Wednesday, December 18, 2013

The problems facing PERS and other pensions

Andrew Biggs published a very good essay in the Wall Street Journal Monday on the problems facing public pensions.  PERS discussions go over your head? Mr. Biggs argues public employee retirement systems such as PERS will face more problems as they are forced to make riskier bets in the stock market and gobble up more taxpayer dollars:



The threat that public-employee pensions pose to state and local government finances is well known—witness the federal ruling earlier this month that Detroit's pension obligations are not sacrosanct in a municipal bankruptcy. Less well known is that pensions are larger and their investments riskier than at any point since public employees began unionizing in earnest nearly half a century ago.....

How much riskier are public pensions now? According to my research, public pensions pose roughly 10 times more risk to taxpayers and government budgets than in 1975. And while elected officials—a few Democratic mayors included—are now pushing for reforms, even they may not realize the danger.

In 1975, state and local pension assets were equal to 49% of annual government expenditures, according to my analysis of Federal Reserve data. Pension assets have nearly tripled to 143% of government outlays today. That's not because plans are better funded—today's plans are no better funded than in 1980—but mostly because pension plans have grown as public workforces have aged.
Enlarge Image

The ratio of active public employees to retirees has fallen drastically, according to the State Budget Crisis Task Force. Today it is 1.75 to 1; in 1950, it was 7 to 1. This means that a loss in pension investments has three times the impact on state and local budgets than 40 years ago.
Enlarge Image (KF note: PERS mirrored this trend: 1.79 in 2013.)

And pensions can expect to take losses more often because of increased investment risk. Public plans have historically assumed roughly an 8% rate of return. But thanks to falling yields on safe assets, pensions must invest in riskier assets to have any hope of getting 8% returns. A one-year Treasury bond in 1975 yielded a 5.9% return. In 1980, it offered 14.8%, and in 1985 an investor could expect 6.5%. Today, the Treasury yield hovers at 0.1%. (Thank you Bernanke and now Yellen for your Quantitative Easing BS.)

Meager yields leave America's enterprising public-pension plan managers with a choice: Accept a lower return—forcing higher taxpayer contributions—or take on more risk to keep 8% returns flowing. My estimate, based on Treasury yields and analysis from economists at the Office of the Comptroller of the Currency, is that a pension today must build a portfolio with a standard deviation—how much returns vary from year-to-year—of 14%. Such high volatility means that a fund would suffer losses roughly one out of every four years.

By contrast, in 1975 a plan could achieve 8% expected returns with a standard deviation of just 3.7%. Those portfolios would lose money once every 65 years. This level of risk varied little through the 1980s and 1990s: An 8% return portfolio in 1985 would require a standard deviation of 2.7%, and 4.3% in 1995. Risk began inching upward after 2000 and has increased rapidly since the recession as low-risk assets continue to fall.

These figures aren't theoretical. They represent public pensions' decades-long shift from safe bonds to risky stocks, along with the recent growth of "alternative investments" such as hedge funds and private equity. These alternatives are, according to Wilshire Consulting, 60% riskier than U.S. stocks and more than five times riskier than bonds.

Larger pensions and riskier investments combine to increase risk to state and local budgets. The standard deviation of public pension investments equaled 1.8% of state and local budgets in 1975. That figure crept upward to 2.2% in 1985, and reached 5.8% in 1995. Today it stands at 19.8%. Pension investment risk to budgets has risen roughly tenfold over the past four decades.

As pension plan managers in Detroit, California and elsewhere can attest, there aren't easy solutions. Mature pensions should move their investments away from risky assets, but many plan managers are doing the opposite in a double-or-nothing attempt to dig out of multitrillion-dollar funding shortfalls. In most instances, significant benefit cuts for current retirees who made the contributions asked of them is difficult to justify and legally problematic.

The only real option, then, is to make structural changes, including more modest benefits and increased risk-sharing between plan sponsors and public employees. But that will only happen if elected officials accept that they can't continue with business as usual without accumulating tremendous risk.

Mr. Biggs is a resident scholar at the American Enterprise Institute. Rest of essay

18 comments:

Anonymous said...

Does Mr Biggs report that money for pensions was
siphoned off to pay for pet projects and funneled to
The selected few in the private sector ? Irresponsible
governance and snake oil salesmen are a bad combination. Guess the pensioners will get screwed
and vilified by the Right.

Anonymous said...

I put my nest egg in fixed income but if I had made the 60% asset allocation into equities like PERS I'd have almost 50% more.

The public has the same exposure with not quite as pro money management as a pension fund garners. If I had stuck with my own winners like energy and defense stocks I'd have done almost as good...

The political gridlock in Washington frightened me more than the general market risk.

Anonymous said...

Agree with 7:55. If I hire you to do a days work for agreed upon pay, what would you do at the end of the day if I said oops, I spent the money I can't afford to pay you as promised? That's our legislature.

If you did that in the private sector, you would go to jail. If you do it as a state legislator, you are called a conservative.

A. Hamilton said...

The pension funds being greater by 149% of government outlays is a product of the financial orientation of the economy. Banks are facing a federal re-write that limits them in financial speculation but adds more regulation on the smaller, more localized banks. The money center banks would be limited to traditional banking which is NOT how they see themselves really. They want to be like hedge and equity players instead of banks.

Financial assets would be more stable in the future if banks and pension funds invested more in real estate instead of paper. PERS has only $2B out of $22B in real estate.

Anonymous said...

The public has the same exposure with not quite as pro money management as a pension fund garners.

Shudder the thought that the enemic PERS ROI is the result of professionals.

Anonymous said...

Last year the ROI was 13% and the year before it was zero. Then the next two years ROI was 25% and 15%. 2009 ROI was minus 20, I think. It would be interesting to know why it was nil in 2011.

The alternatives: have the PERS board set up a committee of their own to pick stocks, use an index, let lawmakers pick stocks, let PERS participants pick stocks, let rich doctors or their wealth managers pick them, or hire other money managers.

Anonymous said...

The "math" is not partisan. Whining about promises made or unfounded statements about funds being siphoned off does nothing to address the problem. It's like arguing over gravity.

The combination of low returns (function of interest rates) rates and increasing longevity of pensioners means the plans cannot be adequately funded.

Rightsizing the funds comes only through algebraic manipulation......increasing the returns (increasing volatility and mathematically impossible absence leverage); increasing the amount of contributors (not logistically feasible or needed); killing off pensioners to reduce benefits (only works in Obamacare through rationing--generally frowned upon by both unions and general public); or reducing benefit payments (either voluntarily or through Chapter 9 Bankruptcy).

The plans are not recoverable financially, and like socialism, the prospect only works until you run out of other people's money. It's neither right or left.....it's simply the math and it affects us all.

Anonymous said...

The recent returns show the volatility 10:49 mentions. The only way to get those returns is with greater risk. Even with those above average returns, the funding gap grew. Why......people on pensions are living longer.

Even investing 100% in stocks (when you need an income stream to pay benefits) would not get it to solvency. You would have to issue pension bonds (borrow) for the express purpose of buying more stocks and options to try and get higher returns. We just had a bubble burtst from leverage, and the recent stock returns are just another asset bubble. This won't end well.

Anonymous said...

Let Tim Medley and Cecil Brown manage the PERS assets. Their private clients are satisfied with their returns.

Anonymous said...

Hire Malachi!

Anonymous said...

Ponzi schemes never end well.

Anonymous said...

PERS = PONZI

Anonymous said...

the operator of the ponzi is the legislature, not the working stiffs.

Hands Off, Cecil! said...

Ponzi schemes never end well because ponzi schemes never end. That's the definition of ponzi. At least this discussion has (so far) been about the problems with investments, not Kingfish bashing employees or Kangaroo giving his expert opinion on the stock market.

Hopefully, the number one rule will continue to be that the legislature can NOT touch the damned money.

Anonymous said...

If the math shows the pensions can't be paid, why
are other state obligations not treated in the same fashion? Why aren't bond holders taking a hit ?

Anonymous said...

9:14--do you not see the ratings for states with the largest unfunded positions.....like CA, IL, NJ, etc. These states must pay higher rates of interest to compensate for their credit risk. Bond holders are at risk.....a higher risk of default and loss of principal.

Anonymous said...

Our state leaders have it under control. 'One time money' will not be used as it was to get us through the downturn. We have little left in the rainy day fund to spend anyway.

No Republican is ever going to raise taxes unless its a 'user fee' or maybe a sin tax. The tax on wine is low comparatively, but you are hitting the yuppie Republicans so that is off the table.

PERS will be fine if it remains in a lock box and capitalism is not run in the ground again by Wall Street misconduct and fraud.

Anonymous said...

Some here have made valid points. Others, well, gang, you're shooting from the hip.

Those shooting from the hip, PERS has a website, read it! Read the handbooks and the regulations. After you've done that then a responsible conservation can be held.

Is the system in trouble, oh yeah.



Recent Comments

Search Jackson Jambalaya

Subscribe to JJ's Youtube channel

Archives

Trollfest '09

Trollfest '07 was such a success that Jackson Jambalaya will once again host Trollfest '09. Catch this great event which will leave NE Jackson & Fondren in flames. Othor Cain and his band, The Black Power Structure headline the night while Sonjay Poontang returns for an encore performance. Former Frank Melton bodyguard Marcus Wright makes his premier appearance at Trollfest singing "I'm a Sweet Transvestite" from "The Rocky Horror Picture Show." Kamikaze will sing his new hit, “How I sold out to da Man.” Robbie Bell again performs: “Mamas, don't let your babies grow up to be Bells” and “Any friend of Ed Peters is a friend of mine”. After the show, Ms. Bell will autograph copies of her mug shot photos. In a salute to “Dancing with the Stars”, Ms. Bell and Hinds County District Attorney Robert Smith will dance the Wango Tango.

Wrestling returns, except this time it will be a Battle Royal with Othor Cain, Ben Allen, Kim Wade, Haley Fisackerly, Alan Lange, and “Big Cat” Donna Ladd all in the ring at the same time. The Battle Royal will be in a steel cage, no time limit, no referee, and the losers must leave town. Marshand Crisler will be the honorary referee (as it gives him a title without actually having to do anything).


Meet KIM Waaaaaade at the Entergy Tent. For five pesos, Kim will sell you a chance to win a deed to a crack house on Ridgeway Street stuffed in the Howard Industries pinata. Don't worry if the pinata is beaten to shreds, as Mr. Wade has Jose, Emmanuel, and Carlos, all illegal immigrants, available as replacements for the it. Upon leaving the Entergy tent, fig leaves will be available in case Entergy literally takes everything you have as part of its Trollfest ticket price adjustment charge.

Donna Ladd of The Jackson Free Press will give several classes on learning how to write. Smearing, writing without factchecking, and reporting only one side of a story will be covered. A donation to pay their taxes will be accepted and she will be signing copies of their former federal tax liens. Ms. Ladd will give a dramatic reading of her two award-winning essays (They received The Jackson Free Press "Best Of" awards.) "Why everything is always about me" and "Why I cover murders better than anyone else in Jackson".

In the spirit of helping those who are less fortunate, Trollfest '09 adopts a cause for which a portion of the proceeds and donations will be donated: Keeping Frank Melton in his home. The “Keep Frank Melton From Being Homeless” booth will sell chances for five dollars to pin the tail on the jackass. John Reeves has graciously volunteered to be the jackass for this honorable excursion into saving Frank's ass. What's an ass between two friends after all? If Mr. Reeves is unable to um, perform, Speaker Billy McCoy has also volunteered as when the word “jackass” was mentioned he immediately ran as fast as he could to sign up.


In order to help clean up the legal profession, Adam Kilgore of the Mississippi Bar will be giving away free, round-trip plane tickets to the North Pole where they keep their bar complaint forms (which are NOT available online). If you don't want to go to the North Pole, you can enjoy Brant Brantley's (of the Mississippi Commission on Judicial Performance) free guided tours of the quicksand field over by High Street where all complaints against judges disappear. If for some reason you are unable to control yourself, never fear; Judge Houston Patton will operate his jail where no lawyers are needed or allowed as you just sit there for minutes... hours.... months...years until he decides he is tired of you sitting in his jail. Do not think Judge Patton is a bad judge however as he plans to serve free Mad Dog 20/20 to all inmates.

Trollfest '09 is a pet-friendly event as well. Feel free to bring your dog with you and do not worry if your pet gets hungry, as employees of the Jackson Zoo will be on hand to provide some of their animals as food when it gets to be feeding time for your little loved one.

Relax at the Fox News Tent. Since there are only three blonde reporters in Jackson (being blonde is a requirement for working at Fox News), Megan and Kathryn from WAPT and Wendy from WLBT will be on loan to Fox. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both and a torn-up Obama yard sign will entitle you to free drinks served by Megan, Wendy, and Kathryn. Get your tickets now. Since this is an event for trolls, no ID is required. Just bring the hate. Bring the family, Trollfest '09 is for EVERYONE!!!

This is definitely a Beaver production.


Note: Security provided by INS.

Trollfest '07

Jackson Jambalaya is the home of Trollfest '07. Catch this great event which promises to leave NE Jackson & Fondren in flames. Sonjay Poontang and his band headline the night with a special steel cage, no time limit "loser must leave town" bout between Alan Lange and "Big Cat"Donna Ladd following afterwards. Kamikaze will perform his new song F*** Bush, he's still a _____. Did I mention there was no referee? Dr. Heddy Matthias and Lori Gregory will face off in the undercard dueling with dangling participles and other um, devices. Robbie Bell will perform Her two latest songs: My Best Friends are in the Media and Mama's, Don't Let Your Babies Grow up to be George Bell. Sid Salter of The Clarion-Ledger will host "Pin the Tail on the Trial Lawyer", sponsored by State Farm.

There will be a hugging booth where in exchange for your young son, Frank Melton will give you a loooong hug. Trollfest will have a dunking booth where Muhammed the terrorist will curse you to Allah as you try to hit a target that will drop him into a vat of pig grease. However, in the true spirit of Separate But Equal, Don Imus and someone from NE Jackson will also sit in the dunking booth for an equal amount of time. Tom Head will give a reading for two hours on why he can't figure out who the hell he is. Cliff Cargill will give lessons with his .80 caliber desert eagle, using Frank Melton photos as targets. Tackleberry will be on hand for an autograph session. KIM Waaaaaade will be passing out free titles and deeds to crackhouses formerly owned by The Wood Street Players.

If you get tired come relax at the Fox News Tent. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both will entitle you to free drinks.Get your tickets now. Since this is an event for trolls, no ID is required, just bring the hate. Bring the family, Trollfest '07 is for EVERYONE!!!

This is definitely a Beaver production.

Note: Security provided by INS
.