Tuesday, September 8, 2015

TEXPERS Comments on Swamped Whitepaper of the Laura and John Arnold Foundation

TEXPERS responded the most recent whitepaper produced by the Laura and John Arnold Foundation via a press release distributed Friday to all Texas journalists. Here is the text of the release:

HOUSTON, Sept. 4, 2015 /PRNewswire/ -- Max Patterson, executive director of the Texas Association of Public Employee Retirement Systems, commented on "Swamped: How Pension Debt is Sinking the Bayou City," a whitepaper released by the Laura and John Arnold Foundation:

"The best I can say about this propaganda is that it is accurate in one regard: the city of Houston has shortchanged, over decades, the actuarially required contribution (ARC) its pension funds needed to function fully to their design. Employee benefits calculations could have been made to rely less on employer and employee contributions if the pension funds had received adequate assets to generate investment returns. By this action, successive Houston city councils have torpedoed the funds' abilities to create those returns and the unfunded liability measure has increased.

"Contrary to the Arnold Foundation's conclusion, why would any lawmaker want to give more control to a city management style that created this situation?

"By contrast, look at San Antonio, where decades ago the city and its employees agreed to increase contributions to fully fund the ARC each year, no matter what, and to place that agreement in state statute. The San Antonio Fire and Police Pension Fund now has the best funded ratio and lowest unfunded liability of Texas pension funds with assets greater than $1 billion. Houston should follow suit.

"The remainder of the Arnold Foundation whitepaper is misinformation endeavoring to confuse the general public and policy makers by creating dire, what-if scenarios for its unfunded liabilities, equating them to debts as if they are due today or next year," Patterson said.

"The truth is that unfunded liabilities are not debts that require the payment of interest, but they are like calculations for a homeowner's mortgage. Does a homeowner have the assets on hand today to pay the purchase price of their home? Of course not. That is why they obligate themselves to pay monthly over 30 years. Through diligent, disciplined effort and aided by career stability and benign inflation, the homeowner can expect their monthly mortgage payment to decrease each year as a percentage of their take-home income.

"The same is analogous to unfunded liabilities. They are snapshots of a city's ability to pay future liabilities today, but they don't have to be paid in full today. They are simply an accounting guidepost that should encourage a city to fully fund its ARC. It's inconceivable how a foundation with a billionaire hedge fund benefactor can misconstrue this fundamental pension accounting concept unless it is trying to effect some backroom agenda," Patterson said.

With specific reference to the Arnold Foundation's call to rescind statutes which govern Houston and other big cities' pension funds, Patterson said:

"A pension fund situated in a steady, healthy city economy whose elected leaders responsibly compensate employees for services they deliver will not have a problem generating investment returns over time. While Houston's leadership should prioritize its budget accordingly, there's little evidence it will do so. Why should pension funds and city employees become completely and absolutely subject to the whimsical, undisciplined behavior of a city council by ending the balancing force of their protection 
in state statute?" Patterson said.

"By placing some factors of their governance in statute, the pension funds can stick to the long-term investing horizons they need to generate the returns for retiree benefits, reducing the contributions required of cities and employees. But whipsaw council budget-making – of which Houston's history is example A – would undermine the pension funds' ability to produce. Why should other big cities' pension funds suffer a similar fate? The Arnold Foundation is advocating for seriously flawed and dangerous public policy with its call for absolute local control," Patterson concluded.

Tuesday, July 28, 2015

Does Good Math Matter to the Opponents of Defined Benefit Plans?

The Texas Public Policy Foundation (TPPF) and others like it have developed a reputation around the state capitol for sometimes playing fast and loose with budget facts. This year, they are doing the same with pension facts.

In 2013, Governor Rick Perry took issue with the TPPF’s assessment of the Texas appropriations bill. The TPPF is an Austin think-tank which is regarded as the leading conservative issue driver in Texas. It had claimed that Texas’ budget was similar to that of California’s in its runaway spending.

Gov. Perry responded to the TPPF report by saying “I did read some of the criticism and I’m not sure that those who were making that criticism have a really good handle on the Texas budgeting process. Frankly, I don’t understand the math.”

In recent months the TPPF has taken the same fuzzy-math approach to assessing the health of Texas’ state and local pensions.

The group’s pension policy analyst has published two op-ed’s in major Texas newspapers making wild claims about “unworkable systems” being in “rough shape, and things are getting rougher.”

People with significant pension experience reviewed the op-eds and came up with a similar conclusion to Gov. Perry’s. It could be restated like this: “We aren’t sure those who are making the criticisms have a really good handle on Texas pensions.”

Max Patterson, the executive director of the Texas Association of Public Employee Retirement Systems, noted how the TPPF op-ed pointed to a $57 billion gap between earned benefits and plans’ assets at pensions across the state.

Of course, Patterson noted, that appears to be a large number, but $32.1 billion was due to the Teachers Retirement System, the largest in the state, with 1.4 million participants. Three other statewide pensions, serving 992,000 participants account for another $14 billion, or $46.1 billion total.

So 80% of the TPPF’s headline number is attributable to four statewide plans with nearly 2.5 million participants. The remaining $11.4 billion gap is spread among roughly 90 local pensions across Texas, and almost half of that amount is due to four pensions in Houston, Dallas and Fort worth, Patterson said in response to the TPPF op-ed.

Tim Lee, executive director of the Texas Retired Teachers Association, also questioned the TPPF assessment: “Last year, TRS’ investments saw an $18 billion return and paid out $8.5 billion in retiree annuities. The average monthly annuity for our retired teachers is $1,995. One out of every 20 Texans is a participant in TRS… Investments account for more than 64 percent of the value of this $130 billion fund, more than three-fifths of the pension fund’s revenue.

“The TRS defined benefit plan is a great bargain for the Texas taxpayers and provides a modest but reliable retirement for our public educators. …We believe [the TPPF analyst’s] time is better spent trying to improve retirement security for all Americans, not robbing dedicated school employees of a benefit they have paid into their entire career,” Lee said.

Thursday, July 2, 2015

401(k)s: “A lousy idea, a financial flop, a rotten repository of our retirement reserves”

Our last blog entry noted how the opponents of defined benefit plans willfully peddle an unwarranted assumption fallacy, that 401(k)s are the only solution to the liabilities that some (not all) pensions are currently experiencing.
But, we continue ask, are 401(k)s really the best alternative in seeking the best outcome for America’s hard working middle class?

There is a growing body of evidence that they are not and the headline of this blog entry is a summation of Stephen Gandel, one financial journalist who is writing on the issue.

We recommend reading Gandel’s entire article, “How easy is it to become a 401(k) millionaire? Here’s the truth,” but we’ve posted his conclusion below:
If you want to end up with $1 million dollars in your 401(k), all you have to do is work for the same employer for more than three decades, save about 40% more than most financial planners dare to recommend, land a job at of the rare companies generous enough to match 5% of your contributions, and totally crush the market, while you go about your normal day job, avoiding all the sudden financial traumas that lead people to borrow against their retirement funds.
Of course Gandel ridicules the possibility for all those components of the perfect world equation that are offered by Fidelity Investments. In sum, 401(k)s are sending many hard-working, hopeful American workers down a rabbit hole of future despair. We would not wish them upon our worst enemies.

Tuesday, June 16, 2015

Beating the Drums for Defined Contribution Plans with the Unwarranted Assumption Fallacy

One of the most frustrating dynamic of the entire “defined benefit versus defined contribution” argument for public employee pensions is our opponents’ continuing use of unwarranted assumptions to make their points.

An unwarranted assumption makes a conclusion that is based on a premise which is false or unwarranted by the facts. The premises are typically “suppressed or vaguely written,” according to Wikipedia's explanation of unwarranted fallacies.

Let’s take as example “Commentary: Solving the debt in public employee retirement systems,” an opinion piece published recently by Brent Sohngen.

First, Sohngen is a “professor of environmental economics at Ohio State University… [who] conducts research on land use and climate change, carbon trading, and water quality trading.” It’s hard to understand how Sohngen is knowledgeable about pensions, especially in Texas.

Second, Sohngen displays the unwarranted assumption fallacy with his rather simplistic statement:
The National Bureau of Economic Research suggests that the unfunded liability in systems all over the country is more than $1 trillion. Aside from incredible returns in the stock market and a lot of lucky guesses, only three things that can be done to fix this problem: Increase contributions by people in the system, reduce payouts to retirees, and shift people to private defined contribution plans. [emphasis added]
Really? Only those three things can fix the problem of unfunded liabilities?

We can think of at least one additional thing: employers should make the full actuarially required contribution (ARC) always and everywhere. When they don’t problems occur.

In Texas this year our legislators admirably owned up to their previous shortchanging of the state’s Employees Retirement System, passing HB 9 and adding $440 million to the program by raising state employee contributions to 9.5% of payroll. It was a situation that was brought on by years of underfunding. It need not have happened this way.

Next, Sohngen notes how a shift to defined contribution plans in Ohio was sold to employees:
In 1997, the state passed legislation that allowed a set of public employees to shift out of the defined benefit plan, and into a defined contribution plan. These public employees would be set loose to manage their own retirement investments, like private 401(k) plans. Those who shift out bear more individual risk, but for many people the risks are worth it because they gain portability — or the ability to take their retirement savings with them if they leave state employment.
Since 1997, only 3.1 percent of employees have shifted to this defined contribution plan. Why is this? Perhaps the most important reason is that the benefits paid to retirees who stay in the defined benefit plan are still really generous. When cost-of-living adjustments are included, they are greater than the payments a private citizen is likely to get from saving the same amount of money over their career and investing in a stock index fund tied to the Standard & Poor's 500.

Did you notice that the most important reason for the failure of a shift away from the DB plans was that the defined benefits are still really generous. He ignores his own argument in the preceding paragraph, but apparently the ability to gain portability and being “set loose to manage their own retirement investments” weren’t good reasons for employees to switch either. 

If someone is let loose to manage their own investments it would seem that they would be confident they could beat the returns gained from the pensions’ investments. The truth is that few do and most people know they won’t. Who really wants to bear more risk? Moreover, why should they when they were told that they would have lower annual salaries in return for longer-term retirement benefits.

Sohngen steps in it further, noting how Ohio’s ‘tax’ of those who opt out is another disincentive. Of course it is. Converting public employees to defined contribution plans (which, remember, was one of only three possible options) is expensive to existing plans. Someone somewhere has to contribute ongoing increments to DB pensions to keep them viable. They were structured from the beginning to assume normal population, economic, and employee growth and the contributions that come with them. You can’t tinker with the foundations of the structure because the first contributions to the pension were so small. The government employers and taxpayers in that city benefited from those structures by being able to divert funds to other needs.

To be clear, Texas isn’t sticking its head in the sand and declaring that defined benefit or defined contribution plans are the only way to go. Several different organizations are studying the issue.

For example, upon finding that its teachers’ pension was struggling in 2011, the Texas Legislature asked the Teacher Retirement System of Texas to study whether defined contribution plans made sense. The answer was simply, “No.” Here are the key paragraphs from its study:

  • In conducting the Study, TRS modeled the alternative plans using two different approaches: the “Targeted Benefit Approach” and “Targeted Contribution Approach.” The TRS benefit, as currently designed, replaces roughly 68% of a career employee’s pre‐retirement income before a loss of purchasing power. Therefore, TRS modeled the plans in the “Targeted Benefit Approach,” to provide the same level of benefit as the current plan regardless of cost. As shown in Figure 2, TRS determined that the alternative plans would be 12% to 138% more expensive than the current plan (not including the cost to pay off any unfunded liability) to provide the same level of benefit.
  • Conversely, under the “Targeted Contribution Approach,” TRS modeled the alternative plans to cost the same as the current plan regardless of the benefit level provided. Under this approach, TRS determined that the alternative plans would replace 27.7% to 59.7% of pre‐retirement income for a career employee retiring at age 62.
The proponents of defined contribution plans also routinely ignore various warnings about how those with 401(k)s do not save enough or manage their retirement investments with a long-term growth perspective. These are recipes for disaster.

So, again, the unwarranted assumption fallacy provided by Sohngen and other DC-die-hards rarely measure up to a conclusion that they are only one of three options to dent the unfunded liabilities of pension funds. The unwarranted assumption fallacy runs throughout their argument.

We will have to continue to beat our drum for defined benefit plans as long as they beat theirs.

Wednesday, April 15, 2015

Be Wary of HB 2608 and the call for “Local Control”

TEXPERS Executive Director Max Patterson has produced an op-ed regarding HB 2608. We would appreciate sharing and publishing when possible.
Among the many low-key, but potentially damaging, pieces of legislation now being considered by the Texas legislature is HB 2608, filed by State Representative Jim Murphy of Houston, to address budget problems in the state’s largest city. Members of the Texas Association of Public Employees Retirement systems oppose the Houston bill: it would radically – and detrimentally -- alter the structure of pensions in other cities around the state. 

HB 2608 is simple in intent: it would eliminate the Legislature’s review of retirement benefits changes that cities and their pensions work out for their local police, firefighters and municipal employees. Proponents say the Legislature interferes in city affairs and that HB 2608 gives the people paying local taxes “a clear voice” in how their pension system operates.

But is any of that true?

A good many local pensions, with the help of their city governments, sought decades ago to enshrine city- and employee-contribution rates, retirement age benefit formulas, and cost of living adjustments in state code. Mayors and city councils have fleeting political and budget goals in the long life of a city. Pensions, on the other hand, are built with long-term returns in mind. They calculate hard financial mathematics every day to ensure that their investments will meet future retirement benefits. (In Texas, roughly 60% of pension benefits are created from investment returns.) While local elections and competing budget priorities among council members might resemble a tennis match, the pensions are playing chess.

And so it was that many pensions and cities came to set their pension operations in state law, so that only when the city council, the pension, retirees, unions and city staff came to consensus would the Legislature be asked to vote and approve changes to their governing documents. Beyond that, the Legislature plays no role in the local affairs of Texas pensions.

Given that our pensions are among the best performing in the nation, the system has worked well.

So along comes HB 2608, attempting to persuade a majority of legislators that the problems now being experienced in Houston warrant wholesale change to the structure of pensions across Texas.

In our view, Houston’s problems with its pensions didn’t stem from involving the legislature in pension issues. Decades ago, various leaders began short-changing the pensions of the money they needed to remain actuarially viable.

At first the pensions went along, accepting the city’s promises for re-payment. As time went on, and the city kept digging holes, the pensions balked at accepting any more “deals” that served the city’s short term budget goals, but ignored the long-term liabilities of their pensions.

TEXPERS keeps an eye on the investment performance of local pensions. Our yearly research shows most pensions, when given a chance by their cities, do a great job of earning the investment returns needed to keep the promises their city makes to public employees. Only when cities balk at honoring their commitments do pensions get in trouble, such as has happened in Houston.

HB 2608 should be opposed because of what we know of local pensions which have “local control.” Those are the cities whose budgets often fail: nothing is more tempting to mayors and councils than promising unsustainable benefits to large, motivated city employee groups – the ones who vote. While the proponents of HB 2608 suggest that city governments will manage their finances responsibly through “local control,” experience doesn’t support their contention.

Keep the current system of checks and balances which has worked so well across the great state of Texas. Oppose HB 2608.

Wednesday, April 8, 2015

TEXPERS releases annual study on Asset Allocation and Pension performance

In a press release today, the Texas Association of Public Employee Retirement Systems noted that Texas’ local pensions for police, firefighters and municipal employees increased their rate of return for the 20-year period which matters most in determining pension health.

See the full report here and the press release below, but here are some highlights in terms of pension performance.

Best       20-year average return – 10.14% – Big Spring Firemen’s Relief and Retirement Fund

15-year average return –8.3% -- Houston Municipal Employees Pension System

10-year average return – 9.35% -- Houston Municipal Employees Pension System

5-year average return – 11.10% - VIA Metropolitan Transit Retirement Plan

3-year average return – 15.83% -- Irving Firemen’s Relief and Retirement System

1-year average return – 12.41% - Irving Firemen’s Relief and Retirement System

Thursday, February 12, 2015

Open Season on Defined Benefit Plans in Austin

When the 84th Texas legislature convened early in January, it triggered a starting gun for some political groups to begin calling for the end of defined benefit plans. This year the Texas Public Policy Foundation is leading the charge.

In late January, TPPF published and promoted a report titled, “Reforming Texas’ State and Local Pension Systems for the 21st Century,” a 28- page document which, when it actually talks about Texas, admits that the state and its local pensions aren’t in bad shape. The goal of the report seems mostly to try to compare Texas to New York, California, and Illinois, and then to scare Texans and our elected officials into making wholesale changes that aren’t necessary.

A quick look at the data they use for analysis comes from 2008 and 2009, some of the worst years ever in the recent stock market history. Cherry-picking select data to bolster a position doesn’t make for a convincing argument.

But the report continues with that approach in its focus on troubles at the Texas Teachers Retirement System. It’s widely known that the state shortchanged its contributions to TRS over the years, and that those contribution shortfalls are causing TRS problems today.

Without naming or exploring the issues around a single local Texas pension that might be experiencing trouble, the report cites its view of nationwide trends as evidence that Texas’ local pensions will experience similar trouble.

Of course the danger with such a report is that its assertions might become more widely believed, even though its data is built on house of cards.

In this type of environment, it’s important for the people at Texas’ local pensions to keep their elected officials informed about the health of their system and what they are doing to continually improve it.