More Cheery News: Public Pensions in deep doo doo

[clifp]

It seems to me there are several problems with state and local (not so much Federal) pensions. First of all they are simply too generous. Hawaii use to allow you to retire at 50% pay (years *2%) at any age with 25 years service. They now require you to be 55 with 30 years, but allow early retirement at 55 with 20 years. The pension can be inflated with vacation pay, overtime etc although it isn't a huge factor.

Now I can understand allowing cops, firemen etc. to retire at the age, I just don't see how we can afford as a society to fork out 30+ year of pension payments for every government clerk, lawyer etc. This especially true when the employee contributions are so modest (6-8%) of salary. Cops contribute more 12.7% but have an even more generous pensions.

The second and I think worse problem is that pensions are completely divorced from the economy. Regardless of how the city, state, or corporation is doing financially, or the level of the market, pensions get paid and generally increased based on fix formula (2.5% Hawaii, COLA, COLA -1% etc).

This leads to the problems we have been seeing today, the state constitutions/union contracts mandate these pension get paid, but there isn't money to pay them.

There needs to be a middle ground between subjecting retirees to the full volatility of the market, and blindly giving them more money than can be prudently distributed.

[brewer12345]

Quote:

Originally Posted by youbet A more realistic approach to attracting qualified candidates to hard-to-fill public sector jobs would be to offer hiring bonuses, higher starting pay and a system of merit increases based on performance. A "sweet" pension plan (while it pushes off the cost to the next set of politicians years from now) is more abstract for young candidates to see the value. And it pays everyone the same regardless of whether they were constantly superior performers or they were just barely able to keep the job.

Um, ever worked one of these jobs? Merit/incentive pay is a joke, the incentive to work hard and outperform is generally minimal, and there are many vested interests that like things just the way they are.

[jazz4cash]

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Originally Posted by utrecht ....... Ive said this before and I'll say it again about pensions. The problem isnt with overpromising of benefits...its with the mismanagement of the pension fund itself. My dept's pension fund is in no trouble whatsoever even after losing 19.9% in 2008. During the current decade, the SP500 is just about flat. Actually its slightly negative. My dept's pension fund has returned just under 7% per year during the 2nd worst decade in history. I dont see why they all cant do that. Then, there wouldnt be a problem.

Sounds like your fund managers figured a way to have thier cake and eat it too! Our pension fund has similar results, but I know for a fact they took big risk to achieve this level of return and were smart lucky enough to sidestep most of the recent decline.

[Goonie]

Or, as is the case with the state pensions in Illinois, the law requires the state to pay into the pension fund every year. However, for the past MANY years the governors (democrats AND republicans) have refused to do that. They put little, if any, money into those pension funds, and instead squander use the money that has been allocated in the state budget for pension funds, to fund their pet projects. They then say, "well, we'll pay it back tomorrow", and they NEVER have.

Then when employee contracts come up, the Guv says "hey, sorry guys....but we're pretty crunched for money, and besides YOUR pension funds are so low that you're gonna have to think about accepting lower pension payments down the road." So the Guvs conveniently take the blame off themselves for not funding the pensions, and place it firmly upon the backs of the employees who have been pointing out the fact, and complaining, that it was the Guvs who have basically been stealing from the kitty that has caused the problem the get go.

So in IL it doesn't make a lot of difference what the rate of return on investments is (or isn't), because they can't make any returns on money that isn't there to begin with.

Let's see....we have one former guv in federal prison currently, one that will most likely be going there soon as well, and the current one that is trying very hard not to get caught doing anything that might make him a future cellmate of the other two. Our state may have a high unemployment rate, but our politicians go to extreme lengths and make personal sacrifices to see to it that law offices, courthouses, and prisons remain open and fully staffed!

[Nords]

Quote:

Originally Posted by youbet A more realistic approach to attracting qualified candidates to hard-to-fill public sector jobs would be to offer hiring bonuses, higher starting pay and a system of merit increases based on performance. A "sweet" pension plan (while it pushes off the cost to the next set of politicians years from now) is more abstract for young candidates to see the value. And it pays everyone the same regardless of whether they were constantly superior performers or they were just barely able to keep the job.

Quote:

Originally Posted by brewer12345 Um, ever worked one of these jobs? Merit/incentive pay is a joke, the incentive to work hard and outperform is generally minimal, and there are many vested interests that like things just the way they are.

In some ways you guys are describing the system used to attract officers to the U.S. Navy's submarine force...

[youbet]

Quote:

Originally Posted by brewer12345 Um, ever worked one of these jobs? Merit/incentive pay is a joke, the incentive to work hard and outperform is generally minimal, and there are many vested interests that like things just the way they are.

Well, yes, I was once an employee of the great state of Illinois. But that was a long time ago............

You may have misunderstood my post. I'm not suggesting there are good merit systems in place for public employees. Rather, I'm suggesting that good merit plans be established. I realize that wouldn't be easy with the workplace culture and unions already in place.

[clifp]

Quote:

Originally Posted by Goonie Or, as is the case with the state pensions in Illinois, the law requires the state to pay into the pension fund every year. However, for the past MANY years the governors (democrats AND republicans) have refused to do that. They put little, if any, money into those pension funds, and instead squander use the money that has been allocated in the state budget for pension funds, to fund their pet projects. They then say, "well, we'll pay it back tomorrow", and they NEVER have. Then when employee contracts come up, the Guv says "hey, sorry guys....but we're pretty crunched for money, and besides YOUR pension funds are so low that you're gonna have to think about accepting lower pension payments down the road." So the Guvs conveniently take the blame off themselves for not funding the pensions, and place it firmly upon the backs of the employees who have been pointing out the fact, and complaining, that it was the Guvs who have basically been stealing from the kitty that has caused the problem the get go.

I'll concede that Illinois beats Hawaii when comes to corrupt politicians. However, I think we can give you guys a run for stupid pension moves. Back in the late 90s, the HI legislator actually passed a law that not only eliminated any contribution from the state to the employee pension fund, but allowed any excess return over 12% (or maybe 15%) to be transferred from the pension to the states general fund. I couldn't figure out to get a answer from FIRECalc, but I was dying see the probabilities of pension fund achieving its target 8% return while putting a ceiling of 12% and 50/50 AA. I am pretty sure the number is close to zero.

BTW,here is an simple exercise that urge anybody with a pension to do.
Find a copy your or your state/local pension plans financial statement. Take the total assets and divide by the total number of participants. Then take the total assets and divide by the number of retirees. Post the numbers to this thread.

Here is Hawaii's data.
Assets 6/09 8.82 billion
Participants 106,000
Retirees 35,324
Avg value $83,200
Avg Retiree $249,600

As we can see the pension value is awfully close to the average 401K balance of 50K. Of particular amazement to me is that if simply gave all the assets in the pension fund to current retirees,and told the current government employees paying into the found tough sh*t. There is only $250K a piece. Applying the 4% SWR rule that equals a $10,000 a year pension. I suspect almost all recent retirees are drawing a pension considerable above that.

I have done this simple ratio for a couple of other pension and the ~$100K average balance seems to pretty typical. If anybody with better actuarial skills would like to explain to me what I am missing I'd truthfully be delighted to be shown as a fear monger.

[youbet]

Quote:

Originally Posted by clifp Of particular amazement to me is that if simply gave all the assets in the pension fund to current retirees,and told the current government employees paying into the found tough sh*t. There is only $250K a piece. Applying the 4% SWR rule that equals a $10,000 a year pension. I suspect almost all recent retirees are drawing a pension considerable above that.

I agree with the concept but not the detail. The 4% withdrawal rate usually results in residual funds left in the portfolio at the retiree's death. That isn't the case with pensions. You'd need to use an annuity calculator to get a better number. It'll be something greater than $10k. But your point is clear and well taken.

[clifp]

Quote:

Originally Posted by youbet I agree with the concept but not the detail. The 4% withdrawal rate usually results in residual funds left in the portfolio at the retiree's death. That isn't the case with pensions. You'd need to use an annuity calculator to get a better number. It'll be something greater than $10k. But your point is clear and well taken.

You are absolutely right the correct thing to do is to annuitize it. So I went to the TSP website (Vanguard no longer provides annuity quotes) and looked at 250K annuity for a 65 year and 70 year with a COLA kicker (capped at 3%)

65 year old 1158/month = 13,896 annual
70 year old 1373/month = 16,476 annual

Better but not much.

[youbet]

Quote:

Originally Posted by clifp You are absolutely right the correct thing to do is to annuitize it. So I went to the TSP website (Vanguard no longer provides annuity quotes) and looked at 250K annuity for a 65 year and 70 year with a COLA kicker (capped at 3%) 65 year old 1158/month = 13,896 annual 70 year old 1373/month = 16,476 annual Better but not much.

Your case is still made even with those "better" numbers! We have a similar situation here in Illinois. The current NAV of the teacher's pension fund couldn't come close to buying annuities for the retired teachers at the level of pension they're now receiving. Apparently the pension board is counting on some sort of future windfall (higher taxes and contributions to the pension fund?) to make up the difference? And, worse yet, the Teacher's Retirement System is in the best shape of the five state funds.

[Htown Harry]

Quote:

Originally Posted by clifp BTW,here is an simple exercise that urge anybody with a pension to do. Find a copy your or your state/local pension plans financial statement. Take the total assets and divide by the total number of participants. Then take the total assets and divide by the number of retirees. Post the numbers to this thread. Here is Hawaii's data. Assets 6/09 8.82 billion Participants 106,000 Retirees 35,324 Avg value $83,200 Avg Retiree $249,600

OK, I'll bite. Here's the data from my public plan:

Assets 12/08: 12.8 billion (down from $18.5 B a year earlier)

Annuitants 36,509

Terminated Employees’ Accounts:
Vested 12,100
Nonvested 40,088
Total 52,188

Current Employees’ Accounts:
Vested 51,327
Nonvested 69,020
Total 120,347

Not sure how you would divide this out, clifp, but I’d say my plan’s ratios look a bit stronger than Hawaii’s.

It's also pretty evident that the number / percentage of vested employees is very relevant to the calculations.

Here’s what the annual report says in actuary-speak:

The funded status of the pension plan as of Dec. 31,
2008, the most recent actuarial valuation date, is as
follows ($ Millions):

Actuarial Value of Assets (a) $14,862
Actuarial Accrued Liability (AAL) – Entry Age (b) $16,768
Unfunded AAL (UAAL) (b-a) $1,906
Funded Ratio (a/b) 88.6%
Covered Payroll (c) $4,830
UAAL as a Percentage of Covered Payroll ((b-a) / c) 39.5%

[clifp]

Harry yes the plan is in better shape but only a bit better.

You have virtually the same number of retirees (annuitants) 36K vs 35K and considerably more money 12.8 vs 8. billion. You also have considerably more people paying into the system than Hawaii. Still there is only $350K per current retiree which is unlikely to be enough to fund an annuity at today rates to even get close paying the typical pension payment.

One of the most important take away from this whole exercise is the funded ratio 88.6% in your case 67% in Hawaii's case which is what Public Pension funds typically publish is to be a kinda subjective measure. (BS maybe more accurate) AFAIK, it is dramatically effected by the projected future earning of the fund and the discount rate. Using a 8% rate which is typical makes the situation look merely bad, but today the TSP fund is offering only 3.75% rate for annuity and Vanguard appears to be offering only 2.7%. If we plug in today's actual assets with today's actual rates the situation is dire.

[kyounge1956]

Quote:

Originally Posted by clifp (snip) BTW,here is an simple exercise that urge anybody with a pension to do. Find a copy your or your state/local pension plans financial statement. Take the total assets and divide by the total number of participants. Then take the total assets and divide by the number of retirees. Post the numbers to this thread. Here is Hawaii's data. Assets 6/09 8.82 billion Participants 106,000 Retirees 35,324 Avg value $83,200 Avg Retiree $249,600 As we can see the pension value is awfully close to the average 401K balance of 50K. Of particular amazement to me is that if simply gave all the assets in the pension fund to current retirees,and told the current government employees paying into the found tough sh*t. There is only $250K a piece. Applying the 4% SWR rule that equals a $10,000 a year pension. I suspect almost all recent retirees are drawing a pension considerable above that. I have done this simple ratio for a couple of other pension and the ~$100K average balance seems to pretty typical. If anybody with better actuarial skills would like to explain to me what I am missing I'd truthfully be delighted to be shown as a fear monger.

I had the numbers all written up for the City of Seattle employees' pension system, but I must have zigged when I should have zagged because I hit preview and my post disappeared. It's too late to look it all up again, but the best I remember the numbers were as follows:
total assets about $1.79 billion
number of active members about 8300
number of retirees 5011
average value +/-$357K
per retiree +/-$255K

All of which sounds really nice until I reveal that these are the figures from 2006. The most recent annual report posted on the System website is 2007 and I couldn't find the number of active members for that year so I had to go back one more. The fund operated in the red for three years, IIRC 2000-2002, due to the tech bubble, but by 2006 it was nicely getting its legs back under it, and by 2007 the funding level was up into the high 90's and the "floor" was increased: pensions are now guaranteed to retain 65% of their original purchasing power (the floor had been 60%). Then came last year. The fund lost almost 27% of its value in 2008. It dropped from a funding level of 86.96% as of February 29, 2008 to 63.06% as of Nov. 30, 2008 (as reported in the March 09 minutes of the Retirement Board, the most recent ones available), but I bet that wasn't the worst of it—the Dow lost another 2200 points or so between November and March and I'm sure that didn't help matters any. A couple of other relevant numbers: each employee puts in 8.03% of salary, which is matched by the City. The assumed growth rate of the fund is 7.75%

Maybe I would be smart to take the reduced benefit + lump sum option and buy an annuity, rather than leaving all my eggs in the City's basket. I'll have to go play with that annuity calculator and see what it looks like. I still haven't figured out how the City can give you a lump sum of 100% of your accumulated contributions and still pay you about 75% of the "straight" pension you'd have been eligible for.

[heyduke]

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Originally Posted by Want2retire ... It's not just my job - - my agency is having a hard time getting engineers or scientists of any needed specialty in the New Orleans location. The top brass from OPM came out to look into the matter a few weeks ago so maybe he can do something (like, raise the pay through the "locality pay" approach, possibly).

Why is that when we leave a job they always seem to advertise it after we leave for more pay? We work hard and are very appreciated for our work and earn our meager COLA's to slowly increase our pay. Then we quit and it always seems (at least in government jobs) that in order to fill the position we leave they seems to always raise the pay?

Government Employers wake up! Pay your people what they are worth if you don't want them to leave... [john puts his soapbox back in the garage]

[W2R]

Quote:

Originally Posted by Want2retire My supervisor began advertising my job last March. But there has not been one qualified (or even remotely qualified) applicant yet. This despite the recession, the health care crunch, and so on. Personally, I thought my job was a plum due to the benefits and job security, but I guess the combination of low pay, living in New Orleans, and working for "the man" is a turn-off for many. The ad was not bad, but I made some suggestions anyway and gave her a list of universities offering graduate oceanography degrees that she can notify in the hopes of getting someone who just graduated. She retracted the ad and has been working on it. It's not just my job - - my agency is having a hard time getting engineers or scientists of any needed specialty in the New Orleans location. The top brass from OPM came out to look into the matter a few weeks ago so maybe he can do something (like, raise the pay through the "locality pay" approach, possibly).

Quote:

Originally Posted by heyduke Why is that when we leave a job they always seem to advertise it after we leave for more pay?

Well, actually that has been the opposite of my experience. My job was advertised, and will be advertised in the future at the same pay grade and step at which I originally took it. I got promoted along the way, and I am now at the highest possible technical pay grade (no room for any further promotions), but there is no way in h*ll they would give my present pay grade to a brand new employee fresh off the street. They can't, even if they wanted to, and besides our other employees would raise cain if a newbie was making more than everybody else. Instead of advertising it at my present pay grade, my supervisor plans to re-advertise it at the usual beginning pay grade (for a Ph.D with several years of relevant experience), and use the excess to promote someone else in my section who has been there a long time and has earned it. If nobody applies for my job, she will just make do with fewer employees. This is what has usually happened with openings at my work, since Katrina.

When I leave we will only have 4 of 8 in my section since this is far from a unique situation. We have been working like dogs. Maybe they will have to reorganize.

Quote:

Originally Posted by heyduke Government Employers wake up! Pay your people what they are worth if you don't want them to leave... [john puts his soapbox back in the garage]

That's for sure. Many/most of our scientists are actively looking at other jobs with higher pay relative to local cost of living, despite the fact that the majority are over 50 or 60. Younger scientists have already left, for the most part. I seriously doubt that the OPM guys will raise our locality pay by any substantial amount. Our upper management asked them to do that every year since Katrina when the cost of living doubled or more, and they have essentially thumbed their noses at us. They are coming out here, but I doubt they will raise the locality pay and if they do, there is no way they could justify much of a substantial increase on the fifth year after Katrina. That would be admitting that they have been wrong all along.

[Bimmerbill]

NH changed their plan a few years ago making it harder to retire early. I think they added an age restriction, even with years of service.

But, the state has underfunded the plan for several years running. Now they are facing "catch up" contributions that may be funded directly from the towns (in the form of tax increases I bet).

Everyone says this sort of system is not sustainable. I'm not sure I believe that. Can't they estimate the benefits and work their way backwards to find out how much funds are needed? Then work a plan to fund it?

I'll have 13 years as a fed in Feb. That's 13% of my salary with COLA. Many more years to work...

[youbet]

Frequently, some turnover is a good thing, keeping the team fresh and flexible. Excessive turnover = bad. Zero turnover = bad. So there is a fine line to walk.

If you're paying so much that no one ever wants to leave for a better job, you're probably overpaying. If you have high turnover and training costs, learning curves and incomplete projects/missed opportunities due to empty desks, you're probably underpaying.

[ziggy29]

Quote:

Originally Posted by Bimmerbill NH changed their plan a few years ago making it harder to retire early. I think they added an age restriction, even with years of service.

My wife's new job has her in the Texas teacher retirement system. In the handbook you can see several examples of the different deals people are getting based on their hire date.

If you were already in the plan before 9/1/2007, you get full retirement with "80 points" -- age plus years of service equal 80. (This can be someone who starts teaching at 23 and retires at 52 -- that's 81 points.) After that date, full 80-point early retirement can't begin until age 60.

Also, folks who were in the system by 2005 have their pension based on the average of the highest three years salary instead of the highest five after that date.

I suspect at some point in the future, there will be another cutoff hire date where folks hired in after that date get even more watered down retirement benefits. Looking at state and local budgets I don't see how we can honor existing promises without doing that. (Again, since the feds went to FERS their pension liabilities became sane and manageable. CSRS would have been unsustainable to continue in today's realities.)

[youbet]

Quote:

Originally Posted by ziggy29 I suspect at some point in the future, there will be another cutoff hire date where folks hired in after that date get even more watered down retirement benefits

Either that or the public needs to dip into their collective pockets and pay higher taxes to fund the current level of pension benefits. But the current situation where benefits promised exceed funding levels isn't going to work out. Something has to change.

[randyman65]

"Either that or the public needs to dip into their collective pockets and pay higher taxes to fund the current level of pension benefits. But the current situation where benefits promised exceed funding levels isn't going to work out. Something has to change. "

You mean the public who doesn't receive a DB pension and who must save for their own retirement? In NY, we face a similar shortfall, exaserbated by comparatively high police and teacher salaries (in my county, rookie cops start at $57k, and reach $120k within five years. Teachers typically receive six figure salaries, and school superintendants typically earn $180-350K). But the contribution of pension participants comes nowhere close to funding future obligations. There will come a time when the haves vs. have nots will refer to those receiving taxpayer-funded pensions and those struggling under an onerous tax burden to fund them, people who have no hope of ever receiving a comparable pension themselves.