Mississippi Legislature approves bill increasing employee contributions

Pension bill sent to Barbour

State and local employees to pay more into system

Jackson Clarion-Ledger April 24, 2010

The Senate sent legislation to the governor early Friday afternoon that amounts to a pay cut for thousands of state and local employees. In signing off on House Bill 1, the Senate gaveled to a close a special session called by Gov. Haley Barbour to increase employee contributions to the state pension system.

Senate Finance Committee Chairman Dean Kirby called it "not a real popular bill" but one necessitated by tough economic times. "Those state employees need to understand that we're protecting them," Kirby, R-Pearl, said.

Under the bill, employees would be asked to chip in an additional 1.75 percent of their salary to keep the state's retirement system solvent.

The Senate voted 28-16 for the bill. The House passed the bill Thursday by an 81-39 vote.

Without the legislation, agencies, schools and counties would have had to come up with the $90 million needed.

Kirby said that would have poked holes in state agency budgets, causing possibly as many as 2,000 layoffs. Currently, employees pay 7.25 percent of their salaries into the retirement system, and state and local governments pay 12 percent.

California oversight commission hears testimony on state pension issues

The “Little Hoover Commission,” an independent state oversight agency formally known as the Commission on California State Government Organization and Economy, heard testimony April 22 regarding public pension plans in California. Speakers included Girard Miller and David Crane. Crane is an advisor to Governor Schwarzenegger and a proponent of making significant changes to pension plans in California, including placing limits on plans’ investment return assumptions, requiring calculation and disclosure of market value of liability disclosures, and reducing pension benefit levels.

Access the commission’s pension plan agenda, along with links to speaker testimony, here: http://www.lhc.ca.gov/studies/agendas/Apr10.html

Excerpts of Girard Miller’s testimony to California commission

Public finance consultant and commentator Girard Miller writes regularly on public pension and finance issues for Governing Magazine. Below are excerpts of his remarks to California’s “Little Hoover Commission,” referenced above.

Even when the national and California economies recover from the Great Recession, the so-called “new normal” level of economic activity and governmental revenues across the country will most often be insufficient to defray the escalating costs of public employees’ retirement benefits. Simply stated, the revenue will not be there to absorb these totally predictable cost increases.

…

Just like our nation’s Social Security and Medicare retirement systems, the state’s public employee retirement systems’ financial deficits will have to be resolved through serious measures with shared sacrifices that include benefits plan reforms and reductions, higher retirement ages, service level reductions, layoffs, and in some cases, additional revenues from taxpayers.

As I will explain, these remedies can best be provided through a constitutional solution that requires shared sacrifices and lays a foundation for sustainable, affordable and sufficient benefits that assure the retirement security of our state’s dedicated public servants and the respectful support of taxpayers. In some cases, legislation or administrative reforms alone can help improve the retirement systems’ operational efficiency and long-term financial sustainability. But it is my professional conclusion after studying this issue in depth that today’s problems in California are so fundamentally deep and widespread that only a constitutional reform can fix the deficits that have accumulated over the past thirty years.

My suggestions are intended to provide reforms that will strengthen and preserve the public employee retirement systems in California. Unlike the critics who would throw out the baby with the bathwater, and replace the entire public pension system with the defined-contribution structure now commonly used in the private sector, I strongly believe that retirement security for public employees can be most effectively and efficiently provided by retaining and reforming the defined benefit structure as the core feature in the overall retirement system for public employees—using defined contribution plans more extensively to supplement the base benefits and to share risks and costs equitably between public employers and employees.

Without significant structural reforms to the defined benefit system, however, it will inevitably collapse under its own weight, and the disparity between public pensioners and the taxpayers who support them will worsen to the point that a severe backlash could ensue. California must provide a legal framework to enable dysfunctional and unsustainable benefits plans to be modified, frozen or converted to a viable structural form that enables the employer to resolve a financial crisis without resorting to bankruptcy or defaults on other obligations. Otherwise bond ratings throughout the state will suffer, and financing costs for vital facilities will rise even higher, if California’s legislature allows one or more public employers to drag down the entire state because of mismanaged retirement plans. Hybrid systems and plan termination features as I propose below will assure taxpayers and voters that public employees and employers share equitably in the costs and the risks inherent in their retirement plans, and bear the consequences of greed and ineptitude equitably as well. I would also suggest that every new public employee should have a legal right to elect into a defined contribution plan, as explained below.

Access the entirety of Mr. Miller’s remarks here: http://www.lhc.ca.gov/studies/activestudies/pension/MillerApr10.pdf

LA Times on California commission hearing

Public employee pensions under pressure

State and local leaders see the growing cost as a threat to California's fiscal well-being. Efforts to reduce benefits are setting up a collision course with public employee unions.

Evan Halper and Marc Lifsher, Los Angeles Times April 23, 2010

Across California, state and local leaders are moving to confront the cost of public employee retirement packages — an escalating financial burden that threatens to choke off funding for other government services. Legislation now being debated in Sacramento would curtail pension benefits to future state employees. Elsewhere, city and county governments are looking at a variety of measures, including raising property taxes to cover shortfalls and reducing payments to retirement funds.

On Thursday, pension consultant Girard Miller told California's Little Hoover Commission that state and local governments have $325 billion in unfunded pension liabilities, which he said amounts to $22,000 for every working adult in the Golden State. "In California we had the Internet bubble, we had the housing bubble, and I see in the very near future the public pension bubble," Gov. Schwarzenegger said this week. Confronting the pension crisis, he said, should be the state's No. 1 policy priority.

If the problem is not addressed, the burden for funding government employee pensions would fall to the state's taxpayers. Many elected officials are advocating a reduction in benefits mostly for new hires to stave off tax hikes — setting up a collision course with the state's powerful public employee unions.

"When you have men and women standing side by side in extremely stressful, hazardous, grueling situations over the course of a career, it's hard to look one or the other in the eye and say your future security matters less," said Carroll Wills, a spokesman for California Professional Firefighters, which represents 30,000 state public safety workers.

Wills said state employees are taking the fall for the Wall Street financial crisis, which bludgeoned the stock portfolios that help fund pensions. "We would argue that reforms like this basically are hitting the little guy for what the big guys did," he said.

Others contend that the typical pensions enjoyed by the public sector have simply become too expensive and have largely been abandoned by the private sector in favor of 401(k)-type plans in which employees build a nest egg but can't count on monthly payments for life.

Under current law and union contracts, for instance, retirement packages allow some classes of government workers — mostly police officers, firefighters and prison guards — to retire as young as age 50 with a pension equal to nearly their entire salary.

"Public pension costs are becoming unsustainable, and benefits are out of alignment with the private sector, generating public resentment," the nonpartisan League of California Cities recently warned.

The shortfall at the California State Teachers' Retirement System has ballooned so big — the system estimates it at $42.6 billion — that officials there say future investment profits could not come close to covering it. CalSTRS would have to see returns exceeding 20% a year for five years in a row to make up the gap, according to an internal report. Otherwise, school districts and taxpayers would have to foot the bill.

In Los Angeles, where pension costs are expected to consume 19% of the general fund budget in the coming fiscal year, Mayor Antonio Villaraigosa wants voters to sign off on scaling back the pensions available to police officers and firefighters. The City Council, he said, has the authority to make those changes for the rest of the city's employees.

Grand juries in Fresno and Ventura counties, and the city and county of San Francisco, have all warned of pension shortfalls. San Diego and Orange counties have taken steps to trim benefits.

In Rialto, the City Council is mulling over a plan to cover an $8-million shortfall in the pension fund with a property tax hike that would cost the owner of a $200,000 home $300 each year. Voters in the San Bernardino County community will have a chance to weigh in on the idea in an advisory measure on the June 8 ballot.

City Councilwoman Deborah Robertson, who opposes the proposed tax hike, can guess at the outcome.
"The comments have been, ‘Hey, why should we in these times want to add an additional tax?' " she said.

Labor leaders and some pension system officials say the condition of the retirement funds is not as dire as many critics have forecasted. They say much of the problem would disappear if the financial markets simply performed as they have over the last two decades and if public employers and employees kicked a little more into their pension funds.

But many government officials are leery of betting too heavily on the financial markets to cover future costs. Local governments are not permitted to default on pension payments short of declaring bankruptcy. And the state government, which cannot legally go bankrupt, has to pay the obligations even if it means eliminating other services — such as healthcare and social programs — or raising taxes.

Current benefits are less generous for those public workers outside of public safety ranks but still far outpace what is typically available in the private sector. And many government workers can begin collecting their pensions at age 55.

Lifetime healthcare is also part of the retirement package for hundreds of thousands of government workers.

That costly benefit, which most private employers stopped providing long ago, was created decades ago when health insurance was inexpensive and the offering seemed an easily manageable expense; money was never invested to cover it, but now the bills are astronomical.

Unions have at times traded salary increases for the bigger pension payouts. They contend that payments to most public-sector retirees are modest, averaging $2,100 a month for those under the state's largest pension fund, the California Public Employees' Retirement System.

But with so many Californians in the private sector having lost their jobs or seen their pay cut, supporters of rolling back benefits say the public wants changes.

The Field Poll, one of the state's largest independent polls, found in a survey it conducted in October that majorities of voters favored replacing public pension plans with 401(k)-style savings programs or setting limits on the benefits given newly hired public employees.

Still, public employee unions have successfully resisted changes to retirement formulas, contending that warnings of a pension funding collapse are exaggerated. "There's been a big drumbeat from a relatively small group on the issue," said Dave Low, assistant director of governmental relations for the California School Employees Assn. "It's not exactly a groundswell. The issue is of low salience to the average voter."

But former Assemblyman Joe Nation, a Marin County Democrat, said local governments will find themselves in serious trouble if they don't take action. "This may end up pushing more cities and counties either into or closer to bankruptcy," he said. "The numbers are just staggering."

In Los Angeles, which faces a $1-billion shortfall in three years, the mayor and top budget officials are working on a plan to cut pension costs by scaling back benefits for newly hired workers. Changes in pension plans for police and fire employees can be reduced only with voter consent.

The city projects that the taxpayers' share of city pension costs will grow from $653 million this year to nearly $1.3 billion in four years, accounting for 1 of every 4 dollars spent on basic services.

The city of San Diego, one of the first to experience a pension crisis early this decade, is preparing for a round of employee layoffs and a slashing of services to try to close an unanticipated $179-million budget gap created by a jump in pension obligations. Heavy investment losses and an increase in the number of city employees deciding to retire contributed to the increase. The system now has only 66.5% of the money it needs to cover its obligations to retirees, the lowest level in six years.

The minimum a system typically needs to cover retirees is 80% of its total obligations.

Yet even in relatively flush cities, such as Ventura, which has set aside more than 90% of the money needed to pay future pensions, concern is mounting. In the last year, Ventura budget officers and a citizens task force have been studying a number of pension solutions, including a so-called two-tier program that would dramatically reduce benefits for newly hired workers. They also would have all workers pay for a share of their pension costs.

"These are the kinds of techniques we might use to have a more financially sustainable pension," said Ventura Mayor Bill Fulton.

Wall Street Journal: Public pension accounting standards merit scrutiny; a five percent investment return assumption would be appropriate

Pension Bomb Ticks Louder

California's public funds are assuming unlikely rates of return.

The time-bomb that is public-pension obligations keeps ticking louder and louder. Eventually someone will have to notice.

This month, Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds.

The pension funds responsible for the time bombs denounced the report. Calstrs CEO Jack Ehnes declared at a board meeting that "most people would give [this study] a letter grade of 'F' for quality" but "since it bears the brand of Stanford, it clearly ripples out there quite a bit." He called its assumptions "faulty," its research "shoddy" and its conclusions "political." Calpers chief Joseph Dear wrote in the San Francisco Chronicle that the study is "fundamentally flawed" because it "uses a controversial method that is out of step with governmental accounting standards."

Those standards bear some scrutiny.

The Stanford study uses what's called a "risk-free" 4.14% discount rate, which is tied to 10-year Treasury bonds. The Government Accounting Standards Board requires corporate pensions to use a risk-free rate, but it allows public pension funds to discount pension liabilities at their expected rate of return, which the pension funds determine. Calstrs assumes a rate of return of 8%, Calpers 7.75% and the UC fund 7.5%. But the CEO of the global investment management firm BlackRock Inc., Laurence Fink, says Calpers would be lucky to earn 6% on its portfolio. A 5% return is more realistic.

California Gov. Arnold Schwarzenegger warns of a public pension crisis.

Last year the accounting board proposed that the public pensions play by the same rules as corporate pensions. But unions for the public employees balked because the changed standard would likely require employees and employers to contribute more to the pensions, especially in times when interest rates are low. For now, it appears the public employee unions will prevail with the status quo accounting method.

Using these higher return rates for their pension portfolios, the pension giants calculate a much smaller, but still significant, $55 billion shortfall. Discounting liabilities at these higher rates, however, ignores the probability that actual returns will fall below expected levels and allows pension funds to paper over the magnitude of their problem.

Instead, the Stanford researchers choose to use a risk-free rate to calculate the unfunded liability because financial economics says that the risk of the investment portfolio should match the risk of pension liabilities. But public pensions carry no liability. They're riskless. That's because public employees will receive their defined benefit pensions regardless of the market's performance or the funds' investment returns. Under California law, public pensions are a vested, contractual right. What this means is that taxpayers are on the hook if the economy falters or the pension portfolios don't perform as well as expected.

As David Crane, California Governor Arnold Schwarzenegger's adviser notes, this year's unfunded pension liability is next year's budget cut—or tax hike. This year $5.5 billion was diverted from other programs such as higher education and parks to cover the shortfall in California's retiree pension and health-care benefits. The Governor's office projects that, absent reform, this figure will balloon to over $15 billion in the next 10 years.

What to do? The Stanford study suggests that at the least the state needs to contribute to pensions at a steadier rate and not shortchange the funds when markets are booming. It also recommends shifting investments to more fixed-income assets to reduce risks.

But what the public-pension giants find "political" and "controversial" is the study's recommendation to move away from a defined benefits system to a 401(k)-style system for new hires. Public employee unions oppose this because defined benefits plans are usually more lavish, and someone else is on the hook to make up shortfalls. Calpers and Calstrs are decrying the Stanford study because it has revealed exactly who is on the hook for all of this unfunded obligation—California's taxpayers.

Opinion: Competing views of South Carolina pension plans’ funding condition

Report: State Pension Plan Among Worst-Funded

Kevin Dietrich The Nerve April 23, 2010

The South Carolina Retirement Systems is among the worst-funded pension plans for teachers in the nation, according to a study released last week by the Manhattan Institute and the Foundation for Educational Choice.

Titled "Underfunded Teacher Pension Plans: It’s Worse Than You Think," the study estimates that only 41 percent of the Palmetto State’s public retirement system is funded, eighth-worst in the nation.

Only West Virginia, Illinois, Oklahoma, Indiana, Kansas, Rhode Island and New Jersey fared worse, according to the report.

The S.C. Retirement System is different from some other teacher pension plans in that it administers retirement benefits for all retirees of South Carolina’s public work force, not just teachers.

In plans such as South Carolina’s, where it covers teachers and other non-education public employees, the funding gap calculated in the report was pro-rated based on the share of teacher participation.

The report says the Dow Jones Industrial Average "would have to nearly double overnight" to make up for the underfunding of 59 pension funds that cover most of America’s teachers.

"Although it is generally acknowledged that education is the foundation of every modern society’s future prosperity, schools unfortunately will have to compete with retirees for scarce dollars," according to the report’s authors. "This competition is uneven, because retirees have a legal claim on promised pension benefits that supersedes schools’ budgetary needs."

However, Keith Brainard, research director for the National Association of State Retirement Administrators, said he has three major issues with the study:

· It is based on calculations and methods that do not comply with standards set forth by professional accounting and actuarial standards-setting boards;

· It is based on assumptions of future investment returns that are unreasonably pessimistic, ignoring a long history of capital market performance and returns from diversified portfolios that typify public pension fund investments; and

· It focuses solely on investment risk while ignoring other risks that public sector policymakers must consider.

In Brainard’s view, the critical factor is whether the funding of the plan is causing fiscal stress on the state’s budget.

"This past fiscal year saw a significant decline in the stock market, but one of the things we try to do in public pension plans, because we have the ability to pool the risk and spread it over a long period of time, is to try and spread out the volatility," said Peggy Boykin, S.C. Retirement Systems director. "The perpetuity of government – the fact that government isn’t going to cease to exist – gives us the flexibility of planning for the long term."

In fiscal year 2008-09, the state retirement system’s rate of return was negative 19 percent, according to the entity's 2009 annual report. However, in the first six months of the current fiscal year, the system was showing a positive return of 16 percent, Boykin said.

There has been talk of increasing contributions to the plan by one-quarter to one-half percent as a result of the stock market’s decline in recent years, but the system’s actuary has recommended delaying a decision on that until 2012, when the full impact of the recent upturn can be assessed, Boykin said.

Since 1974 the S.C. Retirement System’s average annual return has been 7.75 percent. If the first half of this fiscal year are included, that figure jumps to 8.25 percent, she added.

The report said U.S. taxpayers owe $932.5 billion to teacher pension accounts, nearly three times the amount stated by the retirement plans.

"The insufficiency of assets in state teacher pension funds is massive and unsustainable," the report said. "States can start by accounting honestly for the current costs of future benefits. If they did so, they would reduce the temptation of their elected officials to be overly generous in awarding benefits."

The authors said states should consider shifting to 401(k) plans used in the private sector, especially for new and younger employees.

Officially, the S.C. retirement system has a stated funding gap of nearly $4.9 billion, according to the report. That would mean it was 69 percent funded. But after adjusting for market value, the funding gap was nearly $12.2 billion, leaving it only 41 percent funded.

"What they’re using is not public pension-funding methodology," Boykin said. "They’re valuing us as though we were a corporate pension plan, and there are big differences between how a public pension plan is operated and a corporate pension plan is operated."

The funding gap cited in the study is the result of aggressive "discounting" of the cost of paying benefits in the future because fund operators assume that the value of stocks held in fund portfolios will be much higher by the time the funds have to pay out those benefits.

This assumption permits public officials to contribute fewer dollars toward satisfying these plans’ obligations, and thus to avoid taking the cautious but unpopular step of raising taxes or cutting services.

The Manhattan Institute is a New York-based think tank that promotes economic choice and responsibility while the Foundation for Educational Choice is a pro-school choice organization.

Nevada pension officials dispute characterization of pension funding condition

Officials: Retirement plan not in financial danger

April 25, 2010 nevada appeaL

Contrary to claims by conservative groups including the American Enterprise Institute, managers of Nevada's Public Employee Retirement System say the plan isn't in danger of financial collapse.

Economist Andrew Biggs of AEI issued a research paper recently stating that public pension plans like PERS are not calculating their unfunded liability accurately and, therefore, aren't showing taxpayers the true risk.

In Nevada's case, his paper states that a market analysis shows PERS is $33.5 billion short as of June 30, 2008 — just 42 percent funded for regular employees and 38 percent funded for police and fire retirees. Biggs could not be reached but he told the Nevada News Bureau annual returns can have large fluctuations.

PERS Executive Officer Dana Bilyeu said news reports detailing Biggs' conclusions resulted in numerous calls from concerned public employees worried about the stability of the retirement system.

She said latest calculations using the industry standard actuarial method of analysis shows the plan is more than 70 percent funded — a significant improvement from

25 years ago when plan assets were $1.6 billion and it was just 45 percent funded with an estimated $2 billion unfunded liability in 1985.

She said the plan currently has a significant unfunded liability — about $9 billion — but that it's a manageable problem since the only way that debt would come due is if everybody retired at once.

She and Investment Officer Ken Lambert compared the unfunded liability to a homeowner's mortgage — a large debt that the homeowner makes payments on every month.

“If you had 70 percent of your mortgage paid off, would you be bankrupt?” she asked.

“They're saying you're insolvent because you can't pay your mortgage off today,” Lambert said. “No one's going to call in five years and say you owe me $9 billion. There's no balloon payment looming over anyone.”

Both said they aren't focused on short term fluctuations in investment earnings because PERS manages contributions over the long haul — a 25-30 year period. Over the past 20 years, they said the system has had a 9.4 percent rate of return.

Lambert said as a result, 80 percent of the monthly benefits check paid to a retired public worker is interest earnings. “Of the $1 billion we pay out in benefits each year, $800 million of that is investment return,” he said.

Bilyeu also pointed out that the study uses June 2008 figures. She said the plan's fund fell sharply in the recession, losing billions in value. But the past year has been a different story. “We've made $7 billion in the last 10 months,” she said. “We're up 19 percent.”

Lambert said total PERS assets are back to $22.5 billion — about $200 million less than the fund's peak before the recession hit. And he said the value of those investments is still growing as the markets recover. “That doesn't make us geniuses,” he said. “We're one of the top performing funds in the country because we're conservative.”

He said the conservative, long-term approach to investing helps PERS “ride through” economic cycles without suffering sharp ups and downs.

PERS serves 173 public employers in Nevada and has a total of more than 120,000 members. Employers and employees split the monthly contributions which, for regular employees, total 21.5 percent of pay. Contribution rates are higher for police and fire employees.

Bilyeu has already cautioned lawmakers that the rate may have to be increased slightly in the upcoming legislative session.

Press Release: TRS of Texas announces Ronnie Jung’s pending retirement

April 23, 2010

RONNIE JUNG TO STEP DOWN AS TRS EXECUTIVE DIRECTOR ON JULY 1, 2011

AUSTIN – Today, Teacher Retirement System of Texas (TRS) Board Chairman R. David Kelly announced today that Ronnie Jung has notified the board of his plans to step down as the agency’s executive director, effective July 1, 2011. Jung informed the trustees of his plans to continue working as the agency’s executive director through one more legislative session.

“Ronnie has served Texans and Texas state government for 36 years, and all of us on the board are grateful that he dedicated his last 14 years to TRS,” said Kelly. During Jung’s tenure at TRS, the pension fund grew from less than $50 billion to $98 billion, and TRS oversaw successful implementation of a new statewide health care program for active public school employees.

“I have really enjoyed and appreciated the opportunity to serve nearly 1.3 million Texas public educators,” said Jung. “Maintaining a solvent retirement system is critical to the financial security of our public educators. I am confident that the board and the TRS staff are well positioned to meet the future needs of our members.”

Jung will work with the board of trustees and the new executive director to ensure a smooth transition of leadership for the system.

TRS delivers retirement and related benefits authorized by the Texas Legislature, and manages a $98 billion trust fund established to finance member benefits. Nearly 1.3 million public education and higher education employees and retirees participate in the system.

Opinion: New Jersey governor’s spending cuts target teachers and public employees

Chris Christie's budget bruiser

By John Gramlich, Stateline April 28, 2010

TRENTON, N.J. — At a press conference in his Capitol office here last week, Governor Chris Christie was asked for his reaction to comments made by one of New Jersey’s local school superintendents. “Chris Christie is determined to run New Jersey like an episode of The Sopranos,” the superintendent had told local media. “A foreign terrorist could not do as much damage to public education as Chris Christie has in the past three months.”

The room fell silent, but Christie seemed amused. “I assume I’m not getting his vote in three years,” he said with a shrug. Christie had called the press conference to boast about the results of school elections held around the state the previous day — local elections on which the governor had staked an unusual amount of his own credibility. Christie had urged voters to reject any school budget that did not include a pay freeze for teachers; a record 58 percent of the school budgets were voted down.

“That stuff rolls off my back,” Christie said of the superintendent’s remarks. “I was sent here to do a job, and I’m going to do that job. And candidly, it sounds to me like he’s on the wrong side of history.”

Only three months into his term, Christie, a former federal prosecutor, has grown accustomed to deflecting verbal attacks like this. Just two weeks before, Christie extracted an apology from the head of the state teachers’ union for a memo that a local chapter had circulated, jokingly wishing for the governor’s death. But the 47-year-old Republican throws his share of rhetorical punches, too — especially when discussing his plans to fix a $10.7 billion budget deficit exclusively with cuts. In a recent interview with the Wall Street Journal, Christie accused union leaders of intimidating previous governors to get their way on salaries and pensions. He also called New Jersey “the best example of a failed experiment in America on taxes and bigger government.”

But there’s another line Christie likes to use to describe the fiscal situation he inherited: “The day of reckoning is here.” It’s difficult to argue his point. While nearly all states are in deep fiscal trouble, New Jersey is in deeper than most. Its deficit amounts to 37 percent of the entire state budget. Christie has responded by proposing to slash billions of dollars in state spending on everything from aid to municipalities to the normally sacrosanct K-12 education system. More than 1,300 state government positions would be eliminated.

The governor’s proposal — and his unapologetic defense of it — have made him a villain to mayors, teachers, superintendents and other public employees. But Christie, perhaps more than any other governor these days, has captured the imagination of conservatives who admire his eagerness to take on powerful public employee unions. Many Republicans believe that Christie’s tough stance on spending is hitting exactly the right political note in a major election year marked by anti-government anger and Tea Party activism.

Indeed, with the governorships of 37 states up for grabs in November — and state finances not expected to improve much anytime soon — Christie’s budget-cutting quest and all the hot rhetoric both for and against it may amount to much more than political theater. It may be a preview of how some new Republican governors will lead in states they win this year. In Pennsylvania, Attorney General Tom Corbett, the front-runner to become the GOP’s candidate for governor, says he’s been paying close attention to what’s going on in the state next door. Chris Christie, he told Stateline in an interview, “has made a very good example.”

While not everyone likes Christie’s blunt-talking style, many people in New Jersey have come to see a governor as aggressive as he is about cutting spending as overdue. The state’s taxes are among the nation’s highest. And despite hikes in the sales and personal income taxes in recent years, revenue has fallen far out of sync with spending. Meanwhile, an enormous debt burden requires the state to make huge interest payments each year. A recent report by the nonpartisan legislative research office predicted that New Jersey is unlikely to return to its 2008 revenue levels until 2014.

For the most part, other states have been dealing with their own budget crises with a mix of budget cuts and tax hikes. If there is one governor who has recently tried something like the Christie approach, it’s Nevada’s Jim Gibbons. Like Christie, Gibbons is a Republican. And like Christie, Gibbons has to contend with a legislature controlled by Democrats. Last year, Gibbons set out to close a huge budget gap using cuts alone — including a 36-percent cut for higher education — but ultimately ran into opposition. Democratic lawmakers raised taxes by about $800 million by overriding his vetoes with the help of some legislators from across the aisle.

That seems less likely in New Jersey. Democrats in the legislature seem mindful of the political capital Christie accrued by defeating Democratic incumbent Jon Corzine last year. Their criticisms of the new governor have been relatively muted, given his brash talk.

“Spending is out of control,” says Senate Majority Leader Barbara Buono. “I agree with the governor.” Buono is quick to point out, however, that she has plenty of differences with Christie’s specific proposals, including his planned cuts in aid for senior citizens and college students. She also opposes Christie’s plan to do away with a tax hike approved last year on residents who earn more than $400,000 a year.

But Christie enjoys more executive power than Gibbons does in Nevada. He can line-item veto any items in the budget Democrats present him. And Democrats in the Legislature don’t have enough votes to override him.

Other factors are at play, as well. For all of Christie’s anti-tax talk, one could argue that parts of his budget plan effectively would raise taxes. For example, Christie proposes to reduce New Jersey’s earned income tax credit, a move that would increase the amount of taxes paid by the working poor.

Then there’s the schools plan that has been causing so much controversy. Christie proposed slashing $820 million in state aid to local schools — an amount he says is equal to what teachers across the state would give up if they agreed to take a one-year pay freeze and make new contributions to their own health benefits. Many school districts are planning on responding to the cuts by raising property taxes.

Nothing has more encapsulated Christie’s approach than the school-aid issue. In New Jersey, local school district budgets are put directly to the voters each spring. Christie took the unusual step of issuing a public call for voters to reject budgets in districts where teachers refused to make the concessions he called for. The high-profile ultimatum ramped up pressure on teachers and drove up voter turnout. In districts where teachers agreed to the concessions, 79 percent of school budgets passed; in districts where they did not, only 41 percent passed. Christie hailed the outcome of the elections as a loud-and-clear signal that voters “want fundamental reform.”

The New Jersey Education Association, the state’s largest teachers’ union, counters that Christie is a bully who is distorting the facts when it comes to his K-12 budget. The union notes, for instance, that legislative researchers found that even if all the state’s teachers agree to the concessions Christie is seeking, K-12 education still would face a huge shortfall.

The dispute between the union and Christie got so tense in the run-up to the school-budget elections that The Trenton Times, this city’s daily newspaper, couldn’t resist poking fun at it in an editorial cartoon. It showed two Iraqis watching TV coverage of the school elections from a café in Baghdad. One says to the other, “You’ve gotta admire New Jersey holding an election in the midst of war.”

Press Release: Report finds public employee pay lags private sector for comparable positions

NEW STUDY FINDS PUBLIC SECTOR EMPLOYEES EARN LESS THAN COMPARABLE PRIVATE SECTOR EMPLOYEES

Analysis May Shed Light on Government Hiring Difficulties, Despite Economic Conditions

Press/Interested Parties Webinar/Conference Call Today at 11 AM ET

WASHINGTON, D.C., April 28, 2010 - Employees of state and local government earn an average of 11% and 12% less, respectively, than comparable private sector employees. An analysis spanning two decades shows the pay gap between public and private sector employees has widened in recent years.

These findings are contained in a new report, "Out of Balance? Comparing Public and Private Sector Compensation Over 20 Years," commissioned by the Center for State and Local Government Excellence (Center) and the National Institute on Retirement Security (NIRS). The study provides an original analysis of data from the U.S. Bureau of Labor Statistics. The study finds that:

Jobs in the public sector typically require more education than private sector positions. Thus, state and local employees are twice as likely to hold a college degree or higher as compared to private sector employees. Only 23% of private sector employees have completed college as compared to about 48% in the public sector.

Wages and salaries of state and local employees are lower than those for private sector employees with comparable earnings determinants such as education and work experience. State workers typically earn 11% less and local workers 12% less.

During the last 15 years, the pay gap has grown - earnings for state and local workers have generally declined relative to comparable private sector employees.

The pattern of declining relative earnings remains true in most of the large states examined in the study, although there does exist some state level variation.

Benefits make up a slightly larger share of compensation for the state and local sector. But even after accounting for the value of retirement, healthcare, and other benefits, state and local employees earn less than private sector counterparts. On average, total compensation is 6.8% lower for state employees and 7.4% lower for local employees than for comparable private sector employees.

"The picture is clear. In an apples-to-apples comparison, state and local government employees receive less compensation than their private sector counterparts," said Keith A. Bender, report co-author and associate professor, Department of Economics at the University of Wisconsin-Milwaukee. "These public sector employees earn less than they would earn if they took their skills to the private sector," he added.

John S. Heywood, report co-author and distinguished professor, Department of Economics at the University of Wisconsin-Milwaukee said, "Jobs in state and local governments consist disproportionately of occupations that demand more education and skills. Indeed, accounting for these differences is critical in understanding compensation patterns."

The study sheds light on a recent survey of government hiring managers, sponsored by the Center. Elizabeth K. Kellar, president and chief executive officer of the Center reported, "Hiring managers told us that despite the economy, they find it difficult to fill vacancies for highly-skilled positions such as engineering, environmental sciences, information technology and healthcare professionals. The compensation gap may have something to do with this."

Beth Almeida, NIRS executive director said, "For a long time, there has been a compensation trade-off in public sector jobs - better benefits come with lower pay as compared with private sector jobs. This study tells us that is still true today." She added, "What's striking is that on a total compensation basis - looking at pay and benefits - employees of state and local government still earn less than their private sector counterparts."

A webinar/conference call will be held on Wednesday, April 28, 2010 at 11 AM ET with the report authors to review the findings a respond to questions. Pre-register for the webinar at: https://www2.gotomeeting.com/register/683193490

Those registering online will be provided with a link to access the online presentation, as well as the dial-in number and password. To ensure access at 11 AM, please log on and dial in at 10:45 AM.

For phone only, Dial In is 773-945-1011 and Access Code is 497-863-224. Only participants logged in online to the webinar will be able to ask questions. Participants not logged in online can participate via phone in listen-only mode.

The full report, PowerPoint, Fact Sheet and FAQ are available here.

ABOUT

The Center for State and Local Government Excellence helps state and local governments become knowledgeable and competitive employers so they can attract and retain a talented and committed workforce. More information is available at www.slge.org. The National Institute on Retirement Security is a non-profit organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy through national research and education programs. More information is available at www.nirsonline.org.

CONTACTS:
Amy Mayers, Center for State & Local Government Excellence
202.682.6102
amayers@slge.org

Kelly Kenneally, National Institute on Retirement Security
202.457.8190
kkenneally@nirsonline.org

SNL skit mocks public employees

http://taxdollars.freedomblogging.com/2010/04/27/sln-skewers-unions-in-public-employee-of-the-year/55981/

Opinion: Public employee perks have become a laughing matter

Public Perks Become a Laughing Matter

By Steven Malanga RealClearMarkets April 28, 2010

Saturday Night Live has long helped to define the country's political mood and to shape it at the same time. Chevy Chase's portrait of President Ford as a stumbling, bumbling figure didn't do Ford's 1976 election bid much good. Dan Aykroyd's portrayal of a chastened Jimmy Carter apologizing that he couldn't fulfill all of his campaign promises helped to define the later years of the Carter presidency. And Tina Fey's imitation of Sarah Palin has managed to make the former Alaskan governor both a butt of jokes and a bona fide celebrity, depending on the circles you travel in.

So I assume we've reached some sort of tipping point in our attitudes toward the perks enjoyed in the public sector after the SNL skit this weekend entitled the "2010 Public Employee of the Year Awards." Hosted by one Desmond McCoy, a transit worker from Oakland who announces he has retired on full disability because he's permanently paralyzed (even though he's clearly ambulatory as he saunters on the stage), the skit celebrates government employees who are "just like workers everywhere except for the lifetime job security, guaranteed annual raises, early retirement on generous pensions and full medical coverage with no deductibles, office visit fees or co-payments." Wow. This is a long way from Phil Hartman playing Bill Clinton visiting McDonald's to snarf up French fries.

Still, SNL is undoubtedly tapping into a mood that's become widespread among voters and is reflected especially in state and local budget battles this spring. After a 2009 budget season in which government employees were largely spared much pain thanks to federal stimulus money and a host of tax increases and fiscal gimmicks that helped balance local budgets, 2010 is shaping up as the year when elected officials, many up for reelection and under pressure from taxpayers, are cutting back pension plans, worker contracts and benefits in an effort to deal with new round of budget shortfalls.

Some of the impetus for reform is no doubt coming from New Jersey which, because its gubernatorial election occurs the year before mid-term congressional elections, is often considered a bellwether. Chris Christie's election as a Republican reform running against high taxes and rich public employee prerogatives was telling, but what was perhaps even more telling is that his opponent, Democratic incumbent Jon Corzine, managed to get just 45 percent of the vote in a state in which his party has a 700,000 edge in voter registrations (an independent who also ran on public sector reform garnered 6 percent of the vote).

The Democratically controlled state legislature in N.J. has already passed one round of benefits reform, signed by Christie, which eliminated part-timers from the state's rich pension system, bases retirement earnings on the last five years of service (instead of the last three) and requires state employees to contribute 1.5 percent of salary toward their health care. Tellingly, the Senate President in Jersey is a former private sector union leader who has said that blue collar workers can no longer afford the taxes needed to keep benefits so high for public workers.

Pension reform is now on the table in a number of states. Illinois, which by some measures is suffering from the largest unfunded pension liabilities of any state, passed legislation earlier this year which rolls back the retirement age for state workers from 62 to 67, though it only applies to those entering the system as new hires.

The new law also bases pensions on the last eight years of earnings, rather than the current four years, and prohibits public employees from drawing pensions from more than one source. The measure followed an investigative series in the Chicago Sun-Times last year which found the pension bill for state, Cook County and the city of Chicago pensions were upwards of $800 million a month.

Pension costs are a central part of campaigns in states with the worst fiscal outlooks. Meg Whitman has made reform of California's system a key part of her campaign to be governor in a state where a recent study estimated the three major public employee pension funds to be a half trillion dollars underfunded. Whitman is touting a plan to move employees to a defined contribution plan. Her likely Democratic opponent, Jerry Brown, has slammed the plan an effort "to put everyone into the loving embrace of Wall Street." That clearly sets out the turf between the two.

Staggering pension costs have even sparked calls for reform from public union allies. Los Angeles Mayor Antonio Villaraigosa used his job as a union organizer for teachers as a jumping off point for his political career, but with his city under budget pressures so severe he's worried about running out of cash, he's calling for scaling back public pensions. No wonder. Pension contributions will consume nearly a fifth of L.A.'s general fund this year.

Although pension costs are a long-term problem, public sector pay increases, including automatic gains locked in by contracts, have helped drive budget deficits and are now a target for cuts to help balance budgets. When Christie announced an $833 million cut in state aid to local school districts, he pointed out that if teachers took a one-year pay freeze and agreed to contribute a small amount to their health plans, districts could make up the entire lost state subsidy. But only a handful of the state's 591 school districts won such concessions from their teachers, which sparked anger in Jersey, where private sector pay declined 1.8 percent last year. That prompted a school budget revolt where voters in 60 percent of towns rejected school budgets.

In Chicago, meanwhile, school officials are trying to leverage the fact that private wages declined 1.2 percent last year to get teachers to accept a one-year wage freeze, which the system estimates would save $169 million. In New York, Gov. Paterson used emergency powers of his office to delay a 4 percent wage hike for state workers under the rationale that the state was in danger of running out of money (in fact, the state has delayed sending out tax refunds for the same reason). Paterson is lobbying to make the freeze permanent, but the legislature is balking. In Louisiana Gov. Bobby Jindal has already signed off on pay freezes for 90,000 executive and rank and file workers to deal with a $1 billion budget shortfall in a $25 billion budget.

There is clearly a voter desire for such savings. In New Jersey a poll taken after Christie's election found 61 percent of voters backed public-employee layoffs, and fully three-quarters supported a wage freeze for state workers. But you don't need polls to tell you that when even Saturday Night Live is getting in on the act.

Oregon treasurer’s race features allegations of excessive investment staff travel expenses

Travel probe heats up treasurer’s race in Oregon primary

The World (Oregon’s South Coast) Monday, April 26, 2010

PORTLAND — Within 48 hours of the death of State Treasurer Ben Westlund last month, an up-and-comer in Oregon politics was named to succeed him. One of the first things Ted Wheeler learned from his new staff was that The Oregonian newspaper was investigating the luxe life led by the employees who oversee the state’s $67 billion investment portfolio.

Since then, the headlines from the paper’s investigation into $495-a-night hotel bills and double dipping on meal expenses have put pizazz into a race that wasn’t even scheduled this year.

After the contests in both parties for nominations to run for governor, a Democratic primary contest for treasurer leads a short list of statewide races that includes one for a Supreme Court seat and another for state school superintendent.

Wheeler was chairman of the government in Multnomah County, the state’s most populous, when Westlund died March 7 of a recurrence of lung cancer with two years left in his term. Two mornings later, Gov. Ted Kulongoski named Wheeler treasurer, on the day of the 5 p.m. deadline for filing as a candidate to complete the term.

Wheeler knew by that point he had a challenger in the primary May 18, Democratic state Sen. Rick Metsger of Welches. The winner faces Republican state Sen. Chris Telfer of Bend in November.

Metsger is among the Democrats, including Kulongoski and House Speaker Dave Hunt, who have pressed Wheeler to move quickly to deal with the stories that showed the 13 employees in the treasurer’s office traveled well as they made their rounds of investment companies, advisory boards and partnership meetings. The companies, which charge the state investment fees, pick up the tabs.

The investment officers are widely credited with generating returns well above average for the portfolio that largely consists of public pension dollars, and the traveling considered necessary to oversee the investments.

But the Democrats are fretting about the election-year image of state employees living lavishly as they hobnob with financiers while Oregonians suffer through a weak economic recovery, with unemployment stuck at well above 10 percent and foreclosures rising.

“We have our own little version of Wall Street in Salem,” Metsger said last week. “Ted’s the boss now,” Metsger said. “He’s not responsible for what happened in the past, but he is responsible for change.”

Wheeler says he has moved judiciously to “button it down,” announcing a series of steps such as requiring investment officers to pay for their own golf and other entertainment, barring gifts, clamping down on first-class travel, and ending practices that allowed the investment officers to claim “per diem” expenses for meals that investment companies had already paid for.

He plans a series of reviews, including one eventually by the state’s ethics commission.

While the contest between Metsger and Wheeler sets up a contest in November, the races for the Supreme Court and education posts are nonpartisan, under state law, and the May ballot will be decisive.

Opinion: Are we in a bond market bubble?

Bubble trouble for bonds?

Fortune Magazine April 28, 2010

(Fortune) -- Andrew Mellon, the banking icon, once famously said: "Gentleman prefer bonds." The implication being that bonds, while less perhaps less sultry than equities, will generate a predictable return for investors, and not put their investments at serious risk of capital impairment. Ostensibly the latter part is true: bonds sit higher up in the capital structure of and therefore have more downside protection. If a company performs poorly and its stock goes down, stockholders get nothing. On the other hand, if a company can't pay off bonds it's issued, investors could end up at least owning the company and its assets.

Asset allocation decisions are made based on many factors. The correct allocation with the appropriate timing can ensure both capital preservation and capital growth for investors. In the construction of a diversified portfolio, a critical decision relates to the appropriate percentage of allocation to bonds versus equities versus other asset classes.

Investors have effectively three choices as it relates to bond, or fixed income, allocation: government bonds (at all levels of government), investment grade bonds, and junk bonds. In theory, the credit worthiness occurs in that order as well, and yields go down as credit worthiness goes up. So government bonds will have lower yields than similar duration corporate bonds, and vice versa.

A river of money is flowing into bonds

According to the Investment Company Institute, investors have poured almost $400 billion into bond funds since the start of 2009 and in aggregate there is more than $2.2 trillion invested in bond funds. As a result of this massive inflow of money into bond funds and the government's purchase of government bonds as part of its quantitative easing program, yields in the bond market have come down substantially since the credit crisis of late 2008. So, given the massive inflow into bond funds over the past, the question remains: Are we in a bond bubble?

The answer is nuanced. From a longer term perspective, bonds are, broadly speaking, at near all-time lows in yield. In particular, given the current loose monetary policy being implemented by the Federal Reserve, Treasury bonds are at close to all time lows in yield, and therefore highs in price. Given this extreme in Treasury bond pricing, there is clearly bubble potential in the U.S. government bond market.

A quick Google search of "Bond Bubble" indicates that pundits have been suggesting bonds are in a bubble very consistently for the past three years. While it is easy to make a call that an asset class is in a bubble, it is more difficult to be accountable to the timing of such a call. In addition, a bubble inherently implies that the unwinding of that bubble will be a crash. So far the pundits have been wrong both counts.

We've charted the spread of corporate junk bonds bond versus 5-year treasuries and corporate investment grade bonds versus 5-year treasuries going back to 2002 (see chart above). Interestingly, while yields for both investment grades and junk bonds are close to their lows in yield for this period, currently at 8.24% versus their low of 7.75% for junk bonds and 4.7% versus their all time low of 4.5% for investment grades, the spreads between 5-year treasuries remains relatively wide. In fact, these spreads bottomed in 2007 at 0.93% for investment grade and 3.1% for junk, versus their current spreads of 2.30% and 5.74%, respectively.

Bonds don't exist in a vacuum. So is there a Treasury bubble?

Since the price of bonds should never be taken in isolation, if there is a bubble in bonds, it is likely related to Treasuries. The case for the Treasury bubble is effectively three-fold:

First, as mentioned, they are being priced based on extreme monetary policy that will not be sustained in perpetuity.

Second, they are incorporating very limited expectations for inflation, which we believe will occur and perhaps in dramatic fashion.

Third and finally, government bonds will eventually have to reflect the declining credit worthiness of the Unites State based on the United States' deficit as a percentage of GDP and growing debt to GDP ratios.

Treasury bonds cannot stay at their current yield level forever. And while we have seen some correction, yields and prices for U.S. government bonds are still at generational extremes. In reality, though, just as it took decades for interest rates to come down from the meteoric highs of the 1980s, it will take interest rates time to go up, and it is likely that no crash is imminent. So even if there is a bubble, there won't likely be a "pop." This move will be long and sustained.

From an investment perspective, the most effective way to play the re-pricing of Treasuries over time is to be short Treasuries out right, or to play a narrowing of the spread between treasuries and corporate bonds.

The reality is, gentleman -- and ladies -- do prefer bonds. But, only when the price is right.

--Daryl G. Jones is Managing Director of Hedgeye.

Correction: Full article describing Missouri pension bill

In last week’s NASRA News Clips, I inadvertently omitted a paragraph from the story below, which is re-run here in its entirety. kb

Bill to reform state retirement benefits advances

Springfield News-Leader • April 21, 2010

Jefferson City -- A bill to reform state employee retirement benefits took a step forward Tuesday in the face of mounting opposition from groups not directly affected by the legislation.

Shortly after the Senate passed the pension reform bill 27-5, the House retirement committee held an informal hearing with the bill's sponsor, Sen. Jason Crowell.

Even though the bill does not affect local government or public school employees, there is a push by education groups to kill the bill.

Former House Speaker Jim Kreider, now a lobbyist for retired teachers, asked members of the House
retirement committee to stop the legislation.

Crowell's bill has several controversial components:

- Increasing the typical retirement age for new state workers hired after 2011 to 67 and requiring them to contribute 4 percent of their salary. Current employees pay nothing toward their retirement.

- Requiring 10 years of service to the state -- instead of the current five -- to vest and get a pension.

- Combining the investment arms of the two pension funds for state workers and forming the Missouri Public Trust Co. to manage and invest the assets of the Missouri State Employees Retirement System (MOSERS) and the Missouri Department of Transportation and Highway Patrol Employees' Retirement System (MPERS).

In a letter, Kreider said the bill "is a money grab by investment managers, lobbyists, security attorneys, political cronies and campaign contributors." "In effect, this legislation creates a Goldman Sachs-like investment firm with little or no oversight protecting the dollars of the taxpayer or the retiree," wrote Kreider, executive director of the Missouri Retired Teachers Association.

Not true, says Crowell.

The bill would establish a quasi-governmental company with public employees to manage the investment of MOSERS and MPERS. The two funds would remain equal, but the state would realize significant savings by cutting administrative redundancies, Crowell said.

The board of the proposed investment company would consist of directors of MOSERS and MPERS, the governor's Office of Administration commissioner and four gubernatorial appointees confirmed by the Senate. Under the bill, MOSERS and MPERS directors would submit a panel of potential board members to the governor, who could reject the group and ask for others.

To prevent the new investment board from becoming another landing pad for political cronyism, the bill would prohibit members of the General Assembly from serving on the board or doing business with it for five years after leaving
office.