New York Times: Public pension funds are “going to Las Vegas”
Public Pension
Funds Are Adding Risk to Raise Returns
Mary Williams Walsh
New York Times March 8, 2010
States and companies have started investing very differently when it comes to the billions of dollars they
are safeguarding for workers’ retirement.
Companies are quietly and gradually
moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds.
But states and other bodies of government are seeking higher returns for their pension funds, to make up
for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns
come with more risk.
“In effect, they’re going to Las Vegas,” said Frederick
E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that
state. “Double up to catch up.”
Though they generally say that their strategies
are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures,
junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously
shunned hedge funds are trying them now.
The Texas teachers’ pension fund recently
paid Chicago to receive a stream of payments from the money going into the city’s parking meters in the coming years.
The deal gave Chicago an upfront payment that it could use to help balance its budget. Alas, Chicago did not have enough money
to contribute to its own pension fund, which has been stung by real estate deals that fizzled when the city lost out in the
bidding for the 2016 Olympics.
A spokeswoman
for the Texas teachers’ fund said plan administrators believed that such alternative investments were the likeliest
way to earn 8 percent average annual returns over time.
Pension funds rarely trumpet
their intentions, partly to keep other big investors from trading against them. But some big corporations are unloading the
stocks that have dominated pension portfolios for decades. General Motors, Hewlett-Packard, J. C. Penney, Boeing, Federal Express and Ashland are among those
that have been shifting significant amounts of pension money out of stocks.
Other companies
say they plan to follow suit, though more slowly. A poll of pension funds conducted by Pyramis Global Advisors last November
found that more than half of corporate funds were reducing the portion they invested in United States equities.
Laggards tend to be companies with big shortfalls in their pension funds. Those moving the fastest are often
mature companies with large pension funds, and who fear a big bear market could decimate the funds and the companies’
own finances.
“The larger the pension plan, the lower-risk strategy you would like to employ,” said Andrew
T. Ward, the chief investment officer of Boeing, which shifted a big block of pension money out of stocks in 2007. That helped
cushion Boeing’s pension fund against the big losses of 2008.
Shedding stocks gave Boeing
“material protection right when we needed it most,” Mr. Ward said. By the time the markets had bottomed out last
March, Boeing’s pension fund had lost 14 percent of its value, while those of its equity-laden peers had lost 25 to
30 percent, he said.
“We estimated that the strategy saved our company in the short
term right around $4 or $5 billion of funded status,” he said.
Boeing and other companies seeking
to reduce their investment risk are moving into fixed-income instruments, like bonds — but not just any bonds. They
are buying and holding bonds scheduled to pay many years in the future, when their retirees expect their money.
The value of the bonds may fall in the meantime, just like the value of stocks. But declining bond prices
are not such a worry, because the companies plan to hold the bonds for the accompanying interest payments that will in turn
go to retirees, not sell them in the interim.
Towers Watson, a big benefits consulting firm,
surveyed senior financial executives last year and found that two-thirds planned to decrease the stock portion of their companies’
pension funds by the end of 2010. They typically said their stock allocations would shrink by 10 percentage points.
“That’s 10 times the shift we might see in any given year,” said Carl Hess, head of Towers
Watson’s investment consulting business. Economists have speculated that a truly seismic shift in pension investing
away from stocks could be a drag on the market, but they say it would not be long-lasting.
Corporate America’s change of heart is notable all on its own, after decades of resistance to anything other than
returns like those of the stock markets. But it’s even more startling when compared with governments’ continued
loyalty to stocks. When governments scale back on the domestic stocks in their pension portfolios these days, it is often
just to make way for more foreign stocks or private equities, which are not publicly traded.
Government pension plans cannot beef up their bonds that mature many, many years from now without dashing their business
models. They use long-range estimates that presume high investment returns will cover most of the cost of the benefits they
must pay. And that, they say, allows them to make smaller contributions along the way.
Most have been
assuming their investments will pay 8 percent a year on average, over the long term. This is based on an assumption that stocks
will pay 9.5 percent on average, and bonds will pay about 5.75 percent, in roughly a 60-40 mix.
(Corporate plans do their calculations differently, and for them, investment returns are a less important factor.)
The problem now is that bond rates have been low for years, and stocks have been prone to such wild swings
that a 60-40 mixture of stocks and bonds is not paying 8 percent. Many public pension funds have been averaging a little more
than 3 percent a year for the last decade, so they have fallen behind where their planning models say they should be.
A growing number of experts say that governments need to lower the assumptions they make about rates of return,
to reflect today’s market conditions.
But plan officials say they cannot.
“Nobody wants to adjust the rate, because liabilities would explode,” said Trent May, chief investment
officer of Wyoming’s state pension fund.
The $30 billion Colorado state pension fund is
one of a tiny number of government plans to disclose how much difference even a slight change in its projected rate of return
could make. Colorado has been assuming its investments will earn 8.5 percent annually, on average, and on that basis it reported
a $17.9 billion shortfall in its most recent annual report.
But the state also disclosed
what would happen if it lowered its investment assumption just half a percentage point, to 8 percent. Though it might be more
likely to achieve that return, Colorado would earn less over time on its investments. So at 8 percent, the plan’s shortfall
would actually jump to $21.4 billion. Contributions would need to increase to keep pace.
Colorado cannot afford the contributions it owes, even
at the current estimated rate of return. It has fallen behind by several billion dollars on its yearly contributions, and
after a bruising battle the legislature recently passed a bill reducing retirees’ cost-of-living adjustment, to 2 percent,
from 3.5 percent. Public employees’ unions are threatening to sue to have the law repealed.
If Colorado could somehow get 9 percent annual returns from its investments, though, its pension shortfall would shrink
to a less daunting $15 billion, according to its annual report.
That explains why plan officials
are looking everywhere for high-yielding investments.
Mr. May, in Wyoming, said many governments
were “moving away from the perceived safety and liquidity of the investment-grade market” and investing money
offshore, but he said he was aware of the risks. “There’s a history of emerging markets kind of hitting the wall,”
he said.
Last year, the North Carolina Legislature enacted a measure to let the state pension fund invest 5 percent
of its assets in “credit opportunities,” like junk bonds and asset-backed securities from the Federal Reserve’s
Term Asset-Backed Securities
Loan Facility, an emergency program created to thaw the
frozen markets for such securities.
The law also lets North Carolina put 5 percent of its pension portfolio
into commodities, real estate and other assets that the state sees as hedges against inflation. A summary of the bill issued
by the state’s treasurer and sole pension trustee, Janet Cowell, said it would provide “flexibility and the tools
to increase portfolio return and better manage risk.”
But some think they see new
risks.
“It doesn’t pass the smell test,” said Edward Macheski, a retired money manager living
in North Carolina. “North Carolina’s assumption is 7.25 percent, and they haven’t matched it in 10 years.”
He went to a recent meeting of the state treasurer’s advisory board, armed with a list of questions about the investment
policy. But the board voted not to permit any public discussion.
Wisconsin, meanwhile, has become one of the first states to adopt an investment
strategy called “risk parity,” which involves borrowing extra money for the pension portfolio and investing it
in a type of Treasury bond that will pay higher interest if inflation
rises.
Officials of the State of Wisconsin Investment Board declined to be interviewed but provided written descriptions
of risk parity. The records show that Wisconsin wanted to reduce its exposure to the stock market, and shifting money into
the inflation-proof Treasury bonds would do that. But Wisconsin also wanted
to keep its assumed rate of return at 7.8 percent, and the Treasury bonds would not pay that much.
Wisconsin decided it could lower
its equities but preserve its assumption if it also added a significant amount of leverage to its pension fund, by using a
variety of derivative instruments, like swaps, futures or repurchase agreements.
It decided to
start with a small amount of leverage and gradually increase it over time, but word of even a baby step into derivatives elicited howls of protest from around the
state.
The big California pension fund, known as Calpers, was already under fire for losing billions of dollars
on private equities and real estate in the last few years. So far it has stayed with those asset classes, while negotiating
lower fees and writing off some of the most troubled real estate investments.
It announced
in February that it had started looking into whether it should lower its expected rate of investment return, now 7.75 percent
a year. It has embarked on a study, but a spokesman said that process would not be done until December, safely after the coming
election.
NIRS response to New York Times story
March 10, 2010
The New York Times
620 Eighth Avenue
New York, NY 10018
To the Editor:
The New York Times March 9th reporting on pensions missed the real story behind some interesting trends in pension investing. An accurate
read of the data reveals the effects of broken Federal retirement policy and the resulting degradation of retirement security
for millions of Americans.
Data released quarterly by the Federal Reserve provides a comprehensive, independent look at pensions’
investment allocation patterns. Contrary to claims made in the article, the data indicate that pension plans in both the
corporate and public sectors have adjusted investments to reduce risk. Prior to 2007, private and public pensions invested
about 60% of assets in stocks. By the third quarter 2009, both public and private plans pared back their equity holdings.
This trend has been much more pronounced among corporate pension funds in recent years. Why? One has to look no further
than to the passage of Federal pension legislation in 2006 that created an environment whereby hundreds of companies closed
or “froze” their pensions.
A frozen pension plan “ages” much more rapidly than an
open plan – its population becomes more heavily weighted with retirees with each passing year. That means the plan needs
to keep more of its funds liquid, since more money will be needed sooner to pay benefits. Thus, the logical investment pattern
for a frozen plan is the same as a worker approaching retirement ‐ move away from long‐term investments like stocks in favor of short‐term holdings like cash and bonds.
But, a frozen
plan and its asset allocation impose significant costs. Companies must forego the opportunity to earn better returns that
could have been achieved with a more balanced portfolio—so it costs more to pay for benefits. But that’s not all.
Economists and retirement experts agree that pension freezes have been disastrous for Americans’ retirement security.
The good news is that pension policy in the public sector has avoided this trap. Public pensions remain open to serve
retired, active and newly hired workers like teachers, firefighters and police officers. As compared to frozen corporate plans,
these public plans are better positioned to continue taking a long-term approach to investing because they have a healthy
mix of younger workers, middle aged Americans, and retirees. So it’s no surprise that these plans are taking a more
measured approach to investing and are continuing to hold more balanced, diverse portfolios.
Hopefully, future
reporting will focus more closely on independent sources of data and the impacts of the overlying policy environment on pensions.
In doing so, the real story behind the crumbling road to retirement for Americans will be revealed.
Beth Almeida,
Executive Director, National Institute on Retirement Security
Latest Wilshire report estimates market-based state pension
funding level of 65 percent
State plan funding lowest in 20 years, Wilshire claims
Pensions & Investments
March 8, 2010
The average funding
ratio of state defined benefit plans has fallen to its lowest level in two decades, according to a new report by Wilshire
Consulting.
The report, which examined data from 125 plans, estimates the asset-to-liability ratio dropped to 65% in 2009, the lowest
since Santa Monica, Calif.-based Wilshire began analyzing the data in 1990. Fifty-seven of the plans examined by Wilshire
had reported data as of June 30, 2009, or later, while 68 plans last reported their financial status prior to that date.
The 65% ratio
is down 20 percentage points from 2008, when Wilshire estimated the average funding ratio at 85%.
The Wilshire report is bound
to add fuel to the debate over state pension funding, with states already saddled with revenue shortfalls.
Steve Foresti, managing director
with Wilshire Associates, said even with future robust results on their investments, it is unrealistic to expect state plans
to significantly improve their funding ratio to make up for bear markets at the beginning and end of the decade.
The report noted
that it was important to view the data in the context of the depressed market level of June 30, 2009, when many plans reported
their data. Global equity markets have rallied 19% in the eight months through Feb. 28, so funding ratios would have been
higher if the expanded period had been considered.
However, Mr. Foresti said there would still be a significant funding ratio deficit even if the rally were
taken into account. He said his crude estimate would put the ratio for public defined benefit plans around 72% as of Jan.
31.
Given
that estimate, he says public defined benefit plans would need to add about $1 trillion to the current $2 trillion in total
assets to achieve full funding.
“This gives you a sense of the size of the deficit,” he said.
The Wilshire report forecasts a
long-term median plan return of 6.9% annually, 1.1 percentage points below the median actuarial interest rate assumption of
8%.
“There
is a big hole that needs to be made up,” said Mr. Foresti, one of the report's authors. “The prudent and least
disruptive way to get back to fully funded status is to increase the level of funding over time.”
The report found none of the
125 state retirement systems studied was expected to earn long-term asset returns equal to or exceeding their actuarial interest
rate assumptions.
“This is a dramatic change compared to the 23 state retirement systems that were expected to earn long-term
returns that equaled or exceeded their actuarial rate assumption” last year, the Wilshire report said.
For the 57 retirement
plans that reported actuarial data as of June 30 or later, pension assets declined by 21.4% to $643.3 billion from $818.6
billion as of June 30, 2008. During the same period, liabilities jumped to $446.9 billion for the 57 plans from $214 billion,
the report said.
All of those 57 plans were underfunded, the report said. Of the 57, four plans had funding ratios less than
50%; nine plans had funding ratios of 50% to 60%; 14 plans, 60% to 70%; 11 plans, 70% to 80%; 15 plans, 80% to 90%; and four
plans, 90% to 100%.
The Wilshire report also examined asset allocation. It found that plans on average had a 66.8% allocation
to equities — including real estate and private equity — and a 33.2% allocation to fixed income. The 66.8% equity
allocation was slightly lower than the 67% allocation in 2004, when Wilshire previously examined asset allocation data, the
report noted.
But the report also found that asset allocations varied widely, with 13 of the 125 retirement systems holding at least
75% in equities while five systems had less than 50% in equities.
Wilshire used the asset allocation to calculate the potential returns
for pension plans.
Access
the report here: http://www.nasra.org/resources/Wilshire_2009.pdf
Federal Reserve reports combined value of public pension fund assets grew in fourth quarter of 2009
In its December 31,
2009 quarterly Flow of Funds report, the Federal Reserve today reported that the combined value of defined benefit plan assets
held by state and local governments increased to $2.67 trillion, up by $86 billion, or 3.3 percent, from the level for the
quarter ended 9/30/09. The 12/31/09 figure is higher by $346 billion, or 14.9 percent from its 12/31/08 level, and some
$500 billion higher, or 23 percent, above its recent low point measured on 3/31/09.
Opinion: IMRF is an Illinois public pension
plan that actually works
An Illinois public pension plan that actually works
Greg Hinz Chicago Crain’s Business March 3, 2010
It
sounds like an oxymoron: a public Illinois pension plan that actually works?
I don't want to believe it either, not in a state whose five major employee funds collectively are a stunning
$80-something-billion in the red. But after a few days of calling around, I can't get anybody to say anything bad
about the $22 billion Illinois Municipal Retirement Fund.
Instead — be it worker or employer
groups, or outside watchdogs like the Civic Federation and the Taxpayers' Federation of Illinois — what I'm
hearing is that good things have happened at IMRF, things that lawmakers might keep in mind as they try to stanch the bleeding
elsewhere.
IMRF's executive director, Louis Kosiba, isn't exactly shy about praising his fund's performance.
The fund represents "the great success story in the pension business in Illinois," he brags. "We kept our eye
on the ball." Big words.
But to back them up, Mr. Kosiba notes that the fund had a 24.5% return on its
investment last year. That return — as yet unaudited — was enough to give it 81.4% of the resources that
the actuaries say it eventually will need to pay its beneficiaries.
That 81.4% isn't as high as the 100%
level it hit before the stock market crash of 2008 clobbered IMRF. But compared to other state pension funds, which have
only half to two-thirds of what they'll eventually need, 81.4% is absolutely stellar.
Employers are happy.
"They're probably the gold standard of Illinois pension funds," says Mark Fowler, executive director of the
Northwest Municipal Conference, which represents IMRF's client villages and cities. "Their disciplined fund approach
is the secret for maintaining the funded ratio," says a spokesman for AFSCME, the big union that represents many of the
folks who work for those villages.
"They represent the best model we have in Illinois," says Civic Federation
President Laurence Msall.
So, what are they doing right?
A bit of it is good fortune combined with savvy
politics. IMRF represents non-police and non-fire municipal workers and non-teaching educational workers —about 182,000
public employees at nearly 3,000 units of government outside the city of Chicago.That mix means IMRF does not have to deal
in Springfield with the powerful teachers and public-safety unions, which have used their power to jack up retirement benefits
mandated by the state.
As a result, IMRF benefits haven't changed since the early '80s, while benefits
covered in other plans have been sweetened time after time.
Ergo, a policeman covered by a different fund can retire
with full benefits as soon as age 50. But someone in IMRF must be at least 60 — and they can get full benefits only
if they've worked 40 years.
Another factor is IMRF's relatively conservative investment strategy. Compared
to other funds, IMRF has more money in bonds and other fixed-income holdingsand less in real estate and other alternative
investments that became quite trendy in the past decade. As a result, Mr. Kosiba says, the fund suffered little direct loss
from sub-prime mortgage investments, while others lost billions.
But the main reason for IMRF's success seems
to be plain old discipline. IMRF actually isn't one big fund but administers separate funds for each of its 3,000 member
governments. But it sets the rules and — crucially —does the math.
Every year, IMRF reviews the books,
checks with the actuaries and lets each of its members know how much they will have to pay next year to keep reserves adequate.
And the towns effectively have no choice but to pay, because IMRF has the legal authority to tap the tax income of towns and
districts that don't pay up.
Occasionally, the agency bends the rules, as it did this year, capping most mandatory
annual contribution hikes at 10% each in 2010 and 2011. But it doesn't do that often.
In comparison, the
state never has followed any discipline in contributing to its pension funds. Sometimes they pay, sometimes they don't.
When politicians take money needed to pay bills and instead spend it on other, more popular programs, trouble
eventually arrives. Which explains why Illinois now has $80 billion in unfunded pension liability.
But not at IMRF,
which aims to be back above at least the 90% funded level not too far in the future.
If lawmakers want a model
as they prepare to revamp the state's pension funds, they could do a lot worse than follow an agency that keeps benefits reasonable,
carefully reviews its costs and then raises what's needed to pay the bills. I just hope they look.
* * * 5:30 p.m. update.
I got a call from the village manager of a DuPage County town who, while conceding that
IMRF is better than most, said it's not perfect.
The manager's particular gripe is that part-timers get
as much credit as full-timers. So someone can work part-time for a village for 15 years, switch to full-time for five years,
then retire with 20 years of full-time credit. Eventually, he adds, IMRF is going to have to switch from a defined-benefit
to a defined-contribution system, just like most of the private sector has.
For what it's worth.
Wisconsin Core Fund benefit payments will decline for second consecutive year
Biz Beat: State pension payouts to fall
again
Mike Ivey
The Capital Times March 9, 2010
For the second year in a row, retired public employees in Wisconsin could see a decline in their
pension payouts.
Payments for participants in the "Core Fund" will decline 1.3 percent beginning in May, according to
figures released Tuesday by the Department of Employee Trust Funds (ETF). That follows a 2.1% decline last year, the first
ever in the history of the Wisconsin Retirement System.
"The need to reduce Core annuities again demonstrates the severity
of 2008's investment declines," says David Stella, director of the ETF.
Stella says the two-year decline in payouts
is due to the continuing effects of the Core Fund's 26.2% investment decline in 2008. Core Fund returns are smoothed over
a five-year period to help cushion year-to-year market volatility.
"The sheer size of 2008's Core Fund decline is the reason for
this year's negative core annuity adjustment for retirees," says Stella.
Retirees in the optional "Variable
Fund" will see an increase in the variable portion of their annuities by 22%. That compares to a 2009 variable annuity
adjustment of -42%.
Annuity adjustments depend solely on the investment returns of the trust funds and current and projected
Wisconsin Retirement System funding needs.
In 2009 trust fund investments rebounded significantly. The Core Fund returned 22.4%, its
third-highest gain in history. The Variable Fund returned 33.7%, its highest gain ever.
Over the past 10 years, the annual
core annuity adjustment has averaged 1.97%. For the variable annuity, the adjustment has average -4.99%.
The WRS covers about
150,000 retirees, some 35,000 of whom have exposure to the Variable Fund.
Dave Stella response to report critical of Wisconsin retirement
benefits
An excerpt:
“After nine months of study, the Wisconsin Policy Research Institute has issued
a report that clearly shows that the pension benefits earned by public employees in Wisconsin provide an adequate level of
income in retirement,” announced David Stella, Secretary of the Department of Employee Trust Funds.
The report entitled “The Imbalance Between Public and Private Pensions in Wisconsin,” notes that plans like
the Wisconsin Retirement System (WRS) offer economic efficiencies over private sector defined contribution plans. The report
also found that defined benefit plans, such as the WRS, earned consistently higher rates of investment return due to professional
management of the plan’s assets and offered secure and predictable retirement income. In fact, the study showed, using
a hypothetical example, that the retirement benefit of a public employee earning $48,000 per year and retiring with 25 years
of service at age 65 almost exactly equals the recommended retirement income needed for an adequate retirement, whereas the
retirement benefit of a hypothetical 65 year old private sector employee earning $70,000 per year falls far short of producing
the recommended amount.
How should this imbalance between adequate and inadequate benefits be resolved? The solution,
according to George Lightbourn, president of WPRI, is to radically reform the WRS by cutting the adequate benefits of public
employees to bring them more in line with the private sector.
“The solution offered
by the report badly misses the mark,” said Stella. “There is a retirement crisis looming in this country, but
it’s not a crisis of having too much retirement income. When the report points out that only 51% of all private sector
employees participated in a retirement plan of any kind and that less than half of all non-union private sector employees
participated, the scope of the crisis becomes clear. That’s why it’s so disappointing to see the WPRI advocating
for slashing benefits of the men and women who protect our communities, teach our children, and serve the public in so many
different ways rather than offering solutions to make sure retirement security is achievable for all. We ought to be talking
about improving retirement security of everyone in Wisconsin rather than reducing it for some.”
Stella also pointed out that the report completely ignored the fact that the WRS is a tremendous value to the state.
“The WRS not only provides economic security for public employees and their families in Wisconsin, it benefits the whole
state when its investments are made in Wisconsin companies and when its benefits are spent in Wisconsin communities, creating
jobs and tax revenue for the state and local governments,” said Stella.
Overall,
Stella noted, the WPRI has based its recommendations on a report that: compares only a slice of the compensation packages
available in the public and private sectors; shows that the WRS is set up very much like private sector defined benefit plans;
acknowledges that defined benefit plans offer large employers many economic efficiencies not available in the defined contribution
setting; establishes that employer contributions to defined contribution plans approach those of the WRS; ignores the positive
economic value the WRS offers the state; and demonstrates that the WRS produces a retirement benefit that in most situations
is in keeping with recommended national retirement income replacement standards.”
“In the
end,” noted Stella, “the WPRI’s recommendations don’t appear to be supported by its own study and
they do nothing to ensure the retirement security of anyone in Wisconsin.”
Read the full response here: http://etf.wi.gov/news/WPRIResponse22010.pdf
Girard Miller: Handicapping California pension reform
Crosswinds for Pension Reform
Governing Magazine March 04, 2010
California's pension-limitation ballot initiative
hits a wall.
Sponsors of a proposed California ballot initiative to tame the high cost of public employee pensions came up short
in February. Two key Republicans, Governor Arnold Schwarzenegger and prominent gubernatorial candidate Meg Whitman, both shied
away from endorsing the proposal, which would have reduced benefits and made other pension reforms. Whitman, who has received
the endorsement of the Jarvis-Gann taxpayer alliance as a defender of taxpayer interests, has instead proposed a defined contribution
system for new hires coupled with increased employee contributions and higher retirement ages within the pension system.
The California Foundation
for Fiscal Responsibility (CFFR), the sponsors of the ballot initiative, has suspended its efforts to obtain signatures to
qualify for the November 2010 ballot. The CFFR may come back another time with a 401(k)-like defined contribution proposal,
according to the group's president Marcia Fritz. But that approach may suffer the same fate as Schwarzenegger's earlier
proposal along those lines — pushback from the police and fire unions. Meanwhile, mainstream Republicans are nervous
that a pension ballot issue would draw fierce union turnouts in the general election, impairing their chances to elect the
next governor and additional legislators.
This is more than a California issue. Political analysts, state officials and benefits
geeks have been following this initiative closely to see whether it might become a bellwether for other statewide ballot proposals
to reform pensions. Judging from the hurdles encountered in California, it seems that citizen anger over pension abuses doesn't
easily translate into a viable ballot measure. Without a political endorsement or substantial private funding to secure the
necessary signatures to qualify for the ballot, the costs of collecting signatures in California is sufficiently high to quash
a voluntary effort. Moreover, without an activist leader with big name recognition to challenge the status quo, a grassroots
effort to reform pensions tends to succumb to organized interests, such as public employee unions and retiree organizations.
A
difficult path forward. Unlike the taxpayer revolts of the 1970s, where fed-up voters could reap immediate pocketbook savings
from a tax limitation, the pension issue is much more ideological and conceptual. And that creates problems in engaging the
public. For those unfamiliar with classic writings in political science, there is a wonderfully insightful book written four
decades ago by Murray Edelman entitled The Symbolic Uses of Politics. A political sociologist, Edelman observed that average
citizens and unorganized voters seek symbolic reassurance in the bewildering world of politics and remain quiescent in comparison
with the focused efforts that organized interests make to obtain tangible resources. California's stumbling ballot initiative
followed Edelman's playbook exactly. The organized interests won — at least this round — without even having
to put on their heaviest armor.
In light of the Supreme Court's recent free-speech decision opening the doors to unlimited
campaign contributions by labor unions as well as corporations, the path to successful public pension reform at the ballot
box could be even more difficult. Few private companies have a direct, material and vested interest in public pension plan
politics, especially if the only resulting changes would be a reduction in costs for new hires. The payoff for corporate taxpayers
is simply too far removed in time to make a campaign-underwriting effort worthwhile from a business perspective.
For the labor unions,
however, pension and benefit issues can mobilize their members. An external threat provides a reason to march into battle
to defend their workers' interests as they have defined them.
Ironically, the measures proposed by the California group in its ballot
proposal were relatively tepid in the context of what's at stake. Although characterized by labor interests as Draconian
measures, few objective observers could argue with a pension cap of 75 percent of salary, the elimination of pension-spiking
or a prohibition on retroactive benefits increases without voter approval. Even the lower proposed multiplier for civilian
employees could have been supplemented by a defined contribution plan to ensure adequate retirement income. No civil servant
would have had to eat cat food in retirement, despite the unions' rhetoric.
Prepare for the next round. California's
public employers must now accept the reality that the voters will not provide them budgetary relief. It's time to gear
up for some hard-nosed collective bargaining, employer-by-employer. New and lower benefits tiers with higher retirement ages
for new employees will be the norm for governments and agencies that now realize they can't afford their current benefits
obligations. Incumbent employee contributions to the retirement funds must increase in order to get the operating budgets
to balance. Retiree medical benefits must be capped for incumbent employees. For new employees, many public employers will
reduce their benefits to post-Medicare supplements to achieve long-term fiscal sustainability, which will still compare favorably
with local private employers.
In an ideal world, municipalities would introduce legislation to curb the abuses in public pensions
in California. Unfortunately, I doubt that such a measure could pass this legislature. The public employee unions hold heavy
sway in Sacramento. That leaves the bargaining table as the only viable game in town — unless things get so bad that
municipal bankruptcy becomes the only solution. That may become the sad end-game for some cities in California if the unions
don't start to smell the coffee and accept reasonable reforms.
Is defined contribution the solution? If the CFFR folks want to succeed
eventually with a defined contribution (DC) proposal, they need to be very skillful in its design. California's police
and fire unions want defined benefits and most politicians will not fight them on a widows-and-orphans issue. A hybrid plan
that is half defined-benefit and half defined-contribution — sharing investment risk equally between taxpayers and employees
— would be logical but requires careful crafting. Making a DC plan strictly optional for public safety, along with reasonable
higher retirement ages and the 75 percent pension ceiling, might be one way to find the middle ground. The financial industry
would support that approach, taking half a loaf rather than none. Candidates like Whitman who prefer a DC approach might be
well advised to refine their positions along such lines.
Editorial: Public plan sponsors should commit to make contributions
or switch to defined contribution plans
Never-ending deficits
Pensions & Investments March 8,
2010
The irony of the pension plan model is that while it was created to provide a way to responsibly and affordably finance
retirement benefits, it has turned into a financial catastrophe for many state and local governments.
A study by the Pew Charitable
Trusts' Center on the States, released Feb. 18, quantifies the aggregate depth of the pension funding hole in state retirement
systems at some $500 billion. The underfunding rises to a total of $1 trillion when unfunded pension liabilities are combined
with retiree health-care and other retirement benefit obligations.
Pew notes its calculation underestimates the financial problem because
it does not fully reflect the severe investment declines in pension funds suffered in the second half of 2008, before the
modest recovery in 2009, or the amortizing practice in valuation that public plans use to account for investment losses or
gains over a period of several years.
The severity of the problem in some state and local government plans has been known for many years and predates
the market meltdown. The Pew study underscores that the problem has generally only become worse over time. The time has come
for state and other public pension plans in chronic severe underfunding to face their retirement financing problem instead
of putting it off.
Either state sponsors should commit to a schedule of contributions to bring their systems to close to fully
funded status, or they need to replace the current systems with defined contribution plans. Otherwise, they face out-of-control
pension liabilities that will make the system unaffordable and either cause broken pension promises or, for constitutionally
protected systems, massive taxpayer bailouts, which would likely wreak havoc on state economies.
Weak economies like the current
one are the worst times to raise contributions. Fully funded pension plans can cushion taxpayers, employers and employees
from the need for more contributions in times of falling markets and weak economies. But few public employee systems prepared
for such scenarios.
Some states don't have the money, or don't want to commit the money, to fund the necessary contributions
and have looked in desperation to the market, or pension obligation bond financing, to bail out their systems. Illinois issued
$3.466 billion in bonds to finance its contribution for the fiscal year ending June 30. Illinois still has outstanding almost
all of the $10 billion in pension obligation bonds it issued in 2003. The state has paid only $100 million in principal on
those bonds. But the combined state systems' underfunding has grown to $70 billion now from $35 billion in 2004.
Fortunately,
some systems are facing up to the problem.
Among them, Colorado enacted legislation that raises employer and employee contributions and reduces benefits
to help the $35.4 billion Colorado Public Employees' Retirement Association.
The Iowa General Assembly has a bill pending that
would raise contributions and lower benefits for the Iowa Public Employees' Retirement System and some other state plans.
A
funded defined benefit program is the most cost-efficient way to finance retirement income in the long term, according to
studies over the years. But that doesn't mean a defined benefit system is best for all participants. The defined benefit
system severely shortchanges employees who do not stay for the vesting period.
Iowa, for instance, seeks to raise vesting to seven years from five. In Iowa, 50% of the teachers stay less than
five years, causing them to lose the state part of their contributions, in effect forcing them to help shore up the system,
according to Michael L. Fitzgerald, state treasurer.
To extend an argument by Mr. Fitzgerald, states should create optional defined contribution plans to allow
shorter-term employees a choice to benefit fully from the state portion of contributions on their behalf. That is a failure
of the defined benefit system easily remedied.
The defined benefit model can work if funded honestly and appropriately, benefits kept affordable, assets
invested in a long-term risk-appropriate strategy and state officials do not regard it as a piggy bank to be raided periodically
when politically expedient.
Four state systems, including the $129.4 billion New York State Common Retirement Fund at 107%, were overfunded,
according to the Pew study. Among local governments, the $3.96 billion City of Milwaukee Employees' Retirement System,
now 99% funded, expects an actuarial study now under way to find it more than 100% funded.
In short, the model isn't the
cause of the underfunding. It is the poor discipline in carrying out a plan to implement the model.
Report says corporate and public pension funds are taking
different approaches to address unfunded liabilities
2 approaches to 1 problem
Corporate funds cut risk while public funds swing for fences
Pensions & Investments
March 8, 2010
Corporate and
public pension fund officials are taking diametrically opposed approaches to dealing with their severely underfunded plans,
with corporate plans going for safety by cutting risk and public ones pushing for big returns by adding risk, according to
a forthcoming report from Greenwich Associates.
Corporate plan officials — driven largely by impending mark-to-market accounting rules — continue
to lower the risk levels of their funds, indicating their willingness to trade higher contributions for less volatility and
more predictability.
Public plan officials, however, unconstrained by accounting rules yet hampered by an inability to boost contributions,
are adding risk in an effort to make up funding declines with investment returns.
“There's clearly a derisking going on
that's continued despite the fact that, because of the historically low levels of interest rates and the decline in market
values, corporate pension funds are substantially underfunded,” explained Chris McNickle, an analyst at Stamford, Conn.-based
Greenwich Associates, in an interview. “And that implies a willingness or acknowledgement that they're going to
have to make contributions” to become fully funded once again.
“Public funds are going in a different direction,” he continued.
“They've got huge (funding) gaps and they're trying to make that up by excess returns. It looks to us like they're
trying to respond to the problem of underfunding by swinging for the bleachers and taking additional risk.”
According to
the Greenwich Associates report, which is based on interviews with officials at more than 1,000 of the largest tax-exempt
institutional funds in the U.S., the average funded ratio among public pension plans fell to 83% last year from 86% in 2008.
In addition, more than 30% have funded ratios of 79% or lower and more than one in 10 has a funded ratio of 69% or lower.
The
survey period was from September 2008 to September 2009.
The drop in funded ratios for corporate pension funds last year was
more dramatic, according to Greenwich, but mainly because they started from a stronger position.
Average funding ratios for the
projected benefit obligation of U.S. corporate pension funds fell to 80% in 2009 from 101% in 2008. The proportion of corporate
pensions funded at less than 85% rose to 57% in 2009 from roughly 8% in 2008 and the share funded at less than 75% increased
to 31% from less than 1%.
Overall, the value of assets in the portfolios of U.S. defined benefit plans declined to $5.9 trillion in
2009 from $7.2 trillion in 2008, representing a retreat to asset values last seen four to five years ago, according to Greenwich
Associates.
Higher expectations
Part and parcel of public funds' aggressive efforts to rebuild their funded status is their expectation
of investment performance.
According to the Greenwich report, the mean annual portfolio outperformance expectation of public pension
funds is 140 basis points, up from 124 in 2008. More specifically, public funds with assets of $500 million or less increased
their stated expected outperformance to 180 basis points in 2009 from 135 points in 2008. Plans with $500 million to $1 billion
in assets reduced their alpha projections to 174 basis points in 2009 from 187 in 2008.
Corporate funds, on the other hand,
have the lowest stated expectations among all institutional investors covered in the survey for alpha, at 116 basis points.
“Public
funds are backing into numbers that allow them to avoid contributions at a time when states are very stressed in their ability
to tax,” Mr. McNickle said. “Public funds don't seem to be in a good position to meet their funding requirements.”
What's
more, public funds' optimism about future performance is not limited to alpha generation, according to Greenwich Associates.
Corporate
funds reported a mean annual rate of return expectation of 5.47% on fixed-income investments compared with a 5.65% return
that public funds expect. Similarly, corporations expect an annual return of 8% for U.S. equities, but public funds expect
8.85%. Where corporate fund expectations for international equities are reported at an annual 8.66%, publics are expecting
9.44%.
Aside from the public funds' return expectations, whether their investment strategies are appropriate is yet another
question, Mr. McNickle said.
“It's not clear they have the right balance between a realistic expectation of returns and asset
allocation,” he said.
According to the Greenwich report, overall, U.S. institutions' allocations to domestic stocks declined
to 32.2% of total assets in 2009 from 37.6% in 2008. Among corporate funds, domestic equity allocations declined to an average
33.8% last year from 40.7% the year before, while for public pension funds, the allocation dropped to 31.5% from 36.5%.
Long-term move
Mr. McNickle
acknowledged that part of the decline in allocations to U.S. stocks was a result of the 2008-'09 bear market and ensuing
recovery, but he said the longer-term trend confirms the active movement of assets out of domestic equities.
“The five-year
pattern cuts through years when the market was up, which makes it clear that the marketplace is moving away from U.S. equities,”
he explained, adding that corporate pension funds are also moving out of international equities, but to a lesser degree.
Corporations
“continue to move into hedge funds or strategies that hedge downside risk,” he said. “They're clearly
taking risk levels down. They're not prepared to live with the level of risk of long-only equity.”
In fact, the
Greenwich report found that over the next two to three years, corporate funds plan to shift assets from domestic stocks into
fixed income, and to a lesser extent, into alternatives focused on diversification and downside protection.
Fixed income
currently makes up 40% of total assets among corporate defined benefit plans and almost 20% of corporate funds plan to increase
fixed-income holdings between now and 2012, compared with only about 6% planning significant reductions.
On the flip side, roughly 17%
of public funds plan to cut fixed-income allocations “significantly” over the next two to three years, with 23%
planning to make “significant” additions to private equity. About 20% have similar plans for international equity
allocations and 17% for hedge funds.
Overall, the proportion of U.S. institutions reporting that they invest directly in individual single-strategy
hedge funds dropped to 24% in 2009 from 32% in 2008 while the share investing in hedge funds through fund-of-funds vehicles
was essentially unchanged at 30% to 31%.
Additional observations on “dummies” exchange
Last week’s
edition of NASRA News Clips featured an article, written by Ted Siedle and published in Forbes magazine, titled “Public
pension funds are run by dummies.” I found the content of the article to be as objectionable as the title. Since Mr.
Siedle provided little evidence in support of his perspective, I took advantage of the Forbes online user comments board to
point out that public pension fund investment returns are consistent with or higher than those of corporate funds and foundations
and endowments.
I’m no investment expert, but I do know that a fund’s investment return, per se, is not the best indicator
of its performance. A better indicator of fund performance might be to measure the fund’s risk-adjusted return or to
compare actual and expected returns. By comparing median returns, I was merely trying to provide some concrete evidence to
an argument that cried out for it. Moreover, I did not want to let Mr. Siedle’s depiction of public pension funds go
unchallenged, feeding an uninformed perception held by too many already. Mr. Siedle presented lots of circumstantial evidence
for his contention that public pension funds are incompetently invested, but based on at least one simple measure that I can
understand—median returns—the facts do not appear to support his perspective.
Two news clips readers shared their
thoughts on the exchange, and graciously have permitted me to share them:
Bob Gentzel, director of communications &
policy at the Pennsylvania SERS, shared his thoughts on this exchange, which he graciously permitted me to share:
Your response to the “dummies” by Siedle was good but missed the larger point, which is that what he’s
really arguing against is civilian control of government. When it comes to waging war, who are the experts? The
military. But do we let them decide when and where to invade? NO! We leave it to the “dummies” in
elected office (and, ultimately, to the “dummies” who voted for them). Same with anything else you care
to name. Public schools? Why do we vest control with school boards filled with elected dummies when we could leave the
whole thing to the EdD’s? Why do we leave verdicts of innocence or guilt (literally life or death in some cases) to
the “dummies” who serve as jurors? Why not, following Siedle’s logic, just leave it to the police,
prosecutors and judges to decide who’s guilty?
Larry Beeferman, who runs the Labor & Worklife Program at Harvard
Law School, said:
Somewhat more than a dozen academic studies carried out starting in the early 1990s have looked at the relationship
between pension board composition (and other factors) and investment returns (and other) outcomes with respect to selected
years as far back as 1985 and running to 2008. The results for the most part point to few statistically significant links
between different kinds of board trustees – for example, ex officio, appointed, member-elected - and investment returns.
On balance they suggest that there might be a positive correlation between the percentage of elected members and investment
returns with, perhaps, the percentage of elected active members being the source of that outcome. There is conflicting evidence
on the correlation between the percentage of appointed members and returns.
Because (1) each of the studies relates to often different but sometimes overlapping small clumps of years over an extended
period and they measure investment returns in different ways, for example, abnormal or excess 1-year returns, 1-year gross,
and average 3-year gross returns, and (2) there may be legitimate concerns about the quality of the data upon which they rely,
any assertions based on those studies might be viewed with caution. Nonetheless, it is probably fair to suggest that
not-infrequent claims about the lack of expertise of particular categories of board members, particularly member trustees,
resulting in poor investment returns have, as of yet, little foundation in that literature. We are in the process of gathering
what we believe could be better quality data and doing calculations relating to these and other pension fund characteristics.
We anticipate reporting findings that we hope will better ground debate about factors that bear upon pension fund investment
performance more firmly in the facts.
British pension group seeks change in accounting standards,
saying market-based measures don’t work
NAPF to call for
overhaul of rules
Financial Times March 10 2010
The trade body representing UK pension plans is to call for an overhaul of the accounting rules that govern the disclosure
of company retirement liabilities arguing that these are intellectually flawed and partly to blame for the widespread closure
of schemes.
Lindsey Tomlinson, chairman of the National Association of Pension Funds, which is holding its annual investment
conference, will on Thursday all for the creation of a high-level panel of plan sponsors, accounting standards setters and
investors to look again at a set of rules that have given rise to current calculations of woefully
underfunded pension schemes.
“What
we are saying is that the current framework isn’t satisfactory,” Mr Tomlinson said, adding that the debate was
similar to that occurring among banking regulators about the merits of valuing assets by reference to existing market prices.
Bankers and some accounting bodies have argued that there is little point in requiring companies to value
assets at prices reflecting panic selling.
Mr Tomlinson, who is also a managing director at
fund manager BlackRock and is on the board of the Financial Reporting Council – which oversees auditors and actuaries
– said that the underlying philosophy behind valuing assets and liabilities with reference to market values is that
markets are efficient in setting prices. “What I say is that we all know the efficient market hypothesis is a flawed
hypothesis and it is being talked about in the banking world, too,” Mr Tomlinson said.
The Pension Protection Fund, the industry financed safety net for underfunded retirement schemes of insolvent employers,
is to step up its investment in assets, including private equity and infrastructure projects, to boost returns. Alan Rubenstein,
chief executive, said the planned shift from the current investment profile was modest and likely to be gradual.
Press Release: Financial Accounting Foundation appoints
Michael H. Granof to the GASB
FOR IMMEDIATE RELEASE
Contact:
Neal McGarity 203-956-5347
The Financial Accounting Foundation Appoints
Michael H. Granof to the GASB
Norwalk, CT, February 24, 2010—The Financial Accounting Foundation (FAF) today announced
that Michael H. Granof, PhD, CPA, Ernst & Young Distinguished Centennial Professor of the McCombs School of Business
at the University of Texas at Austin, has been selected to serve as a member of the Governmental Accounting Standards
Board (GASB) starting July 1, 2010. The appointment was made by the FAF Board of Trustees, which oversees the activities
of the GASB and Financial Accounting Standards Board (FASB).
John J. Brennan, FAF Chairman, stated,
“On behalf of the FAF Board of Trustees, I am pleased to welcome Michael Granof to the GASB. His expertise in
governmental accounting, as well as his understanding of the issues facing state and local governments in these challenging
economic times, will be an asset to the GASB’s efforts to make improvements to accounting and financial reporting within
this important sector of the United States economy.”
Robert Attmore, Chairman of the GASB,
added, “Michael Granof has dedicated his academic career to the understanding of financial reporting for government
entities. His extensive knowledge in this area will be invaluable to GASB deliberations on a number of important initiatives,
and we look forward to the benefit of his expertise and insight during his term on the Board.”
Dr.
Granof has been a member of the faculty of the McCombs School of Business since 1972. Appointed in 1984 to his current
role as the Ernst & Young Distinguished Centennial Professor, he served as Chairman of the school’s Department of
Accounting from 1984-1988. Concurrently, he is also a Professor of Public Affairs at the Lyndon B. Johnson School of
Public Affairs of the University of Texas at Austin, a position he has held since 1999.
Throughout
his distinguished professional career, Dr. Granof has focused on government accounting and auditing issues. In addition
to writing a number of articles and textbooks on these subjects, he is currently a part-time member of the Financial Accounting
Standards Advisory Board for the federal government, and he previously was a member of the National Council of Governmental
Accounting, the AICPA Committee on Governmental Accounting and Auditing, the U.S. Comptroller General’s Advisory Council
on Government Auditing Standards, and various committees of the Texas Society of CPAs.
Dr. Granof begins
his term on the GASB effective July 1, 2010, when he will become one of six part-time members serving on the seven-member
Board. His term extends until June 30, 2015. He succeeds Dr. William Holder, who concludes his second five-year
term on the GASB on June 30, 2010.
About the Financial Accounting Foundation
The
FAF is responsible for the oversight, administration, and finances of both the Financial Accounting Standards Board (FASB)
and its counterpart for state and local government, the Governmental Accounting Standards Board (GASB). The Foundation is
also responsible for selecting the members of both Boards and their respective Advisory Councils.
About the Governmental Accounting Standards Board
The
GASB is the independent, not-for-profit organization formed in 1984 that establishes and improves financial accounting and
reporting standards for state and local governments. Its members are drawn from the Board's diverse constituency, including
preparers and auditors of government financial statements, users of those statements, and members of the academic community.
More information about the GASB can be found at its website www.gasb.org.
Sales tax rates in U.S. reach record high
U.S. Sales Tax Rates Hit Record
High
Forbes, 03.08.10
While President Obama's push to
raise federal income taxes for the wealthy gets lots of attention, the continuing upward creep in the sales tax rates imposed
by state and local governments has gotten less notice.
But Vertex Inc., which calculates sales tax for Internet sellers, reports
that the average general sales tax rate nationwide reached 8.629% at the end of 2009, the highest since the Berwyn, Pa., company
started tracking data in 1982. That was up a nickel on a taxable $100 purchase from a year earlier and up nearly 40 cents
for the decade. The highest sales tax rate in the country now stands at 12%.
In Pictures: America's Highest Sales Taxes
During 2009 seven
states and the District of Columbia raised sales tax rates, with one jurisdiction--North Carolina--actually doing it twice.
Only four states hiked rates in 2008 and only one in 2007. Given state budget problems, the 2009 state sales tax increases
aren't surprising. States have also been raising income tax rates on the wealthyand on corporations and boosting excise
taxes on alcohol and tobacco. With states now facing record budget shortfalls, more tax increases seem likely.
State level sales
tax generally accounts for only about two-thirds of the total sales tax bill. The rest comes from levies assessed by counties,
municipalities, Indian tribes and special-purpose taxing districts funding mass transit, urban renewal and even stadiums.
Among lower level jurisdictions such as counties and towns, Vertex counted 649 new or increased sales tax rates during 2009
and just 192 reductions.
The result is a wide range of combined sales tax rates across the country. At the bottom: 0%, found
in all of Delaware and New Hampshire, and most of Montana, Oregon and Alaska. The country's highest rate now is 12%, in
the tiny portion of tiny Arab, Ala., (population 7,500) sticking into Cullman County. The rest of the northern Alabama town,
in no-sales-tax Marshall County, pays just 8%.
Right now Chicago has the highest big-city rate, 10.25%. But in a move forced by Cook County
lawmakers, the rate is scheduled to drop on July 1 to 9.75%, matching that of Los Angeles. In New York City the total bite
is 8.875%. Other high big-city rates include San Francisco and Seattle(9.5%), New Orleans (9%), Houston, Dallas and Charlotte
(8.25%), Las Vegas (8.1%) and Philadelphia and Atlanta (8%).
In Arizona, voters will go to the polls May 18 to pass judgment on a
1% rise in the state's 5.6% rate for three years. If approved, the rate in Phoenix would jump from 8.3% to 9.3%.
Some of the highest
sales taxes in the nation are designed to grab dollars from tourists. The New Orleans International Airport has a special
10.75% rate, while Snowmass Village, the ski resort in Colorado, levies a 10.4% sales tax. (Many locales also impose special
higher taxes on services purchased by tourists, such as rental cars and hotel rooms.)
Nationally, sales taxes in 2008 generated
more revenue for state and local governments--about $450 billion, a recent Government Accountability Office report suggests--than
did either property taxes ($411 billion) or personal income taxes ($310 billion).
At the federal level and in some states,
the income tax is progressive, with higher rates imposed on upper-income taxpayers. But rich and poor pay the same sales tax
rate. In many states, however, there's no sales tax on food or medical prescriptions.
The combined local sales rate is
what local merchants charge for in-person customers. Through a parallel system called the use tax, it's also what residents
in a given jurisdiction are supposed to pay on purchases over the Internet from out-of-state sellers, but such payments are
widely flouted. Congress has declined to pass legislation that would require large Internet only sellers like Amazon.com and
Overstock.com to collect sales taxes for all states. (Currently, they only have to do so for states in which they have some
physical presence.)
Many big online merchants, including Wal-Mart, Dell, Office Depot Inc. and Staples Inc., collect sales
taxes from Internet buyers. Some states, with New York in the lead, have adopted new "Amazon" laws designed to force
the Web giant and others to collect their taxes. More such laws are likely this year.
Research finds state and local governments are increasingly
focusing on fiscal sustainability
From the Rockefeller Institute of Government:
State and Local Finance: Increasing Focus on Fiscal
Sustainability
By Robert B. Ward and Lucy Dadayan
ABSTRACT: In recent decades, the scope of state and local governments’
budgetary commitments has expanded significantly due to a combination of policy decisions at all levels of government and
sharply rising costs in one area, health care. At the same time, states and localities are confronted by challenges in their
revenue systems, including heightened voter resistance to tax increases and tax structures that fail to capture growth in
important sectors of the economy. Meanwhile, states’ finances — long intertwined with those of localities
— have become increasingly influenced by federal programs and policies.
State and local expenditures have not only grown
sharply, but have changed qualitatively in important ways over the last three to four decades. Just as the federal budget
is increasingly dominated by entitlement spending programs, state/local expenditures have taken on ‘‘entitlement’’
characteristics as well. Such expenditures have become more difficult to adjust when economic and revenue conditions deteriorate,
largely because of growing costs for health care.
Government and academic researchers, and the agencies that set financial
reporting standards for states and localities, are increasingly focusing attention on ‘‘fiscal sustainability.’’
This is a broad and longer-range concept that has been defined in varying ways to represent the ability of governments (whether
at the national, state or local level) to meet existing program commitments with existing resources not only in current terms
but into the future.
This article builds on previous research and analysis of fiscal sustainability for state and local governments.
First, it reviews recent history of states’ expenditures and revenues, as background for the emerging concern over sustainability.
The article describes evolving themes in analyses of state/local fiscal pressures over the last three decades, discusses varying
definitions of fiscal sustainability that have been offered in previous literature, and argues for greater precision in such
definitions. Finally, the article examines potential action by the Governmental Accounting Standards Board in this area, and
discusses how developments in the economy, and potential action at the federal level, may influence state and local budgets
in years to come.
Access the full paper here: http://publius.oxfordjournals.org/cgi/content/full/pjp014?ijkey=S9XUAuCoLmVz70P&keytype=ref
Oregon
state treasurer dies
State treasurer Ben Westlund dies
He was being treated for a recurrence of cancer
By Beth Casper • Statesman Journal • March 8, 2010
Oregon officials mourned the loss of state treasurer
Ben Westlund, whom they called a friend to Oregon and dedicated to living up to Oregon's traditions. Westlund, 60, died
Sunday morning of cancer.
"He loved this state in a way that is very special," said Senate President
Peter Courtney, D-Salem. "He felt so strongly that he had to live up to Oregon's traditions."
Westlund
was elected treasurer in 2008 after 12 years in the Legislature. He had surgery and treatment for lung cancer in 2003. This
past fall, Westlund told his staff he was undergoing treatment for a cancer recurrence.
"Ben cared about the
people of this state and worked tirelessly throughout his public service career to create hope, opportunity and build a better
future for all Oregonians," said Gov. Ted Kulongoski in a prepared statement. "Oregon has lost a leader, a friend
and a member of our collective Oregon family, but his spirit and enthusiasm will continue
to inspire the best in all
of us."
Westlund was elected to the Oregon House as a Republican in 1996 — becoming co-leader of the
Legislature's joint budget panel in 2001 and 2002 — and was appointed to the Oregon Senate in 2003. He won a full
term the next year.
In 2006, he left the Republican Party to mount an independent bid for governor, but abandoned
the campaign and switched parties. He was elected state treasurer as a Democrat in 2008.
<snip …>
Former Hevesi aide pleads guilty to felony, citing “culture
of corruption”
Ex-New York Pension Fund Officer Pleads Guilty
March 10 (Bloomberg) -- David Loglisci,
who was chief investment officer of the New York state pension fund under former comptroller Alan Hevesi, pleaded guilty over
his role in what he called a “culture of corruption” at the fund.
Loglisci, 38, today admitted violating the
state’s general business law, a felony, in state Supreme Court in Manhattan. He is the sixth person convicted in a probe
of fraud at the retirement fund, the third-largest in the U.S., recently valued at $126 billion. He faces a possible prison
sentence of 1 1/3 to four years and will cooperate with New York Attorney General Andrew Cuomo’s investigation, according
to the plea agreement.
Loglisci acknowledged breaching fiduciary duties and said he had “effectively ceded my authority”
over the fund’s so- called alternative investments to Henry “Hank” Morris, the former top political adviser
to Hevesi. Investment deals were steered to Morris and politically favored firms, Loglisci said at today’s hearing.
“The political motivations for investment selection were chronic and institutionalized throughout the office, creating
a culture of corruption at the highest levels,” Loglisci said.
Loglisci was charged last March along with Morris in a 123- count in
indictment. If convicted of enterprise corruption, Loglisci faced up to 25 years in prison. He allegedly benefited through
investments in a 2004 low-budget movie, “Chooch,” produced by his brother, Steven.
“David Loglisci found himself
in a nearly impossible situation at the fund, but two facts are now clear: While those around him made millions, Loglisci
never asked for a single cent from anyone and, during his tenure, the fund was among the top 5 percent of performing pension
funds in the country,” Kevin Keating, Loglisci’s lawyer, said in a telephone interview.
Loglisci said he was instructed
by a senior official to get approval from Morris before recommending or declining investment suggestions. He also said he
ceded authority over the alternative investment portfolio at the direction of senior officials. Loglisci didn’t benefit
monetarily, Cuomo said. “Was there additional money to him? We don’t believe so,” Cuomo said on a telephone
conference call.
Ellen Biben, special deputy attorney general for public integrity in Cuomo’s office, declined on the conference
call to identify the senior officials cited by Loglisci.
Hevesi has neither been charged nor cleared in the investigation. Bradley
Simon, a lawyer for Hevesi, didn’t immediately return a call for comment.
Morris has pleaded not guilty and his case
is pending. William Schwartz, Morris’s lawyer, didn’t immediately return a call for comment. “We are not
commenting about what Mr. Hevesi knew or didn’t know at this time,” Cuomo said.
Morris corrupted the investment
process to favor those who either contributed to Hevesi’s campaign, which Morris managed, or agreed to pay placement
or other fees to Morris or his associates “and to punish who would not,” Loglisci said in court. Loglisci knew
Morris split sham placement fees with certain agents, or had other financial interests he concealed from the state retirement
fund. In some instances, Morris concealed the information from him as well, Loglisci said.
In December 2006, Hevesi pleaded
guilty to defrauding the government and agreed to resign from office for using state employees as drivers and personal aides
to his disabled wife.
Elliott Broidy, founder of Markstone Capital Partners, pleaded guilty in New York state court in December,
saying he worked with high-ranking officials at the comptroller’s office, including Loglisci, “to confer benefits
upon public servants for having violated their duties.”
Broidy said in that in seeking investments from the pension fund, he
made almost $1 million in payments for the benefit of high-ranking officials.
Former state Liberal Party Chairman Raymond
Harding pleaded guilty in October for pocketing illicit payments. Others who pleaded guilty are Saul Meyer, a Dallas money
manager, Los Angeles placement agent Julio Ramirez Jr. and Dallas hedge-fund manager Barrett Wissman, who was accused of paying
and receiving kickbacks.
Loglisci was in the state comptroller’s office from 2003 to 2007. Under Loglisci, the pension
fund’s assets doubled to about $180 billion from about $90 billion, his attorney Irv Seidman said when he was indicted.
Lurid details surround departure of high-profile
money manager
Firing the $70 billion man
March 10, 2010
NEW YORK (Fortune) -- On November 19, 2009 Jeffrey Gundlach was named a finalist for Morningstar's
award for bond fund manager of the decade. For Gundlach, the nomination recognized 10 years of stellar results, exceeding
even the returns of the legendary king of bonds, Bill Gross.
Two weeks later Gundlach was confronted,
fired, and then pursued on foot out of a Los Angeles skyscraper by two lawyers working for TCW, the money management firm
with $110 billion in assets where Gundlach had worked for 24 years.
Not only
did TCW oust Gundlach, but the firm also announced that it was acquiring an entire company -- crosstown rival Metropolitan
West Asset Management -- to replace him. That in turn set off a wave of defections from TCW, as 45 of the 60 staffers who
had worked for Gundlach streamed out the door to join him at a new firm that he had opened within days of leaving.
Then things really turned nasty. TCW filed an incendiary lawsuit in January accusing Gundlach
of conspiring with confederates at TCW to steal proprietary information as part of a long-running plot to form their own competing
firm. The suit added a salacious twist of the knife, perfectly calibrated for maximum media interest -- Gundlach had allegedly
stashed a trove of illicit material in his office: 70 pornographic magazines and videos, 12 "sexual devices," and
several bags of marijuana.
Gundlach has countered with his own lawsuit. He charges
TCW and its owner, the French bank Société Générale, with pushing him out so that they can get
their hands on his lucrative fees. In addition to his mutual funds, Gundlach had managed what were effectively two hedge funds
for TCW, each of which commanded the amped-up fees typical of those vehicles. Gundlach calculates that he would have personally
reaped $600 million to $1.2 billion over the next few years.
What in the name of Peter Lynch is
going on here? Sure, we've come to expect shenanigans from Wall Street. But even if the mutual fund world hasn't been
exactly pristine (remember the market-timing scandals a few years ago?), more often than not its managers and executives have
been well-behaved schoolboys compared with the leather-clad (in spirit, anyway) rock stars among the investment bankers and
hedge funders.
But unlike most mutual fund companies, TCW has always aspired to a Wall Street culture. In
particular, it cultivated a star system. The company grew by importing ambitious money managers and granting them autonomy.
They could invest as they liked; TCW would handle sales and marketing. The two sides would then split the fees, with each
manager cutting an individual deal. The result could be huge rewards for managers -- Gundlach made $134 million over the past
five years -- but some came to view themselves essentially as sole proprietors.
TCW
seemed content with the arrangement and did little to tie its managers' fates to the company as a whole. Few of them,
for example, received significant stakes in TCW. That bred frustration in multiple generations of standout performers, who
viewed corporate executives (some of whom did receive ownership shares) as getting rich off their toil.
So it went for Gundlach, a bona fide investing star who, by the end, oversaw about 70% of TCW's assets,
some $70 billion, putting him in charge of one of the biggest pots of money in the country. Gundlach didn't just generate
steady returns; he avoided the blowup of the century. A specialist in mortgage-backed securities, he publicly warned in 2007
that "the subprime mortgage market is a total, unmitigated disaster, and it's going to get worse." He invested
accordingly, not only delivering positive returns in the blighted year of 2008 but also earning himself a growing role as
a media sage. His ego grew along with it.
There are few people like Jeffrey
Gundlach in the mutual fund world -- or in any world. A former rock-and-roll drummer, Gundlach, 50, is a math whiz (but not
a quant). He views everything in binary terms: Either you perform to his standards or you don't, and he won't hesitate
to let you know which category you fall into. Nor is he shy in articulating his view of himself. "I was by far the biggest
revenue generator at TCW, by far the biggest performer," he says. "I created $4 billion in value for clients in
'09. If telling you that is self-promotion, so be it. It's just a fact."
With Gundlach, it's hard to tell which is largest: his brain, his self-regard -- or his resentment of TCW. He claims
that his recent firing was actually the third time the company tried to get rid of him. "All three of them were an attempt
to just steal the economics," Gundlach contends. "And this time they did it. Except they didn't steal the economics.
They blew it up. They blew it up. They tried to steal the economics, but they didn't understand. They never understood."
TCW customers, meanwhile, have been watching the blood feud in disbelief. Investors have fled,
with assets shrinking $25 billion since Gundlach was fired. For those who have remained, it seems that their patience is limited.
"I'm aware of the investment prowess of both [Gundlach and the new TCW team]," says Mansco Perry III, CIO of
the Maryland State Retirement and Pension System, which has $50 million invested in TCW. "But right now I don't believe
they're acting in the best interest of their clients."
<snip …> Read the full story here: http://money.cnn.com/2010/03/09/news/companies/TCW_Gundlach_full.fortune/index.htm?postversion=2010031004
