Tags: Pensions

Teachers’ Pensions Are a Half-Trillion Short


The habitual overpromising and underfunding of government-employee pensions is a fiscal powder keg in an economy full of sparks — and a new report estimates that teachers’ pensions alone are underfunded by nearly a half-trillion dollars.

Strange, then, that the state of New York has decided to take about $1 billion out of its teachers’ pension system to “invest” in infrastructure projects related to recovery from Hurricane Sandy, an initiative announced by Bill Clinton. (Remember him?)

New York is one of the few states that can afford to roll the dice a little bit with its teachers’ pensions, because New York is one of the few states with pension systems that are not critically underfunded. (The few others include Idaho, Alaska, Wisconsin, South Dakota, North Carolina, Tennessee, and Washington.) City comptroller John Liu said yesterday: “This innovative plan could help us rebuild the city, create jobs, and yield solid returns on our pension funds,” but it is not yet entirely clear how that will happen, and the details of the particular investments remain murky. The pension fund may simply buy bonds related to infrastructure projects, or it may take a direct ownership interest in some of the projects.

I find this troubling inasmuch as mixing a pension manager’s fiduciary responsibility with political incentives invites conflicts. For example, the pension fund could face political pressure to make investments in the districts of influential elected officials, or to lend money on overly liberal terms. The public enterprises that perform well usually are those that do one thing and concentrate on doing it well, and it probably would be best for New York’s teachers if their pension manager focused exclusively on fiduciary concerns rather than try to act as a creator of jobs or an organizer of hurricane-recovery projects. It will be interesting to see what kind of returns these investments yield.

Beyond New York and the handful of funded-up states, the picture looks pretty grim. Key findings from “No One Benefits,” the report referenced above:

Pension systems are severely underfunded. According to the most recent data available, NCTQ estimates that teacher pension systems in the United States have almost $390 billion in unfunded liabilities. Funding shortfalls have grown in all  but 7 states between 2009 and 2012.

Pension underfunding is even worse than meets the eye due to unrealistic assumptions and projections about returns on investments. Even with states almost certainly overestimating how well funded their pension systems are, NCTQ finds that pension systems in just 10 states are, by industry standards, adequately funded.

Retirement eligibility rules add to costs. In 38 states, retirement eligibility is based on years of service, rather than age, which is costly to states and taxpayers as it allows teachers to retire relatively young with full lifetime benefits. In the just ten states—Alaska, California, Illinois, Kansas, Maine, Minnesota, New Hampshire, New Jersey, Rhode Island and Washington—that no longer allow teachers to begin collecting a defined benefit pension well before traditional retirement age, states save about $450,000 per teacher, on average.

Most pension systems are inflexible and unfair to teachers. Many assume that defined benefit pension plans are a clear win for teachers. But while most defenders of the status quo fight tooth and nail to preserve traditional pension plans, the reality is that these costly and inflexible models are out of sync with the realities of the modern workforce. Current National Council on Teacher Quality pension systems are built on a model that assumes low mobility and career stability and helps to put public education at a competitive disadvantage with other professions.

Note that the savings per teacher derived from the reform of eligibility rules runs $450,000, or more than two and a half times the average net worth of a retirement-age U.S. household. The real value of the average teacher’s retirement benefits in low-cost Wyoming is pushing the $1 million mark. The value of the average teacher’s retirement in Illinois is estimated at $2.4 million — and they were on strike over compensation not too long ago. Illinois has been issuing debt to meet its pension obligations, an unsustainable strategy.

The economics of the pension situation is of course worrisome (terrifying), but the political lesson is depressing, too: Government simply cannot be trusted to keep honest accounts.

NOTE: This has been corrected since first posting.

Tags: Fiscal Armageddon , Pensions

Public Pension Rumblings


The state of Kansas now has a permanent legislative committee on the public-pension crisis.

Prichard, Ala., has stopped paying its municipal pensions.

Indiana considers allowing “Chapter 9″ bankruptcies — bankruptcies for cities.

Rhode Island’s worst basketcase heads for bankruptcy.

A Michigan basketcase heads there, too.

Bankruptcy is a possibility for San Diego.

State-bankruptcy law is suddenly a hot subject.

I hope investors are holding out for really, really good yields on municipal bonds. Ah, good.

Tags: Debt , Deficits , Despair , Fiscal Armageddon , Pensions

Why Is the World Bailing Out Ireland?


Ireland is headed for a massive international bailout, and it is no surprise that the national governments quickest to put up loan money — Britain and Sweden — are not members of the single currency. The euro-holdouts are to European finances what the United States is to world military order: the knuckle-dragging, unenlightened, anti-social misfits that everybody goes running to when real trouble hits.

Nobody is making much of a stink about bailing out Ireland, and there is something significant in that — but it isn’t Britain’s purported sentimental feelings for “a friend in need.” If Ireland had not been in the euro — if it had been in control of its own monetary policy — then a massive devaluation would have been its likely response to its untenable fiscal position. But that option has been foreclosed, which leaves either a bailout or a much nastier alternative: default.

The short-term reason that Britain and other major powers dread an Irish default is that their banks own a lot of Irish debt. Bondholder haircuts are nobody’s idea of a good time, and the Irish are positioned to put the high-and-tight on their former colonial oppressors but good.

But the long-term reason is narrow governmental self-interest: If Ireland defaults, that is going to make borrowing a lot more expensive for every government in the world. Even with the bailout on the way, borrowing costs are going up, for Ireland (obviously) but also for fellow PIIGS-club member Spain. Politicians fear lots of things — honest labor, easily understood and headline-friendly scandals, constituents who read Hayek — but above all they fear having their credit cards taken away. A government that cannot borrow cheaply is a government that cannot pawn off hard decisions on future generations; it is a government that has to govern, with prudence and thrift, rather than merely to enjoy the pleasures of exercising power. That’s a lot less fun than the current model of political life, and less lucrative in retirement, too.

No surprise that the parties most open to raining pain on bondholders are the Germans, who are in the habit of dealing with fiscal challenges like adults (or at least, as people who behave maturely by European standards.) The New York Times reports:

“Policy makers face the same dilemma as in any crisis with respect to haircutting bonds, and the real-life decisions are always extremely difficult,” said Robert E. Rubin, the former Treasury secretary, who faced just such a quandary in 1994, when he helped arrange a $47 billion rescue package for the Mexican government as it teetered on the verge of default.

“Holding bondholders harmless contributes to moral hazard and increases risks elsewhere,” Mr. Rubin added. “But imposing bond haircuts can make future market access expensive or impossible for an extended time and can create serious contagion effects elsewhere.”

… One signal that the policy pendulum may be swinging away from bondholders came earlier this month when the German chancellor, Angela Merkel, supported by President Nicolas Sarkozy of France, tried to persuade other European leaders that bondholders needed to accept some of the risk in future bailouts.

The move spurred a bond market rout, and Ms. Merkel had to retreat.

… Even so, any talk of default — or a debt restructuring, the term that bankers and technocrats prefer — remains anathema in capitals like Athens and Dublin. Their leaders fear that they would be put in a financial penalty box and denied fresh access to funds.

A similar problem probably will be played out in the United States as unsustainable pension obligations and general fiscal incontinence threaten to send dozens of U.S. states and scores of municipalities into insolvency. Municipal bonds and state debt have long been a preferred investment vehicle for millions of Americans and a great number of retirement funds, both because of the (alleged!) security of government debt and the tax-preferred status of munis. When Illinois, California, and New Jersey come knocking on Congress’s door looking for a bailout, they won’t be alone: Millions of Americans will be lined up behind them, because they stand to lose a great deal of their savings, including retirement savings, if U.S. states go into default — and a default by any U.S. state would probably send borrowing costs skyrocketing for every other state. Lot of elderly muni investors live in swing states such as Florida and Pennsylvania, which are our grayest states. Republican governors and legislatures will have a strong incentive to support Democratic governors and legislatures. (Not that Democratic states are the only ones that will need bailouts, but Republicans are notionally more opposed to state bailouts than Democrats are. I hope.)

In the U.S. as in the EU, saying no to bailouts won’t be easy.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Tags: Debt , Deficits , Fiscal Armageddon , General Shenanigans , Pensions

The State Pension Implosion: A Chronology


Business Insider checks in with Prof. Joshua Ruah, Exchequer’s favorite source for data on state-government pension shenanigans, and draws up a list of which states are going down in what order. My only beef with this analysis is that I think it relies on assumptions about investment returns that are slightly over-rosy, meaning that the pensions funds are liable to go toes-up sooner than projected.

No. 1 on the list is perennial fiscal offender and Obama career incubator Illinois, followed by Connecticut (no surprise), Indiana (uh, governor?), New Jersey (uh, governor?), Hawaii, Louisiana (uh, governor?), Oklahoma, Colorado, Kansas, Kentucky, and New Hampshire.

I count three states with Republican governors who are positioned to be national bigwigs and possible presidential contenders. The legislatures, of course, are the real problem, but state bankruptcy can be a real career-ender for a governor.

I like Hawaii’s odds: Surely there is some way to leverage the unquenchable interest in Barack Obama’s birth certificate and make some money. You know, a kook tax. As for the rest of these states — it looks grim. They cannot tax their way into solvency (the expenses are simply too heavy), they cannot borrow, and many of them, including Illinois, are constitutionally forbidden to reduce pension payments.

I think the odds are slightly better than even that we’re looking at a $1 trillion plus federal bailout of the state pension systems.

Tags: Debt , Deficits , Despair , Fiscal Armageddon , Pensions , Unions

Public-Pension Criminals


So now that the state of New Jersey has been charged by the SEC with lying to bond investors about the (desiccated, horrific, probably insolvent) state of its pension funds, the guessing game begins: Who is next? Exchequer readers will not be surprised to learn that Illinois, the place where Barack Obama developed his famous financial acumen, is on the list of potential targets.

When Illinois passed its pension “reform” law a few months ago, it decided it could skip an additional $300 million in pension contributions this year, and many millions more in the future. This, for a pension system that already is less than half funded. The New York Times asked a few actuaries about that decision, and the bean-counters are crying foul:

Paradoxically, even though the state will make smaller contributions, the report forecasts that Illinois will get its pension funds back on track to a respectable 90 percent funding level by 2045. It projects that costs will increase slowly and an economic recovery will make cash available for the state to make the contributions it has failed to do in the past.

Whether that is even possible is contested by some actuaries who note that its family of pension funds is now only 39 percent funded. (If a company let its pension fund dwindle to that level, the federal government would probably step in, but federal officials have no authority to seize state pension funds.)

Some actuaries who have reviewed the state’s plans said that shrinking contributions would make the pension funds shakier, not stronger.

Indeed, one of them, Jeremy Gold, called Illinois’s plan “irresponsible” and said it could drive the pension funds to the brink.

Further, Mr. Gold pointed out that Illinois’s official disclosures said that its pension calculations used an actuarial method known as “projected unit credit,” but that the pension reform report used another method, which had not been approved for disclosure.

“According to Illinois statute, the prescribed contributions are determined under a method that may not be in compliance with the pertinent actuarial standards of practice,” Mr. Gold said.

The Wall Street Journal has more on state pension shenanigans here.

Hey, taxpayer: How’s your retirement fund looking these days? Anything left to put in it after the state-workers’ unions are done with you? Heck, you’re probably the kind of sucker who pays his mortgage with his own money.

Tags: Angst , Debt , Deficits , Despair , Fiscal Armageddon , General Shenanigans , Illinois , New Jersey , Pensions

Bobby Bailout: Casey to Put Taxpayers on Hook for Teamsters’ Shenanigans


Sen. Robert Casey (D., Pa.) and Rep. Earl Pomeroy (D., N.D.) are pushing legislation that would commit taxpayers’ dollars to bailing out the Teamsters’ retirement pension fund. The financial crisis and the Great Recession may have upset your retirement plans, but that’s not reason that politically connected union thugs have to share the pain.

Here’s the deal, as former Department of Labor official Vincent Vernuccio, now an analyst at the Competitive Enterprise Institute, tells Exchequer: Under the Democrats’ plan, the U.S. Pension Benefit Guaranty Corp., which is basically a pension-insurance fund run by the federal government, would be able to receive tax dollars to bail out so-called orphan pensions — pensions for which employers have ceased making contributions, usually for reasons of insolvency. Under normal circumstances, PBGC does not use taxpayer money to bail out pensions; it charges an insurance premium to the funds it covers and uses that money to make good on pension obligations if a particular pension fund goes bankrupt. It’s like an FDIC for pension funds: If a fund is sufficiently mismanaged, PBGC can step in, take it over, and take care of its obligations.

The Casey bill would change all that, creating a “fifth fund” within PBGC that would receive taxpayer support. Currently, federal law carefully specifies that PBGC obligations are not obligations of the U.S. government. Casey-Pomeroy would reverse that, mandating that “obligations of the corporation that are financed by the [fifth fund] shall be obligations of the United States.” In other words: You, sucker, are paying the bill.

This is worrisome for a lot of reasons, as Vernuccio points out: First, it establishes a precedent for taxpayer-funded bailouts of union pensions. As galling as it would be to bail out the Teamsters and their other private-sector union buddies — whose meatheaded management of their pensions has left them with as much as $165 billion in unfunded obligations, according to Moody’s — things would immediately get much, much worse if that precedent were used to justify a bailout of the public-sector unions, whose unfunded pension liabilities run into the trillions. (President Obama’s home state of Illinois is leading the way down the toilet when it comes to state-employee retirements. California’s pension shortfall, Vernuccio notes, is larger than the GDP of Saudi Arabia.) Casey-Pomeroy wouldn’t authorize public-sector bailouts, but it would establish an all too easily expandable template.

Second, Casey-Pomeroy almost certainly would lead to a broader union bailout. PBGC already has more obligations than it can meet, and its operations already are larger and more complex than most Americans imagine. According to its web site, “PBGC pays monthly retirement benefits, up to a guaranteed maximum, to nearly 744,000 retirees in 4000 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,476,000 people.” Unsurprisingly, PBGC already is more than $20 billion in the red — which is to say, the guys who are supposed to cover you when your pension fund cannot cover its obligations cannot cover their obligations — and its own analysis suggests it will be $34 billion short by 2019. Guess who they’ll be going to for that money?

And that is the truly worrisome part: Casey’s bill would allow for the transfer of money from the “fifth fund” to other PBGC funds. In other words, we could end up paying for the whole thing. “It takes a couple of leaps,” Vernuccio says, “but, long term, you can see this being a backdoor bailout of PBGC.” There is no statutory limit on the amount of taxpayer money that could be committed to bailing out union pensions under the Casey bill. Taxpayers already have an unlimited commitment to bailing out Fannie Mae and Freddie Mac — do we really want to offer a bottomless well of public money to the Teamsters, too?

– Kevin D. Williamson is deputy managing editor of National Review.

Tags: Angst , Bailouts , Democrats , Despair , Fiscal Armageddon , General Shenanigans , Pensions , Unions

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