More Cheery News: Public Pensions in deep doo doo

[clifp]

Today's Washington Post has a great article that everybody with state or local pension should read (and most of you taxpayer also). Steep Losses Pose Crisis for Pensions

A couple of interesting data points.

The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.
Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade.

The other thing that struck me is this section. At a time when the board consensus thought a 8% return wasn't safe Our pension plan administrators were basing future returns on this number.

From there, the deficit will grow even wider, according to Kim Nicholl, the national director of PricewaterhouseCoopers public sector retirement practice. Even if public pension funds were to hit their 8 percent investment targets every year, Nicholl calculated they would have less than half of what they need by 2025. This is because a greater share of the population will be retired and those who are will live longer, thus collecting benefits longer, she said.

I have to say in the upcoming war between higher taxes and lower benefit for public employees, while I am rooting against tax increases, I see no winners.

 

[crazy connie]

It is astoundingly short sighted to give (spend) more than you have and think the well will never run dry. The day is dawning when those who govern will be the mop up team from those who have moved on (been voted out). Gov't spending has been on a collision course for some time and this recession just exacerbates it. No difference in my minds eye to all those who are now in pain from having lived the good life on false profits with home equity loans. It is a royal mess and will impact even those who did not indulge in the insanity as well as the children and those not yet born.

 

[tuixiu]

My wife's govt pension plan gives an 8% interest rate on contributions and matches, applicable if you cash out. The match fully vests after 10 years.

I always thought that rate of return absurd, it's like a GIC fund on steroids.

 

[ziggy29]

The first thing they need to do is eliminate or substantially water down the "pension deal" for new hires in most public sector occupations. In this economy, you don't need to offer a Cadillac retirement plan to attract decent employees. If there are particular occupations that have a strong and legitimate need for retention (such as public safety and perhaps education), those can be examined on a case by case basis -- but even those may not be able to afford the "3% at 50" type of plan with a COLA and health insurance for life. And there should be no more spiking.

By doing that, maybe we can avoid reneging on the promises made to people already in the plan and reduce the amount by which state and local governments have to come to the taxpayers to make up shortfalls.

 

[W2R]

The first thing they need to do is eliminate or substantially water down the "pension deal" for new hires in most public sector occupations. In this economy, you don't need to offer a Cadillac retirement plan to attract decent employees.

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).

 

[utrecht]

Ziggy,

This time I agree with everything you said, but you would be surprised how very few people meet the qualifications (and want) to become a police officer. Our "now hiring" sign is NEVER taken down. The positions cant be filled even with our sweet pension.

 

[bbbamI]

The first thing they need to do is eliminate or substantially water down the "pension deal" for new hires in most public sector occupations. In this economy, you don't need to offer a Cadillac retirement plan to attract decent employees. If there are particular occupations that have a strong and legitimate need for retention (such as public safety and perhaps education), those can be examined on a case by case basis -- but even those may not be able to afford the "3% at 50" type of plan with a COLA and health insurance for life. And there should be no more spiking.

By doing that, maybe we can avoid reneging on the promises made to people already in the plan and reduce the amount by which state and local governments have to come to the taxpayers to make up shortfalls.

My old Megacorp stopped providing pensions for new hires about eleven years ago. Hopefully this fact will help keep those checks coming to us for years to come.

 

[W2R]

Ziggy,

This time I agree with everything you said, but you would be surprised how very few people meet the qualifications (and want) to become a police officer. Our "now hiring" sign is NEVER taken down. The positions cant be filled even with our sweet pension.

The NOPD has a terrible time hiring police officers! The pay is very low, the work is unbelievably dangerous, and the hours are grueling. From what I have been told, the NOPD pension may sound great but it is based on their base pay, not what they actually make. They make a lot in overtime and on details. So, the pension isn't really as good as one might think.

 

[bbbamI]

Ziggy,

This time I agree with everything you said, but you would be surprised how very few people meet the qualifications (and want) to become a police officer. Our "now hiring" sign is NEVER taken down. The positions cant be filled even with our sweet pension.

It's different in my town. We just had testing for three positions. There were 350 applicants...

 

[Texas Proud]

Maybe someone needs to send this article to the Times reporter on the other thread...

There is no such thing as a 'guarantee'... someone is paying for it... someone is taking the risk..

 

[Leonidas]

It's different in my town. We just had testing for three positions. There were 350 applicants...

There are always people who want the job - in fact you could charge people to do it if you wanted and would still have folks lined up for it - but the question comes down to are they the kind of people you want wearing badges.

Our pension system took a hit in the recent bad times - 18% down - but the real problem has always been the city over-promising on the pension while undercutting their contributions. We had to take steps to try and protect the system from the politicians and filed a suit against the city. The new administration came in and we worked out a compromise, and I would say we are doing much better than we were.

 

[youbet]

Ziggy,

This time I agree with everything you said, but you would be surprised how very few people meet the qualifications (and want) to become a police officer. Our "now hiring" sign is NEVER taken down. The positions cant be filled even with our sweet pension.

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.

 

[Bestwifeever]

Our town offers its law enforcement workers a pretty limited and not too dangerous level of crime to deal with (emergency, come quick, someone at the high school is missing an iPod!) and a nice salary and benefits. Seems like there should be some economic equation applied: more dangerous environment = higher salary and benefits. Could be applied to education, too.

 

[ziggy29]

but the real problem has always been the city over-promising on the pension while undercutting their contributions.

Yep. And this overpromising can cause pension fund managers to take more risk than is prudent. There are pension funds which were in bed with the hedgies when they blew up. That is simply ridiculous.

Combine the overpromising and excessive risk-taking with a down market and state/local governments not wanting a taxpayer revolt over increased pension costs in the budget, and you wind up with the perfect storm we're seeing today.

 

[bbbamI]

There are always people who want the job - in fact you could charge people to do it if you wanted and would still have folks lined up for it - but the question comes down to are they the kind of people you want wearing badges.

Hopefully the rigorous testing and background checks can get at least three good ones out of all those applicants...

 

[bssc]

The NOPD has a terrible time hiring police officers! The pay is very low, the work is unbelievably dangerous, and the hours are grueling. From what I have been told, the NOPD pension may sound great but it is based on their base pay, not what they actually make. They make a lot in overtime and on details. So, the pension isn't really as good as one might think.

Houston police department used to be similiar. The hospital I worked at used to hire the officers for security. The idea was that they could double their very low pay by moonlighting and have a semi decent standard of living. Of course, none of this was calculated into their pension.

 

[utrecht]

It's different in my town. We just had testing for three positions. There were 350 applicants...

Thats probably true for lots of small towns. Im talking about the City of Dallas (or just about any big city for that matter).

PS..We have thousands of applicants. Thats not the problem. The problem is that most of them arent qualified. Hiring standards for police officers are pretty strict.

Also, we recently added a $10,000 signing bonus and other incentives, but that was all taken away within the past 6 months along with 900 city employees (not all within the police dept) getting laid off.

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.

 

[Goonie]

....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.

Our pension plan is in just about the same shape....it took a hit in the last year or so, but it's still strong & steady, with NO shortfall or impending doom. The good years were very good, and the bad years weren't very good, but they weren't real bad either. Our plan went from being just over 100% funded, to about 89-90% funded. The plan's [-]financial gurus[/-] trustees are confident that it will get back to 100% within a few years, and I think that they're right.

Thankfully, even though it's public pension plan in Illinois, it's NOT run by or administrated by the state...and under the state constitution they can't touch it!!! It's controlled and administrated by trustees elected by participating employers, employees, and retirees.....so ALL of the trustees have a very real stake in the well-being and solidity of the fund. They're ALL either future or current recipients of the plan! They're also not a bunch of risk takers either....they tend to keep investments fairly conservative!

 

[ziggy29]

Thankfully, even though it's public pension plan in Illinois, it's NOT run by or administrated by the state...and under the state constitution they can't touch it!!! It's controlled and administrated by trustees elected by participating employers, employees, and retirees.....so ALL of the trustees have a very real stake in the well-being and solidity of the fund. They're ALL either future or current recipients of the plan! They're also not a bunch of risk takers either....they tend to keep investments fairly conservative!

I think this is why a lot of the private-sector pension plans that are actually run by the unions are in better shape than the ones that aren't -- the folks who make the investment decisions are also pensioners of that fund, so they have a vested interest to not use hedge funds and arcane options strategies and other things -- they can just keep a conventional and fairly conservative asset mix and avoid getting killed in a bad market.

 

[clifp]

Even more cheery news. This guy with impressive credentials, PHd from the London School of Economics and lots of think tank experience, argues that article misses an even bigger problem with public pensions.

The Washington Post
reports today on the sorry state of funding in state and local employee pensions, focusing on the impact of recent poor stock returns. While a poor investment climate certainly hasn't helped, it's not the biggest reason public employee funds are in bad shape. A bigger reason public pension plans are underfund is that, in effect, we told them they can be. State and local pension plans use different and far less demanding accounting rules than do corporate pensions, even though public employee benefits are guaranteed by law while corporate pension benefits are not.

....
Corporate pension plans must discount their future benefit liabilities at the low interest rates earned by high-quality corporate bonds, while public pension plans are allowed to use the much higher expected return on their assets, which include a high proportion of stocks and, more recently, hedge funds and private equity. The effects can be startling.

He then goes on to make case that public pension actually need twice their current assets. Meaning that in 15 years they'd only be 25% funded oh joy.

 

[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]

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]

.......
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]

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.

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