Report finds most states experienced revenue declines in first quarter of 2010, and projections are not encouraging

Tax Increases Push States’ Revenues Into the Black for First Time Since 2008,
Rockefeller Institute Reports

Collections still declining in most states, including key April income-tax revenue

June 3, 2010 Rockefeller Institute of Government

Albany, N.Y. — States’ overall tax revenues rose in the first quarter of calendar 2010 on a year-over-year basis, marking the first such gain since the third quarter of 2008, according to preliminary data in a new report from the Rockefeller Institute of Government.

Despite the overall growth in revenues, a majority of states still saw declines, according to Institute Senior Policy Analyst Lucy Dadayan, the report’s author. The increase in total collections was mostly attributable to revenue growth driven by legislated tax increases in just two states — New York and California. If those two states are removed from the calculations, total collections across the nation show a 2.2 percent decline in the first quarter of 2010. And even with the boost from those two states, overall revenues remain significantly below pre-recession levels.

Further, early indications of revenues in the April-June quarter — marking the end of the fiscal year for 46 states — are not promising, as the important April collections from income taxes showed a 7.6 percent year-over-year decline.

States will continue to face a rough road to fiscal recovery, Dadayan predicted.

“The income tax shortfall for the April-June quarter will push states to take hasty actions for dealing with the shortfall,” she writes in the report. “The April shortfalls in income tax collections come late in the fiscal year and late in the budget process, leaving little time for revenue analysts to evaluate the budget shortfalls, for budget forecasters to revise their forecasts, and for elected officials to assess the magnitude of the state fiscal crisis.

“The 46 states whose fiscal years end June 30 will be hard-pressed to enact legislation reducing spending, lay off workers, raise taxes, or otherwise obtain resources sufficient to offset the lost revenue before the end of the year,” Dadayan concludes.

Overall state tax revenues grew by 2.4 percent in the first quarter of 2010, compared to the same quarter a year earlier, based on preliminary data in the Institute’s State Revenue “Flash” Report. Personal income tax revenue increased by 2.7 percent for the nation. Yet 34 of 49 early reporting states had declines in both overall and personal income tax collections.

Sales tax collections increased by 0.5 percent, and corporate tax collections increased by 2.3 percent.

On a regional basis, the New England, Mid-Atlantic and Far West regions of the country all saw increases in tax collections, while the remaining regions suffered declines. The Great Lakes region was the weakest by far in terms of both personal income tax and overall tax revenue collections, while the Southwest region was the weakest in terms of sales tax collections.

The Institute will issue a more complete report of state revenues for the first quarter of calendar 2010 once data from Census Bureau become available.

For a full copy of the report, visit www.rockinst.org.

Survey finds states continue to reduce spending

NASBO/NGA survey finds states continue to reduce spending

U.S. States Plan Spending Caps Amid Limited Revenue

June 3 (Bloomberg) -- U.S. states reduced spending for a second consecutive year as the longest U.S. recession since the 1930s cut tax revenue, a survey by two associations said.

Governors may struggle to raise spending in fiscal 2011, which begins July 1 for 46 states, as they close deficits without the aid of federal stimulus money that runs out this year, according to a report by the National Governors Association and National Association of State Budget Officers.

States will have dealt with $296.6 billion of budget deficits from fiscal 2009 to 2012, covered in part by $135 billion of federal money received under stimulus legislation, the groups said. Governors still face $127.4 billion of deficits for the rest of fiscal 2010, 2011 and 2012.

“The federal government has helped states avoid even more significant cuts to state services and/or proposed tax increases,” according to the report, which the Washington-based associations publish twice a year based on a survey. “The loss of these funds combined with the anticipated slow recovery of state revenues is expected to result in the continuation of difficult state fiscal conditions.”

Warren Buffett, whose Berkshire Hathaway Inc. has been paring its municipal bond portfolio, yesterday predicted a “terrible problem” for the debt of states and local governments in coming years. Berkshire has cut its municipal holdings to less than $3.9 billion as of March 31, from more than $4.7 billion at the end of 2008, according to the company’s first-quarter report.

Below 2008 Levels

Buffett, Berkshire’s chief executive officer, in May predicted the U.S. probably would feel compelled to rescue a state facing “extreme financial difficulty” after it committed $700 billion to bail out financial firms and automakers. California, the most-populous U.S. state, is contending with a $19 billion deficit and Illinois faces a $13 billion gap.

In fiscal 2011, revenue is forecast to reach $495.8 billion, down 8.4 percent from 2008, according to the report. That may force 39 states to spend less than they did three years ago, the groups said.

Governors’ recommended budgets for fiscal 2011 forecast a 3.6 percent total spending increase to $635.3 billion from $612.9 billion in 2010, the first jump in three years, according to the report. That’s still 7.6 percent less than in 2008. Combined, state budgets fell 6.8 percent in 2010 and 4.3 percent in 2009, after rising 4.9 percent in 2008.

Tax Collections Drop

It may be a decade before states can spend at the same level as they did in 2008, association officials in Washington told reporters on a conference call. Sales and income-tax revenue, the source of 80 percent of state general funds, will be $477.4 billion for 2010, 12 percent less than collected in 2008, according to the report.

“States are still suffering from the recession,” Scott Pattison, executive director of the budget officers’ group, said in the press briefing. “States are still in fiscal peril.”

In fiscal 2010, 40 states including Florida, California and New York made mid-year budget cuts totaling $22 billion, according to the survey. During the year, states raised taxes and fees by $23.9 billion.

Spending is estimated to drop 6.8 percent to $612.9 billion in fiscal 2010 from $657.9 billion in 2009, the groups said. Revenue for 2010 is below original projections in 46 states.

States have already pared expenses, including 48,000 jobs, as the recession forced up unemployment and pushed down property values, cutting tax revenue, Raymond Scheppach, executive director of the governors association, told reporters. Finding more spending reductions may mean taking more from schools and health care, he said.

“Where do you go for the rest of the cuts?” asked Scheppach. “They will have to cut more jobs.”

Job Losses Projected

“In the year ahead, state budget-closing actions could cost the economy up to 900,000 public- and private-sector jobs without more federal help,” said Nicholas Johnson, director of the state fiscal project at the Washington-based Center on Budget & Policy Priorities, a research group. “When states cut spending, they lay off teachers and police officers and cancel contracts with vendors,” Johnson said in a prepared statement. “The impact then ripples through the wider economy as laid-off workers spend less at local stores, putting more jobs at risk.”

Quarterly Revenue Decline

The majority of U.S. states had a drop in revenue last quarter over the same period in 2009, the Albany-based Nelson A. Rockefeller Institute of Government said today in a report. According to the survey by the governors group, financial pressures from the recession have reduced year-end aggregate balances to 2.2 percent of general fund expenditures in 48 states for fiscal 2010, excluding Texas and Alaska. Including those two, reserve balances were 6.2 percent, down from a peak of 11.5 percent in 2006.

Any reserve fund below 3 percent is considered low, Pattison said.

This year, residents of 37 states will vote for governors, including 15 incumbents seeking re-election, according to the governors association. The four states that don’t begin their fiscal years on July 1 are Alabama and Michigan, which start Oct. 1, Texas, which starts Sept. 1, and New York starting April 1. Twenty-one states operate on two-year budgets.

States cutting benefits to bridge budget gap

States Shrink ‘Unaffordable’ Benefits to Bridge $1 Trillion Gap

June 04, 2010 By Dunstan McNichol

June 4 (Bloomberg) -- Janet and Mark Hartmann, a New Jersey couple with 68 years of government jobs between them, may retire ahead of plan because the state is $102 billion short of funds needed to pay all the benefits it owes.

New Jersey and 20 other states are urging early retirements, cutting benefits and demanding employees contribute more in the face of what the Pew Center on the States says is a $1 trillion gap between available assets and what’s owed workers.

Declining tax revenue has left governments unable to make up the $724 billion of market losses suffered by the 100 largest state retirement plans in the two years that ended last June, according to the U.S. Census Bureau. Some states have skipped payments to retirement accounts or borrowed to make them, endangering their credit ratings.

“This, in my opinion, is the public issue of this decade,” New Jersey Governor Chris Christie said at the Manhattan Institute for Policy Research on May 25. “Things that used to be sacred cows, that used to be the third rail, no longer are. They’ve been replaced by the unaffordability, absolute unaffordability.”

The deepest recession since the Great Depression cut state tax revenue by $67 billion during the fiscal year ending last June 30, the most on record, according to the Census Bureau. That’s combined with rising costs to leave only four states with assets considered sufficient to cover promised benefits in the year that ended in June 2008, the last period with complete figures, the Pew Center said.

Short of Assets

States had $2.35 trillion set aside to cover $3.35 trillion of pension, health-care and other retirement obligations in fiscal 2008, Pew said in February. Assets at 125 state plans surveyed by Wilshire Associates, a consultant in Santa Monica, California, covered only 65 percent of liabilities on June 30, 2009, down from 85 percent in 2008.

Private industry is doing little better. Pensions at companies in the Standard & Poor’s 1500 Index had median assets in 2009 to cover only 75 percent of what they owed, said a June 1 report from the consulting firm Mercer, a unit of Marsh & McLennan Cos.

“It’s primarily due to the effects of the 2008 market downturn,” said Keith Brainard, chief researcher for the National Association of State Retirement Administrators, based in Baton Rouge, Louisiana. The S&P 500 Index lost 38 percent in 2008. “That raised the plans’ unfunded liabilities and, therefore, the amount of contributions needed to pay for them.”

Market Losses

In New Jersey, the pension system lost $15 billion in the year ended June 30, 2009, a period in which the S&P 500 dropped 28 percent. That left state funds, which cover about 800,000 teachers and government workers, with $89 billion of assets to pay $135 billion of benefits, according to the most-recent actuarial report. The state has set aside nothing to cover $56 billion in health-insurance benefits promised to retirees.

In response, Christie, a 47-year-old Republican who took office Jan. 19, proposed that employees still working after Aug. 1 contribute to health care and get lower benefits, encouraging those like the Hartmanns to retire now under current terms.

“The pension for our retirement was part of the reason we took these jobs,” said Mark Hartmann, 59, a business manager in the Treasury Department’s tax division in Trenton, the state capital. His wife, Janet, 58, a reading teacher since 1976 in Hillsborough in central New Jersey, wants to keep working, he said at a retirement seminar last month. “But if it’s going to cost her in her retirement, how can she?”

Added Costs

The 3,294 teachers who began collecting benefits last year through New Jersey’s Teachers Pension and Annuity Fund, the largest of the state’s seven retirement systems, receive on average $49,378 a year, the fund’s latest report says. Christie’s plan to charge retirees 1.5 percent of their benefits to pay for health care would cost each about $741 a year.

Christie also has proposed rolling back a 9 percent benefit increase that was approved by state lawmakers in 2000, a change that would cost retirees of the age and experience of the Hartmanns about $2,500 a year, based on the most-recent actuarial reports.

“We need to get to the problem of present employees,” Christie said in his Manhattan Institute speech. The state must “say no” to unions that assert they have “a birthright to ever-increasing benefits,” Christie said.

Christie and others unfairly blame public workers for pension-funding gaps caused by poor investment returns and deferred state payments, said Robert Master, legislative and political director in New York and New Jersey for the Communications Workers of America, New Jersey’s largest state- worker union.

Private Destruction

“You’ve seen the destruction of the defined benefit almost completely in the private sector,” he said in a telephone interview, referring to pensions with guaranteed payments. “So it becomes very easy to whip up resentment against public employees.”

Michigan, whose school-employee pension fund lost almost $5 billion in the year ended Aug. 31, according to its most-recent report, is trying to lure 28,000 of its 270,000 teachers and other education workers into early retirement. Those who leave by June 11 would receive enhanced benefits, saving school districts $681 million this year by replacing higher-cost veterans with entry-level staff.

New York, the second-largest public pension fund after California, cut benefits for those hired in 2010 after assets declined $45 billion in the year that ended March 31, 2009, to $109 billion. In Nevada, where the $19 billion pension lost $3.5 billion in the year that ended June 30, 2009, benefits were lowered for new hires and the retirement age went to 62 from 60 for most.

25 Percent Loss

U.S. public pension funds posted a median loss of 25 percent in 2008, according to Wilshire Associates. As the value of assets declined, benefit payments to retirees grew 8 percent, to $175 billion in 2008 from $162 billion a year earlier, according to the Census Bureau.

New York’s pension costs rose 16 percent annually between 1999 and 2009, faster than any area of spending except property- tax relief and almost triple the overall growth rate, documents for a recent bond sale show. Pennsylvania’s payments will rise to $4.6 billion in 2013 from $561 million this year without changes, Governor Edward Rendell’s February budget proposal showed.

New Jersey’s $3 billion payment for the fiscal year that starts July 1 is almost four times what it contributed in 2004 and more than 10 percent of its entire $29.3 billion budget, according to documents for a 2010 bond offering. The state will skip the payment, as it did with $4.6 billion of installments due in 2009 and 2010, to balance its budget.

Borrowed Payments

Illinois, which finished the 2009 fiscal year with less than 40 percent of the funds needed to cover promised benefits, borrowed $3.5 billion this year to make its payments. The state will borrow a similar amount for pensions next fiscal year under Governor Pat Quinn’s proposed budget.

To protect its credit rating, the second-lowest of any state after California, Illinois cut benefits and raised the retirement age for future employees to save its pension $250 billion over 35 years. States that don’t do likewise “could be setting themselves up for greater hardship,” Standard & Poor’s said last month.

The decline in tax revenue for states continued into the second half of 2009 before moderating this year. Collections rose 2.4 percent in the first quarter from a year earlier, the Nelson A. Rockefeller Institute of Government said yesterday.

Most of the gains came from increased tax rates in New York and California. Excluding those states, collections fell 2.2 percent, leaving governments little relief in their need to wring pension savings from employees like the Hartmanns. “There’s a lot of animosity between the teachers and the current administration,” Mark Hartmann said. “It just does not seem like an atmosphere for somebody who puts in 10-hour days.”

Opinion: Politicians are turning on public employee labor unions

Pols turn on labor unions

Politico Ben Smith and Maggie Haberman June 6, 2010

Spurred by state budget crunches and an angry public mood, Republican and some Democratic leaders are focusing with increasing intensity on public workers and the unions that represent them, casting them as overpaid obstacles to good government and demanding cuts in their often-generous benefits.

Unlike past battles over the high cost of labor, this time pitched battles over wages and pensions are being waged from Sacramento to Springfield to New York City and the conflict is marked by its bipartisan tone, with public employee unions emerging as an intransigent public enemy number one in cities and state capitals across the country.

They're the whipping boys for a new generation of governors who, thanks to a tanking economy and an assist from editorial boards, feel freer than ever to make political targets out of what was once a protected liberal class of teachers, cops, and other public servants.

Republicans around the nation have cheered New Jersey Gov. Chris Christie, whose shouting match over budget cuts with an outraged teacher—“You don’t have to” teach, he told her without sympathy—became a YouTube sensation on the right last week.

And even Democrats, like the nominee for governor in New York, Andrew Cuomo, have echoed the attacks on unions.

Christie is merely the most florid voice for a calculated, national effort to fundamentally reshape the debate on the labor costs that account for the bulk of government spending at every level. And at the core of the shift is a perception among many political leaders that public anger at civil servants is boiling over.

“We have a new privileged class in America,” said Indiana Gov. Mitch Daniels, who rescinded state workers' collective bargaining power on his first day in office in 2006. “We used to think of government workers as underpaid public servants. Now they are better paid than the people who pay their salaries.”

“It's a part of a very large question the nation's got to face,” Daniels told POLITICO in an interview. “Who serves whom here? Is the public sector—as some of us have always thought—there to serve the rest of society? Or is it the other way around?”

The new focus on public workers is the product of a perfect storm of anti-labor factors.

First are the very real financial obligations imposed by their salaries, health benefits and—especially—their traditional, defined-benefit pension plans, which have been sweetened over the years in many states by legislators eager for the support of politically-powerful unions. This is particularly true in the northern and western states that allow public workers to organize. A recent study from the Pew Center on the States found that states are short $1 trillion toward the $3.35 trillion in pension, health care and other retirement benefits states have promised their current and retired workers, the product of a combination of political decisions and the recent recession.

But the immediate cause of the new spotlight on public sector unions is the collapse in tax revenues that came with the 2008 Wall Street crash, something that union leaders bitterly note is not their fault.

“It’s outrageous to blame a librarian – to blame a fireman for the financial mess that we find this country it,” the president of the American Federation of State County, and Municipal Employees, the largest national public workers union, Gerard McEntee, said. “We are the scapegoats in the states.”

The revenue crunch coincides with a bipartisan national resistance against teachers’ unions and the power they wield over classroom instruction, an effort financed – ironically -- largely by Wall Street and championed by figures ranging from Barack Obama to Newt Gingrich, Mike Bloomberg to Al Sharpton.

Governors have made sporadic attempts over the last decade to fundamentally alter the spiraling pension costs that have consumed increasing shares of state budgets, and which legislatures in states like New York and California often sweetened as a gift to political allies.

The recent revenue crunch, though, has given governors and big-city mayors new leverage. The early initiatives have largely been stopgap measures: everything from furloughs in the two biggest states, New York and California, to initiatives like Bloomberg’s deal last week in New York City with teacher unions to cancel raises in exchange for avoiding layoffs.

Other executives have won larger, structural changes. Illinois Gov. Pat Quinn, a Democrat, signed into law last month a bill changing benefits for all five of the state’s pension systems, raising the retirement age, limiting pension raises, capping maximum benefits and ending public pensions for people who work another public job.

California, however, remains ground zero for pension fights, as the seat of both the nation’s highest-profile budget crises and some of its most powerful public unions. Republican Gov. Arnold Schwarzenegger has been fighting them since he took office, and they have handed him his most stinging political defeats. He failed in 2003 and 2004 to attack pension costs through the legislature, then in 2005 backed ballot initiatives to shift public workers to a 401(k)-style pension system, to cap spending and to roll back teachers’ tenure. But he was forced to drop the pension measure amid claims it would cut death benefits for police widows, and lost the other measures in an expensive, bruising political fight that was the worst defeat of his tenure.

Now, though, Schwarzenegger – in his final months as governor– is gearing up for what he views as a final, climactic battle over public sector pensions. And he told POLITICO in an interview that he feels the time is now ripe for elements of the fight he lost five years earlier. “The atmosphere has changed,” Schwarzenegger said. “People understand that they have to lay off their workers or they don’t have the money for their family. What they don’t like is when there is a certain group that doesn’t like to make the sacrifices.” Schwarzenegger said he “will not sign” a budget without pension reform. “I will hold up the budget. It doesn’t matter how long it drags—into the summer or fall or into November or after my administration—and I think the people will support that,” he said.

Schwarzenegger’s political judgment reflects a growing national consensus that public sector unions may be at their most vulnerable point ever.

“The public mood is clearly changing regarding these issues,” said Minnesota Governor Tim Pawlenty. Pawlenty, a likely 2012 presidential candidate, boasts of weathering a 44-day bus strike in 2004, the longest in the nation’s history, and recalled that during that “knockdown, drag-out brawl,” he shored up support by telling the public that “bus drivers under one version of their contract could get retirement benefits for the rest of their lives after working for just 15 years.”

“If you inform the public and workers in the private sector about the inflated benefits and compensation packages of public employees, and then you remind the taxpayers that they’re footing the bill for that – they get on the reform train pretty quickly,” he told POLITICO.

The assault has caught the giant national unions that represent public employees largely flatfooted, and many leaders concede privately that they find themselves on defense.

“The Al Shankers and the Victor Gotbaums .....they're not around any more,” said Norman Adler, the former political director of the New York City public workers union , referring to public sector union leaders who battled through the crises of the 1960s. “The people who have replaced them are either not as sophisticated or not as talented as the old guard was.”

But another consultant to major unions pointed to a different, more structural shift: Public sector unions are increasingly the face of American labor, and they have prospered as private sector unions disappeared and workers’ wages stagnated.

"The face of labor today is now public employee unions whose wages and benefits largely outstrip those of average Americans,” said the consultant.

But union leaders they also express outrage at what they see as the fundamental opportunism of politicians whose own Wall Street supporters caused an economic collapse using it to attack middle-class union members.

American Federation of Teachers President Randi Weingarten, for instance, blamed “the hedge fund folks” who, she said, are “trying to use charters as a way of demonizing public school teachers.

Democrats from Obama on down, however, have backed the pressure on teachers’ unions to drop inflexible work rules and accept private-sector style merit pay. But the sharp attacks on the workers and their leaders remain largely a Republican theme. Illinois Governor Pat Quinn, for instance, who won a major victory over unions in the pension changes (which start applying only to workers hired next January) distanced himself from the Republican rhetoric.

“I don’t get involving in that kind of scapegoating – I don’t think it’s right,” he said, after hearing Daniels’ remarked about a “privileged class. “I respect public employees, I respect teachers, and I think they deserve a pension,” he said.

Quinn noted that pension liabilities had blossomed under the Republicans who governed Illinois from 1977 to 2002, and indeed, local Republicans from coast to coast have often accepted the support of unions and defended their perks. That day appears to be over, at least for now. Former eBay CEO Meg Whitman, campaigning to replace Schwarzenegger, has promised to cut 10 percent of the state work force, or 40,000 jobs.

The lingering question, however, is whether the turn against public sector unions is here to stay. Union leaders hope that rising state revenues will ease the pressure, while Republicans insist that there has been a deep shift in the perception of public workers and even of the typically popular teachers.

“The question now is, is there going to be a paradigm shift,” said E.J. McMahon, the director of the conservative Empire Center for New York State Policy. “Or are the unions simply going to hunker down, let the wave wash over them, and emerge stronger than ever?”

San Francisco voters approve higher contribution rates for new public safety hires

Prop. D: Ballooning pension costs reeled in

San Francisco Examiner June 8, 2010

SAN FRANCISCO — A step toward reducing burgeoning pension costs for city workers was approved by voters.

Proposition D included a number of changes to draw down expenses by increasing retirement-contribution rates for some workers, changing the pension formula for new hires and ensuring money can be socked away during strong economic times for retiree health benefits.

Under the measure, the retirement-contribution rate will increase from 7.5 to 9 percent for newly hired public safety workers. Other workers will continue to pay a 7.5 percent contribution. Currently, pensions are based on the highest pay earned in a year. The measure’s formula calculates it on the average of the highest two years.

In years when San Francisco’s contribution to the retirement fund is less than expected — offset by strong returns on investments — The City would put the difference into a special health care trust fund used to pay for retired health workers’ benefit costs. The City has a $4 billion future cost for retiree health benefits.

The measure was introduced by Supervisor Sean Elsbernd with the support of Mayor Gavin Newsom. It was later modified by the full Board of Supervisors before being placed on the ballot.

The savings the measure could generate for The City is estimated at between $300 million and $500 million, “depending on future wage and benefit rates for employees and other factors,” according to the City Controller’s Office.

The City will pay about $300 million in retirement benefits for city employees during this fiscal year and the amount is expected to increase to about $800 million by 2014, which is more than the cost of operating San Francisco General Hospital and five times the amount of the Recreation and Park Department’s budget, supporters of the measure have said.

City officials have said the measure is part of an ongoing effort necessary to rein in the burgeoning costs of workers’ benefits and pensions.

James Hacking decides to remain at Arizona PSPRS

Hacking decides to stick around at Arizona Public Safety

Pensions & Investments June 7, 2010

James Hacking, administrator of the Arizona Public Safety Personnel Retirement System, Phoenix, reversed his decision to step down and now will stay on at the $6.3 billion system at least through August 2013.

The system's board also reserves the option to retain Mr. Hacking for two additional one-year periods through August 2015, according to a system news release.

Mr. Hacking had announced last November that he would step down in August. In a telephone interview, he said that with all the investment changes the system has made in recent years, along with new board members and a new administrator there was concern that the system's investments could be jeopardized.

“(The board) wanted some continuity,” Mr. Hacking said.

Brian Tobin, interim chairman of the board of trustees, said in the news release that the board persuaded Mr. Hacking to stay because of significant changes that have and will continue to take place on the board.

Of the current five board members, two are relatively recent appointees,” Mr. Tobin said in the release. “Two more appointees are expected to be named soon by the governor (Jan Brewer) to fill two new board positions that were authorized by legislation that became law last month. With so much change on the board, the existing members felt that every effort should be made to continue to retain the services of Mr. Hacking, who has been instrumental in the system restructuring that has been going on for the last four years.”

Mr. Hacking said in November that he had no immediate plans to retire, but noted then that he would move to St. Paul, Minn., where his wife, Laurie Hacking, serves as executive director of the $15 billion Minnesota Teachers Retirement Association.

North Carolina State Treasurer announces appointment of new chief investment officer

June 7, 2010 FOR IMMEDIATE RELEASE Contact: Heather Franco (919) 807-3132

TREASURER COWELL ANNOUNCES CHIEF INVESTMENT OFFICER

Wischmeier to Oversee Investments for North Carolina

RALEIGH – State Treasurer Janet Cowell announced today that Shawn Wischmeier will join the Department of State Treasurer as the new Chief Investment Officer for the $68 billion North Carolina Retirement Systems.

Wischmeier comes to North Carolina after serving as Chief Investment Officer for the Indiana Public Employees’ Retirement Fund (PERF) since 2006 where he brought the plan from fourth to first quartile investment performance in less than four years and was recently recognized as Large Public Plan of the Year by Institutional Investor News' Money Management Letter. Prior to joining PERF, Wischmeier was with Eli Lilly and Company’s Global Treasury group, where he progressed through varied roles, primarily focused on pension and benefit investments, corporate investments, and financial risk management.

Wischmeier has a Master of Business Administration degree from the Kellogg School of Management at Northwestern University where he majored in analytical finance, a Bachelor of Science in Chemical Engineering degree from Rose-Hulman Institute of Technology, and a Master of Engineering Management degree from the McCormick School of Engineering and Applied Sciences. The national search for the position was conducted by Korn/Ferry International led by Managing Director, Michael Kennedy.

“Mr. Wischmeier brings a great set of analytical and management skills to this Department,” stated Cowell. “I look forward to working with him as he takes on the responsibilities of leading our expert investment team that works to protect the benefits for over 820,000 retirement system members.”

“North Carolina is fortunate to have Mr. Wischmeier,” stated John Medlin, Vice-chair of the Investment Advisory Committee. “With his experience and background, he will be a great asset in maintaining the long term stability of the pension fund for our state’s public workers.”

The Department of State Treasurer’s Chief Investment Officer is responsible for managing a staff of over 22 investment professionals and oversight of approximately $68 billion in assets for the North Carolina Retirement Systems.

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About the Pension Fund:

The North Carolina Retirement Systems, the formal name for the pension fund, is now the tenth largest public pension fund in the country. It provides retirement benefits and savings for more than 820,000 North Carolinians, including teachers, state employees, firefighters, police officers, and other public workers. For more information visit www.nctreasurer.com

Florida investment board adds hedge funds to allocation

Fla. panel revises pension investment policy

Miami Herald June 8, 2010

A panel headed by Gov. Charlie Crist approved a revised investment policy Tuesday for Florida's state retirement fund to reduce its reliance on stocks and other equities while adding hedge funds. The State Board of Administration adopted the changes recommended by a consulting firm, the board's advisory council and its executive director, Ash Williams, a former Wall Street hedge fund manager.

The changes are expected to reduce the $109.5 billion pension fund's risk while increasing its return by $2.1 billion over a span of 15 or more years.

That's money taxpayers would save on retirement benefits paid to state and local government employees, said Rowland Davis, an actuary for Ennis, Knupp & Associates of Chicago.

Hedge funds have gotten a bad rap as being exotic and risky, Williams said. He said they held up far better than the broad equity average during the 2008 stock market collapse.

"All hedge funds are not created equal," he told the three-member board. "It's not something that should cause you to lie awake at night."

The revised policy has two parts, a transitional phase that can be accomplished under existing law and a final phase that will require action by the Legislature.

The board currently has had no hedge fund investments. The revised policy targets 4 percent of the pension assets for hedge funds during the first phase and 6 percent if the Legislature changes the law.

The board now invests 37.4 percent of the pension fund in domestic equities and 20 percent in foreign equities - 57.4 percent combined. The new policy would lump them together as global equities and reduce the total to 56 percent on an interim basis and to 52 percent if the law is changed.

Attorney General Bill McCollum noted Williams' predecessor attributed the health of Florida's retirement fund to the board's heavy reliance on domestic securities, but that was before 2008.

"Because of the way the world economy looks at the present time and the way that everything's shaping up for the next few years, one would not have as rosy a scenario for the domestic equity markets," McCollum said. "Therefore, we need to make these changes."

McCollum, who is seeking the Republican gubernatorial nomination, and Chief Financial Officer Alex Sink, the leading Democratic candidate for governor, sit on the board with Crist, a former Republican running for the U.S. Senate without party affiliation.

Current law limits what it terms alternative investments, including hedge funds, private equity and venture capital, to no more than 10 percent of the pension fund's investments.

The revised policy puts hedge funds, debt oriented funds and infrastructure investments in a new category called strategic investments now totaling 1.8 percent but with an interim goal of 6 percent and 11 percent if the law is changed.

Private equity is a separate category under the new policy. It will increase from 3.5 percent now to 4 percent in the transitory phase and could go to 5 percent with a law change.

The policy also calls for small reductions in fix income assets and a slight increase in real estate while leaving cash holdings unchanged.

The retirement fund lost value in May but still is up 14 percent for the fiscal year ending June 30, Williams said. He said investment income pays 65 cents of every dollar in retirement benefits paid out or $270 million per month.

CalSTRS board approves investing in commodities

No. 2 US pension Calstrs okays commodity investing

NEW YORK, June 4 (Reuters) - The California State Teachers Retirement System, the No. 2 U.S. pensions fund, has approved a plan to invest in commodities, indicating passive investors were still keen on oil, metals and grains futures despite uncertainties in long-term outlook.

Calstrs has not immediately approved a budget for its maiden investment in commodities but officials at the $138.5 billion fund said they will probably know by early autumn how much they should recommend for an allocation.

"The way it works is that we have to put up an agenda for the investment committee," said Steven Tong, one of the two Calstrs officials who presented the commodities plan to the fund's board on Thursday for approval.

"What we're anticipating right now is probably in the early fall of this year, probably in the September time frame, to know what the allocation will be," Tong, who is Calstrs' Director of Innovation and Risk, told Reuters by telephone from the fund's headquarters in Sacramento, California.

Calstrs spokesman Ricardo Duran added in an email to Reuters that the commodities allocation will come out of the fund's Absolute Return asset class, which targets to make up 5 percent of the fund's overall size.

At nearly $140 billion, Calstrs is the second largest public pensions in the United States, after the $200 billion California Public Employees' Retirement System, or Calpers.

Its move into commodities comes at a particularly uncertain time for the asset class as erratic economic data from around the world, a stubbornly strong dollar and growth challenges in China and Europe cloud the long-term outlook for energy, metals and agricultural markets.

"This shows large entities out there still have an appetite for commodities, and it makes sense because their participation in this asset class is next to nothing if you compare all the money they have in bonds, stocks and real estate," said Shawn Hackett, an investment adviser in Boynton Beach, Florida.

U.S. state pension funds have invested only a tiny fraction of their assets in commodities, despite the hype about a "wall of money" descending on the asset class, data gathered by Reuters shows.

Calpers, for instance, started investing in commodities in 2007 with a $450 million program that tracked the S&P GSCI Commodity Index. The program attained a value of over $1 billion in early 2008 as Calpers' benefited from record high prices of oil and other raw materials. But the portfolio plunged to about half of its value during the recession.

This year, oil and copper prices have fallen more than 10 percent while those of raw sugar have tumbled almost 50 percent.

Passive investors in commodities, who basically have exposure to commodity indexes like S&P GSCI, have also seen losses from trying to maintain positions in crude oil.

Every forward month contract in U.S. crude oil now cost at least $1 per barrel more than the spot month, causing a "negative roll" for investors moving out of expiring contracts into those still trading.

CalSTRS board delays action on staff recommendation to reduce investment return assumption from 8.0 to 7.5 percent

CalSTRS delays decision on investment forecast reduction

Sacramento Bee Jun. 05, 2010

CalSTRS postponed a decision Friday on reducing its forecast of investment returns, deferring a delicate question that could cost taxpayers hundreds of millions of dollars at a difficult time politically.

The board of the California State Teachers' Retirement System wasn't willing to approve a staff recommendation to cut the pension fund's official forecast a half point, to 7.5 percent a year.

Board members weren't sure it was the right move and they wanted more time to digest data from their outside consultant, Milliman Inc. The consultant's representatives said they support the move to 7.5 percent.

Investment forecasts are crucial to public pension funds like CalSTRS, especially now. The less CalSTRS expects to make from its investments, the more it will need from the state and school districts. But putting more burden on taxpayers becomes tricky when the state is facing a $19 billion deficit and Gov. Arnold Schwarzenegger is calling for a two-tier system that reduces benefits for new hires.

As it is, CalSTRS already plans to ask the Legislature next year for additional funding to help it recover from big investment losses in 2008. Reducing the investment forecast will mean more pressure on taxpayers.

CalSTRS currently gets more than $6 billion a year from the state, school districts and teachers.

Milliman's consultants said many pension funds are lowering their forecasts, partly to reflect the big drop in yields on government and corporate bonds in recent years.

But board members put off a decision until November. "I haven't heard anything that's convinced me that 7.5 percent is better than 8 percent," said board member Beth Rogers.

Access the CalSTRS board agenda item here: http://www.nasra.org/resources/CalSTRSinvreturn1006.pdf

Blackrock CEO tells Oregon investment board that hitting eight percent investment return will be difficult

Blackrock CEO tells Oregon money managers U.S. economy "ready to rock and roll"

The Oregonian June 02, 2010

The U.S. economy is "ready to rock and roll," says Larry Fink, the chief executive of the world's largest money management firm, Blackrock Inc. But its improving fundamentals are being held back by uncertainty over the European sovereign debt crisis.

Blackrock manages $3 trillion for institutional investors and governments worldwide, including $4.5 billion in Oregon pension and school funds. The firm has been a major player in the financial bailout, managing pools of assets from troubled financial institutions and playing an advisory role in the U.S. rescue of mortgage giants Fannie Mae and Freddie Mac.

Fink was in Tigard on Wednesday to provide a market update to staff at the Oregon State Treasury and the citizen's council that oversees investment of the state's $52 billion pension fund.

Fink said he remained bearish on Europe, and skeptical its central bankers and politicians can unwind the ongoing debt crisis without unleashing a deeper recession and social upheaval in Southern Europe. That uncertainty is what's anchoring the nascent recovery in the U.S., which could otherwise gather significant new momentum, he believes.

With the creation of a single European currency, Fink told the Oregon investment council, Spain, Portugal and Greece have been able to finance budget deficits ranging from 10 to 15 percent of their gross domestic products on the backs of their much stronger Northern European neighbors. Those same countries have aging populations and unemployment levels that would be considered stratospheric in the U.S., combined with government programs that provide generous unemployment and retirement benefits.

"Much of Europe's problem is a failure of the social state," Fink said. And while countries like Spain have proposed major austerity programs to reduce their deficits, it's not clear whether the governments can survive their implementation, which could tip their economies into deeper recessions. "The real test is whether these austerity programs can be initiated without causing social unrest," Fink said. "I'm worried. Will we see in these hot summer months some type of protests that get ugly?"

The sovereign debt crisis could also undermine European bank solvency, Fink said, because those institutions loaded up on those countries' bonds and regulators haven't required banks to establish reserves or take charges against possible defaults. If Spain or Greece had a major issue, it could cascade though the banking system and stock markets in the same manner as the real estate crisis did in the United States.

"No one is talking about this one," Fink said "This is a severe issue right now. It's the biggest test for Europe... We'll see how it all works out in the next three or four months, and it's creating great uncertainty in the United States."

In general, Fink was more bullish on the U.S. economy, which has more favorable demographics, a banking sector that is addressing its problems and a deficit that, while large, appears manageable as a percent of GDP.

Fink said the U.S. economy is at a pivot point. He believes second quarter earnings will be stronger than Wall Street estimates, and says the number one question he gets from corporate executives is what to do with all the cash they're sitting on. Most have avoided capital investment for several years, have low inventories and are ready to expand at any sign of sustainable growth. "We're at a moment of capitulation or of acceleration," Fink said. The question is whether the European crisis "will change the momentum or be a temporary pause."

In a wide-ranging overview, Fink offered a variety of other high level insights. He thinks the United States has the opportunity to recapture basic manufacturing jobs, albeit at lower pay than the fully loaded union pay rates of the past. He's still bullish on China, and believes its structural and currency issues will temper, but not derail growth there.

One dark cloud for the state pension managers: Fink says public pension funds across the country will be hard pressed to hit their aggressive investment earnings targets of 8 percent annually. That's the basic assumption underlying the solvency of Oregon's retirement system. "You can't consistently earn 6 percent above" the overall level of economic growth, Fink said. "If you get four to five percent GDP growth, you can get to 8 percent pretty fast. I don't see that, but that's what we need."

New Mexico Educational Retirement Board approves funding to defend members against investment-related lawsuits

NM pension board sets aside $1.5M for legal costs

By BARRY MASSEY (AP) June 7, 2010

SANTA FE, N.M. — New Mexico's pension program for educators plans to set aside $1.5 million to pay for legal expenses of board members who are facing lawsuits and a pending federal investigation over failed investments.

However, the Educational Retirement Board's reimbursement proposal is coming under scrutiny by a legislative committee, which plans to review it at a hearing Friday. The $1.5 million will come out of pension funds.

The Legislative Finance Committee also is looking at other state investment agencies' policies for indemnifying appointed members from legal claims brought against them.

The committee wants to "see whether or not these policies are going beyond what we would consider to be acceptable legally," said Rep. Luciano "Lucky" Varela, a Santa Fe Democrat and the panel's chairman.

Four current and former educational pension board members have been sued, either in whistleblower lawsuits brought on behalf of the state by a former pension fund investment officer, or in class-action lawsuits by educators and retirees alleging that the pension fund was hurt by bad investments.

The lawsuits allege "pay-to-play" political considerations in Gov. Bill Richardson's administration influenced investment decisions. Administration officials say there's been no wrongdoing and one of the whistleblower lawsuits has been dismissed by a state district court judge. The governor is not named as a defendant in the lawsuits.

A federal grand jury and the Securities and Exchange Commission are investigating investments by the pension fund and the State Investment Council. The target of the investigation remains unclear, but documents have been subpoenaed about a financial firm that advised the state agencies and has been implicated in a New York state pension fund scandal, and third-party marketing agents involved in securing state business for their clients.

State-paid lawyers are provided for board members and state agency officials who are defendants in lawsuits, but ERB chairman Bruce Malott also has hired a private lawyer to handle matters not covered by his government attorney. Malott's lawyer told the pension board earlier this year his client had nearly $300,000 in legal expenses so far.

In March, the board approved a policy for paying legal fees of board members. However, no reimbursements have been made so far, according to ERB executive director Jan Goodwin.

The board based its policy on a state law that says members of the board "shall be indemnified from the fund by the state from all claims, demands, suits, actions, damages, judgments, costs, charges and expenses ... and against all liability, losses and damages of any nature whatsoever that members shall or may at any time sustain by reason of any decision made in the performance of their duties."

The board has a pending "budget adjustment request" to take $1.5 million from the pension fund for reimbursing current and former board members for legal services they receive in the current fiscal year. The Richardson administration's budget agency has approved the request, but the Legislative Finance Committee is holding a hearing on it Friday. The LFC lacks the power to veto the proposal, however, allowing the board to move ahead despite any objections.

The Investment Council has reimbursed its appointed members and agency staff for more than $110,000 in legal expenses related to the federal investigation, including providing documents and other information to investigators, according to Charles Wollmann, a spokesman for the council, which manages state endowment funds valued at about $13 billion.

Members of the pension fund board and Investment Council are not paid a salary but receive a "per diem" expense payment for attending meetings. Wollmann said indemnification for legal costs or damage claims is important if investment agencies want qualified public members to serve. "Who wants to put their neck on the line for basically per diem," Wollmann said Tuesday.

Opinion: Efforts to apply MVL to California pension plans are political and unconvincing

Flawed Financial Theory & Ginned-Up Political Study Unconvincing

June 4, 2010 City Watch (an LA city hall watch blog)

Alexander Rublacava’s attempt to “clarify” CityWatch columnist Jack Humphreville’s misleading attacks on public employee pension funds and to refute my recent statements, falls short of clarification and only adds to the obfuscation of issues. (Link ) First, Mr. Rublacava’s recitation that true cost of the pension plans should be done by comparing the market value of plan assets to the current value of liabilities (i.e., without smoothing) is wrong. That is only relevant if the plan is going to be closed (termination liability); and current participants are no longer accruing benefits, no new participants are added, and the plan simply pays out promised benefits accrued as of that date over the remaining life of the beneficiaries.

However, the Los Angeles public employee pension plans are not going to be closed, but instead are ongoing; therefore her entire article's premise is an irrelevant straw man.

Mr. Rublacava blithely asserts that the “the market value of the liability should be stated with a low discount rate that's appropriate to the senior nature of pension liabilities in a public entity's capital structure.

In pension finance, the word “discount” means what the pension fund assets will actually earn. However, when Mr. Rublacava uses the word “discount”, he means what rate the market might assign a stream of payments, based on the current yield curve, independent of a plan's asset allocation.

Without going into the weeds, this theory has been rejected by nearly every actuary who values public pension plans, and is not the method used by the Governmental Accounting Standards Board (GASB), which is currently the source of generally accepted accounting principles (GAAP) used by state and local governments.

Market Value Liability (MVL) is is a theoretical construct whose adherents disagree on what have yet to formulate a widely accepted definition of what it means. If adopted, its artificially low return rate will lead to current taxpayers paying much more for already retired beneficiaries---precisely the generational cost shifting that MVL proponents claim their approach would stop.

Gary Findlay, CEO of the Missouri State Employees Retirement System so aptly summed up MVL when he said, “ Once you strip away the trappings of rigorous analysis obfuscating what is being proposed, you end up with what is, essentially; (i) a plan termination-like obligation for a plan that cannot be terminated; (ii) information which is presumably needed by a plan sponsor that cannot go out of business so they can report what will happen if they go out of business; and (iii) amounts computed based on capital market expectations for markets that differ dramatically from the way in which plan assets are being prudently invested for the long term to offset obligations.

( It may be worth reading the last sentence again — not that it will become any clearer, but it does point out the inconsistencies in what is allegedly being proposed for the purpose of achieving consistency.)”

Then, of course, there is the debate whether the 7% return rate plucked out of thin air by Mr. Humphreville is the proper rate to be assigned investment returns. As Mr. Rublacava notes, pension funds invest in assets other than “stocks and bonds”, such as private equity, real estate, hedge funds of various types, infrastructure, or currency.

These returns are often uncorrelated with, and many times superior to, those of the stock market over a long time horizon. Thus, when calculating their long term assumption rates, the funds factor in their percentage exposure to stocks, bonds, and these other asset classes to come up with a total assumed rate of return.

It is simplistic and naïve to claim, as Mr. Rublacava does, that the long term rates of pension funds should be 6% because that is the return of stocks and bonds---since that claim completely ignores the added value of other asset classes.

Further, it is interesting to read Rublacava dismiss the returns of the past 20 years as being outside the norm for returns. His partner in the attack on the Los Angeles pensions, former Los Angeles Mayor Richard Riordan, held the exact opposite view in the early 1990's when the pension fund returns boomed.

At that time, Mr. Riordan claimed the pension funds were understating their assumed returns. In one instance, he appointed a campaign fundraiser to the DWP Board in an attempt to make them hike the assumed rate of return and value of assets. The reason was simple; with a higher assumed rate of return, the City would have to pay less into the fund, just as arbitrarily lowering the assumed rate of return as Mr. Humphreville does would increase the City contributions.

It is beyond amusing to see Mr. Rublacava cite Schwarzenegger aide David Crane and the now infamous "Stanford study" as authority for a lower discount rate.

First, Mr. Crane and the Stanford study are not independent of each other----the parameters of the Stanford study was dreamed up Mr. Crane, and written by graduate students hired by Governor Schwarzenegger! The study is not an objective piece of research, but instead a political position paper. Citing Mr. Crane and the study as two separate authorities supporting a lower discount theory is disingenuous at best.

While Mr. Rublacava notes GASB has been debating what methods should be used to value pension liabilities, the tentative decision of GASB is to reject the Market Value Liability favored by Mr. Rublacava, and continue to use the current valuation methods.

Finally, the approach advocated by Mr. Rublacava replaces risk management with risk aversion fails to recognize the intergenerational burden shifting the approach would lead to, and does not acknowledge the permanence of public pension plans.

Most importantly, its conclusion that the cost of a pension plan to the taxpayers is the price the member would have to pay in the open market to replace the pension is inconsistent with the nature and purpose of a public pension plan.

It is no wonder that the theory advocated by Mr. Rublacava is soundly rejected by actuaries for public pension plans, and has to date gained no traction with GASB.

(Marshall E. McClain is the President of the Los Angeles Airport Peace Officers Assoc.)

Annual EBRI study reviews income of population age 65 and over

Executive Summary from www.ebri.org

Income of the Elderly Population Age 65 and Over, 2008

WHERE RETIREES GET THEIR INCOME: This article reviews the latest available data on the older population's income (from the U.S. Census Bureau’s March 2009 Current Population Survey) and how it has changed over time, as well as how the elderly's reliance on these sources varies across demographic characteristics.

SOCIAL SECURITY THE DOMINANT SOURCE: In 2008, Social Security was the largest source of income for those currently age 65 and older, accounting for 39.8 percent of their income on average. Pension and annuities income was 19.7 percent, income from assets 13.0 percent, and income from earnings was 25.6 percent. Nearly all individuals (89.2 percent ) age 65 and over were receiving income from Social Security in 2008, while 55.3 percent received income from assets, 35.4 percent received income from pensions and annuities, and 20.4 percent received income from earnings.

MEDIAN INCOME LEVELS: Real median income of the elderly (the midpoint, 50 percent above and 50 percent below) reached $18,001 in 2008, the highest point in the Census Bureau time series.

Access the full report here: http://www.ebri.org/pdf/notespdf/EBRI_Notes_06-June10.Inc-Eld.pdf

Annual Fidelity study finds a 65-year-old couple needs $250,000 for medical expenses in retirement

Fidelity Investments® Estimates Couples Retiring In 2010 Will Need $250,000 To Pay Medical Expenses During Retirement

New Study of Retirees Finds Current Health Care Costs Higher Than Expected, Consuming One-Fifth of Monthly Budgets

BOSTON, March 25, 2010 - Fidelity Investments^®, a leading provider of employer benefits, today announced the results of its annual Retiree Health Care Costs Estimate that found a 65-year-old couple retiring this year will need a quarter of a million dollars ($250,000¹) to pay for medical expenses throughout retirement, not including nursing-home care.

The annual health care costs estimate is calculated by Fidelity's Consulting Services business, which helps mid- to large-size employers assess and design their workplace benefits programs.

Fidelity also surveyed 376 married individuals, 65 years or older and not working full-time, to better understand their experiences in financing health care needs in retirement. This effort revealed that almost half (47%) are paying more each month for insurance premiums and out-of-pocket health care costs than they had anticipated in retirement. Only three out of 10 of these retirees saved specifically for health care needs in retirement during their working years.

The nationwide study²found that health care costs average $535 a month, or about one-fifth of an average couple's total monthly expenses of $2,842. Among those surveyed, 11 percent said their health care costs are $1,000 a month or higher. Average health care costs ranked second to the largest expense, food, which averaged $659 a month and slightly higher than housing-related costs, which averaged $494.

"It's crucial that workers begin to incorporate future medical expenses into today's retirement plans," said Brad Kimler, executive vice president of Fidelity's Consulting Services business. "In the past, retirees relied on their former employers to provide health care coverage, but this is no longer something to which most of today's retirees have access."

Current and Future Health Care Costs Biggest Financial Concern for Many

When asked to identify their single biggest financial concern today, three out of 10 retirees said paying for today's health care costs and long-term health care expenses such as a nursing home are among their biggest worries. Other financial concerns included paying for daily living expenses such as food, transportation and utilities (17%), assisting grown children and grandchildren with their financial needs (10%) and paying for housing (7%). A little more than a third (35%) of retirees said they have no financial worries.

Half of Retirees Use Own Cash for Health Care Costs Not Covered By Medicare

According to the study, over half (51%) are paying out-of-pocket for health care costs not covered by Medicare and four out of 10 (45%) have bought supplemental insurance to cover the gap. Only a small percentage of retirees indicated using other measures, such as tapping retirement funds earlier than anticipated (2%), credit cards (2%) or relying on family (1%). However, more than four in 10 of those surveyed (44%) said health care expenses have had a negative effect on their retirement budget.

2010 Retiree Health Care Costs Estimate Up 56% Since Introduction in 2002

The Fidelity 2010 retiree health care costs estimate is 4.2 percent higher than last year's estimate of $240,000 and 56 percent higher than in 2002, when Fidelity first calculated retiree health care costs at $160,000.

The survey assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program Medicare. The Fidelity estimate takes into account cost sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

The significant jump in the retiree health care cost estimate from 2002 to 2010 can be attributed to a number of factors including higher costs (e.g., for doctor's visits, diagnostic tests); increased expenses associated with new technology; and general price inflation.

Fidelity offers guidance to help individuals budget for health care expenses in retirement at the Retirement Resource Center at Fidelity.com.

Methodology

Data for the Consulting Services' retiree survey was collected via telephone between March 4, 2010, and March 14, 2010, by Infogroup/ORC of Princeton, N.J. It is based on responses from a national sample of 376 people who were married, not working full time and 65 years of age or older. The results of this survey may not be representative of all people meeting the same criteria as those surveyed for this study.

Fidelity's Consulting Services

Fidelity's Consulting Services business helps mid- to large-size employers nationwide assess the effectiveness of their benefits programs. The business provides a holistic approach to benefits design, strategy, funding, communications and delivery by looking at clients' health care and retirement plans before diagnosing business solutions. The group's specialties include retirement and health care plan consulting, custom data administration, compliance, employee communication and human resource transformation. Consulting Services has offices in Boston, New York City, San Francisco, Chicago, Raleigh, Dallas and Merrimack, N.H.

About Fidelity Investments

Fidelity Investments is one of the world's largest providers of financial services, with assets under administration of over $3.2 trillion, including managed assets of $1.5 trillion as of February 28, 2010. Fidelity offers investment management, retirement planning, brokerage, and human resources and benefits outsourcing services to over 20 million individuals and institutions as well as through 5,000 financial intermediary firms. The firm is the largest mutual fund company in the United States, the No. 1 provider of workplace retirement savings plans, the largest mutual fund supermarket, a leading online brokerage firm and one of the largest providers of custody and clearing services to financial professionals. For more information about Fidelity Investments, visit Fidelity.com.