cheryl and her team. Great work up there!

Which now brings us to another story about great fund management, just in different terms.

We’ve been made aware of an article appearing in the Texas Observer by Forrest Wilder, about Bill King’s targeting the Texas Teacher Retirement System and his assessment that there is crisis imminent when there is none. As Wilder says:

The system does have about $24 billion in unfunded liabilities. What does that mean for the system’s long-term viability? Let’s look at TRS’ most recent report:

“Assuming the current contribution policy continues, the Pension Trust Fund has assets in place to make benefit payments through 2112.”

In other words, TRS should be able to pay all guaranteed benefits to teachers for the next century.

The article demonstrates how King is very worried about the state of Texas at some point possibly needing to increase its contribution from 6 percent to 8 percent to avoid insolvency decades from now, but not right now (and maybe never). Wilder says this:

“We’ve seen this movie before: Manufacture a crisis where there is none, scapegoat working people (even better if they work for the dread government), and under the guise of reform push through a plan that would never fly otherwise.

King wants to take way public employees’ guaranteed retirement benefit in favor of a defined-contribution, 401(k) approach subject to the vagaries of the stock market. This is destroy-the-village-to-save it logic. And it’s certainly not “conservative” in the classic sense of the word.

We are glad to see these types of stories appearing as they certainly provide balance to the sky-is-falling perspective of many opponents to defined benefit plans. – Max Patterson.

Austin American-Statesman Continues Coverage of Pension Issue

By virtue of its location in the state’s capitol, the Austin American-Statesman has been doing great work on covering issues that would affect all public sector employees in Texas. We greatly appreciate their interest in these issues.

To wit, the AAS editors last week accepted and ran an opinion piece I wrote addressing points made in a Wall Street Journal article that advocated for requiring public employees to abandon defined benefit plans for defined contribution plans.

As I note in my article, it’s becoming increasingly apparent that defined contribution plans aren’t doing what they should to increase employees’ retirement wealth. It’s my hope that a shared public policy goal would be reducing the amount of public funding needed by people once they retire.

We could do this by working to ensure that sound retirement plans are in place for all workers, regardless of whether they are in private or sector employment. Right now that would require making changes to regulations for defined benefit plans in the private sector to create an incentive for business to provide meaningful retirement benefits for their employees. – Max Patterson

Houston Pension Debate Continues; Other Texas Cities Look On

Debate is good and we’re glad to see that Houston’s leaders continue their constructive engagements on the subject of public employee pensions, their funding, and their role in a well-governed city. But we need to remind our readers that what happens in Houston should stay in Houston.

Here’s what’s going on and why we’re concerned that some in Houston are trying to spread their misery:

The latest volleys started with an op-ed by Bill King, appearing in the Houston Chronicle on Feb. 4, explaining his formation of the group Texans for Public Pension Reform, as well as his reason for resigning, recently, from that group’s Board of Directors. King, a Houston attorney and former mayor of Kemah, has written voluminously on the subject of Houston’s budget problems and its penchant for issuing debt to cover both city operational expenses and pension promises.

We should note that King’s concerns about the city of Houston’s outstanding debt obligations is a real, and serious, issue with which the city is coming to terms. But King’s ongoing campaign about public employee pensions in Houston and other places in the state has been interpreted by many as evidence that he wants to run for another political office, possibly a statewide position. He said his resignation from the Board of the group he helped form reflected his acknowledgement of critics’ intuition.

A few days after King’s op-ed appeared, the editors at the Houston Chronicle weighed in with their own views, in “Fixing the pension mess.” The editors did a great job of confining their comments to the situation in Houston, which was the right thing to do. Houston’s problem is Houston’s problem. It’s not the state’s problem. It’s not a Houston-sized problem in the other Texas cities. It’s not Abilene’s problem, or Corpus Christi’s problem, or El Paso’s problem.  Across Texas, in situations where benefits have had to be resized according to revised projections of city finances, that has indeed occurred, in Austin, Dallas, Fort Worth, San Antonio and other cities in recent years.

But unfortunately King has been casting his attacks on pensions with broad brushes, projecting his concern about the Texas Teacher’s Retirement System (TRS) and Houston’s situation onto other Texas statewide pensions and other Texas cities, without really knowing what’s going on outside of Harris County. Note that the group he helped form with the Greater Houston Partnership was not named “Houstonians for Public Pension Reform.”

Let’s go back to King’s op-ed, where he uses the claim that the Texas Teacher Retirement system is underfunded to then say that that is what is happening in “local governments,” with Houston being his prime, and only, example:

                                      

Some of the plans are also becoming an intolerable burden on local governments. In Houston, the contributions required to fund its three pensions plans grew from $100 million in 2000 to $220 million in 2010. The actuary reports on Houston's plans project that the contribution will need to be $500 million in 2020. At that time, that will represent about half of the city's property tax collections.

There are many ways to address this problem. Private industry did so 20 to 30 years ago, mostly by freezing their existing defined-benefit plans and converting future pension benefits to defined-contribution plans. There are other ways to address the problem, but continuing on the current path is not an option. It will result in a financial disaster for everyone.

Many people are starting to pick up on King’s broad stroke attacks and his one-size-fits-all assertion that defined contribution plans are the answer (because they are not).

Former Texas firefighter Laura Matau provided King and Chronicle readers with her own op-ed, on February 9, offering the view that defined benefit plans have worked, and will continue to work, for public employees across Texas.

Public defined-benefit plans have been a Texas institution for 70 years. More than 2 million working, active and retired Texans participate in these plans, with combined net assets of about $170 billion. Defined-benefit plans provide retirement security for public employees who devote their lives to educating our children, protecting our homes, keeping our neighborhoods and streets safe and providing other critical services that enrich the quality of all our lives.

Matau concludes by reminding Houstonians that strong retirement plans attract high caliber people to public service and the states and cities should keep the promises they’ve made to the people they hired.

Then, yesterday, in a newsletter note to AFL-CIO members in Texas, Houston Independent School District Superintendent Gayle Fallon came to the defense of the Teacher Retirement System and other systems by providing statistics on TRS’ historically high rates of return and its similarities to the Social Security contribution rates. Teachers do not pay into Social Security so they don’t receive any SS benefits in retirement. And Fallon offered her own theory on why there is this effort by King and others to convert defined benefit plans to defined contribution plans, like 401(k)s:

“There is over $170 billion sitting in public pension funds in Texas. Unfortunately those funds have the attention of greedy investors and hedge fund operators who salivate at the thought of converting public pensions into 401(k)s and collecting huge administrative fees.”

All of this back and forth aside, our point here is simple. Texans should not be confused by what is occurring in Houston. Yes, Houston has a problem. Texas, and all its local pension systems, do not.

King’s understanding of how local pensions operate and perform is still growing, as evidenced by the following statement in his op-ed:

That does not mean that we should do away with pension plans altogether. You may have seen an article that appeared in the Austin American-Statesman where I seemed to take that position. The Statesman quoted me as saying, "Texas needs to get the hell out of this (pension) business completely." However, the quote was taken out of context. At the time the reporter and I were talking about the state laws that mandate pension plans for many cities in Texas. I was making the point that I thought the state should stop dictating pension plans for local governments.

In fact, Texas does not “dictate” how pension plans operate for local governments. Someone should tell that to Mr. King.

All cities have choices about how they run their systems. Most let the Texas Municipal Retirement System invest their money and run their benefit programs for their employees, but the benefit levels and contributions are decided by the cities themselves. Those Texas cities that run their own investments and benefits administration – TEXPERS members -- have sought to codify their plans in Texas law to protect the continuity of their plans from potentially abrupt changes in city administration’s after elections.  But codification in statute is entirely an effort to preserve their individual plans through a 3^rd party. That is not the state’s ‘dictating’ plans onto cities, as Mr. King seems to think.  

It’s our hope Mr. King’s comprehension of these issues continues and that Texans, as strong independent thinkers, will take in these and other facts about a public employee pension system that has a proven track record of working well for public employees and taxpayers. --- Max Patterson