Defined Benefit Plan Good for State Economy?

[Deleted]

We get a newsletter from the Retirement Systems of Alabama perhaps quarterly. Today's main article explained why RSA's returns were 1% below the average. Its stocks and bonds did fine, but 15% was used to invest in Alabama for the past 15 years.

They had the $$$ when the state didn't to attract the Mercedes plant. They had the $$$ to build hotels and golf courses to build up tourism.

What was interesting was that Bronner said he couldn't do this if it had been a defined contribution plan. I guess that's because the primary responsibility would have been to have maxed the return to the contributors. Some would say it still is since the contributors are also the taxpayers, but he's definitely done a good job. The 100,000 jobs he created in the auto industry certainly were in the taxpayers' best interest.

When he started, it was 25% funded. It has been as much as 100% funded in good times, but it is now 70% funded. I believe that is without contributions from the state.

It's an interesting perspective when so many people want to get rid of our "government" pensions and move us toward 401ks. The RSA has billions to invest in the state that wouldn't otherwise be invested.

ETA: He said he could have built the hotels and golf courses in California where they charge higher rates, but what good would that have done in terms of Alabama jobs?

[phil5185]

It's an interesting perspective when so many people want to get rid of our "government" pensions and move us toward 401ks. The RSA has billions to invest in the state that wouldn't otherwise be invested.

Your perspective is the opposite of most teachers - they usually complain that the gov't is gambling with their money by investing in private industry.

But they say that the RSA return was 1% below average. The average of the SP500 Index? Or a bond or a T-bill index?

[Deleted]

It IS gambling. Yes, it could pay off, but I look at it this way. If it's a viable enterprise (hotel, golf course, Mercedes plant), why couldn't they raise funds privately? You can't tell me "no one" had the money. People and companies that had money to invest didn't consider it viable, or wanted more interest (i.e. perceived it as riskier) than the pension funds did. Are hotels or golf courses guaranteed wins? Hardly. I'd also be concerned about how these deals get made. Does the person who's making investment decisions for the pension fund have a brother-in-law whose construction business would profit from a new hotel being built?

In this case (for once in my life) I agree with the teachers in phil's post.

[formerexpat]

It's an interesting perspective when so many people want to get rid of our "government" pensions and move us toward 401ks. The RSA has billions to invest in the state that wouldn't otherwise be invested.

Instead of sitting there as a pension funding hole, the money would currently be in your 401k [or whatever equivalent name] and used by the roughly 15,000 public companies to expand their business in your state and others. Best of both worlds.

[bimetalaupt]

Jan 31, 2011 18:53:43 GMT -5 phil5185 said:

It's an interesting perspective when so many people want to get rid of our "government" pensions and move us toward 401ks. The RSA has billions to invest in the state that wouldn't otherwise be invested.

Your perspective is the opposite of most teachers - they usually complain that the gov't is gambling with their money by investing in private industry.

But they say that the RSA return was 1% below average. The average of the SP500 Index? Or a bond or a T-bill index?

Just judging from the simple statement .. It looks like they took less risk and make less money on the investment due to the blue chip nature of the investment. Most very high end real-estate produces solid but low returns.. The profits come when you sell it. I will bet the total income goes to the state in the form of taxes will offset the lower income to the RSA.

I just have not heard of MBA being a weak firm. Great jobs and better long term employment then most jobs in this industry.. Long term pay off should be great for the state and this should return more money to the state to make payments for your future retirement.

Sounds like a win-win-win to me. now we are making great cars in America. They did say 15% .. I will bet it was a loan and if you read the fine print I will bet the State stands behind the loan ?
From the MBUSA site.. Cute Blond!!! great Bonds!!!
ercedes Manufacturing Excellence… in Alabama

Welcome to Tuscaloosa County, Alabama, U.S.A., and the manufacturing facility where the M-Class, the R-Class, and the GL-Class are built. Everything is under one roof… from Body, Paint, and Assembly shops to Administration and Shipping. This unity helps to emphasize the importance of teamwork and to foster team member communication and facilitate the consistent, incomparable quality inherent in the assembly of all Mercedes-Benz vehicles.

Each model is built "just-in-time," a manufacturing method based on the idea that stockpiling large amounts of inventory is not only inefficient but unnecessary. In fact, in the assembly shop, the target is to have only 2 hours worth of inventory stocked (approximately 3 hours in the body shop) at any given time for the production line. When additional inventory is needed, our automated system places an order for replenishment and it's delivered almost immediately.

The manufacturing process for both models begins in the Body Shop where the components that comprise the metal body are welded together. Then, from the ultra-clean Paint Shop, the painted body finishes its journey in Assembly where it becomes a new Mercedes-Benz M, R, or GL-Class ready for shipping. From beginning to end, our Mercedes-Benz vehicles are created with style, functionality, and quality in mind.

To make this process possible, the MBUSI Energy Center provides and monitors the power required to produce the vehicles. Team members in the Energy Center work around the clock in three shifts to make sure that we have all the electricity, natural gas, compressed air, and various waters used in the manufacturing process. The energy required at full production is approximately 50 million watts—or roughly similar to the typical energy needs of 10,000 single-family homes. :oNOW OTHER AUTO MAKER ARE MOVING TO ALABAMA IWTH THE SUPPLIERS THEY NEED.. THEY ALSO MAKE V-8 POWER FOR TOYOTA.

Bi Metal Au Pt

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[Deleted]

That's funny, Phil, that I never feel like this guy is trying to gamble with our retirement. He is the first person who ever tried to make it actuarially sound, insisting that the legislature provide the funding when they so generously give retirees raises, for example. He's rather legendary for making RSA financially sound . . . and for taking on the Mafia and a few other "Walking Tall" stories.

Anyway, I just thought it was interesting that he believes that a defined benefits plan for government employees can help a state's economy. There's some interest in changing the model so I guess that was who he was refuting.

[Savoir Faire-Demogague in NJ]

Sounds like crony capitalism to me.

[Clever Username]

It all depends on who is administering the plan and how it is run.
What strikes me is the wild swing in quality of administrators you have had.
Yes, you may now have a brilliant financial mind at the helm.

But all things return to the mean.
Don't get too used to it.

[Urban Chicago]

I think this could be a viable part of pension fund investment. Like all others though, pension investments need to be properly diversified to minimize risk.

[Deleted]

Feb 1, 2011 10:04:01 GMT -5 Savoir Faire-Demogague in NJ said:

Sounds like crony capitalism to me.

Yeah, that would be my concern. DH's stepfather belonged to the electrician's union and received only a sliver of the pension he expected because they made investments in hotels in Las Vegas that supposedly didn't return anything. Well, they didn't return anything to the pensioners, anyway. That was before ERISA and there are tighter regulations now, but I'd still be concerned about conflicts of interest in making these investments.

The link below is a lengthy article, but what I pulled out of it was a stat that the average hotel is now worth 34% less than it was in 2007. I know that a hotel in my area, attached to a convention center, was supposed to be paying for itself by now (opened in September, 2001- bad timing). Instead it's being supported by a "convention center" tax paid by anyone who stays in a hotel in the area-including competing hotels.

www.hospitalitynet.org/news/154000392/4049958.search?query=large+hotel+mortgage+defaults

It does sound like Bronner is trying to do the right thing and fund the pension plan adequately. That's huge. Most administrations don't have the guts to do that.