Teacher Tenure/Unions/Government/Pensions

[macrockett]

Mar 25, 2010 8:19:22 GMT -6 sam2 said:

Doc,
I understand that you're upset about your pension changes. But you make my point: federal law allows private industry to change, or discontinue, pension plans. It's preposterous that state plans cannot be changed....

Lastly, to try to clarify my discussion about freezing earned benefits, thee majority of defined benefit plans had a option related to payouts: an annuity, which was typically the benefit elected -- so much a month for life, but they also provided for a lump sum payment. That sum was determined by doing a net present value of the projected monthly benefit payments. In other words, what amount of money today, is necessary to fund the amount of payments an participant would receive if tehy elected an annuity. They are, in theory, equivalent values.

WHat I don't know is how government pensions are calculated. The three we terminated had benefits that were calculated at a rate of $x/month per year of service. Government pensions may be based on some percentage of final pay and length of service. It changes the calculation I propose, but not the methodology...Participants may not like it but it really is financially fair, unless the pension plan is fatally flawed to begin with... There is an entire market for immediate annuities that is exactly the same calculation:: how much money do I give an insurance company in exchange for the promise of a monthly check for the rest of my life.

It's not a groundbreaking idea -- it's been around for a long, long time -- I can see no reason not to adopt it as part of the solution to our current problem....the unions won't like it, the participants may not like it, but it can be explained and it can be done fairly.

Govt pensions, in general, are calculated on years of service, avg salary of certain period and a % for each year of service. So say avg salary over certain period was $100k. Say 30 years of service, and then 2% for each year of service. $100k * 30 * .02 = $60k per year. That is how most state, local and teachers compute. Feds might me a little different.

This is a civics lesson for all of us. Those in government will take care of themselves first. They will throw us the crumbs to stay in power and move from job to job to collect another pension. Call me cynical, but I deal in facts. And the facts are there for anyone to see.

[casey]

Forwarded to me by a friend:

Friends and Neighbors,
Saw this video today, and thought it would be wise to bang out a note of concerns to my fellow taxpayers. I am not a politician, but just concerned about our financial situation. Especially since leaders seem to have one goal - and only one goal - regardless of the costs to the elderly, children, the poor. Save our pension scheme! Damn the Torpedoes!

The video captures some of the essence of the Illinois financial problems. I neither support nor am against the suggestions in the video. However, I have trouble trusting that even the video is not somehow driven by special interests, because that's the way it seems to be these days.

Example, the video essentially says "the state needs to meet its pension promise to employees" - really, even if it was doomed from the start - impossible to do that by any standard benchmark in the financial industry? Have any financial managers gone to jail yet or have been sued for misrepresenting what they could deliver just to get the contract? Has the school district sued the state for the "free money" we were supposed to get yet? Have the cities like Chicago been sued by the state and the unions for not paying into the pension plan? Have the suburbs sued Chicago for essentially asking us to fill their financial hole?

Are the district 204 taxpayers now supposed to fund over $40 million in Special Needs costs for the entire region out of their savings because the state wants to protect it's pension plan, and some fat cat cigar chomping pol says in a Springfield back room "hey... their a rich district...they can handle dat"? Fat cats who has lived off our tax revenues, while producing nothing but skimmed enrichment for family and friends. Why? "...because their my family and friends...wouldn't you do the same ting?". Hey, half my family was from the "sout" side - OK? You "talkin" to me?... Come on. End this already. This is not Iraq...is it?

blogs.suntimes.com/marin/2010/02/illinois_going_over_the_cliff.html

Cliff's notes for the video:

* Promotes Illinois income tax increase from 3 to 5% (including tax on retirement for the first time), and corporate tax increase from 4.8 to 6.4%. So if you are lucky enough to have an IRA, 401k, etc. savings of $1 million, that tax amounts to $50,000. (will the politicians, administrators and unions be exempt for their retirement? Hope not).


* No cuts in the 6500 government business units that award contracts (many no bid) to friends, family and cronies. A figure that is nearly 50% more than the next highest state (New Jersey - a well known high tax, highly corrupt state).

* A $12.8 billion shortfall in the pension plan (the worst in USA including California). And that isn't even the real number, but just this year's shortfall I am told.

* No change in the current pension plans, even though the terms may lead to insolvency. Only exploring a 2-tier system that allows the fat/happy union employees, and those who incestuously benchmark off the unions (like school district administrators) to keep the current plan without a single dime sacrificed, and a second tier of reduced benefits only for new hires (who will not be hired for years because of the cost of the existing employee benefits).

* The unions and other plans, that incestuously benchmark to the unions (like school district administrations), still get: a) 26% career ending bump-ups for the sole purpose to drive up pension plan benefits, b) payouts now benchmarking to about twice amount of the Fortune 500 pensions for equally experienced/educated employees, c) no loss of job due to poor performance, d) fat annual escalators (guaranteed annual increases even though not attainable) before and after retirement. Yes, that's not a miss-print, corporate America, that's an annual increase to the retiree!

* And it does not matter if the overall pension plan investments are totally miss-managed, and skimmed for massive fees by financial services industry and other special interests. They take whatever they can, and we taxpayers have to fill the whole back up again by the law of the state and our constitution.

* No talk of 10% pay cuts across the board in an environment where company employees have had to do exactly that or worse - lost their jobs. And a freeze fro two years followed by getting it all back in the next contract, is unethical at best. I guest lecture on leadership and ethics, and this "keep me whole at cost to everyone else" is unfair to the taxpayers.

Only one politician I know of in America, John Anderson, a member of the Will County Board, had asked for a 10% pay cut across the board. He was voted down. Remember that folks! Who else is going to step forward and show a little courage? And was that simply theater for the voters? Who knows.

In fact, why not ask every politician, union member, administrator, or government official you see at town hall meetings, coffees, etc. "What solution do you have that actually costs you money?" Then listen for the double talk, then ask the same unanswered question again, and demand an answer.

Ask them another question: "Who was behind getting the state of Illinois Constitution amended to put union pensions ahead of all other state priorities - even special needs children, education, health care, aid to the elderly, etc. - in terms of debt obligations for the state?"

With crisis comes opportunity! We may find strategic solutions to strategic problems. Let's hope that the key leaders are as wise as their years, because the fall-out from mismanaging this situation will be swifter than we think.

Finally, has anyone looked into the constitutionality of the pension amendment? I am sure it was air tight legislation because there was so much at stake - self enrichment. But, what if a procedural step was missed. You never know...maybe we get lucky. Can we repeal the amendment, and if so, due to the financial crisis, why are our politicians not doing exactly that for the financial stability of Illinois going forward?

[asmodeus]

That sum was determined by doing a net present value of the projected monthly benefit payments. In other words, what amount of money today, is necessary to fund the amount of payments an participant would receive if tehy elected an annuity. They are, in theory, equivalent values.

The big question, though, would be the expected rate of return. If the pension funding is based on expected returns of 8%, then the participants will demand that any present value calculation reflect that rate, even if it is nowhere near realistic rates.

[sam2]

Mar 25, 2010 10:43:26 GMT -6 asmodeus said:

That sum was determined by doing a net present value of the projected monthly benefit payments. In other words, what amount of money today, is necessary to fund the amount of payments an participant would receive if tehy elected an annuity. They are, in theory, equivalent values.

The big question, though, would be the expected rate of return. If the pension funding is based on expected returns of 8%, then the participants will demand that any present value calculation reflect that rate, even if it is nowhere near realistic rates.

Asmodeus

I cannot answer your question. I know little about government pensions, but the answer to your question in general is a little counter intuitive.

When we terminated our plans, we used a rate of return stipulated by the ERISA regs. At the time, it was in the 8% area and was based upon 30 year treasuries -- this was a long time ago.

Here's the counter intuitive part: If the plan was managed based upon 8%, it wouldn't matter as a lump sum will be calculated on the rates in effect today -- maybe 4 to 6%. So, since the expected rate of return is much lower, the amount needed to support the pension benefit is much higher. If you think about it, it will make sense, but lower investment returns require a bigger pot of money to be invested.

It's why I won't buy an immediate annuity today -- the same amount of cash invested will bring me a much higher payout when rates return ( increase) to what I consider a more normal rate than at present.

[asmodeus]

You are right...to clarify, I should have said the participants will scream if 8% is used to determine the lump sum because that will result in a lower present value--they know they would never be able to match those returns on their own without taking huge risk.

[refbasics]

Mar 25, 2010 6:09:37 GMT -6 asmodeus said:

Madigan says the plan would save the state’s pension systems more than $100 billion over the next several decades.

Madigan and the rest of these Democratic thieves should just shut their traps. The bill does NOTHING for the current $80b that is underfunded. Saying that it will save hundreds of billions over the next several decades is fallacious. It's like saying that by not buying a Porsche next year, I will be "saving" $100k. And it does nothing to address the Mercedes that I bought last year.

-----------------------
well, that's a START... can you imagine passing anything quickly which would address the state's present pension problem? i wonder how many gov't employees are hired each day in IL?

... but that better not be the END of pension reform!

[asmodeus]

well, that's a START...

I'm afraid they will point to this as "major" reform just to have an election point to run on, and won't go any further.

[macrockett]

Back to the discussion of returns on pension assets. In this clip, Tony Crezcenzi, from Pimco, (largest bond firm) talks briefly about the lower growth in the future due to less leverage. That means smaller returns, consistent with the CA article where the money managers are reviewing whether current expected returns are reasonable:

Minute 9:25 --> www.cnbc.com/id/15840232?video=1451875884&play=1

[macrockett]

www.nytimes.com/2010/03/28/opinion/28damato.html?pagewanted=print

March 28, 2010
Op-Ed Contributor
End the Unions’ Sweetheart Deals
By ALFONSE D’AMATO

New York’s painful fiscal crisis should be an opportunity to restructure state finances for the benefit of future generations.

First, our legislators must take a stand against special interests, particularly the public-sector unions. Their large checkbooks have made them equal-opportunity terrorizers, able to buy both Republicans and Democrats. Because of their influence, state workers last year avoided not only layoffs but even milder measures like a wage freeze similar to the one New York City employees negotiated to help the city recover from its fiscal crisis in 1975.

Such a freeze must now be on the table. And if state employee unions will not agree to a reasonable plan, the governor should exercise his power to lay off state employees to make up the difference.

Thanks to the unions, New York has the highest overall pension cost per resident in the country. The creation of a fifth, less-generous tier in the state’s pension plan, agreed on by the governor and the unions last year, will save the state as much as $48 billion dollars over the next 30 years. But that should be only the first step; another compelling option is to make state pension programs similar to a 401(k) plan, so that retirees can help take the state off the hook for exorbitant defined benefits.

New York could also reap as much as $600 million in annual revenue by enforcing the law requiring the state to collect sales tax on cigarettes sold on Native American reservations. Why should New York be the state of tax evaders?

Finally, our short-term cash crunch would be eased if the state refinanced the interest rates on its tobacco-settlement bonds. Given current low long-term interest rates, this is preferable to Lt. Gov. Richard Ravitch’s plan, under which the state would borrow $2 billion a year over three years for operations, leading us down a perilous road of annual borrowing.

These steps would not necessarily be popular — but it is time for Albany to lead, not simply pander.

— ALFONSE D’AMATO, a Republican who was a United States senator from New York from 1981 to 1999

Alfonse D’Amato, a Republican, was a United States senator from New York from 1981 to 1999.

[macrockett]

www.nytimes.com/2010/03/28/opinion/28kellerman.html?pagewanted=print

March 28, 2010
Op-Ed Contributor
No More Aid for the Affluent
By CAROL KELLERMANN

Long after the recession and political crises are history, Albany will continue to be pressed fiscally, unless changes are made in three big areas of state spending: Medicaid, education and employee benefits, which together account for 70 percent of the budget.

MEDICAID The program’s long-term care provisions drive overall Medicaid spending, and New York has such loose eligibility policies that many relatively well-off families can claim benefits. Fully 32 percent of all elderly-services beneficiaries nationwide are in New York, though our share of the population in poverty is just 7 percent. Albany will need to make cuts to Medicaid soon; restricting access to long-term care benefits so they go only to the truly needy is the place to start.

SCHOOL AID There is no question we should continue helping lower-income students. But New York spends too much on educating the wealthy. During the 2007-2008 school year, the richest 10 percent of New York school districts were spending $28,754 per pupil, almost three times the national average. Why did the state provide $3,809 per pupil to support such lavish spending in those districts? That money could be saved, or better spent elsewhere.

STATE EMPLOYEE BENEFITS State employees can retire after only 10 years and get lifetime health care for themselves, their spouses and dependents for just 10 percent of the premium for an employee and 25 percent for a family, even if they go on to another job. By 2014, state employee benefits will add 60 percent on top of their salaries. And, despite the recent adoption of a new, less generous pension tier, pension costs are expected to increase 132 percent during those three years. This is untenable.

Even if revenues fall no further and state leaders manage to agree to $5 billion in spending reductions this year, the budget gap in three years will still be a formidable $12.4 billion. To close it without raising New York’s already high taxes, entitlements must end for those who do not need them.

Carol Kellermann is the president of the Citizens Budget Commission, a nonprofit watchdog group.

[macrockett]

video of CA candidate for governor Whitman discussing defined benefit pensions for public employees. March 22, 2010

www.californiapensionreform.com/?p=815

The other video and material below the Whitman video are also interesting.

This is the second candidate for governor to speak out about this. Christie, now Gov of NJ, was the first (that I am aware of).

[macrockett]

online.barrons.com/article/SB126843815871861303.html#articleTabs_panel_article%3D1

Barron's Cover
MONDAY, MARCH 15, 2010
The $2 Trillion Hole

By JONATHAN R. LAING | MORE ARTICLES BY AUTHOR
Promised pensions benefits for public-sector employees represent a massive overhang that threatens the financial future of many cities and states.

LIKE A CALIFORNIA WILDFIRE, populist rage burns over bloated executive compensation and unrepentant avarice on Wall Street.

Deserving as these targets may or may not be, most Americans have ignored at their own peril a far bigger pocket of privilege -- the lush pensions that the 23 million active and retired state and local public employees, from cops and garbage collectors to city managers and teachers, have wangled from taxpayers.

Some 80% of these public employees are beneficiaries of defined-benefit plans under which monthly pension payments are guaranteed, no matter how stocks and other volatile assets backing the retirement plans perform. In contrast, most of the taxpayers footing the bill for these public-employee benefits (participants' contributions to these plans are typically modest) have been pushed by their employers into far less munificent defined-contribution plans and suffered the additional indignity of seeing their 401(k) accounts shrivel in the recent bear market in stocks.

And defined-contribution plans, unlike public pensions, have no protection against inflation. It's just too bad: Maybe some seniors will have to switch from filet mignon to dog food.

Most public employees, if they hang around to retirement, can count on pensions equal to 75% to 90% of their pay in their highest-earning years. And many public employees earn even more in retirement than their best year's base compensation as a result of "spiking" their last year's income by working ferocious amounts of overtime and rolling in years of unused sick and vacation days into their final-year pay computation.

A survey by the watchdog group California Foundation for Fiscal Responsibility found that some 15,000 Golden State public employees are knocking down $100,000 or more, while some 200, mostly police and fire chiefs and school administrators, are members of the $200,000-a-year-and-up club.

THE PROSPECTS ARE BLEAK for many state and local governments as a result of all this. According to a survey last month by the Pew Center on the States, a nonpartisan research group, eight states -- Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia -- lack funding for more than a third of their pension liabilities. Thirteen others are less than 80% funded.

Governments could fill that gap by raising property, sales and income taxes, but most are wrestling with huge revenue shortfalls in trying to balance their budgets.

The more likely outcome is dramatic cuts in essential services, such as police and fire protection, health spending, education and infrastructure improvements, in order to cover ballooning pension payments. State and municipalities, after all, must do something: Most have a legal obligation to pay out earned pension benefits. And some don't even have the courage to switch new teachers, bureaucrats and police to a defined-contribution system, to prevent the funding problem from worsening as time rolls on.

THUS, MORE DEBT DEFAULTS and bankruptcy filings probably lie ahead, unsettling the $2.7 trillion municipal-bond market. The possibility of taxpayer revolts and likely insolvencies has shaken some investors' confidence in general-obligation bonds -- those backed by the "full faith and credit" of the states or localities. Once the gold standard for munis, GOs are under a cloud in financially troubled areas.

The size of the legacy-pension hole is a matter of debate. The Pew report puts it at $452 billion. But the survey captured only about 85% of the universe and relied mostly on midyear 2008 numbers, missing much of the impact of the vicious bear market of 2008 and early 2009. That lopped about $1 trillion from public pension-fund asset values, driving down their total holdings to around $2.7 trillion.

Other observers think the eventual bill due on state pension funds will be multiples of the Pew number. Hedge-fund manager Orin Kramer, who is also chairman of the badly underfunded New Jersey retirement system, insists the gap is at least $2 trillion, if assets were recorded at market value and other pension-accounting practices common in Corporate America were adopted.

Finance professors Robert Novy-Marx at the University of Chicago and Joshua Rauh of Northwestern University asserted in a recent paper that the funding gap for state pension plans alone might exceed $3 trillion, in part because state funds are using an unrealistic long-term annual investment return of 8% to compute the present value of future payments to retirees, as is permitted in government standards for pension-fund accounting.

This establishes a "false equivalence" between pension liabilities and the likely investment outcomes of state investment portfolios, which are increasingly taking on more risk by beefing up their exposure to stocks, private-equity deals, hedge funds and real estate. Using a much lower expected return -- say, one at least partially based on the riskless rate of return on government securities -- would both properly and dramatically boost the present value of the pensions' liabilities while decreasing their likely ability to meet them. The academic pair, using modern portfolio theory, claim that state funds, as currently configured, have only a one-in-20 chance of meeting their obligations 15 years out.

MAKING THE STATE AND local pension problem all the more trying is that government entities can do little to wriggle out of their exposure, even if spending on essential services is threatened. The constitutions of nine states, including beleaguered California and Illinois, guarantee public-pension payments. And most other states have strong statutory or case-law protections for these obligations. "One shouldn't be surprised by this, since state legislators, state and local judges and the state attorneys general are beneficiaries of the self-same public pension funds that they've done so much to promote and protect," Orin Kramer notes wryly.

True, a dozen or so states, including New York, Nevada, Nebraska, Rhode Island and New Jersey, are attempting reforms such as raising retirement ages, cutting pension-benefit formulas, boosting employee contributions, curbing income "spiking" and partially switching employees to less costly defined-contribution plans. But these changes affect almost exclusively new employees and do little to solve the existing funding gap.

The municipal-bond market, for one, seems vulnerable to the growing public pension mess. Warren Buffett, in his 2007 Berkshire Hathaway annual report, inveighed against the "woefully inadequate" funding in many public pension funds to meet "huge" promised payments to retirees. True to his word, Buffett has sold precious little municipal-bond insurance in a Berkshire Hathaway unit he set up for that purpose in 2008.

Jim Spiotto, a muni-bond restructuring expert at the Chicago law firm Chapman & Cutler, argues the pension crisis is quickly reaching a tipping point after being ignored for years.
[chart]

"I just can't believe that any bond issuer would be willing to suffer the stigma of defaulting on their general-obligation debt as a result of having to fund future pension obligations, but such a situation is no longer beyond the realm of possibility," he observes.

For proof, look no further than the San Francisco Bay city of Vallejo, which filed for Chapter 9 bankruptcy in 2008 as a result of insolvency.

The California municipality, which has 120,000 residents, is proposing a three-year moratorium on all interest and principal payments on the $53 million of municipal debt that is backed by its general fund. But it is keeping fully intact its $84 million in pension-fund obligations.

SOVEREIGN DEFAULT IS A hot topic these days. With Greece tottering and other European countries in fiscal distress, some have even voiced the possibility that a U.S. state -- also considered a sovereign entity -- could suffer a general-obligation debt default.

Says Todd Zywicki, a law professor at George Mason University: "In many ways, some of our states are like General Motors before its bankruptcy, suffering from falling revenue, borrowing money to cover operating expenses and operating under crushing legacy health and pension liabilities. It's entirely possible, given the gigantic size of the pension liabilities, that some states might do what was once the unthinkable at GM and default."

Such assessments might be alarmist. A rebound in the U.S. economy and a continued rally in stocks would do a world of good for ailing public pension funds. And only one state -- Arkansas in 1934 -- has defaulted on its GO bonds in the past century with their holders suffering losses. Arkansas, however, was a special case. In addition to the Great Depression, it was ailing from large local debts it had assumed as a result of catastrophic floods in the 1920s.

But what if the stock-market rally falters, the economy doesn't return to full health, jobs remain scarce and tax revenues remain depressed?

According to muni-bond expert Spiotto, most defaults at the municipal level have come as a result of shortfalls in the revenue generated by quasi-public projects, such as hospital additions, sports facilities, housing-development infrastructure, giant garbage incinerators and the like, rather than systemic financial failures of major localities like Vallejo. And even after New York City's debt default in 1975, municipal-debt holders were ultimately made whole.

NONETHELESS, SOME MAJOR BOND investors are altering their strategies in light of the impending pension crisis.

John Cummings, the executive vice president in charge of the $27 billion muni portfolio at giant fixed-income house Pimco, says it is underweighting the GOs of the "poster boys" of debt problems and pension under- funding -- California, Illinois, New Jersey and Rhode Island. Revenue bonds -- those backed by the money generated by a specific source -- have become more attractive to Pimco, particularly if they're backed by essential services like water authorities, sewer systems or school districts and have dedicated, stable revenue streams that can't be diverted to other uses. Revenue bonds funding new projects could be considerably more risky.

Says Cummings: "We want to stay as far away as possible from bonds that depend on the politicians and general funds of financially shaky states and smaller issuers unless the price is right. You ask California Treasurer Bill Lockyer, one of the greatest bond salesman ever, about the state's pension situation and all you get back is a thousand-yard stare and a quick change of subject. That's concerning."

A spokesman for Lockyer told Barron's that the treasurer "realizes that the pension-underfunding problem is serious, unsustainable and therefore needs to be fixed. He wants to ensure that any reform is fair to all stakeholders, including the state, public employees and taxpayers."

No one, of course, would dispute that public servants deserve adequate retirements, particularly the 25% to 30% that lack Social Security coverage. But the old saw that rich retirement packages are a necessary inducement to attract good employees to public payrolls because of below-average pay scales no longer is true.

According to the latest compensation survey by the Bureau of Labor Statistics, the average state and local employee outearns his counterpart in the private economy with an hourly wage of $26.11, versus $19.41. That's before benefits (pensions, health care, paid vacations and sick days and leaves) drive the disparity even higher, to $39.60 an hour for public employees and $27.42 for private workers.

Even if one looks at pay received by so-called management and professional employees in each realm, fat benefits in the public sector drive the total compensation received by state and local managers to almost dead-even with private-sector managers -- $48.15 versus $48.17.

THE CURRENT STATE AND local pension crisis has many fathers. State and local governments have been under-funding their pension systems for a decade or more, under the misapprehension that the stock-market boom of the 1990s would continue and bail out any shortfalls. The underfunding has continued with a vengeance over the past two years as budgets were slashed to eliminate deficits.

For example, last year New Jersey, under Gov. Jon Corzine -- a financially savvy former Goldman Sachs chief -- contributed only $105 million, instead of an actuarially determined $2.3 billion. In all, states and localities kicked in $72 billion in fiscal 2008, far short of adequate funding levels of $108 billion, according to the recent Pew study.

Such behavior is only encouraged by the fact that state and local governments are allowed as much as 30 years to close funding gaps. So it's easy for politicians to kick the can forward, avoiding the pain of boosting taxes and making hard spending decisions. The 30-year amortization periods have an evergreen nature, being renewed and invoked almost every year as the compounding of pension obligations works relentlessly against units of government.

Then, too, pension funds are being hit by baby-boomer retirements. A report from the National Association of State Retirement Administrators underlines this impact: It found that in 2008, for every state retiree collecting benefits, only 2.02 current workers were contributing to pension systems, compared with 2.45 in 2001.

Besides the politicians, the primary culprits are the public-employee unions, which have used their growing power to dramatically enhance pension benefits. They curry favor with sympathetic politicians, lavishing them with large donations and manning campaign phone banks. They also engage in full-court-press lobbying at all levels of state and local government.

One would think legislators or managers in state, county and local governments would protect the taxpayer by bargaining hard. But they clearly don't, because of inherent conflicts of interest.

Nearly all public employers, regardless of their position, benefit from the very same pension programs, either directly or indirectly. Legislators in the main receive the same pension benefits that they lavish on other public employees. And administrators, though subject to independently negotiated contracts, use enriched union pension plans as a valuable bargaining wedge. So there's little incentive to fight the unions with much vigor.


In fact, bad behavior abounds on both sides of the table when it comes to pensions. Plunder!, a recently published book by California journalist Steven Greenhut, details a number of ploys that both workers and management employ to goose their retirement checks. A favorite, he asserts, is income spiking. In the year before they retire, California police, firefighters and prison guards typically start notching hours and hours of overtime that has been reserved for them by less senior colleagues. Whatever they make in that final year is used in the formula that determines the monthly retirement check. Golden State, indeed.

OTHER ABUSES DETAILED in the book include widespread "double-dipping." Public employees can start collecting their full pensions while returning to their old job as consultants. Alternatively, they can take another public-sector job to earn credit toward yet another pension.

Stories are rife around the country of various pension hijinks by public employees. A Contra Costa Times article bemoaned the artistry of a retired local fire chief in San Ramon, Calif., who boosted his annual pension from $221,000 a year to $284,000 by getting credit in his final earnings for unused vacation and sick leave.

In Illinois, veteran police with more than 12 years of service receive annual longevity pay boosts of 4% to 5% in addition to other salary increases. In some local departments, these boosts are all awarded as a 20% bump-up in the first couple months of the year, rather than prorated evenly throughout the year. This, of course, helps police in those jurisdictions get a 20% jump in their presumed compensation -- and, therefore, their pensions -- if they time their retirement date properly.

VALLEJO, CALIF., HAD NO CHOICE but to file a Chapter 9 bankruptcy in 2008 after property-tax revenue collapsed in the housing bust and a major employer -- the U.S. government's Mare Island Ship- yard -- closed. With the tax base hammered, rich public-employee contracts granted in better times were devouring more than 90% of the city's budget.

Though Vallejo is still months away from getting a court decision on whether it can go ahead with its debt-adjustment plan, it has succeeded through contract renegotiations and major layoffs in cutting its employee costs by nearly a quarter.

But the fallout has been brutal. Employee health-care benefits have been decimated. Holders of the city's municipal bonds are unlikely to get all their money back. And violent crime rates have shot up dramatically as a result of reductions in its police force from 158 to 104 officers.

The only thing that will be left untouched? The very thing that tipped the California city into Chapter 9 -- its $84 million in future pension obligations.

[macrockett]

www.contracostatimes.com/top-stories/ci_14765618

County delivers dire economic projections, more bad news about budget
By Rick Radin
Contra Costa Times
Posted: 03/26/2010 03:13:53 PM PDT
Updated: 03/27/2010 05:00:38 AM PDT

PLEASANT HILL — Contra Costa County probably will be struggling with more budget cuts for at least the next five years, particularly if nothing is done about ballooning employee pension costs.

Such was the grim news delivered Thursday night to 80 employees and residents by county Administrator David Twa, the keynote speaker of a town hall meeting on the budget.

"We will see budget reductions through 2015 without changes to pensions and benefits, given our commitments," Twa said.

The county will need to pay $59 million each year on top of its current pension contributions between now and 2015 for retired employees and for those who will be retiring.

Overall, Contra Costa will need $50 million in cuts in 2010-11, on top of $139 million in reductions from its $1.2 billion budget since 2008.

Economic conditions are likely to remain dire, Twa said.

The county has a 12.1 percent unemployment rate and the average house price has dropped 56 percent in the past two years, he said. These two factors will continue to keep a lid on property and sales taxes, the county's primary sources of revenue.

"We're predicting unemployment will stay high and housing prices will drop another 5 percent," Twa said.

County department heads reflected Twa's remarks, although some of the bad news comes from proposed state budget cuts and uncertainty over federal funding.

If the federal government doesn't give California $6.9 billion to pay for welfare programs, Gov. Arnold Schwarzenegger has proposed to eliminate the Welfare-to-Work program, said Joe Valentine, director of the county's employment and human services department. That would end CalWORKs grants that average $694 a month for 10,790 families in the county. They would be shifted to general assistance, a county-funded program that pays an average of $228 a month.

"The governor has proposed draconian cuts that will not save money in the long run," Valentine said. "The state needs to pause and look at the long-term consequences."

District Attorney Robert Kochly said he had 85 attorneys, 15 fewer than two years ago, but his office was spending 28 percent more time prosecuting cases. The department last year backed off a proposal to transfer some prosecutions to cities last year.

Health Services Director William Walker praised the national health care reform bill for its potential to reduce the numbers of patients coming to the county after being cut from private insurance. However, Twa said, the department faces increased costs over the next few years.

"We will be well underwater by the time coverage for the uninsured begins in 2014," he said.

[macrockett]

online.wsj.com/article/SB10001424052748703416204575146213238489720.html?mod=WSJ_hps_LEFTWhatsNews#printMode

Gurus Urge Bigger Pension Cushion

MARCH 29, 2010

By GINA CHON

Government-pension problems, widely considered bad, may actually be even worse.

That is the assessment of some experts who maintain that the current rules of number crunching for state and local governments make retirement-benefit obligations seem lower than they really are.

Soon, their view may prevail. The accounting board for governments is likely to move toward changes that would increase the pension liability that local governments display on balance sheets by tens of billions of dollars.

If the modifications are approved, many already cash-strapped states and municipalities would likely have to increase the amount they are supposed to pay annually to their pension funds to help cover the shortfall.

The General Accounting Standards Board, or GASB, Norwalk, Conn., indicated the direction it was heading in board meetings in January and February.

Since then, public pension funds have been abuzz about the potential change. People familiar with the matter say it is likely those tentative decisions will be adopted. Initial recommendations will be out in June and a final decision is expected next year.

Even without GASB changes, underfunded pension systems already represent a financial problem for many states, thanks mostly to market declines, a lack of funding by governments and benefit increases.

According to a recent study by Wilshire Consulting, the average funding level of state public pension plans was at 65% in 2009, compared with 85% in 2008. Experts recommend that public pension funds maintain at least an 80% level of funding to be healthy.

Governments that have to make up for pension-funding shortfalls could increase taxes or cut public services to meet that need.

The accounting changes generally focus on the entire amount of underfunding, rather than the status of a typically smaller annual contribution, and move away from using a fund's expected investment return to calculate pension liabilities.

Twenty-seven state treasurers and 61 representatives of pension systems wrote letters to GASB opposing any changes. The opponents include some of the largest pension funds in the country, including those in California, New York State and Texas.

"This volatility and uncertainty would promote not only inconsistency in the measurement and disclosure of pension information, but also would disrupt public sector budget processes," said the pension systems' letter on the possible changes.

Proponents of the modifications, which include some government bond buyers, civic groups and others who use the financial information presented by local governments, say the current standards mask problems facing pension systems, and therefore, the fiscal predicaments of local governments.

"The current pension deficit disclosure standards have been professionally gamed for a long time," said Diann Shipione, a former trustee of the pension fund for the city of San Diego who has long pushed for tougher standards in pension-fund accounting. "The GASB is now fighting to create the environment where greater clarity is the result."

One thing GASB is looking at is how pension liabilities should be calculated. Governments normally don't display their unfunded pension obligation as a liability on the balance sheet.

Instead, they list only the shortfall in the annual required pension contribution. As a result, states and municipalities that pay the annual contribution report zero pension liabilities. The total unfunded liability is reported in the notes section of the balance sheet.

Under tentative decisions by GASB's board, the displayed number would be changed to the total unfunded pension liability, typically larger than the annual obligation.

For example, New Jersey hasn't paid its annual contribution of $2.5 billion for the current fiscal year, but its underfunded pension liability currently stands at $46 billion.

Another issue: how to calculate the unfunded pension obligation. Currently, the total projected benefits obligation is lowered based on how much the fund is expected to reap in investments, commonly 8%.

Critics argue that rate, which for accounting purposes is known as the discount rate, is inappropriately high. GASB has looked at several alternatives that are currently lower than 8%.

The drop of one percentage point in the discount rate means a 10% to 20% increase in the total pension obligation, according to James Rizzo, senior consultant and actuary at Gabriel, Roeder, Smith & Co., a consulting firm for the public sector. For example, a pension system with a total liability of $100 billion would have an obligation of as much as $120 billion after a decline of one percentage point in the discount rate.

The displayed amount of the unfunded pension liability could be increased even further if GASB lowers the so-called amortization period for unfunded liabilities, or the number of years funds can stretch the liability over. The longer the period, the smaller it looks.

Currently the figure used is a maximum of 30 years. The GASB's tentative decision is that pension liabilities should be amortized over the remaining employment years of the worker, which can be closer to 15 to 20 years for some employees.

"This could double or triple the annual contribution needed from governments," Girard Miller, a senior strategist at Public Financial Management Group and former voting member of the GASB board.

Not everyone is fretting about the possible changes. Carol Knowles, spokeswoman for the Illinois Comptroller's Office, said in an email: "The woeful state of Illinois' pension systems is not a secret. We follow GASB, so whatever it is determined the rule should be, we would follow it."

The Difference a Number Makes
How a change in discount rate affects liabilities for a hypothetical pension system

* Discount Rate: 8%
* Total pension liability: $100 billion
* Unfunded liability: $40 billion

* Discount Rate: 7%
* Total pension liability: As high as $120 billion
* Unfunded liability: As high as $60 billion

Source: Gabriel, Roeder, Smith & Company, an actuary consulting firm

Write to Gina Chon at [e-mail]

[sam2]

Is there anyone reading this board that can summarize the differences between goveernment and non- government pension accounting?

The article above mentions GASB, which I believe should be Government accounting standards board, but doesn't compare the proposed or existing disclosure to what non-govenrment companies must report -- I believe under FASB (financial accounting standards board) FAS-87.

I',m most interested in assumptions about investment return or discount rate and whether the future liabilities are recorded on the balance sheets or just in the footnotes.

I've done a quick online search without success, but I'm guessing a CPA with a larger firm will know the answer to this as they audit both government and non-government entities.

Thanks