Sunday, September 23, 2012

Simple Math ... Are We the People as Dumb as Our "Public Servants" Believe We Are, or Are Our "Public Servants" the Dumb Ones?

Illinois keeps providing us all with lessons in fiscal responsibility and the dumb and dumber approach to funding public sector pensions.

Consider a few facts. Illinois public pension funds are underfunded by ~$85 billion. On Friday the state announced that it will assume for actuarial purposes that its pension fund investments will now earn 8% annually on average as opposed to the former assumption of 8.5%.

That change in the actuarial assumed rate of return will necessitate the funding of an additional ~$300 million beginning next year. So we have an ACTUAL funding shortfall of $85 billion and a new ASSUMED future annual investment return of 8%, thus requiring additional annual funding contributions of $300 million. But we're only talking about the $300 million.

Now $300 million admittedly is a whole lot of money, but it's not much compared to the $85 billion. Assuming the $85 billion was in the pension fund and invested, we would expect it to earn ~$6.8 billion annually (8% on $85 billion). Since Illinois is short $85 billion, however, in reality it won't earn anything on that ZERO amount. However, we can and should assume that its unfunded liability will grow by ~$6.8 billion each year as a result of the lack of $85 billion to invest.

So here's the math question du jour: Which is greater, $300 million or $6.8 billion? And if $6.8 billion is the larger number, why don't the politicians talk to us about the $85 billion and what they intend to do about that funding shortfall?

Wouldn't that make more sense instead of pretending they'll earn 8% on $85 billion in pretend money which they would expect to earn $6.8 billion on if it were really to be invested? Confused yet? If so, the politicians are winning.

Are the politicians really that dumb, or do they actually believe we're that dumb? Either way it's really dumb of them to do what they're doing and say what they're saying while not dealing with the real problem.

So here's what I say they should do. Forget about the assumed rate of return of 8% or any other assumption until they come up with and present for approval to the good people of Illinois a realistic plan about what to do concerning the $85 billion.

After the $85 billion is funded, or at least there's a credible plan going forward, then an 8% rate of return assumption is probably ok for pension fund planning purposes. So would be some other number close thereto.

But until then, just assume a zero return and propose to make up for the pension funding shortfall by some combination of dramatically raising taxes, increasing employee contributions, reducing promised future benefits, making the retirement date later before employees become eligible for retirement benefits or adopting a 401(k) type plan to replace the pension plan. In  other words, the pols need to do what they're paid to do. Serve the public and take on the tough issues by proposing realistic solutions to the very realistic problems confronting the state and its citizens.

This latest move by the Illinois politicians of tinkering with the rate of return assumption, while costing $300 million the first year and rising each year thereafter, is ridiculous and intended to throw We the People off the trail by ignoring the $85 billion elephant and its funding needs.

Let's not fall for that one, fellow citizens. Instead let's show the pols that they really are the dumb ones --- either for believing what they're saying or believing that we're believing what they're saying.

Pension Crisis Looms Despite Cuts makes it "perfectly clear" that the problem isn't confined to Illinois:

"Almost every state in the U.S. has made cuts to its public-employee pensions, seeking to dig out from the economic downturn, but so far the measures have fallen well short of bridging a nearly $1 trillion funding gap.

Since 2009, 45 states have rolled back pension benefits for teachers, police, firefighters and other public workers, including cuts by Michigan and California this month. Next week, Republican Ohio Gov. John Kasich is expected to sign legislation requiring, for example, that certain teachers work longer and pay more toward their pensions.

The state measures show how economic forces are reshaping traditional rivalries, convincing lawmakers and labor leaders that past public pension plans are unsustainable. In Ohio and elsewhere, politically potent unions have locked arms with state officials over the pension cuts.

But the new laws have trimmed just $100 billion out of the $900 billion gap between what the states and their workers put into their retirement plans and what the states owe in retirement benefits . . . .While most states have approved some form of pension cuts, many have opted to apply those changes only to workers who have yet to be hired.

That means most of the savings won't be realized for decades, when the most expensive retirement benefits come off the books. . . .

For years, part of the attraction of public service jobs has been guaranteed pensions and other benefits. That remains largely intact for current workers. Only a handful of states have replaced some guaranteed pension benefits with 401(k)-style retirement accounts that are commonplace in U.S. corporations. . . .

Many states have avoided reducing benefits for current workers or retirees, saying the plans have legal protections. Courts in Minnesota and Colorado have ruled that cost-of-living raises can be reduced.

"There is a lot of gray area,'' said Alicia Munnell, director of the Center for Retirement Research at Boston College. More states could try to cut future benefits for current workers because the laws aren't clear, she said. . . .

On Friday, the Teachers Retirement System of the State of Illinois said its pension bill to the state would increase by about $300 million in the fiscal year that starts next July. The higher costs derive from a pension board decision to lower its assumed rate of investment return, citing the "volatility of the world economy."

The lower the expected return, the more the pension's unfunded liabilities grow—unless the state fills the gap with higher contributions from employees or taxpayers, or tries to cut benefits.

Illinois lawmakers had a chance to address the deepening hole last month but they couldn't agree on a bill to limit cost-of-living adjustments. "Changes of some sort are necessary and everyone expects them to happen,'' said Richard Ingram, executive director of the Illinois teachers' pension fund.

In Ohio, lawmakers this month passed a series of changes that touch current and retired workers, along with new hires.

Many of the state's public-employee unions supported the pension cuts less than a year after they fought a bruising battle with Republican lawmakers to retain their current rights to collective bargaining. But on the pension issue, many state labor leaders agreed that their members' retirement benefits needed to be trimmed.

"It is a tough pill to swallow,'' said Kevin Griffin, who is president of the local teachers union and an English teacher in Dublin, Ohio.

An educator since 1994, Mr. Griffin will now have to retire later and pay more of his salary to receive a smaller pension.

"We had to make the math work," he said. "It came down to the question of whether there will be a pension there for me when I retire or not.""

Summing Up

It actually seems like common sense is entering the discussion in Ohio.

Soon it will elsewhere as well, even in states like Illinois and California, if only because We the People will force the much needed conversation to take place.

The time has come to gut up and do something, even if it's wrong.

Thanks. Bob.

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