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Post by macrockett on Apr 12, 2012 15:55:56 GMT -6
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Post by macrockett on Apr 19, 2012 21:05:04 GMT -6
Cleveland and Atlanta Regional Federal Reserve video on State and Local debt, with focus on public pensions (released 4/13/12): www.youtube.com/watch?feature=player_embedded&v=Kb4RZJdC51kFed Res Bank of Cleveland's accompanying article: www.clevelandfed.org/Forefront/2012/winter/ff_2012_winter_08.cfmThe General Accounting Office is also looking at this issue: www.gao.gov/assets/590/589043.pdfAs I have told friends, there is not coincidence in the Federal Reserve starving fixed income investors in order to push them into more risky assets like equities. The Fed is scared to death of the outstanding national pension liability, i.e., the unfunded liabilities sitting off balance sheet of most state and local governments. What do these pension funds invest in? One of the biggest holdings is equities. If the Fed can force people into these securities it helps the pension funds. Imagine that. (The other reason to keep rates low is to take pressure off of real estate assets, where the Banks are the primary lenders.) We know Illinois' combined pension and OPEB liabilities are now close to or over $100 billion. If you include municipal government liabilities that number goes much higher. For example, Will County unfunded pensions are near $147 million; Naperville, $120 million; DuPage County over $182 million; District 204 unfunded OPEBs $29 million... And those amounts are in addition to the debt on the books of these government entities. For example Illinois have over $45 billion of debt on its books. |
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Post by macrockett on May 1, 2012 9:56:15 GMT -6
Right now Illinois and Los Angeles are about in the same place, relatively speaking. Their pension and health care liabilities are about 4 times their annual budget. There are some differences, but materially, this is one of the canaries in the coal mine. Here is the latest on LA: www.calwatchdog.com/2012/04/30/los-angeles-teeters-on-the-brink-of-bankruptcy/NEW: Los Angeles teeters on the brink of bankruptcy April 30, 2012 By Brian Calle Taxpayers in Los Angeles are facing a major crisis if Mayor Antonio Villaraigosa and other officials do not begin to address the systemic, structural issues putting the city on the fast track to economic upheaval. The situation is similar to that in other California cities such as Stockton and Vallejo. Much ado has been made about the city’s projected $238 million budget shortfall for fiscal year 2012-2013 and the mayor’s proposal to cut jobs and tinker around the edges of pension reform. But the picture is much grimmer than a single year’s budget shortfall. The tsunami of unfunded pension liabilities and health benefits is about to hit the shoreline for Los Angeles. And if Stanford University’s estimates are correct, Los Angeles is facing roughly $27 billion in unfunded pension liabilities. For a city whose annual budget is in the $7 billion range this year, that figure is daunting.The Big Budget Picture Budget gaps are no rarity for the City of Angels in recent years. It seems like an annual tradition. In fiscal year 2011-2012, the city projected a budget shortfall of over $400 million. For 2010-11’s fiscal year, the tune was the same. As was 2009-10, and so on. L.A.’s chief administrative officer, Miguel Santana, noted that the budget shortfall is likely to be much greater by 2014-15. “Every year it gets worse,” he said. The chain of events is always the same. City officials announce a budget shortfall and the mayor seeks to bandage it with gimmicks that fail to address the underlying causes. Criticizing Villaraigosa’s approach to last year’s budget shortfall, City Controller Wendy Greuel said that ”kicking the can down the road is not a solution when we can anticipate a growing structural deficit in future years.” She was referring specifically to a plan Villaraigosa outlined to borrow money to solve part of the deficit. But her summation applies to the inept budgeting approach of the city for years. Sound familiar?Former Los Angeles Mayor Richard Riordan predicted increased hardships and eventual bankruptcy if drastic action wasn’t taken by city officials. In an editorial he penned in the Wall Street Journal in 2010, he wrote, “Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy.” Riordan is not shying away from those comments. In a recent phone conversation, he told me that bankruptcy for L.A. could come “as early as next year.” Ballooning Pension Costs What has rapidly perpetuated financial woes for the city is that payouts for retirement benefits have increased in recent years, thus crowding out services the city provides. A study released in early April by the Stanford Institute for Economic Policy Research found that, for the city of Los Angeles, “Pension costs increased from 8.5 percent of total city expenditures in 1999 to 13.7 percent in 2011.” For fiscal year 2011-12, estimated pension costs look to have climbed to “15.4 percent of city expenditures.” Sound familiar?Stanford’s study also estimated that each of the city’s three independent pension funds is unfunded by billions of dollars: the city of Los Angeles Fire and Police Pension System is $9.25 billion unfunded; the Los Angeles City Employees’ Retirement System is $11.32 billion unfunded; and the city of Los Angeles Water and Power Employees’ Retirement System is $6.59 billion unfunded. “In 1999, Los Angeles City’s aggregate annual required contributions for its three systems totaled $291 million, rising to $923 million in 2011, an annual average growth rate of 11.1 percent,” according to the Stanford report. But here is the kicker: The growth in pension spending by the city “outpaced that of spending on public protection, which grew at 5.2 percent, on health and sanitation (3.6 percent), and on recreation and cultural services (5.8 percent), and it occurred while spending on public assistance programs fell by an average of 3.0 percent per year.” If the trend continues, the city will be little more than a professional retirement payment and processing service. Union Power Economic downturn aside, interminable spending fueled by powerful unions has pushed Los Angeles to the brink of bankruptcy. As Riordan argues, unions basically control the Los Angeles City Council. For example, “A compensation package negotiated in 2007 irresponsibly guaranteed many city workers more than 25 percent in pay hikes over five years,” according to a Los Angeles Times editorial. And as the city continues its downward spiral, “most employees represented by the Coalition of Los Angeles City Unions are scheduled for 11 percent increases in compensation over the coming two years,” the Times reported. One of the ideas for offsetting some of this year’s budget shortfall was to ask city workers to forgo raises. But the union bosses balked at the idea claiming that city employees had sacrificed enough in recent years. As for pension benefits, some city employees are able to retire with up to 100 percent of their salaries, a benefit virtually unheard of in the private sector. Triggering Bankruptcy “What will likely trigger bankruptcy is when Wall Street stops buying bonds from [the city of] LA,” Riordan told me. “Someone will wake up and say, ‘They aren’t going to have enough money to pay off my bonds,’ and that will be that.” “If you predict ahead three or four years,” Riordan argued, the city will have to “close parks, libraries and cut police and fire services,” similar to what has happened in the cities of Stockton and Vallejo. Tap Dancing Around Reform To close this year’s budget shortfall, Villaraigosa plans to get rid of 669 positions in the city; 231 of the positions would be layoffs, the others are currently vacant and would be eliminated. Of course, layoffs will not be enough, and Villaraigosa has argued that city workers will have to assume more costs for their own health care. And he has announced plans for changes to the city’s pension system, including raising the retirement age for new hires to 67 (current workers retire at 55 or 60) and limiting pension benefits so that retirees cannot retire with 100 percent of salary. Union leaders instantly chastised the mayor for his pension proposals, specifically his plan to raise the retirement age. But frankly, his proposals barely scratch the surface of what’s necessary for fiscal sustainability. At the very least, a new, less-generous pension plan has to be created for new employees, something like the 401(k) plans private sector employees have. Jan Perry, a Los Angeles city councilwoman and candidate for mayor, told me, “A new pension tier for people not even hired is completely reasonable to pursue.” Pension expert Marcia Fritz said that all of the city’s employees should pay at least half of pension costs. “This eliminates the employer paid pension contribution and will reduce pension costs as a whole,” she said. “Another thing L.A. should do,” if bankruptcy becomes reality, “is break retiree health contracts,” she said. “They weren’t prefunded, so are empty promises, and courts have allowed retiree health to be lumped in with other unsecured creditors.” The best option would be to adjust promised benefit levels for current workers. Some experts believe, as Fritz also noted, that “fiscally distressed agencies may have the ability to adjust benefits for current workers.” She argued that there is a growing precedent that governments can call on employees to increase retirement contributions and suspend cost-of-living increases when municipal or agency funds are at unhealthy levels. Still, these necessarily bold approaches are untested. Of course, another option to fix the hole would be astronomical tax increases, which would likely only delay real solutions. Riodan balked at the idea, asking, “Can you imagine L.A. quadrupling their taxes? Everyone would flee the city and the state.” Even with the city’s challenges, as hard is it may be to believe, Riordan contended: “L.A. is better off than a lot of cities” in California and elsewhere. If that’s the case, there is a bumpier road ahead. |
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Post by macrockett on May 1, 2012 10:51:42 GMT -6
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Post by macrockett on May 1, 2012 11:06:00 GMT -6
The situation in Stockton, CA is important to watch to see what happens after the State mandated mediation, that is required prior to bankruptcy. If there is no resolution, CA and Federal Bankruptcy law will go head to head. Remember in the Vallejo Bankruptcy the city did not abrogate the pension agreements. Stockton, on the other hand, could act very differently. www.governing.com/columns/public-finance/col-stockton-californias-debt-problems-may-set-precedent.html#Stockton, California’s Debt Problems May Set Precedent The city has entered into a mandated medication period before it can file for bankruptcy -- how the story unfolds could have major consequences for public employee pensions and bondholders nationwide. BY: John E. Petersen | May 2012 Under a new California law governing municipal distress, Stockton has entered into a mandated mediation period before it can file for bankruptcy under Chapter 9 [read "Stockton, California's Bankruptcy Makes 'Normal' Cities Nervous"]. The city, state, employees, retirees and bondholders -- not to mention the citizens -- have a lot riding on how the story unfolds. Moreover, the unfolding could have major consequences for public employee pension plans and bondholders nationwide. Stockton faces an avalanche of obligations that it cannot meet. Foremost among them are contributions to public employee pensions, as well as debt service on bonds earlier sold to fund its pension contributions. All told, the retirement-related annual payments by the city amount to about $37 million of its total budget of $196 million, not including another $17 million spent on retiree health care. With only $1 million left in its cash balances, the city is on the brink of collapse. While a number of special districts and specific projects have filed for bankruptcy, it’s been rare for general governments (such as cities or counties) to do so. In the past, the major concern was often with outstanding bonded indebtedness or a legal judgment against a small city. But times have changed. Now, the major de facto creditors are likely to be a jurisdiction’s retirees and current employees that have unfunded pension or post-retirement liabilities. The question that likely will be faced if the Stockton bankruptcy goes forward is the ability of a government to retroactively change contract provisions that have promised benefits and required levels of contributions to fund pension plan commitments. Where one stands in the chain of creditors’ claims is a critical issue for general obligation bondholders, who have long considered themselves to be the first in line. Governments have an interest here, too: If a state allows the bondholders to be pushed behind in the line, credit ratings will suffer and borrowing costs will go up for everyone in the state. The major players as Stockton’s unraveling continues are likely to be the public employee unions and the state’s giant public employee pension program, the California Public Employees’ Retirement System, or CalPERS. The key issue: Are the pension fund benefits and required contributions constitutionally protected? If the Stockton case lands in a federal court, will the state law prevail over that of the bankruptcy court as it works out an equitable recomposition of the debt? CalPERS, in particular, is not anxious to see an escape hatch open for localities since it could reduce contributions to the pension system. The stakes of a confrontation between public pensions and bondholders are potentially very high. State and local governments have $3 trillion in municipal securities outstanding, with perhaps $1 trillion of this amount representing general obligation debt. Meanwhile, state and local pension systems have an estimated $1 trillion to $2 trillion in unfunded liabilities, depending on how one calculates the liability. It is not the huge sums themselves that are at issue. There is little doubt that most claimants will get paid as promised. Rather, the issue is how debt and pension obligations will be viewed in the future as the judicial and legislative sorting process takes place and priorities among claims on revenues are established. The growing number of fiscal difficulties -- the aftermath of the Great Recession -- should not be misinterpreted. Painful reductions in spending are going on, and governments are deleveraging by paying off debt and growing more reluctant to borrrow. Moreover, they are not defaulting on bond repayments. Only five general obligation bonds rated by Moody’s have defaulted in the last 40 years; only one in the last three years. Despite the favorable history, bondholders are not free from worries. Bankruptcy or state-managed rescue operations may lead to questions about the pecking order of various forms of obligations. The range of indebtedness now extends to the pension fund and post-retirement health benefit liabilities. States and localities have shown a growing appetite for altering pension agreements, but to date have usually avoided changes affecting retirees and current employees. Faced with the need to deleverage unsupportable obligations, such forbearance may no longer be possible. This is John Petersen’s final Public Money column. He passed away last month. |
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Post by macrockett on May 1, 2012 11:30:19 GMT -6
This story goes under the heading, "Well that didn't last very long." (Also, remember the State just recently restructured its own pension agreements). www.bloomberg.com/news/print/2012-04-30/providence-eying-bankruptcy-cuts-pensions-in-rhode-island.htmlProvidence Eying Bankruptcy Cuts Pensions in Rhode Island By Michael McDonald - May 1, 2012 Providence, Rhode Island’s biggest city, will halt cost-of-living increases for retirees among steps to overhaul a $422.8 million pension system and avoid becoming the state’s second municipal bankruptcy. Less than three months after Mayor Angel Taveras said Providence stood on the “brink of bankruptcy,” the City Council yesterday voted 13-0 for changes that save almost $19 million a year, partly by capping benefits, according to Jake Bissaillon, the council’s staff chief. While Taveras backs the overhaul, Paul Doughty, who leads the local firefighters union, called it “a huge mistake” that will be challenged in court.“These reforms have overwhelming support from the community, business leaders and the Local 1033 Laborers union,” Taveras said, referring to a municipal workers’ union. In a statement after he signed the measure at City Hall following the council vote, the mayor described the overhaul as “a big step toward the necessary structural changes we must make.” Rhode Island, which had the ninth-highest jobless rate in the U.S. in February, authorized a similar overhaul of the state pension system last year, suspending cost-of-living increases and raising retirement ages for government workers and teachers. Retiree benefits have been in the spotlight since August when Central Falls, the state’s smallest city, declared bankruptcy after being overwhelmed by pension promises. Banking on Cuts Providence is banking on the cuts to help balance its fiscal 2013 budget. Ending cost-of-living increases of as much as 6 percent a year for some retired public-safety workers will save $15.6 million, according to a council report. Taveras said that one former fire chief who earned $63,510 the year he retired collects $196,813 annually now and that there are at least 25 city pensioners whose annual payments top $100,000. The increases may resume once the retirement system has enough assets to cover 70 percent of promised benefits, according to the measure. Testimony at council hearings on proposed changes put the current funding level at 34 percent. Another element of the overhaul caps pensions at 1.5-times the state’s median household income, although no savings estimate was provided in the report. The city pension serves 3,000 retirees and another 2,000 current workers, including police and firefighters, said David Ortiz, a Taveras spokesman. Cutting Unfunded Liability The overhaul will reduce Providence’s unfunded liability of about $900 million by more than $240 million, according to the council report. The larger figure represents the difference between what the city has set aside to pay for promises to retirees and the estimated cost of those future benefits. Providence is one of the few municipal governments that has sought to roll back benefits already being paid to retirees or accrued by public workers, said Amy Monahan, a professor at the University of Minnesota Law School. In most cases lawmakers have sought to cut costs by increasing contributions for new workers or renegotiating current contracts, she said. “Most people would be very hesitant to take action that would interfere with a collectively bargained agreement,” Monahan said. “You typically preserve what has been earned.” Just as labor groups say they plan to sue the state of Rhode Island, the smallest in the U.S. with about 1.05 million residents, unions in Providence, the capital, said they will challenge the city of about 178,000. Doughty said that Taveras and the council are playing a dangerous game by counting savings from the overhaul to help balance its budget, because changing contracts already in force is illegal. ‘Huge’ Error “It’s a huge mistake,” said Doughty, the firefighter union chief. “If they lose this in court, almost certainly they will end up in bankruptcy. They’re playing a huge game of chicken.” The average city pensioner gets about $25,000 a year, Doughty said. Rhode Island’s median household income averaged about $54,900 over five years through 2010. The vote in Providence comes as the Legislature run by Democrats debates a proposal from Governor Lincoln Chafee that would authorize municipalities with poorly funded pension plans to suspend cost-of-living increases. If it becomes law, the measure would strengthen Providence’s argument that it needed to overhaul its system, said Ortiz, the Taveras spokesman. To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net. To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net. |
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Post by macrockett on May 1, 2012 12:44:06 GMT -6
Here's an article in the WSJ that hits pretty close to home... Take a look at the paragraph below with the sentence underlined. When that increase is triggered, you can expect the war to begin. online.wsj.com/article/SB10001424052702303592404577361891800868180.htmlSteven Malanga: How Retirement Benefits May Sink the StatesIllinois is a lesson in why companies are starting to pay more attention to the long-term fiscal prospects of governments.By STEVEN MALANGA Chicago Mayor Rahm Emanuel recently offered a stark assessment of the threat to his state's future that is posed by mounting pension and retiree health-care bills for government workers. Unless Illinois enacts reform quickly, he said, the costs of these programs will force taxes so high that, "You won't recruit a business, you won't recruit a family to live here."
We're likely to hear more such worries in coming years. That's because state and local governments across the country have accumulated several trillion dollars in unfunded retirement promises to public-sector workers, the costs of which will increasingly force taxes higher and crowd out other spending. Already businesses and residents are slowly starting to sit up and notice.
"Companies don't want to buy shares in a phenomenal tax burden that will unfold over the decades," the Chicago Tribune observed after Mr. Emanuel issued his warning on April 4. And neither will citizens. Government retiree costs are likely to play an increasing role in the competition among states for business and people, because these liabilities are not evenly distributed. Some states have enormous retiree obligations that they will somehow have to pay; others have enacted significant reforms, or never made lofty promises to their workers in the first place.
Indiana's debt for unfunded retiree health-care benefits, for example, amounts to just $81 per person. Neighboring Illinois's accumulated obligations for the same benefit average $3,399 per person.Illinois is an object lesson in why firms are starting to pay more attention to the long-term fiscal prospects of communities. Early last year, the state imposed $7 billion in new taxes on residents and business, pledging to use the money to eliminate its deficit and pay down a backlog of unpaid bills (to Medicaid providers, state vendors and delayed tax refunds to businesses). But more than a year later, the state is in worse fiscal shape, with its total deficit expected to increase to $5 billion from $4.6 billion, according to an estimate by the Civic Federation of Chicago.Rising pension costs will eat up much of the tax increase. Illinois borrowed money in the last two years to make contributions to its public pension funds. This year, under pressure to stop adding to its debt, the legislature must make its pension contributions out of tax money. That will cost $4.1 billion plus an additional $1.6 billion in interest payments on previous pension borrowings. Business leaders are now speaking openly about Illinois' fiscal failures. Jim Farrell, the former CEO of Illinois Toolworks who is heading a budget reform effort called Illinois Is Broke, said last year that the state is squandering its inherent advantages as a business location because "all the other good stuff doesn't make up for the [fiscal] calamity that's on the way." Caterpillar, the giant Peoria-based maker of heavy construction machinery, made the same point more vividly when it declined in February to locate a new factory in Illinois, specifically citing concern about the state's "business climate and overall fiscal health."California is another place where businesses have come to view three years of budget uncertainty and huge pension liabilities (not to mention the state's already high taxes and complex regulatory regime) as an inducement to migrate elsewhere. The state and its municipalities already face unfunded pension bills that now top $500 billion, according to studies by Stanford University's Joe Nation, and several of the state's cities, including Stockton in the Central Valley, face the prospect of insolvency. Executives at Stasis Engineering, a formerly Sonoma, Calif.-based auto design firm that left the state for West Virginia in the midst of an unfolding budget crisis in 2009, told the Press Democrat newspaper that the "budgetary bedlam gripping Sacramento" seemed to portend, as the paper characterized the company's concerns, "a future filled with tax increases and service cuts." More recently, in December 2011, Ron Mittelstaedt, the chief executive of Waste Connections, a recycling company formerly based in Folsom, Calif., told the press that the state's "structural [budget] mess" was a contributing factor in its decision to relocate to Texas. Meanwhile, Oakland Tribune columnist Daniel Borenstein notes that his city has levied what he calls a "hidden pension tax" on property owners for decades to pay off a municipal pension fund that went bust in 1976. Today, the average Oakland home with an assessed value of $266,267 pays an additional $419 a year in property taxes to finance the benefits of the defunct system, Mr. Borenstein estimates, while a home assessed at $1 million pays an added $1,575 in taxes. Bigger bills will fall due elsewhere. Earlier this year, the Massachusetts Taxpayers Foundation examined unfunded retiree health-care liabilities in 10 midsize municipalities, including Worcester and Springfield, and found the debt averaged $13,685 per household. To pay those commitments over 30 years would require adding $565 a year to property tax bills on average, the group estimated. In one community, Lawrence, the tab was $1,209 annually, a 50% increase over current taxes. Back in Illinois, Dana Levenson, Chicago's former chief financial officer, has projected that the average city homeowner paying $3,000 in annual property taxes could see his tax bill rise within five years as much as $1,400. The reason: A 2010 Illinois law requires municipalities to raise the funding levels in their pension systems using property tax revenues but no additional contributions from government employees. The legislation prompted former Chicago Mayor Richard Daley in December to warn residents that the increases might be so high, "you won't be able to sell your house."Mr. Malanga is a senior fellow at the Manhattan Institute and a contributor to PublicSectorInc.org. A version of this article appeared April 28, 2012, on page A13 in some U.S. editions of The Wall Street Journal, with the headline: How Retirement Benefits May Sink the States. |
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Post by doctorwho on May 1, 2012 13:14:36 GMT -6
unlike here - at least some legislators actually seeing reality |
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Post by macrockett on May 2, 2012 20:43:47 GMT -6
A Tale of Two Missions w/ Juan Williams (abridged) www.youtube.com/watch?v=RmnFQkD0Eg0"A Tale of Two Missions" -- a film by Juan Williams and Kyle Olson -- tells the story of competing cultures in American education through examples from Chicago. Most people know who Juan Williams is, however you may not be familiar with Kyle Olson. He has done some impressive investigative reporting. You can see his site here: eagnews.org/ |
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Post by macrockett on May 2, 2012 20:49:29 GMT -6
On another note, here is more information about Quinn's pension reform proposal, via Illinois policy institute. Looks like D204 (we) will be on the hook for another $13million that the State will no longer fund. See: illinoispolicy.org/news/article.asp?ArticleSource=4821Playing favorites: Education pension spending favors wealthy, suburban schools More Sharing ServicesShare | Share on facebook Share on myspace Share on google Share on twitter 5/2/2012 To read the full report, click here. To see how this will affect your district, click here. To download the one-page Policy Point, click here. The problem State education funding is designed to ensure a base amount of money is available to every student in Illinois. To that end, the state strives to send more money to poor districts and less money to districts with a healthy property tax base. But a bird’s eye view of Illinois education spending reveals that the state’s intention of sending dollars to poorer districts is blunted by the state’s obligation to pay local teachers’ pensions. The state’s largest education funding program is General State Aid, or GSA. While local property taxes are the main funding source of public schools, the GSA is designed to counter inequalities in local property wealth by sending dollars to poorer communities and at-risk students. Through this program, school districts can achieve a minimum amount of spending per pupil. Contrast GSA with the state’s contributions to the Teachers’ Retirement System, or TRS, which is the state’s second largest education expenditure. How much the state spends on TRS contributions is based on how much local school districts pay their teachers. Since wealthier school districts tend to pay their teachers higher salaries, the state ends up paying higher TRS contributions for teachers from these districts. While GSA dollars favor poorer districts, TRS contributions favor the state’s wealthier districts. In effect, the state’s education dollars are working at cross-purposes. Our solution State education dollars will continue to work at cross-purposes until the state stops paying the employer’s share of the normal cost of teachers’ pensions on behalf of school districts. In 2011, for example, the state paid approximately $800 million toward pension benefit accruals earned by teachers during the 2010-11 school year. School districts, on the other hand, paid just $50 million. By paying the employer contribution of teachers’ pensions on behalf of school districts, the state essentially is paying for spending decisions over which it has no control. These individuals are not state employees, and the state should not pay these pension costs. The body of government that approved these costs – the school districts – should be held accountable and responsible for these spending decisions. While the state should continue to pay for the unfunded pension liabilities of years past, local school districts should pay for the normal pension costs of their employees moving forward. It is both fair and fiscally responsible for costs to be paid where they are incurred. Why this works Local pension accountability is not an unusual practice. School districts in New York pay the entire employer pension cost. In California, the school districts pay a majority of the employer cost. And, in Illinois, of course, Chicago Public Schools already pays the employer share of pension costs. Restoring pension costs to school districts is a matter of fairness and fiscal responsibility. Taxpayers in southern Illinois should not be on the hook for spending decisions made by wealthy districts in Chicago’s north shore. Illinois sorely needs the increased accountability these reforms would produce. Taxpayers, teachers, administrators and students deserve a clear and understandable pension system, one in which incentives are aligned with cost savings. |
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Post by macrockett on May 2, 2012 21:01:17 GMT -6
Finally, the last of three posts here today. A reminder of the dedication of your elected officials in making sure they maximize the extraction from your wallet: John Tillman appeared on Varney & Co. on FOX Business to discuss Illinois' pension problems. www.illinoispolicy.org/news/article.asp?ArticleSource=4820 |
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Post by macrockett on May 2, 2012 21:16:15 GMT -6
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Post by macrockett on Jun 18, 2012 22:29:11 GMT -6
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Post by macrockett on Jun 19, 2012 7:36:39 GMT -6
The Bond Buyer weighs in on the Pew Report...about a 15% growth in underfunding levels... not good, and I suspect this is just the tip of the iceberg when you consider assumed 8% returns for pensions in a 0% interest policy...:
The Bond Buyer - The Daily Newspaper of Public Finance
States' Pension Gaps Widening, Pew Report Says
Monday, June 18, 2012
By Kyle Glazier
WASHINGTON — The gap between many states’ pension and health care benefit commitments and the money set aside to meet them is growing wider, representing a continuing and growing threat to their financial stability and creditworthiness, according to a new report from the Pew Center on the States.
The report updates the center’s April 2011 report using fiscal 2010 data, which is the most recent available. It shows that 34 states have pension obligations funded below the 80% level actuaries suggest as the minimum. Collectively, the data reveals a $757 billion gap between pension obligations and money set aside to meet them, a 75% funding level nationwide. That’s up from $660 billion in last year’s report.
North Carolina, Washington, South Dakota and Wisconsin all boasted pension obligations 95% funded or better. Illinois and Rhode Island both clocked in at under 50%.
David Draine, a senior researcher at the center, likened state behavior in the past decade to an irresponsible credit-card holder who continuously delays paying a balance, driving the long-term cost up.
“States have built up a substantial balance that requires bigger dollar amounts to pay off with each passing year,” he said.
This is displayed in the rapidly rising level of actuarially recommended contributions to state pension funds, which have grown by 175% since 2000.
Kil Huh, director of the States’ Fiscal Health Project at the Pew Center, said there was no direct link between states’ pension and health care obligations and municipal debt obligations, but Draine noted that muni market participants are “certainly aware” of the problem and “are not predicted to react strongly to this.”
There is a lag between the Pew numbers and steps taken since fiscal 2010, so some state efforts at reform may not be reflected in the data.
Draine pointed out that Rhode Island, in particular, has taken major steps to address the issue. Those have included reductions in cost-of-living adjustments, an increase in the retirement age and a new hybrid retirement plan with rolled-back benefits. Other states have sought to move from defined-benefit plans to 401(k)-style plans that move the risk away from the state and onto the worker, Draine said.
The continuing growth of unfunded liabilities bodes poorly for states’ ability to borrow at low rates, particularly when efforts at pension reform have not gone smoothly.
Earlier this month, Standard & Poor’s weighed in after Illinois Gov. Pat Quinn and state legislative leaders failed to move ahead on pension reform legislation, warning that the inactivity could harm the state’s credit.
Most reform efforts are aimed at altering benefits for future workers, but Draine said efforts at more sweeping reform will likely have to work their way through various state appeals and supreme courts.
Despite the real risks involved in allowing pension liabilities to continue to accumulate, he added, no state is in imminent risk of defaulting on its obligations. Even the states most underwater, including Illinois, have the ability to keep sending pension checks for another decade or beyond, Draine said.
That’s in contrast to localities, some of which, like Central Falls, R.I., did fail to keep pace with obligations.
“The worst cities are far worse than the worst states,” Draine said.
The report also showed that states are far behind in meeting their retiree health care benefit obligations. The data revealed that 17 states had no money set aside for those obligations at all, and that together only 5% of states’ retiree health care liabilities are funded. However, those liabilities are smaller than the $2.31 trillion pension liability, totaling $627 billion.
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Post by macrockett on Jun 23, 2012 6:39:20 GMT -6
When I read articles like this I want to cringe at how ignorant (or corrupt) public officials can be. In this case I am talking about two congressmen, one from VA, one from NY. Both Dems. What they are doing is trying to coverup the dirty little secret about unfunded liabilities for pensions and healthcare for public employees. Rather than post these liabilities as footnotes, as they currently are, GASB recognizes the need to put them right on the balance sheet. What this will do is put the liabilities out of balance with the assets and reduce the size of the reserves necessary to fund those liabilities. In short, most government bodies are required by their states to have liabilities that are under a certain % of assets, or tax revenues, or some other measures.
By quantifying the unfunded liabilities and putting them right on the balance sheet will create "stress" on the assumptions of the health of the government entity financial. This is how it should be, as the "unfunded" liabilities are expected to come to fruition at some point.
Aside from that, these two elected officials are ignorant when they discuss the projected returns for pension plans. Especially when they discuss the last 25 years (see highlighted section below). We haven't been in that world in some time, i.e., for the last 12 years, annual turns have been more like 3-4%. When you are compounding at 8% plus, the gap between expected and reality grows quit large very fast (I posted an example of this in the economics section several months ago.)
In short, we need to stop lying to each other.
The Bond Buyer
Saturday, June 23, 2012 | as of 8:20 AM ET
Washington
Dems Hit GASB on Pensions
WASHINGTON — Two congressmen joined issuers in urging the Governmental Accounting Standards Board to retool or withdraw a proposal that would change how cash-strapped states and localities report pension liabilities, saying the new standards would prove destructive in the current economy.
GASB in July outlined the proposal that would require state and local governments, for the first time, to report unfunded pension liabilities on their balance sheets.
Currently, many governments disclose pension information in the footnotes to their financial statements, and generally only report the contributions they are required to make in a given year, as well as what they actually paid.
GASB said the proposed standards — one for reporting by government employers that provide pension benefits and a second for pension plans that administer the benefits — would lead to “significant improvements” in its pension standards.
But the congressmen and issuers stressed the proposal would subject state and local governments to a new accounting system for which they had insufficient resources and time to prepare.
“While changing accounting standards as you have proposed would be destructive, counterproductive, and unjustified during any economic circumstances, it would be particularly damaging now,” wrote Reps. Gerald Connolly, D-Va.. and Edolphus Towns, D-N.Y., in a two-page letter, dated Aug. 11, to GASB chairman Robert Attmore.
The congressmen said the proposed changes were unnecessary, “given the reliability of most public pension plans and their sponsors.”
Specifically, they said, public pensions over the past 25 years have generated average annual returns of 9.25%, with very low default rates among cities and counties.
“Local governments are managing their money just fine without having arbitrary and destructive new standards imposed on them by GASB,” they wrote.
In addition, Connolly and Towns said GASB’s proposed changes would “impose gratuitous volatility and economic hardship on cash-strapped localities” and likely “exacerbate” existing economic difficulties, particularly for “the smallest governments.”
Issuer groups and issuers echoed these concerns, focusing on one proposed change in particular: a recommendation that public sector plans report net pension liabilities on their balance sheets, not just payment of the annual required contribution, or ARC.
A coalition of 21 issuer, public pension and public sector union groups submitted a joint two-page comment letter, dated Oct. 14, saying this recommendation was a “radical departure from long-held practice.”
Specifically, they said, the proposal would significantly alter how state and local government account for pension benefits and create “much confusion.”
Collectively, the groups — including the Government Finance Officers Association, the National League of Cities, the U.S. Conference of Mayors and the American Federation of State, County and Municipal Employees — said GASB should “clearly and specifically articulate” in its final rules, slated for release in June 2012, that the new accounting measures are not based on, and should not be used for, government pension funding and budgeting.
Separately, the GFOA submitted a comment letter saying it “adamantly opposes” the board’s proposal to “abandon” the ARC as the basis for measuring pension cost.
Such a move “would mark a major step backward,” the GFOA said. In particular, the group noted, “the unfunded actuarial accrued liability is simply too volatile to display as a liability on the face of the financial statements.”
The GFOA also said there was no “cause to jettison” the ARC “in favor of an alternative approach that promises little in the way of information of practical use to actual public-sector decision makers.”
Issuers — large and small — picked up on this theme as well.
Denison, Texas, for example, told GASB the proposed standards would impose “significant expense and reporting burdens” on state and local governments.
Susan Way, the city’s finance director, also wrote that the proposal was “needlessly complex,” would reduce transparency and should be withdrawn.
A large issuer made a similar point, saying the board’s proposal would impede, not enhance, reliability in financial reporting.
In a letter dated Sept. 14, Mark Page, director of New York City’s Office of Management and Budget, wrote that the “first priority” in pension reporting should be to indicate whether a government is “responsibly and systematically” contributing to its pension plans.”
But, Page wrote, GASB’s proposal would shift from “a funding based approach” toward a “'point in time’ estimated measure of a net pension liability.”
Such a measure is “insufficiently reliable” for inclusion on a government’s financial statements and would introduce “volatility” that could obscure a government’s contributions, be they “responsible or otherwise.”
“We continue to believe that an actuarially calculated annual required contribution, based on an acceptable actuarial measurement approach and regularly monitored assumptions is the best available proxy for the burden current period taxpayers should be bearing for current services,” he wrote.
GASB’s proposal would also change the formula states and localities use to convert projected pension benefits into present value, based on an assumed “discount rate.”
Specifically, GASB recommends that pension plans use a historic rate of return — typically 7% to 8% — only to the extent the plan has sufficient assets, set aside in an irrevocable trust, to make projected benefit payments.
When a plan reaches a point of no longer having sufficient assets set aside in a trust for long-term investments, it would have to shift to a so-called risk-free rate of return pegged to a tax-exempt, high-quality, 30-year municipal bond index, typically 3% to 4%.
In its comment letter, the GFOA said it supported the board’s “principled decision” to retain the long-term expected rate of return,” especially in view of criticism “from those advocating the use of a risk-free rate of return.”
The Public Employee Pension Transparency Act, introduced Feb. 9 by Republican Reps. Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin, would require state and local governments to determine pension liabilities using a risk-free rate and report them to the federal government. Issuers who failed to comply would lose their ability to issue tax-exempt, tax-credit or direct-pay bonds.
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