Opinion: A contrarian view: the myth of fully-funded pension funds

Richard P. Larkin Senior Vice President, Director of Credit Analysis, Herbert J. Sims & Co. June 29, 2010

Excerpts:

Uninformed observers, citing unfunded pension liabilities as the “bubble” that will lead to the next bond market crisis, would have you believe that a fully funded pension plan is required for fiscal solvency and financial stability. James Spiotto, a lawyer at Chapman & Cutler and a widely respected authority on municipal bankruptcy, pointed out that average state pension funding ratios have grown and declined over time. Funding levels were as low as 50% in the 1970s, 80% in the 1980s, and only reached 100% in the mid- 1990s after stock market returns averaged 28% per year.

Simply put, pension funds are created to set aside employee and employer deposits and invest them in order to accumulate monies to pay future retirement benefits. Pension funding levels will therefore be affected by changes in employee and employer deposits, as well as changes in investment earnings on those funds. Stock prices and earnings go up and down over time; bond prices and interest rates do as well. Since investment earnings will fluctuate, by definition pension funding ratios will fluctuate as well. Therefore, just the existence of an unfunded pension liability does not result in immediate stress.

…

In conclusion, pension funding is a financial challenge but not an immediate threat to insolvency for state and local governments. They face long-term funding pressure, but it is not a problem that must be totally solved this year or next. The long-term decisions and commitments which must be made to keep pension funding stable should be balanced between those already retired and those who continue to work and contribute to their retirement.

Access this report via the NASRA webpage, Pension bonds and credit effects of public pension plans, here: http://www.nasra.org/resources/pensionbonds.htm

and directly here: http://www.nasra.org/resources/HJS1006.pdf

Standard & Poor’s: Pension funding and policy challenges loom for U.S. states

June 2010 Robin Prunty

The decline in public pension fund assets that started in fiscal 2008 is now contributing to significant budget challenges for U.S. states as many of them are faced with having to increase their pension contributions even as federal stimulus funding dries up and before meaningful revenue recovery has taken hold. Our observations show that many states are re-thinking core services, programs, and benefit levels--including pensions. Historically, this has been a common government response in a difficult budget climate and we believe that for the most part states will move relatively slowly and incrementally in dealing with pension funding. We plan to analyze their overall success in managing pensions and reducing long-term liabilities in conjunction with future investment performance and their demonstrated commitment to funding required pension contribution increases.

There are other policy challenges that we believe will serve to keep public pension liabilities and sustainability in the forefront for governments and investors alike. The first relates to assumed investment earnings relative to performance. Second, we believe the recent "preliminary views" released by the Governmental Accounting Standards Board (GASB) will cause lively debate about pension accounting and financial reporting and, possibly, funding.

…

Recent investment declines have cut across most asset classes and will likely present challenges for public pension plan managers in the coming years, we believe. Most governments have a track record of absorbing increased contributions due to the phased-in nature of these increases. We expect that the funding trends and annual costs of servicing this liability relative to a government's resources will be important elements of our credit review in the future. However, if governments consistently ignore postretirement benefits and underfund contributions in the hope that future economic growth will bolster their finances sufficiently, they could be setting themselves up for greater hardship, in our view.

Access this report via the NASRA webpage, Pension bonds and credit effects of public pension plans, here: http://www.nasra.org/resources/pensionbonds.htm

and directly here: http://www.nasra.org/resources/sandp1006.pdf

Opinion: Economic recovery holds the key to state and local government budget fortunes

State and Local Fiscal Problems: How Big a Headwind?

David Greenlaw MorganStanley www.morganstanley.com

June 29, 2010

Over the past few weeks, concerns related to the fiscal condition of state and local governments in the US have intensified. In particular, the price of credit default swaps on a basket of benchmark municipal bonds has risen even more than the CDS on European sovereign debt.

Before we attempt to assess the magnitude of the problem confronting the municipal sector, some background might be helpful. Government finance at the state and local level works differently than at the federal level. For example, most states and municipalities are required to balance their operating budgets - or to at least enact a balanced budget. Obviously, there is no such requirement at the federal level. Moreover, the federal government does not distinguish between operating funds and capital investments. To be sure, the balanced budget requirement for many states is not quite as strict as it might appear. Almost half of the states allow deficits in their operating budgets either to be carried forward to the next year or to be covered through borrowing. Also, states carry ‘rainy day' or reserve funds that can be drawn upon to cover short-run deficits. Still, because there is greater pressure to at least attempt to balance the budget at the state and local level, deterioration in the fiscal environment will likely lead to announcements of spending cuts and/or tax increases of the sort seen in recent press reports.

How did they get into this mess? The bulk of the recent deterioration in state and local government finances is attributable to macroeconomic cyclical forces. As I looked through one of my dusty old files on the subject, I came across press clippings with headlines virtually identical to those of today. The only difference - they are all about 10 or 20 years old, having been published shortly after the 2001 and the 1990-91 recessions. And, it's no coincidence that the New York City fiscal crisis in 1975 followed on the heels of one of the most severe national recessions in the modern era. This time round, the situation is serious and widespread, but that largely reflects the fact that the recent economic downturn was far more severe than the 1973-75, 1990-91 or 2001 recessions. The bottom line is that the business cycle is largely to blame for the fiscal imbalances currently being faced by states and municipalities - as is usually the case.

The main driver of state and local budget pressures is a fall-off in income taxes, consistent with our cyclical story. For example, the growth rate of personal income taxes - which comprise a little less than 15% of state and local government receipts - has swung from about +10% per year during the 2004-07 boom to -19% in 2009 (note that 43 states and a handful of cities currently impose some form of a personal income tax). Even so, S&L personal tax revenue has held up much better than at the federal level, where there was a swing from a +11% growth pace during the 2004-07 period to -6% in 2008 and -25% in 2009. In fact, the deterioration in overall tax revenue has been much less severe at the state and local level. This is largely attributable to the relative importance of sales taxes and property taxes, which together account for nearly 40% of state and local government receipts. Sales taxes have dipped in recent years, but not by nearly as much as income taxes. And, despite the widespread weakness in real estate markets, property taxes have continued to edge higher as many municipalities have adjusted tax rates to offset the decline in property values. Moreover, support from the federal government (which accounts for about 25% of S&L sector receipts) continues to grow rapidly. In fact, grants from Washington to the states have been rising at about a 20% annualized pace since the passage of the fiscal stimulus legislation (ARRA) in February 2009, helping to prop up S&L spending.

How big is the problem? There is no question that the fiscal position of state and local governments is poor. The accompanying figures highlight the recent deterioration in operating budgets and the draw-down in reserve balances. However, it's worth noting that the swing in the budget picture pales in comparison to the federal sector. That's because the federal government has a much larger and more volatile revenue base - and because the federal government has been providing a significant amount of support to the states. While tax inflows have inched a bit lower in the state and local sector of late, they have plummeted at the federal level. Measured on a National Income and Product Account (NIPA) basis, the state and local government budget deficit actually improved from $40 billion in calendar 2008 to $19 billion in 2009, as grants from the federal government to states and municipalities more than offset the declines in their tax receipts. At the same time, the federal government deficit (on a NIPA basis) grew from $640 billion in 2008 to $1.2 trillion in 2009.

Meanwhile, the tax increases and spending cuts that have been enacted at the state and local level in an effort to try to rein in budget gaps have been relatively modest when gauged against an overall $14 trillion economy. In its June report, the National Conference of State Legislatures (NCSL), an organization that compiles budget figures for all the states, estimated that states enacted revenue changes of $24 billion in F2010 (note that the state fiscal year runs from July to June). The NCSL report indicates that another $3 billion of tax hikes have already been proposed for F2011. This includes about $1.5 billion of higher taxes in the state of New York attributable to a hike in the excise tax on cigarettes and a new tax on soft drinks.

Despite cutbacks, spending is rising. On the spending side, there have been significant cutbacks in some discretionary categories that attract a good deal of media attention, but overall expenditures are now rising at a modest pace. The Medicaid program warrants special focus. Medicaid is a means-tested entitlement program financed jointly by the states and federal government, which currently provides medical care to 60 million low-income individuals. The program accounts for a little more than 20% of total state spending at present. Enrollment growth has been accelerating in response to the recession, and thus overall Medicaid outlays jumped by an estimated 10.5% in F2010. However, the ARRA stimulus program provided significant Medicaid-related support to the states by raising the federal government's contribution share. The ARRA funding for Medicaid during the 2009-10 interval amounts to a little less than $100 billion. This went a long way towards holding down the states' contribution. But the extra support from the Federal government is slated to run out at the end of 2010. If no action is taken, the burden on the states will rise dramatically in coming years. As a result, many states are on the verge of implementing Medicare cost containment plans that include cuts in doctor payments, benefit limitations, higher patient co-payments, etc. Moreover, many states are fearful that the recently enacted healthcare reform will lead to additional Medicaid-related costs when it goes into full effect in 2014.

Pension funding poses long-term challenge. Of course, state and local governments also face looming pension challenges that are likely to lead to ongoing pressures on operating budgets in the years ahead. In fact, the Pew Center on the States (a well-respected think tank) reports that pension obligations are less than 80% funded in 21 states. Moreover, many states appear to be relying on overly optimistic assumptions that make their funding status appears better than it actually is. For example, the state of California reports that its plan is only about 13% underfunded at present. But Pew estimates that applying a 6% discount rate (as opposed to the actual assumed rate of 7.75%) would lead to an underfunding of $82 billion - more than double the reported $35 billion shortfall.

Federal financial impact outweighs the state and local one. Even after taking into account all of these headwinds, the macroeconomic impact of fiscal policies at the S&L level pales in comparison to the potential impact of changes at the federal level. For example, we estimate that there would be about $200 billion of fiscal drag in 2011 if the 2001 and 2003 federal tax cuts are allowed to expire as scheduled at the end of the current calendar year. If Congress adopts the Obama Administration's proposal to extend the cuts for families with less than $250,000 of income (as assumed in our current forecast), the associated fiscal drag in 2011 will be reduced to about $75 billion. By comparison, state and local budget cuts likely will amount to a few billion dollars in F2011 (a July-to-June fiscal year) - assuming that Congress approves an extension of Federal Medicaid assistance to states. Thus, the outcome of the federal tax debate represents a far greater source of macroeconomic impact than anything that happens at the S&L level over the next year.

Continued economic growth is key to near-term outcome. Although the fiscal situation at the state and local level represents an obvious potential headwind for the national economy, swings in federal government finances are generally far more important from an overall macro perspective. If the economic recovery in the US were to stall, budget woes at all levels of government would intensify, and the inability of the state and local sector to run large-scale operating deficits would lead to another round of tax hikes and spending cuts. But if the national economy continues to recover as we anticipate, the near-term fiscal condition of the vast majority of state and local governments should begin to improve.

Economists predict increased layoffs among state and local governments

Expect lots of government layoffs at state, local level

USA Today July 6, 2010

Here's another headwind for a sputtering job market: State and local governments plan many more layoffs to close wide budget gaps. Up to 400,000 workers could lose jobs in the next year as states, counties and cities grapple with lower revenue and less federal funding, says Mark Zandi, chief economist for Moody's Economy.com.

The development could slow an already lackluster recovery. Friday, the Labor Department said employers cut 125,000 jobs, mostly because 225,000 temporary U.S. Census workers completed their stints. The private sector added 83,000 jobs, fewer then expected, as the jobless rate fell to 9.5% from 9.7%.

Layoffs by state and local governments moderated in June, with 10,000 jobs trimmed. That was down from 85,000 job losses the first five months of the year and about 190,000 since June 2009.But the pain is likely to worsen. States face a cumulative $140 billion budget gap in fiscal 2011, which began July 1 for most, says the Center on Budget and Policy Priorities.

While general-fund tax revenue is projected to rise 3.7% as the economy rebounds in the coming year, it still will be 8%, or $53 billion, below fiscal 2008 levels, according to the National Association of State Budget Officers.

Meanwhile, federal aid is shrinking. Money for states from the economic stimulus is expected to fall by $55 billion, says the National Governors Association. And the Senate last week failed to pass a measure to provide states $16 billion for extra Medicaid funding, an initiative that would have extended benefits from last year's stimulus. The House approved $25 billion in enhanced Medicaid funding.

Philippa Dunne, who surveys state financial officials for a newsletter, the Liscio Report, says most plan to intensify layoffs the coming year after relying largely on furloughs."The downturn has gone on so long, all the low-hanging fruit has been taken," says Scott Pattison, head of the state budget officers group.

Wells Fargo economist Mark Vitner expects state and local governments to cut about 200,000 workers this year if Medicaid benefits aren't extended. That's largely why Wells Fargo cut forecasts for third-quarter economic growth to 1.5% from 1.9%.

Even if Congress extends Medicaid subsidies, Zandi expects 325,000 job cuts the next year, though
Vitner says losses could be far less.

Among cuts planned and made:

•New York City is planning 4,500 layoffs, and more if the Medicaid subsidies aren't approved, says the Center on Budget and Policy Priorities.

•Washington state would have to chop 6,000 jobs without the Medicaid money.

•The city of Maywood, Calif., laid off all 68 of its employees July 1 and is contracting out police services, partly because of a $450,000 budget deficit.

“Greece by Lake Michigan:” Illinois fiscal condition approaching crisis stage

Illinois Stops Paying Its Bills, but Can’t Stop Digging Hole

New York Times July 2, 2010

CHICAGO — Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo.

He picks the papers off his desk and points to a figure in red: $5.01 billion. “This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says in his downtown office.

Mr. Hynes shakes his head. “This is not some esoteric budget issue; we are not paying bills for absolutely essential services,” he says. “That is obscene.”

For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget.

Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.

States cannot go bankrupt, technically, but signs of fiscal crackup are easy to see. Legislators left the capital this month without deciding how to pay 26 percent of the state budget. The governor proposes to borrow $3.5 billion to cover a year’s worth of pension payments, a step that would cost about $1 billion in interest. And every major rating agency has downgraded the state; Illinois now pays millions of dollars more to insure its debt than any other state in the nation.

“Their pension is the most underfunded in the nation,” said Karen S. Krop, a senior director at Fitch Ratings. “They have not made significant cuts or raised revenues. There’s no state out there like this. They can’t grow their way out of this.”

As the recession has swept over states and cities, it has laid bare economic weakness and shoddy fiscal practices. Only an infusion of federal stimulus money allowed many states to avert deep layoffs last year.

Cuts in Work Forces

The federal dollars are nearly spent. Last month, local governments nationwide shed more than 20,000 jobs. Should the largest struggling states — like California, New York or Illinois — lay off tens of thousands more in coming months, or default on payments, the reverberations could badly damage a weakened economy and push housing prices down still further.

“You’re not seeing these states bounce back, and that could be a big drag on the national economy,” said Susan K. Urahn of the Pew Center on the States. “It could be a very tough decade.”

In Illinois, the fiscal pain is radiating downward.

From suburban Elgin to Chicago to Rockford to Peoria, school districts have fired thousands of teachers, curtailed kindergarten and electives, drained pools and cut after-school clubs. Drug, family and mental health counseling centers have slashed their work forces and borrowed money to stave off insolvency.

In Beardstown, a small city deep in the western marshes, Ann Johnson plans to shut her century-old pharmacy. Because of late state payments, she could not afford to keep a 10-day supply of drugs. In Chicago, a funeral home owner wonders whether he can afford to bury the impoverished, as the state has fallen six months behind on its charity payments, $1,103 a funeral.

In Peoria — where the city faced a $14.5 million gap this year and could face an additional $10 million budget hole next year — Virginia Holwell, a trainer of child welfare caseworkers, lost her job when the state cut payments to her agency. She sits in her living room high above the Illinois River and calculates the months of savings left before the bank forecloses on her house.

“I’ve got enough to last until the end of August,” she says, matter-of-factly. “I’m 58 and I’m pretty good at what I do, and I got to tell you, I’m pretty devastated.”

Public colleges and universities occupy a fiscal sickbed all their own. This year they muddled through without $668 million expected from the state; the University of Illinois has yet to receive 45 percent of its state appropriation. Legislators made no pretense of promising to pay this bill soon. Instead they authorized colleges to borrow against the expected state payments.

“The big fear is that next year we’ll be down twice as much,” said Randy Kangas, an associate vice president of the university. “No one knows how to make the cash flow work.”

Illinois legislators tend to plead victim to economic circumstance, and the state’s maladies are considerable. In 2006, the Illinois unemployment rate stood below 5 percent; now it is near 11 percent, and the percentage of long-term unemployed exceeds the national average. Major manufacturers have eliminated thousands of jobs, and the state ranks in the top 10 nationally in foreclosures.

Five years ago, the Chicago suburb of Tinley Park issued about 650 home building permits; last year it processed one. The city of Rockford plans to close fire stations and lay off firefighters, and in Decatur, 180 impoverished seniors have lost their delivered meals. The lakeshore condo towers in Chicago bespeak affluence, but there are so many foreclosures on the bungalow blocks of southern and western Chicago that “for sale” signs sprout like sunflowers.

Few budget analysts are surprised to see Illinois, with a limping economy and broken political culture, edge close to the abyss. Two of the last six governors have served jail terms, and a third is on trial.

“We are a fiscal poster child for what not to do,” said Ralph Martire of the Center for Tax and Budget Accountability, a liberal-leaning policy group in Illinois. “We make California look as if it’s run by penurious accountants who sit in rooms trying to put together an honest budget all day.”

Stopgap Solutions

The Community Counseling Centers of Chicago is another of those workaday groups that are like the stitches on a baseball, holding together poor and working-class neighborhoods. With an annual budget of $16 million, the agency tends to families torn by crime and violence as well as people who are psychologically stressed and abusing drugs.

On any given Monday morning, the agency’s chief administrative officer, John J. Troy, 61, has no idea how he is going to keep its doors open until Friday. He said the state had not come through with an expected $2.2 million, which is about six months of arrears. He has laid off and recalled employees three times in the last two years.

“Two weeks ago, I had days to meet my $420,000 payroll and all I was looking at was a $200,000 line of credit from a bank,” recalled Mr. Troy. “I drove down to Springfield and said, ‘Hey, you owe us $3 million.’ They said: ‘Oh, that’s nothing. We owe another agency $10 million.’ ” “The fact of the matter is,” he added, “I don’t sleep much these days.”

Illinois’s fiscal practices are thoroughly fractured. Large agencies survive from one payday to the next. Small agencies seek high-interest loans from out-of-state finance companies.

The state pension system is a money sinkhole and the most immediate threat. The governor and legislature have shortchanged the pensions since the mid-1990s, taking payment “holidays” with alarming regularity.

The state’s last elected governor, Rod R. Blagojevich, is on trial for racketeering and extortion. But in 2003, he persuaded the legislature to let him float $10 billion in 30-year bonds and use the proceeds for two years of pension payments.

That gamble backfired and wound up costing the state many billions of dollars. Illinois reports that it has $62.4 billion in unfunded pension liabilities, although many experts place that liability tens of billions of dollars higher.

Legislators this year raised the retirement age and slashed benefits. Though changes apply only to future employees, the legislature claimed immediate savings.

“Savings upfront and reforms down the road,” said Mr. Hynes, the state comptroller. “It’s just bad habits and bad practices.”

More broadly, Illinois is caught between blue state convictions about social safety nets and a red state aversion to taxes. For years, the Democratic-controlled legislature has passed budgets that are, in effect, in deficit. Lawmakers routinely skip around the state’s balanced-budget law, with few consequences. (Republicans are near monolithic in voting against any tax increases and borrowings. When one broke ranks to try to keep the pension solvent, he was stripped of a committee position, reducing his pay and pension.)

“The pension move was Enron-esque,” said Mike Lawrence, a press secretary to the former Republican governor Jim Edgar, who was the last governor to sign an income tax increase. “Blagojevich was not a tax-and-spend governor; he was a spend-and-borrow governor.”

The state’s income tax burden is not terribly high — Illinois ranks in the bottom half of states — and its government is not terribly large. (The budgets in New York and California, per capita, are much larger). Even if the state cut out all family and human services spending, more than half of the budget deficit would remain.

As comptroller, Mr. Hynes has trained his attention on the public and nonprofit agencies that rely on state money; he tends to roll his eyes at the notion that slashing alone is a solution. “Only the most delusional people think you can solve this without raising taxes,” he said.

The legislature has a different instinct: to borrow. In good times, that leads to unsightly imbalances. In bad times, it becomes catastrophic. This year, leaders gave the governor authority to move money around and left town to campaign.

“Each budget has gotten historically worse during this recession,” said Laurence Msall, president of the Civic Federation, a policy research organization. “We’ve borrowed more and pushed larger unpaid bills into the future.”

‘Everything Is Triage’

So where is the exit door from this crisis? In Illinois, it depends on whom you ask. The state representative Barbara Flynn Currie, one of the Democratic leaders in the statehouse, sees salvation in the economic cycle. “In the long run, we’ll muddle our way through,” she said.

Perhaps, but many analysts, liberal and conservative, warn of a potentially far grimmer reckoning — Greece by Lake Michigan. Borrowing costs are rising, nonprofits that depend on taxpayer money are dropping contracts, and the state’s pension costs and unpaid bills balloon each month.

Newspaper reports offer stories of hundreds of young teachers moving out of state. Sounding as if she had been punched in the stomach, Ms. Johnson, 53, the pharmacist in Beardstown, said she was going to work at Wal-Mart. Mr. Troy keeps logging on to the comptroller’s Web site to see whether money might soon flow to his counseling centers.

And Ms. Holwell has joined Illinois People’s Action, which challenges banks and foreclosures. With a raspy voice, she talks of her irritation with “the people who just yammer.”

“We’ve helped save four houses,” she said. “Now I wonder: can I save my own?”

For now, Illinois spends a minor fortune papering over its budget holes. Last year, the comptroller’s office paid $55.3 million just in interest on two short-term borrowings to pay the state’s bills.

Mr. Hynes walked into his child’s elementary school recently and learned that kindergarten hours were being cut because of the state budget. “Everything is triage now,” he said. “We work to avoid outright disaster.”

In past years, when nonprofits needed credit lines to see themselves through tough budget times, the comptroller issued letters assuring banks that vendors would be paid. Not anymore. “I don’t feel comfortable doing that,” he said, adding with a shrug, “I mean, who knows, right?”

California controller sues Schwarzenegger to block state employee pay cut to minimum wage

Chiang, Schwarzenegger battle over minimum wage for state workers

Sacramento Bee July 8, 2010

The battle is on.

State Controller John Chiang filed suit Wednesday to block Gov. Arnold Schwarzenegger from cutting pay for most state workers to the federal minimum wage during the current budget impasse.

The action places California's Republican governor and one of the state's highest-ranking Democrats at loggerheads on a high-stakes issue affecting nearly 200,000 state workers.

Two key state worker labor unions, the Service Employees International Union 1000 and Professional Engineers in California Government, vowed Wednesday to join with Chiang in his challenge.

Schwarzenegger contends that the state constitution and a 2003 California Supreme Court decision require him, absent a state budget, to cut employee pay to the federal minimum.

Chiang's suit, filed in Sacramento Superior Court, argues that the governor's letter ordering minimum wage is legally deficient and seeks a court order deeming it invalid.

The controller argues that he is being forced to choose between violating Schwarzenegger's order or violating various federal and state laws. "The plan puts tremendous risk on state taxpayers because if labor laws are violated, the damages could cost Californians billions," said Jacob Roper, a spokesman for Chiang.

Aaron McLear, Schwarzenegger's spokesman, accused Chiang of trying to sidestep his legal obligation. "Californians expect their leaders to do their jobs, not grasp at flimsy excuses to skirt the law," he said.

Chiang's action was a cross complaint to a lawsuit filed Tuesday by Schwarzenegger to force compliance with his order.

Schwarzenegger filed a second complaint Wednesday, this one seeking temporary compliance until the competing suits can be resolved.

The governor's minimum-wage order would reduce the salaries of most state workers to $7.25 per hour, with most managers and supervising receiving $455 per week. Lost pay would be reimbursed when a budget is signed.

The order would not apply to state agencies that are subject to continuous appropriations, such as the California Public Employees' Retirement System, the state's pension system.

Schwarzenegger has provided an exemption for 37,000 workers in six labor unions that recently reached tentative agreement on new contracts.

A legislative appropriation would be needed to pay full salaries for the six unions, representing doctors, Highway Patrol officers, firefighters, psychiatric technicians, equipment operators, and health and social service professionals.

Employees not covered by federal minimum-wage laws, such as teachers and attorneys, would receive no pay at all under the governor's order. The governor, legislators and their aides are precluded by state law from receiving any pay until a budget is signed.

The 3rd District Court of Appeal ruled last week that the governor has authority to cut employee pay to the federal minimum during a budget impasse.

Chiang's lawsuit focused on alleged deficiencies in the letter ordering the pay cut, saying it failed to:

• Exempt state workers who are covered by a collective bargaining agreement and, thus, can have their pay cut only by the Legislature.

• Consider limitations of the state's antiquated payroll system.

• Provide guidance on how to pay employees whose salaries are continuously appropriated and not dependent upon passage of a budget.

• Exempt employees of the state Department of Corrections and Rehabilitation who are under the authority of a federal receiver and the U.S. District Court.

• Provide instructions on how to handle deductions such as federal income tax, state disability insurance and state retirement contributions.

• Provide a way to accurately determine which state employees have worked overtime in a given month and, therefore, are entitled to full salary during that pay period.

Chiang has vowed not to cut salaries until "final resolution" by the courts.

For checks to be issued Aug. 1, the cutoff date is July 20, so "we don't anticipate cutting pay to minimum wage unless a final court ruling instructs us to," Chiang said through a spokeswoman this week.

With pension insolvency on the horizon, City of Cincinnati grapples with dismal choices

City pension cut options dire
July 4, 2010 Cincinnati Enquirer

The options before Cincinnati City Council on ways to stabilize the city's troubled retirement system could cost many future retirees $10,000 a year or more in reduced pension benefits, setting the stage for a showdown at City Hall.

From a scenario that would reduce individuals' pensions by nearly $407,000 over 25 years to alternatives that would cost retirees from $114,000 to $280,000, the options make it clear that no one has a bigger stake in council's decision than city employees and retirees.

While taxpayers also are likely to feel the impact through reduced services or higher taxes - or both - the heaviest financial consequences of the changes needed to put the $2 billion pension plan on solid footing will fall on the roughly 7,600 city employees, retirees and their dependents served by the retirement system.

"This would completely destroy all your retirement planning - how long you thought you'd have to work, how much your pension would be," said Diana Frey, an 18½-year city employee who is president of Cincinnati Organized and Dedicated Employees, which represents about 870 current workers. "It's so unfair that I'm almost speechless."

Twenty-four options - a half dozen variations on each of four major approaches - are outlined in a report submitted to council recently by an 11-member task force.

"The big picture is how the city gets out of this hole," said task force member Marianne Steger, director of health care and public policy for the American Federation of State, County and Municipal Employees - Ohio Council 8, the city's biggest public employees union. "But you also have to look at how these changes would affect people's lives. Because that's what we're talking about here."

The proposed changes focus primarily on city workers not yet old enough to retire or lacking sufficient years on the job to do so. Core pension benefits for current retirees and workers eligible to retire are protected by law, limiting the impact on them to potential changes in health coverage and the possible reduction or elimination of a $7,500 death benefit.

Frey's case illustrates how the proposed changes would affect city employees. Frey, 50, had planned to work about another 11½ years to reach the 30-year threshold at which she would be eligible to retire. But if some of the major changes proposed are adopted, she would have to work another four years to earn roughly the same benefits.

"It becomes a quality of life issue both in terms of money and the fact that I'll be 65 instead of 61," said Frey, who throughout her career has worked for City Council, the Public Services Department and the Metropolitan Sewer District. "To change the rules for people told one thing when they started with the city and ever since is incomprehensible."

One of the most volatile issues before the council will be whether to apply any changes to city employees with less than 23 years of service or not within 7 years of "normal" retirement, or whether to instead make any new rules applicable only to future workers.

If the new policies apply to current workers, the city's potential savings would be bigger and more immediate. But Frey, expressing a viewpoint shared by some council members, says: "The only moral way to do this is to start it with new hires, so when you come in the door you understand how it will be."

The report's most extreme alternative, which would cut $406,992 over 25 years, was included not as a recommendation, but rather as a way for task force members to underline the gravity of the pension system's condition for council members, who are expected to tackle the issue after returning in September from their summer break.

Among other things, that option illustrates how severely benefits would have to be scaled back to significantly reduce the city's pension contribution via an immediate lump sum cash infusion and annual payments. But the annual benefit cuts would be so deep - rising from $5,000 to nearly $32,000 over 25 years - as to "reduce retirees to poverty," Steger said.

"It's draconian," said task force member Chris Stenger, a retirement consultant. "But it makes a point."

By the numbers

The Cincinnati Retirement System faces a $1 billion long-term shortfall that would grow to more than $1.5 billion within five years if the current level of benefits and city and employee contributions continue, a city task force concluded.

Without major changes, the pension system would be bankrupt within 18 years. This is how we got here:

· Generous benefits - city retirees now may draw up to 90 percent of the average of their three highest years' salary as a pension, with annual increases that often push their retirement check beyond what they were paid.

· Heavy investment losses during two recessionary events over the past decade

· Growing number of retirees as Baby Boomers age

· A shrinking city workforce means reduced payments into the system

· Years of inadequate funding by City Hall - a factor retirees are quick to point to in assessing blame, but which the task force found produced less than 1 percent of the system's actuarial losses from 2000-2008

· Increased life expectancies result in pensions being paid for more years

· Soaring health costs, now a $5 million-a-month expense for the city, also have strained the system's resources.

There are four major approaches for City Council to consider in altering the system's funding and benefits, each based on varying changes to city and employee contributions, annual cost-of-living adjustments and pension calculation formulas.

Here's how the four approaches would affect future retirees:

The least costly plan would reduce projected benefits for a $50,000-a-year worker with 30 years of service by $114,209 over 25 years. In the first year this worker would receive $35,715, compared to $36,593 under the current formula. By the 25th year, the retiree would receive $64,598, about $10,000 less than under the existing plan.

Another option entails an overall cut of $173,416, with yearly cuts increasing to about $17,000 by the 25th year

An option that offers a significantly lower cost of living hike would mean an overall cut of $280,561. Under it, individuals would see an annual five-figure pension drop for much of their retirement. Their estimated $43,215 payment in year 15, for example, is $12,000 less than the current plan, and the $48,572 pension in year 25 reflects a nearly $26,000 reduction, or about $500 per week.

The most extreme alternative, included to underline the depth of the pension system's problems, would cut $406,992 over 25 years.

New York AG finds widespread spiking among public employees

Cuomo report: Employees take more overtime to pad pensions

Albany Times-Journal July 8, 2010

ALBANY — Some public workers across the state are inflating their pensions by significantly increasing overtime hours in the last few years of employment, according to a preliminary report Wednesday from Attorney General Andrew Cuomo.

Cuomo said his office is expanding its pension-padding investigation by sending out 23 more letters requesting payroll information from public employers. All are high-cost jurisdictions in terms of pension costs, he said.

The agency so far has analyzed 2009 payroll data from 50 of 64 state agencies, local agencies, municipalities and authorities the attorney general sought records from a few months ago. There is evidence of pension padding for 28 of the 50 employers, Cuomo said.

The report is available on a new website, www.nypensionpadding.com.

Cuomo, the Democratic nominee for governor this year, offered recommendations for reform of the pension system, such as capping overtime and centralizing the administration of overtime. Pension amounts are based on employees' total income rather than base salary.

In 14 of the 50 employers analyzed, there were cases of employees who began working large amounts of overtime only as they neared retirement.

For 26 of the 50 public employers, some employees dramatically increased the amount of overtime they worked in the period leading up to retirement.

The preliminary report recommends:

• Adopting overtime caps and establishing a reporting system to monitor overtime per employee.

• Setting up a centralized system for overtime with uniform policies and procedures.

• Reducing overtime in general by requiring management to plan for adequate staffing rather than on overtime to meet needs.

• Getting away from seniority-based systems for assigning overtime. Seniority-based assignment systems can be included in union contracts, but not all employees are bound by such agreements.

Assets of the state Common Retirement Fund — which includes the Employees' Retirement System and the Police & Fire Retirement System — exceed $129 billion and cover more than a million members and retirees. Taxpayers contribute an estimated $2.5 billion a year to the fund, which paid out more than $7.3 billion in 2009.

Mandated contributions from state and local employers to the Employees' Retirement System will increase from 7.4 percent of payroll to 11.9 percent of payroll in 2011. For the Police & Fire Retirement System, contributions will increase from 15.1 percent to 18.2 percent.

Additional Facts

How to help

Attorney General Andrew Cuomo's office is asking anyone with knowledge of questionable pension-padding practices to call the agency's Public Integrity Bureau at 1-212-416-8090 or e-mail public.integrity@ag.ny.gov.

Editorial: Florida law reforming return-to-work takes effect, at last

Florida finally fixes double-dipping abuse

Thursday, July 8, 2010 St. Petersburg Times

As national news carries almost daily headlines about faltering state pension funds, here's good news for the Florida Retirement System: No longer will public employees be allowed to game an already generous retirement system by "retiring" for just 30 days and then returning to work in order to double dip — collect both a pension and a paycheck. The reform took more than a year to pass the Legislature and another year to become law, but finally taxpayers' interests prevailed.

Now under the law, public employees who begin collecting their pension after July 1 will forfeit their pension payments if they return to their employer within six months. The reform, pushed by Sen. Mike Fasano, R-New Port Richey, and Rep. Robert Schenck, R-Spring Hill, will curb the worst abuses of the system.

A series of articles by St. Petersburg Times senior correspondent Lucy Morgan that began in 2008 disclosed that more than 225 elected officials and more than 9,000 members of the retirement system were collecting both pensions and paychecks. Some were even collecting two pensions and a paycheck while earning credit toward a third pension. They included schoolteachers, prison officers and sheriff's deputies.

But the most egregious and offensive cases involved highly paid elected and appointed officials — from sheriffs and judges to community college presidents and county property appraisers — who thoroughly gamed the system. First they would enter the state's generous five-year deferred retirement program where they would collect a wad of cash upon retirement in addition to their pension benefit. Then 30 days later — often without any notice to the public that they were ever "retired" — they would quietly return to work so they could still collect hefty paychecks as well.

Many double-dippers defended the practice, saying they were just getting their due without any harm to the taxpayer. They argued if they really retired, someone else would just be hired to take their place. And many legislators, themselves potential candidates for double-dipping in the future, also resisted making changes.

But such rationalizations ignored the fact that any replacement employee hired for non-elected jobs would likely be younger and command a lower salary, reducing taxpayers' burden and potentially the ranks of the state's unemployed. Some would not have been replaced at all. What's more, every pension dollar paid reduces the pension fund's balance, ultimately impacting what rate it will charge taxpayers to remain actuarially sound.

Floridians — most of whom can't even conceive of such a generous pension from a private employer — understood that. This is good reform, even if it took far too long to take effect.

Kentucky legislature and governor approve “historic” retiree health care legislation

Kentucky TRS newsletter, April 30, 2010

Historic Legislation Passes

Kentucky's Education Community, General Assembly and Governor Establish a Solution of Shared Responsibility for Long-Term Funding of Retiree Health Care

Retiree health care legislation, developed and supported by the education community, passed through the Kentucky House of Representatives and Senate, without a single negative vote, and was signed into law on Tuesday, April 13, 2010, by the Governor. This legislation helps insure that not only Kentucky's current retired teachers, but active teachers when they retire as well, will continue to receive health benefits. It also helps the pension fund.

The medical benefit, first provided in 1964, was established on a pay-as-you-go basis similar to Medicare. In other words, all dollars coming in were used to pay for retiree medical benefits as they became due, leaving no spare funds to invest to cover future costs. The source of funding consisted of contributions from active members with the state paying an equal amount. Currently these contributions are .75% of salary (1.75% for those members hired after June 30, 2008). For years now, the costs of providing retiree health care have overwhelmed the contributions generated by these two sources of funding. For the most recent year, these contributions generated only $48 million of the $182 million cost, a shortfall of $134 million.

As previously reported, to make up this growing shortfall, the state has been redirecting contributions away from the teachers' pension fund to the medical insurance fund. Since 2004, over $560 million has been redirected with the agreement it will be repaid by the state with interest over staggered 10 year terms. At this rate, even with repayment, the assets of the pension plan would be depleted by 2029. Though all involved knew this practice wasn't sustainable long-term, we are extremely grateful to the General Assembly and Governor for providing this short-term strategy without which retiree health care would have been drastically cut years ago. This short-term strategy provided needed time to develop a long-term solution.

The Shared Responsibility Solution

The KTRS Board of Trustees and Executive Secretary, Gary Harbin, have been calling attention to this growing problem for years. With the immediate urgency of the issue, the Board of Trustees and the staff of KTRS began working with constituent groups representing Kentucky's education community. This included retired teachers, active teachers, school boards, school superintendents and the state to search for a solution to this problem. Numerous meetings among these constituent groups involved reviewing many options presented by experts. From these meetings, a consensus was formed to support a solution of Shared Responsibility. This proposed solution, developed only after serious deliberations by these groups of its effect on retirees, members and employers, was introduced in the General Assembly on February 26, 2010, as House Bill 540.

House Bill 540 is a Shared Responsibility solution that provides permanent funding for retiree health care and ends the long history of underfunding this important benefit. Shared Responsibility calls upon each party (active teachers, retired teachers, school districts, and the state) to share in a piece of the solution by investing a little more now to receive substantial returns later.

The Shared Responsibility Solution
for Active Teachers

Active teachers are an essential piece of the Shared Responsibility solution and were key in passing this legislation. Views of active teachers were sought throughout and though teachers will be contributing more, the long-term benefit they receive will be far greater. In short, this legislation was about helping teachers and improving their security in retirement.

Under Shared Responsibility, active members will now have medical benefits when they retire. Without Shared Responsibility, teachers would have to pay the full cost of health care, currently $7,068 per year. As is clearly evident, without medical benefits, retirement security is uncertain. The likely outcome would be that teachers would need to work much longer to make up for the loss of this benefit. Shared Responsibility means teachers will be able to retire at a time of their choice, with greater retirement security.

Effective July 1, 2010, most active members will begin contributing an additional ¼ of 1% of salary on a pre-tax basis into the medical insurance fund. For the average teacher earning $45,000 per year, the net amount will be approximately $8 per month in the first year. Over six years, this will gradually increase to three percent. Historically, salary increases over that time span have been more than sufficient to offset this amount.

The Shared Responsibility Solution for Retired Teachers

The second piece of the Shared Responsibility solution is provided by retirees who receive medical benefits. Retired teachers also are an essential piece of the Shared Responsibility solution and were very instrumental in passing this legislation. Their views and insights were sought to determine the impact of this legislation on both current and future retirees. They certainly were cognizant that Shared Responsibility would save this most important benefit for retirees and strongly supported it.

Retirees participate by paying either the Medicare Part B premium if they are age 65 and over, or by paying into the medical insurance fund the equivalent of the Medicare Part B premium if under age 65. Since retirees age 65 and over are already paying the Medicare Part B premium (standard rate of $110.50 per month) they will experience no change. Retirees under age 65, regardless of retirement date, who receive medical benefits through the Kentucky Employees' Health Plan, will begin contributing an additional amount to the medical insurance fund effective July 1, 2010. This amount is based on the Standard Medicare Part B premium that is currently paid by retirees age 65 and over. The amount will be 1/3 of the cost of the Standard Medicare Part B premium, or $37 per month (1/3 x $110.50) for the last six months of 2010. The Standard Medicare Part B premium is subject to adjustment by the Centers for Medicare and Medicaid Services each January 1st. Should that occur, the amount paid by retirees would adjust accordingly at that time. Effective July 1, 2011, the amount will be 2/3 of the cost of the Standard Medicare Part B premium, and effective July 1, 2012, the amount will then be equal to the full Standard Medicare Part B premium paid by retirees age 65 and over. Amounts contributed will be automatically deducted from the monthly pension.

The Shared Responsibility Solution for School Districts and Other Employers

School districts and other employers provide the third piece of the Shared Responsibility solution by paying the same additional amount that active members will contribute. Shared Responsibility will save the school districts future salary costs estimated to be over $300 million per year by maintaining normal retirement patterns. To further explain, a series of negative events would occur for employers if the medical benefit for retirees is lost. As the bubble of baby boomers in America approaches retirement age, approximately one in four of Kentucky's teachers today is eligible to retire. Replacement of those teachers lowers salary costs for districts because retiring teachers on average earn $57,000 per year compared to starting teacher average salaries of $34,000. Without the medical benefit, the average retirement age would move closer to age 65, the time retirees would be eligible for lower cost coverage through Medicare. Therefore, by employers participating in Shared Responsibility, they are able to maintain normal retirement patterns and reduce the overall cost of education.

The Shared Responsibility Solution for the Commonwealth

Beginning July 1, 2010, the state will begin paying the net cost of medical insurance for all new retirees who are not Medicare eligible, thus providing the final piece of the Shared Responsibility solution. In addition to saving future salary costs, Shared Responsibility has other far reaching positive impacts for the Commonwealth. By pre-funding this benefit, taxpayers will be relieved of over $2.8 billion of future costs in funding retiree health care (as based on last year's actuarial report, the unfunded liability will be reduced from $6.2 billion to $3.4 billion). In addition, by relieving Kentucky taxpayers of these future liabilities, bond rating agencies will look upon future borrowings of the Commonwealth more positively, giving the state a better rating, thus a better interest rate on debt and reducing the amount of interest the Commonwealth will pay on that debt.

As originally drafted and supported by the various groups in the education community, House Bill 540 also required increased matching contributions by the state into the pension fund to begin addressing its unfunded liability. Though the final version of the bill omitted these contributions, the KTRS Board of Trustees is most appreciative that a number of members of the General Assembly stated that they will work with the education community on a solution addressing this need. Kentucky Teachers' Retirement System benefits are not only valuable to the retirement security of more than 123,000 educators; they also provide a $1.5 billion, and growing, economic stimulus that is injected annually into local economies across the Commonwealth.

Legislative leaders have applauded Kentucky's education community for their strong leadership and hard work in developing the Shared Responsibility approach that will provide the needed funding for the health care of current and future retired teachers. The pension and medical benefits are extraordinary tools for recruitment and retention of teachers. Protecting the integrity of these tools continues the Commonwealth's commitment to education and Kentucky's future.

Press Release: Alan Milligan appointed CalPERS chief actuary

June 16, 2010

External Affairs Branch
(916) 795-3991
Patricia K. Macht, Director
Contact: Brad Pacheco, Chief, Public Affairs
pressroom@calpers.ca.gov

Alan Milligan Appointed CalPERS Chief Actuary

SACRAMENTO, CA – The CalPERS Board of Administration today appointed Alan W. Milligan as the Pension Fund’s Chief Actuary.

Milligan was the Pension Fund’s Deputy Chief Actuary and had been serving as the Interim Chief Actuary since the retirement of former Chief Actuary Ron Seeling in March 2010.

The Chief Actuary reports to the CalPERS Board and CEO Anne Stausboll, and is a member of the CalPERS executive team.

“Alan Milligan is a top-notch pension actuary who understands CalPERS and has worked closely with our contracting employers,” said Rob Feckner, President of the CalPERS Board. “CalPERS employers, members, and the taxpayers of the State of California will be well-served as we address future challenges in the dynamic world of public employee pensions.”

The Chief Actuary evaluates, develops, and implements actuarial policies and procedures and provides actuarial advice to the CalPERS Board and its Benefits and Program Administration Committee. Milligan will supervise the work of 15 actuaries and 30 support staff in the CalPERS Actuarial Office, which produces more than 1,500 actuarial valuations each year for approximately 3,000 public employers in California. The Actuarial Office also provides cost analyses and other actuarial services for CalPERS contracting employers.

“Alan Milligan is a seasoned pension fund actuary with more than 20 years of public and private sector experience,” said CalPERS Chief Executive Officer Anne Stausboll. “I am confident Alan will do an outstanding job of serving our members and employers.”

Milligan started his CalPERS career in 2001 as a senior pension actuary. He was subsequently promoted to supervising pension actuary, managing actuary, and deputy chief actuary.

Prior to joining CalPERS, Milligan was an actuarial associate and consulting actuary for Leong & Associates Actuaries and Consultants, a private pension actuarial firm. Prior to that, he worked for the Johnson & Higgins Willis Faber actuarial firm.

Milligan is a fellow of the Conference of Consulting Actuaries, a member of the American Academy of Actuaries, a fellow of the Canadian Institute of Actuaries, and a fellow of the Society of Actuaries. He has a mathematics degree from the University of British Columbia.

CalPERS is the largest public employee pension fund in the U.S., with assets of more than $203 billion. The retirement system administers retirement and health benefits for 1.6 million active and retired California State, public school, and local public agency employees and their families on behalf of 3,000 public employers. More information is available at www.calpers.ca.gov.

Alan Milligan elected chair of California Actuarial Advisory Panel

From CalPERS E-News July 7, 2010

Milligan Elected Chair of State Advisory Panel
Alan Milligan, CalPERS Chief Actuary, has been elected Chair of the California Actuarial Advisory Panel. The panel provides information on pensions, other post employment benefits and best practices to the Legislature, Governor, public retirement systems and other public agencies. Milligan was recently appointed as CalPERS Chief Actuary.

Read information about the actuarial advisory panel here:

http://info.sen.ca.gov/pub/07-08/bill/sen/sb_1101-1150/sb_1123_cfa_20080811_183814_asm_floor.html

Nancy Goerdel named CIO at Texas Municipal Retirement System

TMRS Selects Nancy Goerdel as CIO

From the June 25, 2010 TMRS e-bulletin for cities

Executive Director David Gavia announced that Nancy Goerdel will be the new Chief Investment Officer of the System. Nancy has served as the Acting Chief Investment Officer of TMRS since the departure of former Executive Director / CIO Eric Henry in August 2009. She also held the position of Director of Public Investments and Asset Allocation. As CIO of TMRS, she will implement the Board of Trustees’ Investment Policy and will oversee an Investment Department of six employees who cover Fixed Income, Equities, and Real Estate investments.

Nancy joined TMRS in 1998 as an Investment Officer to assist with the management of the organization’s then all–fixed income allocation. She has been instrumental in moving TMRS to a total return objective and continues to be at the forefront of TMRS’ diversification efforts. Nancy has been involved in public fund investing for over 30 years, 20 at a senior level. Before joining TMRS, she was Chief Investment Officer of the Iowa Public Employees Retirement System and, prior to that position, headed the Investment Department at the Employees Retirement System of Texas for over 12 years. She was raised in Austin and received her Bachelor of Science degree in mathematics from Stephen F. Austin University in Nacogdoches. Nancy is a member in good standing of the CFA Institute, an organization dedicated to developing and promoting the highest educational, ethical, and professional standards in the investment industry.

Kentucky Retirement Systems CIO announces resignation

CIO Tosh to leave Kentucky Retirement Systems

Pensions & Investments June 23, 2010

Adam Tosh, chief investment officer of the $14 billion Kentucky Retirement Systems, Frankfort, is resigning effective July 16 for a position in the private sector, Mr. Tosh confirmed.

He has served as CIO for the retirement system since February 2007. In a telephone interview, Mr. Tosh declined to disclose the name of the firm he is joining.

Brent Aldridge, KRS director of alternative assets, will assume the duties of CIO until a permanent replacement is chosen.