Three stories below sum up the delusion, corruption, and idiocy of the politicians and public employee unions. State politicians across the land have promised government employees $900 billion more than they have actually funded. Liberals pretend they don’t understand the term unfunded liability and completely ignore the fact that the only way to honor these unfunded promises is to jack up your real estate, sales, and income taxes by 50% or more. Essentially, it is mathematically impossible to honor these promises without crushing the American taxpayer. Are you willing to pay an extra $1,000 per year in real estate taxes so a high school gym teacher can get a $100,000 per year pension?
Now for the bad news. The 2nd story made me laugh. The mental midgets that run the City of Pittsburgh refuse to even examine the possibility of changing the return assumption on their pension plans from 8% to 7.5%. They actually believe their pension plan will return 8% per year over the long term when 10 Year Treasuries yield 1.7% and the S&P 500 is priced to return 4.5% over the next ten years. Someone needs to tell the delusional numbskulls in Pittsburgh that just because you choose to pretend that reality doesn’t exist, doesn’t mean your pension fund will have the cash to pay out to government drones.
The 3rd story reveals the reality of the situation. CALPERS, the biggest public pension fund in the world, returned 1% last year. That was slightly below their 7.5% assumption. This country continues to act like a 3 year old child. We want our candy and will throw a fit until our mommy gives in. Pretend and extend, while faking the accounting, will not create the cash needed to pay our unfunded liabilities. Using a REAL return assumption of 4% would make the unfunded state pension liability approximately $1.6 trillion.
I predict hundreds of municipal bankruptcies in the next five years when reality meets delusion and false assumptions.
States see pension crisis looming despite cuts
Published September 23, 2012
| The Wall Street Journal
Almost every state in the U.S. has made cuts to its public-employee pensions, seeking to dig out from the economic downturn, but so far the measures have fallen well short of bridging a nearly $1 trillion funding gap.
Since 2009, 45 states have rolled back pension benefits for teachers, police, firefighters and other public workers, including cuts by Michigan and California this month. Next week, Republican Ohio Gov. John Kasich is expected to sign legislation requiring, for example, that certain teachers work longer and pay more toward their pensions.
The state measures show how economic forces are reshaping traditional rivalries, convincing lawmakers and labor leaders that past public pension plans are unsustainable. In Ohio and elsewhere, politically potent unions have locked arms with state officials over the pension cuts.
But the new laws have trimmed just $100 billion out of the $900 billion gap between what the states and their workers put into their retirement plans and what the states owe in retirement benefits, according to estimates prepared for The Wall Street Journal by researchers at Boston College.
Unfunded liabilities in many states grew to troubling levels after investment losses in the 2008 financial crisis depleted pension assets. While most states have approved some form of pension cuts, many have opted to apply those changes only to workers who have yet to be hired.
That means most of the savings won’t be realized for decades, when the most expensive retirement benefits come off the books. Changes made to the retirement plans of newly hired workers are expected to reduce pension costs by 25% over the next 35 years, according to Boston College estimates.
For years, part of the attraction of public service jobs has been guaranteed pensions and other benefits. That remains largely intact for current workers. Only a handful of states have replaced some guaranteed pension benefits with 401(k)-style retirement accounts that are commonplace in U.S. corporations.
Experts say the differences between public and private retirement benefits will eventually narrow as cuts to new workers’ plans take hold.
Many states have avoided reducing benefits for current workers or retirees, saying the plans have legal protections. Courts in Minnesota and Colorado have ruled that cost-of-living raises can be reduced.
“There is a lot of gray area,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. More states could try to cut future benefits for current workers because the laws aren’t clear, she said.
Earlier this month, California Gov. Jerry Brown, a Democrat, signed pension reductions he called the “biggest rollback to public pension benefits in the history of California pensions.” The changes, mostly for newly hired workers, are expected to save the state retirement system as much as $55 billion over the next few decades. But the measures won’t immediately reduce unfunded liability, said spokesman for Calpers, the state pension fund.
A spokesman for the California department of finance said the pension changes would achieve some immediate savings, but they are largely designed to address the long term sustainability of the retirement system. He said pensions of current workers were “vested rights” that can’t be altered
The $100 billion reduction in unfunded liabilities comes from such states as Rhode Island and New Jersey, which suspended annual cost-of-living raises for retirees, according to the Boston College estimates.
States also have shifted more pension costs to employees. As of 2010, state workers were paying 10% more toward their retirement plans compared with three years earlier, according to Boston College. These increased contributions will gradually reduce unfunded liabilities.
Some states say they need more immediate relief.
On Friday, the Teachers Retirement System of the State of Illinois said its pension bill to the state would increase by about $300 million in the fiscal year that starts next July. The higher costs derive from a pension board decision to lower its assumed rate of investment return, citing the “volatility of the world economy.”
The lower the expected return, the more the pension’s unfunded liabilities grow—unless the state fills the gap with higher contributions from employees or taxpayers, or tries to cut benefits.
Illinois lawmakers had a chance to address the deepening hole last month but they couldn’t agree on a bill to limit cost-of-living adjustments. “Changes of some sort are necessary and everyone expects them to happen,” said Richard Ingram, executive director of the Illinois teachers’ pension fund.
In Ohio, lawmakers this month passed a series of changes that touch current and retired workers, along with new hires.
Many of the state’s public-employee unions supported the pension cuts less than a year after they fought a bruising battle with Republican lawmakers to retain their current rights to collective bargaining. But on the pension issue, many state labor leaders agreed that their members’ retirement benefits needed to be trimmed.
“It is a tough pill to swallow,” said Kevin Griffin, who is president of the local teachers union and an English teacher in Dublin, Ohio.
City pension board rejects studying ‘realistic’ returns
Pittsburgh pension board members refused Thursday to consider lowering the fund’s annual investment-earnings projection, saying the move would require increased cash contributions each year that the city could fund only on the backs of employees or with a tax increase.
City Controller Michael Lamb proposed a study to determine whether the projected annual rate of return, now 8 percent, should be lowered to 7 percent or 7.5 percent. Mr. Lamb said he believes 8 percent is unrealistic in current market conditions and means, in a sense, that the city is still underfunding the pension fund.
But four other board members — Mayor Luke Ravenstahl, city council President Darlene Harris, public safety director Michael Huss and firefighters union president Joe King — opposed a study.
A lower investment projection would increase the city’s required annual cash payments to the fund, Mr. Ravenstahl said — and leave him scrambling to find funds in a lean budget or asking taxpayers for more money. “To me, this is where this is going, and I’m not going to do it,” Mr. Ravenstahl said, noting he has never advanced a property tax increase and doesn’t plan to now.
Mr. Ravenstahl’s office said a change from 8 percent to 7.5 percent could require the city to pay an additional $9.3 million annually to the fund, without making a significant difference in the funded liability.
In addition, Mr. Huss said further discussion of pension funding only leads some retirees to fear that they won’t get their checks. Pension payments, he stressed, are not in jeopardy.
Mr. Lamb said he wasn’t wedded to a reduction in the anticipated rate of return but believed a study was needed to determine whether one would be feasible and appropriate.
“I don’t believe 8 percent is realistic for this kind of fund. But you’re right, the other side is, can we afford to lower it?” Mr. Lamb said. Because of the opposition, he withdrew his proposal for a study.
The pension fund is funded with cash payments and investment earnings. To remain in compliance with state funding formulas, a change in the anticipated rate of return likely would increase the required cash contribution.
This year, the city is contributing $55 million, including about $13.4 million in parking tax money from a city council-led bailout in 2010 that averted a state takeover of the fund last year. Employees are contributing $10.8 million.
Because of the bailout, the city briefly covered 62 percent of fund liabilities, up from 29.3 percent before. Because of market performance, however, the funding level had fallen back to 57 percent by June 30. Meanwhile, the city’s payments to retirees continue to outpace fund revenues, another of Mr. Lamb’s concerns.
On Aug. 7, James McAneny, executive director of the state Public Employee Retirement Commission, told the city’s state-appointed financial overseers an 8 percent investment-earnings projection was unrealistic. “Nobody carries 8 anymore,” he said.
That statement brought criticism Thursday from Mr. Huss and Mr. King, who gave the pension board charts showing that many municipalities in Pennsylvania use 8 percent.
In a phone interview after the meeting, Mr. McAneny said 8 percent is not commonly used nationwide but is still used by some municipalities in Pennsylvania.
Mr. King said 8 percent is a realistic return over a long period, and Mr. Huss accused Mr. McAneny of telling overseers, who are often in conflict with the mayor, what they wanted to hear.
CALPERS Returns 1% For Fiscal Year
CALPERS, which had assets of $233 billion as of June 30, has an annual investment return target of 7.5%, which it had lowered from 7.75% recently.
The data is a bad sign for public pension funds nationally, many of which are under pressure as governments face large budget deficits and face troubles funding their pension commitments.
Stocks in the CALPERS portfolio dropped 7.2% due to turmoil in Europe and slowing economic growth globally, CALPERS said. Real estate was a bright spot and was up 15.9% for the year.
Private equity was actually up 5.4% for the year. While the firm did not release returns data for funds as of June 30, CALPERS’ most recent data as of March 31 showed that private equity had a five-year internal rate of return of 7.5%. Venture capital, which is a small piece of PE for CALPERS, had a 4.0% IRR. CALPERS has previously said it is cutting its target exposure to venture capital to 1%.