Wednesday, April 26, 2006

Maryland boosts teacher pensions

Contrary to a nationwide trend, Maryland Governor Robert Ehrlich signed into law an increase in pension benefits for his state's school teachers.

The governor's signature on the pension measure marks a major milestone in a four-year push for reform that has been led by the state's 62,000-member teachers union. The Maryland State Teachers Union Web site proclaimed yesterday, "It's the law!"

It was unclear even two weeks ago whether Ehrlich would sign the bill, which passed by wide margins in the Democrat-controlled legislature. He has consistently opposed such costly benefit enhancements.

"We're very pleased that the legislature took the mantle and challenge of finding the funding to make this improvement," said Bonnie Cullison, president of the Montgomery County Education Association, which represents more than 10,000 teachers. "This is absolutely essential to the state of Maryland and is critical and essential for the recruitment and retention of teachers in the state."
The benefits package will cost the state an additional $120 billion.

Tuesday, April 25, 2006

Chicago Fed Blogs

Did you know that the Federal Reserve Bank of Chicago has blogs? I didn't. Who would have imagined such a thing?

The Chicago Fed's homepage features links to three blogs, which deal with the Midwest economy, economic education, and pensions.

The pension blog features highlights from the Fed's State and Local Government Pension Forum. It has links to some interesting articles, including one about GASB 45, which we have written about previously on this site.

The pension blog is written by Rick Mattoon, Senior Economist and Economic Advisor of the Federal Reserve Bank of Chicago. He calls GASB 45 "The 800 Pound Gorilla in the Room." He says the new accounting standard, which requires public pension funds to estimate the future cost of benefits to their members, presents many challenges:

  • Estimating the total OPEB liability is an accounting nightmare. Unlike pensions where actuarial estimates can be at least somewhat understood, OPEB requires making guesses about things like health care and prescription drug inflation and utilization. One estimate suggests the unfunded liability is around $700 billion, but this is a back of the envelope guess. Other estimates suggest that OPEB exposure could range from five to ten times current outlays for retiree health care.


  • Managing OPEB costs is tricky. In most cases, retiree health care is not a contractual responsibility like pensions. It is a voluntary benefit offered by the employer. However where it is a contractual responsibility, the ability to require retiree contributions, increase co-pays or cut benefit coverage is limited. Where retiree health insurance can be modified, a concern is that when these liabilities are reported, some governments may choose to abandon or significantly reduce coverage, forcing the federal government to serve as the health care insurer of last resort.


  • There are strategies for managing OPEB costs. Efforts to contain health care costs and slow increases in health insurance premium costs can help. Shifting more costs to retirees can be an option, along with trying to limit future OPEB obligations by changing benefit packages for new employees. One strategy that is popular (and essentially required) for addressing OPEB costs is to set up a trust fund. A trust fund meets the new accounting standard requirement that an irrevocable source is identified for meeting OPEB obligations. It also has the advantage of allowing governments more flexibility in the use of investment options. Like pension funds, OPEB trust funds would permit investments in equities and other potentially higher yielding investment vehicles. A potentially attractive option that a trust fund may allow is the ability to issue OPEB bonds to cover part or even all of a government’s OPEB liability. Like pension bonds, these are essentially an arbitrage strategy, where the bond issuer anticipates that the investment yield they will receive from the bond assets will exceed the interest that will be paid to bond holders. Also like pension bonds, the OPEB bonds are not free from federal taxes so they must carry slightly higher interest rates than tax-free investments.


  • The impact on credit ratings for governments is another real concern. Once this liability is recognized, some governments’ finances might appear more fragile. To date, several of the major rating agencies have indicated that they will judge the creditworthiness of these governments based on whether their plan for meeting OPEB liabilities appears prudent rather than on the size of the liability on the balance sheet when it is first recognized. Credit agencies do expect OPEB liabilities to be largest in the Northeast and Midwest, where government entities have large unionized work forces and slightly older workers on average than in other areas.


  • Finally, OPEB is still a major concern for the private sector. It is estimated that for the 337 companies in the S&P 500 that have OPEB obligations, the funding ratio is around 27% (versus 88% for pensions). For the 282 companies with the most complete financial records, the unfunded liability in 2005 was estimated at $292 billion versus an unfunded pension liability of $149 billion. OPEB liability is concentrated in Ford and GM. Their unfunded liability alone is $94 billion, representing 32% of the S&P 500’s total. (These two companies also have 13% of the total pension underfunding.) Telecom is the other industry where OPEB is a significant issue.
  • The Chicago Fed's pension blog has a lot of good stuff, but it is not updated frequently. Of course, if that were a crime, I'd be doin' time. ;-)

    Sunday, April 23, 2006

    Panel to examine Montana pension system

    From the CBS affiliate in Billings:

    A new state panel meets for the first time today, to begin improving communications among the three boards that oversee the state pension systems in Montana.

    The Joint Issues Committee was created by the governor's office. It includes two members each from the Board of Investments, the Public Employees Retirement Board and the Teachers Retirement Board.

    Unlike other states, where pension boards invest retirement money and administer benefits, the state pension systems in Montana divide those duties. The boards of the two retirement systems administer retirement benefits, while the Board of Investments is charged with investing the money paid in.

    Is Hawaii pension system too expensive?

    Hawaii is beginning to engage in the same debate taking place in other parts of the country. The question is whether the pension system for the state's public employees is too costly.

    This story in the Honolulu Advertiser casts the issue as a conflict between state workers and their private-sector couterparts.

    Kaimuki resident Ward Fukunaga can only wish he had the pension benefits that state and county workers receive. As a self-employed businessman, he hasn't been able to save anything for his retirement.

    "When you're in the private sector, you take that risk," said the 34-year-old Fukunaga.

    Hawai'i's more than 63,000 state and county workers are enrolled in a traditional pension plan that guarantees payments for life, a benefit that is becoming more rare among private employers.

    Only four in 10 Hawai'i companies offer traditional pensions, according to one survey. The move away from traditional plans is prompted by the high cost. This year taxpayers will contribute $400 million, or about $300 per person, to the pensions of state and county workers.

    Is it time to consider a less expensive pension system for government workers?

    "It's something that people should talk about," said state Rep. Kirk Caldwell D-24th (Manoa, Manoa Valley, University). "They're going to have to be looking at some of the things the private sector is doing."

    Friday, April 21, 2006

    George Ryan could lose pension

    The Illinois public pension board will consider revoking the $200 thousand annual pension of former Governor George Ryan, who was convicted Monday on charges including conspiracy, racketeering and mail fraud.

    Ryan makes more in retirement than he did as the state's chief executive, thanks to a generous public pension system and a tenure that included stints as speaker of the Illinois House, lieutenant governor, secretary of state and governor.

    Ryan was making $150,691 a year when he left the governor's mansion in January 2003. Currently, he is collecting $197,037 a year in state pension.

    Robert Knox, who heads the state pension system for elected officials, said that after Ryan is sentenced the pension board will decide whether the crimes Ryan was convicted of breached the public trust.

    CalPERS flexes its muscles on performance, governance

    The California Public Employees' Retirement System issues warnings to six companies on corporate governance and financial performance.

    The Columbus Dispatch reports:

    Cardinal Health Inc. is among six companies that need to improve their financial performance and corporate-governance practices, the California Public Employees’ Retirement System said.

    Calpers, as the biggest U.S. public pension fund is known, also named Brocade Communications Systems Inc., Clear Channel Communications Inc., Mellon Financial Corp., Office-Max Inc. and Sovereign Bancorp Inc. to its annual "Focus List" of companies that the fund said are in need of the most improvement.

    "The stock performance and governance of these companies is unacceptable to us and other shareowners," said Rob Feckner, Calpers board president.

    The pension fund each year targets as many as 10 of the public companies in which it invests with the goal of forcing them to improve practices such as executive compensation, auditor independence or financial returns.