AC Alert for July 26, 2012 Framing the Pension Crisis in Understandable Terms AC Alert for July 26, 2012 Framing the Pension Crisis in Understandable Terms

Friday, July 27, 2012 - 4:00pm

CONTENT: Newsletter

What's Happening With USA pension fund finances?  State Budget Solutions (SBS), a nonprofit organization advocating for fundamental reform of state finances, released a startling report last week on the true scope of the state and local public pension crisis. The SBS analysis found that the average public employee pension plan is only 41 percent funded -- while total unfunded liabilities as of 2011 are at least a startling US$4.6 trillion. (Source: Marketwatch)

So how would most people respond to a report such as this? We're guessing that it didn't make much of an impression on average Americans, despite the dramatic -- let's call it extra-ordinary -- unfunded liability figure. Why? Because US$4.6 trillion is such a huge amount of money it is beyond comprehension for many of us.

What isn't beyond comprehension is when the pension crisis is framed in more everyday terms.

By now most of us have probably heard of the fiscal problems being experienced by the city of Scranton, Pennsylvania. The former industrial city of 76,000 citizens, located amid the rolling wooded coal country hills of north-eastern Pennsylvania, has just about run out of money. Its debts are huge, so much so that earlier this month the pay for all its municipal workers, including firemen, police and the mayor, were cut to the minimum wage of $7.25 an hour. However, lost amid all the publicity about the city's financial problems are another set of serious fiscal problems in the region:

How to deal with bloated school district pension programs.  "In five years, pension contributions for Scranton area school districts are projected to increase by US$172.9 million. With reduced levels of state funding and limits on how much districts can raise local property taxes, superintendents fear there will be one option: bankruptcy. The recently passed 2012-13 state budget did nothing to address what many call the upcoming pension crisis. Area districts have already furloughed teachers, cut tutoring programs and increased class sizes. Scranton Superintendent William King says if the problem is not addressed at the state level, school districts are going to go bankrupt." (Source - for full story read: Scranton Times-Tribune)

Our editors suggest that the threat of a local school district declaring bankruptcy is likely to elicit a much more alarmed and immediate response than the US$4.6 trillion figure.

Truth is, they are both alarming repercussions of a pension system gone awry.

How did we get here? It goes back at least 40 to 50 years, perhaps even more. Salaries in the private sector regularly outpaced the salaries of government workers. To attract qualified workers into the public sector, such as cities, towns and counties -- and school districts -- often the promise of payments and benefits in retirement was the sweetener. 
Labor unions also negotiated regularly for more generous plans for government employees.  Over the decades, government salaries caught up to many similar positions in the private sector, but retirement promises (i.e. pension plans) were not usually cut back to even the playing field. Government plans grew more generous over the decades.

So how do the municipalities pay for these benefits in today's dollars? Key question, difficult answers:  Increase taxes; reduce retiree benefits, eliminate pensions, postpone payments? The need for addressing these problems is urgent. Unfortunately the answers are not easy to find.
Meanwhile, every week brings another round of developments - some shocking and dramatic. And as taxpayers or beneficiaries, or public officials having to deal with these issues timely information is needed.
AC's Hot Topics Section on Pensions: The Next Financial Crisis follows these developments every day with fresh news, commentary and research. Here are some of the more recent articles:

Nation's largest public pension fund reports dismal 1 percent annual return
(Source: Washington Post) CALPERS, the nation's largest public pension fund collected only a 1 percent annual return on its investments, a figure far short of projections that will likely bring pressure on California's state and local governments to contribute more money.

Calpers tells California cities to keep eye on pension terms
(Source: Reuters) California's cities should learn how to keep their pension costs in check instead of blaming the California Public Employees' Retirement System for their problems, according to some of the pension fund's board members.

New Report Shows Total Public Pension Debt Exceeds $4.6 Trillion
(Source: Marketwatch) State Budget Solutions (SBS), a nonprofit organization advocating for reform of state finances, released an analysis on the scope of the state and local public pension crisis which found that the average public employee pension plan is only 41 percent funded while total unfunded liabilities as of 2011 are at least US$4.6 trillion.

Herald News: Pension reform not having desired effect
(Source: North New Jersey's public employee pension system has an unfunded liability of US$42 billion, making it one of the state's major fiscal problems. Matthew Boxer, the state controller, said in a report last week that 202 outside professionals, primarily lawyers and engineers working for municipalities and school districts, improperly remain in the state pension system, "potentially costing taxpayers millions of dollars per year."

City pension funds stumble to post weak 1.7% return in past year
(Source: NY Daily News) New York City's pension funds posted returns of only 1.7% over the last year, according to Controller John Liu. These returns compare with an average of 6.7% over the past 10 years.

NM public employee pension plan changes proposed
(Source: CNBC) Retired public employees could see their yearly cost-of-living adjustments shrink under a plan recommended to New Mexico lawmakers that would shore up the long-term finances of a pension plan for more than 50,000 workers.



Editorial: CalSTRS audit must dig into spiking claims
(Source: Sacramento Bee) The editorial board of the Sacramento Bee notes that the State Teachers' Retirement System remains on the state auditor's list of "high risk" fiscal issues facing California. The US$147 billion retirement fund is more than $56 billion in the hole. CalSTRS officials have said they will need an additional $4 billion a year in state support for the next 40 years to achieve full funding. Before the state forks over any more money, the board believes that it needs to make sure CalSTRS is doing all it can to protect its existing funds from illegal spiking.



Public Pension Portfolios Double Down
(Source:  Many U.S. public pension plans have a propensity to imprudently invest their portfolios more aggressively than private plans or their Canadian and European peers with similar demographics. That's one of the findings documented in a study by an international trio of academics. That paper is potentially the most important research in the public pension arena this decade.

Putting more funds in the pension funds:  Over recent years stock market upturns had helped pension funds to regain some of their losses from the financial crisis of 2007-2009 period. But some of the conditions of funds as cited in this week's AC ALERT are quite disappointing. There are fundamental pension management principles -- long accepted common wisdom -- that are due for a change to protect both current and future retirees. 

The public sector pension fund issues are fast changing --  we  invite you to stay up-to-date on the issues by accessing the content of our Hot Topic - Pensions: The Next Financial Crisis regularly.

This is just a sampling of the information in our Alert. Go here for the full text of this alert, and more information on Sustainability, and other Accountability related topics.