Teacher Tenure/Unions/Government/Pensions

[macrockett]

I've have already written about the cutbacks in state police in Iowa and Illinois. That's what happens when economics hits generous pensions. Something has to give somewhere. Here is another example. It is just a matter of time before it happens to the ranks of teachers. I suggest everyone pick up an economics book. You need go no further than Econ 101...

JULY 19, 2010 WSJ

Cities Rent Police, Janitors to Save Cash
By TAMARA AUDI

Faced with a $118 million budget deficit, the city of San Jose, Calif., recently decided it could no longer afford its own janitors. So the city's budget called for dropping its custodial staff and hiring outside contractors to clean its city hall and airport, saving about $4 million.

To keep all its swimming pools open and staffed, the city is replacing some city workers with contractors.

"These are cases where the question is being asked, 'Is this a core service at the city level?' " said Michelle McGurk, senior policy adviser to the San Jose mayor.

After years of whittling staff and cutting back on services, towns and cities are now outsourcing some of the most basic functions of local government, from policing to trash collection. Services that cities can no longer afford to provide are being contracted to private vendors, counties or even neighboring towns.

The move saves cities budget-crushing costs of employee benefits like health insurance and retirement. Critics say contracting means giving up local control and personalized services.

Cities say they have little choice. Municipalities across the U.S. will face a projected shortfall of $56 to $86 billion between 2010 and 2012, according to a report from the National League of Cities.

"You can do across-the-board cuts for only so long," said Andrew Belknap, Western Regional Vice President for Management Partners, a government consulting group. "It's gone from the tactical cost cutting to get through a recession, to in some cases saying we have to exit that business or service altogether."

Maywood, a tiny city southeast of Los Angeles, is taking contracting to the extreme. The city of around 40,000 is letting go of its entire staff and contracting with outsiders to perform all city services. The city is disbanding its police force and handing public safety over to the Los Angeles County Sheriff. Its neighbor, the city of Bell, will take over running Maywood's City Hall.

Like many towns, Maywood is battling a budget deficit. But city officials said they were forced into the situation when the city's insurance carrier decided to cancel coverage because of the $21 million in legal expenses and judgments against the city stemming from the conduct of its police department. Without insurance, the city is barred from hiring employees who work directly for the city.

"We're on the cutting edge here. We're the tip of the spear," said Magdalena Prado, Maywood's community-relations officer, who works for the city as a contractor. Ms. Prado said she has gotten inquiries from cities across the country "wanting to know how this is going to play out. They're facing their own financial strains and looking to us as an example."

Maywood officials insist services will continue. The city has for years used contract workers to run services such as parks and recreation.
[CITYCUT]

But not every transition is smooth, and city employees losing their jobs are seldom eager to help their replacements take them over.

Cities can face expensive lawsuits or severance costs when they lay off employees, although these costs differ in every city, depending on the union contract, the number of people losing their jobs and whether the contractor is willing to hire the former employees.

Maywood city council member Felipe Aguirre said the city negotiated severance packages with civilian employees, but the former police officers have been more difficult. The police union attempted to stop the city from dismantling the department by filing a temporary restraining order. The order wasn't granted, and the police department was disbanded July 1.

Los Angeles County Sheriff's Department officials say they are getting more inquiries from cities and towns who want to pay them to take over local policing. The Los Angeles County Sheriff's Department has policing contracts with 42 out of 88 cities in the county.

Lakewood, a small city near Long Beach, is known nationally for developing a model city structure, known as the Lakewood Plan, that contracts out some major services while maintaining local control over others. The city contracts 40% of its services to outside vendors, including public safety, which is run by the Los Angeles County Sheriff's Department. Other areas it continues to handle itself, including parks and recreation, city-hall administrative services and the water department.

Outsourcing is on the rise around the country. Johns Creek, an Atlanta suburb that incorporated in 2006, contracted all of its city-hall and public-works services with CH2M Hill, a Denver company that provides everything from staff to furniture. The city maintains its own fire and police departments, and employs its own city manager and finance director.

"The county was hard-pressed to provide the services here that people wanted and expected," said Doug Nurse, the city's spokesman, and a CH2M Hill employee. "We had everything in place. We were good to go."

In California, the state's $19 billion budget deficit is putting additional pressure on local governments. The state has begun to reduce the amount of redevelopment funds cities have traditionally received; Pasadena, for instance, had to hand $10.8 million back to the state.

In Long Beach, city officials are considering a plan to help close an $18.5 million budget deficit by hiring a private contractor to manage city marinas.

"We're trying to focus on core services so that non-core services can be eliminated eventually," said David Wodynski, the assistant director of financial management for Long Beach.

A recent Nevada state law requires cities and counties to study consolidating services and provide detailed analysis to lawmakers by September.
Experience WSJ professional
Editors' Deep Dive: Critics Pan Privatization Plans

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GOVERNMENT EXECUTIVE
Battle Centers on Definition of Federal Employee
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Aviation Daily
Airport Privatization Makes Headway
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The Star-Ledger (Newark, NJ)
Environmentalists Slam Plan To Privatize Parks

Access thousands of business sources not available on the free web. Learn More

The Los Angeles suburbs of Burbank, Glendale and Pasadena are contemplating merging services such as tree-trimming, employee training, purchasing and police helicopters. All three face deficits, and reductions in state funds. The cities have already started a joint emergency-dispatch center that has grown to include other cities.

Glendale has faced an $8 million shortfall on a $170 million annual budget for the last three years, said city manager Jim Starbird, and has already cut police and fire personnel.

"We have to find ways to reduce the costs of services we provide," he said. "We can't just keep cutting services."

Write to Tamara Audi at [e-mail]

[macrockett]

Another example

JULY 17, 2010 WSJ

Roads to Ruin: Towns Rip Up the Pavement
Asphalt Is Replaced By Cheaper Gravel; 'Back to Stone Age'

By LAUREN ETTER
[GRAVEL] Dan Koeck for The Wall Street Journal

A road crew in Jamestown, N.D., where road repair means reclaiming the original asphalt and processing it to resemble gravel.

SPIRITWOOD, N.D.—A hulking yellow machine inched along Old Highway 10 here recently in a summer scene that seemed as normal as the nearby corn swaying in the breeze. But instead of laying a blanket of steaming blacktop, the machine was grinding the asphalt road into bits.

"When [counties] had lots of money, they paved a lot of the roads and tried to make life easier for the people who lived out here," said Stutsman County Highway Superintendant Mike Zimmerman, sifting the dusty black rubble through his fingers. "Now, it's catching up to them."

Outside this speck of a town, pop. 78, a 10-mile stretch of road had deteriorated to the point that residents reported seeing ducks floating in potholes, Mr. Zimmerman said. As the road wore out, the cost of repaving became too great. Last year, the county spent $400,000 on an RM300 Caterpillar rotary mixer to grind the road up, making it look more like the old homesteader trail it once was.

Paved roads, historical emblems of American achievement, are being torn up across rural America and replaced with gravel or other rough surfaces as counties struggle with tight budgets and dwindling state and federal revenue. State money for local roads was cut in many places amid budget shortfalls.

In Michigan, at least 38 of the 83 counties have converted some asphalt roads to gravel in recent years. Last year, South Dakota turned at least 100 miles of asphalt road surfaces to gravel. Counties in Alabama and Pennsylvania have begun downgrading asphalt roads to cheaper chip-and-seal road, also known as "poor man's pavement." Some counties in Ohio are simply letting roads erode to gravel.

The moves have angered some residents because of the choking dust and windshield-cracking stones that gravel roads can kick up, not to mention the jarring "washboard" effect of driving on rutted gravel.

But higher taxes for road maintenance are equally unpopular. In June, Stutsman County residents rejected a measure that would have generated more money for roads by increasing property and sales taxes.

"I'd rather my kids drive on a gravel road than stick them with a big tax bill," said Bob Baumann, as he sipped a bottle of Coors Light at the Sportsman's Bar Café and Gas in Spiritwood.

Rebuilding an asphalt road today is particularly expensive because the price of asphalt cement, a petroleum-based material mixed with rocks to make asphalt, has more than doubled over the past 10 years. Gravel becomes a cheaper option once an asphalt road has been neglected for so long that major rehabilitation is necessary.

"A lot of these roads have just deteriorated to the point that they have no other choice than to turn them back to gravel," says Larry Galehouse, director of the National Center for Pavement Preservation at Michigan State University. Still, "we're leaving an awful legacy for future generations."

Some experts caution that gravel roads can be costlier in the long run than consistently maintained asphalt because gravel needs to be graded and smoothed. A gravel road "is not a free road," says Purdue University's John Habermann, who organized a recent seminar about the resurgence of gravel roads titled "Back to the Stone Age."

Paving grew in popularity in the early 20th century as more cars hit streets and spread when the federal government built the Interstate Highway System.

Over the years, many of the two-lane arteries that connect country roads with metro areas have deteriorated under rising traffic and the growing weight of farm combines, logging trucks and other heavy equipment.

Frederick Wachtel, county engineer in Coshocton County, Ohio, says his budget, largely driven by fuel taxes and vehicle registration fees, was off 5% last year, the first decline in nearly 20 years. He is now letting some of his roads return to nature.

In Spiritwood one day recently, a soft breeze carried the scents of cow manure and hot asphalt over the tall broom grass. The giant Caterpillar chugged along at a speed of 2.4 feet per minute and pulverized Old Highway 10 into a black dust with chunks of rock and pavement. A piece of equipment following behind rolled the surface flat.

The machines rumbled along a path carved by homesteaders' covered wagons in the 1800s. Over time, grain elevators and railroad depots sprung up along the route, which became known as the Old Red Trail. Later, the road was paved and renamed Highway 10.

After Interstate 94 was built alongside the road in the 1950s, it became Old Highway 10. Traffic volumes gradually dropped until Old 10 became a lazy backcountry road dotted with abandoned farmsteads. In the 1960s the state gave Old 10 to the counties it ran through, leaving them to pay for upkeep. North Dakota's Stutsman County got a 30-mile stretch.

The gift became a burden. The Stutsman highway department, which gets the bulk of its funds from local property taxes, state fuel taxes and vehicle registration fees, let the road fall into disrepair as it juggled other projects. Every year without major maintenance, the road became more expensive to fix.

Judy Graves of Ypsilanti, N.D., voted against the measure to raise taxes for roads. But she says she and others nonetheless wrote to Gov. John Hoeven and asked him to stop Old 10 from being ground up because it still carries traffic to a Cargill Inc. malting plant. She says the county has mismanaged its finances and badly neglected roads.

"Our expenses outweigh the income," says Mr. Zimmerman, who has been with the county highway department for nearly 30 years. He says the county will pay about $2,600 per mile annually for the newly ground-up road, as against about $75,000 per mile to reconstruct it.

Gayne Gasal, who lives along the redone stretch of road, says it has turned out "better than we all thought." But Sportsman's Bar owner Hilda Kuntz worries that the classic cars and bikers that roll through town in the summer will stay away.

"It's going to kill my business," she said.

Write to Lauren Etter at [e-mail]

[macrockett]

Ya think Ron? I think it's already here. I can't keep up with all the articles I have seen recently. From NY, NJ, IL, CA (oh, especially in Bell, CA). In fact, I just wrote an email to the Chairman of the Personnel & Pension Committee regarding the 8% assumption in pension investment returns (see below the article). As for this case in CO that i mentioned in an earlier post. It will become more common in other states soon as everyone begins to realize the exponential aspect of raises in compensation and their effect on pension liability, let alone the 8% assumption. Based on my understanding of the law, I believe that CO will win its case and pensions will be adjusted for current public employees.

www.nytimes.com/2010/08/07/your-money/07money.html?ref=business&src=me&pagewanted=print

August 6, 2010
Battle Looms Over Huge Costs of Public Pensions
By RON LIEBER

There’s a class war coming to the world of government pensions.

The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.

The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.

At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.

The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?

Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country.

Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.

This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.

Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”

But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.

The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”

Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?

After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.

And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.

The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.

But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.

Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.

No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”

Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.

Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.

Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?

If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.

If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.

And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.

“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”

-------------------------------------------------------------------------------------------------------------
----- Original Message -----
From: MACrockett
To: [e-mail]
Sent: Thursday, August 05, 2010 10:20 PM
Subject: pension actuarial assumptions


Dear Representative McCarthy,

As Chairman of the Personnel & Pension Committee I wanted to bring to your attention the flawed actuarial assumptions regarding pension investment returns. In Illinois, I believe the assumtion is 8% or above. As a CPA I have a solid understanding of this subject and in the current economic environment (and into the foreseeable future), these returns are extremely unlikely.

There is a growing body of work now available that is sounding the alarm that the approximately 8% assumed investment returns are not achievable for the reason I have stated above.

The ramification is that contributions by the State and public union participants are too low. Eventually this burden will unfairly be borne by the taxpayer.

I am requesting that you hold the plan actuaries accountable. Please challenge them to prove that their assumptions are correct in light of the information provided below.

Sincerely,

Michael Crockett
630-416-6441




Here are the sources, while not exhaustive, that clearly point out the actuarial flaws:

1: Joint study by Kellogg and University of Chicago. See link to Kellogg

www.cnbc.com/id/15840232?video=1502930553&play=1 (cncb interview with Raug re the below study)

An interview on cnbc with Joshua Rauh, of Kellogg School of Management, author of the Pension study www.kellogg.northwestern.edu/faculty/rauh/research/JEP_Fall2009.pdf that discusses the unsustainable pension benefits to public employees.

Once again, in this video, on at least two occasions, the guests each state that the actuarial assumptions of returns in the area of 8% are not realistic in today's economic climate.

2: Stanford's Institute for Economic Policy Research study. Blackrock (4 trillion under management) CEO, Laurence Fink comments as well in the below article that 5% is a more reasonable figure.

online.wsj.com/article/SB10001424.....html#printMode
APRIL 27, 2010
Pension Bomb Ticks Louder

California's public funds are assuming unlikely rates of return.

The time-bomb that is public-pension obligations keeps ticking louder and louder. Eventually someone will have to notice.

This month, Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds. siepr-new.stanford.edu/system/files/shared/GoingforBroke_pb.pdf

The Stanford study uses what's called a "risk-free" 4.14% discount rate, which is tied to 10-year Treasury bonds. The Government Accounting Standards Board requires corporate pensions to use a risk-free rate, but it allows public pension funds to discount pension liabilities at their expected rate of return, which the pension funds determine. Calstrs assumes a rate of return of 8%, Calpers 7.75% and the UC fund 7.5%. But the CEO of the global investment management firm BlackRock Inc., Laurence Fink, says Calpers would be lucky to earn 6% on its portfolio. A 5% return is more realistic.

news.stanford.edu/news/2010/april....html?view=print

Stanford Report, April 5, 2010
California state pension funds going broke, Stanford study finds

New calculations by Stanford graduate students show that California's three main public employee pension funds are in more dire financial trouble than previously believed.


3: Calsters itself is reassessing it's pension assumptions.

articles.latimes.com/2010/mar/16/business/la-fi-calstrs16-2010mar16

PENSIONS
For CalSTRS, an investment bet that failed
The state's teachers retirement fund had hoped four years ago that a flourishing bull market would help make up for a big projected shortfall. Now the fund is $43 billion behind as of June.

By Marc Lifsher

March 16, 2010

The increases are necessary because CalSTRS' actuaries say the fund would need a return on investments of more than 20% a year over the next five years to make up for recent recessionary losses. Over the last 30 years, CalSTRS' portfolio has increased an average of 8.65% a year.

In an attempt to be more conservative, the board now is considering reducing its assumed annual return to as low as 7.5%. CalPERS also is considering lowering its 7.75% benchmark.

Those assumed numbers are still higher than the 6.9% annual return that investment guru Warren Buffett assumes for investments held by pension funds at units of his Berkshire Hathaway Inc.

"Who are they [CalSTRS] kidding? They should not be assuming more than 6%," said David Crane, a former investment banker and the governor's special advisor for jobs and the economy.

"Unreal assumptions," he warned, "will come out of the pocket" of future generations of Californians.

--------------------------------------------------------------------------------
CalSTRS Board Considers Revised Investment Assumptions
May. 27, 2010 Chad Christman
www.calstrsbenefits.us/post/calst....ent-assumptions

The Teachers Retirement Board will discuss possible changes to its investment return assumption at its June 4, 2010 meeting. A change would affect the funded status and actuarial valuation of the CalSTRS Defined Benefit (DB) and other programs.

Each year, the Board adopts an actuarial valuation of the DB Program that projects the program’s assets and liabilities to give the Board a snapshot of the program’s current fiscal health. One of the key components of that snapshot is the assumed rate of return on investments. The 2008-09 market downturns and the uncertain investment outlook for the next few years has prompted this review of the investment rate of return actuarial assumption. At its February 2010 meeting, the Board discussed alternatives that would reduce the current investment return assumption of 8 percent to 7.75 percent or 7.50 percent.

A decision to lower the investment return assumption from its current 8 percent would increase the unfunded liability and lower the funded status of the Defined Benefit (DB) Program, increasing the need for higher contributions in the future.

4: Interview with Bill Gross, founder of Pimco, with 1+ trillion of assets under management.

The bond king, Bill Gross, head of Pimco with over 1 Trillion in assets under management. "Returns on stocks and bonds will be lower in the years ahead" at approximate minute 5:40 and minute 7:50.

www.cnbc.com/id/15840232?video=1500422088&play=1


Other articles or videos of interest:


------------------------------------------------------------------------------------
Bloomberg
States Face Pension Stress as GASB Rules Widen Gap
July 09, 2010, 12:11 PM EDT
www.businessweek.com/news/2010-07....-widen-gap.html

----------------------------------------------------------------------------------------------
www.cnbc.com/id/15840232?video=1499551640&play=1 (if it doesn't load, click the page refresh button a few times)

Airtime: Thurs. May 20 2010 | 4:18 PM ET
Listen to segment beginning at 5:10-5:35 where Calpers CEO says unequivocally that after review, they do not believe earnings expectations of 7 3/4 are realistic.

Put this together with that of all other state and local government pensions where actuarial return assumptions are higher and you have underfunded pensions based on contributions by the employees and the requisite govt body. This is in addition to the fact that many govt entities are not making the required contributions in the first place.

--------------------------------------------------------------------------------------------------


Videos from CNBC in July on public union pensions .
www.cnbc.com/id/15840232?video=1533002156&play=1 Chris Christie, NJ Governor

www.cnbc.com/id/15840232?video=1533005835&play=1 Sam Zell

[doctorwho]

Aug 8, 2010 22:28:26 GMT -6 macrockett said:

Ya think Ron? I think it's already here. I can't keep up with all the articles I have seen recently. From NY, NJ, IL, CA (oh, especially in Bell, CA). In fact, I just wrote an email to the Chairman of the Personnel & Pension Committee regarding the 8% assumption in pension investment returns (see below the article). As for this case in CO that i mentioned in an earlier post. It will become more common in other states soon as everyone begins to realize the exponential aspect of raises in compensation and their effect on pension liability, let alone the 8% assumption. Based on my understanding of the law, I believe that CO will win its case and pensions will be adjusted for current public employees.

www.nytimes.com/2010/08/07/your-money/07money.html?ref=business&src=me&pagewanted=print

August 6, 2010
Battle Looms Over Huge Costs of Public Pensions
By RON LIEBER

There’s a class war coming to the world of government pensions.

The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.

The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.

At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.

The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?

Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country.

Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.

This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.

Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”

But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.

The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”

Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?

After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.

And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.

The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.

But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.

Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.

No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”

Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.

Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.

Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?

If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.

If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.

And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.

“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”

-------------------------------------------------------------------------------------------------------------
----- Original Message -----
From: MACrockett
To: [e-mail]
Sent: Thursday, August 05, 2010 10:20 PM
Subject: pension actuarial assumptions


Dear Representative McCarthy,

As Chairman of the Personnel & Pension Committee I wanted to bring to your attention the flawed actuarial assumptions regarding pension investment returns. In Illinois, I believe the assumtion is 8% or above. As a CPA I have a solid understanding of this subject and in the current economic environment (and into the foreseeable future), these returns are extremely unlikely.

There is a growing body of work now available that is sounding the alarm that the approximately 8% assumed investment returns are not achievable for the reason I have stated above.

The ramification is that contributions by the State and public union participants are too low. Eventually this burden will unfairly be borne by the taxpayer.

I am requesting that you hold the plan actuaries accountable. Please challenge them to prove that their assumptions are correct in light of the information provided below.

Sincerely,

Michael Crockett
630-416-6441




Here are the sources, while not exhaustive, that clearly point out the actuarial flaws:

1: Joint study by Kellogg and University of Chicago. See link to Kellogg

www.cnbc.com/id/15840232?video=1502930553&play=1 (cncb interview with Raug re the below study)

An interview on cnbc with Joshua Rauh, of Kellogg School of Management, author of the Pension study www.kellogg.northwestern.edu/faculty/rauh/research/JEP_Fall2009.pdf that discusses the unsustainable pension benefits to public employees.

Once again, in this video, on at least two occasions, the guests each state that the actuarial assumptions of returns in the area of 8% are not realistic in today's economic climate.

2: Stanford's Institute for Economic Policy Research study. Blackrock (4 trillion under management) CEO, Laurence Fink comments as well in the below article that 5% is a more reasonable figure.

online.wsj.com/article/SB10001424.....html#printMode
APRIL 27, 2010
Pension Bomb Ticks Louder

California's public funds are assuming unlikely rates of return.

The time-bomb that is public-pension obligations keeps ticking louder and louder. Eventually someone will have to notice.

This month, Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds. siepr-new.stanford.edu/system/files/shared/GoingforBroke_pb.pdf

The Stanford study uses what's called a "risk-free" 4.14% discount rate, which is tied to 10-year Treasury bonds. The Government Accounting Standards Board requires corporate pensions to use a risk-free rate, but it allows public pension funds to discount pension liabilities at their expected rate of return, which the pension funds determine. Calstrs assumes a rate of return of 8%, Calpers 7.75% and the UC fund 7.5%. But the CEO of the global investment management firm BlackRock Inc., Laurence Fink, says Calpers would be lucky to earn 6% on its portfolio. A 5% return is more realistic.

news.stanford.edu/news/2010/april....html?view=print

Stanford Report, April 5, 2010
California state pension funds going broke, Stanford study finds

New calculations by Stanford graduate students show that California's three main public employee pension funds are in more dire financial trouble than previously believed.


3: Calsters itself is reassessing it's pension assumptions.

articles.latimes.com/2010/mar/16/business/la-fi-calstrs16-2010mar16

PENSIONS
For CalSTRS, an investment bet that failed
The state's teachers retirement fund had hoped four years ago that a flourishing bull market would help make up for a big projected shortfall. Now the fund is $43 billion behind as of June.

By Marc Lifsher

March 16, 2010

The increases are necessary because CalSTRS' actuaries say the fund would need a return on investments of more than 20% a year over the next five years to make up for recent recessionary losses. Over the last 30 years, CalSTRS' portfolio has increased an average of 8.65% a year.

In an attempt to be more conservative, the board now is considering reducing its assumed annual return to as low as 7.5%. CalPERS also is considering lowering its 7.75% benchmark.

Those assumed numbers are still higher than the 6.9% annual return that investment guru Warren Buffett assumes for investments held by pension funds at units of his Berkshire Hathaway Inc.

"Who are they [CalSTRS] kidding? They should not be assuming more than 6%," said David Crane, a former investment banker and the governor's special advisor for jobs and the economy.

"Unreal assumptions," he warned, "will come out of the pocket" of future generations of Californians.

--------------------------------------------------------------------------------
CalSTRS Board Considers Revised Investment Assumptions
May. 27, 2010 Chad Christman
www.calstrsbenefits.us/post/calst....ent-assumptions

The Teachers Retirement Board will discuss possible changes to its investment return assumption at its June 4, 2010 meeting. A change would affect the funded status and actuarial valuation of the CalSTRS Defined Benefit (DB) and other programs.

Each year, the Board adopts an actuarial valuation of the DB Program that projects the program’s assets and liabilities to give the Board a snapshot of the program’s current fiscal health. One of the key components of that snapshot is the assumed rate of return on investments. The 2008-09 market downturns and the uncertain investment outlook for the next few years has prompted this review of the investment rate of return actuarial assumption. At its February 2010 meeting, the Board discussed alternatives that would reduce the current investment return assumption of 8 percent to 7.75 percent or 7.50 percent.

A decision to lower the investment return assumption from its current 8 percent would increase the unfunded liability and lower the funded status of the Defined Benefit (DB) Program, increasing the need for higher contributions in the future.

4: Interview with Bill Gross, founder of Pimco, with 1+ trillion of assets under management.

The bond king, Bill Gross, head of Pimco with over 1 Trillion in assets under management. "Returns on stocks and bonds will be lower in the years ahead" at approximate minute 5:40 and minute 7:50.

www.cnbc.com/id/15840232?video=1500422088&play=1


Other articles or videos of interest:


------------------------------------------------------------------------------------
Bloomberg
States Face Pension Stress as GASB Rules Widen Gap
July 09, 2010, 12:11 PM EDT
www.businessweek.com/news/2010-07....-widen-gap.html

----------------------------------------------------------------------------------------------
www.cnbc.com/id/15840232?video=1499551640&play=1 (if it doesn't load, click the page refresh button a few times)

Airtime: Thurs. May 20 2010 | 4:18 PM ET
Listen to segment beginning at 5:10-5:35 where Calpers CEO says unequivocally that after review, they do not believe earnings expectations of 7 3/4 are realistic.

Put this together with that of all other state and local government pensions where actuarial return assumptions are higher and you have underfunded pensions based on contributions by the employees and the requisite govt body. This is in addition to the fact that many govt entities are not making the required contributions in the first place.

--------------------------------------------------------------------------------------------------


Videos from CNBC in July on public union pensions .
www.cnbc.com/id/15840232?video=1533002156&play=1 Chris Christie, NJ Governor

www.cnbc.com/id/15840232?video=1533005835&play=1 Sam Zell

thought it interesting that Brady just spent some time with Governor Christie -- need to get that view on a roll

[macrockett]

I copied this from an earlier post as it is relevant to this thread:

Just this morning on Fox Chicago Sheila Weinberg, of the Institute for Truth in Accounting, discussed the size of Illinois' unfunded liabilities, conservatively in excess of $100 billion. At minute 1:32 of the attached video link, once again, she comments about the generous investment return assumptions, exceeding 8%, as unrealistic...

www.myfoxchicago.com/dpp/wildcard....inberg-20100827

www.truthinaccounting.org/

www.truthinaccounting.org/uploads/files/50%20State/IL/IL%202009%20FSOS.pdf

Previous article in the Sun Times

'Our state is $120.6 billion short!'

August 23, 2010
BY TERRY SAVAGE

Illinois is bankrupt. By now that should not come as a surprise. In fact, you've seen so many headlines about Illinois' financial woes that you might even find the subject boring. But it won't be so boring when the impact hits you -- and your planned retirement.

Maybe if we all took a simple and honest look at the problems facing the state, we could gather some consensus about what must be done. What services and benefits do we need and want from the state, and are we willing to pay for them? Instead, we go on as usual in the governor's race with each candidate decrying the other's plans for taxes and spending.
» Click to enlarge image
Neither Gov. Quinn nor Republican gubernatorial nominee Bill Brady has the right plan to solve Illinois' deepening financial crisis according to experts.
(AP Photos)

I've got news for you: Both candidates are missing the problem by a mile.

That's not just my opinion. It's the financial analysis of the nonprofit Institute for Truth in Accounting (truthinaccounting.org).

Here's their shocking truth: Even if Illinois used all of its assets -- except for our infrastructure such as roads, bridges, buildings, land, etc. -- we would not have enough to pay the $140.6 billion of bills when they come due.

As Sheila Weinberg, head of the Truth in Accounting Institute, puts it: "Our state is $120.6 billion short!"

We've papered over our annual budget deficits by borrowing, just as many people put off the day of reckoning by using credit cards. But the state now owes $85 billion in bond IOUs -- promises we've made to "pay later with interest." Our credit -- the ability to borrow -- has about maxed out. So we're not paying our bills. Not someday in the future but right now!

Our state's chief bill-payer, Comptroller Dan Hynes, said recently the state owes $5 billion to schools, universities, child-care centers and rehab centers around the state. He calls it "obscene," telling the New York Times: "This is not some esoteric budget issue; we are not paying bills for absolutely essential services."

Whether you're Joe or Mary down the block or Donald Trump or General Motors, that shortfall fits the description of "bankrupt." Filing for bankruptcy is what you do when you can't pay your bills. So it's about time that we -- and our candidates for state office -- acknowledge that truth: "The emperor has no clothes -- The State of Illinois is bankrupt."
How bankruptcy hits you

This house of cards will come falling down -- along with your pension. If you've ever worked for the state, or even an agency that depends on state funding, or even a business or hospital or nursing home or college, your pension will take a hit when the state defaults. There is no federal guarantee fund for state pension obligations.

You know what happens in a bankruptcy. Debts are wiped out. That means someone loses, whether it was a GM supplier, or the mortgage lender or credit-card issuer that takes a loss when Tom and Mary file for bankruptcy.

It's no different for the state. Unlike the federal government, they can't print money. So how will Illinois meet its future obligations to pay retirees and bondholders?
A truthful accounting

Here's what we owe:

• Illinois bond borrowings: $29.1 billion

• Promised pension benefits: $62.4 billion

• Promised retiree health care benefits: $27.1 billion

• "Miscellaneous" (including payments to nursing homes, child care facilities, etc): $21.9 billion.

Maybe you're feeling generous and would like to chip in to help. Well, if each and every taxpayer in Illinois anteed up $29,200, we could wipe out the deficit. Not likely.

So now we're at crunch time. What can and should the state do? And what should we, as voters, do? Actually that's the real question we each keep avoiding.

I know, because every time someone turns to me on TV and asks, "So what should we do, Terry?" I fudge the answer. You can't be popular and tell the truth. But I'm not campaigning for anything. So here are the Truths as I see them, based on the financial facts that are indisputable at truthinaccounting.org.

•Truth: Anyone who gets a pension from a state agency (and most municipal agencies, school districts, etc) should expect to get less than the promised amount. It is inevitable that there will be some cutbacks -- especially for those age 55 or over. So if you're younger, you need to save more than your pension.

• Truth: Expect an increase in state income taxes. I'm not saying that's a good solution. In fact, I think it will be counterproductive in the long run. I actually believe that if we cut our state income tax in half, we'd create enough economic growth, and more, to make up for the difference.

But a tax hike is inevitable because we can't pay our bills, much less our future promises. So let's stop asking our candidates to make promises they can't keep.

• Truth: Expect service cutbacks. Let's stop arguing over whose needs are most important. Everyone is going to take a hit. But it shouldn't be a politically determined hit, or else the most vulnerable who have the least "clout" will be hit the hardest. We need to help those who have no other resources -- the elderly, the impoverished children -- but the decision will not be based on need.

• Truth: Our real "need" is leadership that can say no to everything that is not absolutely necessary -- from museums, to buildings, to events, to you name it -- the things that buy votes! We need a governor and legislators who are not campaigning for the next election. We need leaders who will work part-time for nothing, yes, for FREE -- because they believe they can help Illinois.

If you have ideas to contribute, share them in comments at the bottom of my column at suntimes.com /savage. But suggestions won't solve the problems. Only VOTES and pressure will do the job. That's the ways it has always worked. Clout. Now it's time to use our clout as voters to demand Truth.

It's going to be even more painful than we thought. And that's The Savage Truth!

Terry Savage is a registered investment adviser.

Copyright 2010 Sun-Times Media, LLC | Terms of Use • Privacy Policy • Submission Guidelines • About Our Ads



Modifed 9-6-2010 to add the SunTimes Article

[macrockett]

I neglected to post this email I sent to the Chair of the Personnel & Pension Committee of the State of Illinois regarding the pension assumptions. Here it is...by the way, I haven't heard back...

----- Original Message -----
From: MACrockett

To: [e-mail]
Sent: Thursday, August 05, 2010 10:20 PM
Subject: pension actuarial assumptions


Dear Representative McCarthy,

As Chairman of the Personnel & Pension Committee I wanted to bring to your attention the flawed actuarial assumptions regarding pension investment returns. In Illinois, I believe the assumtion is 8% or above. As a CPA I have a solid understanding of this subject and in the current economic environment (and into the foreseeable future), these returns are extremely unlikely.

There is a growing body of work now available that is sounding the alarm that the approximately 8% assumed investment returns are not achievable for the reason I have stated above.

The ramification is that contributions by the State and public union participants are too low. Eventually this burden will unfairly be borne by the taxpayer.

I am requesting that you hold the plan actuaries accountable. Please challenge them to prove that their assumptions are correct in light of the informaton provided below.

Sincerely,

Michael Crockett
630-416-6441




Here are the sources, while not exhaustive, that clearly point out the actuarial flaws:

1: Joint study by Kellogg and University of Chicago. See link to Kellogg

www.cnbc.com/id/15840232?video=1502930553&play=1 (cncb interview with Raug re the below study)

An interview on cnbc with Joshua Rauh, of Kellogg School of Management, author of the Pension study www.kellogg.northwestern.edu/faculty/rauh/research/JEP_Fall2009.pdf that discusses the unsustainable pension benefits to public employees.

Once again, in this video, on at least two occasions, the guests each state that the actuarial assumptions of returns in the area of 8% are not realistic in today's economic climate.

2: Stanford's Institute for Economic Policy Research study. Blackrock (4 trillion under management) CEO, Laurence Fink comments as well in the below article that 5% is a more reasonable figure.

online.wsj.com/article/SB10001424.....html#printMode
APRIL 27, 2010
Pension Bomb Ticks Louder

California's public funds are assuming unlikely rates of return.

The time-bomb that is public-pension obligations keeps ticking louder and louder. Eventually someone will have to notice.

This month, Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds. siepr-new.stanford.edu/system/files/shared/GoingforBroke_pb.pdf

The Stanford study uses what's called a "risk-free" 4.14% discount rate, which is tied to 10-year Treasury bonds. The Government Accounting Standards Board requires corporate pensions to use a risk-free rate, but it allows public pension funds to discount pension liabilities at their expected rate of return, which the pension funds determine. Calstrs assumes a rate of return of 8%, Calpers 7.75% and the UC fund 7.5%. But the CEO of the global investment management firm BlackRock Inc., Laurence Fink, says Calpers would be lucky to earn 6% on its portfolio. A 5% return is more realistic.

news.stanford.edu/news/2010/april....html?view=print

Stanford Report, April 5, 2010
California state pension funds going broke, Stanford study finds

New calculations by Stanford graduate students show that California's three main public employee pension funds are in more dire financial trouble than previously believed.


3: Calsters itself is reassessing it's pension assumptions.

articles.latimes.com/2010/mar/16/business/la-fi-calstrs16-2010mar16

PENSIONS
For CalSTRS, an investment bet that failed
The state's teachers retirement fund had hoped four years ago that a flourishing bull market would help make up for a big projected shortfall. Now the fund is $43 billion behind as of June.

By Marc Lifsher

March 16, 2010

The increases are necessary because CalSTRS' actuaries say the fund would need a return on investments of more than 20% a year over the next five years to make up for recent recessionary losses. Over the last 30 years, CalSTRS' portfolio has increased an average of 8.65% a year.

In an attempt to be more conservative, the board now is considering reducing its assumed annual return to as low as 7.5%. CalPERS also is considering lowering its 7.75% benchmark.

Those assumed numbers are still higher than the 6.9% annual return that investment guru Warren Buffett assumes for investments held by pension funds at units of his Berkshire Hathaway Inc.

"Who are they [CalSTRS] kidding? They should not be assuming more than 6%," said David Crane, a former investment banker and the governor's special advisor for jobs and the economy.

"Unreal assumptions," he warned, "will come out of the pocket" of future generations of Californians.

--------------------------------------------------------------------------------
CalSTRS Board Considers Revised Investment Assumptions
May. 27, 2010 Chad Christman
www.calstrsbenefits.us/post/calst....ent-assumptions

The Teachers Retirement Board will discuss possible changes to its investment return assumption at its June 4, 2010 meeting. A change would affect the funded status and actuarial valuation of the CalSTRS Defined Benefit (DB) and other programs.

Each year, the Board adopts an actuarial valuation of the DB Program that projects the program’s assets and liabilities to give the Board a snapshot of the program’s current fiscal health. One of the key components of that snapshot is the assumed rate of return on investments. The 2008-09 market downturns and the uncertain investment outlook for the next few years has prompted this review of the investment rate of return actuarial assumption. At its February 2010 meeting, the Board discussed alternatives that would reduce the current investment return assumption of 8 percent to 7.75 percent or 7.50 percent.

A decision to lower the investment return assumption from its current 8 percent would increase the unfunded liability and lower the funded status of the Defined Benefit (DB) Program, increasing the need for higher contributions in the future.

4: Interview with Bill Gross, founder of Pimco, with 1+ trillion of assets under management.

The bond king, Bill Gross, head of Pimco with over 1 Trillion in assets under management. "Returns on stocks and bonds will be lower in the years ahead" at approximate minute 5:40 and minute 7:50.

www.cnbc.com/id/15840232?video=1500422088&play=1


Other articles or videos of interest:


------------------------------------------------------------------------------------
Bloomberg
States Face Pension Stress as GASB Rules Widen Gap
July 09, 2010, 12:11 PM EDT
www.businessweek.com/news/2010-07....-widen-gap.html

----------------------------------------------------------------------------------------------
www.cnbc.com/id/15840232?video=1499551640&play=1 (if it doesn't load, click the page refresh button a few times)

Airtime: Thurs. May 20 2010 | 4:18 PM ET
Listen to segment beginning at 5:10-5:35 where Calpers CEO says unequivocally that after review, they do not believe earnings expectations of 7 3/4 are realistic.

Put this together with that of all other state and local government pensions where actuarial return assumptions are higher and you have underfunded pensions based on contributions by the employees and the requisite govt body. This is in addition to the fact that many govt entities are not making the required contributions in the first place.

--------------------------------------------------------------------------------------------------


Videos from CNBC in July on public union pensions .
www.cnbc.com/id/15840232?video=1533002156&play=1 Chris Christie, NJ Governor

www.cnbc.com/id/15840232?video=1533005835&play=1 Sam Zell


-------------------------
In the interim, Robert Novy-Marx and Mr. Joshua Rauh wrote an op ed in the Tribune on August 13:

www.chicagotribune.com/news/ct-oped-0813-pensions-20100813,0,7216817.story
chicagotribune.com
Can the Illinois pension catastrophe be stopped?

By Robert Novy-Marx and Joshua Rauh

August 13, 2010
Advertisement

Public pension systems in Illinois have long served as vehicles for the government to borrow money out of the view of taxpayers. In place of even higher public employee salaries, politicians have made unfunded pension promises extending far beyond their own terms in office. These debts are coming due, placing a massive burden on state and local budgets.

Government accounting standards have facilitated this surreptitious borrowing by grossly undervaluing the state's pension liabilities. A true financial valuation of unfunded pension liabilities reveals a debt of more than $200 billion for the state and local governments. That is around $42,000 per Illinois household and only counts benefits that public employees can claim based on today's pay and work history.

The April legislation that trims benefits for new hires doesn't reduce your $42,000 debt by one penny. It may gradually slow the growth of your debt to public employees, but only if the state fully funds the benefits earned under the new tier. In fact, it is quite possible that the giveaways of the past will be repeated in the future. As soon as there is the smallest economic recovery, benefits could again be raised or contributions reduced.

What can be done now? First, we need to end the covert borrowing and the hidden pledges that governments make with taxpayer money. Fundamental reforms of public employee compensation are imperative. New public employees should be placed in a 401(k)-type plan and enrolled in Social Security. Their compensation structure should be more like that of new hires at successful corporations.

To avoid some of the pitfalls of 401(k) plans in the private sector, the state should look to the Federal Thrift Savings Program, a cost-efficient 401(k)-type plan for federal government employees that has automatic enrollment, matching employer contributions, low fees and good investment choices.

There is no doubt that this kind of plan would be less expensive for Illinois. Social Security costs 12.4 percent of pay, and a typical federal plan costs around 9 percent, for a total of 22 percent of pay to be shared by employers and employees. The Illinois Teachers Retirement System cost 27 percent of pay in 2009, a rate certain to rise as pension promises made over the last decade come due.

Illinois should also test the legality of moving future work for existing employees onto the same 401(k)-type plan.

Those measures would stop your $42,000 from growing. But the question remains, who is going to pay the $42,000? Here is your menu of choices. Most of them will be unpleasant.

•Taxpayers pay for it all in higher taxes and reduced public services. But it is hard to see us finding an extra $200 billion anytime soon. State and local government tax revenues in Illinois are around $55 billion annually, and budget shortfalls are colossal.

•Continue to borrow to fund pensions. This tactic restructures the debt to employees so that it becomes debt to investors. Unfortunately, future generations of taxpayers would shoulder the burden. Illinois has already made $13 billion of pension bond issues, which are expensive as they enjoy no tax subsidies. The silver lining is that to keep borrowing, Illinois will soon need to credibly show capital markets a reform of its entire budgetary process.

•If the state could increase retirement ages for existing employees to 67 and eliminate openhanded early retirement deals, your $42,000 would be cut in half. The Illinois Constitution states that public employee pension benefits may not be diminished or impaired. But if we are putting all options on the table, this one also has to be there, even if it involves changing the constitution.

•We could do nothing and end up like Greece. If so, Illinois will eventually default on some of its $26 billion of outstanding general obligation and pension bond debt. The depletion of the state's pension funds, which is quite likely within the next 10 years, will provide a catalyst. Illinois will then end up at the federal government's doorstep, hat in hand. This should be avoided at all costs. Markets already are charging more for insurance on Illinois bonds than for bonds issued by Spain, Portugal or California.

None of these options is particularly appealing, but there are no other choices.

Any politician wanting to reduce your $42,000 in unpaid debts to public employees must unfortunately pick from these poisons.

Robert Novy-Marx is an assistant professor of finance at the University of Rochester. Joshua Rauh is an associate professor of finance at the Kellogg School of Management.

Copyright © 2010, Chicago Tribune

[doctorwho]

Aug 29, 2010 15:48:10 GMT -6 macrockett said:

I neglected to post this email I sent to the Chair of the Personnel & Pension Committee of the State of Illinois regarding the pension assumptions. Here it is...by the way, I haven't heard back...

----- Original Message -----
From: MACrockett

To: [e-mail]
Sent: Thursday, August 05, 2010 10:20 PM
Subject: pension actuarial assumptions


Dear Representative McCarthy,

As Chairman of the Personnel & Pension Committee I wanted to bring to your attention the flawed actuarial assumptions regarding pension investment returns. In Illinois, I believe the assumtion is 8% or above. As a CPA I have a solid understanding of this subject and in the current economic environment (and into the foreseeable future), these returns are extremely unlikely.

There is a growing body of work now available that is sounding the alarm that the approximately 8% assumed investment returns are not achievable for the reason I have stated above.

The ramification is that contributions by the State and public union participants are too low. Eventually this burden will unfairly be borne by the taxpayer.

I am requesting that you hold the plan actuaries accountable. Please challenge them to prove that their assumptions are correct in light of the informaton provided below.

Sincerely,

Michael Crockett
630-416-6441




Here are the sources, while not exhaustive, that clearly point out the actuarial flaws:

1: Joint study by Kellogg and University of Chicago. See link to Kellogg

www.cnbc.com/id/15840232?video=1502930553&play=1 (cncb interview with Raug re the below study)

An interview on cnbc with Joshua Rauh, of Kellogg School of Management, author of the Pension study www.kellogg.northwestern.edu/faculty/rauh/research/JEP_Fall2009.pdf that discusses the unsustainable pension benefits to public employees.

Once again, in this video, on at least two occasions, the guests each state that the actuarial assumptions of returns in the area of 8% are not realistic in today's economic climate.

2: Stanford's Institute for Economic Policy Research study. Blackrock (4 trillion under management) CEO, Laurence Fink comments as well in the below article that 5% is a more reasonable figure.

online.wsj.com/article/SB10001424.....html#printMode
APRIL 27, 2010
Pension Bomb Ticks Louder

California's public funds are assuming unlikely rates of return.

The time-bomb that is public-pension obligations keeps ticking louder and louder. Eventually someone will have to notice.

This month, Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds. siepr-new.stanford.edu/system/files/shared/GoingforBroke_pb.pdf

The Stanford study uses what's called a "risk-free" 4.14% discount rate, which is tied to 10-year Treasury bonds. The Government Accounting Standards Board requires corporate pensions to use a risk-free rate, but it allows public pension funds to discount pension liabilities at their expected rate of return, which the pension funds determine. Calstrs assumes a rate of return of 8%, Calpers 7.75% and the UC fund 7.5%. But the CEO of the global investment management firm BlackRock Inc., Laurence Fink, says Calpers would be lucky to earn 6% on its portfolio. A 5% return is more realistic.

news.stanford.edu/news/2010/april....html?view=print

Stanford Report, April 5, 2010
California state pension funds going broke, Stanford study finds

New calculations by Stanford graduate students show that California's three main public employee pension funds are in more dire financial trouble than previously believed.


3: Calsters itself is reassessing it's pension assumptions.

articles.latimes.com/2010/mar/16/business/la-fi-calstrs16-2010mar16

PENSIONS
For CalSTRS, an investment bet that failed
The state's teachers retirement fund had hoped four years ago that a flourishing bull market would help make up for a big projected shortfall. Now the fund is $43 billion behind as of June.

By Marc Lifsher

March 16, 2010

The increases are necessary because CalSTRS' actuaries say the fund would need a return on investments of more than 20% a year over the next five years to make up for recent recessionary losses. Over the last 30 years, CalSTRS' portfolio has increased an average of 8.65% a year.

In an attempt to be more conservative, the board now is considering reducing its assumed annual return to as low as 7.5%. CalPERS also is considering lowering its 7.75% benchmark.

Those assumed numbers are still higher than the 6.9% annual return that investment guru Warren Buffett assumes for investments held by pension funds at units of his Berkshire Hathaway Inc.

"Who are they [CalSTRS] kidding? They should not be assuming more than 6%," said David Crane, a former investment banker and the governor's special advisor for jobs and the economy.

"Unreal assumptions," he warned, "will come out of the pocket" of future generations of Californians.

--------------------------------------------------------------------------------
CalSTRS Board Considers Revised Investment Assumptions
May. 27, 2010 Chad Christman
www.calstrsbenefits.us/post/calst....ent-assumptions

The Teachers Retirement Board will discuss possible changes to its investment return assumption at its June 4, 2010 meeting. A change would affect the funded status and actuarial valuation of the CalSTRS Defined Benefit (DB) and other programs.

Each year, the Board adopts an actuarial valuation of the DB Program that projects the program’s assets and liabilities to give the Board a snapshot of the program’s current fiscal health. One of the key components of that snapshot is the assumed rate of return on investments. The 2008-09 market downturns and the uncertain investment outlook for the next few years has prompted this review of the investment rate of return actuarial assumption. At its February 2010 meeting, the Board discussed alternatives that would reduce the current investment return assumption of 8 percent to 7.75 percent or 7.50 percent.

A decision to lower the investment return assumption from its current 8 percent would increase the unfunded liability and lower the funded status of the Defined Benefit (DB) Program, increasing the need for higher contributions in the future.

4: Interview with Bill Gross, founder of Pimco, with 1+ trillion of assets under management.

The bond king, Bill Gross, head of Pimco with over 1 Trillion in assets under management. "Returns on stocks and bonds will be lower in the years ahead" at approximate minute 5:40 and minute 7:50.

www.cnbc.com/id/15840232?video=1500422088&play=1


Other articles or videos of interest:


------------------------------------------------------------------------------------
Bloomberg
States Face Pension Stress as GASB Rules Widen Gap
July 09, 2010, 12:11 PM EDT
www.businessweek.com/news/2010-07....-widen-gap.html

----------------------------------------------------------------------------------------------
www.cnbc.com/id/15840232?video=1499551640&play=1 (if it doesn't load, click the page refresh button a few times)

Airtime: Thurs. May 20 2010 | 4:18 PM ET
Listen to segment beginning at 5:10-5:35 where Calpers CEO says unequivocally that after review, they do not believe earnings expectations of 7 3/4 are realistic.

Put this together with that of all other state and local government pensions where actuarial return assumptions are higher and you have underfunded pensions based on contributions by the employees and the requisite govt body. This is in addition to the fact that many govt entities are not making the required contributions in the first place.

--------------------------------------------------------------------------------------------------


Videos from CNBC in July on public union pensions .
www.cnbc.com/id/15840232?video=1533002156&play=1 Chris Christie, NJ Governor

www.cnbc.com/id/15840232?video=1533005835&play=1 Sam Zell


-------------------------
In the interim, Robert Novy-Marx and Mr. Joshua Rauh wrote an op ed in the Tribune on August 13:

www.chicagotribune.com/news/ct-oped-0813-pensions-20100813,0,7216817.story
chicagotribune.com
Can the Illinois pension catastrophe be stopped?

By Robert Novy-Marx and Joshua Rauh

August 13, 2010
Advertisement

Public pension systems in Illinois have long served as vehicles for the government to borrow money out of the view of taxpayers. In place of even higher public employee salaries, politicians have made unfunded pension promises extending far beyond their own terms in office. These debts are coming due, placing a massive burden on state and local budgets.

Government accounting standards have facilitated this surreptitious borrowing by grossly undervaluing the state's pension liabilities. A true financial valuation of unfunded pension liabilities reveals a debt of more than $200 billion for the state and local governments. That is around $42,000 per Illinois household and only counts benefits that public employees can claim based on today's pay and work history.

The April legislation that trims benefits for new hires doesn't reduce your $42,000 debt by one penny. It may gradually slow the growth of your debt to public employees, but only if the state fully funds the benefits earned under the new tier. In fact, it is quite possible that the giveaways of the past will be repeated in the future. As soon as there is the smallest economic recovery, benefits could again be raised or contributions reduced.

What can be done now? First, we need to end the covert borrowing and the hidden pledges that governments make with taxpayer money. Fundamental reforms of public employee compensation are imperative. New public employees should be placed in a 401(k)-type plan and enrolled in Social Security. Their compensation structure should be more like that of new hires at successful corporations.

To avoid some of the pitfalls of 401(k) plans in the private sector, the state should look to the Federal Thrift Savings Program, a cost-efficient 401(k)-type plan for federal government employees that has automatic enrollment, matching employer contributions, low fees and good investment choices.

There is no doubt that this kind of plan would be less expensive for Illinois. Social Security costs 12.4 percent of pay, and a typical federal plan costs around 9 percent, for a total of 22 percent of pay to be shared by employers and employees. The Illinois Teachers Retirement System cost 27 percent of pay in 2009, a rate certain to rise as pension promises made over the last decade come due.

Illinois should also test the legality of moving future work for existing employees onto the same 401(k)-type plan.

Those measures would stop your $42,000 from growing. But the question remains, who is going to pay the $42,000? Here is your menu of choices. Most of them will be unpleasant.

•Taxpayers pay for it all in higher taxes and reduced public services. But it is hard to see us finding an extra $200 billion anytime soon. State and local government tax revenues in Illinois are around $55 billion annually, and budget shortfalls are colossal.

•Continue to borrow to fund pensions. This tactic restructures the debt to employees so that it becomes debt to investors. Unfortunately, future generations of taxpayers would shoulder the burden. Illinois has already made $13 billion of pension bond issues, which are expensive as they enjoy no tax subsidies. The silver lining is that to keep borrowing, Illinois will soon need to credibly show capital markets a reform of its entire budgetary process.

•If the state could increase retirement ages for existing employees to 67 and eliminate openhanded early retirement deals, your $42,000 would be cut in half. The Illinois Constitution states that public employee pension benefits may not be diminished or impaired. But if we are putting all options on the table, this one also has to be there, even if it involves changing the constitution.

•We could do nothing and end up like Greece. If so, Illinois will eventually default on some of its $26 billion of outstanding general obligation and pension bond debt. The depletion of the state's pension funds, which is quite likely within the next 10 years, will provide a catalyst. Illinois will then end up at the federal government's doorstep, hat in hand. This should be avoided at all costs. Markets already are charging more for insurance on Illinois bonds than for bonds issued by Spain, Portugal or California.

None of these options is particularly appealing, but there are no other choices.

Any politician wanting to reduce your $42,000 in unpaid debts to public employees must unfortunately pick from these poisons.

Robert Novy-Marx is an assistant professor of finance at the University of Rochester. Joshua Rauh is an associate professor of finance at the Kellogg School of Management.

Copyright © 2010, Chicago Tribune

Great stuff - I keep learning more from you on this all the time- it is appreciated.

[Arch]

Now, if that $42K each doesn't wake people up, I don't know what will.

[southsidesignmaker]

Mac, thanks again for driving home the "ever closer" time bomb. The portion outlined below sets off immediate alarms.

"PENSIONS
For CalSTRS, an investment bet that failed
The state's teachers retirement fund had hoped four years ago that a flourishing bull market would help make up for a big projected shortfall. Now the fund is $43 billion behind as of June.

By Marc Lifsher

March 16, 2010

The increases are necessary because CalSTRS' actuaries say the fund would need a return on investments of more than "20% a year over the next five years" to make up for recent recessionary losses. Over the last 30 years, CalSTRS' portfolio has increased an average of 8.65% a year.

In an attempt to be more conservative, the board now is considering reducing its assumed annual return to as low as 7.5%. CalPERS also is considering lowering its 7.75% benchmark.

Those assumed numbers are still higher than the 6.9% annual return that investment guru Warren Buffett assumes for investments held by pension funds at units of his Berkshire Hathaway Inc.

"Who are they [CalSTRS] kidding? They should not be assuming more than 6%," said David Crane, a former investment banker and the governor's special advisor for jobs and the economy.

"Unreal assumptions," he warned, "will come out of the pocket" of future generations of Californians."


_____________________________________________________________________________



Mac your continued warning regarding unrealistic ROI sent me on a mission to examine our own personal pension situation about 8 months ago. With a newly acquired financial adviser it became apparent that my 8.5% to 9.5% ROI is nothing more than a "pipe dream". After further investigation it became apparent that any dreams of retiring before 66 or 67 was just that a "pipe dream".

Our family and small company have reassessed ROI and pegged a long term return of 6% which may even be at he upper end based on recent economic events. Government agencies that think the old days will ever return are doing their constituents a disservice.

[southsidesignmaker]

Institute Confirms State’s Financial Situation is ‘Obscene”

August 23, 2010
PRESS RELEASE

CONTACT:
Darlene Porteus, 847-835-5200
mailto:[e-mail]

TRUTH IN ACCOUNTING ISSUES ILLINOIS’
“FINANCIAL STATE OF THE STATE”
Study Confirms State’s Financial Situation is ‘Obscene”

Chicago – Today, the Institute for Truth in Accounting released Illinois’ “Financial State of the State”, which answers the question “Is the state bankrupt?” The Institute’s reports the state has only $20 billion of assets to cover $140.6 billion in bills —- a $120.6 billion shortfall. Each Illinois taxpayer’s share is $29,200.

This precarious financial position falls under one definition of bankruptcy —- A debtor that does not have the financial means to pay their bills as they come due. The Institute’s detailed study of Illinois’ June 30, 2009 audited financial report and retirement systems’ actuarial reports found the state does not have the $120.6 billion needed to pay for its liabilities as they come due.“ The state has incurred billions of dollars of liabilities and does not have the means to meet these liabilities,” said Sheila Weinberg, founder & CEO of the Institute.

On July 2 Comptroller Dan Hynes admitted that the state did not have $5 billion to pay bills that were due. In a New York Times interview Hynes stated, “This is not some esoteric budget issue; we are not paying bills for absolutely essential services”. He underscored, “That is obscene.”

“Our study of the Illinois budget processes and financial reports found our governor and legislators continue to damage the state by not following the state budget law,” stressed Weinberg. “Their total disregard of Illinois’ balanced budget requirement has resulted in a financial hole that may be insurmountable.”

The Institute’s study revealed that each year when calculating a balanced budget the governor and legislators routinely overlook billions of dollars of payroll costs, including earned retirement benefits. Bill Gates recently called this practice “accounting fraud”. The Institute’s chair Roger Nelson commented, “We must stop this practice, which our elected officials have used to pretend they have balanced the budget, while not providing the necessary funding for $100 billion retirement benefits promised our state employees and teachers.”

The Illinois’ Financial State of the State can be found on the Institute’s website:http://www.truthinaccounting.org/. Research comments can be found at:http://illinois.statebudgetwatch.org/

About the Institute for Truth in Accounting

The Institute for Truth in Accounting (IFTA) is dedicated to promoting honest, accurate, and transparent accounting at all levels of government and business. As a non-partisan, non-profit organization, the IFTA works to expose accounting deficiencies while promoting better, more accessible delivery of accurate government financial data—and, in turn, providing a foundation for more informed public policy. The IFTA provides its expertise to develop more effective accounting standards and deliver accurate government financial information to policymakers, opinion leaders, and citizens, so they can all work for a more secure financial future. To learn more, please visit our website at www.TruthInAccounting.org.

Institute for Truth in Accounting
1500 Skokie Boulevard, Suite 304
Northbrook, IL 60062
847-835-5200

[macrockett]

And more to the point of the pensions SSSM...

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Another Illinois plan sells investments to cover benefits
By Barry B. Burr
Source: Pensions & Investments
Date: August 24, 2010

(updated with correction)

Illinois Teachers' Retirement System, Springfield, plans to sell $3 billion in investments, or about 10% of its $33.1 billion in assets, in the current fiscal year to pay pension benefits, according to Dave Urbanek, public information officer.

The system is the fifth Illinois statewide defined benefit plan to sell off investments this fiscal year to pay benefits.

Illinois State Universities Retirement System, Champaign, expects to sell $1.2 billion in investments from its $12.2 billion defined benefit fund this fiscal year to raise liquidity to pay benefits to participants.

The Illinois State Board of Investment, Chicago, could sell $840 million investments from its $9.9 billion fund to pay benefits of the Illinois State Employees' Retirement System, Illinois Judges' Retirement System and Illinois General Assembly Retirement System. ISBI oversees the investments of the three systems.

The liquidity stress from the investment sales at the five plans could force each of them to restructure their strategic asset allocations, terminate investment managers and search for new managers.

Illinois Teachers sold $290 million in investments so far this month and $200 million last month because of a lack of state contributions.

“Without the monthly state contribution, TRS estimates sales of roughly $3 billion for the entire fiscal year, or approximately $250 million every month,” Mr. Urbanek said in a statement in response to an inquiry.

So far, TRS has accomplished the investment liquidation through “appropriate rebalancing,” Mr. Urbanek said in the statement. “As the year progresses, this approach will no longer be sufficient to cover the total amount of benefit payments and more targeted asset sales will need to be considered.

“TRS staff continues to study the impacts of the current liquidity situation on the total portfolio and recommendations will be made as necessary to adjust targets. These changes could include revisions to the system's target asset allocation and termination of investment manager relationships as 10% or more of the portfolio is liquidated to pay benefits this fiscal year,” he said.

Mr. Urbanek said the investment sales could force changes in the system's current asset allocation impacting whether it could meet its current 8.5% target rate of return.

“In the current market environment, there are significant market opportunities to institutional investors with available capital. In the absence of the required contribution from the state, TRS and the other Illinois pension systems will no longer be able to participate in these opportunities,” he said.


Sounds like a red herring excuse to me. Masking the fact that 8.5% returns are not achievable in this environment.

R.V. Kuhns, the system's investment consultant, is evaluating possible allocation changes for liquidity needs as they arise, Mr. Urbanek added. He said it was “impossible” to know details of possible searches or terminations at this time.

Since the start of the fiscal year on July 1 through Aug. 20, the system has received only $90 million in contributions from the state. For the current fiscal year, ending June 30, 2011, the system requested $2.35 billion in contributions from the state, Mr. Urbanek said.

In the last fiscal year, the system sold $1.3 billion in assets to pay pension benefits; it received $170.4 million in employer contributions and $899 million in member contributions, while requesting $2.08 billion in employer contributions alone.

TRS' current asset allocation is U.S. equities, 30.5%; international equities, 20.3%; fixed income, 17.5%; real estate, 9.6%; real return, 9.3%; private equity, 8.3%; absolute return, 3.6%; and short-term investments, 0.9%.

[southsidesignmaker]

Thanks Mac, I did read a similar article and was stunned that a pension would sell of assets rather than "bite the bullet" and cut benefits. A farmer might consider this selling the seed corn for next year's harvest.

My concern is "how many harvests" will there be until the taxpayer is not asked, but told how much will be needed.

When will the public wake up and demand this situation change.... The sooner the better, start with cutting back all pensioners that received the "20% bump", and go back 10 years. Put all defined pension employees that are 30 or younger in self directed Keogh type plans.

[macrockett]

My solution is to put the heat on our legislators. Such as write McCarthy as I did. There is no way these legislators can play ignorant to the facts when you hit them in the face with so much data. It is pretty overwhelming now.

Next I will write to papers in his district. I have been in contact with Darlene Senger but need to follow up. But bottom line is more people need to let their legislators that they are aware of the issues and are watching to see what their representatives are doing about it.

[southsidesignmaker]

Mac, it is going to get real simple: Operations refs are going to come up for vote and the common voter is going to cast his / her vote according to the good old pocket book.

Watch closely as COD junior college asks the voter for more cash. The voter will start asking how the employers are addressing these escalating employee costs. If the answer is to "ask the voter" for more cash I feel these agencies are in for a rude dose of reality.

[doctorwho]

Aug 29, 2010 19:41:53 GMT -6 southsidesignmaker said:

Mac, it is going to get real simple: Operations refs are going to come up for vote and the common voter is going to cast his / her vote according to the good old pocket book.

Watch closely as COD junior college asks the voter for more cash. The voter will start asking how the employers are addressing these escalating employee costs. If the answer is to "ask the voter" for more cash I feel these agencies are in for a rude dose of reality.

I believe you are correct - the hit most families have taken economically crosses all political spectrums amd 'alliances'. I believe even with the spin any ref will here filled with scare tactics - ( now that they've been trained by the original firm- remember split shifts and cutting of curriculum etc.) - is going to fail...regardless of how one feels about our school board - admin- 3rd HS- boundaries- bussing or anything else. In 'normal' times, the state income tax increase would have already been in effect...

Don't talk to many people anywhere who believe any public/government entity, including schools is addressing the 500 pounf gorilla in the room...yet EVERY private company has done so, some more than others, years ago.