More Cheery News: Public Pensions in deep doo doo

[youbet]

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]

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]

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]

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]

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]

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]

(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]

...

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]

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).

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.

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]

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]

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.

 

[youbet]

You mean the public who doesn't receive a DB pension and who must save for their own retirement?

Yes, exactly. I'm not saying I support that concept. But I am saying that either tax payers need to insist that they pay higher taxes to support public sector pension promises or throw the politicians who are making the promises out of office. There is no possible positive outcome to be derived from promising higher and higher public pensions and not funding them.

BTW, in Illinois public pensions are not taxed. So indeed, it is exclusively folks who aren't benefitting from public pensions who pay for them. Not saying that is either right or wrong, but that is the way it is.

 

[ziggy29]

Yes, exactly. I'm not saying I support that concept. But I am saying that either tax payers need to insist that they pay higher taxes to support public sector pension promises or throw the politicians who are making the promises out of office. There is no possible positive outcome to be derived from promising higher and higher public pensions and not funding them.

Seems to me the obviously answer should be to cease or sharply curtail benefits for new hires while striving to honor existing promises. That wouldn't stop the bleeding but it would make it manageable and somewhat temporary.

Politicians could play to taxpayer advocates and budget hawks by saying they are reducing future liabilities by closing or sharply cutting back the pension programs for new hires in many occupations. They could also play to the large number of public employees and retirees by pledging that no one already in those pension plans would be adversely impacted. Most likely you'd have to change compensation packages to include a 401K or 403B match plus a higher salary (in areas where gov't employees are significantly underpaid relative to the private sector).

Frankly, I think more state and local retirement plans should follow the FERS blueprint, which provides the true "three legged stool" of retirement income.

 

[Texas Proud]

Seems to me the obviously answer should be to cease or sharply curtail benefits for new hires while striving to honor existing promises. That wouldn't stop the bleeding but it would make it manageable and somewhat temporary.

Politicians could play to taxpayer advocates and budget hawks by saying they are reducing future liabilities by closing or sharply cutting back the pension programs for new hires in many occupations. They could also play to the large number of public employees and retirees by pledging that no one already in those pension plans would be adversely impacted. Most likely you'd have to change compensation packages to include a 401K or 403B match plus a higher salary (in areas where gov't employees are significantly underpaid relative to the private sector).

Frankly, I think more state and local retirement plans should follow the FERS blueprint, which provides the true "three legged stool" of retirement income.

One of the problems with sharply curtailing current hires is that it is partly a ponzi scheme... so you would sharply cut off current funding for the people... unless of course you kept taking it out of the current hires paycheck.. which would probably mean fewer people applying for the job...

 

[randyman65]

In further example of the problem with this funding scheme: I live in a very heavily taxed region (typical SFR property taxes are $9k per year, two thirds of which fund the 127 separate school districts in thw county region serving a total of 476,000 students with a student to teacher ration of 13.2 to one) in which taxes are continually raised to support guaranteed entitlements to public employees. Partially as a result, the region has seen a net outflow of 20-34 year old workers, along with the manufacturing base to employ them. Property tax breaks are given to those 55 and older, and affordable housing developments are almost exclusive for 55 and older residents. We're finding those who wish to survive, much less thrive, in their working lives are tending to leave for more affordable regions. What remains are low income workers, those in public service (often making very, very good money), and those who have either already made their money or who thrive in the remaining local economy. But for those who care to look at these sorts of things, several factors point to an impending crisis:

- 20% of the local GDP feeds local and state government. The two-county region as 901 separate taxing authorities.
- Public pensions rely overwhelmingly on tax assessments for funding - employee contributions fall far, far short of those necessary to reached anything approaching full funding levels.
- Public pensions - mostly union-negotiated - rely on an outdated formula which allows for overtime in pensino calculations, and pays out unsued sick and personal days at final salary levels (one recent school superintendant retired with a $240k per year pension and a $967k lump sum payout).
- Pension fraud is rampant. Virtually all retirees from the local commuter railroad retire on full disability. Commissioners and other employees of local agencies "retire" to begin drawing pensions and immediately go back to work in their old jobs at the same salary, only now drawing a pension typically equal to their old salary.
- 35% of the regional population is 55 years or older.

To say this is a recipe for disaster is an understatement. The response from public employee unions has been as expected: as long as they get theirs it doesn't matter the cost to the region. There are 50 states in this country, and as workers look at their futures, they will vote with their feet. Frustrated with their prospects and treated as the goose who laid the golden retirement egg, young workers are leaving in droves. What will remain is an increasingly untenable system in which "promises" must be fulfilled by a smaller and smaller group of taxpayers.

The last 60 years has seen the greatest intergenerational transfer of wealth in history. It is difficult to think of a word more appropriate than "selfish" when used to describe two generations who have willingly sacrificed the future of their children and grandchildren for their own advantage today.

 

[youbet]

Seems to me the obviously answer should be to cease or sharply curtail benefits for new hires while striving to honor existing promises. That wouldn't stop the bleeding but it would make it manageable and somewhat temporary.

Honor the existing promises to current employees retirement as long as we're willing to do whatever it takes with taxes and truly fund the pension systems to support that. But remember if there has been significant hiring in the last decade, or so, it'll take many years before the system really gets much relief.

Otherwise, another alternative is to make the current employees plans a hybrid:

1. New hires get new, reduced pension benefits.

2. Current employees receive credit at the old promise level for years already put in and receive credit at the new promise level for future years.

With this plan, very senior employees, say within a few years of retirement, would feel only a small impact. Newer employees would have more of an impact, but would still get credit at the old, higher promise level for years already worked and "in the bank" and would be aware long before retirement while they still have time to save and invest accordingly.

 

[randyman65]

"Honor the existing promises to current employees retirement as long as we're willing to do whatever it takes with taxes and truly fund the pension systems to support that. But remember if there has been significant hiring in the last decade, or so, it'll take many years before the system really gets much relief."

The problem is that the tax camel is already one straw away. Every proposal involves throwing potential employees under the bus while giving current employees a complete pass, all funded by increasing taxes rather than employee contributions. I think we can see what it did to GM - essentially the entire company assets were given to retirees.

AS previously noted, the Fed did the smart thing in 1982 by adopting the FERS approach - employees would receive a guaranteed floor income while being expected to reach into their own pockets like those without DB pensions. Unfortunately, we don't see that on the state or local level. Instead of trying to move these pension programs more in line with Federal and private programs, trends in recent years have been to push for even more generous terms. In NY, both the United Federation of Teachers and the Transit Union have been pushing for an improvement in their existing 25/55 scheme (25 years of service at 55 years of age for full benefits), strgonly advocating - and striking for - a 20/50 scheme. Thats right - as states an municipalities state in horror at the ticking timebomb of pension obligations, public employee unions are lobbying hard to spend fewer years working to receive full pension benefits for an even longer period of time. Meanwhile, they vociferously object to increasing employee contribution from 2% of salary to 3% of salary.

It is far too late to simply cut benefits for "unborn" workers, not that the typical public employees union would allow that. In many states, agencies, and municipalities, salaries have grown to be more than generous under the guise of remaining competitive, free for life health insurance has become unbearably costly, and the answer is either a) pretend the pension funds will magically make much more than market rate returns, or b) assume that the taxpayer will pick up the tab down the line. The other two alternatives are the third rail of union politics. Either enact wholesale reform of the pension system similar to the Fed's actions on 1982, or require employees to fully fund their own defined benefit scheme. Unfortunately, the most politically expedient thing to do is pretend the problem doesn't exist and hope you'll be long gone when the systems fails.

 

[youbet]

" Every proposal involves throwing potential employees under the bus while giving current employees a complete pass,

Not true randyman. See my post above where I propose a reduction to current employee's plans.

 

[ziggy29]

Not true randyman. See my post above where I propose a reduction to current employee's plans.

This is true, but would be a very hard sell politically and some would consider that breaking a promise. It might be best to be content with the lower hanging fruit at this point.

 

[randyman65]

"Not true randyman. See my post above where I propose a reduction to current employee's plans."

Let me rephrase that - in my state, every proposal by the public employee unions advocates preserving all current benefits while cutting those to "unborn" workers. And as far as breaking a promise, I never promised anyone that I'd fund their retirement at the expense of my own. Someone in the past has promised my income to someone else, but it wasn't me.

 

[youbet]

This is true, but would be a very hard sell politically and some would consider that breaking a promise. It might be best to be content with the lower hanging fruit at this point.

Yes, it would be a tough political nut to crack. The solution I proposed (current employees continue to get credit for the current pension plan for years already worked but get credit for a less generous plan for future years) commonly occured in private business over the past decade. But doing that to public sector employees would create quite a stir, that's for sure.........

I think it's just a matter of how bad the underfunding gets and what tax increases would be necessary to bail out the funds. If taxpayers continue to struggle preparing for their own retirements, they might create quite a bit of political turmoil themselves if asked to pay dramatically higher taxes. The proposal on the table here in Illinois is for a 50% state income tax increase!

The fed govt was able to switch active employees to a new plan going forward when FERS was created. Why can't the states and municipalities do the same using similar tactics?