Chris Christie’s pension reform: round two

I have a lot of experience talking to Congressional staffers, regulators, rating agency analysts, municipal bond traders and portfolio managers. When you pump these parties for information there is always a clear line about the type and amount of information they will share.

But I had a bad encounter with the press spokesperson for New Jersey Governor Chris Christie’s treasury department. When I questioned the department’s methodology for their claim that reform in 2011 had reduced over $100 billion in future state pension liabilities, the treasury spokesman told me I need to go to college to understand pension fund projections. I wrote in 2011:

The accomplishment that seemed to be propel Christie to national prominence was his pension reform efforts. He has over-inflated his accomplishments on the issue. For example, he claims he made only one of three payments in seventeen years into the state’s public pension funds. If this were true the funds would have collapsed.

Now Christie is back with a new story about the pension system in New Jersey and how it needs to be repaired again because the first fix was not enough. This from John Reitmeyer of The Record:

Christie has regaled audiences across the country with stories of how he teamed up with Democrats and pulled New Jersey’s debt-plagued pension system back from the brink of insolvency. His victory lap after a 2011 bill-signing on pension reforms took him to California for a speech before Nancy Reagan and to the libertarian Cato Institute in Washington, D.C.

Chicago firemen pensions is a 90 year-old problem


Chicago is drowning in unfunded pension liabilities. Last month, Illinois passed pension reform for state pensions, but did not take up Chicago’s pensions. Illinois governor Pat Quinn says the city’s pension will be taken up in the spring. Chicago’s pensions are deeply underfunded and have unique problems. The Chicago Tribune wrote:

The much-discussed government worker pension debt in Chicago now has a price tag: $18,596 for every man, woman and child living in the city.

That per-person figure is the highest among the nation’s 25 largest cities. It’s nearly double that of New York, the city with the second-largest tab. And it’s more than five times the median for locales included in the new study done by a major investment research company.

How effective was Illinois’ pension reform?

The state of Illinois had two milestone events recently. The legislature passed a long-awaited pension reform and the state treasurer issued $350 million of taxable general obligation (GO) bonds. The Bond Buyer reported on the GO offering:

The yields ranged from 0.75 percent on the short end to 5.65 percent on the long end. The two-year maturities priced at a yield of 1.28 percent, 95 basis points above a Treasury rate of .33 percent. The spread on the state’s final 2038 maturity was about 175 basis points more than the 30-year Treasury rate of 3.90 percent Thursday.

Thomson Reuters Municipal Market Monitor’s Dan Berger wrote in a December 10 commentary about Illinois GO bonds:

Mapping the pension blues

Chris Mier and his team at Loop Capital recently published the 11th Annual Public Pension Funding Review. It is the gold standard for public pension reporting. Mier was onto the pension story well ahead of Meredith Whitney and others, including myself. One thing that is great about Mier’s report is how graphic the pension data is.

Here is a map of the “actuarially required contributions” (ARCs) that states made to their pension plans. Note the numerous blue states that that made 100 percent or more of what was required. Laggard New Jersey, meanwhile, only paid 15 percent of what it was required.

Loop Capital commented:

Thirty one states continue to struggle with making their full Annual Required Contributions (ARC). During periods of budgetary pressure, legislators are tempted to use funds to ‘pay the bills’ instead of paying into pensions. While revenues continued to improve at the state governmental level in 2012, the slow rate of improvement in the economy and the continuing trend of reduced federal support maintained ongoing pressure on state budgets.

A pension system that swings with investment returns

Although the media is full of hair on fire stories about the level of funding in public pension funds some of the funds are in great shape. State run pension systems like the North Carolina Local Government, Wisconsin Retirement System and numerous Washington state funds have extremely high funding levels, near 100 percent in the latest figures from 2011. Each plan has different state funding requirements, retiree benefit schemes, asset mix and projected investment returns. But each plan has been prudently managed, and, most importantly, excessive benefits have not been promised to retirees.

Almost every public pension has a “defined benefit” structure, which means that the benefits promised to an employee upon retirement are a fixed amount and may also have mandated annual inflation increases. The pool of assets that these benefits are paid from fluctuates in value from year to year and state and local governments are responsible to make up any funding shortfall in the plan. This structure, where the government is responsible for all shortfalls, is what has caused large and accelerating government contributions to make up for investment losses from the 2001 and 2008 financial crises. And when governments have to unexpectedly increase pension contributions it crowds out funds that would have been used for education or other social services. Or taxes must be raised.

Unique among state pension funds, the Wisconsin Retirement System is structured as a “defined contribution” fund where everyone, taxpayers, employees and retirees share the risk that the fund will not achieve the returns necessary to fully fund pensions. Wisconsin is structured like a giant 401(k) for its members with steady contributions from the government and employees but the annual payout to retirees varies according to how well the fund is performing. Institutional Investor describes it:

Illinois, the sovereign entity, gets a slap on the wrist

Numerous public pension plans across America are in horrendous shape. The employee plan of the Commonwealth of Puerto Rico, funded at an alleged 7 percent of assets, is functionally broke. Other public plans, like that of Charleston, West Virginia, have 24 percent of the assets needed to meet future promises to retirees.

There is little to no regulatory oversight of public pensions. And what little there is comes in a roundabout way. For example, the sanction that the Securities and Exchange Commission administered to the state of Illinois for not adequately disclosing to bond investors that it was not properly funding its system.

The core of the SEC complaint says:

The state omitted to disclose in preliminary and final official statements material information regarding the structural underfunding of its pension systems and the resulting risks to the state’s financial condition.

Why municipal pension systems may be a very good idea

Muniland ground rule number one: Never use the state of Rhode Island as example of national issues. The state has been poorly managed and dominated by union interests for decades. Rhode Island is a high school dropout when it comes to fiscal management. The underfunding of its public pensions is exhibit one.

Josh Barro of Bloomberg has broken muniland’s number one rule and used Rhode Island’s public pension system to argue about systems nationwide. He writes:

This lack of attention has meant that local plans are much more likely than statewide plans to have become deeply underfunded. Of the 110 statewide pension systems covered by the Public Funds Survey, the worst-funded is the Illinois State Employees’ Retirement System, with a funding ratio of 35.5 percent. Sixteen of Rhode Island’s 36 local plans are worse funded than Illinois SERS.

Texas takes the lead on public pension transparency

Texas explains how Texas is mounting the transparency pony:

A quartet of the most powerful legislators in Texas filed bills Thursday to make available to the public detailed financial information from most local taxing entities and pension systems across the state.

Senate bills 14 and 13 and their identical House counterparts establish, at the request of state Comptroller Susan Combs, new requirements for the posting of public debt, unfunded liabilities, borrowing and project costs on websites maintained by state and local agencies.

This new legislation, if passed and signed by the governor, has the potential to set the gold standard for public accounting of spending and taxpayer liabilities. The legislation would require the posting of all tax rate information:

American cities are bloated with unfunded pension liabilities

There have been hundreds of articles written about how a number of U.S. states have unfunded pension liabilities. These massive shortfalls have been researched by numerous groups, and although they differ on the size of the shortfalls, they all agree that pension liabilities are creating a troublesome drag on many state budgets. The Pew Center on the States is one of the first groups to dig down and analyze the condition of city pension funds and the promises made for retiree health benefits. Their new study, A Widening Gap in Cities, reports a mixed picture.

Cities such as Milwaukee, Wi. and Washington D.C. are prepared to meet their financial commitments to retirees (see above). Others, such as Chicago and Portland, Or. have seriously neglected their pension funds. Almost universally, cities have failed to pre-fund the commitments they have made for retiree health care. In total, cities have pre-funded only 6 percent of their healthcare promises, leaving a shortfall of $118 billion, according to Pew. In contrast, cities have funded 74 percent of pension liabilities, leaving an unpaid balance of $99 billion. In fact, 22 cities face larger unpaid bills for retiree health care than for pensions (page 16).

There are many approaches to increasing the funding for pension and retiree benefits. Pew discusses some of these approaches (page 22):

The real action on Rhode Island pensions has begun


Although the national media has always been a fan of Rhode Island State Treasurer Gina Raimondo, I’ve personally been lukewarm on her performance. She built a case for draconian changes in pension benefits for current workers by inflating the portion of the state pension plan that was unfunded. This led the State Assembly to adjust pension benefits in a way that seemed to go against the law. Unions sued the state and State Superior Court Associate Justice Sarah Taft-Carter has just ordered the case to undergo federal mediation. But I’ve always thought the bigger issue for Rhode Island was that its pension fund had horrible investment returns; some of the lowest in the country. And Treasurer Raimondo has only taken steps this week to change the fund’s management.

Pension funds derive 60% of their revenues from investment returns on a national basis. The other 40% of revenue comes from employee and government contributions. Rhode Island pension funds have had sub-par investment returns for years. The first thing that I would have done was change the pension fund manager before making legislative changes. One year ago I wrote this:

[…]The problems Raimondo addressed were not the biggest that the state faced. The main problem with Rhode Island’s pension system is that it has very poor investment returns on its $6.5 billion portfolio of assets. Over the past ten years the state’s investments returned 2.47 percent compared with the national median of 3.4 percent (page 6). These returns are in the lowest tier of state pension plans, and this chronic underperformance is causing a substantial shortage of assets to pay retirees.

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