Tuesday, March 17, 2009

Bob Stein: Why we need to fix STRS investment policy, not just control expenses

From Bob Stein, March 16, 2009
Subject: WSJ Article

This is why we need to fix STRS investment policy, not just control expenses.

Pension funds' investment policies are all still on cruise control and depending on "The Market" to "turn around" and save them from the problems described in this Wall Street Journal Article.

It is unreasonable to depend on "The Market". The gains would have to be astronomical and abrupt to recover in even a few years. And we have still not stopped losing. Total STRS assets for 2/27/09 were $46.4 billion. Even if we were getting our "8% projected return" on $46.4 B we would have about $3.7 B/year -- far less than the $5 billion STRS pays annually in current pensions.

STRS pensions are NOT guaranteed by law -- just the fact that there will be a pension system. (Check Ohio Revised Code section 3307.50)

Bob Stein
http://www.bobstein.us

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WSJ Article below (3/15/09)
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Many state and city governments reeling from financial woes are about to get whacked again, this time by an unforeseen increase in their pension bill thanks to market declines.

In an effort to stave off tax increases, New Jersey lawmakers on Monday will consider a bill that would allow municipalities to defer payment of half their annual pension bill, due April 1, for one year. Those towns, counties and schools that opt to defer would face a higher pension bill for years to come.

Other states and municipalities are facing similarly difficult choices. In Pennsylvania, the state employees and public teachers pension funds both have warned that employer contribution rates could surge seven-fold from about 4% of payroll to 28%, starting in 2012. The Detroit police and fire pension plan might have to double employer contribution rates to 50% of payroll by 2011, according to the fund's outside actuary.

Two of the nation's biggest public pension funds, New York State Common Retirement Fund and the California Public Employees' Retirement System, also have warned state employers to brace for future rate increases.

"It's going to be huge showdown" between taxpayers and public employees, said Susan Mangiero, president of Pension Governance Inc., a consulting and research firm in Trumbull, Conn. "The anger is more acute today when people are feeling economic hardship."

The specter of higher pension bills comes as many states and cities are struggling to balance their budgets or, in some cases, avoid drastic measures, such as filing for bankruptcy protection, amid falling tax revenue, foreclosures and rising unemployment costs.

In most states, retirement benefits for public employees are guaranteed by law, so governments have little choice but to pay them in full. During bull markets, that wasn't a problem. But with the median rate of return for a public plan of negative 25% in 2008, according to Wilshire Associates, many plans now may be unable to meet their obligations without further injections unless markets rebound significantly, analysts said.

The Detroit police and fire pension plan, where employees are ineligible for Social Security so the benefit plan is more generous and costly, employer contribution rates could double to 50% over the next three years unless the markets turn around, said Norman Jones of Gabriel, Roeder & Smith in Southfield, Mich., the fund's outside actuary.

For future New York City police and firefighters, Gov. David Paterson and Mayor Michael Bloomberg have proposed a minimum retirement age of 50, where no minimum currently exists. They also want to raise to 25 from 20 the number of years these employees must serve before they can collect full benefits.

Proposals pending elsewhere would move new public employees to a 401(k) plan. Some state lawmakers believe they would save money with a 401(k), which requires employees to pay a higher percentage of the contribution rate than they do under defined-benefit plans, said Alicia Munnell, director of the Center for Retirement Research at Boston College.

Municipal unions said they would oppose such a shift, and note that such efforts have failed in the past, including four years ago in California. "It's not a program that is attractive to state employees," said Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees. "It's doesn't work because you wouldn't be able to hire people."

But soaring pension costs are emboldening critics of public plans. They said local governments cannot afford to pay what are often perceived as generous benefits to government employees when the 401(k) plans held by others have shrunk, and as taxpayers already are looking at higher taxes and fewer services.

The pain is about to start in Wisconsin. The state has an unusual policy of adjusting the amount of benefits paid based on the pension fund's performance. Now, for the first time in 25 years, the majority of retirees will receive a benefit reduction.

This month, Wisconsin officials said that beginning in May nearly 150,000 retirees will face at least a 2.1% decrease in benefits, after the pension fund had a 26% negative return in 2008.

About 35,000 of retirees who held a portion of their retirement savings in an optional fund that invests entirely in stocks will be hit harder. Depending on how much of their savings they earmarked for the all-stock fund, their overall retirement income could be cut by up to 40%, according to a spokeswoman for the State of Wisconsin Investment Board.

Jim George, a 64-year-old retired elementary-school teacher in Milwaukee, estimates that his $3,700-a-month benefit check will be slashed by about $600. He is talking with his wife about where they will have to cut back: their annual January vacation to Florida, eating dinner out, maybe their high-speed Internet connection. "It's going to make things tight," he said.

His brother John George, a retired teacher in Madison, Wis., faces the 2.1% benefit reduction. But with the markets reeling this year, he is worried about what future cuts might look like. "The stock market and my pension fund are a daily worry," he said.

Optimism, in part, contributed to this quandary: Legislatures from Pennsylvania to California boosted employee benefits after the stock market boom years of the 1990s, which has added to their burden now.

Most pension funds also took the step of enacting smoothing policies, in which the benefit determination is based on average returns over five years. This was intended to dilute the impact of a particularly bad year. For the most part, this policy has worked to limit sudden or severe rate increases at most pensions.

"But these policies weren't meant to accommodate losses as big as pension funds suffered last year," said Ms. Munnell of Boston College. The college's Center for Retirement Research estimates that the average public plan's liabilities, if based on year-end 2008 market prices, now exceed its assets by 35%. For public funds in worse financial shape, including funds in Connecticut, West Virginia and Indiana, due to stock-market declines liabilities exceed assets by 50% or higher, according to the center.

Some states may decide it is easier to cut public employee benefits than it is to raise taxes, especially during hard economic times. In the Virginia General Assembly, a bill would freeze the current pension plan starting in July and replace it with a 401(k) plan for all future hires.

A state senator in Pennsylvania introduced a similar bill in 2007, and it went nowhere. But this year it is attracting attention.

If employer contribution rates in Pennsylvania jump as high as 28%, "the pension system is just not manageable," said Pat Browne, the Republican state senator who sponsored the bill. He said he expects it to be voted on this year. "We need to get it passed quickly if we are to phase out the existing plan in time to make an impact."
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