Pension Matters
State Employees Retirement Fund
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September 2013
September Investment Advisory Committee (IAC) Meeting
I attended the quarterly meeting on September 5th. This meeting covered the pension fund performance for the period ending 6/30/13. In addition, the group heard from Randy Mundt, President and CIO for Principal Real Estate Investors.
The past year has been a positive one with equities up and bonds going up. The retirement plan achieved a 12.2% annualized return this past year and over a ten year period has achieved a 7.4% return nearly reaching the actuarially assumed 8% rate of return.
The combined retirement systems paid out $2.7 billion net of contributions over the past twelve months ending in June. This figure represents 5.5% of the June 20, 2012 market value.
The overall market is finally experiencing a meaningful increase in interest rates with a 10 year Treasury rate of 2.6% even with the Fed easing off its bond buying stimulus. Returns will continue to be slow as the Fed eases off.
Go to http://www.michigan.gov/treasury to find the Quarterly Investment Reports as well as the Asset Liability Studies for all pension funds.
State Employees’ Retirement System Board Meeting
I attended the August 22nd meeting of the Retirement Board. Introduced myself to Ronald Jones, newly appointed Board member representing retirees. Mr. Jones works for the Municipal Employees’ Retirement System of Michigan and serves as investment compliance counsel. He replaces Doug Drake.
The Board was given an update on the Court of Appeals ruling on PA 264 (see 4% Unconstitutional). At this writing, there has been no formal decision by the State on whether to appeal this decision.
Detroit Pension Fund Not as Underfunded as Stated
A new analysis from Morningstar weighs in on the debate over the size of Detroit’s pension liability, suggesting that current pension fund assumptions fall mostly within accepted industry standards. The fate of the city’s pension benefits will be a key battle if Detroit enters into Chapter 9 bankruptcy. Pensions are protected under the Michigan constitution, but Detroit emergency manager Kevyn Orr and Gov. Rick Snyder have proposed dramatic cuts, and whether or not federal bankruptcy will trump state law could have reverberations beyond Detroit. See more at http://tiny.cc/h3ay2w
The Bigger Question in the Detroit Bankruptcy
According to an article by the University of Pittsburgh School of online legal research forum, The Jurist, "Even if Detroit can modify its pension obligations, the bigger question is whether it should do so. The effect that such a modification would have on the city and the nation as a whole is likely to be immeasurable. Detroit’s other financial difficulties certainly exacerbate the problem, but the pension issue by itself is not entirely unique to Detroit. One study at http://tiny.cc/r5ay2w found that 61 of the largest US cities have a combined underfunded pension obligation of about $100 billion and another $118 billion in underfunded health care obligations. Another study at http://tiny.cc/jfby2w puts the total underfunded pension liability for all municipalities at over $2 trillion. Even a relatively financially stable city like Chicago has a pension fund that is only about 52 percent funded. As a result, a successful pension restructuring through bankruptcy could have ripple effects throughout the nation." http://tiny.cc/9tby2w
Promises Made, Promises Broken
According to a recent article in Governing, the nation’s state public employee pensions combine for an underfunded ratio of 39 percent – or $4.1 trillion based on a new report that uses more stringent accounting practices similar to ones taking effect this year. Illinois pensions combine for a national low of just 24 percent funded while Wisconsin plans are the healthiest – just 57 percent funded – according to a report released Tuesday by State Budget Solutions (http://www.statebudgetsolutions.org/) , a nonpartisan nonprofit with the mission of reforming governments’ approach to budgeting. Pretty sad when the winning pension is only 57% funded. This new study shows Michigan’s funded ratio at 34%. The study used a significantly lower rate in its calculations, the 15-year Treasury bond yield as of August 21, 2013 (3.225 percent), rather than the 8% actuarially assumed rate. Keep in mind that this rate is extremely low considering the Michigan pension funds recently report long term rate of return. Read more: http://tiny.cc/viby2w
ORS on Facebook
The Office of Retirement Services has a Facebook page. Check it out at www.facebook.com/michiganors
State Funded Pension Levels
In June, Moody’s released a report using fiscal year 2011 pension information to compare what states owe to what states have. Illinois topped the list with a liability-to-revenue ratio of 241 percent. For every dollar Illinois needs to save to erase its shortfall, it has set aside only 43 cents. The top of the liability list continues with Connecticut (189.7 percent), Kentucky (140.9 percent), New Jersey (137.2 percent) and Hawaii (132.5 percent).
On the other end of the spectrum, the states most prepared to pay their pension obligations were Nebraska with the lowest ratio of 6.8 percent, followed by Wisconsin (14.4 percent), Idaho (14.8 percent), Iowa (16.1 percent) and New York (16.6 percent).
Overall, the median liability-to-resource ratio in FY 2011 was 45 percent; and according to CNBC, only 17 states have financially sound plans funded at more than 80 percent of their projected liability.
There’s a wide range of reasons why states’ ratios (ranging from 6.8 percent to 241 percent) are so varied. Historic and current management, funding efforts and the size of benefits and the payee pool -- whether the state fund has responsibility for teachers or local government employees, for example -- all play into the numbers. Regardless of the reason, though, if U.S. Sen. Orrin Hatch of Utah gets his way, states may soon be forced to address their collective $1 trillion pension liability shortfall by reducing their employee benefits or transitioning to a 401(k)-style plan. www.cnbc.com has a great article and map of states and what shape their pension is in.
Retirement Programs In Australia, Canada, And The Netherlands Outshine U.S., New Research Finds - Adequacy, Financial Sustainability, and Risk Sharing
According to the National Institute on Retirement Security (NIRS), "While the U.S. faces a retirement crisis, other countries have implemented programs that provide a better level of economic security in retirement. As compared to the U.S., Australia, Canada and the Netherlands provide higher retirement income for more of their citizens through their social security and universal/quasi-universal employer retirement plans.
These findings are contained in a new research brief entitled, Lessons for Private Sector Retirement Security from Australia, Canada, and the Netherlands. The paper is authored by John A. Turner, PhD, director of the Pension Policy Center and Nari Rhee, PhD, manager of research for the National Institute on Retirement Security. " Find the issue brief at http://tiny.cc/l7ay2w
Feds Eye State, Local Pension Transparency Reform
Keep an eye on this one. Sponsored by Rep. Devin Nunes and introduced last week, the Public Employee Pension Transparency Act (PEPTA), asks state and local governments to file annual reports with the Treasury Department disclosing how they calculate their unfunded pension liabilities. The measure would require governments to use a rate of return pegged to a Treasury rate of 4 to 5 percent, instead of the more widely used 7 to 8 percent return rate. While not mandatory per se, governments that don’t participate would no longer be allowed to issue municipal bonds as tax-free. http://tiny.cc/i9ay2w
Half Ways.
Did you know that Social Security provided at least half the income for 64 percent of the aged beneficiaries in 2011? That women accounted for 55 percent of adult Social Security beneficiaries in 2012? That the average age of disabled-worker beneficiaries was 53.2 in 2012? Fast Facts & Figures About Social Security, 2013. www.ssa.gov
FYI
Governing analyzed mean weekly wages for all industries reported in the Labor Department’s Quarterly Census of Employment and Wages, adjusting for inflation using CPI. In the five-year period from 2007 (the recession officially started in December of that year) to 2012, the following states recorded the largest declines in real wages:
- Nevada: -6.5%
- New York: -4.8%
- Connecticut: -3.3%
- Idaho: -2.7%
- Michigan: -2.7%
- Florida: -1.8%
- New Jersey: -1.8%
- Delaware: -1.2%
- Illinois: -1.1%
- Georgia: -0.9%
Editor’s note: June Morse may be contacted at jmorse10@comcast.net or 517-886-9323.
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