CalSTRS board postpones decision on staff recommendation to reduce investment return assumption from 8.0 to 7.5 percent

ALBANY — Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.

And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

As word of the plan spread, some denounced it as a shell game and a blatant effort by state leaders to avoid making difficult decisions, like cutting government spending or reducing pension benefits.

“It’s a classic Albany example of kicking the can down the road,” said Harry Wilson, the Republican candidate for comptroller, who holds an M.B.A. from Harvard.

Pension costs for the state and municipalities are soaring, a result of enhanced retirement benefits for public employees and the decline in the stock market over the past two years. And, given declines in tax revenue and larger budget shortfalls, the governments are struggling to come up with the money to make the contributions.

Under the plan, the state and municipalities would borrow the money to reduce their pension contributions for the next three years, in exchange for higher payments over the following decade. They would begin repaying what they borrowed, with interest, in 2013.

But Mr. Paterson and other state officials hope the stock market will have rebounded to such a degree by that time that the state’s overall pension contribution burden will have been reduced.

The maneuver would cost the state and local governments about $1.85 billion in interest payments, according to an estimate by the State Senate, though a number of factors could drive interest payments up or down.

Another oddity of the plan is that the pension fund, which assumes its assets will earn 8 percent a year, would accept interest payments from the state that would probably be 4.5 percent to 5.5 percent.

This would be only the second time the state has borrowed money from its pension fund, and it would involve much more money than the previous time, which occurred in the aftermath of the Sept. 11 terrorist attacks. New York State faces a $9.2 billion deficit this fiscal year, which began on April 1, and the budget is already more than two months late. The governor and legislative leaders are under pressure to make structural changes that will bring new discipline to state spending, but few expect them to do so.

Instead, they are expected to rely heavily on borrowing, tax or fee increases and an array of one-time maneuvers, like tapping the coffers of public authorities.

The governor and Comptroller Thomas P. DiNapoli back borrowing against the pension system, and a tentative agreement to do so was reached after negotiations on Thursday among key lawmakers and the governor’s representatives. The plan excludes New York City, which has its own pension system.

The initial plan in the governor’s budget called for the borrowing of up to $9 billion over the next six years.

Under the agreed-upon plan, the state would be authorized to borrow $1.5 billion to $2 billion over the next three years, according to forecasts provided by the governor’s office and the Senate. Municipalities would be allowed to borrow nearly $4 billion, according to a Senate estimate.

Senator Diane J. Savino, a Staten Island Democrat who negotiated the agreement for the Senate, said she pushed for a limit.

“There’s a question as to whether or not we should do this,” she said, adding, “I didn’t want to leave it open-ended, because six years is too long. The temptation is too great to do it over and over again.”

As part of the plan, the state and municipalities will have to make higher minimum payments into the pension system during bull markets to mitigate the impact of market crashes.

The governor’s plan, which was included in his executive budget in January, only highlighted the savings that the plan would reap over the next few years and included no mention of the long-term costs.

The amount borrowed would depend on various factors, like the stock market’s performance, which has fallen sharply since the fiscal year ended in March. The plan also allows state and local governments to choose whether to borrow from the pension fund each year, so much depends on whether future leaders choose to do so.

But with pension-contribution rates expected to climb over the next few years, political pressure is likely to be high to defer payments in a climate in which budget problems are coming from many directions.

Those pushing the plan are taking pains to avoid describing it as “borrowing,” saying they are seeking to amortize or “smooth” pension contributions. That is in part because they have distanced themselves from a plan proposed by Lt. Gov. Richard Ravitch that would have the state borrow as much as $6 billion for general operating expenses over the next three years in exchange for budget reforms.

“We’re not borrowing,” said Robert Megna, the state budget director and one of the governor’s top advisers.

Mr. DiNapoli, the comptroller, said: “We would view it more as an extended-payment plan.”

Asked about the pension plan, Mr. Ravitch said, “Call it what you will, it’s taking money from future budgets to help solve this year’s budget.”

Mr. Megna, when reminded that the plan envisioned delaying an obligation today and eventually paying it back with interest, softened his view in the process of a lengthy interview.

“I’m not going to sit here and characterize it as not a borrowing,” he said. “But it is an annual, relatively small borrowing we’re doing this year that were doing to get a modest savings.”

In 2004 and 2005, the state borrowed $655 million from the pension fund; it still owes more than $400 million.

Budget negotiations are expected to continue through the weekend, as state leaders push to reach a broad budget deal. What has become clear is that substantial borrowing will be part of the budget, leaving only the question of the amount.

This week, Mr. Paterson called borrowing “a last resort,” but added, “I have never said I wouldn’t borrow.”

New York state comptroller reverses position; now opposes pension borrowing plan

Comptroller Backflips on Pension Borrowing

By DANNY HAKIM NY Times (blog) JUne 15, 2010, 9:49 am

ALBANY — State Comptroller Thomas P. DiNapoli is trying some political acrobatics as he voices opposition to the tentative deal reached by state leaders last week to borrow billions of dollars from the state pension fund.

“Let me be very clear,” Mr. DiNapoli said in a statement Monday. “The pension fund will not be used to balance the budget.”

Here’s the rub. The plan to allow the state to borrow from its pension fund originated with Mr. DiNapoli, who has been pushing it since last year. In fact, his plan would allow an even greater amount of borrowing than the agreed plan, and for an unlimited period of time.

Yet on Monday, he was holding himself up as the defender of the pension fund against the plan, and being hailed by labor unions for doing so.

Huh? Mr. DiNapoli’s spokesman, Dennis Tompkins, said the comptroller’s proposal was different from the one agreed upon by state leaders because it would also force state and local governments to set aside funds during prosperous times in reserve accounts that could be tapped during bear markets.

“The key aspect of Tom’s plan is to create these reserve accounts that would force localities to contribute during good times to this fund, so when the volatility comes back in, it smooths it out,” he said.

But Mr. DiNapoli’s plan would also allow billions in borrowing against the pension fund.

“That’s a side piece,” Mr. Tompkins said. “If the state opted into Tom’s plan, obviously there would be some short-term benefit to the state.” He added, “We’re not going to let the governor or anyone else borrow against the fund to balance the budget.”

Mr. DiNapoli’s Republican opponent, Harry Wilson, said in his own statement, “Our unelected state comptroller’s office is now dubiously suggesting that he has not been briefed on the governor’s proposal, yet he proposed a nearly identical plan himself a year ago.”

Mr. Wilson’s statement went on: “He has either been cut out of talks on the future of the state pension plan, making him irrelevant in his duties as comptroller, or he is being less than honest about his role in this outrageous proposal.”

Republicans nominate former hedge fund manager for New York State comptroller

GOP nominates Harry Wilson for NY comptroller

BusinessWeek June 1, 2010

New York's Republican Party has nominated former hedge fund manager Harry Wilson to run for state comptroller against incumbent Democrat Thomas DiNapoli.

Wilson worked at four different financial firms, including Goldman Sachs. The Westchester County resident says his experience assessing investments and making decisions for those companies would serve him well as comptroller. Wilson also served on Democratic President Barack Obama's automotive industry task force. The auto task force was responsible for the overhauls of General Motors and Chrysler.

The nomination came Tuesday, the first day of the Republican state convention.

DiNapoli was endorsed by the Democrats at their convention last week.

The comptroller is the sole trustee of the public workers pension fund and responsible for auditing government.

Note: Harry Wilson has publicly indicated his belief that the state pension plan investment return assumption should be six, not eight percent. kb

Opinion: How muni investors can avoid the risks associated with public pensions

Avoiding Pension Hell for Munis

By RANDALL W. FORSYTH Barron’s June 15, 2010

Huge retirement-plan shortfalls pose risks for states and localities; what investors can do.

AS GREECE'S DEBT COMPLETES ITS JOURNEY across the River Styx to full junk status, it's easy for Americans to cluck condescendingly at the feckless borrowing and spending practices that put the Hellenic Republic in the fiscal hell in which it finds itself.

Moody's Investors Service Monday lowered its rating of Greek debt four notches, to Ba3, essentially matching the cuts by Standard & Poor's and Fitch Ratings. Even though Moody's move followed that of its rivals by a month and a half, it served to remind markets that the European debt crisis is as still with us.

Well, Athens has nothing on Albany, the capital of state of New York in terms of budget legerdemain. Already more than two months late in submitting a budget for the fiscal year that began April 1, New York hasn't had to resort to tactics such as California, which last year paid its bills with IOUs when its coffers ran dry. Instead, New York State merely is funding the state employees' pension system with its IOUs.

"In a classic sleight-of-hand," the New York Times reported over the weekend, New York "will borrow the money to make payments to the pension fund -- from the same pension fund."

Notwithstanding such maneuvers, New York actually is one of the better states in terms of its pension liabilities, according to a municipal-finance expert. "The State of New York has many economic and political issues, but it continues to maintain strong funding levels for its pension liabilities," writes Howard J. Cure, director of municipal research for Evercore Wealth Management of New York, in a report to clients.

Indeed, New York was among only four states that could boast of having fully funded retirement systems as of 2008, with Florida, Washington and Wisconsin being the others. After the budget and economic crises of the 1970s and 1980s, New York was forced implement more affordable pension plans with tiered benefits for newer employees.

Under the tentative agreement for this year's funding, New York state and its municipalities would borrow in order to reduce their pension contributions for the next three years, in exchange for higher payments over the following decade, Cure explains. After 2013, they would have to repay the borrowings with interest. (New York City has its own pension plans and doesn't figure into the proposed arrangement.)

On average, state pension plans are 84% funded, according to a February report from the Pew Center on the States cited by Evercore. Ohio and California are 87% funded, while New Jersey is 73% funded and Illinois is just 54% funded, although Cure the latter two states are "beginning to address some of the most costly, burdensome and generous benefits."

Barron's readers are well aware of the massive threat posed to state and local finances posed by public pension plans from Jon Laing's cover story a few months ago ("The $2 Trillion Hole," March 15.) And, as Laing further noted, taxpayers are up in arms for footing the bill for these lush benefits. \

"Some 90% of public-sector employees enjoy defined-benefit plans with guaranteed pension payments," according to Evercore's Cure, "compared with on 20% of private-sector employees. The growing resentment of taxpayers who largely lack these benefits but must support them through their taxes is thus understandable."

With everyone from Warren Buffett on down has been warning that American states and municipalities are heading into the financial abyss like Greece and Europe's other debt-burdened countries, what can investors do? After all, households own over $1 trillion in state and local securities. And with income-tax rates certain to head higher, intermediate-to-long-term munis remain the fixed-income asset of choice in taxable accounts.

Cure suggests several tacks for muni investors to deal with the risks posed by public pension funds:

Bonds backed by specific revenue streams, such as sales or personal income taxes, with the debt service on the securities getting first dibs. He cites the New York City Transitional Finance Authority, backed by the city's sales- and income-tax revenues in a strong legal structure that segregate them from general credit risks of the state and city of New York.

Essential-service revenue bonds, such as for water, sewer or electric utilities. Even people who "strategically" default on their mortgages keep paying their utility bills so the lights or water don't get turned off. Moreover, Cure points out most municipal utilities typically only distribute power that they purchase. That means fewer employees and hence fewer pensions.

Bonds issued by private colleges and universities. While they are getting increasing competition from cheaper public colleges, private institutions typically have defined-benefit plans. Universities with substantial endowments and that are broadly attractive to students provide strong bondholder protection.

Finally, go for states with stronger pension funding, which as noted includes New York. Illinois and New York finally have begun to address their pension problems, Cure says, while Colorado and Minnesota are challenging existing retirees' benefits. So, he says, "there is hope for progress in other states as well."

The European debt crisis serves as an example of what happens when public-employee expenses reaching the breaking point. And no doubt the pension problems aren't going away anytime soon, barring a swift ascent to Dow 36,000 or some such other miracle. Barring that, bond issuers' pension burden should be a key consideration in muni investors' decisions.

Opinion: Amid projected pension insolvency, some states are adding to their payrolls

Pension Plans Go Broke as Public Payrolls Expand: Joe Mysak

Commentary by Joe Mysak

June 11 (Bloomberg) -- Seven states will run out of money to pay public pensions by 2020. That hasn’t stopped them from hiring new employees.

The seven are Illinois, Connecticut, Indiana, New Jersey, Hawaii, Louisiana and Oklahoma, according to Joshua D. Rauh of the Kellogg School of Management at Northwestern University. Combined, they added 9,700 workers to both state and local government payrolls between December 2007 and April of this year, says the U.S. Bureau of Labor Statistics.

This number, 9,700, illustrates just how hard it is for political leaders to reduce headcount even as tax revenue declines, and even as the gap grows between what governments owe their workers in retirement pay and benefits and the amount they have on hand.

Hard? It’s almost impossible, as that number shows.

Politicians have talked a lot about layoffs during this recession. In most cases, that talk is an empty threat. Nobody wants to fire teachers, or firemen, or policemen, in the name of efficiency or good government.

It’s easy to get passionate about the subject. Let’s take a look at the numbers.

Companies started firing more employees than they hired in January 2008. After pausing in November 2009, they fired more in December. With the economy starting to turn around, they have hired more than fired every month so far this year.

Since the Peak

Employment peaked in December 2007 at 115.6 million, according to the U.S. Department of Labor. During the subsequent two years, companies shed 8.5 million workers, or 7.3 percent.

State and local governments, by contrast, kept hiring right through August 2008. From a peak of 19.8 million, these governments have reduced headcount by 231,000, or 1.2 percent.

This breaks down to 46,000 fewer employees on the state side (0.9 percent) and 185,000 among local governments (1.3 percent).

And this, I think, is what drives people crazy. What our politicians are telling us is that state and local governments are optimally sized -- just right. If tax revenue declines, well, then we’ll just have to find more taxes and fees to replace it. We couldn’t possibly look at the cost-of-labor side of the equation.

Doesn’t that strike you as a tad arrogant and entitled?

If you really want to provoke outrage, of the same populist stripe that once targeted bankers’ bonuses, you have to take into consideration public pensions.

Enviable Dotage

Generous and bloated are the terms that have been used to describe them; critics have set up websites to pillory those government retirees who enjoy $100,000-plus annual pensions and other goodies, such as health-care benefits for themselves and their families for life.

These pensions and benefits are enviable, not to mention envied by all those private-sector employees who long ago were forcibly weaned off such defined-benefit programs to 401(k) plans that were subsequently shellacked by the stock market crash.

What’s equally clear is that such pensions and benefits now seem unaffordable, because those responsible -- state and, sometimes, local governments -- didn’t put away enough, or haven’t invested wisely enough, to pay for them.

“Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities” is the title of Rauh’s recent study. It’s a provocative piece of work, especially for one of its tables, titled, “When Might State Pension Funds Run Dry?”

Circle 2018

Not everyone may agree with Rauh’s conclusions or methodology. He did get my attention with that table, showing Illinois running out of pension-fund assets in 2018; Connecticut, Indiana and New Jersey in 2019; and Hawaii, Louisiana and Oklahoma in 2020.

That’s when I consulted the website of the Bureau of Labor Statistics and was surprised, or perhaps nonplussed is the word, to discover that the state and local governments in these states, combined, added employees even as private companies were firing.

They have joined other state and local governments in firing workers since the peak of August 2008. That month, the seven states and their local governments employed 2,714,800 workers. They have since shed 20,300, and now employ 2,694,500. That’s still more than they carried in December 2007. But I suppose it’s a start.

CalSTRS board postpones decision 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

South Dakota investment staff recommends reducing investment return assumption from 7.75 to 7.50 percent

As investment gains show less potential, SDRS needs bigger gains than in the past

Watertown (SD) Public Opinion June 10, 2010

PIERRE - The financial dilemma facing the South Dakota Retirement System became stunningly clear in the span of a few minutes Wednesday.

The public-employees' pension plan could see a 20 percent gain in the market values of its investments this year but the system would still be underfunded by 11 percent for the long term.

To eliminate that deficit would require above-normal gains for the next 30 years, outside actuary Doug Fiddler told the SDRS board of trustees.

He said investment values would need to increase by an average of 8.2 percent annually through the year 2040.

The 8.2 percent is well above the assumed 7.75 percent annual average which the trustees used in recent years for making decisions.

Moments after Fiddler presented those sobering numbers, State Investment Officer Matt Clark encouraged the board to reduce its expectations on investment gains to below 7.75 percent.

Clark said the professional analysis by his staff suggests that the 7.75 percent is too high. He encouraged the trustees to scale back to 7.5 percent.

SDRS administrator Rob Wylie said that during the next 18 months the trustees will need to look at adjusting their assumptions about investment earnings as well as the members' demographics. "We'll have a lot of challenges to look forward to," Wylie said.

The system currently has about 73,000 members from 470 units of state, county and local governments, school districts, public universities and public safety agencies across South Dakota.

The trustees began talking Wednesday about modifying the benefits system, so that the participating government units carry the risk for providing a floor, while the employees and employers would jointly share the risk of any future improvements in benefits.

"We cannot not recognize the volatility that's in the marketplace right now," Wylie said. "We're nowhere near the position of talking about benefit improvements unless something amazing happens."

The system's investments had a market value of about $6.6 billion on May 31. That's a gain of about $1 billion since July 1, but the value remains well below the peak of $8 billion-plus two to three years ago. "We knew it wasn't worth that $8 billion. Everything was overvalued and due for a setback at some point," Clark said.

The trustees decided to seek a benefit increase when values were at their high point. By the time the Legislature granted the improvements, the values had started their plunge.

The Legislature put corrective modifications into place this year at the trustees' request, including a flexible cost-of-living adjustment that depends upon the system's financial health.

Clark said investment valuations remain attractive. "You've got a better than random chance of having good returns the next three, four years," he said. The markets were 15 to 20 percent overvalued at their peaks, and the discounts reached more than 50 percent at the lows early this year, he said. "The markets had gotten within 10 percent of fair value a month ago," he said. He said they're currently at 14 percent below fair value. When that remaining potential is fulfilled is uncertain."Maybe it will come in a month. Maybe it will come 10 years from now. Maybe it will get cheaper first," Clark said.

Press Release: San Diego County retirement plan reduces investment return assumption from 8.25 to 8.0 percent

SDCERA Board of Retirement adopts 8% annual assumed rate of return

June 3, 2010

A new 8% annual assumed rate of return for the County’s pension program was adopted today by the San Diego County Employees Retirement Association (SDCERA) Board of Retirement. The Board’s vote is a proactive step to benefit its members by adopting an overall financial plan that will strengthen the pension portfolio.

The new 8% annual assumed rate of return acknowledges changes in the financial markets that reduce the likelihood of returns at the 8.25% rate, the assumed rate SDCERA used for the past 13 years. The Board’s decision today [June 3] balances the fluctuations in the current economic market and the fund’s historical ability to generate strong returns – averaging 10.4% over a 25 year period. The adjustment will mean that the County and active County employees will increase their contributions to the pension fund.

“In the current economic environment, it is important the Board of Retirement implement sound financial decisions that will ensure the future retirement benefits for our members,” said Brian White, Chief Executive Officer. “The vote to adopt an assumed rate of return of 8% is supported by extensive research and calculations that were used by the Board to help implement the most prudent financial strategy.”

In keeping with the Board’s responsibility to make sound investment decisions, the Board adopted a new asset allocation model earlier this year. The new model and the adopted 8% assumed rate of return are proactive measures: the asset allocation model is designed to generate returns higher than the previous portfolio while minimizing exposure to potential losses from market fluctuations; and, the assumed rate of return sets a prudent target that recognizes the portfolio’s ability to generate returns in a variety of economic environments.

The asset allocation model adopted by the Board earlier this year was designed to improve

diversification and protect against losses by decreasing the allocation to equity and increasing

the allocation to U.S. Treasuries. Typically if the stock market goes down, then the opposite is

true of Treasuries. By further diversifying assets, there is greater opportunity for SDCERA’s

portfolio to reach its goals.

The Segal Group, an independent actuarial firm, prepared the 2009 Actuarial Experience Study

and presented it at the June 3 Board of Retirement meeting. The purpose of the Experience

Study is to conduct an overall review of the assumptions the Board uses when considering

whether the contribution paid by members and their employer will be sufficient to pay the

retirement benefits for all current and future SDCERA members.

The assumptions the Board uses, which are reviewed every three years as part of the Experience Study, are based on demographic such as retirement age, salary growth, life expectancy in retirement and economic factors such as how much the plan’s investments will earn. The Board recognizes that past performance is not an indicator of future results, and as such, will continue to regularly assess the fund’s performance and make any necessary modifications in the future.

SDCERA is an independent association established by the County Employees Retirement law of 1937, which governs 20 California county retirement systems. SDCERA provides retirement

benefits for approximately 36,000 eligible current and former employees, and retirees of the County of San Diego.

CalPERS board committee reduces expected—not assumed—investment returns

CalPERS cuts expected return rates

Pensions & Investments June 14, 2010

CalPERS lowered its estimate of how much it expects to earn in the 10 years ended 2021.

Return estimates discussed at Monday’s investment committee meeting calculate an annualized return of 7.54% for the 10-year period.

This compares to the 8.3% fund officials previously concluded they could earn. They attributed the drop to changes in the global economy and their increased inflation estimate of an average 3% per year over the period vs. last year’s estimate of 2.5%.

Given inflation, CalPERS real returns for the 10-year period are estimated to be an annualized 4.54%, vs. last year’s estimate of 5.8%.

In fixed income, the return estimate dropped to an annualized 4.5% from 5.25% last year; in public equities, 7.75% from 8.6%; and in cash, 3.25% from 3.75%.

Private equities, on the other hand, are calculated to increase to an annualized 9% estimated return; last year, fund officials predicted they would return an annualized 8.75%.

The projected returns for real estate and inflation-linked investments remain the same — an annualized 6%.

* * * *

Access the CalPERS investment committee agenda packet here:

http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/invest/201006/item05a-00.pdf

Access accompanying material here:

http://www.calpers.ca.gov/index.jsp?bc=/about/board-cal-agenda/agendas/invest/home.xml

and go to Agenda Item 5.

Federal Reserve reports combined value of public pension assets grew for fourth consecutive quarter

The Federal Reserve last week reported that the combined value of defined benefit plan assets held by state and local governments increased to $2.79 trillion, up by $108 billion, or 4.0 percent, from the level for the quarter ended 12/31/09. The 3/31/10 figure is higher by $626 billion, or 29 percent, from its 3/31/09 level, which was near the low point of the 2008-09 equity market decline. Data was reported in the Fed’s quarterly Flow of Funds report for March 31, 2010. kb

Aggregate value of state and local government pension funds

Alaska settles actuarial lawsuit for $500 million

Alaska's pension suit settled for $500M

JUNEAU EMPIRE June 13, 2010

Alaska officials announced late Friday that they'd won a record actuarial malpractice settlement from a consulting firm they say knowingly gave bad advice to the Alaska Retirement Management Board, costing the state billions.

Mercer Inc., the actuarial consulting subsidiary of the huge Marsh & McLennan Companies Inc. insurance brokerage firm, has agreed to pay $500 million to the state, Attorney General Dan Sullivan announced at an Anchorage press conference. "We think this is a fantastic settlement for the state," he said, adding that the previous record actuarial malpractice claim was $110 million.

In exchange for the $500 million settlement, which will net the state $403 million after legal expenses and fees, the state is giving up claims potentially worth billions.

While Sullivan said he was confident in the state's ability to win a trial, that option had risks as well. "Though we think our case in strong, a judge and jury may not decide in our favor," he said. Any verdict would almost certainly result in lengthy appeals as well, he said.

The state originally sued for $1.8 billion, and then bumped it to $2.8 billion after additional errors were found. Some of those claims were for unfair trade practices, which include a penalty of treble damages, which significantly increased the risk for Marsh.

The case had been scheduled to go to trial in Juneau in July, following the failure of an earlier attempt by Mercer to have the case dismissed.

The state's case claimed that Mercer failed to correctly estimate the costs the state would face in rising health care costs, in part because it didn't use a health care actuary to develop those costs. Later, after Mercer discovered that it had provided Alaska with flawed data, it knowingly did the same thing the next year, the suit claimed.

"Mercer made some very, very bad mistakes," said Sam Trivette, vice-chair of the Alaska Retirement Board, which oversees the Public Employee and Teacher Retirement Systems. Trivette, of Juneau, represents public employees on the board. "It's clear that they committed fraud, all of us, I think, felt there was a substantial amount of money lost because of their actions."

The state retirement systems currently have an unfunded liability of $8.9 billion, which is the difference between the value of the reserves they have on hand and what they'll be worth when they're needed to pay pension benefits.

Sullivan said the settlement would not solve the state's retirement woes, however. "It's not a silver bullet for the state's pension plan challenges," he said, because Mercer was only responsible for a portion of the retirement shortfalls.

The state said that it suffered a direct loss of $1.9 billion because of Mercer's actions, including $1.2 billion that it failed to collect from participants and $700 million in lost investment earnings, but there were likely other impacts as well.

The state mistakenly thought its pension plans were better funded than they actually were, and may have agreed to pay raises that it wouldn't have otherwise been able to afford.

After accurate numbers became available, the state reacted by making dramatic changes to pensions. In 2005, the state did away with defined-benefit pension plans for new employees and shifted retirement responsibility to them with a controversial 401(k)-style plan.

Sen. Hollis French, D-Anchorage, Friday called the settlement "gratifying" but said Mercer's mistakes led the state to gut its retirement system and harm public employees. "We must fix that mistake for our teachers, our firefighters and our police officers by returning them to a system that provides predictable and secure benefits," he said.

The $403 million settlement amount will go to strengthening the retirement systems, but retiree benefits are guaranteed and would be paid anyway.

Sullivan said Assistant Attorney General Mike Barnhill handled the case for the state, spending five years developing the case that sought to recover money for the state's workers and retirees.

Representing the state on a contingency basis was the New York-based law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. It will receive most of the $97 million in legal expenses. Sullivan said the state negotiated a contingency fee of 18.5 percent, well below some contingency fees that have ranged as high as 33 percent.

A Mercer spokesperson did not return phone calls from the Empire Friday or Saturday, but the company issued a statement acknowledging the statement and continuing to deny liability. The statement said one of the reasons it settled was the risk of continuing a case in which it was facing claims of at least $2.8 billion as well as "the uncertainty of the outcome of a jury trial in Juneau, with its high concentration of plan participants."

The state fired Mercer after the errors came to light.

Maryland state retirement system files suit against former actuarial consultant

Md. pension system tries to recoup $73M from actuary

Milliman rebuffs state’s claims; sues over pension loss dispute

Baltimore Business Journal June 11, 2010

The Maryland state pension system is blaming its former auditors for years of miscalculations it says cost the system nearly $73 million in underfunding and lost income. And it wants Milliman Inc., the system’s auditors until 2005, to pay up.

The dispute between Milliman and the Maryland State Retirement and Pension System has wound up in Circuit Court for Baltimore City, where it is playing out in a trio of lawsuits. The dispute will get its first public airing in court on June 11.

In court papers, the pension system alleges that over a 22-year period between 1982 and 2004, Milliman miscalculated the amount the state should have paid into the fund on behalf of members of the Maryland State Police, judges and other state law enforcement officers, including the Maryland Transit Administration police.

“We’re moving ahead to try to collect the $73 million,” said Dana Reed, an assistant attorney general representing the pension system in the dispute.

Milliman’s job was to conduct an actuarial review of the fund each year and tell the fund’s trustees how much the state needed to contribute to cover payments for current and future retirees. But state officials say Milliman failed to properly account for benefits the three systems pay a surviving spouse after the retiree dies.

As the pension fund’s actuaries, Milliman did not handle the investing of the fund’s assets. That is the job of investment advisers the fund hires. The advisers are overseen by the pension system’s Chief Investment Officer Mansco Perry III and the funds’ trustees.

Jim Loughman, director of public affairs for Milliman, which is headquartered in Seattle, said the company had no comment on the matter. “It is a long-standing policy that we don’t comment on pending litigation,” Loughman said. “This is an intermediate step in a lengthy litigation process, and as such, we can’t comment further.”

In January, the Maryland State Board of Contract Appeals sided with the state, ruling that Milliman should pay $72.9 million for breaching its contract as a result of the alleged mistakes. The appeals board awarded the state about $34 million, representing the shortfall in contributions, and nearly $39 million in money that would have been earned had those contributions been made.

But the administrative ruling is just the start of a lengthy legal drama that could go on for years.

Milliman, meanwhile, has filed two court cases. One seeks to overturn the Board of Contract Appeals’ decision. A second suit seeks to recoup from the state any money a court orders Milliman to pay. The state should be responsible for making any payments to the alleged shortfall, Milliman said in court papers.

It is as if the state has two pockets, Milliman said. The state transfers money from one pocket into the other pocket to pay for its pension obligations. But any underfunding meant the state got to keep its money in the first pocket, where it either was invested or used for other important purposes, Milliman said.

The state pension fund administers pensions for more than 116,000 retired state workers and beneficiaries and more than 251,500 state workers who are still working. The fund had $33.7 billion in assets as of March 31, the most recent date for which figures are available. That was up 3.6 percent from Dec. 31, 2009. The fund has increased by an average of 3.96 percent a year in each of the past five years ending March 31.

Ohio Retirement Study Council votes to commission fiduciary audit of state highway patrol retirement system

State retirement fund to get audit

Inaccuracies discovered in Ohio Highway Patrol pension data.

Dayton Daily News June 11, 2010

COLUMBUS — For the first time in its 66-year history, the Ohio Highway Patrol Retirement System will receive a systemic fiduciary audit by an outside consultant.

The Ohio Retirement Study Council voted unanimously Wednesday, June 9, to invite three consulting firms to make their pitches this summer on how they would conduct the audit.

A fiduciary audit must be done every 10 years for each of Ohio’s five public pension systems, according to a law adopted in 2004 in the wake of pension system scandals.

In October of last year an independent consultant — Evaluation Associates — discovered inaccuracies in HPRS’ data. The Ohio Retirement Study Council decided to put the highway patrol system next in line for a full review.

HPRS must pay for the audit, which is expected to cost about $250,000. However, the system’s proposed 2010 budget does not include the fiduciary audit and the system’s minutes indicate no annual budget was ever formally adopted. HPRS is now five months into its fiscal year.

HPRS Executive Director Dan Weiss said he is uncertain whether the board voted to adopt the budget and that action was inadvertently left out of the minutes or if the board still needs to take a budget vote.

Evaluation Associates, which was hired by the study council, raised concerns about HPRS’ investment portfolio not matching its investment policy and about the lack of written documentation on how the system selected its investment advisors.

HPRS represents 2,900 active and retired patrol members and their beneficiaries. It has investment assets of $664 million.

“We need to make sure the Ohio Retirement Study Council does what we are charged to do and that is to monitor these systems,” said state Sen. Sue Morano, D-Lorain, a council member.

The State Teachers Retirement System and Ohio Police & Fire Pension Fund underwent fiduciary audits in 2006.

San Diego city pension fund names new director

San Diego’s Pension Fund Names New CEO

City News Service June 11, 2010

SAN DIEGO — The interim chief executive officer of the San Diego City Employees' Retirement System was selected today to permanently head the city's pension fund.

Mark Hovey was named interim CEO of SDCERS after David Wescoe resigned last November. Hovey joined SDCERS in 2007 as its chief financial officer.

The SDCERS Board of Administration voted unanimously to select Hovey as the CEO from a field of 65-plus candidates following a nationwide search.

"Mark Hovey is an outstanding executive and has proven to be a very effective leader," said Mark Sullivan, the board's president.

"Through an extensive national search process, which garnered over 65 candidates, Mark's knowledge, experience and professionalism elevated him above the competition every step of the way," he said. "I am confident that his high ethical standards and pursuit of operational excellence will move SDCERS even closer to its pursuit of being the best run public pension system in the country."

Wescoe, who had headed SDCERS since 2006, left to take a job as executive administrative director of the Motion Picture Industry Pension & Health Plans.

President Obama requests emergency funding for state and local governments to “avoid massive layoffs”

Obama pleads for $50 billion in state, local aid

Washington Post June 13, 2010

President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid "massive layoffs of teachers, police and firefighters" and to support the still-fragile economic recovery.

In a letter to congressional leaders, Obama defended last year's huge economic stimulus package, saying it helped break the economy's free fall, but argued that more spending is urgent and unavoidable. "We must take these emergency measures," he wrote in an appeal aimed primarily at members of his own party.

The letter comes as rising concern about the national debt is undermining congressional support for additional spending to bolster the economy. Many economists say more spending could help bring down persistently high unemployment, but with Republicans making an issue of the record deficits run up during the recession, many Democratic lawmakers are eager to turn off the stimulus tap.

"I think there is spending fatigue," House Majority Leader Steny H. Hoyer (D-Md.) said recently. "It's tough in both houses to get votes."

Democrats, particularly in the House, have voted for politically costly initiatives at Obama's insistence, most notably health-care and climate change legislation. But faced with an electorate widely viewed as angry and hostile to incumbents, many are increasingly reluctant to take politically unpopular positions.

The House last month stripped Obama's request for $24 billion in state aid from a bill that would extend emergency benefits for jobless workers. Senate Majority Leader Harry M. Reid (D-Nev.) hopes to restore that funding but with debate in that chamber set to resume this week, he acknowledges that he has yet to assemble the votes for final passage. Obama's request for $23 billion to avert the layoffs of as many as 300,000 public school teachers has not won support in either chamber.

Mixed signals

Senior Democratic congressional aides said those initiatives have not gained traction in part because the White House has not made additional spending on the economy a clear priority.

In recent weeks, for instance, the White House has appeared more intent on cutting spending -- threatening to veto a defense bill over a jet engine project that the Pentagon views as unnecessary and urging every agency to come up with a list of low-priority programs for elimination. Obama has also proposed a three-year freeze in discretionary spending unrelated to national security, an idea endorsed by leaders of both parties at a meeting at the White House last week, according to Obama's letter.

With the letter, however, Obama makes a direct and unequivocal case for additional "targeted investments," including state aid and several less-expensive initiatives aimed at assisting small businesses. He specifically calls for passage of the measure that is before the Senate, which would extend unemployment benefits and offer states additional aid, increasing deficits by nearly $80 billion over the next decade.

Obama asks lawmakers to be patient on the deficit, noting that a special commission is at work on a comprehensive deficit-reduction plan. "It is essential that we continue to explore additional measures to spur job creation and build momentum toward recovery, even as we establish a path to long-term fiscal discipline," Obama wrote. "At this critical moment, we cannot afford to slide backwards just as our recovery is taking hold."

In an interview, White House Chief of Staff Rahm Emanuel said the letter is intended to settle the growing debate over the opposing priorities of job creation and deficit reduction and "where you put your thumb on the scale." "While some people say you have to spend and some people say you have to cut, the president wants to talk about both cuts and investing," Emanuel said.

GOP alternative

Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell (R-Ky.), called the letter full of "contradictions."

"He's calling on Congress to pass a [jobless] bill that will add about $80 billion to the deficit, but then calls for fiscal discipline; he says these measures need to be targeted and temporary, but then calls for extending programs passed in the stimulus more than a year ago," Stewart said in an e-mail.

Republicans have offered an alternative package that proposes to cover the cost of additional jobless benefits -- but not aid to state governments -- by cutting federal spending elsewhere. In contrast to the Democratic bill, the GOP measure would reduce deficits by nearly $55 billion over the next decade, according to the nonpartisan Congressional Budget Office.

The politics of the Democratic bill before the Senate are further complicated because it has become a grab bag of must-pass provisions. In addition to state aid and more money for jobless benefits, it includes a plan to extend $32 billion in expired tax breaks for individuals and businesses and a separate provision, known as the "doc fix," that would postpone until 2012 a scheduled pay cut for doctors who see Medicare patients.

When it was first unveiled last month, the total cost of the package approached $200 billion, with only about $50 billion paid for through higher taxes on multinational corporations, hedge fund managers and certain small businesses. Conservative Democrats in the House balked, forcing House leaders to scale back the doc fix and strip out the state aid, as well as $6 billion in health insurance subsidies for jobless workers. In the letter, Obama asks Congress to reconsider that decision. The House narrowly approved the trimmed-down bill.

Now the Senate is struggling to assemble a 60-vote coalition for the measure. Reid moved last week to restore the state aid, but the CBO said the resulting measure would add nearly $80 billion to budget deficits over the next decade. Moderates objected, saying they could not support such a big increase in borrowing at a time when the total national debt has topped $13 trillion, nearly 90 percent of the gross domestic product.

On Saturday, as Obama called for urgent action, senior Senate aides said the scramble for votes would delay final action on the bill for at least another week.

Opinion: Public employee unions are on the defensive; they need to reboot and rebuild public support

Public employee unions on the defensive

Peter Scheer San Francisco Chronicle June 13, 2010

For public employee unions - those representing police, firefighters, teachers, prison guards and agency workers of all kinds at the state and local levels - these are the worst of times.

Despite record high membership and dues, and years of unparalleled clout in state capitols, public-sector unions find themselves on the defensive, desperately trying to hold onto past gains in the face of a skeptical press and angry voters. So far has the zeitgeist shifted against them that on one recent weekend, government employees were the butt of a "Saturday Night Live" skit, and the next day, a New York Times Magazine cover article proclaimed "The Teachers' Unions' Last Stand."

Public unions' traditional strength - the ability to finance their members' rising pay and benefits through tax increases - has become a liability. Although private-sector unions always have had to worry that consumers will resist rising prices for their goods, public sector unions have benefited from the fact that taxpayers can't choose - they are, in effect, "captive consumers."

At some point, however, voters turn resentful as they sense that:

-- They are underwriting, through their taxes, a level of salary and benefits for government employment that is better than what they and their families have.

-- Government services, from schools to the Department of Motor Vehicles, are not good enough - not for the citizen individually nor the public generally - to justify the high and escalating cost.

We are at that point.

In California, government-sector unions, once among the most entrenched and powerful labor groups in the country, mainly have themselves to blame. For most of the postwar period, they were a force for progressive change, prospering by winning over public support for their agenda.

In the 1970s and '80s they backed laws like the Public Records Act and Brown Act to make state and local government more transparent. Because unions enjoyed broad-based political support, efforts to enhance government accountability and responsiveness to voters were seen - correctly - as benefiting the unions and their members. The public interest and public employees' interests were aligned.

But the unions switched strategies. Although the change was gradual, by the 1990s, California's government unions had decided that, rather than cultivate voter support for their objectives, they could exert more influence in the Legislature, and in the political process generally, by lavishing campaign contributions on lawmakers. Adopting the tactics of other special-interest groups, government unions paid lip service to democratic principles while excelling at the fundamentally anti-democratic strategy of writing checks to legislators, their election committees and political action committees.

While not illegal (in fact, such contributions are constitutionally protected), the unions' aggressive spending on candidates put them on the same moral low ground as casino-owning tribes, insurance companies and other special interests that have concluded that the best way to influence the legislative process is to, well, buy it.

Public unions' distrust of voters, and abandonment of government transparency as a union objective, could be seen in their successful push, in the mid-1990s, for a change to the Brown Act, California's open-meeting law. The new provision ensured that the public would have no access to collective-bargaining agreements negotiated by cities and counties - often representing 70 percent or more of their total operating budgets - until after the agreements were signed.

What happens when voters and the press have no opportunity to question elected officials about how they propose to pay for a lower retirement age, better health benefits for retirees' dependents, richer pension formulas and the like? The officials make contractual promises that are unaffordable, unsustainable and, in general, don't come due until after those elected officials have left office. In the case of Vallejo, this veil of secrecy and the symbiotic relationship it fosters led to municipal bankruptcy.

The biggest blow to unions' public support has come from revelations about jaw-dropping compensation and pension benefits. Police have received unwelcome attention for budget-busting overtime and the manipulation of eligibility rules for "disability pensions," which provide higher benefits and tax advantages. Other government employees, particularly managers, have been called out for "pension spiking": using vacation time, sick pay and the like to boost income in the last years of employment, which are the basis for calculating retirement benefits.

Such gaming of the system boosts starting pensions to levels that can approach, and even exceed, employees' salaries. Some examples from the reporting of the Contra Costa Times' Daniel Borenstein: A retired Northern California fire chief whose $185,000 salary morphed into a $241,000 annual pension; a county administrator whose $240,000 starting pension was 98 percent of final salary; and a sanitary district manager who qualified for a $217,000 pension on a salary of $234,000. At a time when most Californians anticipate an austere retirement (if they can afford to retire at all), government pensions are a source of real voter anger.

The harm to the credibility of public employee unions from these excesses is made far worse by the unions' attempts to hide them. The revelations about pay and pension abuses have surfaced only as a result of lawsuits. (The First Amendment Coalition has been a plaintiff in several of these cases.) Public employee unions, could have, and should have, taken the lead to stop abusive pension practices, which mainly involve managers and other senior staff. Instead, they have vigorously opposed disclosure of individual employees' salaries and pension amounts.

Public employee unions need to reboot. The old strategy of cynically buying political influence and excluding the public from decision making has run its course. Unions can rebuild public support by recommitting to an agenda of open government in the public interest. If they don't, they will be further marginalized.

Peter Scheer, a lawyer and journalist, is executive director of the First Amendment Coalition, a California nonprofit dedicated to government transparency and political accountability. Contact him at www.firstamendmentcoalition.org.

Analysis disputes study finding that government workers are underpaid

Are Government Workers Underpaid? No

By Andrew G. Biggs American Enterprise Institute June 9, 2010

Once all promised benefits are included, government employees at all levels—local, state, and federal—receive significantly greater total compensation than private-sector workers.

A recent research paper released by the Center for State and Local Government Excellence argues that employees of state and local governments earn salaries and benefits significantly less than similar private-sector workers. But this study omits unfunded pension and retiree health benefits for public-sector workers. Once unfunded promises are included, state and local employees may receive significantly greater total compensation than private-sector workers.

Study authors Keith Bender and John Heywood of the University of Wisconsin-Milwaukee analyzed differences in salaries between private-sector workers and state and local employees using the Current Population Survey (CPS). Even when controlling for differences in age, education, race, marital status, and other factors, they found that state and local workers received salaries around 11 percent lower than otherwise identical private-sector employees.

As far as this goes, it’s fine. My former AEI colleague Jason Richwine (now ensconced at the Heritage Foundation) and I used the same data and methods to analyze the pay of federal employees (who, we found, received around a 12 percent pay premium relative to similar private-sector workers). Our figures regarding state and local salaries match those of Bender and Heywood. It’s quite possible that state and local workers are underpaid even as federal workers extract a premium.

In addition to health coverage and other benefits that are consumed today, most state and local employees also become eligible for defined benefit pension and health benefits in retirement.

But Bender and Heywood’s result holds only if public and private workers receive similar benefits, as the authors believe. Since the CPS doesn’t report benefits directly, Bender and Heywood use data from the National Compensation Survey (NCS), which reports how much employers spend on a variety of non-wage benefits. According to the NCS, both state and local governments and large private-sector employers pay fringe benefits equal to around one-third of their total compensation. Put another way, for each dollar of salary they receive, their employer devotes around 50 cents toward benefits. If these data are dispositive, then state and local workers receive total pay around 11 percent below private employees.

But here’s the problem. In the private sector, the amount employers spend on workers’ benefits is a good measure of what the employees themselves will receive. Most private-sector employers pay matching contributions into 401(k)-type pension plans, premiums for health coverage, and other similar benefits. Once employers have paid these costs, their obligation ends.

Not so in the public sector. In addition to health coverage and other benefits that are consumed today, most state and local employees also become eligible for defined-benefit pensions and health benefits in retirement. But state and local governments haven’t come close to fully funding these obligations. That means that the amount government employers spend today may be well less than what employees will actually receive when they retire. (Just because these benefits are underfunded doesn’t mean they won’t be paid; in most cases, payment is required by law or state constitutions.)

Given the data available, it’s not easy to precisely calculate the effect of unfunded benefits on public-sector compensation. But here’s an initial attempt to shake the numbers out, starting with defined-benefit pensions.

As of 2006, pensions were funding only around 9 of the required 11 percent, leaving a gap of 2 percent of pay that is unfunded.

State governments need to set aside around 11 percent of workers’ pay each year to cover existing pension costs and the additional benefits generated by workers in that year, according to 2006 data compiled by the Center for Retirement Research at Boston College. Due to rising costs and declining pension assets, today that required contribution rate is likely higher. But, as of 2006, pensions were funding only around 9 of the required 11 percent, leaving a gap of 2 percent of pay that is unfunded.

That doesn’t sound like much. But it’s also increasingly understood these figures are a significant underestimate of what pensions truly should be funding. As I’ve written elsewhere, if pension funding were calculated using private-sector accounting methods—which is in any case a good approach, since we’re trying to compare public- and private-sector benefits—public pensions’ reported funding shortfall of $438 billion (as of 2008) rises to slightly over $3 trillion. To fully fund these pension promises would require annual government contributions not of 11 percent of workers’ wages, but of around 75 percent. But since these benefits will be paid, it makes sense to focus on what governments should fund, not on what they’re currently funding.

It’s a similar story with retiree health benefits, which generally provide full health coverage for public employees from the time they retire until they become eligible for Medicare and so-called “Medigap” coverage thereafter. Overall retiree health liabilities are smaller than for pensions—around one-fifth the size, according to a recent Pew Foundation report. The problem is that they’re almost entirely unfunded.

To fully fund these pension promises would require annual government contributions not of 11 percent of workers’ wages, but of around 75 percent.

A study by the Center for State and Local Government Excellence showed that states should devote an amount equal to around 13 percent of public employees’ pay to funding their retiree health benefits. But as a recent Pew Foundation report showed, most states fund only around one-third this much. In other words, state and local workers are promised unfunded retiree health benefits worth around 9 percent of pay, but this value isn’t reflected in compensation data.

I’m hesitant to put a total value on these unfunded promises, given the multiple moving parts and haphazard state of the data. But if public-sector workers are promised pension benefits that should require another 60 percent of wages to cover and retiree health benefits that should require an additional 9 percent of wages, then total effective compensation is almost 50 percent higher than you would conclude based solely on what government currently pays its employees. That’s more than enough to make up for Bender and Heywood’s 11 percent gap in what government employers currently pay relative to the private sector, and would leave state and local workers almost one-third better paid overall.

Now, there may be some reasons to scale these estimates back a bit. But the generosity of public-sector pension and retiree health benefits and the degree of underfunding mean that looking only at what government employers currently pay toward benefits isn’t representative of what government employers—and the taxpayers—ultimately will pay for these benefits.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. From 2008 to 2009 he served as principal deputy commissioner of the Social Security Administration and as secretary of the Social Security Board of Trustees.

Virginia county will stop paying employee pension contributions

County quits retirement contribution for new workers

Daily Progress (Charlottesville) June 9, 2010

Albemarle County officials decided Wednesday to stop picking up the tab for what local government employees have to pay into the state retirement system.

Albemarle, along with the bulk of localities in Virginia, has long been required to pay what is considered the employees’ retirement contribution share. But earlier this year, the General Assembly gave localities the option to make new employees pay the contribution themselves — which equals 5 percent of their salaries — so Albemarle decided to make new employees start paying.

The change applies only to new employees who have never been in the Virginia Retirement System and are hired after July 1.

The benefit payouts will be deducted from employees’ paychecks.

Depending on how many employees the county hires after July 1, the move at Wednesday’s joint meeting between the Board of Supervisors and School Board could save the county perhaps a couple hundred thousand dollars per year, officials estimated.

Heading into the meeting, some school officials wanted to have the Albemarle government continue to pay for the retirement contributions. But School Board members and supervisors said it might be better to increase new employees’ salaries by 5 percent and in return have employees pay the contribution.

Going that route could have multiple benefits, some officials said. For one, offering potential teachers, for example, bigger dollar figures for their salaries could give Albemarle a competitive edge over other localities, officials argued, noting that some prospective employees get excited by the salary figure presented to them and spend less time analyzing what deductions are included.

Also under the system, when the employees pay for their shares of the contribution themselves, they are able to draw funds from the system after fewer years of work than had the county picked up the bill.

As for the employees who are hired after July 1 for fiscal 2011, while they will have to fork over 5 percent of their pay for retirement, they will not get a salary bump, as the fiscal 2011 budget is already drawn up.

Officials left on the table the possibility of covering new employees’ retirement contribution shares beginning in fiscal 2012, but elected heads said they needed more time to crunch dollar figures and weigh their options.

Arizona city experiencing consequences of not capping early retirement incentive

No retirement buyout cap in 2009 haunts Scottsdale

Arizona Republic June 8, 2010

An audit of Scottsdale's retirement-incentive program scheduled for release this week is expected to shed more light on just how generous the city was in offering buyout packages to 100 of its employees in 2009. The program has stirred controversy for the past year, even contributing to the dismissal of Scottsdale's former city manager, after Scottsdale officials said they learned the city was liable for far more than they were led to believe.

An Arizona Republic review of the six largest Valley cities that offered retirement incentives last year shows Scottsdale was the only city that did not cap program costs.

Scottsdale council members say city management didn't fully disclose the true costs of the program. They also were upset that some of the retirees who benefited from the program had a hand in developing terms of the incentives.

Scottsdale allowed 100 employees to retire in exchange for one week of pay for every year of service to the city. Without caps, the unlimited payouts allowed three employees to leave with $100,000 apiece on top of receiving six-figure increases to their pension benefits. The program cost the city roughly $9 million on top of the medical and vacation leave that employees cashed out.

Of the six largest cities that offered incentives, Tempe's costs were second to Scottsdale at roughly $7.5 million and the city removed 130 employees from the payroll.

Interim Scottsdale City Treasurer David Smith said Scottsdale must pay the Arizona State Retirement System $5.2 million in "unfunded liability." That is what the city owes the system by allowing employees to retire earlier than they otherwise would have and increasing retiree pension benefits through buyouts.That unfunded liability could have been reduced with incentive caps.

"The thing that creates this (unfunded liability) is the fact that these retirement monies paid get lumped into retiree earnings and boosts their pensions," said Smith, who became treasurer after the program was implemented. "It creates a big pile of money we have to pay." Of the 100 who retired in Scottsdale, 56 received pension spikes. Several cities said they made sure to cap
their programs specifically to keep down costs and avoid large unfunded liabilities.

In Phoenix, in order to limit expenses, a $3 million cap was placed on the program, according to an e-mail to The Republic from city spokeswoman Toni Maccarone. Phoenix, however, did not need to use the entire $3 million.

Tempe Deputy Human Resources Manager Jon O'Connor said the city capped the program at a maximum of $50,000 per employee "to avoid excessive payouts to participants with significant tenure and limit the total program cost."

In Peoria, employees received one week of pay for every year of service, but were limited to 10 weeks. "We wanted to limit our exposure," Peoria Deputy City Manager Susan Thorpe said.
"You could get people who have been there 30 years and they'd get 30 weeks' pay if we didn't do the cap. We wanted to make it reasonable, fiscally responsible and attractive."

John Little, who was Scottsdale city manager at the time, has stood by the program, saying the retirement buyouts will save the city more than $9 million every year."Where would (the city) be this year without the savings accrued from the retirement program?" Little asked. "They'd be cutting services today. It's true then, and it's true now."

Scottsdale Councilman Ron McCullagh called the city's retirement-incentive program "disenchanting." He and other council members were under the impression that Scottsdale's program would cost $2.8 million to $5.3 million based on reports provided to elected officials
before they unanimously approved the program. "I thought we asked the right questions and I
thought we had a city manager at the time who would tell us if there were significant changes in the numbers used to justify estimates and that didn't happen," McCullagh said.

Little said the initial figures offered to the City Council were used as estimates to illustrate how the program works. He also said the council and the Scottsdale Budget Review Commission had been updated on how the program was going several times. "I anticipate them having selective memory about that," Little said.

Opinion: President Obama should remember that public pension funds are major holders of BP shares

Obama's crude rhetoric targets BP, hits state pensions

Commentary: Populist attacks ignore inconvenient truth June 9, 2010

LONDON (MarketWatch) -- President Obama's ramped up rhetoric over the BP oil spill is beginning to have an effect.

Analysts Wednesday began to show concern for the oil giant's dividend, with Societe Generale putting the chance of a skip of the current quarter's payout at 50-50. And company insiders and shareholders are apparently contemplating whether Chief Executive Tony Hayward or Chairman Carl-Henric Svanberg should be offered up as a corporate sacrifice. But even as the president keeps looking around for somebody's "ass to kick," to distract from the botched federal response to the spill, he should be mindful of the law of unintended consequences.

Because according to data from FactSet Research the evil scum who own BP (NYSE:BP) (LONDON:UK:BP.) include:

· The New Jersey Division of Investment (51 million shares)

· The California Public Employees Retirement System (36 million shares)

· The Pennsylvania Public School Employees Retirement System (7.1 million shares)

· The Teachers Retirement System of Alabama (4.5 million shares)

· The Employees Retirement System of Texas (4.1 million shares)

· The Ohio Public Employees Retirement System (1.1 million shares)

· The Illinois State Board of Investment (1.1 million shares)

· The Indiana Public Employees' Retirement Fund (0.7 million shares)

· The Washington State Investment Board (1.2 million shares)

Of special note, the United Nations Joint Staff Pension Fund holds 21.9 million shares of BP.

At a time when unfunded state pension liabilities are yet another looming fiscal catastrophe, presidential jawboning against an important holding is hardly helpful.

Corporate pensions and sponsors pressure Congress over swap provision in pending financial reform bills

Pension funds pressure Congress over swaps

Pensions & Investments June 14, 2010

Congress should revise key provisions in pending financial reform bills to ensure that pension plans are free to continue using swaps to manage risk, said more than 150 pension plan sponsors and organizations in a letter to all lawmakers.

One provision on the industry’s hit list in the Senate bill, approved May 20, would require swap dealers to assume a fiduciary role when entering into swaps with plans, effectively precluding the transactions, the letter said. “This would require swap dealers to have conflicting fiduciary duties: one fiduciary duty to its shareholders; and a conflicting fiduciary duty to the plan in negotiating the terms and price of a swap,” the letter said. “Clearly, swap dealers cannot fulfill both duties.”

The House bill, approved in December, would require plans that had a substantial net position in outstanding swaps to meet a series of capital, margin, business conduct and registration requirements, the letter, issued Friday, said. “This could lead to swaps being an economically unrealistic investment for plans,” the letter said.

In addition, the letter said the statutory definition of swaps in both the House and Senate bills was so broad it could be interpreted to include at least some stable value funds. “The bills inadvertently threaten the existence of these funds by appearing to include at least some of them in the broad definition of swaps,” the letter said.

Senate and House leaders are trying to work out the differences between their bills, hoping to approve final legislation before July 4, said Ted Godbout, a spokesman for the ERISA Industry Committee, which signed the letter.

Among the other organizations that signed the letter were the American Benefits Council, the Committee on Investment of Employee Benefit Assets and the National Association of Manufacturers.

Editorial: For millions of Americans approaching retirement, the financial crisis is just about to begin

A Nation of Helen Thomases

Wall Street Journal June 11, 2010

Say what you like about Helen Thomas, but she's the future of America.

No, not for her militant anti-Zionism. For working well into the third age of life—and long after some of her colleagues wished she'd moved to Florida.

The dean of the White House press corps was 89 when the latest brouhaha forced her, finally, to holster her pen. Few of us will work that long. But we'll still be working long after turning 65. And it won't be because we love our jobs. It will be because we don't have anywhere near enough to retire on.

The biggest, but most underreported, financial story in America is the looming retirement disaster. Eighty million baby boomers are approaching retirement, and most have absolutely no idea what's going to hit them. For them the financial crisis isn't over. It's just about to begin.

Here are seven reasons we're about to become a nation of Helen Thomases.

1. We're going to live longer than we think.

If you make it to 65 today, you don't just need enough money to last you another 10 or 15 years. Government data show that the average person will live nearly another 20 years. And that's merely the average. If you want to make sure you don't outlive your savings, you need to plan for much longer. More than a quarter of 65-year-olds will live to 90. Among white women who make it to 65, one in seven will live another 30 years.

2. We don't have our parents' pensions.

Previous generations benefited from final-salary pension plans. The income was secure, it lasted for life, and it was backed by the rising productivity of the next generation of workers. The risk of longevity was shared broadly: Those who lived to 95 were supported by the contributions of those who died young.

But in the private sector, those so-called defined-benefit plans started to get phased out a generation ago. Instead, most today rely on a so-called defined-contribution 401(k) plan instead. There's no shared risk. You're on your own. What you have to retire on depends on what you were able—or willing—to pay in. (And how well you invested it.)

3. Social Security is only a safety net.

Social Security is designed to replace only about 40% of your pre-retirement income, and that's only if you have an average income. It's important, to be sure. But it's hardly going to be enough for most people.

The Social Security Administration says the maximum payment per worker is about $28,000 a year. The average: just $14,000.

And, as everyone knows, the system suffers from serious funding questions. Even if the doomsayers are proven wrong, there is little chance that Social Security is going to get more generous, and a significant chance it will get less so.

4. Most people have saved far too little.

"I see clients at 35 with the same balances [in their investment accounts] as people who are 60," says Steve Dimitriou, managing partner at Mayflower Advisors in Boston and a retirement-planning expert. "It's because the people age 60 only started to save in the last decade."

According to the Employee Benefit Research Institute, barely half of all workers age 55 and over have even set aside $50,000. (To put that in context, $50,000 will buy a 65-year old woman an annuity of just $290 a month.) And 29% have saved less than $10,000.

Among those aged 45 to 54, 60% have saved less than $50,000, and 38% have less than $10,000.

The EBRI data do not include home values. This is, at least, some comfort—although after the past few years the number with a lot of equity less than it was.

5. Medical costs are rising.

In the past 10 years, medical costs have risen 50% on average, according to government data. Prescription drugs costs are up 43%, nursing-home costs, 51%. Hospital services have doubled in price.

Such inflation may not continue. But even if you hope for better, you have to plan for the worst.

Someone retiring at 65 may need to set aside a couple of hundred thousand dollars for likely medical premiums and out-of-pocket expenses, the EBRI calculated last year—with so many unknowns it admitted the range of estimates was very wide.

"One thing that has become a major wild card lately is the cost of health care when you are older," says Mr. Dimitriou. "All the projections are out the window because the cost of health care has gone up so much, particularly for retirees."

6. They are still hoping the stock market will save them.

The stock-market boom of the 1980s and 1990s, and the housing boom of 1995 to 2005, spoiled a whole generation of Americans. They figured they didn't have to save because the market would magically make them rich.

That game is over.

Financial consultant Andrew Smithers, author of "Wall Street Revalued," recently suggested U.S. investors might get only 2% a year or so above inflation over the next decade. Maybe he's too gloomy. But Wall Street, which began the '80s historically cheap, is now expensive. Returns from here are unlikely to come anywhere near the historic average of 5%-6% plus inflation.

7. Long-term interest rates have plummeted.

If you're a 65-year-old woman and you want to buy an annuity that will guarantee you $10,000 a year for the rest of your life, you'll have to pay about $144,000 up front. An income of $50,000 a year will cost more than $700,000.

And that annuity income will have no inflation protection at all. Over 20 or more years, it could easily lose half its buying power.

The reason it will cost so much? Partly, it's to do with longevity. But it's also because annuity rates are based on bond yields, and these have plummeted to, or near, historic lows.

The safest alternative would be inflation-protected government bonds, known as Treasury Inflation-Protected Securities, or TIPS. But they offer low yields too. The 20-year TIPS bond pays just 1.7% plus inflation.

You may not want to hang around an office into your 70s or even your 80s, but you may have no choice. Just don't be surprised if it makes you cranky.

Opinion: Social Security funding is likely to go cash-flow negative this year

Excerpts from http://brucekrasting.blogspot.com/2010/06/social-security-at-mid-year.html:

There is enough published information from the SSTF to make some observations for the first six months of 2010.

…

Cash flow has fallen from $63b to $7b from 2008 to 2010. One might take heart that the number for 2010 is still in the black. But that will not last long. The seasonality of the Fund produces big cash flow losses in the second half of a calendar year. For the full year 2009 the net cash flow was $3.4B. In other words the cash flow fell by $32 billion in the July-December in 2009. It is certain that cash will evaporate in 2010 as well. My number for the net cash flow drain in the second half of 2010 is $55b. This translates to a~$50b deficit for the full year.

My thoughts on the SSTF year to date results:

-I am stunned by the continued drop in FICA/SECA tax receipts. There are many metrics on the overall economy that have shown YoY improvement. The SS revenue numbers are telling us something different. They measure the incomes of 160 million workers. This is the broadest definition of employment we have. My read on the numbers is that we have very fundamental weakness in employment. The problem is bigger than the headline numbers from the BLS suggest.

-The payroll tax revenues versus the benefits paid number lines have crossed. Some, including the CBO, see this as a temporary phenomenon. I disagree. For there to be a return to a positive result of (payroll tax revenue – benefits) the economy would have to grow on a sustained basis at 5% and inflation would have to remain near zero. Those conditions are unlikely to be met.

-The estimated $50 billion of negative cash flow to be realized in the second half of the year is just more money that Treasury has to borrow. It does not, by itself, increase our total indebtedness. It is a shift between the Intergovernmental and Debt to Public accounts. Does an extra 50 Bil matter when the total the public holds is already 8.6 Tril? No, not really. Not as of today at least. But when the tables turn and the markets focus on the US bond/bill calendar it will make a difference.

Opinion: The 2,000-year-old-businessman

The 2,000-year-old-businessman

Stanley Bing Fortune Magazine June 4, 2010

FORTUNE -- Retirement used to be something that happened at age 65 come hell or high water. Due to advances in stem-cell research, cryogenic regeneration, and calorie restriction, however, careers are getting longer and longer. Even so, it's surprising to run into a guy who's been in the corner office of his corporation for 2,000 years. We took a few moments to chat with this gentleman while he was on his way to one of the therapies that keep him fit and ready for action.

BING: Bob? May I call you Bob?

BOB: Well, considering that my original name was Titus Anginus, Bob sounds fine.

BING: You were born during the Roman Empire?

BOB: Yeah. Not too long after Larry King, I believe.

BING: To what do you attribute your longevity?

BOB: Well, first of all, my primary rule -- never retire. Every time they came along and told me I had reached retirement age, I had the messenger executed. In recent years there's been a move away from shooting messengers. I think that's a mistake.

BING: There must be some medical program that's keeping you so spry and chipper.

BOB: It all begins with stress reduction. Stress can't be eliminated, it can only be transferred to somebody else. Attila the Hun was good at that. I learned a lot from him, as did the other guys who are still around from that time.

BING: There are others like you?

BOB: Oh, sure. They don't make a big deal about it. But how do you think Warren Buffett makes all those great investment decisions?

BING: I often ask myself that.

BOB: Also, fruit.

BING: You eat a lot of fruit?

BOB: No, I wear it. What are you, a moron?

BING: Any other secrets?

BOB: Well, right now I'm headed off to a clinic for my regular hemapheresis. All it takes to keep me going for a whole week is the blood of two McKinsey consultants.

BING: I wasn't aware they had any.

BOB: That's why I need two.

BING: Tell me, Bob, who are the greatest business minds you've seen during the past 2,000 years?

BOB: Well, I'd have to say the Sheriff of Nottingham could handle tax issues better than anybody I ever met. Nobody was better at post-merger integration than Genghis Khan. I also enjoyed watching Jack Welch operate for the 1,250 years he ran General Electric. I have no idea why he stepped aside. Now what does he do? Play golf? Write books? God help me.

BING: But what about enjoying the relaxation and contemplation of one's golden years?

BOB: !@# that!

BING: One last thing, sir.

BOB: Dude, I gotta see a man about a horse.

BING: You've been an observer of the business scene for two millennia. What, in your opinion, is the key to success?

BOB: Think big, and be prepared to defend your ideas. Take Papricus, the guy who invented paper money. The first few times he tried it, he got knocked around pretty good. Went up to people, said, "Give me your gold coins and I'll give you this greasy little piece of parchment with a picture of my aunt Sophie on it." People laughed. Some hit him with clubs. But after a while it caught on. Now look. All people want is paper. You can't give away the coins.

BING: What ever happened to him?

BOB: I think he's still around. Last I heard, he was at Goldman Sachs (GS, Fortune 500), selling arcane investment instruments that seemingly have no value. I hear they're getting hotter by the day.

BING: Well, take care of yourself, Bob.

BOB: Don't mention it. Want a nectarine?