And how’s that going guys??
The Public Pension Funding Trap
To make up for shortfalls in contributions, plans take extraordinary risks to earn higher returns
Andrew G. Biggs – May 31, 2015
State and local government pensions were national news during the recession, as unfunded liabilities rose into the trillions of dollars and overheated commentators predicted that rising pension costs could push governments into bankruptcy. Today attention has faded and the public-pension industry claims that plans are back on track. Don’t be too sure.
Governments are still failing to make their full contributions; as recently as this week New Jersey’s chief budget analyst deemed it not “fiscally or physically possible” for the state to make its nearly $3 billion full pension contribution this year. Public pensions are taking greater investment risk with the money they do receive. If those investments fail to pan out, the budget picture for many governments will once again be grim.
In truth, only 41% of state and local plans received their full contribution last year, according to plan data, down from 65% in 2008. New York state plans to defer $1 billion in pension contributions over the next five years. Pennsylvania’s school-employees retirement plan last year received less than half its full contribution.
Even the “full” pension contribution isn’t all it is cracked up to be. Compared with American corporate pension plans or public pensions in other countries, U.S. public pensions calculate their contributions assuming a higher rate of return on their investments, and they take longer to pay off their unfunded liabilities. If U.S. public plans operated under the same accounting rules as corporate pensions, annual contributions would roughly double. In other words, public pensions are failing to meet what is already a very low bar.
To make up for shortfalls, U.S. public plans are taking extraordinary investment risks to earn higher returns. Three Japanese public-employee plans, for example, recently shifted to what news reports termed an “equity-heavy” portfolio holding 50% stocks and 50% bonds. In the U.S., the average public plan devotes 72% of investments to stocks or other risky assets and only one plan out of 98 tracked by the Public Fund Survey held less than half its assets in risky investments.
Kansas has recently gone further, by borrowing $1 billion from the public, which it will invest in hopes of generating a 7.75% annual return. Kansas’ hoped-for return is the norm—the average U.S. public pension also assumes an annual investment return of about 7.75% and bases its contributions on those projected returns.
But are these returns realistic? In October 2014, the Pension Consulting Alliance compiled investment-return projections from eight investment consultants and five asset managers. For a portfolio of 70% stocks, 30% bonds, the survey’s median projected return over the next 10 years was 5.9%. No adviser projected a return exceeding 6.5%.
Many of the investment advisers surveyed are employed by public plans for their advice, but the plans don’t want to listen. If these advisers turn out to be correct, funding costs could rise by 40% above the current levels that most governments already cannot pay.
U.S. state and local governments are required to contribute half as much to their pensions as are private employers, and six-in-10 public plans fail to receive even that low required contribution. If public pensions are indeed back on track, that track may simply be leading the country to more trouble down the road.
91 Arizona cities publicly expressed that they want the Arizona Public Safety Personnel Retirement System’s seven member Board of Trustees replaced due to lack of expertise and lack of fiduciary action. In sum, they are political hacks willing to do anything to save their own skin.
- League of Arizona Cities and Towns call for the closure of the public safety pension
- The league also wants to replace the seven-member Public Safety Personnel Retirement System board
- League’s plan would only influence employees hired after July 1, 2016.
- The Legislature would have to make any changes to PSPRS.
The League of Arizona Cities and Towns is calling for major changes to the financially troubled retirement system for first responders because its members have been hard hit by rising public-safety pension costs.
The 91-member league wants a new statewide retirement system for employees hired after July 1, 2016. It wouldn’t change the pension plan for current members and retirees.
The league also wants to replace the seven-member Public Safety Personnel Retirement System board, which has only three private-sector members, with an independent body of “qualified experts with fiduciary responsibility.“
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money for another person.
PENSIONERS FIRST LINK: The Public Safety Pension Board Should Be Fired
The Arizona PSPRS Board of Trustees
-Brian Tobin, Chairman
-Greg Ferguson, Vice Chairman
-Randie A. Stein
-Richard J Petrenka
-Jeff Allen McHenry
-William C Davis
The league’s plan has been in the works since June 2014. It was presented Wednesday before the PSPRS board, with one member expressing skepticism. The board took no formal action.
The proposal comes amid another reform effort pushed by the Professional Firefighters of Arizona and a work group at the Capitol.
Most of those involved have publicly acknowledged the current system is financially broken and needs an overhaul as cities and towns have been forced to cut services and put a freeze on hiring police and firefighters because of increased public-safety pension costs. Teachers and other public employees are part of the Arizona State Retirement System and not covered by this proposal.
Costs have increased because of generous benefits for retirees, years of poor investment returns and an Arizona Supreme Court decision that rolled back cost-saving reforms.
The Legislature would need to make any significant changes to the public safety pension system.
The league’s plan would:
•Create a different pension system for new employees hired after July 1, 2016.
•Have employers and employees pay the same amount of money or contribution rate into the trust. Currently, employers pay four to eight times the contribution rate of employees.
•Pool assets and liabilities to spread the risks among all government bodies.
•Have a pension board of trustees who are independent, qualified experts. The current board has four public employees with three — a firefighter, police officer and county supervisor — who benefit from the system.
“We have to change the system, and the way it’s designed,” said Scott McCarty, Queen Creek’s finance director and league pension-task-force chairman.
McCarty said the league wants to make changes for future employees to avoid court challenges. Arizona courts and those across the country have struck down numerous pension-reform laws that have reduced benefits for retirees or changed the system for current employees.
Greg Ferguson, PSPRS Vice Chairman and a Yuma County supervisor, told McCarty that the league’s pooled-asset plan amounted to a cost shift for some governments that would have to pay more to offset the burden of other communities that have high contribution rates. Ferguson also said the current system would suffer even more if new members were not allowed to join.
This is exactly why the current Board of Trustees needs to go!
– Pensioners First
McCarty, later in an interview, complained that it was unfair to ask new employees to continue to prop up an ailing system, calling it a “death spiral.”
Sen. Debbie Lesko, R-Peoria, has been running a pension-reform work session at the Capitol since February. Lesko, in a phone interview, said she hoped to have a plan in place for the 2016 Legislature to consider in January.
Lesko said the league is a major player in discussions because its members employ thousands of police officers and firefighters and are major financial contributors to PSPRS.
Lesko said the league’s plan and the firefighters’ proposal, which would change the funding mechanism for pension increases, have good points and that she’s not ruling anything out.
“We are close to a breaking point and everyone realizes we need to do something,” Lesko said. “I’m excited we have all been in the same room talking about this. We may get something done.”
Brian Tobin, PSPRS chairman and a Phoenix deputy fire chief, said he’s attended Lesko’s meetings, and he believes they have been productive.
“It’s a healthy, collaborative effort to determine a reasonable solution to pension reform,” Tobin said.
The Arizona Republic in 2010 published a weeklong series detailing the burdens that state governments faced because of generous pension benefits and rising costs.
The Legislature responded in 2011 by passing cost-saving reforms, but the state Supreme Court in 2014 restored cost-of-living raises to PSPRS retirees, costing the system hundreds of millions of dollars.
Since 2011, the health of the PSPRS has deteriorated, and the funded ratio — the percentage of pension-fund liabilities that could be paid with current assets — has dropped from nearly 62 percent to about 50 percent.
As funded ratios drop, more money is needed from taxpayers to shore up the nearly $8.3 billion trust.
Tucson News Now- http://www.tucsonnewsnow.com/story/28935238/tucson-fd-watson-resigns-after-arrest
15-year-old triple murder mystery ends with the arrest of a Tucson fire captain
- A Tucson fire captain who was arrested on April 25 and charged with the murders of three women
- David Watson is accused of allegedly killing his ex-wife Linda Watson, her mother Marilyn Cox and Cox’s friend Renee Farnsworth
- A spokesman for the Arizona Public Safety Personnel Retirement System said Watson, by quitting, is due his pension equal to what he put into the system
- State law prohibits denying public safety personnel their pension payments that they paid into, even in the event of a felony arrest/conviction
Washington Post –
Linda Watson vanished on Aug. 20, 2000. The next morning, a repairman stopped by her house on a sandy stretch of road in Tucson and found the back door open. A cup lay smashed on the floor near the entryway, but there was no trace of the single mother, save for a few drops of her blood hidden underneath a garbage bag.
Marilyn Cox plastered posters around town promising a reward for information about her daughter’s disappearance. As the months dragged on, she appeared on local radio programs pleading for help catching her daughter’s abductor. “She’s my only daughter,” Cox said, weeping into the studio microphone. “She’s my baby.”
But instead of solving her daughter’s case, Cox became part of it. On May 7, 2003, Cox and a neighbor were gunned down in the driveway to her daughter’s home, where Cox had been living since Linda’s disappearance.
A few months later, Linda’s corpse was found in the desert mountains west of the city.
If the murder of mother and daughter in the same spot wasn’t enough of a coincidence, both women were involved in legal battles with the same man when they died: David Dwayne Watson, Linda’s ex-husband.
For 15 years, David Watson was the main suspect in the slayings. But it wasn’t until Saturday that the Pima County Sheriff’s Department finally arrested the firefighter.
The arrest may provide closure in the cold case. Yet it also raises uncomfortable questions for local authorities. Why didn’t they arrest David Watson sooner? Could they have saved Marilyn Cox and her neighbor if they had taken the mother’s suspicions more seriously? How could they let an allegedly homicidal firefighter act the hero, advancing to be a captain?
So far, the sheriff is staying quiet.
“People have been asking how we broke the case,” Deputy Tracy Suitt told The Washington Post. “Basically, just a lot of hard work. Everything we came through we investigated it to the fullest. That’s where we are right now. A lot of the information we can’t talk about right now because it would be detrimental to our case.”
Suitt said his department is worried that releasing more details on the breakthrough might backfire.
“If for some reason this man is released, we don’t want him to be able to guess the identities of our witnesses from the information we’ve released,” he said. “We are holding onto everything to protect our witnesses.”
Suitt said it could be weeks before authorities reveal why, exactly, they are charging David Watson with the three murders now, almost 12 years after Cox and a neighbor were killed and nearly 15 years after Linda Watson’s disappearance. The Sheriff’s deputy said David Watson has worked for the Tucson Fire Department since 1995 and was promoted in 2007 to captain.According to the Associated Press, however, the fire department was not notified that David Watson was a suspect in the murders.
“We can’t just call them up and say this person is a suspect in homicide until we have enough evidence. That would be irresponsible,” Suitt said. David Watson is on unpaid leave, according to the fire department.
“The Tucson Fire Department is saddened to learn about the circumstances related to one of our employees,” fire department spokesman Barrett Bakersaid. “Our thoughts and prayers go out to the friends and family of the victims.”
Authorities admit that suspicion has always centered on David Watson, who was locked in a bitter custody battle with his ex-wife when she disappeared. Three years later, Cox was also fighting David Watson for custody of her granddaughter when she was gunned down.
Chief Deputy Chris Nanos praised the department for not giving up on the case. “It just goes to show you that the men and women of this department are bulldogs,” Nanos said. “We’ll keep tracking you, we’ll find you and you will get punished for the crimes you do.”
The Cox family has also insisted all along that David Watson was involved in the murders. On Saturday, Marilyn Cox’s sister, Pat Hinkle, released a statement expressing “shock” and “joy” over the long-awaited arrest, but also a hint of frustration that the arrest took so long when all the clues seemed to be there from the beginning.
“Our family is overjoyed that David finally is behind bars. We’ve waited for 15 years for this justice, but it is also bittersweet,” Hinkle said. “He is still destroying lives; his children are going to have to live with this for the rest of their lives. We are all still in a kind of shock; after so many years we sometimes felt it would never happen.”
Here is a timeline of the tragedy:
- Aug. 20, 2000: Linda Watson is last seen by her mother. The two attended church and ate lunch together before Marilyn Cox dropped her daughter off at her home.
- Aug. 21, 2000: A repairman finds Linda Watson’s backdoor unlocked. Inside the house there are signs of a struggle, including a broken cup and drops of blood.
- Aug. 21, 2000: Linda Watson misses an appointment with her attorney to file a restraining order against David Watson.
- Aug. 23, 2000: Linda Watson never shows up to pick up her daughter from David Watson.
- Aug. 24, 2000: Linda Watson misses a custody hearing.
- 2000 – 2003: Marilyn Cox appears on local media to plead for help in solving her daughter’s disappearance.
- May 7, 2003: Cox and her next-door neighbor, ReNee Farnsworth, are shot after going shopping.
- Oct. 2003: Linda Watson’s body is discovered in the desert to the west of Tucson, along with the bodies of undocumented immigrants. However, the corpse is too decomposed to be identified.
- 2011: Authorities finally identify the body found in the desert as Linda Watson’s.
- April 25, 2015: Sheriff’s deputies arrest David Watson. Prosecutors charge him with the murders of Linda Watson, Marilyn Cox and ReNee Farnsworth.
Legal bills go unabated at public-safety pension fund
The Public Safety Personnel Retirement System’s spending on outside legal counsel continued largely unabated in February, bringing its total to $1.1 million for the fiscal year.
Records given to the pension system’s trustees Wednesday show that outside legal bills for February totaled $128,181, and the trust has overspent its fiscal year budget for outside legal counsel by at least $817,885.
Overall system spending was 8.7 percent over budget as of March 20.
The retirement system for police, firefighters, correctional officers and elected officials spends much more on outside counsel than the larger Arizona State Retirement System, which serves teachers and state employees and historically has produced better investment returns than the PSPRS.
The public-safety pension system can offset the overspending by dipping into its $8.1 billion trust fund or by passing the cost on to its members: state and local governments and public employees.
Valley cities, for example,are experiencing a $28.6 million jump in their police and fire pension bills for the next fiscal year, primarily due to an Arizona Supreme Court decision and poor to modest investment returns at the PSPRS.
Some trustees on the seven-member board have publicly expressed concern about the legal expenses. But the trust’s Operations, Governance Policy and Audit Committee on Wednesday morning approved payment of the latest billings.
Trustee Greg Ferguson, a Yuma County supervisor, said he remains concerned about the legal bill. However, he added budget forecasting is difficult because the trust cannot always predict when it may need additional outside legal advice on investment opportunities.
“That is something we don’t have control over,” Ferguson said.
Interim PSPRS Administrator Jared Smout said outside costs for lawsuits and administration have gone down, and “that is what you need to focus on.”
Christian Palmer, a spokesman for the public-safety pension, said outside counsel legal bills for administrative, litigation and investment issues have fallen since July, the start of the fiscal year, and as compared with February 2014.
However, public-safety pension records show February’s outside legal expenses of $128,181 exceeded the monthly tabs in four of the previous five months.
The steepest legal expense continues to be for investment advice. Though the PSPRS has its own in-house investment attorney, who was hired in August at a $215,000 annual salary, Palmer said the investment-related legal workload this fiscal year exceeded the capability of a single attorney.
The public-safety pension also has a state lawyer assigned to it from the Arizona Attorney General’s Office.
The Arizona State Retirement System, whose $34.9 billion trust is more than four times larger than the PSPRS’, does not have an in-house investment lawyer and spends less on private attorneys, ASRS records show. That system on average has spent slightly more than half of what the PSPRS has spent on outside legal counsel so far this fiscal year.
Investment returns at the ASRS typically outperform those at the PSPRS. Last fiscal year, the ASRS posted an 18.6 percent return on investments; the PSPRS had a 13.28 percent rate of return.
Ferguson said the ASRS has a lower legal bill for investments because a larger percentage of its funds are in the stock market, which does not require as much outside counsel. The PSPRS investment portfolio is more diversified to hedge against economic downturns in the stock market, he said.
The largest recipient of PSPRS payments for outside counsel continues to be Kutak Rock, a firm that through February of this fiscal year had been paid $865,058, records show. Kutak Rock’s legal bills dwarf by a 3-to-1 ratio the combined outside legal bills of 10 other firms used by the PSPRS.
Hefty PSPRS legal tab
Legal bills for outside counsel have reached $1.1 million at the Public Safety Personnel Retirement System this fiscal year.
A monthly breakdown:
Phoenix, other Valley cities reel from pension spikes
Tucson’s City Council could have to pay an extra $17.9 million for public safety pension benefits…
Kentucky Has Worst-Funded U.S. Pension
Bloomberg.com – Darrell Preston – January 8, 2015
- A 15.5 percent return in fiscal 2014 wasn’t enough to bolster the Kentucky Employees Retirement System
- Investment returns aren’t enough to turn around struggling pensions
- Partly because of inadequate contributions, the average funding level of state and local pensions has deteriorated even though investment returns have improved
- In 2013, lawmakers passed steps designed to cut the expense of Kentucky’s plans by moving future workers into a type of plan that doesn’t promise specific benefits. They also limited cost-of-living adjustments.
- “The reform is doing nothing to help the state pension plan because we have such a deep hole.”
(Bloomberg) — Kentucky’s worker retirement plan, the nation’s worst-funded state pension, is losing ground even after a three-year rally in stocks, underscoring the fiscal peril of forgoing payments into the pools.
A 15.5 percent return in fiscal 2014 wasn’t enough to bolster the Kentucky Employees Retirement System, which serves 119,735 workers and retirees. Officials shortchanged the plan for more than a decade. They diverted the cash elsewhere, leaving KERS with 21 percent of the funds needed to pay promised benefits in 2014 as distributions exceeded revenue. No single U.S. state plan has a lower ratio, according to the Center for Retirement Research at Boston College.
KERS is one of five pensions in the Kentucky system, which the legislature restructured in 2013 to cut costs and ensure full funding. Its deficit shows that investment returns aren’t enough to turn around struggling pensions. Forty-eight states have enacted changes to their plans since 2009 to lower expenses and provide adequate contributions, according to the National Conference of State Legislatures.
“We won’t run out of money” as long as KERS gets full funding from the state and meets projected investment returns, said William Thielen, executive director of Kentucky Retirement Systems, which oversees the five pensions pools from Frankfort. “If we fail to meet those assumptions it will threaten our solvency.”
U.S. stocks have rebounded from the depths of the recession, pushing the Standard & Poor’s 500 Index to three straight annual gains of more than 10 percent for the first time since the 1990s. States that fully funded their plans saw greater benefit from the rally.
Public pension assets have grown about 37 percent since 2009 on average, according to the National Association of State Retirement Administrators. While some plans grew by as much as 66 percent, states that didn’t fully fund pensions — Kentucky, New Jersey and Pennsylvania — gained 22 percent or less.
“The funds that increased at the fastest rate had been getting a higher percentage of their required contribution,” said Keith Brainard, the Georgetown, Texas-based research director for the association. “Fund returns aren’t enough if you have more money going out than you take in.”
As municipalities mended their finances following the recession, some used pension cash to plug budget deficits. New Jersey, after overhauling and pledging to fund its pensions, skipped $2.5 billion of promised contributions as revenue missed projections.
Partly because of inadequate contributions, the average funding level of state and local pensions has deteriorated even though investment returns have improved, according to a report last year from Moody’s Investors Service on the 25 largest public plans. While returns averaged 7.5 percent from 2004 to 2013, unfunded liabilities tripled to almost $2 trillion.
Kentucky’s pensions haven’t been fully funded since fiscal 2002, Thielen said. The state has confronted budget deficits in the wake of the recession.
The KERS plan for workers in nonhazardous jobs shrank in the fiscal year that ended June 30. It paid out about $914 million of benefits and expenses, or $182 million more than it received from investments and contributions from workers and the state. The state made about $300 million of the $520 million contribution that actuaries had determined was needed to keep pace with outlays.
In 2013, lawmakers passed steps designed to cut the expense of Kentucky’s plans by moving future workers into a type of plan that doesn’t promise specific benefits. They also limited cost-of-living adjustments.
In fiscal 2015 and beyond, the state also committed to make full payments. If Kentucky receives that money and earns its 7.5 percent estimated rate of return, its funding ratio may still shrink to as low as 15 percent in coming years, though it will climb back to 100 percent over 30 years, Thielen said.
The strategy “will work — if we don’t neglect it or negate it,” Democratic Governor Steve Beshear said in his State of the Commonwealth address Jan. 7.
A proposal for extra funding beyond the actuarially required contributions may come up in the legislative session that started this week, Thielen said.
“We need some additional funding over and above” that payment, he said.
The risk is that a future legislature rolls back the steps passed in 2013 and uses the money for other expenses, Thielen said.
“Politics has a way of being sporadic,” he said. “If we have a down year, that has a significant impact on our unfunded liabilities.”
The system’s precarious balance worries workers who depend on it for income later in life, said Jim Carroll, a retiree and co-founder of Kentucky Government Retirees, which advocates for state workers.
“The reform is doing nothing to help the state pension plan because we have such a deep hole,” Carroll, 62, a former public information officer for the state, said in a phone interview. “We’re deeply concerned about the financial status of the plan.”
Judge Rules That There’s Nothing Sacred About Pension Promises
The ruling opens the door for financially strapped towns to cut pension obligations by filing for bankruptcy.
Excerpts from the PSPRS Pension Watch blog at PSPRS.info (Thursday, Sept. 4, 2014)-
“For the fiscal year, PSPRS’ total fund earned 13.82%, gross of fees. If we subtract 0.50% (last year’s amount) for fees paid to outside investment firms, we get an estimated annual return, net of fees, of 13.32%. ”
“Readers can look through the returns of all the different types of investments if they like, but it is more difficult to get a sense of their final performance because they all have different fees attached. ”
“The most glaring thing in the report is the real estate portfolio, which was the only category that lost money. Real estate had a -0.62% return for the year versus a benchmark return of 11.21%. PSPRS’ real estate investments are the source of so many problems, so I guess we should not be surprised that these investments are still causing problems. If real estate investments had achieved a return of just half the benchmark, the PSPRS total fund would have met its benchmark for the fiscal year.”
View PSPRS.info for the complete blog post
Arizona Republic – “In the end, it isn’t only taxpayers who deserve straight answers, but current and future public pensioners as well.”
Good or bad, news on public pensions is a necessity
Being a bad-news messenger is not easy. Just ask reporter Craig Harris.
Harris has written about difficulties faced by Arizona’s public-employee pension plans since fall 2010, beating most of the national journalism pack out of the gate on one of the most important ongoing stories of the decade.
It has already played out in cities like Detroit; San Bernardino, Calif.; and Central Falls, R.I.; where the inability to bring soaring public-employee pension costs under control helped force municipal governments into bankruptcy.
A number of other U.S. cities, from Chicago to Phoenix, now face similar, albeit not so dire, difficulties. And several state systems, notably those in California and Arizona, are substantially underfunded and drawing ever larger sums from the public treasury to maintain stability.
Harris’ first series on pension problems in Arizona was published in fall 2010. The gist of the eight-part series was that overly generous public pensions were costing taxpayers millions and were likely to get into financial trouble. He took a lot of flak for that series from pension-fund members and from state and local officials who perceived it to be an attack on public employees.
It was not. It was a warning based on informed reporting and a careful eye on national trends. Astute observers saw the looming public-pension crisis on the horizon, and The Arizona Republic saw value in examining their forecasts and asking tough questions in Arizona.
Harris and a colleague, Beth Duckett, researched and authored a second series in May 2013 focusing on public-safety pension funds and the dire straits some Arizona communities, such as Phoenix, find themselves in: They can’t afford to hire new cops because their public-safety retirement costs are too onerous.
Between series, Harris has worked with colleagues to spotlight ongoing developments in Arizona’s public-pension systems and efforts to stabilize them. He and reporter Dustin Gardiner, who covers Phoenix City Hall, no doubt have caused ulcers for city officials, pension administrators and many city employees because they write without fear about pension policies that cost taxpayers and put the entire system at risk of failure.
To public employees who find fault with this kind of government accountability reporting, we pose this question: Would they be better served if we waited until the systems are on the financial brink to raise questions?
The Phoenix police union, once one of Harris’ strongest detractors, has come around to the view that maybe he was right about some things after all. His reporting on allegations of irregularities within the Public Safety Personnel Retirement System prompted a former union head to ask for an FBI investigation. And guess what? Police and fire associations recently talked to Harris about a reform proposal they would like on the fall ballot to bring a measure of sanity to pensions — and to stave off more draconian measures contemplated by others.
Harris has fought tirelessly for records to bring these matters to light, often at substantial expense to this newspaper. It is a battle worth fighting. In the end, it isn’t only taxpayers who deserve straight answers, but current and future public pensioners as well. We all have a vested interest in healthy pension plans. Just ask all those public employees in Detroit.
ABOUT THE WRITER
Pat Flannery is a senior editor overseeing a team of five reporters responsible for government accountability. He has been a Phoenix reporter and editor for 33 years.
How to reach him