Public Pensions fund...

[Deleted]

they need to stop talking about it and just do something about it already: online.wsj.com/article/SB10001424052748703410604576216981387864802.html?mod=WSJ_RetirementPlanning_MoreHeadlines

Or we just going to wait till it's too late

Some public pension funds are finding themselves caught in a squeeze between actuaries worried about future benefit costs and local governments worried about immediate budgets strains.

The tension was on display last week, when California pension fund Calpers decided to hold its expected annual return rate steady. The fund's actuary had recommended that the California Public Employees' Retirement System adopt a more-conservative long-term investment expectation; nearly a dozen local officials attended a meeting last week to urge Calpers not to change the rate.

Calpers agreed to the status quo, which will help the governments avoid higher-contribution payments near term. But if Calpers over time fails to hit its investment target, it eventually will come up short of its goals—potentially causing a burden that will fall on governments in the future.

The issue highlights a debate that has caught fire in recent months: whether the underfunding at many public pension funds is partly a result of unrealistic investment expectations as well as accounting methods that underestimate the true size of liabilities. Pension funds say their rates are prudent in the long run, pointing to returns that over the past two decades met or exceeded expectations.

In deciding to keep its assumed investment return rate at 7.75%, the board of the $227 billion fund cited hardships that a lower rate would inflict on local governments. Calpers also said it thought the return was achievable.

The fund's decision is drawing criticism from some who contend it was made for the wrong reasons.

"To say that you should adopt an assumed rate of return because you want to keep contributions low is absurd," says Andrew Biggs, a resident scholar at the conservative American Enterprise Institute, who testified before a House panel last week. If Calpers's actuary is right, he says, "it means you will have to pay higher contributions in the future."

Pension funds pay retirement benefits using a combination of investment income and contributions from employees and state and local governments. They use their assumed rate of a return as their "discount rate," which they use to calculate the present value of benefits they owe to retirees in the future. The lower the discount rate, the higher a pension fund's liabilities, possibly requiring higher contributions from local governments.

Calpers's chief actuary had recommended lowering the return rate to 7.5%. That would have bumped up what local California governments pay to the state pension fund by 1.5% to about 3% of their payroll in many cases, according to a Calpers spokeswoman.

"We cannot afford this," Larry Lavagnino, the mayor of Santa Maria, wrote in a letter to Calpers, saying a lower rate would cost the small city an additional "$575,000 to $1.9 million annually."

In another letter, Gary Arant, general manager of the Valley Center Water District, said water sales have plummeted in recent years.

"This, coupled with the economic problems all of California is facing … has caused us to slash our controllable expenses," Mr. Arant wrote. "Any increase in our costs at this time only increase the pain in our community."

Calpers says it has earned an average annual rate of return of 7.79% over the last 20 years. Looking forward to the next two decades or more, Calpers projects it will earn an average of 7.8%, based on thousands of different investment performance scenarios.

The median expected rate of return among state pension funds is 8%, according to Wilshire Associates, an investment consulting firm. Over the next decade, Wilshire projects public pension plans will see a median annual return of 6.5%.

The Washington state pension fund in 2009 rejected calls from its actuary to lower its rate, in its case to 7.5% from 8%, partly out of concern for the effect on government employers.

There wasn't a "big push to create more budget pain if you don't have to," said Steve Hill, director of the Washington Department of Retirement Systems. He added that some state investment officials believe the 8% assumed rate of return is achievable and it was within the actuary's recommended range.

The actuary, Matt Smith, says that while he still has to complete his analysis, he expects again this summer to recommend cutting the state's return expectation.

"If you do miss the mark on your assumption, I'd much rather have deferred savings than deferred losses," he says.

Corporations use a more-conservative discount rate for their pension funds, based on interest rates of highly rated corporate bonds yielding about 6%.

Some say that with governments grappling with budget deficits, it is unlikely that pension funds will change their discount-rate methodology unless they have to.

Joshua Rauh, a finance professor at Northwestern University's Kellogg School of Management, has argued that public pensions should use a discount rate based on Treasury yields, which for long term bonds are currently about 4%.

"Unless there is pressure from the federal government or [an accounting standards board] that requires the discount rate to change, it is not going to happen," he says.

Other economists say using a so-called risk-free rate would result in an overfunding of retirement systems because their often stock-heavy investments are likely to earn more than Treasurys.

"In effect, current taxpayers would be paying more so future taxpayers would pay less," said Dean Baker, a liberal economist and co-director of the Center for Economic and Policy Research in Washington, D.C. in testimony last week before a House panel.

Added Calpers Chief Investment Officer Joe Dear in an email: "Running a risk-free portfolio would be an incredibly expensive, gutless investment strategy that left billions on the table for taxpayers to make up."

[Savoir Faire-Demogague in NJ]

Most public pension funds are severely underfunded and many have not had their required state contributions made or the contributions were short, resulting in funding shortfalls.

During the boom economic years of the Bush admin, when the markets were rising at 15% and 20% year after year, it was typical for public pension funds to not have contributions made because the rising markets compensated for it.

It is ironic that the very thing that will save all pension funds for that matter, is high corporate profits, rising stock prices across the board... the current climate in our govt is anti-corp profits and very anti-Wall Street.

[Savoir Faire-Demogague in NJ]

I agree with SF about pension funds being underfunded. My former state consistently underfunded their contribution, and the state borrowed money from the pension funds to pay other bills, which was similar to what happened with SS.

To highlight the mismanagement and corruption in the over sight of public pension funds, and the shenanigans that go on, in 2010, the State of NY, did not have money to make the required annual contribution to the NY State Pension fund... so in order to meet the legal requirement, NY State borrowed the money it needed from the pension fund and used these borrowed funds to make the contribution back to the pension fund.

[Deleted]

Mar 28, 2011 10:12:42 GMT -5 Savoir Faire-Demogague in NJ said:

To highlight the mismanagement and corruption in the over sight of public pension funds, and the shenanigans that go on, in 2010, the State of NY, did not have money to make the required annual contribution to the NY State Pension fund... so in order to meet the legal requirement, NY State borrowed the money it needed from the pension fund and used these borrowed funds to make the contribution back to the pension fund.

WOW

So it's like you owe me $100, and you borrow a $100 from me to pay me back the $100 you owe me.

Gotta love it ;D

[souldoubt]

The PEW Center on the states did an analysis on state pensions in February 2010 for the fiscal year end 2008 (google to find the study). Granted the numbers looked worse given the timing of the report but regardless at that point states had liabilities of 3.35T and assets of 2.35T so they were facing a 1T gap. Even before the economy took a many state pensions had been underfunded for years and the study points this out in the first few pages.

[Deleted]

Hey, at least they are trusting some hedge funds to help out even if some people believe it is too late to save pensions

finance.fortune.cnn.com/2011/03/30/hedge-fund-returns-wont-save-public-pensions/

Hedge fund returns won't save public pensions
Posted by Katie Benner
March 30, 2011 12:19 pm

State pension funds are putting more of their money into higher risk investments like hedge funds, private equity, real estate, and commodities. But it won't fix their problems.

As most everyone knows (and as politicians and public workers in Wisconsin, New Jersey, and New York are acutely aware) state and local pension funds could use some big investment paydays. The funds have pension and retiree healthcare obligations that they can't afford to pay.

Pension fund managers have been pushing to allocate more to alternatives since 2005, hoping that the new strategy would generate higher returns. Academics and public worker unions voiced concern, but hedge funds and private equity seemed too lucrative to ignore as markets rose through 2007.

With markets rising again, the number of public pension funds that have allocated money to hedge funds has increased by 51% since 2007, according to a study by Preqin; the mean allocation to hedge funds, meanwhile, nearly doubled over the same period to 6.6%.

The San Diego County Employees' Retirement Association (SDCERA) may increase allocations to approved alternative asset managers, without getting additional authorization, reports HFMWeek. It follows a similar move made last year by the Arizona Public Safety Personnel Retirement System (PSPRS).

The New Jersey State Investment Council is also jumping in -- it recently voted 8-3 to invest up to 38% of the state's pension funds in an array of alternative investments, up from its current allocation of about 15%. The change could be approved in May.

But these investment moves don't solve the real problem facing the pension system, says Douglas Forrester, who served as director of pensions in New Jersey in the 1980s. "The current problem is not a result of lower than average investment returns, so higher than average returns won't really make things better," he says.

The current pension fiasco stems from several things, says Donald Boyd, a senior fellow at the Nelson A. Rockefeller Institute of Government. Pensions have been willfully underfunded by local governments, and investment committees have used a mish-mash of accounting tricks to make pension funds seem healthier than they actually are. Moreover, investment losses incurred in 2008 and beyond greatly exacerbate the problem.

New Jersey perfectly exemplifies this bad brew. In a story two years ago called The Public Pension Bomb, Fortune examined how the state -- one of the wealthiest in the country -- underfunded its public pension and used high finance to minimize the problem on paper.

In New Jersey (as in most cases), these moves were political. In a nutshell, a string of governors diverted money from the public pension pot and used accounting chicanery to hide the deficit. They could then lower taxes and increase public worker benefits -- moves politicians have long depended upon to get themselves reelected.

So while hedge fund investments may goose returns, the new investment allocations are not a quick fix.

Rather, it is imperative to take care of the political roots of the pension problem, says Forrester. For some politicians in Wisconsin and New Jersey, that means tearing up worker contracts, raising the retirement age, or increasing worker contributions to benefit plans. These moves could just be a start -- while they would certainly lower the bill, the political motivations and machinations that made the mess would still be in place.

Forrester believes that at its heart, the pension problem is a governance issue. "Politicians right now may be fighting to get money into pension funds, but administrations will come and go," he says. He argues that if pension funds are still controlled or influenced by politicians, it's only a matter of time before a new wave of elected officials decides to underfund them again.

A real solution would be to remove the pension decision-making process from the political structure. Forrester likens changes to investment allocations, and disputes over worker benefits, to fighting off alligators when you're trying to reclaim a swamp. "You're facing down alligators and coming up with ways to fight them, but you still need to remember the bigger picture is to drain the swamp."