Analysis of paper projecting state pension insolvency dates

Analysis of Joshua Rauh’s Paper “Are State Public Pensions Sustainable?*

June 1, 2010

In his paper “Are State Public Pensions Sustainable?,” Northwestern University Assistant Professor Joshua D. Rauh concludes that “many state systems will run out of money in 10-20 years if some attempt is not made to improve the funding of liabilities that have already accrued.” Subsequently, in a May 19, 2010 presentation at a University of California Retirement Security Institute conference, he recommended that: 1) state and local governments should close their defined benefit pension plans and issue debt to finance their pension liabilities; 2) the federal government should subsidize the debt issued by state and local governments to fund pensions; and 3) all newly hired governmental employees should be enrolled in Social Security and covered by defined contribution plans.

We disagree with his analysis for the following reasons:

1. A primary factor that allows Rauh to project the dates of impending insolvency is his assumption that future contributions will be sufficient only to fund the public plans’ normal costs, and that no contributions will be used to pay down unfunded liabilities. He assumes that future contributions “will be sufficient to fully fund newly accrued or recognized benefits … but no more.”

To support this assumption, he contends that since not all public pension plan sponsors are making their full annual required contribution (ARC), it is reasonable to assume that future contributions will not include any payments to amortize unfunded liabilities. Yet, based on Public Fund Survey data, the average ARC paid by more than 100 plans, from FY 01 to FY 08, is 92 percent, including 86 percent in FY 08. That same year, the average ARC paid to the 10 public plans with the largest pension liabilities was 94 percent, and eight paid their full ARC or more.

In addition, Rauh defines the normal cost using the Accumulated Benefit Obligation (ABO) cost method. Under the ABO method, normal costs are low when a member first joins the plan but increase rapidly as the member approaches retirement age. Although this is one way to fund retirement benefits, the vast majority of public plans use a different method: the entry age normal (EAN) cost method. Under the EAN method, the normal cost is determined as a level percent of pay over the member’s career, which is a more conservative funding approach than the ABO method. Consequently, based on the funding method most public plans use, we believe they have been receiving contributions that (1) are enough to cover the normal cost, and (2) help amortize the unfunded liability. Moreover, if public plans had been funded using the ABO method, they would have fewer assets than they do currently.

As a result of recent investment experience, employer and employee contributions will likely have to rise in the next few years and/or benefits will need to be modified. We believe the increases in these contributions will be used to additionally help amortize the unfunded liability, and not to fund the normal cost (which in the majority of cases is already being fully funded).

Therefore, Rauh’s assumption that plan sponsors will pay only the cost of newly accrued benefits, and not any of the cost to amortize their unfunded liabilities, is unsupported by the facts.

2. Rauh’s analysis fails to provide important information necessary to identify and analyze his underlying assumptions regarding modeling of future cash flows. This leaves the basis for his projections unclear. For example, it is unclear whether the data he uses to estimate new liabilities related to service costs in Figure 2 of his paper includes changes in liabilities related to changes in plan assumptions. For example, if a plan lowered its discount rate in 2007, it would increase the plan’s liabilities in a way that is unrelated to service costs. For an apples-to-apples comparison, the underlying data would need to be adjusted for changes in assumptions; otherwise the new liability related to service costs would be overestimated.

3. Rauh’s financial analysis does not account for changes that have been made and undoubtedly will continue to be made, that reduce public pension liabilities and increase contributions from both employees and employers. More than one dozen states this year alone have made fundamental changes to their pension plan benefit or contribution rate structures, or both.

4. We believe that issuing debt to fund pension benefits adds risk. After the debt is issued, it becomes a liability for the sponsoring government. If the markets fall after the funds are invested, the government now has two sets of liabilities, the outstanding debt and the pension liability. Even with a federal subsidy, we believe this would be a risky approach.

5. Although defined contribution plans are a useful means of supplementing pension benefits, we do not believe they are an effective or efficient vehicle for providing adequate retirement security over retirees’ lifetimes. By pooling mortality and investment risks, defined benefit plans lower participants’ risks of outliving retirement benefits. Defined contribution plans require each individual to bear these risks alone, consequently requiring higher contributions for the same level of retirement security than if the risks were pooled.

Moreover, defined benefit plans offer disability and death benefits while defined contribution plans do not. These benefits are especially important for state and local government employees in hazardous occupations such as firefighters and police officers who may die or become disabled in the line of duty. Switching to a defined contribution plan would mean these benefits would have to be provided through commercial insurance, likely at a higher cost to the employer.

Finally, some of the broader points Rauh makes with regard to the relative size of public pension liabilities and their possible solutions are based on inconsistent or misleading comparisons. For example, he states,

[T]he gap between assets and already-promised liabilities in state pension funds alone was over $3 trillion at the end of 2008. This compares to $1.00 trillion in other forms of recognized state debt under U.S. Census Bureau measures.

The 116 state-based public pension plans account for roughly 90 percent of all state and local government pension assets and liabilities. This is because most state-based pension plans include local government employers and employees, and these plans rely on contributions from these sources. Thus, a more accurate analysis would include 90 percent of state and local government debt, not just state debt, which would be approximately $2.16 trillion.

Although we share Professor Rauh’s concern over the difficult financial situation that state and local governments face in the current economy, we do not believe his analysis or recommendations are helpful for addressing the situation.

* This analysis was prepared by Paul Zorn and Mita Drazilov at Gabriel, Roeder, Smith & Company, Paul Angelo at The Segal Company, and Keith Brainard at NASRA.

This paper is posted online here: http://www.nasra.org/resources/SustainabilityChanges.pdf

Selected approved changes to state public pensions to restore or preserve plan sustainability

This listing of changes was compiled by NASRA based on input from NASRA members and their staff and the National Conference of State Legislatures.

Access the document here: http://www.nasra.org/resources/SustainabilityChanges.pdf

The file is also accessible via the NASRA web page, Reports on the Public Retirement System Community, here: http://www.nasra.org/resources/reports.htm

Cincinnati city council member seeks new retirement board structure with more independent members and expertise

Qualls pushes pension-board overhaul

Cincinnati Enquirer • May 31, 2010

Saying that trustees of the troubled Cincinnati Retirement System lack the expertise, impartiality and accountability needed, City Councilwoman Roxanne Qualls plans to push this week for a dramatic restructuring of the board to put more authority in the hands of pension and investment professionals.

While the current 11-member board consists primarily of current city employees, top city administrators and elected officials, at least two-thirds of Qualls' proposed nine-person body would have no direct employment or commercial ties with the city.

That shift, Qualls argues, would eliminate pervasive conflicts of interest that now leave most pension trustees torn between the interests of the pension fund itself - a matter in which, as members themselves, many have a strong personal stake - and those of the city and taxpayers.

"The way it's set up now, if a trustee does what's best for the retirees and future retirees, that's often not what's best for the city," Qualls said.

The growing complexity of overseeing the $2 billion city pension fund, Qualls said, also demands considerably greater professional expertise than that possessed by current board members, many of whom bring limited financial, investment or actuarial backgrounds to the position.

The city retirement plan faces a $1 billion gap between anticipated long-term revenue and expenses, a deep financial hole with many causes, including a catastrophic $854 million drop in assets amid the 2008 stock market meltdown. Over the past decade, investment returns also have consistently fallen far short of projections.

"This isn't a blame game," Qualls said. "This is recognition that what you need to know today to
effectively oversee pension and investment funds has advanced at light speed, but we're still trying to do it with a canoe."

Not surprisingly, current board members oppose Qualls' proposal, which she said has majority support on council. Qualls plans to present her proposal today to council's finance committee.

"I'm totally against it," said retirement board trustee Bryan Schmitt. "I think it works very well now. If you're really being a trustee, you're looking out for everybody - the employees, the members of the retirement system and the city itself. I don't see any reason to change."

Under the present system, the 11 Cincinnati Retirement System trustees include two elected officials - the mayor and chairman of council's finance committee; three city administrators - the city manager, the finance director and a member of the Civil Service Commission; four active employees, one retired member of the pension system and a citizen representative appointed by the board with council's consent.

Qualls' plan would:

· Authorize the mayor to appoint six of the nine board members to four-year terms, with
council's consent. Each would be independent of the city, being neither a city employee nor having business ties with City Hall, and would be expected to have expertise and experience in administering a public retirement plan. Examples of individuals qualified, Qualls' motion says, include senior banking or insurance executives with asset management experience, professionals with auditing, accounting, investment or actuarial backgrounds, and academics from relevant
fields.

· Allow active city employees and retired members to each select a representative, who need not
necessarily be members of the plan.

· Permit the other eight board members to select the ninth trustee.

In contrast to the current membership, no elected officials or city administrators would serve on the board. In addition, the board would have the authority to set the pension system's operating budget, including salaries, and to hire its executive director. That post now is filled by an appointee selected by the city administration.

"If you're going to hold these people accountable, you've got to give them the authority to run the board," said Councilman Jeff Berding.

The proposed membership changes, Qualls said, would eliminate fundamental structural flaws
that long have undermined the board's operations, starting with conflicts of interest. "Elected officials inevitably must decide on matters in which the interests of the retirement system and the interests of the city conflict," her motion says. "The active and retired members of the plan who sit on the board have the same conflict, only in reverse. And as members of both groups, the administration is totally conflicted."

Qualls' proposal comes as a task force that has spent the past nine months examining ways to
stabilize the city pension fund prepares to send a series of financially painful options to council.
Those possibilities include sizable increases in the city's annual contribution, an immediate cash
infusion of as much as hundreds of millions of dollars from City Hall, higher employee
contributions, and deep cuts in current and future benefits.

Without major changes, consultants warned the task force, the pension fund - for which
taxpayers are ultimately responsible - could be bankrupt within two decades.

Girard Miller: New GFOA best practice on governance is a gold standard for pensions

Wanted: A Gold Standard for Pensions

Public officials who run pension plans should update their rule books.

Girard Miller | June 1, 2010

Last year, the California Public Employees' Retirement System (CalPERS), the nation's largest pension fund, suffered an embarrassing governance crisis: Marketeers and "placement agents" reportedly paid their way into positions of undue influence. Its board has censured one member, and legislation was introduced to regulate placement agents.

California wasn't the only state to deal with such unseemly conduct on the part of its governing body. In New York, the attorney general received complaints of similar abuses and recently entered into settlement agreements with several implicated firms.

The apparent conflicts of interest--and media coverage of them--are shining a spotlight on the little-known world of pension governance. The attention may be unwelcome, but it has led to a call for sweeping reforms in the way public pension plans are run.

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 and thousands of chief financial officers for public employers and plan sponsors, has issued recommended governance practices that provide clear guidance to pension trustees and administrators on how to govern their plans: http://www.gfoa.org/downloads/GFOA_governanceretirementbenefitssystemsBP.pdf.

It is by far the most comprehensive and thoughtful document now available to pension managers and fiduciaries, and it should be reviewed by every board in the country at least annually. Every new trustee orientation session should include explicit discussion of these recommendations.

The GFOA document starts with three key concepts: duty of loyalty, duty of care and duty of prudence.

The duty of loyalty concept states that trustees must represent the interests of all beneficiaries and the overall plan. They should not represent 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.

The modernized duty of care concept now says that assuring financial sustainability must become a trustees' responsibility. 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.

The duty of prudence concept maintains that many pension plans require 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--the prudent person rule. But prudence goes beyond portfolio construction and should also include fiscal considerations.

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 now 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 industry requirement of a majority of independent trustees; the bare minimum would be a controlling bloc of independents that keeps the self-interested parties in check.

The GFOA's language on codes of conduct 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 finders' fees are addressed directly. 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.

Other national associations in the public pension field would serve their members well by adopting equally informative and detailed guidance on governance practices. State legislatures and oversight bodies would likewise do well to adopt and codify these key principles.

GASB changes could “send shivers” through public pensions and taxpayers

Public pension funds could be in for big shock

PITTSBURGH TRIBUNE-REVIEW June 1, 2010

The Government Accounting Standards Board is preparing to release a document that could send shivers through public pension systems and the taxpayers who fund them.

The document, tagged a preliminary view of proposed pension accounting reforms, is scheduled for release this week. Statements on the board's website suggest coming disclosure standards that could ramp up the need for higher contributions to keep public pension funds on a stable footing.

Economist Andrew Biggs, a senior fellow at the American Enterprise Institute and former deputy commissioner for the Social Security Administration, said it is not clear exactly how the standards would work, but it appears they could require state and local governments, struggling with pension obligations, to dig deeper and set aside more cash each year for pensions.

"If the final rules are the way the draft is laid out, it would probably raise market liability by one-third to one-fourth," Biggs said.

Actuaries use those liability numbers to determine what it will cost each year to keep pension funds solvent. Those costs typically are divided between employees and the governmental units employing them.

Some economists, including Biggs, contend public pension fund liabilities are understated because the funds use unrealistic numbers to discount their future liabilities. Private-sector pension funds typically tag liabilities to a 5 percent discount rate — the rate of return on corporate bonds — while many public pension funds use an 8 percent discount, a rate that drives down the total liabilities calculation.

The Government Accounting Standards Board is an independent professional organization that establishes accounting and financial reporting standards for state and local government. The board's posting suggests it might recommend reducing the number of years pension funds use to calculate amortization of liabilities, another change that could trigger increases in annual contribution rates.

"It would be like paying off a debt over 15 years instead of 30," Biggs said.

Pennsylvania's huge school and state employee pension funds face looming spikes in contribution rates. Officials with those funds said they are monitoring developments with the board closely, but declined to comment, pending the release of additional information.

If adopted, the accounting changes would be the most recent in a trend of changes forcing state and local governments to acknowledge and fund promises they made to future retirees.

Underfunded pension systems in Pennsylvania have raised awareness about the guarantees taxpayers fund — and cast a light on how public officials manage the systems.

Pittsburgh Controller Michael Lamb, a member of the city's pension board, wasn't aware of any discussions involving pension fund accounting, but he's not surprised the standards panel is considering the issue.

The Pennsylvania Municipal Retirement System, a state board that administers pension plans for many municipalities, uses a 6 percent discount number. City officials have talked about reducing its discount rate from 8 to 7 percent, Lamb said.

Even with the more liberal 8 percent rate, Pittsburgh officials are grappling to boost funding for their plan, which is considered among the most under-funded big city pension plans in the nation. It has about one-third of the money needed to meet promises. It narrowly escaped a state takeover and could be subject to state oversight if does not bring funding levels up to 50 percent this year. Council is weighing a plan to sell or lease city parking garages to put money into the fund.

"If they reduced (the discount rate) to 6 percent, it definitely would increase what we have put in. We already put in $60 million a year," Lamb said.

On the other hand, Lamb said, if the standards are reduced to recommendations, they could have little impact beyond forcing officials to acknowledge a larger liability.

Bankruptcy talk spreads among California municipal officials

Bankruptcy talk spreads among Calif. muni officials

Thu, May 27 2010

SAN FRANCISCO (Reuters) - Two years after Vallejo, California, filed for bankruptcy protection, officials in nearby Antioch are also tossing around the 'B' word.

Antioch's leaders earlier this month said bankruptcy could be an option for the cash-strapped city of roughly 100,000 on the eastern fringe of the San Francisco Bay area.

Antioch's fiscal woes are standard issue for local governments in California: weak revenue from retail sales and property taxes is forcing spending cuts, layoffs and furloughs.

But cost-cutting measures may not be enough to keep Antioch's books balanced, so its city council is openly discussing bankruptcy.

"We just want to alert people to the possibility," Antioch Mayor Pro Tem Mary Helen Rocha said.

Orange County Treasurer Chris Street would not be surprised if more local governments across the Golden State sound a similar alarm.

Street expects more talk of municipal bankruptcy across California because local government finances are in such dire shape -- a situation underscored on Wednesday when a top finance officer for Sacramento County projected a worse-than-expected shortfall for the county of $181 million, which could force more than 1,000 layoffs from the county's payroll. "You don't have the easy out of increasing revenue and you have a lot more call on services because of the economy," Street said. "There's no such thing as entertaining bankruptcy; there's ending denial."

Orange County, California's third most populous county, declared bankruptcy in 1994, at the time marking the biggest municipal bankruptcy in U.S. history, after suffering $1.7 billion in losses from bad investments. The county emerged from bankruptcy in 1996 and its credit rating has since recovered from its post-bankruptcy "junk" status. Fitch Ratings earlier this month affirmed its 'AA' rating on the number of the county's long-term obligations.

Marc Levinson, a lawyer with Orrick, Herrington & Sutcliffe LLP who is representing Vallejo in its bankruptcy proceeding, agrees that California's hard times and lean local budgets are forcing local leaders to weigh bankruptcy. "It's a topic on everyone's lips because cities and counties and local governments are hurting," Levinson said.

OVERCOMING THE STIGMA

Municipal officials, however, are unlikely to pile into bankruptcy court in search of relief from their financial woes, Levinson said. Chapter 9 bankruptcy filings are rare to begin, in part because many states limit them and, more important, their consequences include harm to credit ratings that determine borrowing costs, said Jim Spiotto, a partner at the Chicago law firm of Chapman & Cutler, who works on municipal finance matters.

A filing for Chapter 9, the part of U.S. bankruptcy code that applies to municipalities could also result in being locked out of the municipal debt market, adding to fiscal trouble.

"We take that very seriously," Amy Doppelt, a managing director at Fitch Ratings, said of how talk of bankruptcy could affect credit ratings.

Bankruptcy could also scare away investment and new jobs at time when California's unemployment rate is in the double-digits -- 12.6 percent in April -- and payroll growth is critical to bolstering the consumer spending and property markets that fill the coffers of local governments.

Ron Loveridge, the mayor of Riverside, California, and president of the National League of Cities, called bankruptcy a last resort. "It becomes a description of who you are," he said.

Despite its stigma, bankruptcy has paid an important dividend for Vallejo: It has forced public employee unions to the negotiating table, providing city leaders an opportunity to rein in compensation, which city officials said accounts for more than three-quarters of Vallejo's general fund spending. City Councilwoman Stephanie Gomes said the effort has led to concessions from three of four city unions.

Like Vallejo, Los Angeles is suffering from weak revenue at the same time the cost of its pensions and other retirement benefits are rising. Former Mayor Richard Riordan said those factors put the government of the second largest U.S. city on track to declare bankruptcy between now and 2014.

Riordan sees bankruptcy as a necessary tactic for squeezing concessions from the city's public employee unions. It could also pave the way for 401(k) retirement accounts for new city workers instead of defined pension benefit plans with escalating costs, he said.

"The threat of bankruptcy is really the only way you're going to get them to make major changes," Riordan recently told Reuters.

Los Angeles officials dispute Riordan's bankruptcy outlook, published earlier this month in an opinion piece in The Wall Street Journal. City Administrative Officer Miguel Santana said Los Angeles does not want its "brand" tarnished by bankruptcy and that the city can avoid it by continuing to cut spending, by reducing its work force and by handing off some services to the private sector and nonprofits. "Bankruptcy is what you do when you run out of options. The city has a lot of options and has been exercising those options," Santana said.

Talk of municipal bankruptcy has not escaped California's politically powerful public employee unions. A number of them are pressing the legislature to pass a bill that would require local governments to get the approval of a state board before filing for bankruptcy. Since the board could be stacked with union-friendly appointees, bankruptcy pleas could be rejected or delayed.

"It's a horrible bill," Levinson said. "If you don't have the bankruptcy outlet, what do you do? If you can't pay your bills what do you do?"

City of Vallejo proposes 80 percent funding target for retiree health care

Vallejo looks at 80 percent payments to CalPERS

Vallejo Times-Herald June 2, 2010

An ever-mounting debt Vallejo has built up by not setting aside money for retired city employee health benefits would take more than $16 million a year for three decades to pay off.

Paying such a large annual sum of cash, however, would mean a smaller debt in the long-term, city officials said Tuesday at a Vallejo City Council special budget session looking at the 2010-2011 fiscal year.

City finance staff recommended paying only 80 percent of that debt, owed to the state retirement agency. That move would leave the city with millions in debt at the end of 30 years, officials said.

Eighty percent, though, is still nearly $5 million higher than the California Public Employees' Retirement System (CalPERS) is asking as a minimum payment in 2010-2011.

The city's current contribution to CalPERS "will be appreciably higher" without modification, the city's actuary John Bartel told the council. "This is a pay now or pay later situation. If you don't make this contribution higher now, it will be higher later on."

Unlike with city employee pensions, which have funds set aside during workers' employment, retiree health benefits are only paid for once the employees retire.

City Finance Director Rob Stout defended staff members' recommendation for the lower annual payment.

"That's another $2.5 million -- that's another fire station," Stout said. "It's an awful lot to ask citizens of this town to do, beyond what we think is the balance."

Vallejo needs a plan for how to eventually pay its way out of that debt, Mayor Osby Davis said.

Councilwoman Joanne Schivley said she will be "real surprised" if even 80 percent -- about 9.4 million in the first year -- of the debt will be paid off, much as past recommendations to pay the debt have been ignored.

As of press time, council discussion had turned to placing a proposed 1 percent sales tax measure on the November ballot. A second special council budget meeting is scheduled for Thursday.

Beth Almeida: We can afford early retirement

Below is an excerpt from a New York Times online feature titled, “Room for Debate.” Access this and commentary on the subject, “How high can the retirement age go?” here: http://roomfordebate.blogs.nytimes.com/2010/05/31/how-high-can-the-retirement-age-go/?scp=1&sq=room%20for%20debate&st=cse

We Can Afford Early Retirement

Beth Almeida is executive director of the National Institute on Retirement Security, a nonprofit research organization based in Washington. She is the co-author of “A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans.”

June 1, 2010

Longer lives do not necessarily require longer careers. Yes, seniors are living a few years longer than they did decades ago. Life expectancy at age 65 has improved by about 35 percent since 1950. But our country’s gross domestic product is also roughly six times larger than it was in 1950 and household incomes have grown by a similar amount.

That means not only can we still afford retirement, we can afford even more of it if that’s what we want. That’s good news. Yet somehow, longer lives have become an economic bogeyman. A look at the data shows how wrongheaded this thinking is.

First, improvements in longevity are very gradual and quite predictable. Over the past half-century, life expectancy at age 65 has improved by about 1 month with each passing year. In 1950, 65 year-old men lived, on average, to age 78. Today, the average 65 year old man lives to about age 82.

Four additional years in retirement does cost money, but the steady nature of longevity increases makes it easy to plan financially for longer lives, and the costs of those added years is actually quite modest.

In fact, a recent study by Buck Consultants determined that longer life-spans add only about 0.2 percent to 0.3 percent to the cost of a typical pension plan each year.

At the end of the day, whether or not retirement is deemed “affordable” depends as much on our willingness to pay as our ability to pay. A policy choice to balance budgets by raising retirement ages is a judgment call.

Sacrificing time in retirement or paring back in other areas to deal with fiscal constraints will simply be a reflection of policy priorities. But in no way are higher retirement ages a preordained economic or demographic necessity.

Florida governor vetoes reduction in DROP interest rate

Crist refuses to cut DROP for state workers
By Bill Cotterell www.tallahassee.com June 1, 2010

Gov. Charlie Crist refused Friday to slash interest earnings on government-employee pensions in the Deferred Retirement Option Program, saying lawmakers unfairly popped the change into the budget late in the session.

"It's like Gov. Lawton Chiles used to say: 'This time the people win,' only this time, the people are the state employees," said state Rep. Alan Williams, D-Tallahassee. "That was the right decision by the governor."

DROP is an option for state, county and local employees who participate in the Florida Retirement System.

Williams and Sen. Al Lawson, another Tallahassee Democrat who voted against the change last month, were intrigued by the political implications of the veto. Crist, a former Republican now running for the U.S. Senate as an independent, endeared himself to state employees last year by vetoing a 2-percent salary reduction for those earning more than $45,000.

"He's going to get some state-employee support," said Lawson. The Senate minority leader met with Crist early this month and lobbied him to veto the interest cut.

The DROP program allows retirement-eligible employees to start collecting their pensions while continuing to work for up to five years. The monthly pension checks are banked at 6.5 percent interest, but the Legislature voted to cut that to 3 percent for those who enter DROP after July 1.

There's been a flood of DROP applications in the past two months, to beat the cut that now won't come.

Crist said the change was inserted in a joint committee report on the budget "with little or no opportunity for discussion or debate. Changes to employee retirement accounts should be vetted through the normal committee process to avoid unintended consequences that may occur when rushed through the process."

The Bill (HB 5607) passed the Senate 32-6 and the House 78-42. That's more than enough to override a veto in the Senate, but House leaders would have to switch two "Nay" votes to get the required two-thirds majority if an override vote is taken and all members showed up.

Opinion: The debt crisis is just a proxy for the aging crisis

Debt and the demographics of aging

Keeping elderly productive is key to defusing entitlement time bomb

By Dr. Robert N. Butler and Michael W. Hodin May 21, 2010 Washington Times

Greece's recent fiscal meltdown wasn't caused just by carefree government spending. It was an inevitable result of the country's aging population, which has long been accustomed to extravagant health care and retirement benefits. This is what happens when 19th-century policy prescriptions are applied to 21st-century realities.

That's why the most recent European bailout package is only a short-term remedy to the complex issue of global aging. For decades, Europe has built a health-and-welfare system designed around providing support to its citizens at what in an earlier time might have been the very first signs of senior citizenship. Greeks are eligible for government pensions at age 53. The problem will only get worse. Over the next 40 years, a third of Europeans will be older than 60. The debt crisis is really just a proxy for the aging crisis that is coming to every country in the world.

Indeed, the global scope of the graying demographics are well known - and irreversible. Like Europe, Japan and Korea will by midcentury have 40 percent of their populations older than 60. In China, at least a quarter of the population will be elderly. In the United States, the number of citizens older than 65 will double during the next 20 years. These demographic trends will define our social and economic needs and government policy for decades. It requires a radical new way of thinking, which includes a 21st-century approach to policies that align with the longevity revolution begun in the latter part of the 20th century.

The implications are dizzying. Asian countries will have to import health workers to care for their elderly. Public pension plans will have to be re-examined to account for the millions of workers who will need retirement funds even as they continue to work into their 70s. The number of Alzheimer's patients is expected to double every two decades, affecting more than 115 million people by 2050. The incidence of other age-related diseases, such as skin cancer, also will soar. And as longevity extends, insurance and retirement savings plans will need to be reconceived as bulging populations need to stretch benefits for longer periods of time.

Last week, President Obama established a bipartisan "debt commission." Instead of looking at the usual combination of tax increases and spending-cut triggers, this commission ought to lead a conversation about a new approach to aging that will shape the political economy. That conversation should include policies to keep people healthy as they age, but also how we approach work, retirement planning, labor supplies and technology.

There is solid evidence that aging can be treated as an unprecedented opportunity for investment in economic growth. Economists David E. Bloom and David Canning have found that nations that have a five-year advantage in life expectancy have a 0.5 percent faster economic growth rate.

Business and government leaders ought to seize this insight to make the case for a far more enterprising, innovation-based and growth-focused approach to issues of retirement planning, workplace and the treatment of long-term illness.

The workplace is an obvious starting point. Almost all government pension plans, and most private ones, still operate on obsolete assumptions that people stop working in their mid-60s and die soon after. For the 21st century, all G-20 countries need policies aligned with the transformation that aging populations represent - on retirement planning, financial literacy and workplace "healthy aging." Our new middle age can become an engine of productivity, not a cohort of dependence.

The treatment of age-related health conditions will also require policy shifts, just as we have shifted with communicable diseases. France, the United Kingdom, Australia, Sweden, Norway and Japan already have national Alzheimer's plans in place, as do a handful of states here. But to find treatments that reverse the effects of this disease and make progress on care and early detection will require massive, global public-funding commitments.

This fall at the G-20 meeting, our government leaders surely will address the debt crisis. But instead of looking at it only as a short-term fiscal challenge, they ought to use the occasion to introduce a "call to action on aging." Incentives for innovative technology solutions for long-term care, transformational thinking about work and retirement planning and a global fund for age-related diseases such as Alzheimer's might be good places to start.

The alarm bells over Greece ought to be a wake-up call for creative and innovative policy changes that will turn this demographic reality into a platform for wealth creation, innovation and even greater prosperity.

Dr. Robert N. Butler is president and chief executive of the International Longevity Center and received the 1976 Pulitzer Prize for "Why Survive? Being Old in America" (Johns Hopkins University Press, 2002). Michael W. Hodin is adjunct senior fellow at the Council on Foreign Relations and executive director for the Global Coalition on Aging: Health, Work, Financial Security.

NASRA Associate Member: The Manhattan Paradox

NASRA is happy to present and link to articles and research prepared by NASRA Associate Members that may be of interest to NASRA members and others in the public pension community. The article below was drafted by the founder and CIO of Arrowhawk Partners, Michael Litt.

The Manhattan Paradox

Summary

Pension plans and other long term pools of capital are reconsidering their strategic asset allocation policies in light of the losses incurred during the 2008-2009 period. At the same time a new generation of Executive Directors and Chief Investment Officers are placing a higher priority on controlling risk within the asset portfolio. At present they are working with their Trustees to help them better understand the improvements that are possible by moving the focus of their portfolio discussions away from relative performance metrics. This piece is intended to act as a centerpiece for staff and Trustees to better understand why diversification strategies which evolved during the 1980’s have become less effective with the globalization of financial markets. This evolution in portfolio management is to be expected as 90 years ago it would have been prudent to solely invest in railroad company debt.

The discussion begins by trying to understand how ‘conservative’ investment allocations ended up with so many leveraged credit investments in the portfolio by 2007, just prior to the failure of the credit transmission system. Also considered are demographic factors which have impacted markets as well as investor behavior. The role of the 1996 tax exemption for buying and selling homes every two years in creating the residential housing asset bubble is also discussed. Each of these factors has increased the challenge of funding long term pension and healthcare liabilities for plan sponsors. It is for this reason plans are considering a shift in their strategic asset allocations.

To bring home these points the paper calls upon the legend of the Indian tribe which sold the island of Manhattan to the Dutch for what seemed to be a very low figure. It is often noted that this small amount compounded at a given rate of interest would allow the tribe to repurchase the island today. This is meant to highlight the power of compounding. From this simple tale factors such as volatility, non-normal distribution of returns, payout policies, and the use of surplus to increase benefits are considered. The ability of the tribe to repurchase the island and the very survival of their asset pool comes into question as additional real world scenarios are considered. Clear points of distinction can be drawn from the Indians experience that have application to strategic asset allocation decision making today.

A number of public pension plans are using this piece as one element of their upcoming offsite with staff and trustees.

For information about Arrowhawk Partners, contact: