Reading the News with Meep: Waiting for a bailout, NYC pension reform, Illinois finance, and more

Also: let's do it for Stu!

Nov 02, 2020

The Actuarial Outpost, as it was, is finally dead. For actuarial chatter, join us at Go Actuary. I’m meep there.

For those who used to keep up with my “watch” threads on the AO, I will be sharing the links on my blogs for now. I’m looking for a content management solution for what I want to do with that stuff. [I prefer my memory to be external to me and my computers.]

I apologize for the delay on the rate-based follow-up to this: Mortality with Meep: Comparing COVID-19 with Historical Mortality and Prior Pandemics. That will be the next post after this one; just need to check the numbers carefully, as rates can be tricky.

Waiting for the election, to see if there’s a bailout

There was no stimulus/bailout bill before the election, and everybody is waiting to see the composition of White House/House of Reps/Senate to figure on the odds of getting a lame duck session stimulus/bailout, wait for January 2021, or realize that the various financial profligates had best learn to deal without more bailout dough.

Still, some are commenting on the bailout bills that had already passed and were signed, and Pelosi’s wishlist from the HEROES Act [passed the House, not going anywhere in Senate].

New York City pension reform proposal… for somebody in the future

The Manhattan Institute has put together a proposal for reform of the New York City pensions.

Let’s use their NY Post op-ed as the jumping off point: How to start defusing NYC’s pension bomb

Gotham’s public-health crisis risks becoming a financial crisis — including by ravaging the underfunded retirement systems promised to public workers. Four essential steps could avert catastrophe.
Even before the crisis, the city had set aside just 2 percent of the savings needed to cover retiree health benefits for city workers, while its pension funds contained only 79 cents for every dollar needed to cover projected benefits. These fringe benefits consumed one-third of the city’s municipal payroll and one-tenth of the city’s budget.

I want to note: even with a near-80% funded system, the annual costs of employee benefits are gobbling up the budget. Heck, a fully-funded system could still be too costly to maintain.

However, it’s even worse the more underfunded the pensions are… and this funded ratio and these costs come from FY2019, which ended June 30, 2019. That’s well before the current financial crunch for the city.

Let’s go through the recommendations:

Start with management. The current system wastes a surprising amount on overhead by running five parallel retirement systems, all with their own real estate, redundant staff and extra audits. The IBO estimates that by consolidating them into three funds, “the city could save $20 million in the first years, with the savings growing to $41 million by the second year.”

I don’t want to make fun of these amounts. But let’s just put that up against NYC ERS contributions.

The required contribution is 25% of payroll. The Most recent CAFR shows an employer contribution amount of $3.7 billion for the fiscal year ending June 30, 2019.

Even if I go with the $40 million savings, that’s 1% of the contribution amount. That’s just for one of the pension plans. If I combined the five and compared, it will be much, much lower than 1%.

If I compare these savings up against the assets, this “improvement” is even punier.

So, this may be a good idea from a management point of view, but this is not really anything that substantially helps the city.

Second, health care. New York City’s liabilities total $132,464 per employee, the highest of any major city in the country. Gotham is also the only city in the country to pay for Medicare Part B premiums, and it’s one of the few employers anywhere to provide full and fully subsidized health coverage for retirees under the age of 65.
Lax enforcement of eligibility rules could mean that many people covered under a spouse’s health plan still receive gold-plated subsidies. Eliminating Medicare Part B subsidies, requiring a half contribution to premiums and making sure retirees take alternative plans when they’re on offer would save more than $1 billion dollars a year, while still ensuring high-quality coverage to municipal retirees.

Yes, this would be substantial savings. $40 million is a pittance compared to $1 billion, and this is the order of magnitude of savings needed to make the NYC retirement systems sustainable.

Then there are New York City’s retirement plans, which should vest faster and have more portability to help the city attract a high-quality workforce, rather than short-changing younger and more mobile talent. The city should transition to a cash-balance system as in Rhode Island, a way to offer affordable benefits to all employees, no matter how long they stay in city government.

The issue here is that having the new employees on this plan only prevents the DB promises from getting worse.

The main problem is the unfunded liabilities already accrued from past service.

This is not a bad idea, but it doesn’t help to fix the legacy pension problem.

For more immediate savings, the city should consider paring back supplemental benefits, which are not constitutionally protected. Each year the city spends more than $1.7 billion giving uniformed retirees a $12,000 bonus, contributing to union annuity funds and guaranteeing a 7 percent return for teachers’ voluntary contributions. All three of these programs should be scaled back or eliminated.

Get rid of the 7% guarantee, holy crap. That sort of thing brought down Dallas.

The full report at the Manhattan Institute: Reforming New York City’s Public Retirement System. They’ve got tables at the end showing their estimates of savings of each option.

The current NYC admin isn’t going to move on any of this, but if there were something they’d move on, it would likely be consolidating management. This is one of the things an ineffective leadership likes to do: if things are centralized, de-centralize it; if it’s de-centralized, consolidate it.

It basically does nothing for the essential problem and makes it look like you’re doing something. Huzzah.

Changing pension investments via the courts

Bloomberg: The World’s Courtrooms Could Unleash the Next Wave of Green Investing

The legal risk for pension funds that fail to account for climate change in portfolio investments is about to become a little clearer.
While activists and investors around the world are using courts to push government officials and company executives to cut emissions, a trial set to start Monday in Australia offers an early test of whether money managers have a fiduciary duty to help combat the ravages of a warmer planet.
The case was brought by a 25-year-old environmental scientist, Mark McVeigh, who sued his A$57 billion (U.S. $41 billion) pension fund for not adequately disclosing or assessing the impact of climate change on its investments. His claim is part of a surge in global lawsuits — from the U.S. to the Philippines to the Netherlands — seeking to force changes intended to slow the pace of natural disasters including wildfires, floods, typhoons and droughts.
“Litigation has become a transnational movement,” said Joana Setzer, an assistant professorial research fellow at the London School of Economics and Political Science. For many, cases are “driven by frustration, by realizing that so many other routes to address climate change, especially international negotiations and national legislation, have been insufficient,” she said.

Yes, litigation when you can’t get to your goals via legislation. That sounds familiar.

If the returns aren’t up to snuff, the retirees will just absorb the losses, right?

Center for Retirement Research: ESG Investing and Public Pensions: An Update
P&I: Public plans’ social investing may impact returns, social goals
ai-CIO: DOL, Dubious About ESG Pension Investing, Cuts It a Bit of Slack in Final Rule
ThinkAdvisor: Labor Finalizes Controversial ESG Rule

Illinois finance containment area: you know the drill

One of the biggest “waiting for a bailout” offenders is Chicago and, of course, the legislature of Illinois. They’ve never made a difficult decision, and they’re waiting to see if the suckers, um, I mean, voters, take the bait and vote in the “we’ll keep defining ‘rich’ down til we get enough dough” state constitutional amendment.

Yvette Shields: Without touching rating, S&P gives Chicago something to think about
Financial Advisor: Chicago Poised For Painful Choices To Close Record Budget Gap
Illinoisans Apparently Seeing That ‘Fair Tax’ Is The Wrong Amendment On The Ballot – Wirepoints
Reason: Illinois’ Governor Begs Citizens To Let Government Tax Them Even More
Fred Klonsky: ILLINOIS TRS INVESTMENTS WITH LEON BLACK’S APOLLO GLOBAL. “WE HAVEN’T DISCUSSED IT YET.”
Elizabeth Bauer: Whatever Happened To Illinois’ Plan To Fund Pensions With Asset Sales? Not Much, It Turns Out.
Ted Dabrowski and John Klingner at Chicago Tribune: Commentary: A 60% tax hike on Illinois’ richest won’t be a free lunch for the rest of us
Elizabeth Bauer: Lightfoot Again Calls For Pension Reform – And It’s Time To Fish Or Cut Bait
Wirepoints: A preview of Chicago’s 2021 budget: more taxes, phantom savings and no reforms. – Wirepoints Quicktake
Eric Allie on Fair Tax proposal: Dracula and Hellraiser (he had more, but those were my two faves)
Yvette Shields: Chicago rating outlook gets Fitch Ratings cut to negative
Greg Hinz at Crain’s Chicago: What the heck is going on at the Chicago Teachers’ Pension Fund? – sounds like the drama at Calpers, but even pettier
Wirepoints: Read it and weep: Cook County Treasurer Pappas details 20 years of astronomical property tax hikes – Quicktake

I think the credit rating agencies are also waiting to see what falls out of the election for potential of at least a teeny-weeny bailout for places like Illinois and Chicago.

It doesn’t fix their long-term problems. The borrowing they’ve been doing from TALF barely makes a drop in their huge unfunded liabilities.

Public pension stories

P&I: Pennsylvania fund halting business with Apollo
P&I: Connecticut hits the brakes on new business with Apollo
Las Vegas Review-Journal: EDITORIAL: CalPERS desperate for private equity – what they’re desperate for, like all public funds, is high yielding assets. They hope private equity can do it. [Probably not at their scale]
Reuters: U.S. pension funds sue Allianz after $4 billion in coronavirus losses
Brett Arends: Opinion: Why are pension funds investing in hedge funds?
P&I: Controller Yee: ‘More work’ ahead for CalPERS board
Reason: Evaluating the Actuarial Soundness of Texas’ Largest Public Pension Plans
Brett Arends: ‘Pathological’ behavior by pension fund trustees leads to billions blown on real estate
Yves Smith: CalPERS: Poster Child of Private Equity Cargo Cultism
NYT: Marching Orders for the Next Investment Chief of CalPERS: More Private Equity
Bloomberg Law: Calpers Seeks Five-Year Commitment From Next Investment Chief [good luck with that]
naked capitalism: An Indictment of the “Standard Model” for Pension and Endowment Investing
ai-CIO: Local Pension Plans Benefited from Shifting Money to MassPRIM, Report Says
WSJ: Trump’s State Pension Gift
Arnold Ventures: Pension Bonds Are a Short-Term Strategy That Carry Long-Term Risk
University of Minnesota: POLICY BRIEF: Pension Obligation Bonds are a Bad Idea

Yes, pension obligation bonds are a bad idea.

Movember campaign: do it for Stu!

It’s November, which means it’s my fundraising month for the Movember Foundation.

Stu is the first part of STUMP, and we’ve been married for 20 years. You can read a little more about my Movember fund-raising, and I will be doing some Mortality with Meep posts related to the cause. The sex gap in mortality is huge, and the Movember Foundation is one group focusing on improving the situation by looking at male-specific mortality problems: prostate cancer, testicular cancer, and men’s mental health.

I will be addressing this more this month, and for this post, I do the bald ask: please donate to the cause!

STUMP - Meep on public finance, pensions, mortality and more

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