Friday, September 12, 2014

Pension Funding is a Local Matter

Our blog articles contend that every Texas city knows better than Austin or Washington how to appropriately fund their pension. It’s good to see an article in Governing.com reflect our position.

The story, “Pensions’ Unfunded Liabilities Still Going Up,” is based on a Loop Capital Markets survey of a number of cities. It found that, overall, American state and local pensions’ funded ratios decreased from 65.6 percent to 65.3 percent when comparing the 2012 to 2013 periods.

Let’s focus on the comments by Loop Capital Markets managing director Chris Meir in summarizing the study. He said that that pension reforms across the country have been whittling away at unfunded liabilities in many states and localities, but the processes are slow:
Thanks to each state’s particular legal and economic structure, he said, the reform process has been a “state-by-state skirmish,” thus dragging out the process. “Therefore, we do not believe [this] is a systemic problem,” he said. “It is a state-by-state problem with a state-by-state solution."
We’ll add that this dynamic produces very unseemly processes that aren’t for the faint of heart. Every state is different, just like every city is different. The study describes how states experiencing the biggest declines, like New Jersey, Massachusetts, New York and Virginia, are older states with more expensive infrastructure to maintain. Some of those states are also seeing population decreases. Those and other dynamics require continuous management from elected officials.

Similarly, all of Texas’ cities, in one form or another, wrestle with balancing city infrastructure needs with their civil service infrastructure needs. It’s an ongoing give-and-take process.  But it should always be handled at the state level for state pensions, and the local level for local pensions.

It’s possible that the seemingly sloppy, stop-and-start, two steps forward, one step back process is too much to handle for many who follow such matters at foundations and political research organizations. Nothing is neat and simple, but to those ivory tower folks who are inclined to put everything in boxes, the pension funding discussion process must be infuriating. Nonetheless, we have yet to find any other process that can honor and reflect the individual characteristics of each city and their different pensions.

We salute the people who take up these tasks daily. – Max Patterson

Friday, August 8, 2014

New Pensionomics Report indicates Texas economy gets $12 billion boost from state and local pension benefits

The National Institute on Retirement Security took another look at the economic impacts of pension payments in 2012 to retired state and local government employees. 

The key finding: pensions in and outside Texas generate $12.1 billion in direct payments to Texas residents. Pension benefits are then spent in local communities, rippling their effects as one person’s spending becomes another person’s income. The multiplier effect of these benefits supported $23.7 billion in total economic output per the chart below.

You can read the entire report here.

We are always impressed by the overall amounts of benefits that the pensions generate from employer and employee contributions to the funds. Here’s the telltale paragraph:
Between 1993 and 2012, 21.80% of Texas’s pension fund receipts came from employer contributions, 16.09% from employee contributions, and 62.11% from investment earnings. Earnings on investments and employee contributions—not taxpayer contributions—have historically made up the bulk of pension fund receipts.
In essence, this 62.11% is imputed savings to taxpayers for the benefits received by their public employees. Don’t tell the IRS or they’ll find out some way to tax that from us! – Max Patterson

Tuesday, July 22, 2014

The Age of Fracture

By Thomas J. Mackell, Jr., Ed.D.
Special Advisor to the International President International Longshoremen's Association, AFL-CIO
  
This is an age of fractured jobs, a fractured economy, fractured families, a fractured political system, a terribly fractured American Dream and where the political protagonists, our elected leaders, are in need of spinal transplants.

The soon-to-retire greying generation is experiencing no pensions. Those pensions are promises that will not be kept, leaving thousands of employees in dire straits when they are most vulnerable. Roller-coaster retirement accounts subject to the whims of the market. Longer life spans and higher health care costs. Children in college. Young adults with staggering student-loan debt who are financially incapable of purchasing a home. Aging and ailing parents. A will to work but fewer jobs to be had.

America is dying for a champion who makes preserving the middle class a top priority. They want somebody who can level the playing field so that Main Street doesn't always come second to Wall Street. Someone who is not running networks of oligarchs who take advantage of our weakened campaign finance laws to manipulate the democratic process in pursuit of their self-interests.

This is the scenario as we head into the 2014 Congressional elections with predictions that Republicans will hold the House of Representatives and ,perhaps, gain control of the Senate.

If that happens, forget a Congress that looks out for the little guy.
In conjunction with a non-caring Congress, today, unfortunately, the concept of freedom has come to mean the freedom of the wealthy to do whatever they want, without regard to the consequences for the rest of us. In reality, the 1 percent has undertaken a serious effort to buy elections.

At any kind of gathering whether it be at work or at home, Americans are expressing disappointment about the way things run in Washington. They don't see them dealing with the multitude of problems facing our nation.
Their approval rating is at an all-time low. Many citizens say they see no value in bothering to vote.

Clearly, the constant bickering between the Republicans and Democrats is wearing thin on Main Street and leads to a notion of false equivalency.
The Pew Research Center says that Republicans and Democrats are more divided along ideological lines than at any point in the last two decades.

The GOP has done all it can to undercut the Obama presidency. Democrats had to fight back. The line is drawn in the sand which has resulted in blind allegiance or blind hatred.

But let's put the blame where it belongs: on the Republican side of the aisle. The Republicans must end their internal civil war between the moderates and the Tea Party aficionados.

Recently, a number of the members of Congress who have announced their plans to retire have expressed their frustration with the cantankerous environment in Washington and their inability to get things done.

When even the pols start complaining, you know that things are really bad. If they can't find solutions then we are, truly, in deep trouble.

Despite this horrendous dilemma, failing to vote surely will make things worse. We have a solemn obligation to go to the polls. Neglecting the most fundamental responsibility of citizenship invites complacency and encourages political abuse. Showing up on Election Day proves we are in the game, that we care and that we want to see change.

There are areas of this country where people have been removed from the ranks of eligible voters and GOP operatives are doing all they can to suppress participation by traditional Democratic constituencies.

Today, the American workplace is plagued with wage theft, disrespect of culture, pressure, unsafe environments, unbridled automation and more.
Everything solid is melting into air. This should not be tolerated in modern America. We must vote our pocketbook to protect our livelihoods and our well-being.


We must encourage our union memberships, thoughtful young folks and retirees to go out on Election Day and exercise their right to vote.

They must be engaged in their communities and serve as an example to those who might stay away. Staying home is not an option. It will only continue and calcify this dangerous divisiveness.

Thursday, July 10, 2014

TEXPERS Testimony to the Texas House Pensions Committee

On July 9, TEXPERS Executive Director Max Patterson was invited to testify before the Texas House Pension Committee regarding the implications of GASB rule changes on local pension funds. The following remarks were submitted by Patterson to the Honorable Bill Callegari (R-Katy), Chairman of the House Pension Committee.
Max Patterson is seated in the middle of three men facing the Texas House Pensions Committee on July 9. His testimony can be heard at the 56:24 mark in this tape of the meeting hosted by the Texas Legislature. http://tlchouse.granicus.com/MediaPlayer.php?view_id=28&clip_id=8814

Honorable Chairman Callegari, thank you for this opportunity to provide testimony on the Implications of GASB on local pension funds.
I am Max Patterson, Executive Director, Texas Association of Public Employee Retirement Systems (TEXPERS). 
GASB is intended to show all of the cities debt obligations and in this effort this rule change requires the disclosure of cities pension obligations to be “moved” from the footnote section in its annual financial disclosures (CAFR) to its balance sheet. It should be pointed out that any pension obligations by the city have “always” been disclosed. The primary reason for debt disclosures are to insure that all obligations are disclosed when a city attempts to raise money by the selling of bonds. Pension obligations have always been disclosed but GASB is attempting to highlight any pension obligations because of the growing obligations by cities. It is important to note here that those cities who have been deferring pension payments have increased their debt obligations significantly as compared to the cities that have consistently made their pension payments. 
Unfortunately, because of the GASB 68 change people have directed there attention towards the pension plans rather than to the cities and ask why are you deferring payments when you have previously agreed to these obligations.
When people look at municipal debt it is important to look at all debt not just the pension debt. In most cases, if not all, pension debt is a much smaller debt obligation than other debt the city has accrued. In the Texas Comptroller’s report for August 31, 2013 the City of San Antonio had tax supported debt amounting to $1,406,185,000 and revenue supported debt of $8,426,715,000. As of December 2013 the San Antonio Fire & Police Fund had a $214,876,634 unfunded liability.
If you look at Houston as of August 31, 2013 they have a tax supported debt of $3,383,060,000 and revenue supported debt of $9,293,693,288. The three city pension plans have a combined unfunded liability of $3,051,388,000 as of December 2013.

It is also important to note that these numbers reflect only what is true on that one day and do not reflect a total picture. They don’t reflect on whether a city can make its obligations in the future or if there may be a trend.

When trying to determine if a pension fund is able to meet its obligations we also look at numbers on a specific date and often do not look at other factors to answer the same question.

When trying to determine if a pension fund is able to meet future obligations one has to consider at a minimum three factors; returns, amortization and its unfunded liability. You must look at all three and in conjunction with past numbers to determine if there is a trend. This analysis is a function of the actuary and pension boards depend heavily on the analysis and reporting performed by its actuary and usually on a yearly basis.
In summary GASB focuses primarily on the city and all its debt obligations, but unfortunately some people are seizing the opportunity to transfer the focus toward the pension funds. This discussion could very easily be an issue around a city’s infrastructure, neglected roads and bridges and a failure to set aside sufficient funds to keep up with daily maintenance. Consequently at the end of the day the repair cost is much higher than what it would have been if the repairs were made earlier.

I can’t speak for the rating agencies but in the course of rating a city the bonding agencies look at more than just the numbers on the financial statement. They look at the city’s history of paying its obligations and the ability of the city to meet its obligations going forward. And, they look at all obligations, not just the pension obligation.
As we have always said local pensions in Texas, for the most part, are in good shape. Those cities who are meeting their commitments by making their pension payments are in good shape. Looking at the projected future pension obligation of a pension system can be misleading if that is all you look at. Look at the whole picture before passing judgement.

Friday, May 23, 2014

TEXPERS Objects to Americans for Prosperity Interference in Detroit

New press release out today. Read it here, or below:
HOUSTON (May 23, 2014) – The Texas Association of Public Employee Retirement Systems registered its contempt for the decision by Americans for Prosperity earlier this week to interfere in pension politics in Detroit and pledged vigilance of future similar activities in Texas.
Among other actions, the AFP is encouraging state lawmakers to pressure Detroit into dumping its art collection and switching to defined contribution plans for public employees without fully evaluating the effects of either.

“While we certainly respect the right of special interest groups to assert their views on public policy issues, it seems to us that the AFP’s 11th hour threats of statewide officials is more an effort to grandstand than to really play a part in developing reasonable solutions,” said Max Patterson, the executive director for TEXPERS, an organization with more than 75 pension plans and representing nearly 2 million individuals in Texas.

“Unfortunately, we have been witness to similar gratuitous interventions by other groups in other states and the odds are that they may try such political stunts here in Texas despite the strength of our state and local pensions,” Patterson said.

“Instead of engaging local police, fire and municipal employee pensions in discussions about issues, they prefer the radical’s course with threats and the pursuit of one-size-fits-all hierarchical legislation from the state house. These tactics are foreign to the hard-working men and women who formed and operated their pensions precisely so they would require minimal contributions from local taxpayers for their retirements.
“We would hope that political discussion about pensions in Texas will not revert to ‘might makes right’ by those pursuing singular objectives without consideration of tradition or the financially healthy status of most state and local pensions.”

Tuesday, April 22, 2014

"Alternative Investments" Need Another Name

A couple of weeks ago we released the TEXPERS annual Asset Allocation report, a survey of our members’ investments for the prior year. We noted in our press release that so-called ‘alternative investments’ increased among our members’ investments when compared to last year’s ratios. It got us to thinking: when did ‘Main Street’ investments become ‘alternative’ investments?

For example, years ago it used to be that a city Treasurer, among all their other duties, might run the city’s pension fund by investing in rock solid U.S. government bills, notes and bonds. The Treasurer’s rationale was that they would never be accused of wild speculation with the retirement money of their city’s police, firefighters and municipal employees. They could rightly be viewed as tending conservatively to their fiduciary responsibility. It was an easy choice for them. But the Treasurer often had to go through Wall Street to secure those bonds.

Then, when some began to realize that keeping just slightly ahead of inflation wouldn’t properly maintain their pension obligations, the investment duties were outsourced to a pension organization responsible for making better investments and administering benefits. The investment portfolios tended to a 60% stock to 40% bond ratio, as that was the best thinking on what qualified as a diversified portfolio. Again, that money flowed through Wall Street investment houses.

Over time, another modest change occurred. Pension managers began adding foreign investments to their mix, with companies listed on foreign stock exchanges taking priority. That was considered appropriate diversification. And because the companies were on foreign exchanges, or represented in American Depository Receipts (ADRs) on U.S. exchanges, they had a sense of legitimacy in their own right. And this was yet more money flowing through Wall Street investment firms.

While those dynamics are still at work, today’s pension managers are seeking even broader diversification of their assets. Wall Street stocks and bonds aren’t the only assets that generate returns. Today’s pension boards recognize there is a much wider world of investment opportunities available out there. Oil and gas leases. Commercial buildings. Home rentals. Commodity investments. The list could go on and on.

Many of those investments used to be called “Main Street” because they lived outside Wall Street’s reach.

But it seems that, in many ways, the term Main Street seems to have been replaced by the ‘alternative.’ We talked about this phenomenon last year, when a Wall Street Journal article made it seem like the Texas Teachers Retirement System was really off the rails in its off-Wall Street, private equity investment strategy. Remember their headline, “Pensions Bet Big with Private Equity”? Wasn’t that a bit pejorative? It was in our view. The Wall Street Journal article seemed alarmed that the TRS had been so successful with its private equity investments!

Now, please realize there are a lot of people who would like all investments routed through Wall Street stocks and bonds. They tend to live in New York, or other major investing centers, like Chicago, London, etc. That’s how they make money.

By using the word ‘alternative’ they can imply ‘risky’ or ‘out of the ordinary.’ For those invested in the inner workings of the stock exchanges, those sorts of investments may seem risky and out of the ordinary, but to those beyond the Hudson River they are ordinary, and often less risky than volatile stock markets.

Our point is simply this: our Wall Street friends tend to define terms to their advantage, but the perceptive reader should always remember that Main Street, “alternative” investments are just as lucrative, or sometimes even more so, than what is available through Wall Street financiers. – Max Patterson

Monday, April 14, 2014

More Hyperbole Unsupported by Facts about the Future Health of Pensions

Ray Dalio, founder and co-chief investment officer of the Bridgewater Associates hedge fund, has produced the latest attack on public employee pensions. Falio is reportedly worth $14 billion, according to Forbes. Why are so many billionaires targeting public pension systems these days?

But we digress.

Dalio’s group is reported as estimating that public pensions will require $10 trillion for public pensions to meet their financial obligations 30 years from now, but their $3 trillion in investible assets today won’t allow them to reach that goal. Bridgewater Associates projects that pensions would need to earn 9 percent annually to cover their expenses. We’re not going to dig into their numbers, because we have better things to do with our time, but here a couple of observations:

First, pensions themselves don’t even project out 30 years. Twenty years is the more common standard by people in the business of running pensions. Thirty years is a reach from the get-go. Anything dire can be projected out 30 years. In our eyes, their projections were dubious from the beginning.

Second, 8 percent average annual returns are indeed possible over 20-year periods, despite the Bridgewater Associates forecast that pensions might more realistically achieve four percent or less.

We beg to differ with their forecast.

We have only to look at several TEXPERS member systems who proved in TEXPERS annual Asset Allocation Report that they can achieve outstanding results over 20-year periods. Here are the standout performers for the 20-year period in Texas:

Big Spring Firemen's Relief & Retirement Fund 9.87%
Dallas Police and Fire Pension System 9.04%
El Paso Firemen and Policemen's Pension Fund 8.91%
Amarillo Firemen's Relief and Retirement Fund 8.73%
Lubbock Fire Pension Fund 8.66%
Houston Municipal Employees Pension System 8.64%
Austin Police Retirement System 8.39%

The reason that Texas pensions have been successful is that they are flexible. The pensions of yesterday might have had an investment ratio of 60 percent U.S. stocks and 40% U.S. bonds. Today’s pensions are much more diversified, as our latest report also uncovered. 

Sixty survey respondents representing approximately $170.3 billion in total assets allocated their investments in much different fashion in 2013. The report showed that 32% were using alternative strategies (real estate, private equity, energy, etc.), while 25% were invested in international equities, 22% were in domestic equities, 20% were invested in fixed income, and 1% held short-term securities/cash.

We agree that billionaires must have special insights to achieve their wealth, but they should stick to what they know and leave pensions alone. They should recognize that public employee pension plans have different liabilities when compared to private, corporate and foundation pensions. These differences greatly affect how each one invests. We would suggest to Mr. Dalio that unless he sits on a public fund board or is a consultant to public funds, he should focus on his business and not speculate or draw conclusions from mathematical equations. – Max Patterson