Yet another study claims public pension liabilities and funding ratios are much worse than reported

A new report, this one published this week by the Manhattan Institute, claims that unfunded public pension liabilities are much worse than are being reported by the plans. This study focuses on statewide teacher plans and says that the actual unfunded liabilities of 59 teacher pension plans exceed $900 billion, much higher than the $300 billion reported in financial statements.

This study comes on the heels of one published last week by a group at Stanford University, which claimed that the unfunded liabilities of the three California statewide retirement systems—CalPERS, CalSTRS, and UCRS—are $500 billion, not the $55 billion they are reporting.

Last month, Northwestern University professor Joshua Rauh published a study projecting insolvency dates for public retirement systems. The projected dates of insolvency ranged from 2018, when pension plans in Illinois, New Jersey, and Connecticut would run out of money, to 2042, when the Utah Retirement System would run dry.

What these studies have in common is the use of market value of liabilities measures. MVL relies on a so-called risk-free investment return assumption, rather than using the plan’s expected long-term rate of investment return. For example, the Stanford study used a rate of 4.14 percent to discount the California plans’ liabilities, compared to the rate of return assumptions used by the three large California plans of 7.75, 8.0, and 8.25 percent, respectively. What the Stanford study essentially is saying is that the California plans’ liabilities should be calculated on the assumption that their funds will generate investment returns of 4.14 percent over their funding periods.

The Rauh study differs from the others in that it assumes an eight percent investment return assumption, but inflates the present value of future liabilities on the basis of zero-coupon Treasury yields based on each state’s bond rating. This results in rates that range roughly from four to five percent, and his calculation significantly increases liabilities above levels calculated using industry accounting and actuarial standards.

The 6.06 percent used by the Manhattan study is more reasonable than the Stanford and Rauh studies, which used rates between four and five percent. The 6.06 percent figure is used by private plans and reflects some risk premium. The Stanford study, on the other hand, uses a purely risk-free rate tied to 10-year Treasury yields. Rauh states that the rate he uses is “default-free but contains other priced risks.“

Economist and blogger Dean Baker responded to the New York Times’ coverage of the Stanford study by stating:

[T]he story of outsized pension liabilities in this article is driven largely by a ridiculous assumption about pension returns. There is no reason whatsoever that the state of California should use this 4.14 percent discount rate in assessing its pension liabilities. This calculation would lead it to exaggerate its pension liabilities and therefore raise taxes or cut pensions and/or other spending unnecessarily.

The methodology used by these studies is inconsistent with GASB standards, which advise that a discount rate “be based on an estimated long-term investment yield for the plan, with consideration given to the nature and mix of current and expected plan investments.” Also, Actuarial Standards of Practice No. 27, which provides guidance to professional actuaries and is promulgated by the Actuarial Standards Board, states, “The investment return assumption reflects anticipated returns on the plan’s current and future assets. The discount rate is used to determine the present value of expected future plan payments.”

The Manhattan study states:

Private plans generally choose a discount rate based on a blended average of corporate bonds in the Moody’s Aa rating range, pegged by Mercer Consulting as of February 2010 at 6.06 percent over a fifteen-year plan horizon, the typical period used by public-sector plans. This yield reflects the risks associated with high-quality corporate bonds; nearly risk-free assets such as U.S. Treasury bonds usually pay considerably less. The inclusion of a risk premium reflects the possibility that the sponsoring corporation could go bankrupt and thus default on its pension obligations.

It is beyond the scope of this paper to tell public pension funds what their asset mix should be; as with private plans, it can be perfectly appropriate for such funds to invest in a pool of assets whose risks exceed those of fund liabilities. However, we do contend that public pension funds should adopt the private pension practice of discounting liabilities on the basis of the risk to plan participants that they will not receive their benefits, not on the basis of the expected returns of the funds’ asset pools.

The final sentence of this quotation lies at the heart of differences between financial economists, who insist on a risk-free rate of return or something similar, and those who support current methods, namely, the discounting of liabilities on the basis of a long-term expected rate of return.

GASB is considering this issue and currently appears to be headed toward a position largely in support of the current approach, with a slight nod to the financial economists. There are no indications that GASB is prepared to require public pensions to use a so-called “risk-free” investment return to discount their liabilities.

Additional Resources

· The Manhattan Institute study is receiving significant press coverage, although less than the Stanford study received. Perhaps this is because Stanford’s results were more striking. Alternatively, the additional coverage of the Stanford study may have been related to California’s fiscal condition, which already is dire. See a sampling of media coverage of the Manhattan study here:

http://news.search.yahoo.com/search;_ylt=A0wNdJzu58VL.QwAjt7QtDMD?p=manhattan+teacher+pension&fr2=sb-top&fr=yfp-t-501&type=all&age=all&sao=1

· The NASRA website includes a page on the issue of market value of liabilities, accessible here:

http://www.nasra.org/resources/MVL.htm. This page includes a NASRA resolution on the matter, as well as a white paper that explains MVL.

· Here is a link to the Manhattan Institute press release regarding their study:

http://www.manhattan-institute.org/html/press_release_04-13-10.htm

Opinion: Stanford study on California pensions is grossly misleading

Fuzzy math and public pension hysteria

Recent studies about CalPERS' impending doom should not be trusted.

Douglas Rose April 12, 2010 LA Times

David Crane is an unserious man with a serious purpose -- attacking public employees and public employee pensions, as he did in his April 6 Times Op-Ed article, "The $500-billion pension time bomb."

Crane repeatedly asserts the grossly misleading claim that public pension costs have risen 2,000% since 1999. To make this assertion he cherry picks 1999 as a starting point, when the state paid the lowest contribution to its pension fund, the California Public Employees Retirement System (CalPERS), that it had in many years. The $56 million contributed that year resulted from a four-year "pension holiday" that allowed the state to use CalPERS investment earnings to offset required contributions.

In 1996, a more typical year, the state contribution was $1.2 billion. But Crane used neither that year nor any preceding year, allowing him to make the grossly misleading claim that the state would have to greatly increase its future contribution to CalPERS to meet its pension obligations.

Similarly, Crane's eager trumpeting of Stanford University study purporting to show that CalPERS' unfunded liabilities are far greater than previously reported reeks of the same statistical manipulation. This particular study and others Crane cites assume a 50% decrease in the rate of return. Naturally, with a lower rate of return, projected unfunded liabilities skyrocket.

The real issue is whether the assumed rate of return, used to discount future liabilities for public pension plans, should be set at such an absurdly low rate. Crane writes not a single word addressing that issue, as he knows that virtually every actuary who studies public pensions disagrees with using the U.S. Treasury rate as the assumed rate of return.

Crane claims the Stanford study is "stunning," a word that more accurately describes his considerable attempts to mislead the public in discussing the funding of public pension plans.

Douglas Rose is chairman of the San Diego County Retirement Board. The views expressed in this article are his own and do not represent an official position of the board.

Center for State and Local Government Excellence releases issue brief on state pension funding levels

From www.slge.org:

Issue Brief: The Funding of State and Local Pensions: 2009-2013

By Alicia H. Munnell, Jean-Pierre Aubry, and Laura Quinby

An analysis of the effects the 2008 economic downturn has had on state and local government pension plan funding, along with future projections.

The brief's key findings are:

· State and local plans, which were headed toward full funding, were knocked off track by the financial crisis.

· Their funding ratio dropped to an estimated 78 percent in 2009 from 84 percent in 2008.

· Funding will likely continue to decline to 72 percent by 2013.

· Reversing this decline will be difficult, as plans face constraints in increasing revenues from either employee contributions or taxes.

Access the full brief here:

http://www.slge.org/index.asp?Type=B_BASIC&SEC=%7b6B5D32FD-C99D-41F7-9691-4F1B1D11452B%7d&DE=%7b39254035-6F82-41F3-8B39-E906BF32EF71%7d

Wall Street Journal on states skipping pension contributions

States Skip Pension Payments, Delay Day of Reckoning

April 9, 2010 Gina Chon

State governments from New Jersey to California that are struggling to close budget deficits are skipping or deferring payments to already underfunded public-employee pension plans. The moves could help ease today's budget pressures, but will make tomorrow's worse.

New Jersey's governor, a fiscal conservative, has proposed not making the state's entire $3 billion contribution to its pension funds because of the state's $11 billion budget deficit. Virginia has proposed paying only $1.5 billion of the $2.2 billion required pension contribution. Connecticut Republican Gov. M. Jodi Rell is deferring $100 million in payments this year to the pension fund for state employees to help close a $518 million budget gap

"Yes it's wrong," said New Jersey Republican State Sen. Robert Singer. "But the governor "has no other choice."

The deferrals come as pension experts say the funds need the money more than ever, after losses during the financial crisis. Before the 2008 market collapse, 54% of public pensions for states and local governments had assets totaling at least 80% of their liabilities. Last year, only 33% of plans met that criterion, according to a study released Thursday by the Center for State and Local Government Excellence and the Center for Retirement Research, both nonpartisan groups.

The issue of the contributions is heating up right now with legislatures in the thick of budget season. The recession has left states with less means to make their pension payments just as they are rising.

Now or Later

Annual required contribution to one major pension system in the state and what governments actually paid in, in billions.

The deferred payments are particularly irksome to some public union employees who say they have been unfairly blamed for the fiscal burden of public pensions on taxpayers.

"The state has kicked the can and now the can has become a 55-gallon drum," said Anthony Wieners, president of the New Jersey State Policemen's Benevolent Association. "But our members have sacrificed, some with their lives, and they deserve and expect to have their full pension."

Of 71 pension plans that submitted 2009 contribution figures so far, the Center for Retirement Research found that more than 50%, or 39, reported not paying their full pension bill.

The "kick the can" approach has surfaced before in times of trouble, for example in years after the Sept. 11 attacks. Sometimes the pain gets alleviated if markets improve and pension funds' assets rise.

But this time funds are expected to face pressure because accounting practices are pushing out some of the pain of 2008's market declines into later years, leading to a jump in pension contributions next year.

The delays mean higher bills in the future, because pension payments—the funds' liabilities—are guaranteed to the government workers whose money the pension funds manage. With 401(k) plans, by contrast, employees can enjoy more upside if markets rise but also stand to lose savings if they decline.

In a worst-case scenario, in which a public pension fund was so underfunded that there were concerns it wouldn't be able to pay benefits, a state could resort to taking funding away from schools, social-service programs or other services to fully pay the pension bill.

While funds on average remain close to the recommended 80% funding level, the ratio is expected to decline further unless contribution levels increase, Thursday's study concludes.

(State public pensions are generally viewed as adequately funded at the 80% level because, unlike private corporate pensions with stricter standards, governments generally don't face the same risks of bankruptcy that companies do.)

In New Jersey, Republican Gov. Chris Christie followed steps of his predecessor to address a budget gap for the coming fiscal year by proposing last month to skip a $3 billion payment to the retirement systems for teachers, state employees and other public employees, valued at $66 billion as of June 30.

New Jersey's prior governor, Democrat Jon Corzine, mostly missed a $2.5 billion payment to the pension system and allowed cities and other local governments to pay only 50% of their share of the pension contribution. The fund is one of the most underfunded in the country.

Illinois, with the worst unfunded pension liability in the country, has failed to pay its full annual contribution for its five retirement systems in the past few years. Democratic Gov. Pat Quinn had proposed that the state pay $300 million less than the total $4.5 billion estimated contribution to the state's pension systems for the next fiscal year. The state last month passed bills to scale back pension benefits; the measures are expected to save $100 billion over several decades, according to legislators.

Even states that had been making their full annual contributions have fallen short this year because of budget issues. Connecticut previously had paid all or a big chunk of its annual required contribution for the state employee fund, but this year it paid less.

"Connecticut has only reduced the contribution as a result of the extraordinary financial situation facing the state," said Jeffrey Beckham, undersecretary for legislative affairs.

Some states, like Kansas, have legal limits on their contributions that prevent them from paying the full amount. That has helped reduce costs for those governments but also hurt the funding status of pensions. Some legislators in Kansas have recently contended that was a dangerous course. A bill currently in the state Senate would gradually increase the employer contributions until it reaches the annual required contribution.

Even states that have traditionally met their full contributions have seen funding levels decrease, largely because of the decline in their pension fund's assets because of investment losses. The $113 billion Florida Retirement System, with strict funding payment policies, had been overfunded since 1997 but dropped last year to 88.5%. The state made more than 100% of its annual pension payment to the system from 2007 to 2009.

A few states have tried to mitigate the impact of their delay. Because Virginia recently decided not to pay $620 million of its annual pension-fund payment for the next fiscal year to help balance the budget,, the state legislature approved a repayment measure earlier this year.

"We understand this is money that has to be replenished," said Republican State Sen. Walter Stosch, an accountant.

CalPERS reports spike in state worker retirements

California state worker retirements spike

Sacramento Bee April 14, 2010

The number of California state workers who took their first pension check in January jumped more than 30 percent over the same month in 2009, a strong indication that the state's budget and labor turmoil is pushing a growing number of longtime employees out the door.

New statistics provided to The Bee by the California Public Employees' Retirement System also show that state retirements for the entire year increased almost 18 percent from 2008. School and local government civil service retirements for the year rose about 17 percent.

"California public sector workers are looking forward and see little prospect for pay increases – and perhaps even pay reductions – or higher pension payouts," said Michael Podgursky, a University of Wisconsin professor who studies group behavior in government organizations. "So those who have the option to retire are doing it. It's a perfectly rational calculation."

The state's aging work force demographics account for some of the increase in retirements. Some state workers, moreover, say the furloughs imposed by Gov. Arnold Schwarzenegger last year and the dim prospect that things will improve anytime soon pushed them to speed up their retirement date.

"At some point you decide, 'Enough is enough,' " said Jerry Pollock, who retired Dec. 30 from his job as a supervisor with the Department of Toxic Substances Control.

Pollock, 60, ended his 26-year career after concluding that even if furloughs end June 30 as the governor plans, any meaningful wage increase "looked years and years off – if ever."

The flight of workers such as Pollock does have some upside for the state, since those employees tend to be at the higher end of the pay scale for their jobs.

But their hastened departure also speeds up the depletion of knowledgable workers and seasoned leaders. And the state hasn't done much to groom the next generation, according to a 2009 state audit.

"It is unfortunate that we would lose some of our most experienced and valuable employees sooner than expected," said Schwarzenegger spokesman Aaron McLear, "but we simply can't shield state workers from the same economic realities the rest of the state is facing."

CalPERS administers retirement benefits for about 1.1 million active and inactive members throughout California. State employees account for about one-third, with the rest spread among school districts, local and regional government entities.

In January, the last month for which CalPERS data are available, 2,647 newly retired state workers drew their first pension checks, up 31 percent from 2,022 for the same month in 2009. By comparison, the number of January retirements grew just 6 percent from 2008 to 2009.

Up to a quarter of retiring state employees time their exits for the end of the year, which spikes the number of first-time pensioners each January. The reason: CalPERS rules delay initial pension cost-of-living adjustments until the May following a retiree's first full calendar year away from service.

That means a CalPERS member who retired in December will get that first COLA in May 2011.

A member who retired in January will have to wait until May 2012.

Overall, 9,400 state retirees drew their first pension check last year, up almost 17.5 percent from the year before. By comparison, state worker retirements increased a bit less than 3 percent from 2007 to 2008, according to CalPERS figures.

Cities, counties, schools and other non-state CalPERS employers saw retirements rise 17 percent from 2008 to 2009, roughly 13 percentage points higher than the previous year.

Like the state, many of those government entities have struggled with their budgets. In response, they're cutting jobs, furloughing employees or offering early retirement incentives.

On average, California state employees retire at around 60 with about 23 years of service. A state audit last year estimated the government could lose 13,000 managers and supervisors by 2016, close to half of the employees at that level. About three times that many rank-and-file workers will also retire in that period if the average holds true.

The Schwarzenegger administration has made some moves to modernize the state's hiring practices and succession planning, but it still isn't prepared to replace many of those workers, state Auditor Elaine Howle concluded. And the state generally offers lower pay than the private sector and many other government organizations, which also hinders recruiting and retention.

Despite those challenges, about 21,000 workers started state jobs last year and the work force shrank by just 1,666 employees from January through December. The state ended the year with 237,304 workers, according to data from the state controller's office.

"The goal last year was for departments to manage within reduced budgets," said Lynelle Jolley, spokeswoman for the state Department of Personnel Administration, and not necessarily to cut jobs.

Since then, the state has swept thousands of vacant jobs off its budget books. The administration also has told departments to cap payroll costs for fiscal 2010-11 at 5 percent below this year's levels. Most have planned to meet that target through attrition.

Opinion: Former LA mayor says city will go broke unless it can renegotiate pension benefits

Going for broke in L.A.?

Unless pension costs can be brought under control, the city may face bankruptcy.

Tim Rutten April 14, 2010 LA Times

Former mayor Richard Riordan has been roiling the civic waters by arguing that the surest -- and perhaps the only -- way out of Los Angeles' fiscal crisis is a declaration of municipal bankruptcy, which he believes ought to come sooner rather than later.

In a conversation with The Times over the weekend, Riordan argued that bankruptcy may be the only way to attack the structural problem gnawing the heart out of the city budget: unsustainable public employee pension costs. Currently, Riordan says, the city is struggling to meet its pension obligations, and that's assuming it will receive 8% annually on the money invested on retirees' behalf. In fact, the average return over the past decade has been just 4%. Over the next few years, L.A. may be looking at $1.5 billion in pension obligations it can't meet. "We need some adults to come alive in the city and to talk through how to meet that liability," he said. "If that doesn't happen, we shouldn't rule out bankruptcy."

Mayor Antonio Villaraigosa's chief of staff, Jeff Carr, says categorically that "this mayor has made it clear that we are not going to declare bankruptcy." Moreover, while federal law lets bankruptcy judges reduce negotiated pension and health benefits in the private sector, it forbids changes in public employees' agreements.

Wherever you come down on the bankruptcy question, it's clear that anything approaching a genuine resolution of the civic financial troubles will have to involve a thorough overhaul of the pension system. Traditionally, public employment offered generous benefits because wages and salaries were lower than in the private sector for comparable work. More recently, public sector salaries have increased -- in part because the governmental workforce is the most significantly unionized in the American economy -- at the same time compensation in most of the private sector has been falling. When you narrow the focus of this national trend to labor-friendly L.A., the picture that emerges is fairly stunning.

Dean Hansell, vice president of the Police and Fire Pension Board, agrees that even the intermediate outlook is alarming. He said Monday that less than a month ago, his board received a new set of projections on what police and fire pensions and retirement health benefits will cost over the next five years, assuming an annual return of 8% on investment. This year, the city will need to come up with $423 million to cover those costs. Over the next five years, the annual bill escalates thus: $526 million (2011-12); $643 million (2012-13); $788 million (2013-14); $902 million (2014-15). In 2015-16, Los Angeles will have to come up with more than $1 billion just to pay its retired police officers and firefighters their pensions and to cover their healthcare. As Hansell put it, "Those are astonishing numbers." They're also unsustainable.

Carr, like the mayor, thinks the answer is a new round of labor negotiations in which "you get the unions to agree on sensible annual caps to their current members' future retirement and health benefits and to increases in the employees' pension contributions." He also thinks the city needs to confront the unmentionable topic of increasing revenues. "At the moment everybody wants services we really can't afford."

Riordan says he doesn't "believe the city will ever get those sorts of concessions from its unions. It would take tremendous guts on everyone's part. We're not seeing any evidence of that, and we're probably not going to because everybody negotiating for the city was elected with the unions' support." Bankruptcy, he adds, would allow a judge to do what city officials can't or won't: fundamentally restructure the city's labor agreements. As Riordan puts it: "Who wants to live in a city without decent police or fire protection or libraries or parks? Unless we get these pension costs under control, we won't be able to afford any of those things."

Carr would put that question differently: If a bankruptcy judge were allowed to decide whether or how L.A. would meet its obligations to its employees and creditors, "we'd need to ask ourselves, who wants to live in a city that doesn't keep its word?"

That is a tragic set of options. As Riordan says: "Nobody likes any of these choices, but the question now is whether we want to make the future of this city and its people hostage to the bad decisions of the past."

Girard Miller: Pension reforms in Illinois and New Jersey are a sign that the pension tide is turning

The Pension Tide Turns

Governing.com | April 08, 2010

Illinois and New Jersey legislators try a new tack on reform.

State legislators in Illinois and New Jersey have stood up to union members and lobbyists to approve noteworthy pension reforms. In two states where organized public employees hold powerful sway over legislators, that's a big deal.

The Illinois legislation is a landmark law in its requirement that new employees must wait until they attain the age of 67 to receive full retirement benefits, just like their Social Security checks. Previously the eligibility age was 62. That provision is coupled with a ceiling on pensions equal to the current Social Security earnings cap of $106,800, to curb abuses from pension spiking and pay-pyramiding. It won't change budgetary costs for several years, but it sets a new standard for public pension plans that other state lawmakers should consider seriously.

Earlier, New Jersey legislators took a different approach: Benefits levels were rolled back 9 percent for new hires, and pensions can only be collected from one job in their statewide system. That should help curb outlandish pensions by stopping a practice called pay-pyramiding. That is where managerial personnel draw earnings credits for former employment when they change jobs, yet still collect the former job's pension as well as the retirement from the new job, which gives them credit for the other one. New Jersey also put a cap on pension spiking by public safety and public works personnel who rack up overtime. They did this by limiting to $15,000 the amount an employee can claim as pensionable income at retirement. Employees will also be required to contribute 1.5 percent of salary toward health benefits, a new concept in the traditionally labor-friendly Garden State.

As they face huge budgetary shortfalls and the bad news that their pension costs are skyrocketing from the 2008 stock market meltdown, legislators have begun to smell the coffee and push back at those who demand ever-higher benefits and lax qualifying rules. Pension reform is catching on, and I would expect to see other states take up similar proposals in coming months and years.

So far, the new laws are primarily targeted at new employees, but I wouldn't be surprised to see other legislators pick up the pace and begin to require increased contributions from current employees. That is the most practical way most states and localities can begin to balance the benefits budget in any meaningful way for 2011. Incumbent employee benefits are much harder to change than those of new hires, so their contribution levels are the path of least resistance and greatest opportunity.

In Missouri, the state teachers' retirement system has increased the employees' contribution from 13 to 13.5 percent of pay, and similar actions are expected in other state and local systems in the coming year. The National Conference of State Legislatures keeps track of pension laws. For those seeking to follow the latest developments, Ron Snell tracks pension legislation among a myriad of other tasks he competently and humbly performs for NCSL. To follow the latest developments, click here to see what other states have done with employee contribution rates and other provisions.

So far, the unions representing public employees have stonewalled the legislatures — and are getting terrible press on this issue. They now find themselves in an obstructionist political role similar to Congressional Republicans as the "Party of No." Politically, the unions may have no choice as they want to show their members that they are fighting for their interests in the state capitols. But obstructing necessary reforms may not be as good a tack as working collaboratively to fix the mess we're in. In a conference call with a state official last week, I was told the unions in that state would prefer to endure layoffs than to negotiate pension reductions — the lost workers will no longer be part of the membership and won't be around to second-guess the leadership. So there is a new cynicism emerging in the pension politics that will only become more interesting as the fiscal squeeze tightens even further around the $2 trillion unfunded liabilities of state and local government pension and retiree medical plans.

Eventually, state lawmakers will come to realize that pension reform is not about the rich versus the poor. Retirement plan deficits don't affect the rich. But the budget cuts necessary to offset rising public employee retirement benefits costs will affect the poor and elderly the most — it's social services and safety net programs that are likely to be cut as pensions eat up more of a state's budget.

Next month, I will outline a bipartisan plan for pension and retirement reforms I'm developing for the state of California. It will provide a context for genuine long-term solutions.

Girard Miller: Public pension reforms are yielding new pension math

New Pension Math

Governing Magazine | April 2010

Nationwide, public officials scramble to change new-hire benefits formulas.
In most states, the benefits formulas for active employees are untouchable. The only way to chip away at pension-funding problems is to fiddle with formulas for new employees, partly because unions are more willing to give way on benefits for new hires. Newbies don't vote on today's contract and don't pay dues yet--and union leaders may figure they'll get the benefits restored when the economy improves.

For most public officials, there is great confusion about what would be a fair benefits formula for new employees. Here are some pension math basics:

Cost-sharing. Let's assume the pension fund requires employees to contribute 5 percent of their salary, the national average, to the pension plan. A good case can be made that new employees should pay half of their pension benefits' normal costs, which helps assure they have skin in the game when it comes time to talk about future benefits increases. One of the first issues to address is the employee contribution rate. If the rate is less than half of what the actuary says would be the normal cost of new hires' benefits, it's time to put that issue on the table.

Retirement age. Public employees in many states receive lifetime pensions and sometimes medical benefits long before Social Security's normal retirement age-and usually much earlier than their private-sector counterparts who pay the taxes. Putting aside the special cases of police officers and firefighters whose exposure to danger would justify an earlier retirement age, there's little reason for new hires to begin full pension benefits before reaching the Social Security retirement age (now 66 or 67 for baby boomers). Benefits formulas for new employees should start there and allow an earlier retirement with actuarially reduced benefits--just like Social Security requires of early retirees.

Multiplier math. During the Internet bubble years of 1999-2000, many public plans awarded generous increases in the "multiplier"--the percentage used to calculate pension benefits. (For example, a 2 percent multiplier times 30 years of service times a $50,000 final average salary equals a $30,000 annual pension.) Today many pension plans and employers are finding that their multipliers are unsustainable and often unjustified.

If employees are eligible for Social Security, as most are, a multiplier of 1.7 percent would provide a 30-year employee with a pension of one-half of his or her final salary. When that is combined with Social Security and income from personal savings, average retirees will be able to replace their earnings because they no longer will be making pension and Social Security contributions or putting money into a savings account. And hopefully they pay off the mortgage early in the retirement years, thereby reducing living costs. The usual rule of thumb is 85 percent replacement income will sustain a retiree, as long as the retiree has some inflation protection from the pension plan and Social Security.

For public employers outside of Social Security, a multiplier of 2.5 percent is a reasonable benefit level as long as employees pay at least 10 percent of salary into the plan. After all, they're not paying Social Security taxes of 6.2 percent, which makes 10 percent a bargain for them. Many such public employees still find a way to qualify for some Social Security benefits through side jobs and prior or post careers.

As for public safety employees, a multiplier of 2.3 percent plus Social Security and personal savings will generally provide a sufficient replacement ratio--again depending on how early the employee becomes eligible for retirement. At this level, the employee's matching share of normal costs will likely be in the high single digits, if not greater.

Retiree medical benefits. An equally important issue to address with new hires is their retiree medical package. Some employers are now limiting that benefit to post-Medicare supplements only and putting a consumer price index or dollar cap on the benefit to prevent future runaway medical costs. Limiting retiree medical benefits this way reinforces the higher retirement ages needed to sustain pension plans past 2030.

With these reforms, most plans can provide a sufficient benefit. Only a financial analysis can determine if the benefit package would be sustainable and affordable to both the employer and the new hires.

Girard Miller: New GFOA recommended practice sets gold standard for public pension governance

Setting a Gold Standard for Pensions

Governing.com | April 08, 2010

The Government Finance Officers Association has issued a list of best practices for public pensions. These measures should be adopted nationwide.

Last year, CalPERS, California's public-employee retirement savings plan and the nation's largest pension fund, suffered an embarrassing governance crisis: Marketeers and placement agents had reportedly paid their way into positions of undue influence. Not surprisingly, this caused many pension critics and commentators to cry out for reforms — myself included. My previous column urged trustees to strip voting rights from censured board members who accept payments from marketeers and to prohibit peddlers from meeting with trustees when staff and investment consultants can perform the screening to ensure objectivity. In my view, there is no need for third-party "placement agents" in the first place. But if they are to exist, their role must be tightly controlled and limited.

The national professional associations have now looked at this issue and a new gold standard for governance practices has emerged. The Government Finance Officers Association (GFOA), whose membership includes public pension plan officers as well as thousands of CFOs for public employers and plan sponsors, has issued recommended governance practices that provide clear guidance to pension trustees and administrators on how to manage their business affairs. It is by far the most comprehensive and thoughtful document now available to pension managers and fiduciaries and should be reviewed by every board in the country at least annually. Every new-trustee orientation session should include explicit review and discussion of these recommendations.

The GFOA document starts with three key concepts which every pension board attorney should review with trustees every year:

Duty of Loyalty: Here, GFOA has provided the most important guidance in the field by making explicit the obligation of trustees to represent the interests of all beneficiaries and the overall plan, and not the special interests of whatever groups might have elected or selected them. Trustees are not instructed delegates, like legislators. They are fiduciaries. Accepting campaign contributions, gifts or gratuities from potential service providers should be a clear violation of the Duty of Loyalty.

Duty of Care: GFOA has included the key concept of financial sustainability in the responsibilities of trustees. It's not sufficient for trustees to simply blame structural funding problems on the plan sponsor. If trustees sleep at the switch and allow an unsustainable benefit plan to jeopardize retiree benefits, they are violating their Duty of Care and should be held legally responsible as fiduciaries. If the law or their charter precludes them from changing the system, they must formally admonish those in power to do so.

Duty of Prudence: Many pension plans have adopted a prudent person rule (which requires investments to be made with the judgment and care that an informed person would make with their own money for investment and not for speculation), even if they operate in states with a "legal list" for investments. But prudence goes beyond portfolio construction, and the GFOA language provides a thoughtful basis for consideration of fiscal considerations as well.

Board composition is then addressed, to include the important concept of including enough independent directors free of influence from employee and retiree groups, as well as public employers, to assure balanced decision-making. Pension plans that have become dominated by labor interests should take heed, and plan sponsors and legislatures should take corrective actions to insert sufficient independent trustees on their boards to assure the public's interests. Personally, I would prefer to follow the mutual fund requirement of a majority of independent trustees, but I would settle for a controlling bloc that keeps the self-interested parties in check.

GFOA's language on codes of conduct and codes of ethics is also the strongest of all the policy documents now offered by professional organizations and pension associations. The activities of third-party marketers and the control of campaign contributions and paid influence are addressed directly. Finder fees are discussed explicitly in this document. Trustees and pension-plan managers looking for more concrete language should also study the proposed code of conduct published by the New York attorney general.

The GFOA committee on retirement and benefits administration deserves high praise for its thoughtful work and leadership in this problematic realm of retirement-plan finance. Other national associations in the public pension field would serve their members well by adopting equally informative and detailed guidance on governance practices, instead of general platitudes that fail to instruct trustees on the difficult decisions they need to make in the high-stakes world of pension finance. State legislatures and oversight bodies would likewise do well to adopt and codify the key principles embodied in GFOA's recommendations concerning board composition, trustees' fiduciary obligations, campaign finance and activities of marketers.

North Dakota State Investment Board announces death of executive director Steve Cochrane

The North Dakota State Investment Board distributed the following email message earlier this week:

ND State Investment Board clients, contacts, and friends:

It is with deep sadness that we share with you that ND State Investment Board Executive Director, Steve Cochrane, died unexpectedly over the weekend. Arrangements are pending. Please keep Steve’s wife and family in your prayers during this very difficult time.

Steve will be missed by his family and the many friends, co-workers, business colleagues, and others whose lives he touched. His contributions on behalf of ND and the entire investment community are greatly appreciated.

In the interim, please contact the following should the need arise.

Administrative issues:

Fay Kopp, Deputy Executive Director 701-328-9885 fkopp@nd.gov

Investment operations:

Connie Flanagan, Fiscal & Investment Officer 701-328-9892 cflanagan@nd.gov

Other investment issues:

Paul Erlendson, Invest. Consultant, Callan Assoc. 303-861-1851 erlendson@callan.com

Head of SEIU plans to retire

Andrew Stern, Head of S.E.I.U., Plans to Step Down

New York Times April 12, 2010

Andy Stern, president of the politically potent Service Employees International Union, has told colleagues he plans to step down, two members of his union’s board said Monday.

“It will be very soon,” said one board member, who insisted on anonymity.

Another board member said that Mr. Stern, who is 59, was thinking it was time to resign because Congress enacted one of his longtime goals, a health bill.

Mr. Stern has led the nation’s most politically active union, with 1.9 million members, since 1996. He is known as one of President Obama’s closest labor allies.

“Andy has always taken the position that people should not stay too long in office,” one board member said, “and it is his job to build the organization and then make room for other people.” Mr. Stern’s plans to resign were first reported by Politico.

S.E.I.U. leaders said they expected that Anna Burger, the secretary-treasurer, would succeed Mr. Stern.

Over the last year, Mr. Stern has been involved in fierce battles with two other unions, a large breakaway S.E.I.U. local in the San Francisco Bay area, and Unite Here, the union representing hotel and restaurant workers.

Mr. Stern has become a lighting rod within labor, ever since he led a half dozen unions to quit the A.F.L.-C.I.O., the nation’s main labor federation, in 2005. His union, which represents hundreds of thousands of health-care workers and janitors, asserted that the A.F.L.-C.I.O. had grown stodgy and was doing far too little to unionize workers.

While some union backers praise Mr. Stern as an innovative leader who has made labor a more potent force in politics, others criticize him for being divisive and too quick to make concessions to companies and political leaders. He was also criticized for reaching secret agreements with some companies that he did not disclose to the rank and file.

As one index of his power and proximity to the president, official records show that he visited the White House more than 20 times during Mr. Obama’s first six months in office. Not only that, the White House political director, Patrick Gaspard, had been the political director of the S.E.I.U.’s giant health-care local in New York, and Craig Becker, a newly appointed member of the National Labor Relations Board, was associate general counsel to the union.

Mr. Stern is set to step down without having achieved one of his major goals, passage of The Employee Free Choice Act, a bill that would make it easier to unionize workers.

In the past, Mr. Stern has talked of having a mandatory retirement age for union leaders and even having term limits for union leaders.