Pension Matters
State Employees Retirement Fund
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February 2012
Bureau of Investments (Treasury) CIO Presents at SERA Meeting
Chief Executive/Chief Investment Officer, Jon Braeutigam spoke to SERA members at its February meeting. Mr. Braeutigam directs policies and strategies for the Bureau of Investments in managing the assets of the four retirement systems as well as the assets of numerous state trusts and agencies. He was accompanied by his Director of Investments and COO, Robert Brackenbury.
Bureau of Investments manages the investments for the State of Michigan retirement plans. Over $53 billion in retirement funds and over $5 billion in other trust and agency funds are under Bureau management. The Bureau manages over $61 billion in total.
MSERS funded ratio stands at 72.6% at the end of September, 2010. Total plan membership stands at 82,183 for that same time period. With the Administration’s commitment to providing more funding for the health care retirement liability, the Bureau will also be in a position to invest any additional funds ( not needed for immediate payments) in order to grow these funds through earned interest.
Mr. Braeutigam states he feels the retirement fund is well diversified and did well this past year with a time-weighted return rate 6.5%.
Analysis: Michigan Cannot Grow Out of Pension Problems
According to James Holman, “Michigan’s major government pension funds are underfunded and will require billions for the foreseeable future just to begin catching up. But some argue that multiple years of solid investment growth will eliminate this problem. While nothing would alleviate pension problems like a few years of solid returns, it is unlikely that such sufficient growth will occur”.
A report from consultants R.V. Kuhns and Associates looks at the possibility that the state will return to full funding with investment growth. Currently, the state assumes that it will get an 8 percent return on the money it sets aside to pay for pensions (though a small percentage of the teachers’ fund assumes a 7 percent return). The state, however, has received on average 5.5 percent to 5.7 percent since 1997. This is one of the main reasons why the state government’s pension system for public school employees is underfunded by $17.6 billion. In order to catch up on liabilities, the report shows that returns would need to average 11.7 percent to 12.7 percent for the next decade.
The report also uses a series of assumptions about investment performance. Only under the rosiest of scenarios will the funds return to full strength by 2020, a “75th percentile” event (see report for more details).
The state can ensure that it has enough money to pay for retirement benefits already earned by closing its pension fund to new members. This contains the increase in unfunded liabilities while offering new employees affordable retirement benefits.” By James M. Holman | Jan. 20, 2012 Michigan Capital Confidential.
To read the report from Kuhns go to http://tinyurl.com/85suw32
Pension Withholding Guidelines
The most recent “2012 Pension Withholding Guide” with the most recent MI-4P is available. You will know you have the most current version if the version date “11/11” is in the upper left corner. Go to http://tinyurl.com/7wcnldx to find information and forms on retirement benefit taxes.
Pension Tax Rollout a blunder
Please tell me this isn’t true!!!! The Traverse City Record Eagle’s opinion page hammered the state for taxing exempt state retirees. Anonymous, The Record Eagle, Fri Jan 27, 2012, 07:31 AM EST
www.record-eagle.com/opinion/x370173592/Pension-tax-rollout-a-blunder
January 27, 2012 “Michigan Gov. Rick Snyder and the Legislature get a failing grade for their handling of the Michigan Pension Tax exemption blunder that surfaced when the new tax took effect Jan. 1. Worse, they still haven’t taken the steps necessary to ensure exempt retirees know to stop the deductions.
The state’s first pension tax law exempts retirees born before 1946, but because of the state’s poor communications with pension plan administrators and retirees, the 4.35 percent tax was deducted this month from thousands who should not have to pay.
Imagine the surprise and confusion of many exempt seniors who found their January pension checks 4.35 percent lighter. For retired pilot William Blaha, 80, of Kewadin, $117 was deducted this month — about the same he pays monthly for medications. Though this is the state’s fault, Blaha and other affected seniors won’t be able to get the money back until next year, when they can file for a refund on their 2012 state income tax. And unless they fill out required paperwork, the tax will be withdrawn from every subsequent pension check. Until then, the state gets millions of dollars of interest-free loans from its oldest senior citizens.
State officials laid the blame on retirement plan administrators. But the truth is that the state did a lousy job of informing retirement plan administrators and exempt seniors that retirees born before 1946 needed to file a special MI W-4-P form to notify pension plan administrators to change their status from “withholding” to “exempt.” The mix-up is clearly the result of multiple state failings:
- State treasury officials decided to work through financial institutions and not individual taxpayers.
- They didn’t notify exempt retirees by mail of the need to file the new W-4-P form. Instead, the Treasury Department posted advisories on its website, a totally unrealistic form of notification. Earth to Mars, not all seniors use computers, and who checks — or has ever checked — the Treasury Department’s website?
- The state did not inform retirement plan administrators about the changes until October, even though the law was approved in May.
“That was as quickly as we could get the information pulled together,” Treasury Department spokesman Terry Stanton said.
The state should have delayed starting the tax until it informed tax-exempt retirees individually and notified plan administrators. The governor and Legislature also should apologize to exempt seniors and pension plan administrators. If the situation was reversed, rest assured the state would find a way to get its money back, and now.” http://tinyurl.com/865btpo January 27, 2012.
Bonds Backed by Pension Fund in Default
A Michigan movie studio that opened just ten months ago is in default on an $18 million state-issued bond. While the studio may be in default, the bonds are not, because the State of Michigan Retirement System backed those bonds and is now obligated to make this $420,000 payment due Feb. 1. To read the entire article from Michigan Radio, go to http://tinyurl.com/7k3yb4u.
Notes from the January State Employees Retirement System Board Meeting
Retirement Reform — Laurie Hill from the Office of Retirement Services provided an update on the pension reform under PA 264 (requires DB workers to pay 4% into the fund to remain in the DB fund or switch to a DC plan). Many workers are still weighing the options and ramifications of the changes brought about by this legislation. According to materials handed out at the meeting over 60% of the DB workers have not made a decision and over 97% of the DC workers have not made a decision. Deadline for making changes is March 2nd. Webinars and written communications will be ongoing until that time. These changes do not affect retirees. For more information go to http://tinyurl.com/7gwqk6y.
December Payroll Data — December, 2011 payroll statistics indicate there are 54,760 retirees. The data indicates that of those added to the payroll during this period 64% received pensions under $20,000.
Nason Case — The Supreme Court’s decision to deny an appeal on this case held that the “language in MCL 38.24, which refers to a member’s “total incapacitation for further performance of duty,” solely allows consideration of whether a member can perform the state job from which the member seeks retirement because of the nonduty related injury or disease, not other employment positions or fields for which the member may be qualified by experience and training. Therefore, only the state job from which the member is retiring can be considered in determining if the member can return to past employment. See the Court’s opinion at http://tinyurl.com/832jer3 .
Important Information for MetLife Long-Term Care (LTC) Policyholders Who Recently Transferred Coverage to Prudential
- All transfer forms needed to be postmarked by January 5, 2012.
- If you transferred to Prudential, effective February 1, 2012, your benefits will be covered by Prudential instead of MetLife.
- All MetLife long-term care payroll and pension deductions will be discontinued effective February 1, 2012. Therefore, your last MetLife deduction will appear on your January 19, 2012 pay warrant or January 25, 2012 pension statement.
- All premiums due to Prudential, including payments made directly to Prudential and payroll/pension deductions will begin in February, 2012. Therefore, your first Prudential deduction will appear on your February 2, 2012 pay warrant or February 25, 2012 pension statement. If you have any questions about your premiums, please contact either Prudential or MetLife at the numbers below.
If you have questions about your new Prudential Long-Term Care plan, please contact the Prudential Group Long Term Care Customer Service Center at 1-800-732-0416, Monday - Friday, 8 a.m. - 8 p.m. ET, for assistance.
For questions about your MetLife Long-Term Care plan, call the MetLife Customer Service at 1-800-438-6388, Monday - Friday, 8am - 8pm ET, for assistance.
New Comparison of Government and Private Wages and Benefits
The comparability of state-local versus private sector pay has become a major issue in the wake of the financial crisis. Funded levels of public pension plans declined sharply, and governments’ ability to make required contributions has been severely constrained by the collapse of state-local budgets. Politicians everywhere are looking for ways to reduce pension costs and increase revenues. Often such efforts are couched in terms of excessively generous existing compensation — especially, current pensions. Dueling studies have appeared arguing that state-local workers are paid less or more than their private sector counterparts. Virtually all agree that wages of state-local employees are lower than for private sector workers with similar education and experience, but researchers differ on the extent to which pensions and other benefits compensate for the shortfall. This brief builds on the recent wave of studies by refining the estimates of the value of benefits &To read the entire brief from Boston College Center for Retirement Research, go to http://crr.bc.edu/images/stories/Briefs/slp_20.pdf
Editor’s note: June Morse is the Lansing SERA Chapter President. She may be contacted at jmorse10@comcast.net or 517-886-9323.
Addendum to Retirement Matters
By Doug Drake*
By statute the Revenue Estimating Conference is held at least twice a year, in January and May, and sometimes more often if needed. Key legislative and executive economists and invited others come together to examine the outlook for the US and Michigan, and what that may mean for state revenue collections. By law the Governor’s budget is to be based upon the revenues agreed upon by the participants (Directors of the Office of the Budget, House Fiscal Agency, Senate Fiscal Agency, and the State Treasurer) plus other available funds such as prior year surpluses.
Presenters this year included forecasters from the U of M (whose forecasting model is also used by state officials), IHS Global Insight (an outside private forecaster under contract to the state for economic advice), and the staff economists for the Treasurer and the two legislative fiscal agencies. This year’s conference also had a presentation by a staffer for the National Conference of State Legislatures on their perspective of possible federal budget impacts on the 50 states.
All the presenters had different areas of emphasis and slightly different assessments of the risks to the forecasts, but all generally agreed that both the US and Michigan economies are definitely on the road to recovery. All generally saw a steady but modest recovery, and all noted a number of risks to that recovery.
For the US economy, the forecasters see modest inflation (a bit more nationally than in Michigan), and relatively flat interest rates, with somewhat more volatility in Corporate Bond rates. They also see a slow but steady improvement in the housing market with new starts rising from less than 600,000 we’ve seen in 2010 and 2011, to 873,000 in 2013. This increase, while good, is still far short of what would be considered as “normal” or “strong” levels of 1 million or 1 million plus.
Auto sales show a similar steady and slightly faster rate of improvement to 14.5 million in 2013, but this is still far short of the numbers of a little more than a decade or so ago that were in the high teens and touched 20 million. Perhaps more important than the level of sales, the outlook is for the Detroit 3 to finally begin to increase market share after decades of declining share—a major reason for Michigan’s struggles since the 1980’s.
State government revenue outlook is positive also, but the growth is modest, with the growth rate offset to some degree by the major business tax cuts enacted in Governor Snyder’s first year that were not fully offset by the tax increases on pension and other income received by seniors, and cut in the EITC (earned income tax credit) for the working poor. School Aid Fund revenues in fact decline in FY 2012, pulling combined SAF and General Fund/General Purpose revenues into the red. And the continued impact of the tax cuts keeps the growth at very modest levels for FY 2013 as well. Some additional spending will be possible due to FY 2011 improving more quickly than expected, generating somewhat larger surpluses than were expected when the budget was revised earlier last year.
(Ed’s Note: Doug Drake is a Lansing Chapter SERA member and Chair, State Employees’ Retirement System Board representing retirees, and advisor to SERA on the economic impact of the pension tax.)
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