Pension Matters
State Employees Retirement Fund
Most Recent Market Value | Archived Monthly Profiles
August 2012
Investment Advisory Committee’s June meeting minutes:
“Mr. Braeutigam reported on the performance of the SMRS’ portfolio for the time period ending December 31, 2011. He noted the S&P 500, which was flat in 2011, but as of February 29, 2012, it was up 8.6% year-to-date, which gives a sense of the volatility in the markets. He also discussed the foreign markets, which were down last year and the allocations of International versus the target and peers. Mr. Braeutigam explained the index to emerging and the currency issues, being 20% hedged with regards to the Euro, the Pound, and the Yen. Over the past decade the International portfolio performance has been challenging versus peers because the portfolio was hedged and the peers are completely unhedged. There was a lengthy discussion with several questions regarding hedged versus unhedged investments.”
(This information is taken from the Quarterly Investment Report which is published by the Bureau of Investments, Department of Treasury on a quarterly basis on their web site. For those of you who are pension wonks it is THE place to find information.)
Pensions show poor returns
Public pension funds are expected to report poor annual returns in the coming weeks, results that are likely to increase calls for more realistic retirement promises for teachers, police officers and other public workers.
According to the Chicago Tribune, New Jersey’s $69.9 billion public pension system returned 2.26 percent in fiscal year 2012, falling short of its 7.95 percent assumed rate of return. At least three of the nation’s largest U.S. public pension funds have announced returns of between 1 percent and 1.8 percent, far below the 8 percent that large funds have typically targeted. http://articles.chicagotribune.com/2012-07-27/site/sc-cons-0726-stocks-20120727_1_pension-funds-new-york-city-pension-public-pension.
According to the June Quarterly Investment Review published by the Bureau of Investment, Michigan Department of Treasury, the MSERS portion of the retirement fund earned 1.95% for the second qtr of 2011; -6.25$ for the third Qtr of 2011; 2.96% for the fourth Qtr of 2011 and 6.56% for the first Qtr of 2012. Time weighted rates of return for the period ending March 31. 2012 for the total plan over a one year period was 5.0 (annualized returns) which ranked the state 32nd among its peers.
Raleigh misses payment again
Raleigh Michigan Studios in Pontiac is expected to miss another bond payment due today, which means state employee pension funds will again have to foot the bill. SMRS must cover the payment because it guaranteed $18 million in tax-exempt bonds used to help finance the building of the studio, which opened last year. Read the full story at http://tinyurl.com/d6e97am
Pension data
ORS May 2012 Payroll statistics show 173 new retirees added to the payroll. Total retirees to date are 55,061 with an average pension of $22,736.71.
Fix the Real Problem of the Pension System
Posted by James M. Hohman on July 3, 2012 at 11:25am
“After reading Rep. Chuck Moss’s rebuttal to a spot-on editorial recently published in The Detroit News, a reader might conclude that the only problem with the school employee pension system is that it’s underfunded. The $22.4 billion gap between the system’s assets and liabilities is a symptom that exposes the real problem: that politicians can’t be trusted to properly fund a defined benefit pension system.
State politicians underfund the system in a couple of ways. They use overly optimistic assumptions about investment earnings and payroll growth. Overestimating these, means that the state doesn’t put in as much as it should.
Politicians also have ways to squirm out of making contributions at certain times. In 2007, when the stock market was booming, the state improperly “marked to market” the pension fund’s assets. This was done exclusively so that legislators wouldn’t have to put in as much money as they thought they would.
The underfunding problem can only be fixed (really?) by gradually phasing out the defined-benefit pension system, which is done by closing it to new hires, who instead get a defined-contribution 401(k)-type benefit.
A plan passed by the state Senate does this, but the House plan just perpetuates the problems.
The House did pass a couple of reforms that address Rep. Moss’s concerns over “normal costs” and so-called transition costs. Senators can adopt those if they’d like, but compared to the Senate’s reform they’re just tweaks.
The only real solution is closing the system.” For once I agree with the Mackinac Center’s analysis but not its solution. http://www.mackinac.org/17164
How Pensions Violate Free Speech
An interesting opinion piece was recently in the New York Times (and brought to my attention by a SERA member) which brings an interesting perspective to public pension investing. What do you think?
“Public pensions, moreover, are so-called defined benefit plans, which mean that employees don’t have a say in how their mandatory contributions are invested. The employees cannot request, for example, that their money be used only to buy government bonds or that it be invested only in certain mutual funds or only in select corporations.
Instead, the employees’ money is invested according to whatever decisions the pension plan’s trustee makes. And, not surprisingly, pension plans invest heavily in corporate securities: in 2008, public pensions held about $1.15 trillion in corporate stock.
Here’s the problem. In its Citizens United decision, the Supreme Court held that companies have a First Amendment right to make electoral expenditures with general corporate treasuries. And they’ve done so, with relish, pouring millions into the political system.
What Citizens United failed to account for, however, is that a significant portion of the money that corporations are spending on politics is financed by equity capital provided by public pension funds — capital contributions that the government requires public employees to finance with their paychecks.” You can read the entire article on our Facebook page or find it at http://tinyurl.com/cke3png
The real cost of fees charged by your 401Ik)
Over a lifetime of savings fees can eat a large hole in your retirement savings. Morningstar looks at two funds that benchmark the same financial index. One charged $13.90 per $1000 invested annually while the other charges $2.
“By August 30, thanks to the new Department of Labor rule, all 401(k) plans must give participants an easy to follow explanation of each fund’s average annual returns over one, five and 10 years; the comparable returns of a benchmark fund; and average annual operating costs as a percentage of assets and as a dollar figure per $1000 invested.” You can read this article in its entirety in the July, 1012 Consumer Reports magazine http://tinyurl.com/c9s9wmy or read it at or find it on our Facebook page “Lansing Sera”
Preferential tax rates increasingly benefit top filers
With the Bush-era tax cuts set to expire at the end of 2012, the Obama administration has pushed to extend the tax cuts for all but the top 2 percent of filers. One under-examined feature of the cuts is their disproportionate cut in tax rates on income derived from wealth. Currently, most long-term capital gains and dividends face a top rate of 15 percent, much lower than the overall top marginal rate applied to wages and salaries. This increasingly benefits the wealthiest filers.
As this week’s Economic Snapshot http://tinyurl.com/btojudj depicts, between 1996 and 2006, top filers earned a growing share of their before-tax income from capital gains and dividends and a declining share from wages and salaries. Filers in the top 0.1 percent of the distribution and the top 1.0 percent of the distribution experienced a 6.1 and 7.4 percentage-point increase, respectively, in their share of income from capital gains and dividends. The bottom 80 percent of filers, on the other hand, experienced virtually no change in their share of income from wages and salaries and actually saw a decrease in their share of income from capital gains and dividends.
What outsourcing jobs has meant for this county
This NBER paper http://economics.mit.edu/files/6613, co-authored with David Dorn and Gordon H. Hanson, analyzes the effect of rising Chinese import competition between 1990 and 2007 on local U.S. labor markets. The study finds that rising exposure to Chinese imports increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the aggregate decline in U.S. manufacturing employment in this period (approximately 1 million jobs). Transfer benefits payments for unemployment, disability; retirement and healthcare also rise sharply in exposed labor markets.
Editor’s note: June Morse may be contacted at jmorse10@comcast.net or 517-886-9323.
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