Girard Miller: California unions’ pension concessions are promising first steps toward retirement reform

California’s Down Payment on Pension Reform

Four unions smell the coffee

Governing Magazine June 2010

Last week’s biggest news on the pension and payroll front was a report from Sacramento that California Governor Schwarzenegger’s team has successfully negotiated two vital pension reforms. Link: http://www.thecalifornian.com/article/20100616/NEWS01/100616031/Schwarzenegger-wins-pension-reform-from-some-unions Four key unions representing 23,000 workers or 9 percent of the total state-level workforce reportedly agreed to raise their retirement ages for new hires by five years and to bump up the incumbent employees’ contributions by as much as 5 percent of wages to help pay for their retirement benefits. Employee pension contribution rates of 10 and 11 percent will be well above the national average as a result. Savings of $2 billion annually would be achievable if these terms are adopted throughout the state workforce.

These pending agreements do not roll back retirement benefits of incumbents or control retiree medical costs. http://www.sacbee.com/2010/06/19/2833785/qa-whos-covered-under-four-union.html However, the California Highway Patrol union did also agree to begin paying 2 percent of salary toward their retiree medical (OPEB) benefits in 2013. http://gov.ca.gov/press-release/15376/?&_c=d percent7Cyvcee9xanplikz percent7Cyx45gpe5ocetfe&_ce=1276726269.8483d503087bb18f82f89432f673aba7 New civilian hires will receive a lower multiplier of 2 percent during their service periods, a reduction from 2.5 percent, but public safety retained their generous 3 percent multipliers. Raising the retirement age for new employees to 60 for civilians and 55 for public safety is a sensible path toward ultimate long-term reforms at even higher ages. Thus, the governor’s pending deal with these four unions is a landmark step in the right direction. Other state and local government agencies are likely to seek similar concessions from their unions, so this “template” offers an important precedent. State-level supervisors typically follow the benefits patterns of those reporting to them.

Financial news reporters hounded me last Friday, asking whether these reforms would put out the raging wildfire of pension costs. As you probably suspect, the answer to that question is a definite No. These pension reforms are much needed but will hardly offset the huge increases in pension and retiree medical costs already scheduled to hit governmental budgets between now and 2013 when new accounting standards are likely to become effective. http://www.governing.com/columns/public-money/new-gasb-proposals-pension-bookkeeping.html At best they are a down payment on a much larger bill, and cynics would argue that they represent a stall tactic by labor leaders who know that worse is yet to come unless financial markets magically return the Dow Jones Industrials Average to 14,000 in the next year.

Why this is just a down payment. To put this all into perspective, many California public employers will face retirement plan costs exceeding 20 to 25 percent of salaries for civilians, and as much as 40 to 50 percent of salaries for public safety once (1) the financial impact of the 2008 bear market in stocks is finally recognized in the bills sent out by the pension funds, (2) they start making actuarial contributions for retiree medical plans, and (3) the latest thinking in governmental accounting becomes effective. Even with a 10 percent employee payroll contribution from workers exempt from Social Security, many California public employers will face huge cost increases that most budgets will not be able to sustain without service reductions, pay and hiring freezes, personnel attrition and similar cost cuts. A 5 percent increase in employee contributions is just the down payment on those bills.

I’ve already seen costs at these levels in other states, such as Maryland. Even without prospective accounting changes, county and city retirement plan costs will rise above 70 percent of salaries for public safety in some jurisdictions. The problem we’re trying to solve is deeper than we can resolve with offsets of a 10 percent employee contribution and age 60/55 retirement dates for new hires.

A foundation for more reforms. What public managers in other jurisdictions must now do is to begin with these two key changes and build reform packages on that foundation. To achieve fiscal and political sustainability, retirement ages for public safety personnel hired today can be set at age 57 with 25 years or service, and civilian ages can be aligned at age 62 with 30 years of service or age 67 with 10 service years to match Social Security. Retiree medical benefits can be re-designed along the lines I described in my column two weeks ago. http://www.governing.com/columns/public-money/Funding-retirement-benefits.html If it’s feasible, contributions by incumbents can be set at 10 percent and then raised annually as necessary to equal half of the actuarial costs. If that takes five years, and if the ultimate employee cost reaches 15 percent of pay for those outside of Social Security, so be it. And nobody can justify a pension multiplier of 3 percent in the new normal world of public finance, even if they are outside the Social Security system.

For new hires facing higher retirement ages, hybrid plans with lower costs for everybody can provide a 50 percent defined benefit of 1 percent of pay times years worked--like federal employees get--and 50 percent in a portable defined contribution plan. Such plan designs will provide a valued benefit for younger workers, and can be funded with a lower contribution requirement than older workers must pay to keep their richer benefits. At the same time, the approach would give new employees an optional plan to save more for their retirement and dependents’ health benefits.

Labor leaders acted responsibly. I would like to tip my hat to the labor unions who agreed to the California deal. They deserve credit for smelling the coffee regarding their extraordinarily generous pensions, especially the general employee groups that accepted a reduction in their multiplier. Ten percent employee contributions are a big move on their part (although not such a big deal, really, for employees exempt from Social Security taxes). They stepped up to the plate with a good-faith effort to share in the exorbitant costs of the irrevocable benefits they have previously secured, and for that they deserve a share of the credit. They have also taken responsible actions to curtail pension spiking which inflames California taxpayers. The civilian unions accepted an unpaid personal day each month, which cuts payroll costs by 5 percent. This replaced the current furlough system which hurts them deeply right now. These deals are hardly perfect, but they are far better than obstinacy and deadlock. Labor leaders deserve respect here, even from the pension-bashers.

They say that a good compromise is when both parties feel they took the short straw. As a California taxpayer still getting a short straw, I would rate this pension deal a worthwhile compromise--and the state’s first important step to sustainable long-term retirement reform. Let’s keep moving forward.

Opinion: State employees are not California’s budget culprits

State employees are not the budget culprits

Until the state deals with the real causes of fiscal fiasco, prepare for more misery.

George Skelton LA Times Capitol Journal June 21, 2010

It's the summer budget-brawling season in Sacramento, a time for regurgitating old myths and simplistic solutions.

One persistent myth about the perpetually bleeding state budget is that it's all the fault of public employee unions.

They are to blame for some things: bullying liberal allies they deem insufficiently subservient (Senate leader Darrell Steinberg [D-Sacramento] is the latest target); blocking reforms they feel threaten members (teacher unions are notorious); and driving up retirement benefits to unsustainable levels (CHP officers, prison guards and civil servants are all guilty).

But none of that really contributes to the $19-billion deficit projected for the state general fund.

Another myth is that California government can cut its way out of the hole. Sometimes when government cuts spending, it actually costs money.

In truth, California's budget nightmare stems from a devil's brew of sins: lack of discipline on both spending and tax-cutting in the past; an outdated and unreliable tax system too susceptible to economic booms and busts; the unhealthy dependence of local governments on Sacramento; and a dysfunctional state budgeting process that requires a gridlock-generating two-thirds majority vote.

Based on my e-mail, many people believe that the way for Sacramento to make ends meet is to cut state employees' salaries by, say, 10%. Well, in the last year, most have been cut by 14% through furloughs. And the state still has a $19-billion projected deficit.

For the fiscal year starting July 1, Gov. Arnold Schwarzenegger is proposing to cut salaries by 5%, require workers to contribute an additional 5% of pay to retirement and cut the workforce by 5%. That would save a mere $1.8 billion.

Even if Schwarzenegger could fire every state employee under his control — roughly 230,000 — it still wouldn't balance the books.

"Fire every prison guard, every CHP officer, everyone who works at the DMV, everyone who works for the state parks system … and you're still not there," notes H.D. Palmer, spokesman for the state Finance Department.

That's because roughly 70% of the state general fund flows out to local governments and schools, one of the unintended consequences of Proposition 13, which slashed the property tax 32 years ago.

And those pension costs? The governor has budgeted $3.8 billion in state contributions for the next fiscal year. But only $2.1 billion of that would burden the bleeding $83-billion general fund. The rest would come from self-sustaining special funds.

So even if employee pensions didn't cost the state a cent — an impossibility — the savings would fill only 11% of the general fund deficit hole.

Pressured by politicians and a private sector with pension envy, four public employee unions last week reached agreement with the Schwarzenegger administration on some retirement rollbacks for future hires.

The unions represent about 10% of the governor's workforce, including firefighters, Highway Patrol officers, health and welfare personnel and psychiatric technicians.

The pacts return pensions for future employees to roughly the levels that existed before then-Gov. Gray Davis and the Democratic Legislature boosted benefits substantially in 1999. And that rollback is long overdue.

But the grand savings? All of $72 million a year. And only $43 million of that helps the general fund.

The state gain from the union agreements derives from increases in employee contributions, a workforce cut and one unpaid day off a month. The actual pension rollbacks will help future generations balance the state books, but they'll be of no use to current budget-writers.

The administration also is negotiating with other unions that represent most of the remaining employees. If the same deal is cut for all workers, it would hardly be a budget-balancer — filling only about 6% of the hole.

So lawmakers need to whack away at spending. But some cuts result in no savings or actually increase costs — if not for the state, for local governments.

If Schwarzenegger, for example, succeeds in his effort to close down the state's main welfare program — a $1.2-billion savings — that "clearly would have a significant impact on the counties," Palmer concedes.

That's because counties legally must provide the safety net of last resort for the poor with their general assistance programs. Dan Carson, deputy legislative analyst, estimates there'd be a cost shift to the counties of "at least $1 billion" if the Legislature accepted Schwarzenegger's proposal. Which it won't.

Schwarzenegger also is trying to cut spending on In-Home Supportive Services by $750 million. But that could force many frail, elderly people into much more expensive nursing homes. This would significantly jack up Medi-Cal costs.

The governor has proposed scrapping the state's adult day healthcare program to save $135 million. It serves mostly disabled, chronically ill or elderly poor, some with dementia. This could propel many into emergency room care or even nursing homes and wind up costing the state more.

"These are folks who are at risk and are right there on the edge," says Dr. Rafael Amezcua, medical director for AltaMed Health Services, a major provider under the program.

Palmer rationalizes: "We've got to close a $19-billion gap. And to do that without raising taxes, there's going to be some collateral effects."

Effects such as more misery for a lot of people — and maybe even higher costs for the state.

There's much denial about the true causes of California's fiscal fiasco. And until the real culprits are confronted, the Legislature will keep passing unbalanced, gimmicky budgets rooted in the rhetoric of myth.

Ohio newspapers examine public pensions and return-to-work policies and practices

pension kb

Experience trumps savings: Rehiring retired superintendents becoming the norm in Ohio

Stark County boasts four rehired retired superintendents

Canton Republic June 20, 2010

CANTON — They oversee multimillion dollar budgets. And the education of more than 9,000 Stark County school students. On the books, they’ve retired. But the county’s four superintendents who’ve come back to work after retirement are far from calling it quits.

Advocates of employing local retired superintendents say their 30-plus years of experience as educators is invaluable. And the four defend their positions: A pension is something earned.

Still, these superintendents are, in all but one case, earning salaries of more than $100,000 while collecting their retirement pay. And some are receiving other perks, ranging from tax-deferred annuities to full health benefits to guaranteed raises and supplemental salaries.

An Ohio News Organization survey of the state’s “Big 8” urban school districts and their neighboring counties found more than a quarter — 27 percent — of superintendents were rehired retirees.

Of Stark County’s 17 public school districts, three have rehired retired superintendents: Jackson, Northwest and Tuslaw.

Across Ohio, educators are able to begin collecting pension benefits in their early 50s and continue collecting their regular paychecks.

Prior to 2000, rehiring retired administrators and teachers occurred less frequently. A change in Ohio law, however, shortened the period educators had to wait before returning to work and collecting pension benefits. Retired educators now can be rehired 60 days after they retire, instead of 18 months. And if they want to forgo two months of their retirement benefits, they can be re-employed almost immediately.

What once was considered a savings for districts — rehired retired employees received their medical benefits through the State Teachers Retirement System (STRS) — is no longer the case. In many instances, local school districts are paying the health benefits, the STRS contributions and higher post retirement salaries for superintendents who are hired again after they’ve retired.

“My position is it is legal, and we follow the rules set by the legislature,” said Connie Ramser, a Jackson Local Schools teacher, who serves on the STRS board. “It is a school district situation, and the school board makes the call. Their compensation is up to the local school board. It’s what works the best for a district’s needs. “Retired rehirees are not bad people.”

Before the state passed a law about three years ago stating that districts must offer retirees the same benefits afforded regular employees, STRS spent $3 million in health benefits for rehired retirees, Ramser said. Now, that cost is picked up by local school districts.

The state, which does not allow public disclosure of pension payments, is proposing increased contributions to the pension funds by taxpayers. The new pension legislation also calls for increasing the retirement age and reducing benefits for future retirees.

STRS is just one of the five pension systems in Ohio. From the five systems, nearly 400,000 public retirees receive benefits, and Ohioans pay more than $4 billion toward those benefits each year.

The pension analysis by Ohio newspapers found a growing number of public employees are receiving annual salaries in excess of $100,000, particularly in the Sate Teachers Retirement System. As a result, they are qualifying for pensions higher than $100,000, and with guaranteed cost of living raises their annual retirement benefit can exceed their working wage within a few years.

“I don’t think my personal investment is anyone’s business,” said Larry Morgan, the 68-year-old superintendent of the Stark County Educational Service Center and the R.G. Drage Career Technical Center, when asked about the pension he collects. “The only thing I have here that is not public record is my retirement.”

Morgan, Stark County’s longest double-dipper, brings home a salary of $149,689 — $23,504 more than he was making when he retired 10 years ago.

Educators, such as Stark County’s four rehired retired superintendents, say their hands are tied in many respects. Why? Because STRS actually penalizes educators for not cashing into the retirement system by the time they reach 35 years of service, which for many, is achieved by age 57. There are added benefits to retiring five years earlier — at 30 years of service.

According to STRS, more than 15,000 of its retired members are working in a local school district, college or university.

Sara Clark, deputy director of legal services for the Ohio School Boards Association, said she knows of no definitive study that says schools save money by hiring retired educators.

“Rehiring retirees is an option school districts can consider,” Clark said. “I think most people understand it can be a controversial decision because (rehired retirees) are taking home a paycheck while collecting a pension. Our goal is to always get the right person in the right position to educate students.”

<snip …> Read the remainder of the story here: http://www.cantonrep.com/pension/x1808626738/Experience-trumps-savings-Rehiring-retired-superintendents-becoming-the-norm-in-Ohio

Editorial: Return-to-work policies for Ohio educators are unsustainable; state should switch to a DC plan

Editorial: Pension peril

Double-dipping, rising health-care costs add up to unsustainable system

Tuesday, June 22, 2010 Columbus Dispatch

Public employees who retire to begin collecting their public pension, then are rehired in their old position and collect a public salary on top of their pension, argue that they're not costing the taxpayers anything extra, even when these arrangements result in million-dollar payouts.

But, as Ohio's public pensions slide toward insolvency and the state's budget deficit grows more alarming, the public will be less and less tolerant of this so-called double-dipping.

Defenders of double-dipping argue that if the public employer weren't paying the retiree to do the job, it would be paying somebody else, also at taxpayers' expense, so there's no real difference. This argument has merit, though it should be pointed out that if the retiree is rehired at or above his ending salary, then he probably is being paid much more than a replacement would have received - meaning that taxpayers are, indeed, spending more than they need to.

But the most important aspect of double-dipping is what makes it possible in the first place: the generous early retirement ages afforded by public-employee pensions. Some public employees can retire with full benefits at age 48, while in the private sector, where fewer and fewer employees have pensions, full benefits often are not available until at least age 65.

Not only do these early retirement ages encourage double-dipping and allow most public retirees to draw pensions for many more years than their private-sector counterparts, retiring well before 65 means the retirees need health-care coverage until Medicare kicks in. Although state law doesn't require it, Ohio's public pension plans began offering health-care coverage in the 1970s. Retirees now demand coverage, and its soaring cost is one of several reasons the pension plans are less and less financially sound.

An investigation by Ohio's eight largest newspapers into double-dipping, published Sunday, highlighted some of the most extreme outcomes, involving school-district superintendents. Their relatively high salaries, combined with the perverse incentives of the State Teachers Retirement System, lead many to "retire" early, because it can mean a seven-figure paycheck when they finally stop working.

A superintendent earning $100,000 who retires at age 52 would receive about $64,000 from his pension the first year. He can be rehired in the same job at his last salary and continue to receive raises each year.

No wonder a fourth of Ohio superintendents are collecting pensions along with their paychecks. They're joined by half of the superintendents of educational service centers. Double-dipping instantly increases their incomes by as much as 80 percent.

Teachers, police officers, firefighters and bureaucrats might not rack up numbers quite as high, but the same double-dipping incentives apply.

Taxpayers, many of whom face pay cuts or freezes and diminished retirement prospects in their private-sector jobs, can't be expected to support the current system without change. Managers of the public pension funds should make the necessary changes, however difficult and unpopular, to bring them in line with private-sector plans. Change is needed, not only to ensure continued taxpayer support but to address the growing funding imbalances.

The teachers' system currently has $40 billion in unfunded liabilities and will be looking to taxpayers for at least a partial bailout.

Already, local governments, including school systems, spend $4.1 billion per year to pay for pensions. The Ohio Retirement Study Council would like to see "employer contributions" - taxpayer contributions - raised to the point that they would total $5billion annually.

That's an unrealistic expectation to have of taxpayers.

Instead, pension managers should require employees to pay more into their retirement, raise the retirement age and, ultimately, shift newly hired public employees to a 401(k)-style retirement system. Retirees also will have to shoulder more of their health-care burden.

The status quo isn't sustainable.

NCSL publishes report on state DC and hybrid plans

The National Conference on State Legislatures has produced a helpful overview of defined contribution and hybrid plan coverage among the states.

Excerpt:

The overwhelming majority of statewide retirement plans for public employees and for teachers are traditional defined benefit plans. These provide a guaranteed life-time retirement benefit based on an employee's years of service and final salary Although most statewide plans require employee contributions, the benefit is not tied directly to the amount of those contributions. The plans may include post-retirement benefit adjustments, disability and life insurance, and retiree health insurance, although not all do so.

A number of states depart from that model. Nebraska did so as long ago as 1967, and Indiana’s public retirement plans have long had a component of individual retirement accounts along with a defined benefit component. Defined contribution plans, often called 401(k) plans, provide a retirement benefit that is based on an account an employee has built up through years of employment. In governmental plans, as a rule, both employers and employees contribute to the account, although this varies from state to state. The employee has some control over how the account is invested, usually on the basis of a menu of options.

At retirement, the balance in the fund is the basis of the employee's retirement benefit. The sponsoring government does not guarantee a particular amount of benefit, and usually does not provide post-retirement benefit increases. Such plans are relatively rare in state governments. This report lists state governments' defined contribution retirement plans designed as primary coverage for a group or class of state employees or state teachers: that is, it includes plans that eligible employees are required to join, or that are one of two or three alternative plans that employees choose among. Some states provide hybrid plans, in which employees are covered by both a defined benefit and a defined contribution plan. Details on the different structures of defined contribution and hybrid plans are below in the discussion on individual plans. The maps on the following pages indicate where such plans exist.

This report does not include optional deferred compensation plans, like Section 457 plans, which all states offer employees and teachers as a means of augmenting primary pension coverage. Many states have offered defined contribution plans to higher education faculty; this report is not intended to include all such plans.

The report is accessible directly here: http://www.ncsl.org/LinkClick.aspx?fileticket=yGsmFhwoq7E%3d&tabid=18511

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

Press Release: Center for State and Local Government Excellence publishes issue brief on public pension discount rate

FOR IMMEDIATE RELEASE
For more information contact: Amy Mayers, 202-682-6102, amayers@slge.org

VALUING LIABILITIES IN STATE AND LOCAL PLANS
New Center for Excellence Brief

WASHINGTON, DC, June 17 -- The Center for State and Local Government Excellence has issued a new issue brief, Valuing Liabilities in State and Local Plans. The brief, which was written by Alicia H. Munnell, Richard W. Kopcke, Jean-Pierre Aubry, and Laura Quinby of the Center for Retirement Research at Boston College, sheds light on the debate between economists and actuaries over what discount rate should be used to value pension liabilities in the public sector.

The brief’s key findings are:

What rate to use is a hot topic.

The Government Accounting Standards Board (GASB) recommends the estimated return on pension assets – about 8 percent.
Economists generally argue for a riskless rate – about 5 percent.

Reducing the discount rate would raise the unfunded liability by $1.5 trillion.
While a lower discount rate has a large impact on reported funding status, it does not change what pension benefits teachers and firefighters ultimately receive.
A realistic measure of the funded status may deter plans from offering overly generous benefits when the stock market soars.

Read the full brief at http://tinyurl.com/valuingliabilities

Find all the Center’s publications on public sector pensions and retiree health care at www.slge.org.

-30-

About the Center for State and Local Government Excellence
The Center for State and Local Government Excellence helps state and local governments become knowledgeable and competitive employers so they can attract and retain a talented and committed workforce. The Center identifies best practices and conducts research on competitive employment practices, workforce development, pensions, retiree health security, and financial planning. The Center also brings state and local leaders together with respected researchers and features the latest demographic data on the aging workforce, research studies, and news on health care, recruitment, and succession planning on its website, www.slge.org.

Excerpts from discount rate issue brief

Introduction

To measure the liability of a pension plan requires discounting a stream of promised future benefits to the present. For public sector plans, what discount rate to use in this calculation is a subject of great debate. State and local plans generally follow an actuarial model and discount their liabilities by the long-term yield on the assets held in the pension fund, roughly 8 percent. Most economists contend that the discount rate should reflect the risk associated with the liabilities, and given that benefits are guaranteed under most state laws, the appropriate discount factor is a riskless rate, roughly 5 percent, as discussed below. Thus, the economists’ model would produce much higher liabilities than those currently reported on the books of states and localities. The intensity of the debate is fueled by the assumption that the magnitude of the liabilities dictates the size of the funding contribution and even how the pension fund assets should be invested.

This brief attempts to separate the question of valuing liabilities from the questions of funding and investment. As background, it explains the current approach to valuing liabilities in the private and public sectors. Second, it discusses why, given their guaranteed status, state and local pension liabilities should be discounted at a riskless rate and shows how much measured liabilities would increase by applying such a rate. Third, it argues that valuing liabilities is only one factor entering the funding calculation, and that using a riskless discount rate does not necessarily mean that contributions should increase immediately. In addition, it explains that selecting a discount rate and choosing whether or not to invest in risky bonds and equities are quite separate decisions. The conclusion is that whereas using a riskless rate instead of the assumed return on assets produces a very high measure of public pension liabilities, such a change does not have immediate implications for funding or investment. And adopting a riskless rate has clear advantages: it would accurately reflect the guaranteed nature of public sector benefits; it would increase the credibility of public sector accounting with private sector analysts; and it could well forestall unwise benefit increases when the stock market soars.

…

Conclusion

The argument is compelling that the liabilities of public pension plans, which are guaranteed under state law, should be discounted by a rate that reflects their riskless nature. Such a change would produce a large number. Liabilities would rise from $3.4 trillion to $4.9 trillion, and with $2.7 trillion of assets on hand, unfunded liabilities would rise from $0.7 trillion to $2.2 trillion.

What difference does such a change make? First, a more realistic measure of the funded status of the plans would deter plans from offering more generous benefits in response to supposed excess assets. Second, it would increase the required payment for normal costs, which would have an immediate, but manageable impact on the budgets of states and localities. In terms of the amortization payments, a change in the discount rate will increase the amount to be amortized, but the timing of the payments is a policy decision. Finally, discounting by a riskless rate does not imply that plans should hold only riskless assets. Managers of state and local plans could continue to invest in equities and other risky assets. If the returns on these assets resemble their long-run historical performance, plans’ unfunded liabilities would be paid off more quickly than anticipated, as the gains on their assets exceed the returns on Treasury securities.

Resolving the discount-rate debate would increase the confidence of private sector observers in the reports of state and local pension funds.

The Economist: The prospect of a state defaulting is not as remote as one might believe

Can pay, won't pay

America’s most profligate states do not owe as much, proportionately, as Greece. But their politics are just as problematic

Jun 17th 2010 | Washington, dc

THE state of Illinois has a rather crude way of coping with its ballooning budget deficit. It stops paying bills. Already, it has failed to pay more than $5 billion-worth. State legislators are paying their own office rent to avoid eviction. Schools and public universities are having their budgets cut.

Illinois owes Shore Community Services, a non-profit agency in suburban Chicago, some $1.6m for services to the mentally disabled. The agency has had to lay off a dozen staff. Jerry Gulley, the executive director, says his outfit’s line of credit could be exhausted soon. The bank will not accept the state’s IOUs as collateral. “That’s how sad it is,” shrugs Mr Gulley.

Comparisons between incontinent American states and Greece are all the rage. Though this is an exaggeration, credit-default-swap spreads, which measure investors’ expectations of default, are wider for some American states than they are for some of the euro zone’s other peripheral economies (see chart).

There are other similarities. Like members of the euro zone, American states may not declare bankruptcy, cannot be sued by creditors and, thanks to America’s federal structure, cannot be forced to behave by a higher level of government. They also do not issue their own currency, so inflating away their debt is not an option. And, like many European governments, state legislatures and governors are reluctant to impose the necessary pain. The Illinois legislature recently passed a budget for the next fiscal year, starting on July 1st, which leaves a $13 billion deficit to be closed.

The parallels with Europe are unfair, though only up to a point. American state and local debt last year was $2.4 trillion, about 16% of gdp. But most of that debt is issued by local governments or state agencies and has specific assets or fees, such as road tolls, earmarked for paying it back. Even in the weakest states, debt that needs to be paid out of general tax revenue was under 5% of GDP last year. Greece’s was 115%. The numbers for deficits show an even greater contrast. California’s deficit, assuming the state fails to close it, would equal only 1% of its GDP, compared with 14% for Greece and 9% for Portugal last year.

Greece and Portugal do not have separate federal and state governments, however. So a fairer comparison would take account of gross American federal debt, which currently stands at 85% of GDP. This underlines the fact that most of America’s debt problem is federal not local. The consequence is that, because states’ refinancing requirements are relatively low compared with their tax revenues, no state faces an imminent liquidity crisis. California’s treasurer, Bill Lockyer, is fond of saying that California will not default unless there is thermonuclear war.

It was not always that way. From 1841 to 1842, in the wake of a series of financial panics and recessions, eight states and Florida (then a territory) defaulted. John Wallis of the University of Maryland says that this first series of defaults led states to set up strong constitutional barriers to debt accumulation. States now commonly require either a referendum or a supermajority vote of the legislature to issue a general obligation bond (one not backed by earmarked revenues). All states, except tiny Vermont, now require their annual operating budgets to be balanced, which limits the racking up of debt over time. Many state constitutions also enforce repayment of debt. In California, for example, only schools can be paid ahead of bondholders. This is one reason that state defaults are so rare; the last was by Arkansas in 1933. In 1975, New York state passed a moratorium on servicing New York City debt unless its holders agreed to a restructuring. The next year the state’s court of appeals ruled it unconstitutional.

Still, the prospect of default is not quite as remote as these comforting comparisons suggest. That New York even tried to force a restructuring on creditors, albeit New York City’s, illustrates that the threat of default is primarily not economic, but political. With revenue plummeting, legislatures and governors are often unable to agree on spending cuts or higher taxes to narrow the gap. California’s dysfunctional politics are a big reason why Moody’s rates California only a few notches above junk. “This is the seventh-largest economy in the world—it’s not an ability-to-pay issue,” says Robert Kurtter of Moody’s.

States are also finding ways round the constitutional barriers to borrowing. New York needs voters to approve any general-obligation bond; so, since 2002, it has relied on bonds backed by personal income-tax revenues which don’t require that approval. In January Illinois issued $3.5 billion in bonds to fund its pension payments, and may issue a similar amount in the coming fiscal year, though pension obligations are clearly an operating expense.

Most troubling of all is the squeeze budgets are facing from their unfunded obligations for civil-service retirement pension and health benefits. The Pew Centre on the States, a research organisation, put these at $1 trillion in 2008. In a report, Joshua Rauh and Robert Novy-Marx, finance professors at Northwestern University and the University of Chicago respectively, note that these liabilities are coming due at an alarming rate. By 2018 Illinois will be paying $14 billion a year in benefits, equal to more than a third of the state’s revenue, compared with $6.5 billion now. Mr Rauh says bondholders should worry because several state constitutions, including those of Illinois and New York, make state pensions senior to bond debt.

Still, the assumption of many investors is that the federal government would never let a state default. It might allow an isolated case, but if a default looked like the start of a wave, the federal government would surely blink—just as Europe did when confronted by Greece.

Bloomberg calculates that BP share price decline has cost state pension funds $1.4 billion

BP Oil Disaster Costs U.S. State Pensions $1.4 Billion in Value

June 22, 2010 Bloomberg

The California Public Employees’ Retirement System lost $284.6 million in value as the largest oil spill in U.S. history erased more than $1.4 billion from BP Plc shares held by 42 state retirement accounts, data compiled by Bloomberg show.

BP, the biggest producer of oil and gas in the U.S., has lost 47 percent of its value since a Gulf of Mexico well blew out April 20, destroying the Deepwater Horizon drilling rig, killing 11 of its crew and polluting beaches from Louisiana to Florida.

The declines come as public pension funds are struggling to recover from investment losses that averaged 21 percent last year, according to Wilshire Associates of Los Angeles. U.S. public pension systems held more than 300 million shares of London-based BP, according to Bloomberg data through May 1.

Calpers, the largest U.S. public pension at $210 billion, held 58.2 million shares of BP on April 20, more than any other state pension, and saw the value fall to $301 million from $585.7 million, according to Bloomberg data.

“Calpers has a well-diversified portfolio and long-term investment strategy to weather these ups and downs, even those caused by unusual circumstances such as this one,” said Brad Pacheco, a spokesman. “We will be engaging BP on corporate governance to discuss the impact of the crisis on the value of the company.”

Stock Price

The Gulf of Mexico oil spill sent BP’s stock price to 349.5 pence in London trading yesterday from 642.5 on April 19.

The $1.4 billion in value lost by the pensions is a fraction for funds that manage more than $2.4 trillion, the estimate for the 100 largest public pensions at the end of 2009, according to the Census Bureau. The top 100 funds account for more than 89 percent of total public pension value, the bureau reported.

“This will be less than one-half of a percent of our international holdings,” said Laura Ecklar, spokeswoman for the $58 billion Ohio State Teachers’ Retirement System, referring to the $59 million in BP shares in that fund’s $14 billion international portfolio. “If we put it against all holdings, we’re into a lot of decimal points.”

Among public retirement funds with large holdings of BP, the California State Teachers’ Retirement System, known as Calstrs, ranked second in value lost, at $104.8 million, followed by Florida at $87.8 million and the Texas Teachers Retirement System at $84.5 million, according to Bloomberg data.

Texas Holdings

The Texas fund, which reported a market value of $96.7 billion and record investment returns of 35 percent for the year ending March 31, said in a statement that sales of 8.1 million BP shares before and after the Deepwater accident lowered the total loss of value to $39.7 million since September, 2009.

“The $39.7 million reduction in the market value of its BP holdings is the equivalent of 0.04 percent of the total TRS fund,” spokesman Howard Goldman said in an e-mail response to questions from Bloomberg. “Developments related to BP have had no material impact on the fund.”

New Jersey’s Division of Investment gained $5.2 million on its BP holdings because it began selling off its 52 million- share stake in January, according to Treasury Department spokesman Andrew Pratt.

New Jersey Profit

The state realized profits of about $12 million before the Deepwater Horizon explosion. New Jersey sold its last 20 million shares at a loss of $9.1 million between April 29 and May 11, Pratt said.

Calpers last week asked for a $600 million increase in the state’s contribution toward benefit costs during the fiscal year that starts July 1.

Other affected funds, such as New York state’s $129 billion Common Retirement Fund, which holds 17.5 million BP shares according to spokesman Robert Whalen, and the Pennsylvania School Employees Retirement System, whose BP holdings declined in value by about $30 million, according to spokeswoman Evelyn Tatkovski, are planning to cut retirement benefits and seek higher payments from taxpayers to offset investment losses.

The 100 largest public funds lost a total of $165 billion in the nine months that ended March 31, 2009, according to the Census Bureau.

Concerns about BP’s share value and prospects prompted funds such as New Jersey and the $26 billion Retirement Systems of Alabama to sell all their BP holdings.

‘Moving Parts’

“We’re headed in that direction,” said Marc Green, Alabama’s director of investments, who said the system has been selling off its 6.25 million BP shares as opportunities arise, because of uncertainty about BP’s liability in the spill. “There’s a lot of different moving parts that we can’t get our arms around.”

In New Jersey, the Deepwater accident accelerated a sales pattern that was already under way, Pratt said.

The Division of Investment “took their profits at a reasonable level and when they started to have problems, they got rid of the shares,” Pratt said in a telephone interview June 14. “This is conservative, responsible portfolio management, combined with some luck.”

The collapse of BP’s shares highlights the importance of a broad portfolio, said Keith Brainard, a researcher for the Louisiana-based National Association of State Retirement Administrators.

“There’s a great lesson that public pension funds are learning, and that’s the importance of diversification,” he said. “I would expect the effect on public pension funds to be minimal.” (Note: What I actually said to the reporter was that public pension funds understand the importance of diversification, and a result, the effect of the decline in BP’s share value would be immaterial for most funds. kb)

New York state comptroller plans to sue BP for investment loss

NY pension fund to sue BP for investment loss

Wed Jun 23, 2010

NEW YORK(Reuters) - New York state's pension fund plans to sue BP Plc to recover losses from the drop in the company's stock price following the worst oil spill in U.S. history, Comptroller Thomas DiNapoli said on Wednesday.

New York's Common Retirement Fund has a long history of serving as the lead plaintiff in shareholder lawsuits. DiNapoli said the fund owned more than 19 million shares when the Deepwater Horizon rig exploded in the Gulf of Mexico in April.

DiNapoli, the sole trustee of the $132.6 billion state pension fund, has hired law firm Cohen Milstein Sellers & Toll to represent the fund.

"BP misled investors about its safety procedures and its ability to respond to events like the ongoing oil spill and we're going to hold it accountable," said the comptroller, a Democrat, who stands for election in November.

Spokesmen for other states, such as Virginia, Maryland and New Jersey, Illinois and Ohio, and for New York City, were not immediately available to say whether they would also sue BP to recoup any investment losses.

On Monday, a coalition of eleven East Coast states told the oil giant they will hold the company responsible for any losses caused by its still-growing oil spill in the Gulf.

CalPERS buys one-eighth share of Gatwick Airport

CalPERS takes 12.7 per cent Gatwick stake

www.altassets.com June 22, 2010

The largest state pension fund in the US, CalPERS will pay £106m ($157m) for a 12.7 per cent stake in the airport, following in the footsteps of the Middle Eastern sovereign wealth fund the Abu Dhabi Investment Authority and South Korea’s National Pension Service, both of which reportedly acquired stakes in February this year.

Abedayo Ogunlesi, chairman and managing partner of GIP, said, “We are delighted that CalPERS, one of the world’s largest and most sophisticated public pension funds, is investing alongside GIP in Gatwick. We look forward to working with CalPERS over the coming years as partners in what we believe will be an outstanding investment for all stakeholders.”

The move is also to believed to be CalPERS’ first big direct investment under its infrastructure programme, underlining a growing trend for pension funds to bypass private equity firms for some deals.

The Ontario Teachers Pension Plan recently made a direct investment into UK teaching group Acorn Care and Education, while the Ontario Municipal Employees Retirement System (OMERS) has opened a London office and has announced plans to reduce its reliance on external GPs. Troubled European private equity firm Candover may be facing a takeover from Canadian pension fund the Alberta Investment Management Corporation (AIMCO).

Gatwick is the UK’s second busiest airport behind Heathrow and is the busiest single-runway international airport in the world. British airport owner and operator BAA sold the airport to focus on improving Heathrow and its other airports.

GIP said that the CalPERS stake sale was part of its plan to sell down a portion of its Gatwick holding, but that it would retain a controlling share in the airport. The firm is reportedly planning to raise a second fund, with a target size of $5bn to $6bn.

New York City comptroller changes his mind and will retain ban on placement agents

Liu Backtracks on Placement Agents
June 22nd, 2010

In February, Comptroller John Liu said he was going to lift the ban on placement agents — middle men (or women) who help orchestrate deals with investment managers for control over city pension funds.

Today, the comptroller changed his mind.

“In light of the evolving regulatory environment in Washington and based on our discussions with the Boards of Trustees, we found it appropriate to keep in place the ban on placement agents for private equity,“ said Liu in a prepared statement.

Though this doesn’t mean the comptroller won’t revisit the issue.

Placement agents were the subject of a couple of nasty scandals across the country — including right here in the Empire State. A ban on the state level has been championed by State Comptroller Tom DiNapoli.

When Liu announced in February he wanted to ease the ban, the New York Times called it a “worrying step backward.”

Today’s reversal was accompanied by a series of new disclosure requirements for those that do business with the city’s pension system — the Teachers’ Retirement System (TRS) and the New York City Employees’ Retirement System (NYCERS) — valued at $74.5 billion. As part of the announcement, Liu reiterated his commitment to reject campaign contributions from investment managers or their agents seeking to do business or already doing business with the city’s pension funds.

The other requirements, straight from Liu’s press release, are below.
• Investment managers must certify in writing that they have not given any gifts to any employee in the Comptroller’s Office, and have complied with NYC Conflict of Interest Board gift restrictions for the Systems and Trustees ;
• Investment managers must disclose all contacts with employees of the Comptroller’s Office regarding new investments as well as contacts with other individuals, such as Trustees, involved in the investment decision-making process;
• Investment managers must certify / agree to the following:
o No placement agent was used in the connection with securing the Systems’ commitment to any private equity investment transaction;
o Full disclosure of all fees and terms relating to any firm retained to provide marketing or placement services for transactions that are not covered by the placement agent ban;
o Marketing/placement fees, if any, shall be fully borne by the investment manager;
o They have read and complied with Chapter 68 of the NYC Conflict of Interest Board rules and have not caused any employee of the Comptroller’s Office or Trustee or employee of NYCERS or TRS to breach them in any way;
o Agree that Systems may terminate an investment commitment or contract, and any obligations to pay future management or performance fees, for violation of the Systems’ placement agent policy and related disclosure requirements.

NASRA Associate Member: The time has come for employers to understand health care exchanges

Viewpoint: Group Policies vs. Subsidized Individual Coverage—The Impact of Exchanges

Existing private exchanges, such as those for retiree 'Medigap' policies, provide some lessons

www.shrm.org April 16, 2010 Bryce Williams, Extend Health, Inc.

The landmark health care reform legislation passed in March 2010 will enable small businesses, the self-employed and the uninsured to choose health insurance plans offered through state-run exchanges, beginning in 2014. However, most people who already have insurance will probably continue to get it through their employer group plans

So, why should employers care about exchanges now? There are two important reasons:

• Exchanges for individuals point to a future where employers can offer their employees more choices in health plans.

• Exchanges can provide a way for employers to meet their health care obligations to employees while managing costs.

The Power of Exchanges

Many lessons have been learned from existing private health care exchanges, including Medicare policy exchanges such as ExtendHealth.com (of which the author is the CEO), which offers private supplemental Medicare coverage plans. Retirees can compare and choose from among hundreds of private Medicare plans offered by more than 55 carriers. The vast majority of the retirees in the exchange pay premiums, co-pays and other out-of-pocket medical expenses with funds set aside for them by their former employers in health reimbursement arrangements.

There is mounting evidence that well-run exchanges can offer three things that are rare in our health care system: personalization, choice and competition. They also expose the growing inefficiencies of group health plans. Conventional wisdom says that group insurance is superior to individual insurance because it offers better benefits at lower cost. This was true in the past when most large employers were located in company towns and their employees worked and lived within a few miles of the company headquarters. Health insurers serving employers in that region were able to build and maintain strong networks of health care providers and negotiate good prices in exchange for volume business.

In today’s world of international business and telecommuting, a large employer’s workers are much more likely to be dispersed, living and working outside the primary health insurer’s most efficient network. Seniors are especially likely to move away once they retire. To serve these individuals in a group plan, health insurers must “rent” other insurers or third-party administrators, often paying premium prices for that privilege, which they must pass along to employers in the form of higher premiums. Such attempts to retrofit a 1940s company-town model of health insurance into the global economy of 2010 are proving to be outdated and inefficient.

Another historical advantage of group insurance was that employers could negotiate good rates because they were insuring hundreds or thousands of people, enough to provide a reasonable risk pool for the health insurer and purchasing power for the employer. This was never true for private Medicare plans because, with few exceptions, it's "guaranteed issue" coverage—no one who is eligible for Medicare can be denied.

More Options for Employees

With health care reform, which mandates coverage for most Americans, the purchasing power advantage of group plans will disappear. The individual market risk/purchasing pools will be much larger than any single-employer pool—a powerful driver for keeping premiums in line. Is a pocket of 20 retirees or 100 active employees in Pensacola, Fla., more likely to get lower pricing from a national carrier or from local/regional carriers that have been operating in the area for decades? The answer is more likely the latter.

Another significant limitation of group plans is that employers have had to limit the number of plan options for their employees. Given the time required to analyze, negotiate and administer each plan option, most employers have been unable to offer more than one or two group plan alternatives.

This one-size-fits-all-approach to health insurance was an acceptable tradeoff when group plans were the only game in town, but not in the new world of guaranteed coverage for individuals. Group health plans give employers no alternative but to offer essentially the same benefits to unmarried men in their 20s as they do to married women in their 30s and workers in their 40s, 50s and 60s, regardless of their life situations and their health needs. Imagine the different choices people in these categories might make if they were allowed to compare and purchase individual plans in an exchange.

Individual Empowerment with Sustainable Company Support

The state-run health insurance exchanges coming online in 2014 will likely make a huge difference to Americans who have been shut out of our largely employer-sponsored health insurance system. But an exchange has already proven to be a game changer in the private Medicare market, where employers that have subsidized retirees' purchase of supplemental policies reduced their retiree benefit costs by as much as 35 percent, allowing them to continue to meet commitments to their retirees. The transition has allowed these employers to get out of the business of managing retiree health care plans with their cycle of yearly plan review, difficult negotiations with insurance providers, and time-consuming communications and enrollment procedures. Not to mention calls from retirees throughout the year with questions about plan changes, eligibility and whether a new prescription will be classified as Tier 1 or 2 on the formulary, if it's covered at all.

Being part of an exchange has benefitted individual retirees as well. Just as employers gain greater control over long-term obligations, retirees now have a dependable stipend to pay for health care expenses. Historical data shows that, on average, retired couples who buy supplemental Medicare insurance through the exchange see a $500 a year reduction in total out-of-pocket medical expenses— not an insignificant amount, especially for people on a fixed income in a time of ever-increasing medical costs.

Retirees Today, Active Employees Tomorrow?

No one likes change—it’s disconcerting to many and frightening to some. And health care is a highly charged, very sensitive issue. But after initial skepticism, even the vast majority of individual retirees who have purchased insurance through a private exchange report high satisfaction with their plans, the prices they paid for them and the experience of buying from an exchange. This is because, in the end, exchanges take the fear, uncertainty and doubt out of the health care system for everyone involved.

Exchanges are not a silver bullet, and transitioning active employees from group plans to an exchange would be a change of seismic proportions for any employer. But exchanges are coming, and for employers, the time to explore and educate themselves and their employees about them is now.

Bryce Williams is CEO of Extend Health Inc., which operates the largest private Medicare exchange in the U.S. at ExtendHealth.com. The exchange has helped more than 70 employers, including GM, Ford, Chrysler, Caterpillar, Eastman Chemical, Lawrence Livermore National Labs, Avon, Whirlpool and others, save on their retiree health insurance costs.