Thursday, April 11, 2019

WSJ: Public Pensions Continue to Fall Behind Despite Earning More Money

Public pensions are getting great returns in the markets yet are falling behind in funding future benefits for their retirees.  The Wall Street Journal reported yesterday:

Maine’s public pension fund earned double-digit returns in six of the past nine years. Yet the Maine Public Employees Retirement System is still $2.9 billion short of what it needs to afford all future benefits to all retirees.

If the market is doing better, where’s the money?” said one of these retirees, former game warden Daniel Tourtelotte.

The same pressures Maine faces are plaguing public retirement systems around the country. The pressures are coming from a slate of problems, and the longest bull market in U.S. history has failed to solve many of them.

There is a simple reason why pensions are in such rough shape: The amount owed to retirees is accelerating faster than assets on hand to pay those future obligations. Liabilities of major U.S. public pensions are up 64% since 2007 while assets are up 30%, according to the most recent data from Boston College’s Center for Retirement Research....

Maine’s fund serves about the same number of active workers that it did in 2008—a little more than 51,000—while the number of retirees has jumped 32% to about 45,000. Many funds are experiencing the same trend.

That pattern contributes to an increasing gap between pension fund inflows and outflows—before the funds earn a dollar on investments. Maine’s pension fund paid $982 million in benefits in 2018, $394 million more than the contributions it took in. For a plan trying to improve its funding status, that type of gap makes it harder to recover from investment losses.

Many public pension funds have benefited from the 10-year-long bull market. But now many are lowering their predictions of what they can earn in the future. That accounting change makes their liabilities look even larger, portending more strain in the coming decades.... Rest of Article

These charts of MPERS corroborate the article.

Rate of Returns for last ten years.

2009: -19.4%
2010: 14.1%
2011: 25%
2012: 0.6%
2013: 13.4%
2014: 18.3%
2015: 3.5%
2016: 1.16%
2017: 15%
2018: 9.2%
Average: 8.13

While the funding level never really recovered even when PERS enjoyed great returns in the market. 

The unprecedented growth in retirees might have something to do with it. 

The ever-increasing number of retirees means the payments outpace the contributions.  See the deficit between contributions and payments. 

No mention is made of this in the most recent Mississippi Retired Public Employees Association Newsletter.  MRPEA Elle Presidente Ann Thames stated:

• According to PERS Facts and Figures, as of June 30, 2018, each dollar paid out in pension
benefits supported $1.11 in total economic activity in Mississippi. Each dollar “invested” by
Mississippi taxpayers in these plans supported $4.05 in total economic activity in the state.

• There are more than 258,975 working and retired state and local government employees as of
June 30, 2018.

• Mississippi public employees are REQUIRED to contribute 9% of their salaries to PERS monthly
with the promise of receiving retirement benefits when they are eligible to retire – constituting a
contract with the state which must be honored.

• PERS benefits are earned. They are not an “entitlement.”

• Seventy-three (73) percent of the cost of the retirement system comes from mandatory
contributions and investment income.

• The average retirement benefit for a PERS member is $23,823, one of the lowest in the nation.
This basic benefit is the same from the day a person retires until death.

• The American Legislative Exchange Council (ALEC) located in Arlington, VA, has as a primary
mission pension reform which would bring disastrous results to our retirement system. It is believed by the National Conference of Public Retirement Systems (NCPERS) that ALEC engages in
activities to diminish public pension sustainability. Mississippi House Speaker Phillip Gunn is a
member of the board of directors and Mississippi Senator Josh Harkins and

Mississippi Representative Gary Chism are Mississippi’s state chairs for ALEC.


Anonymous said...

Ponzi me-

Anonymous said...

While we are beating this horse, it would be nice to look at PERs investment returns for the last ten years versus what they could have gotten with a S&P 500 ETF.

Nevermind, I just did it. Despite the S&P 500 losing 37% in 2008, you would have still come out ahead. CAGR of 7.99 for PERS over ten years versus 8.49 for the S&P. And the S&P would have incurred microscopic fees compared to the millions we are paying friends of friends to manage PERS.

Thats not THE fix, but its a big start.

Anonymous said...

There's roughly 1 million households in Mississippi. We have over 100,000 people drawing benefits from PERS and another 150,000 or so people currently employed in PERs covered jobs. Messing with PERS is political suicide given that many voters with skin in the system. It will be kicked down the road. No chance it gets reformed.

Anonymous said...

This never gets reckoned with because pensions are perpetual entities. The only way the debt actually comes due is if we actually kill the plan or if we run out of employees. I don't see either happening in my lifetime. If anything, the government's share of payroll and jobs will increase, not decrease in the next 20 years.

I don't agree that it should, but it will.

Anonymous said...

As this article suggests, PERS is not alone, nor is it the worst case when it comes to public-sector pensions. Google "Kentucky pension crisis, Illinois pension crisis or CALPERS crisis" and see what turns up.

This is a VERY BIG issue that too few people are aware of or talking about. And the vast majority of politicians are certainly not addressing it for the political reasons noted above. The topic pisses everyone off - public employees and retirees don't like hearing that their benefits may get cut, and taxpayers don't like hearing that more of their tax dollars (or more tax dollars absolutely) must go into these programs to feed the beast.

Illinois is likely the canary in the coal mine. That state's finances are in shambles to begin with, and their pensions are abysmally underfunded. There is a reasonably high probability that within 10 years Illinois' pension program(s) will either run out of money or the tax burden required to fund the programs will get so high that the state and local governments won't be able to function and provide acceptable levels of service (some may already be at that point).

Watch that ball, b/c it will set the precedent for how this crisis will be handled writ-large. My prediction is that the Federal govt will bail IL out, thus setting in motion a massive nation-wide bail-out of myriad state and local pension programs. The PEW Charitable Trust reported in 2016 that the aggregate underfunded liabilities for all state programs was $1.4 trillion (yes, that is a "T"). That tab will likely be much higher by the time Uncle Sam is forced to step in.

I am a blue-blooded, conservative, libertarian, free-markets, low-tax guy born and bred. However, at this point I believe that there is no other way to deal with this. Most state legislatures will never fix this problem (although TN has done a pretty good job - perhaps others, I don't know). We as citizens (vs. "taxpayers" or "hard workers" or "private sector earners") can't simply let these retirees lose all of the retirement benefits that they have counted on. That would be catastrophic.

The Great Reset is coming.

Anonymous said...

A few tweaks and the thing is fixed for 50 years. But nobody wants to do any tweaks, thus it will actually break in a decade or so and the fix will be much more painful than a tweak.

Anonymous said...

I keep promising myself I won't rise to the bait on these things but 11:09 has got it EXACTLY right. The numbers I should like to see to have an informed opinion would concern the costs of administration versus the benefits of these geniuses. Unless they're a good bit sharper than the idiots who at one time or another have attempted gorging themselves on my retirement accounts I'm betting they are overpaid.

But I could be wrong.

Anonymous said...

@12:01p - I'm curious as to what those tweaks would be - care to elaborate?

Anonymous said...

1:06 to answer your question about investment manager cost: PERS paid $96 million to investment managers to invest $26 billion during FY 2017. That comes to 0.36% of total assets. page 73.
Put another way, if you invested $100,000 in a diversified, actively managed investment portfolio, then you would pay $30 a month. Morningstar reports the average expense ratio of S&P 500 index funds is 0.95%.

For those who that think a sound investment strategy is to put $26 billion in a S&P index fund: no competent investment manager will tell you to put all of your investments into one type of investment. Diversification is key to a properly managed investment portfolio.

Change the Flag and Fill the Potholes said...

While we are on the topic:

Wall Street’s solution to every investor problem is, and will always be, pay us more fees

Anonymous said...

@ 1:37 I do know better but here goes anyhow.

It's not what the genius who actually predicts the future charges you directly but also what the geniuses who predict the future in each individual fund charge you. For example one of the PERS holdings is the Wellington Midcap Value fund and I note its annualized expense ratio are 0.86% and 1.11% depending on the "class" of shares held

Compare the Vanguard product VMISX -- NOT an "actively managed" product -- whose expense ratio is 0.17% or 1/5 the lesser charge of the PERS holding.

Fortunately I have only a small dog in this hunt, a small PERS benefit coupled with being an extra old blown-out senior citizen. With any luck at all I'll be dead before the system really collapses. I agree with the need to diversify a portfolio notwithstanding Warren Buffet's dictum to his widow: 10% cash and the rest in an S&P 500 index fund. (VOO is the Vanguard ETF version and its expense ratio is 0.04 %.) Of course she'll have more cash than most other folks.

Fonzi For Ponzi said...

While some of the regular sideline geniuses always bark about ponzi schemes, they fail to acknowledge that social security is the larges ponzi of all, not to mention medicare and medicaid.

Any system, government or otherwise, that bets on the come in order to pay current obligations is, by definition, a ponzi. So save your clairvoyance and repetitive chirping.

Anonymous said...

1:37, you omit the expenses and fees contained inside all of the assorted funds PERS is invested in ON TOP of what they pay the advisors. Its easily another 1% of assets under management. Likely 1.5% or more considering all of the alternative type investments. I'd be fine putting the whole thing in the S&P

Anonymous said...

Simple tweaks....

Don't let people receive benefits at age 45 just because they have 25 years in. This is a real thing. We actually have people receiving benefits for 40+ years. Ludicrous.

Change the high 4 to high 10 for newer employees. The high 4 has been abused for decades, especially in certain agencies like MHP.

Don't pay COLA unless the plan is funded at 75% or greater. Then phase it in.

I could list 5 to 10 more that are common sense and don't hurt much.

Anonymous said...

1:37...$96 million to investment managers? On top of the expense ratios of the funds themselves? You can't compare that to a $100,000 portfolio. Apples to Oranges.

Let's say an experienced Harvard MBA with ten years experience in portfolio management can fetch $400,000 per year. You could hire 240 of those guys for $96,000,000.

$96,000,000 a year over thirty years would make a dent in the thing.

Anonymous said...

Einstein supposedly said something about the miracle of compound interest. We are seeing the downside of compound interest....the 3% COLA compounded s burying the plan and I suppose an extra $96 million per year compounded over a few decades doesn't help.

Anonymous said...

The unfunded liability is $16 billion. Sounds like a lot, but our state government spends about $20 billion annually.

So using the $100,000 example above, the unfunded liability is like a guy making $100,000 per year and having total debt of $80,000. And having 40 years to pay it down.

Keep it in perspective.

Anonymous said...

"We actually have people receiving benefits for 40+ years. Ludicrous."

What the hell is wrong with people retiring with 40 or more years? First you bitch about people who retire with 25 and then you find it ludicrous that people retire with 40+.

You can bet your sweet ass any teacher retiring with more that 40 was not in it for the pay or benefits.

Anonymous said...

8:23, slow down. Talkin bout people who retire at age 45 and then DRAW 40 years of benefits. They start cashing checks at age 45.

Its a regular occurrence, and its breaking PERS.

Anonymous said...

Two teachers begin their career. One is 20 and one is 40. After 25 years, they get the same annual pension. They paid in the same amount into the system. But if they both live to their life expectancy, the one who starts at 20 and retires at 45 gets about double the benefit.

Retire at 45 and retire at 65. Pay in the same amount. Receive the same annual benefit. NO WAY people should be drawing lifetime income starting at age 45.

Anonymous said...

A very simple audit would show how many individuals over the last ten years who were already in high salaried positions, but were moved into even higher paying positions as favors to insiders to maximize those four years.....some admins almost doubled their salaries to twice what the governor makes, and while eliminating it in their Board minutes, to maximize those four years to calculate their payout/pensions. How the taxpayers are supporting hundreds of retirees at well over $10,000 a month is obscene. Look at the giant number of those who retired in the last ten years and you will see why the payouts exploded. Will this ever be exposed by the state auditor? Crickets.

Anonymous said...

"NO WAY people should be drawing lifetime income starting at age 45."

Sez who? So, the requirements for retirement should be rewritten to suggest that only 'old' people should be able to retire. And, in the illustration given above (although inaccurate) the teacher who started young should have to wallow in the trenches of educational disrespect for forty five years before retiring?

Age at retirement, whether public or private sector, is none of your damned business, nor mine. Yours is actually a socialist concept in line with the thinking of Obama and Hillary who both said, "These CEOs are making way too much money and I intend to take some of it from them".

Anonymous said...

Payouts have been exploding due to compounding of COLA payments. Somewhere around your 24th year in retirement (if you make it that long), your COLA payment is as much as your annual pension.

Anonymous said...

6:12, nice idea. Also look at the tenure of department heads in certain agencies. There are some at which it is the unwritten rule that you step down after 4 years so the next guy can get his high 4.

Anonymous said...

What sucks is that we go round and round talking about all of these little obvious things but the legislature won't make the necessary small adjustments needed. And then one day, bam! Haircuts. For the next generation.

Anonymous said...

The 'haircuts guy' is back. Only problem with his repetitive poor logic is.....haircuts have NEVER taken place. Yet he keeps warning of them coming right around the corner.

And 9:21 is exactly right. Incompetence on parade. If you plateau out with your ability to contribute to the agency, you're the perfect candidate for elevation to the next step (four higher). Then there's the Peter Principle. There are hundreds of specific examples. Lee Vance comes immediately to mind.

Imagine how that would look if any mayor of Jackson were able to stay in office for sixteen years, tossing around the four-higher-years gifts like beads from a green float.

Rod Knox said...

Is Wall St anything more than a fully loaded luxury Ponzi scheme? Everyone in politics and finance wets themselves at the mention of raising the prime rate or government scrutiny of the Wall St Bull.

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