Happy Labor Day! Pension Retrospective: Pension Primers, POBs, MEPs, and More!

Reality trumps law

Mary Pat Campbell

Sep 07, 2020

Happy Labor Day!

Today I’m wrapping up my series on STUMP themes with the top category of posts here: pensions!

Series links:

I will just hit a few high marks here, as I need to stop hitting substack post limits.

Pension primers

Most of the time when I post on pension issues, whether public or private, single-employer or multiemployer, I assume my audience knows what I’m writing about, or I at least provide some minor explanations.

But sometimes I really need to dig into the concepts because I will be revisiting the issues multiple times and don’t want to explain each time. (Also, with pensions, some of the concepts are quite complicated).

Here are my pension primer posts from over the years, in no particular order:

Okay, I lie, I put that specific post last because I want to talk about the Public Plans Database.

I have been using this database as a source for my analysis for years, and have been pleased as plans have been added, spurious data fixed, and easy-to-use data tools have been added to the site.

I visit lots of public pension and public finance data sites, and I have found this one the best for my purposes. Thanks so much, Center for State and Local Government Excellence (SLGE), the National Association of State Retirement Administrators (NASRA), and the Center for Retirement Research at Boston College! Also, the people who put out the pension briefs. I read them all.

Who I read on pensions and public finance

Before self-indulgently linking to myself more, I would like to highlight the people/sites I’ve been reading for years on pension issues. As mentioned above, the Public Plans Database is a primary data source for me.

Pension Tsunami: this is the granddaddy of all pension sites, rounding up a variety of pension-related stories almost daily, I’ve been going to this site well before I started blogging on the topic in 2009.

Wirepoints: started by Mark Glennon, I go here for everything Illinois and Chicago with respect to pensions and finance.

Truth in Accounting: I’ve used their state of the states and state of the cities reports for sources, and I’m subscribed to their newsletter. I’ve been attending their “Ask the Experts” series this summer as an audience member. Check out their recent panel: Ask The Experts Ep.4: State and local pension reform with Andrew Biggs, Sheila Weinberg, and Bill Bergman.

Elizabeth Bauer at Forbes: Bauer also goes by “Jane the Actuary” — unlike me, she’s a pension actuary, and she writes on retirement issues at Forbes. Here’s a recent piece by Bauer that reached almost 4 million views: Joe Biden Promises To End Traditional 401(k)-Style Retirement Savings Tax Benefits. What’s That Mean?

John Bury’s Pension blog: Bury is a pension actuary in New Jersey, and covers New Jersey pensions steadily, but most importantly for me, he keeps close tabs on multiemployer pensions

Reason Foundation’s pension reform page: I get their monthly newsletter, and while I don’t necessarily agree with some of the ideas posted — I have issues with Pension Reform Newsletter: Leasing State-Owned Toll Roads Could Help Fund Pensions, Public Pension Investment Returns vs. Assumptions, and More — their analysis of current conditions is good.

Edward Siedle at Forbes: I am with Siedle on his attitude towards the use of alternative assets in public pensions, but I believe he’s overselling asset management failures as the primary driver of public pension and MEP failures.

David Sirota — TMI: Sirota is a leftist journalist, and he also has been digging up issues with alternative asset use in public pensions. Most of his substack is in the service of progressive politics, and most posts are not about pensions, but he has done a good job in digging into connections for all sorts of things. I last linked to Sirota in Taxing Thursday: It’s Up to You, New York, New York and Private Equity in 401(k)s? Retirement Saver Beware.

Allison Schrager’s newsletter Known Unknowns. It’s risk-focused, and while she does cover pension issues, it really is all about risk. I also enjoyed her book An Economist Walks into a Brothel.

So check out these writers – you may enjoy them, too!

Are Public Pensions in a Crisis?

This is what I had to say in Are Public Pensions in a Crisis? Part 1: My Opinion

In many ways, traditional public pensions are in a positive feedback loop, which is not a good thing. Positive feedback loops mean that when one gets shoved from a stable point, one does more an more activity that gets you farther away from the stable point. Positive feedback loops are inherently unstable.
In public pensions, one may overpromise benefits, undercontribute to them due to valuation and funding methods that make pension promises look less valuable than they are and that assumes escalating payments will occur in the future. When neither of those pans out, and contributions and promises cannot keep up, then there are incentives to add extra risk to the system in the form of leverage (pension obligation bonds) and riskier assets, instead of adjusting benefits and contributions based on more realistic assumptions.
…..
I’m not saying making the change from a current system to a new, more stable and sustainable system would be easy. Or even simple.
I am saying that many public pensions will not be able to continue as they are, and the ones that are failing will likely not be able to continue on a pay-as-they-go basis. And there will not be a full bailout (but perhaps a partial one).

This was the first part of a five-part series. Here are all the posts:

Part 1: My opinion
Part 2: Is pay-as-you-go sustainable?
Part 3: Is it just an accounting problem?
Part 4: On closing DB plans and replacing with DC plans
Part 5: On Bonds and Bailouts

The stock market has been defying gravity this year… and the less said about that right now, the better. But the cracks have been showing, even with a rising equity market. While my 80% funding myth crusade may be dead for now, the issue of public pensions in dire need for reform is not.

Pension Obligation Bonds

I hate pension obligation bonds.

Let me explain: Why are Pension Obligation Bonds OF THE DEVIL? A Lesson from the Dollar Auction

POBs are most often used by governments that were shortchanging the pensions, or goosing the benefits in insane and seemingly sane ways, to paper over said shortchanging. This farce lasts only so long.
….
The point is that it’s a fake bolstering of the balance sheet — the debt is still there, but now it’s in the form of bonds, and the debtor is not the pension fund but the state (or other government employer) itself. But the pension fund debt was the state’s debt to begin with.
As I said in the last POB post, POBs are like a balance transfer.
Only accounting magic makes the debt look smaller than it actually is. And the debt to the pension fund is actually larger than originally stated. Now the state has two creditors: the holders of the POBs and the pension fund. That sounds more like the dollar auction now.
The POB debt is “sure” — the state is supposed to pay off the interest and the principal. The pension debt is less sure, but somehow it seems to grow even faster after this particular POB trick.
And the only states that feel the need to avail themselves of this particular trick tend to have gotten in their position by bad behavior, and they’re not about to change their behavior after the POB is issued.
This is why I say POBs are of the devil — whether or not you believe in a literal devil, the literary devil is the kind that helps you rationalize the bad behavior you already did and are determined on continuing.
Ask Faust about how that worked out for him.

Even during the current pandemic crisis, there are places that have been authorizing pension obligation bonds. This is nuts. I wouldn’t be surprised if the market were to drop drastically sometime in the short term: issuing POBs at the top of the market is a sucker’s game… and it’s been done so many times before.

Some of my POB-related posts:

Those last four are from February 2018, in which some people floated the idea of the state of Illinois floating $100 billion in pension obligation bonds.

via GIPHY

Thank goodness, the idea didn’t move further.

Multiemployer pensions

I don’t touch on MEPs as often as public pensions. But some of them are in a very bad way. There is one specific pension plan, the Teamsters Central States plan, which covers hundreds of thousands of people, that, when it finally goes officially bankrupt, will bankrupt the PBGC, which provides a backstop for private pensions in the U.S.

Yeah, that’s bad.

Here are some MEP posts:

Central States, the Teamsters, and MEPs: Cuts to Begin
Treasury to Central States: You Didn’t Cut Enough
Central States: I Guess the Plan is To Run Out of Money – that was from 2016, and that still seems to be the plan. Well, the real “plan” is to get a bailout. We’ll see.
Setting the Stage for 2017: Failing Multiemployer Pension Plans
Diversions: Are You Ready for Some Football....Pensions?
When Multiemployer Pensions Fail: Teamsters Local 707
Multiemployer Pension Plans: Critical Plans Treading Water, Waiting to Drown
MEP Watch: About Those Plans to Bail Out Union Pensions
Multiemployer Pensions: Waiting for the Bailout Report
MEP Bailout Quickie: Collapses Like a Flan in a Cupboard
A New Plan to Deal with Multiemployer Pensions
MoneyPalooza Monstrosity! Looking at the Multiemployer Pension Provisions

Regarding that last post: yes, there was an MEP bailout provision in the bill Pelosi got through the House and will likely be flogging once the House finally gets back into regular session (though there was an emergency session to jaw about the Postal Service).

Oh, those meanie Republicans in the Senate! Why don’t we get a blank check?

Happy thoughts on pensions

Oh wait, I lie.

These are harsh thoughts.

From May 2016: Why There Will Be No Bailouts

What I think will happen is not bailouts, but reducing these promises and to top-up people on the margins who need the help a lot more. I get into arguments with fellow actuaries about it, but there’s no “one neat trick” other than a particularly fatal pandemic that targets retirees (because if the productive part of the population is slashed, there will be worse troubles than merely not being able to pay for pensions.)

Um, well. Yeah.

(It’s not enough.)

So if we’re not about to go for a Soylent Green/Logan’s Run remake, I believe the following will happen:
People will be paying more taxes (and not just “The Rich™” – there’s not enough of them, and don’t have enough wealth)
Retirees will have benefits cut some
Bondholders will get a haircut, some drastically
The only bailout will be welfare programs for the poorest
Everyone will have to deal with having less.

There was no bailout in 2016 or anything like it in the years since. As mentioned, there’s a bailout built into the MoneyPalooza from Pelosi, and even should that get through Congress in 2021 with a President Biden (or Harris), it still won’t be enough money to fill the holes of MEPs or public pensions.

I keep coming back to my 2014 post: Public Pension Watch: The Fragility of “Can’t Fail” Thinking

Here is the problem: all sorts of entities directly involved in public pensions have thought that the pensions can’t fail. Because of stuff like: constitutional protections of benefits (so paying pensions would take precedent over other spending needs, like paying for current services), “government doesn’t go out of business”, the supposedly infinite taxation power of the government, and so forth.
Because they thought that pensions could not fail in reality, that gave them incentives to do all sorts of things that actually made the pensions more likely to fail. Because, after all, the taxpayer could always be soaked to make up any losses from insane behavior.
…..
The explicit ability to renege on pensions (known by all parties) would make them less likely to fail, because employee unions would then have some incentive to make sure pension contributions are made, and they would be less likely to ask for benefits that may make their pension plan insolvent. If they knew that no, the taxpayer wouldn’t be there to bail them out of stupid investment decisions, they might not be so happy with all the opaque investments.

As I said there and in many other posts: reality trumps law.

There have been a variety of us who have tried to consider the various options to prevent complete failure, as occurred in Prichard, Alabama when retirees didn’t get any pension payments whatsoever for over a year. That’s pretty bad.

I co-wrote a paper with lawyer Gordon Hamlin, Jr. on one idea to shore up public pensions, involving municipal bankruptcy. After all, pensions to even current retirees were reworked in the Detroit bankruptcy.

But none of these solutions are workable unless people take the possibility of public pension failure seriously.

No, there will not always be taxpayers there to bail out promises that were shortchanged for decades.

No, the federal government will not be able to fully fill the hole. It has its own liability problems in Medicaid, Medicare, and Social Security. Not to mention the multiemployer pension problem.

There are similar problems driving them all, and the main way of dealing with these is to first get real about the situation being faced.

One of the realities: everybody will have to pay.

Happy Labor Day!

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