Cypen & Cypen
NOVEMBER 17, 2011
Stephen H. Cypen, Esq., Editor
1. ACTUARY BLASTS COLLINS REPORT: We recently did a brief review of “Report Card: Florida Municipal Pension Plans” from Leroy Collins Institute (see C&C Newsletter for November 10, 2011, Item 2). Foster & Foster, actuary for public plans in the State of Florida, felt compelled to issue a public response to the report because it was so off the mark. The report begins by stating that it focuses on two critical measurements of municipal pension funds’ sustainability -- funding levels and costs. The report then assigns letter grades to funds based upon funding levels and cost per active plan member. Unfortunately, the Institute does not understand how funding levels are calculated or what makes a plan sustainable. Furthermore, it is borderline irresponsible to label a pension as passing or failing based upon those two measurements. Contrary to what the Institute may imply, sustainability of a pension plan has very little to do with the funding level or absolute cost. Sustainability of a pension plan has far more to do with the sponsor’s ability to continue making the annual payment each year. If the sponsor is flush with cash, funding level or cost per member does not matter. Likewise, a plan could have a funded ratio of 100% and a relatively small annual payment, but if the sponsor’s tax revenues will not support the payment, the plan’s sustainability may be in question. The report erroneously describes how an actuary determines funded ratio. Funded ratio is calculated by dividing the Actuarial Value of Assets (which the report has also misrepresented) by the Actuarial Accrued Liability. Actuarial Accrued Liability is not the present value of projected future payments. It is a description of liability that is developed in accordance with one of a few acceptable actuarial cost methods. Depending upon which actuarial cost method is employed, different answers are developed. For example, a plan given an “F” grade could be given an “A” grade if a different method was used. Not every public plan uses the same cost method. Assigning letter grades to a subjective, non-uniform measure is dangerous, and reflects a material misunderstanding of the actuarial information. The report also attempts to refute the “mortgage analogy,” but does so erroneously. The portion of the sponsor’s contribution each year is made systematically to improve the funded ratio, and many pension boards have made the decision to increase the size of payments so that funding levels increase at a faster rate than what is statutorily required. Further, funded ratio is dependent upon actuarial cost method used, and is not a fair reflection of the percentage of earned benefits covered by current assets. In fact, it is possible that the plan with the 75% funded ratio could cover 100% of liabilities that have been accrued to date based upon current levels of compensation and service. And, yes, a plan that has a 75% funded ratio could easily be 100% funded on a plan termination basis. Besides being largely dependent upon the actuarial cost method chosen, much like a mortgage, it is also dependent upon age of the plan. Some of Florida’s municipal pension plans have not been around as long as others, and, thus, it is unfair to compare the plans to one another. In addition, many municipalities have deliberately lowered their funded ratios in order to serve an alternative purpose. (For example, some cities have implemented Early Retirement Incentive programs to provide increased pensions to employees in return for immediate retirements. Although the tactic lowers funded ratios and increases pension costs per member, it saves the cities millions of dollars in annual cash outlays and prevents citywide layoffs.) The report makes the bold, unsupported statement that full market recovery should not be expected fundamentally to improve condition of the lower-rated plans. In truth, if the actuarial assumptions are met prospectively, those plans will see dramatic declines in funding requirements ten years from now. Foster & Foster consults in other states, and says the Florida public pension system is far better than anywhere else. First, plans are administered by an independent Board of Trustees. Second, sponsors are required to contribute at least the minimum required contribution set by the actuary, as approved by the Board, developed in accordance with the Actuarial Standards of Practice and reviewed by actuaries at the Florida Division of Retirement. Last, the system itself is very sustainable, and has adequate checks and balances. Costs of these plans has risen over the last decade due to the poor investment performance, not because of any mismanagement. Last year’s Senate Bill 1128 requires the Florida Division of Retirement develop a more comprehensive evaluation of public plans. Plans will be evaluated based upon a laundry list of different criteria, as opposed to just two. Meanwhile, we should shift our focus away from the subjective actuarial criteria for purposes of evaluating plans, and focus rather on benefits and associated costs of providing lifetime benefits for public servants. If costs have risen to unsustainable levels when compared to the overall operating budget [which, in our judgment, is extremely rare], then all parties should work together to find ways to bring costs in line. Until then, the plans will take care of themselves. Very well said.
2. THE EMPLOYER CASE FOR DEFINED BENEFIT PENSION: UC Berkeley Center for Labor Research and Education has published “Meeting California’s Retirement Security Challenge.” One chapter deals with making the employer case for defined benefit pensions. Employers can use DB pensions to their advantage to recruit skilled employees who are committed to the long-term success of the organization, they can more easily retain skilled employees with DB pensions than is the case with alternative benefits and they can deliver retirement benefits more efficiently with DB pensions, thus saving money and potentially increasing productivity. DB pensions tend to fare better under certain circumstances than others. The evidence for U.S. employers in the private and public sector suggests that DB pensions are more stable if they operate as stand-alone entities that are separate from the employers’ other operations, receive regular stable contributions from employees, employers or both, and if they are large enough to take advantage of the benefits of economies of scale in their administration and investments. The evidence also suggests that promotion of stable DB pensions may not necessarily require large policy changes. But, the examples of the private and public sector where DB pensions are comparatively stable, specifically multi-employer plans and state and local government plans, indicate that promotion of stable DB pensions requires some coordination mechanism to bring together several employers to implement the three characteristics we highlighted in the chapter: stand-alone entities, regular contributions and economies of scale. The authors presented two proposals -- one from an industry association and one from a state-wide municipal DB plan -- to show where the coordination of employers could come from. It could either be through public seed funding of stand-alone DB pension plans or through expansion of already existing public sector DB plans to private sector employers and their employees. The lessons are twofold: First, DB pensions offer employers a number of attractive advantages. Second, employers could enjoy these advantages at relatively low costs, given the right circumstances. It would not require massive policy changes at the federal or the state level to start creating these circumstances.
3. CENSUS BUREAU SURVEY OF STATE AND LOCAL PUBLIC EMPLOYEE RETIREMENT SYSTEMS: The United States Census Bureau has released its Annual Summary of the Survey of State and Local Public-Employee Retirement Systems for 2009. The survey provides revenues, expenditures, financial assets and membership information for public employee retirement systems. Data in the report were collected from fiscal years that ended July 1, 2008 to June 30, 2009, and do not reflect data for the entire calendar year of 2009. Public pension data have been collected annually since 1957, and a census is conducted quinquennially as part of the Census of Governments. The surveys provide valuable knowledge about government finances for a number of data users, ranging from federal agencies and research organizations to the general public and academic institutions. There are several criteria a public retirement system must have in order to qualify for inclusion in the survey. As defined by the Census Bureau for statistical purposes, a public employee retirement system is one that is financed by a separate accounting fund of the administering government, excluding pay-as-you-go insurance plans. It must have some type of assured revenue stream or dedicated revenue source other than appropriations from the administering government. Other criteria exist for membership, such as funding and organization. A public pension system’s members must consist of current or former public employees who are eligible for inclusion in the employment phase of the Census of Governments. A retirement system must have at least one separate identifiable fund within a recognized government unit, and it must be funded completely or partially with public contributions. A pension system must also be recognized as a government unit that provides revenues, expenditures, financial assets, and membership information for public employee retirement systems. In addition to state governments, the Census Bureau defines five types of local governments: county, municipal, township, school district and special district. Each retirement system is considered an agency of one of these larger government units, but the information in the publication reflects only the retirement system portion of revenues, expenditures, and assets. Total cash and investment holdings decreased by 22.7 percent, from $3,192.1 Billion in 2008 to $2,466.0 Billion in 2009. Most investment categories showed decreases, with increases only in cash and short-term investments, real estate and mortgages. Together, such categories made up only 9.1 percent of total cash and investment holdings. Mortgages showed the largest increase, growing 52.0 percent, from $10.2 Billion to $15.5 Billion, but this category equaled only 0.6 percent of total holdings. On the other hand, the largest decrease was in other nongovernmental securities, decreasing 57.0 percent and amounting to 4.1 percent of total holdings. Corporate stocks composed the largest share (32.8 percent) of total holdings, declining by 29.8 percent, from $1,152.2 Billion to $808.9 Billion. Corporate bonds declined by 20.3 percent, from $514.9 Billion to $410.2 Billion, and making up 16.6 percent of total holdings. Other findings were
The Census Bureau collects three components of retirement system receipts: investment earnings, contributions from employees and contributions from employers. The 2009 fiscal year was greatly affected by the market decline of 2008 because it covered the period from July 1, 2008, to June 30, 2009. Earnings on investments, which constitute the largest portion of system revenues, declined. There were $594.5 Billion in additional losses compared to the prior year of losses on investments. Losses on investments totaled $38.9 Billion in 2008 and $633.4 Billion in 2009. Employee contributions increased 7.0 percent, from $36.9 Billion to $39.5 Billion. Government contributions increased 4.5 percent, from $82.4 Billion to $86.1 Billion. The increase was driven by local government contributions, with an increase of 10.0 percent, which offset the 2.6 percent decline in state government contributions. Total payments increased by 4.0 percent, from $193.7 Billion to $201.5 Billion. The increase was caused by an increase in benefit payments, from $175.3 Billion $187.0 Billion (6.7 percent). There are a total of 3,418 public employee retirement systems at the state and local government level. While there are only 222 state-administered retirement systems, these systems account for 89.8 percent of total membership. There are 17,437,776 state retirement system members out of a total 19,420,047 public employee retirement system members. Municipality-level retirement systems rank second, with 6.2 percent of total membership (1,196,701 members) and county-level retirement systems rank third, with only 2.9 percent (570,430 members). The increase in number of systems from 2008 to 2009 is due to an increase in coverage of retirement systems in several states, including Florida. Local retirement systems increased from 2,332 systems to 3,196 systems. The largest increases were for retirement systems for municipalities, townships and special districts. Very exciting reading.
4. PENN STATE GRAND JURY REPORT: For those of you who are having a good day and want to ruin it, read the full 23-page Penn State Grand Jury Report at http://online.wsj.com/public/resources/documents/Presentment.pdf. WARNING: The report contains very graphic language.
5. THREESOME GOES WRONG – MAN ATTACKS WIFE AND OTHER WOMAN: A se.xual threesome turned violent, resulting in a man’s arrest -- accused of punching his wife, swinging a big-screen television at her and whipping her with a belt. Naplesnews.com reports that Jorge Daniel Silva, 22, faces a felony battery charge after deputies say he became enraged before a planned threesome with his wife and another woman. Silva’s wife told deputies that the three of them began kissing when Silva “freaked out,” and started hitting her. The two women then ran into a bedroom and locked themselves inside, but Silva broke through the door. As his wife curled up to avoid being hit, Silva punched her and swung the TV at her like a bat. After hitting his wife with the television twice, Silva dropped it on her, then grabbed another television and threw it at her. The second woman told deputies she tried to break up the fight but Silva would punch her in response. Silva told deputies two stories: that his wife attacked him after she kissed the other woman, and, that he became jealous when the two women started kissing and would not allow him to join. He also told deputies he broke down the door because he thought the two women were having se.x without him. All three appeared to be under the influence of alcohol – big surprise. The old adage is true: be careful what you wish for… .
6. ON THIS DAY IN HISTORY REDUX: In November 10, 2011 Newsletter (Item 12) we said “In 1940, Walt Disney begins serving as an informer for the Los Angeles office of the FBI; his job is to report back information on Hollywood subversives.” Well, according to an expert on Walt Disney, not exactly. Like hundreds of folks, Disney was a special correspondent of the FBI, which means that he channeled information to them. To call him an “informer” exaggerates the secretiveness and the importance of what he did. Actually, the FBI investigated him as much as he provided information to them. Message to www.historyorb.com, our source: close but no cigar.
7. GOLF WISDOMS: Progress in golf consists of two steps forward and ten miles backward.
8. PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.): Money can't buy happiness, but it sure makes misery easier to live with.
9. QUOTE OF THE WEEK: “For myself, I am an optimist – it does not seem to be much use being anything else.” Winston Churchill
10. ON THIS DAY IN HISTORY: In 1913, Panama Canal opens.
11. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.
12. PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm. Thank you.
Copyright, 1996-2011, all rights reserved.
Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.