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Post by doctorwho on Mar 10, 2010 13:44:52 GMT -6
www.nj.com/news/index.ssf/2010/03/nj_gov_chris_christie_is_bound.htmlGov. Chris Christie says he is bound to 7 percent pay raise, no layoffs in union deal
By Claire Heininger/Statehouse Bureau
March 09, 2010, 3:00PM
Gov. Chris Christie said today that he is bound to follow a controversial deal giving unionized state workers a 7 percent pay raise in the upcoming fiscal year, and barring him from ordering layoffs before January 2011.
Christie said he was "wrong" in previously claiming that he would not be "bound by" the contract struck between unions and former Gov. Jon Corzine last June. The agreement called for 10 unpaid furlough days while deferring a wage increase in exchange for a no-layoff pledge through December 2010. It means two 3.5 percent wage increases are scheduled to take effect in the upcoming budget year, one in July and one in January.
Layoffs or furloughs before January 2011 would trigger that raise right away.
"My lawyers have now told me that I am bound by that deal," the Republican governor said after a meeting with local officials here. "If I could stop it, I would, except the previous governor tied my hands ... I cannot lay off one state worker, I cannot furlough a state worker until January of 2011. That was a great election-year deal he made for us. It is an exquisite pair of handcuffs he put on his successor, but I guess he didn't think he was going to have a successor."
Christie did leave the door open to "the exercise of executive authority" to address the deal in the upcoming budget, which he will present March 16. "I'm going to have to come up with some other ingenious ways to try to accomplish what I need to accomplish," he said. "We're going to do what we need to do as best we can, but I cannot just disregard the law, either." Soon after he was elected in November, Christie said that among the options he was considering was invoking the emergency powers conferred upon him by the state Disaster Control Act. The law gives the governor vast decision-making authority over resources and finances, including the ability to suspend the rules governing state worker layoffs. During a speech last month on how he would balance the current budget that runs through June 30, Christie said a fiscal emergency exists in New Jersey but did not actually invoke the Disaster Control Act. Today, Christie said state employees' salary increases would cost about $332 million in the upcoming budget, which has an $11.2 billion deficit. He said their health benefit costs are also "skyrocketing" and will increase by $288 million in the upcoming budget. Unionized state workers contribute 1.5 percent of their annual salary to their health benefits. Bob Master, a spokesman for the largest state worker union, the Communications Workers of America, welcomed the shift. “We’re pleased that the Governor now acknowledges that he is bound to honor last year’s agreement under which state workers made significant financial sacrifices in exchange for a measure of job security," Master said. "Over the last three years state workers have agreed to $450 million in concessions to help the state address its fiscal problems. Now it’s time for the governor to begin a dialogue with state worker unions about how best to address the state’s fiscal problems in a way that preserves vital services for New Jersey. We have asked to sit down with him, and are disappointed that he has not even responded to our offer.” Christie has made reining in public employee costs at all levels of government a key part of his agenda during his first seven weeks in office. Today, he said he regrets the state can't lead the way for towns and school boards on controlling employee costs. "The state's not showing leadership there. We're absolutely not," he said. "But I didn't make that deal, Jon Corzine did." Corzine defended the deal against Christie's criticism throughout last year's campaign, with the incumbent Democrat saying it protected jobs and saved the state $300 million to $400 million during an economic crisis. Corzine spokesman Joshua Zeitz today said most of those savings have already been realized, and Christie would only lose out on about $66 million in deferred raises if he opted for layoffs in July. "Chris Christie should be thanking Jon Corzine for saving him money," Zeitz said. "It's not Jon Corzine's fault that he doesn't understand the job ... He should try negotiating." too many elected officials are able to skirt the laws and manipulate them-- it's going to take a hell of a crisis to change this- but enough is freak'n enough - these people need to be in jail |
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Post by macrockett on Mar 12, 2010 11:12:55 GMT -6
www.pionline.com/apps/pbcs.dll/article?AID=/20100311/DAILYREG/100319971&template=printartIllinois gubernatorial hopeful wants shift to DC plans
By Barry B. Burr
Source: Pensions & Investments
Date: March 11, 2010
Illinois' five state defined benefit plans would be closed to new state employees who would be put into new defined contribution plans under a bill by state Sen. Bill Brady, Republican nominee for governor.
Current state employees would be allowed to move to the new defined contribution plans, forgoing their continued participation in the DB plans, according to another bill sponsored by Mr. Brady.
Both bills were referred March 8 to the Senate Assignments Committee.
The defined contribution plans' investments would be participant directed, according to the bills. Funding for the plans would come from a combination of contributions from state employers and participants.
The new defined contribution plans' assets, including selection of investment managers, would be overseen by the $32 billion Illinois Teachers' Retirement System, Springfield; and the $9.4 billion Illinois State Board of Investment, Chicago, which now has oversight of the Illinois State Employees' Retirement System, the Illinois Judges' Retirement System and the Illinois General Assembly Retirement System.
Illinois State Universities Retirement System, Champaign, would place new employees in its existing $649 million 401(a) plan; participants now have a choice between that DC plan and SURS' $12.56 billion defined benefit plan.
Mr. Brady couldn't be reached for comment. A bill introduced by Rep. Mike Fortner would direct contributions applied to new state employees' annual pay over $106,000 to new DC plans administered by the existing state systems, while the amount of pay below that level for new workers would continue to apply to the state's existing defined benefit plans. The House Personnel and Pensions Committee has scheduled a hearing on his bill today, Mr. Fortner said. Now “there is nothing to cap the income exposure to the defined benefit systems,” Mr. Fortner said. Mr. Fortner said he is working on quantifying the cost saving to the state his bill would provide, but said it would reduce the state's overall pension contributions. A provision of Mr. Fortner's bill would bar all new state employees who work under contracts and all new politically appointed employees from participating in the state defined benefit systems and place them into the new defined contribution plans. The bill “strikes a good balance between line workers and … high-wage employees,” Mr. Fortner said. Mr. Fortner said he opposes the Brady bills because under them the existing state defined benefit plans would lose all contributions from new employees, which “could cause assets to get dangerously low … and put them in jeopardy.” Gov. Pat Quinn on March 10 proposed cutting pension benefits for newly hired state employees, while keeping them in the state's defined benefit systems. Mr. Quinn, appointed in 2009 to replace impeached Gov. Rod Blagojevich, is the Democratic nominee for governor.-------------------------------------------------------------------------- Don't forget to mention that $1.7 million contribution to Quinn's campaign by SEIU www.seiu.org/
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Post by macrockett on Mar 12, 2010 16:14:15 GMT -6
online.wsj.com/article/SB10001424052748704187204575101461287544470.htmlwww.cnbc.com/id/15840232?video=1438398131&play=1The Wall Street Journal
REVIEW & OUTLOOK
MARCH 10, 2010
California's College Dreamers
When will students figure out the politicians have sold them out?
Hundreds of University of California students rallied against a 32% tuition hike last week. Let's hope their future employers get a better work product. With just a little research, the students could have discovered that compensation packages won from the state by unions were a big reason for the hike.
Last year, the state cut funding to the 10-campus system to $2.6 billion from $3.25 billion. To make up for the reduction in state funding, the UC Board of Regents increased tuition to $10,300, about triple 1999's cost.Understandably, students have gone wild. The UC system is supposed to offer low- and middle-income students a cheaper alternative to a private college education. Now a year at a UC school can cost students as much as at many private schools.
Who's to blame? UC President Mark Yudof rightly notes he had no other means of closing the university's budget gap. The university used $300 million in reserves last year and cut staff salaries by furloughing them between 11 and 26 days this year. Governor Arnold Schwarzenegger says "we've done everything we could, but the bottom line is it's not enough. We need to put pressure on the legislature not only this year in a year of crisis, but in the future."
The California legislature? Good luck with that. In 1999, the Democratic legislature ran a reckless gamble that makes Wall Street's bankers look cautious. At the top of a bull market, they assumed their investment returns would grow at a 8.25% rate in perpetuity—equivalent to assuming that the Dow would reach 25,000 by 2009—and enacted a huge pension boon for public-safety and industrial unions.
The bill refigured the compensation formula for pension benefits of all public-safety employees who retired on or after January 1, 2000. It let firefighters retire at age 50 and receive 3% of their final year's compensation times the number of years they worked. If a firefighter started working at the age of 20, he could retire at 50 and earn 90% of his final salary, in perpetuity. One San Ramon Valley fire chief's yearly pension amounted to $284,000—more than his $221,000 annual salary.
In 2002, the state legislature further extended benefits to many nonsafety classifications, such as milk and billboard inspectors. More than 15,000 public employees have retired with annual pensions greater than $100,000. Who needs college when you can get a state job and make out like that?
In the last decade, government worker pension costs (not including health care) have risen to $3 billion from $150 million, a 2,000% jump, while state revenues have increased by 24%. Because the stock market didn't grow the way the legislature predicted in 1999, the only way to cover the skyrocketing costs of these defined-benefit pension plans has been to cut other programs (and increase taxes). This year alone $3 billion was diverted from other programs to fund pensions, including more than $800 million from the UC system. It is becoming clear that in the most strapped liberal states there's a pecking order: Unions get the lifeboats, and everyone else gets thrown over the side. Sorry, kids.Get ready for more. The governor's office projects that over the next decade the annual taxpayer contributions to retiree pensions and health care will grow to $15 billion from $5.5 billion, and that's assuming the stock market doubles every 10 years. With unfunded pension and health-care liabilities totaling more than $122 billion, California will continue chopping at higher-ed.Mr. Schwarzenegger has routinely called for pension reform, but the Democratic legislature has tossed aside the Terminator like a paper doll. Last year, he proposed rescinding the lucrative pension pay-off for new employees, which he estimated would reduce pension pay-outs by $74 billion and health-care benefits by $19 billion through 2040. More recently, he called for doubling state worker contributions to their pensions to 10% from the current 5% of their pay. But these propositions have little traction in the legislature.California has a governor's race on, and the candidates are semi-mum on this catastrophe. Democratic candidate Jerry Brown has supported modifying public employee benefits but hasn't offered specific proposals and opposes defined contribution plans. Republican Meg Whitman supports increasing the retirement age to 65 from 55 and asking employees to contribute more to their benefits, but she won't support a reform ballot measure for fear it would drive up union turn-out in November.Memo to marching students: The governor can't save you. You guys need a new legislature. This one is selling you out. Organize an opposition and vote them out in November. Plan B is quit school and become a state billboard inspector. --------------------------------------------------------------------------------- Imo, the same thing should happen in Illinois
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Post by macrockett on Mar 13, 2010 0:08:39 GMT -6
I came across a paper discussing unfunded pension liabilities of the states, by some professors at the Kellogg School of Management, released Aug 13, 2009. www.kellogg.northwestern.edu/faculty/rauh/research/jep_20090813.pdfA few excerpts of relevance: As of December 2008, state governments had approximately $1.94 trillion set aside in pension funds. We begin this article by discussing the true economic funding of state public pension plans. Using market-based discount rates that reflect the risk profile of the pension liabilities, we calculate that the present value of the already-promised pension liabilities of the 50 U.S. states amount to $5.17 trillion, assuming that states cannot default on pension benefits that workers have already earned. Net of the $1.94 trillion in assets, these pensions are underfunded by $3.23 trillion. This “pension debt” dwarfs the states’ publicly traded debt of $0.94 trillion. We show that even before the market collapse of 2008, the system was economically severely underfunded, even though public actuarial reports presented the plans’ funding status in a more favorable light. We collected data on the 116 major pension plans sponsored by the 50 U.S. states from their Comprehensive Annual Financial Reports. Total liabilities stated in the plans' annual reports were $2.81 trillion as of 2007, and we call this the "stated liability". We estimate that when all 2008 reports are in, the total stated liability will be $2.98 trillion as of 2008 Most state pension funds use an 8 percent discount rate for converting their expected future pension payments into a present value, and there is very little variation in discount rates across states. The use of 8 percent appears to be a rule of thumb, but it does not have a valid economic motivation. Let's begin by considering what the appropriate discount rate should be. state constitutions in many cases provide explicit guarantees that public pension liabilities will be met in full (Brown and Wilcox, 2009). Second, state employees are a powerful constituency, making it hard to imagine that their already-promised benefits would be impaired. Third, the federal government might well bail out any state that threatened not to pay already-promised pensions to state workers. In practice, Accumulated Benefit Obligation pension liabilities are probably the most senior of all unsecured state debt. Standard financial theory suggests that financial streams of payment should be discounted at a rate that reflects their risk, and in particular their covariance with priced risks. In the case of state pension funds, the "risk" is the level of certainty as to whether certain payments will need to be made. From this point of view, the right discount rate for Accumulated Benefit Obligation pension liabilities is not 8 percent, a rate which implicitly assumes a high covariance with the market, but rather a risk-free interest rate, like the interest rate on Treasury bills and bonds. How much difference does it make if states used a risk-free rate, instead of the typical 8 percent, to discount future pension liabilities? We then use interest rates on Treasury securities as of January 2009 to discount the project cash flows implied by Accumulated Benefit Obligation pension promises. We find that total liabilities were $5.17 trillion as of the end of 2008, implying that the underfunding in state pension plans net of the $1.94 trillion in assets is $3.23 trillion. The $3.23 trillion of unfunded pension-related debt can also be expressed on a perparticipant and per-taxpayer basis. There are approximately 20 million individuals who have earned benefits under state pension plans as current or former employees, and are either receiving benefits now or expecting to receive them in the future. On average, the unfunded pension debt owed to each of these plan participants is therefore $161,500 (or $3.23 trillion divided by 20 million). Based on an approximate 2008 U.S. population of 304 million individuals, the pension underfunding works out to $10,625 for every man, woman and child in the U.S. The $3.23 trillion pension underfunding can also be thought of as amounting to around $21,500 for each of the approximately 150 million households in the U.S. that filed tax returns with the Internal Revenue Service in 2008. (The report is about 19 pages so this gives you a flavor of what is in there) --------------------------------------------------- I pulled the TRS stuff and Social Security to rework, due to errors. Turning to the TRS, trs.illinois.gov/subsections/general/pub13.pdf , As of June 30, 2009, there were 169,158 active members, 101,606 inactive members entitled to but not receiving benefits in TRS, and 94,424 annuitants and beneficiaries receiving benefits. The average age of an active full-time/part-time member was 42. The average age of an annuitant was 69. As of June 30, 2009, the average annual retirement annuity was $43,164. The teachers annuity is as follows: The retirement benefit is calculated by applying a statutory formula based on average salary and years of service. The salary used in the calculation is the average of the creditable earnings in the highest four consecutive years within the last 10 years of creditable service. For post-June 1998 service, this average salary is multiplied by 2.2 percent for each year of service. So, for example, there were approximately 118 teachers and admin at D204 that had salaries in excess of $100K per 2008 payroll. If all retired this year with 30 years service and at $100k avg salary for the past four years the calculation would be 100k x 30 x 2.2% = an annuity of $66000 per year. If they contributed 8% of their salary over that 30 years and for simplicity we use an average salary (over the employment period) of $65k x 8% x 30 years = an out of pocket contribution of $156k. Investment returns assumed by the pension actuaries in Illinois is 8.5%. Will finish this later... |
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Post by macrockett on Mar 14, 2010 15:18:34 GMT -6
www.chicagotribune.com/business/ct-biz-0314-confidential-taxes--20100314,0,5492346.column chicagotribune.com Pension pressure on taxpayers builds
Melissa Harris
CHICAGO CONFIDENTIAL
March 14, 2010An influential group of Chicago business leaders last week offered support for Gov. Pat Quinn's proposal to boost corporate taxes 21 percent. But there's a catch: They want major budget cuts, a cheaper pension plan for state workers and scaled-back health benefits for state retirees.The 95-member Civic Committee's increasingly aggressive campaign for public pension reform is sparking a war with the one of the few interests that could outflank them: the state's public employee unions.
As the committee of corporate CEOs sees it, the state needs to follow the private sector's lead and pare workers' benefits, rather than continue to use their pension funds like a "credit card," said Jim Tyree, a civic committee member and CEO of Mesirow Financial. As things stand, "those of us in business wouldn't live a day," he said.There is evidence that he's right. Some of the same forces pulling down Illinois' finances imploded General Motors, once the richest automaker in the world. In fact, the tale of GM's unraveling is a rather bad omen for Illinois.
Over time, GM and Illinois increased employee benefits. In 1970, when GM was flush and after a 67-day strike, the company gave workers the right to retire after 30 years with full benefits, according to Institutional Investor magazine, which recently analyzed the similarities between California's and GM's finances.But former Gov. Rod Blagojevich doled out generous packages even when times weren't so good. In 2004, the American Federation of State, County and Municipal Employees boasted that its four-year agreement was "the best multiyear wage settlement negotiated for state employees anywhere in the country this year," which was "especially impressive" because Illinois' deficit is "estimated between $2 billion and $4 billion," according to a union summary quoted by the Tribune. That agreement included a 13 percent raise over four years. The 2008 package for AFSCME's 37,000 members included a 15.25 percent wage increase over four years.
Bruce Rauner, a Civic Committee member and chairman of a large investment firm in Chicago, sees legislators as beholden to organized labor. And that's the reason corporations have replaced pensions with 401(k) plans, while governments have not.
"For political leaders, they are a major source of money, patronage, phone bank operators, feet on the street, putting up signs," Rauner said. "They're partisan warriors, and it's a massive army. There's not one policy or budget meeting in Springfield that someone from (a public employee) union is not in and heavily influencing. They are taking their taxpayer-funded salaries to support politicians who in turn give them hugely generous benefits."
Behind the scenes, two important pieces of accounting were taking place to avoid raising alarms.
In setting its budget, Illinois, like GM, assumed its pension assets would earn 8.5 percent every year. That was fine when the market was roaring. But Illinois pension assets lost 5 percent of their value in fiscal year 2008 and 21.9 percent in 2009, according to the state. So every year that returns dip below 8.5 percent, the state must find more revenue to fill the gap, which stood at $62.4 billion in June.
Meanwhile, GM and Illinois were substituting one kind of debt for another. In June 2003, GM sold $13 billion in corporate bonds with the proceeds going to its pension plans. So when GM filed for bankruptcy last year, it had $54 billion in borrowed money on its books, and the 2003 pension sale accounted for more than a quarter of it, according to Institutional Investor.
It seems as if GM took that move straight from Illinois' playbook. Earlier in June 2003, Illinois sold $10 billion worth of bonds to feed its pension plan in what was then, and may still be, the largest offering of its kind. As of Feb. 15, Illinois had an estimated $21.7 billion in borrowed money on its books. Although less than GM's total, the pension debt accounted for a greater portion, more than 60 percent, of it. Add the billions the General Assembly was supposed to be supplying the pension fund, but didn't to avoid making politically unpopular choices, it's easy to see why the prospect of Illinois defaulting is debated.
And the solutions aren't easy. As Institutional Investor points out, although federal laws put all sorts of requirements on public companies — to ensure they're doing what they promised their employees they would do — those rules don't apply to states. And not much can be done to existing employees because the courts generally perceive pension obligations as contractual.
Any move in that direction will generate a lawsuit, a spokesman for the Illinois Federation for Teachers wrote me via e-mail last week.
On top of that, firing workers won't undo the damage, as laid-off employees still have rights to pensions, depending on their length of service. (Case in point, GM had one employee for every 10 retirees.)
But the auto industry has come up with one solution that the Civic Committee wants the state to emulate. When the United Auto Workers union hired bankers to evaluate GM's finances, the bankers told them the situation was far worse than the company itself projected, according to Institutional Investor. So the union agreed to a new retiree health care plan, which operates much like a 401(k). The automakers pay a set amount into a health care trust fund and the fund's managers set benefit levels based on what it can afford. And thanks to a federal bailout, GM employees kept their pensions.
For Illinois, Quinn's proposed bailout seems to be a tax increase. But the state has dug itself into such a hole that anyone who has studied this, such as Civic Committee members, understands that it's no longer a question of whether public employees pay or we all pay. It's now a question of who will pay more.
Melissa Harris, who wants to remind readers that although the problem has to be fixed, state employees also contribute to their pension plans and, unlike the General Assembly, they've never missed a payment, can be reached at mmharris@tribune.com or 312-222-4582. Twitter@ChiConfidential. Copyright © 2010, Chicago Tribune
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Post by macrockett on Mar 14, 2010 15:19:24 GMT -6
www.iimagazine.com/Popups/PrintArticle.aspx?ArticleID=2442415Trillion-Dollar Pension Crisis Looms Large Over America
10 Mar 2010
Paul Ingrassia and Imogen Rose-Smith
The country’s pension system — both public and private plans — faces trillions of dollars in unfunded liabilities. This special report examines what General Motor’s historic bankruptcy has to teach about the looming pension crisis, while pointing to alarming parallels between GM and cash-strapped California, whose pension crisis may already have arrived.
Assuming they can laugh about such things, pension fund accountants might consider telling a joke that goes like this:
What’s the difference between General Motors and California?
California hasn’t gone bankrupt. At least, not yet.
General Motors Corp. did go bankrupt, of course, in a historic Chapter 11 filing orchestrated by the federal government last June. A similar fate for California isn’t out of the question, though it is unlikely. No U.S. state has ever gone bankrupt, although California’s Orange County back in 1994 and, more recently, the City of Vallejo did take the plunge. California’s $20 billion financial crisis — just the latest in a series, like a Hollywood horror movie with endless sequels — makes it Exhibit A of the pension funding predicaments looming over many state and local governments in the U.S. And as it happens, these crises have a lot in common with the pension overhang that helped sink General Motors last year.
Over several decades the leaders of both GM and GS (that is, the Golden State) caved in to the demands of aggressive unions, choosing what seemed the path of least resistance. Both gave their employees richer and richer retirement plans during their respective boom years and assumed that their revenue growth and the hefty returns on their pension fund investments would go on forever. Not so long ago, in fact, officials of both GM and California boasted that their employee pension plans were in good shape.
“Our U.S. hourly and salaried pension plans were overfunded by more than 20 percent at year-end 2007,” GM’s then-CEO Rick Wagoner wrote rosily to shareholders in that year’s annual report, “and we do not expect to be required to make any cash contributions to these plans for the foreseeable future.”
Those words were written, ironically, in the spring of 2008, when General Motors was on the very eve of destruction. The company was burdened with a huge debt load, a big chunk of which was incurred to fund the pension plan (more on that below). When the economic crisis struck and car sales collapsed that fall, GM’s cash reserves evaporated, even as repeated rounds of layoffs left the company saddled with ten retirees for every active employee. The company required a massive federal bailout and bankruptcy to stay in business. Only thanks to cash from the feds did GM’s retirees keep their pensions intact. Retirees of GM’s then-bankrupt auto-parts subsidiary, Delphi Corp., also kept their benefits.In the Golden State, meanwhile, the California Public Employees’ Retirement System, or CalPERS, had sharply increased benefits for state retirees in 1999. “CalPERS’s investment returns provide this historic opportunity,” then-board president William Crist declared, “without causing any additional taxpayer burden.”Since then the state’s public employee pension outlays have ballooned by 2,000 percent, while state revenues have increased only 24 percent. In the current fiscal year alone, some $3 billion has been diverted from other state programs to pay pensions. And California’s general obligation bond ratings from all three agencies — Fitch Ratings, Moody’s Investors Service and Standard & Poor’s — are the lowest among the country’s ten most populous states. The parallels between GM and California aren’t exact. The most notable difference is that states, unlike companies, can’t go out of business. Still, there are plenty of similarities to suggest GM was the proverbial canary in the coal mine for California and other cash-strapped states whose pension crises may already have arrived. “Public pensions can be viewed as a liability eating away at a state’s financial strength,” says Andrew Horrocks, an investment banker at Moelis & Co. who advised the Canadian government on GM’s bankruptcy last year. “This is all about promises made that can’t be kept without bleeding taxpayers. It’s a striking analogue to GM, and it’s frightening.”
Just how frightening, however, is a matter for intense debate. Other experts note that whatever problems states have now, public pension funding has improved markedly over the past few decades. “Thirty years ago state pension plans were funded haphazardly; it was the Wild West,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. Since then most states have tightened funding requirements, and “things are much, much better now,” she adds. “Trends like this count.” Underlying these divergent views are different calculations of the size of the public employee pension problem that get into the arcane world of pension accounting. Don’t cringe. The operative concepts — discount rate, projected rate of return and “smoothing” — are pretty simple.
The discount rate helps calculate the amount a company must set aside now to pay future pensions, allowing for the time value of money. The projected rate of return is just what it sounds like — the assumed investment returns on a pension plan’s assets.
Smoothing, in turn, is the exercise of leveling out a portfolio’s actual performance over two to five years. It evens out one-year aberrations such as the 2008 stock market crash that produced major losses in pension portfolios.
Private companies can exercise discretion in projecting their investment returns but have stricter limits than public funds in setting their discount rate. With a high discount rate and optimistic projected returns — say, 8 percent or more annually on pension portfolios — the public pension landscape doesn’t look so bad. By some estimates, the nationwide funding shortfall is “only” $500 billion.
The actual funding gap is at least $1 trillion, the respected Pew Center on the States recently concluded, adding that its estimate likely is low. But using more-conservative accounting assumptions — that is, requiring public pensions to use accounting standards close to those of private plans — produces a markedly different result.
The “politically unspeakable reality” is that the pension systems are underfunded by something more than $2 trillion, says Orin Kramer, chairman of the New Jersey State Investment Council, citing independent research that he recently commissioned. Kramer, whose council oversees a $67 billion state pension system, says politicians have deferred action for too long. “Kicking the can down the road is not sustainable,” he says. “The road does not have unlimited duration.”
And this $2 trillion shortfall doesn’t count something called OPEB, for “other postemployment benefits,” mainly health care for retired employees. State and local governments have underfunded those obligations by at least $530 billion, Congress’s Government Accountability Office reported last November. The agency also conceded that its number was an extremely conservative estimate. Other forecasts range up to $1 trillion, which would put states’ total retirement funding shortfall at a breathtaking $3 trillion.
So what’s the right number: $3 trillion or $500 billion? Well, using a lower number conveniently allows politicians and public officials to avoid all sorts of painful moves, such as raising taxes or cutting state spending to pay for pensions. Put another way, it’s tempting to engage in “fudging” instead of “smoothing.”
But in the end, there is no avoiding economic reality. In its last annual report before filling for bankruptcy, General Motors used an assumed rate of return of 8.5 percent for its U.S. pension fund, even though the Standard & Poor’s 500 index fell 38.5 percent that year and GM sustained losses of $11.4 billion on its U.S. pension assets alone. Credit Suisse accounting analyst David Zion has long argued that corporate funds should use their actual rates of return to measure their pension obligations. Public plans, which engage in the same kind of magical thinking as their corporate peers when it comes to pension accounting, could also benefit from following Zion’s advice.
Back in 1997, long before Kramer was involved in New Jersey’s pension fund, Governor Christine Todd Whitman sold $2.75 billion in pension obligation bonds. After the bond sale New Jersey all but stopped making contributions to its pension plans for more than six years, making it easier to balance the state’s budget.
When the moves were criticized as reckless financial engineering, Whitman offered a feisty defense. “You’d be crazy not to have done this,” she told Bloomberg News at the time. “It’s not a gimmick. This is an ongoing benefit to taxpayers.”
In fact, the actions have become a drag on New Jersey’s taxpayers. The state now pays on average 7.64 percent annual interest on the 1997 pension obligation bonds, but the fund has earned less than 5 percent a year, on average, since the bonds were issued.
From a funding status of 111 percent back in 2000, the state’s pension funds fell below 73 percent for the fiscal year that ended June 30, 2009. The state’s current pension-and-benefits shortfall now stands at a whopping $90 billion.New Jersey’s pension problem was part and parcel of the budget mess that sank the reelection bid of governor Jon Corzine last year; his successor, Chris Christie, recently cited a “state of financial crisis” to impose a broad freeze on spending. The state’s experience with pension obligation bonds provides another unsettling public sector parallel with the fate of General Motors. Back in 2003, GM announced a $13 billion corporate bond offering, one of the largest such debt offerings in history, with the proceeds earmarked for its pension plans. “We mortgaged, to some degree, our business,” was how Frederick (Fritz) Henderson, then the company’s chief financial officer (and last year briefly its CEO), later explained it to analysts. Investor interest was so strong worldwide, thanks to the bonds’ hefty yield of 7.22 percent, that GM actually sold more than $14 billion in bonds, along with several billion dollars of convertible stock. The company threw in some additional cash from the sale of assets, and voilà! — its pension fund deficit was erased overnight. GM said it wouldn’t need to make annual cash contributions to its pension plans for years, boosting its earnings. “GM Bond Offer Could Be a Template for Covering Underfunded Pensions,” declared a complimentary headline in the Wall Street Journal. Instead, it was a template for ducking the real issue, because GM was merely substituting one kind of debt for another. “It appears they will achieve a nearly fully funded [pension] status, but they did it by issuing $14 billion of debt,” credit analyst Chris Struve of Fitch Ratings said at the time. “So there is a $14 billion debt reckoning in the future.” The reckoning occurred last June, when General Motors walked into federal bankruptcy court carrying a crushing burden of $54 billion of “funded debt,” meaning borrowed money. The pension bonds sold in 2003 accounted for more than one fourth of the total. The massive bond sale had solved the company’s pension crisis, all right, but at a cost that evokes another, more familiar joke: The operation was a success, but the patient died. It wasn’t funny to the investors that held those bonds and to those that owned GM stock when the company declared bankruptcy last year. The 2003 bonds were all unsecured, so the bondholders were pummeled along with the company’s stockholders. GM retirees, in contrast, kept their full pensions thanks to $50 billion-plus in federal aid. Thus a historic transfer of wealth from GM’s owners and creditors to the company’s employees and retirees was made. New Jersey’s Kramer sees a similar scenario for the public sector: an “invisible wealth transfer,” as he puts it, from future taxpayers to pension-holding public employees. The 1966 bankruptcy of Studebaker Corp., a much smaller car company than General Motors, was a watershed in the history of pension plans. Nearly 7,000 Studebaker workers saw their pensions largely or entirely wiped out. The company’s collapse eventually spawned the Employee Retirement Income Security Act of 1974, also known as ERISA, which established new funding requirements for corporate defined benefit plans. ERISA also set up the Pension Benefit Guaranty Corp., funded by insurance premiums from employers, to guarantee pension payments to workers whose companies went bankrupt. Funding of private pension plans began to improve. But another, less positive development also was occurring. Many private companies began sweetening pension benefits and liberalizing their retirement rules, with GM leading the way. In 1970, after a 67-day strike by the United Auto Workers union, GM allowed employees to retire after 30 years on the job with full pensions and health care benefits for life. At first, a minimum age of 58 was required to qualify for “30 and out,” but soon the minimum age was abolished. Thus workers could start on the assembly line at age 18, retire at 48 and — if they lived until age 79 — collect pension and medical benefits for more years in retirement than they actually worked. By 1975, GM’s pension costs had jumped to 83 cents an hour from 43 cents just three years earlier, writes Roger Lowenstein in While America Aged, his prescient 2008 book about the nation’s pension crisis. In 1976, UAW leaders were “flabbergasted” that 29 percent of the GM workers who retired were under 55, wrote union vice president Irving Bluestone. “We were aware . . . that the trend to early retirement was escalating,” Bluestone stated in an internal union memo in April 1977. “But we were surprised at the [extent of the] escalation in 1976. It is astounding.” Such sentiments, however, were kept private. Expressing public doubts about “30 and out” would have been career suicide for union leaders, who stand for reelection every few years. Having served up the gravy train, the UAW’s leadership was powerless to hop off. GM, Ford Motor Co. and Chrysler Corp. executives figured the costs of “30 and out” simply could be passed through to consumers, who didn’t have much choice except to buy Detroit cars. But that was about to change. The Japanese threat was looming on the horizon. Meanwhile, ERISA was producing a sea change in corporate pension plans. By adding to the costs of defined benefit pensions, the law sparked a shift toward 401(k) plans, which have defined employer contributions but no fixed benefit payments. After ERISA the move away from corporate fixed pensions became a rout. “Virtually no new defined benefit plans have been created in the last ten years,” wrote economist William Conerly in a 2005 study for the National Center for Policy Analysis, a conservative think tank. “Once the Cadillacs of retirement plans, they are now the Edsels of employee benefits.” The companies that made Cadillacs (and before that Edsels) stuck with traditional defined benefit pension plans, largely because the UAW insisted on keeping them. The one exception, for a while, was GM’s Saturn subsidiary. In 1985, Saturn and the UAW agreed upon a defined contribution plan as part of a push for cooperation in company-union relations. But the militants who took power at UAW headquarters in the mid-1990s succeeded in scrapping Saturn’s 401(k) plan and returning to a defined benefit pension. Today, Saturn is about to disappear. GM dumped the money-losing brand in last year’s bankruptcy, and an effort to find a buyer collapsed. State pension plans stayed with defined benefits for some of the same reasons — the surging power of public employee unions, a trend that began in the late 1960s and ’70s. Among the most powerful public unions are the teachers’ unions, the Service Employees International Union and the American Federation of State, County and Municipal Employees. But they aren’t the only ones. With the ranks of auto workers dwindling, the UAW has aggressively organized thousands of public sector workers, including those in Detroit’s public library system. Last year, for the first time, the number of public employee unionists in the U.S. exceeded the ranks of union members in the private sector. (Ironically, even the investment professionals who manage the assets of New Jersey’s state pension system are represented, by the Communications Workers of America. Only the agency’s supervisory personnel remain nonunion.) State and municipal officials — like the Big Three automakers — began systematically sweetening the retirement benefits for their employees. New Jersey boosted pension benefits by 9 percent in 2001 and continued to reduce required pension contributions from state employees. The state’s teachers, for example, saw their contributions temporarily reduced to 3 percent of their salaries to fund pensions, down from 8.5 percent.
One 49-year-old state retiree paid a total of $124,000 toward his pension and health benefits during his career, Governor Christie recently told the state legislature, but the state now owes him $3.3 million in pension payments and an additional $500,000 in retiree health benefits. A retired teacher, the governor added, will collect $1.4 million of pension payments even though she paid just $62,000 toward her pension while she was working.
“We cannot in good conscience fund a system that is out of control, bankrupting our state and its people and making promises it cannot meet in the long term,” Christie told the legislature in announcing his intention to pursue pension reform.
Public pensions also have played a critical role in spawning California’s financial crisis. In the late ’90s, CalPERS was comfortably overfunded thanks to a booming stock market and the pension system’s annual investment returns as high as 20 percent. So the state, like GM before it, started allowing early retirements for its employees under increasingly generous terms.
Public safety employees led the way. Nobody wanted 60-year-old firefighters trying to scale ladders to save toddlers from burning buildings. But California, again like GM, went too far.
Before 1999, police, firefighters and prison guards could retire at age 50 with 2 percent of their pay for each year worked, with their pensions capped at 60 percent of their salaries. But in 1999 their benefits were sweetened to 3 percent of pay for each year worked, and the cap was raised to 90 percent of their working salaries.
The slogan used by the state’s police and firefighters’ unions was “3 percent at 50.” It bore a striking resemblance to the “30 and out” rallying cry of the UAW in the 1970s.
Meanwhile, California’s nonsafety personnel, such as teachers, got retirement sweeteners of their own. The state stopped averaging salaries over employees’ final three working years to compute their pensions. Instead, it started using just their final year’s pay, which was almost always higher.
It all seemed okay until the state’s economy tanked, even more than the rest of the country’s. CalPERS’s investment portfolio plunged 23.4 percent in fiscal year 2009, leaving the plan at an estimated 65 percent of funding. The pension shortfall is part of a bleak financial picture that, the state’s treasurer reported last December, has put the credit spreads on California bonds higher than those of Mexico, Indonesia and the Philippines.Connecticut stands as another prime example of the damage caused by the unholy combination of optimistic investment assumptions and liberal retirement provisions. The Connecticut Teachers Retirement Fund uses an 8.5 percent projected rate of return. But in fiscal year 2008, the fund’s investment portfolio lost 4.77 percent; in 2009 it dropped 17.14 percent.
Generous smoothing wouldn’t help the picture much — Connecticut uses a five-year smoothing formula to measure its returns. But even over ten years, the state teachers pension fund’s annualized return is just 3.12 percent, far below the assumed rate. As of fiscal 2009, the state’s employee and teachers’ plans combined were just 58.5 percent funded, which translates to a deficit of $15.8 billion. Add in other postemployment benefits ($24.6 billion) and bond obligations ($18 billion), and Connecticut’s debt equates to $17,628 for every man, woman and child living in the Nutmeg State.
In 2008, trying to prevent an even-worse pension shortfall, Connecticut — borrowing from the GM and New Jersey playbook — issued $2.3 billion in pension obligation bonds for its teachers’ pension plan. Then last year, to cope with a general budget crisis, the state approved the Retirement Incentive Plan, with the unfortunate acronym of RIP.
Connecticut negotiated a deal giving certain unionized employees, including some part-timers, an additional three years’ credit toward retirement.
The idea was to cut the state’s payroll: The governor’s office projected budget savings of $700 million if 3,000 employees took the offer. In fact, 3,856 did so, which increased the savings. The price, however, was adding to the burden on the state’s already underfunded pension system.
As part of the negotiations, the unions allowed the state to forgo pension plan contributions of $50 million in 2009 and $64.5 million in 2010. Again, in easing its immediate budget woes, Connecticut added to the pressure on its pension plan.
The moves helped prompt Moody’s to change its view on the state’s financial picture last October. “With the sale of the $2 billion in pension obligation bonds on top of the state’s normal annual sizable debt issuance,” Moody’s said in a ratings report, “Connecticut’s debt ratio will likely remain among the highest in the country.”
What’s more, if the state were meeting actuarial requirements for retiree health insurance, “it would at least double the fixed costs . . . which were budgeted at $1.78 billion in fiscal year 2008,” Moody’s wrote. The ratings agency says Connecticut’s postemployment benefits obligation now exceeds the state’s annual operating budget. If the problem posed by underfunded public sector pension plans is painfully clear, there are equally obvious solutions (see “Eight Ways to Avoid a Crash,” page 37). That’s the good news. The bad news is that they require steely will on the part of politicians faced with determined and organized public employee unions. Such courage is a rarity in the world of realpolitik. Existing legal requirements don’t help much. The ERISA law that sets strict funding requirements for private sector plans doesn’t apply to the retirement plans of state and local governments. The absence of the stringent standards required in the private sector has the benefit of keeping the public sector’s immediate costs relatively low, but it also allows funding levels to vary widely. The Oregon state employees’ and teachers’ pension plans and the combined Florida state plans were more than 100 percent funded as of June 30, 2009, according to the National Association of State Retirement Administrators. As of the same date, however, the retirement plans for Oklahoma and Rhode Island teachers and public employees were only 57.8 percent and 53.4 percent funded, respectively. The Illinois teachers’ plan was just 43 percent funded. Funding levels will benefit from the nation’s economic recovery, but that has been painfully slow. Meanwhile, the most likely near-term solution is for states to sell more pension obligation bonds, such as the $3.47 billion of paper floated by the state of Illinois early this year. Pension obligation bonds can be a legitimate funding technique if they’re combined with fundamental steps to put a state’s pension plan on sound financial footing. But if history is a guide, pension obligation bonds often will be used to kick the funding problem down the road — at least, until investors stop buying the bonds. “California and other states don’t have the ability to issue limitless amounts of debt,” notes Horrocks, the Moelis investment banker. There are nonetheless signs of new consideration being given to more-fundamental, tough-minded solutions, including reducing retirement benefits for public employees. It’s a step that’s almost impossible to apply to existing employees because public sector pensions are deemed by the courts to be contractual obligations. The U.S. Constitution prohibits the government from breaking contracts with its citizens unilaterally.
In general, the best that state and local governments can do is reduce pensions for new employees, and some are doing just that. As of the first of this year, New York State raised the age at which most employees can retire with full pensions to 62 from 55. Those who retire before 62 have their pensions cut by up to 38 percent.
New York also declared that new state employees must work at least ten years to qualify for a pension, up from five years. And the state limited the use of overtime pay in calculating individual employees’ pensions — a major money-saving step.
The actual savings from New York’s reforms, and similar moves elsewhere, won’t be realized until newly hired employees start hitting retirement age, which will be 20 years or more down the line in most cases. But at least it signals the reversal of decades of mindless, continuing sweetening of public pension benefits. So do the moves afoot in several places to increase public employees’ contributions to their retirement plans, reversing years of making those contributions lower.
The auto industry has set a positive example for state governments by adopting a Voluntary Employees’ Beneficiary Association trust, which allows employers to prefund retirement health care benefits for employees on a tax-deferred basis. In 2007, with their own financial storm brewing, GM, Ford and Chrysler persuaded the UAW to establish a VEBA trust. The move didn’t come easily. Faced with the companies’ request, the union hired Wall Street bankers to assess whether GM’s financial plight was as bad as the company contended. The bankers replied that it was worse. So the union accepted a VEBA, which relieved the companies of direct responsibility for funding retiree health care. Instead, the automakers make fixed payments to their VEBA trust funds, and the trusts now set benefit levels that the funds can afford. VEBA funds will save Detroit’s automakers billions of dollars this year. They could do the same for states if public employee unions would agree. Some believe the best option for state and local pension funds, however, will be shifting from defined benefit plans to 401(k)-type plans, as most of corporate America already has done. The major obstacle here isn’t just public employee unions, but also the public employee psyche. “Government workers tend to be older and less mobile”than their private sector counterparts, says Boston College’s Munnell, “and they’re usually more risk-averse as well.” Many state and local employees tend to view a fixed pension as the trade-off for lower public sector salaries, even though the pay gap has been narrowing. But signs of change are beginning to appear. The city of West Hartford, Connecticut, is currently in negotiations with its teachers’ union to offer defined contribution retirement plans. Over the past decade or so, nearly one third of that state’s municipalities have adopted defined contribution plans for employees, although in many cases the towns also retain defined benefit plans that cover employees hired before the change was made. Helping this transition is the fact that many younger public employees, unlike older ones, don’t see themselves staying in the same government job throughout their careers.Still, defined contribution plans, VEBA trusts and other reforms in the public sector will come slowly and haltingly — at least, until more public employees grow concerned that their government employers might risk going bankrupt, decimating their pensions and benefits in the process. An American state seeking bankruptcy protection is unthinkable, of course. Just like, well, Wall Street coming to the brink of collapse on a September weekend. Or like General Motors, once the biggest and richest company on earth, filing for Chapter 11. Paul Ingrassia, Pulitzer Prize–winning journalist and former Detroit bureau chief for the Wall Street Journal, is the author of Crash Course: The American Automobile Industry’s Road from Glory to Disaster, published in January by Random House.
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