By Jack Dean | Last Friday I flew to Massachusetts to deal with a family health care emergency and I expect to be here for at least another week. While I hope to continue posting headlines daily, I expect the number of postings will be somewhat less than usual. Please bear with me.

Thanks!

Due to a computer problem yesterday, PensionTsunami was rather light on headlines. Thanks to those subscribers who were concerned and sent me a message. Hopefully, we’ll make it up to you today.

By David Spady via AFP — Retired public employees are among the highest earners in the state of California. That’s because an average full-career retiree receives a retirement income higher than his final salary. In fact, lifetime pension benefits for government workers exceed $1.2 million dollars.

By Steven Greenhut via Watchdog.org | The pension numbers are clear. Despite some good recent returns, California’s pension systems are in a deep hole, the result of a decade of expanding pension promises and underfunding the payment of them.

Essentially, any California public-sector worker on the job in the last decade — especially police officers, firefighters, prison guards and the rapidly expanding category of “public safety” worker — have been made millionaires by fiat. One would need millions of dollars in the bank to match the guaranteed pensions provided to this group.

Meanwhile, services are declining, taxes are going up and the most depressed cities are going bankrupt. Something has to give.

Nevertheless, the pension-reform movement is dead in the water. The vast array of California officialdom, which sees itself as part of the union workforce more than as representatives of the taxpayers, has stymied reform at every turn.

They halt statewide initiatives. They kill even modest reforms in the Legislature. State administrative agencies file lawsuits against municipalities where voters pass reform (San Diego). The unions file and win lawsuits. The latest came in Ventura County, where a court ruled this week a pension reform measure that mainly affected new hires wasn’t legal. That measure was designed to be a template for 20 “37 Act” counties that have their own pension systems as authorized by a 1937 law.

No on that too. The judge told reformers to go the Legislature. Of course, the union-controlled Legislature tells reformers to go to the voters.

But when the voters approve reforms — and they almost always do by huge margins, even in overwhelmingly Democratic cities — reformers then must go to the courts, which then find for the unions. Even in bankruptcy, lowly cities (lowly, because they are financially strapped) cannot take on the political muscle of the California Public Employees’ Retirement System — a scandal-plagued system that promised massive pension spiking won’t cost taxpayers a dime (oops).

To continue reading, please click here.

Orange County Supervisor John Moorlach warned the county about bankruptcy in 1994, and for over a decade he has been warning California state and local governments about the dangers of growing public employee pension debt. In this interview he tells SoCal Insider host Rick Reiff why he’s leaving politics at the end of this term.

This interview was excerpted from SoCal Insider with Rick Reiff which first aired on PBS on June 25, 2014.

By Mary Pat Campbell | A nice review of work by an Arizona reporter, made by his boss:

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.
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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.
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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?

And this is exactly the point.

While some pension plans are being sunk by hideous skulduggery, for the most part it is not intentional ill-will or underhanded dealing that has caused the problem of unsustainable pensions.

Some pensions that did what they thought they were supposed to — standard benefit designs with certain minimum years of service requirement, putting in the actuarially-required amount each year, investing in a mix of stocks and bonds with good oversight — are finding the required contributions are climbing rapidly and their funded statuses are falling behind. This is not a good thing.

Of course, many public pensions did not get their required contributions. Those fell even further behind. And continuing to fall further behind.

Even when the public employee unions are not to blame for the pensions being in a poor condition, it does no help pointing at all the “bad guys”, because said bad guys aren’t going to be coughing up the money. There’s no enough money from whoever the bad-guy-of-the-day is (or said bad guys died decades previously).

Ultimately, everything comes from the taxpayers: pension contributions and current salaries both come from the taxpayers. Those “employee contributions” to the pensions are from the taxpayers.

And you can only get so much from the taxpayers.

As noted above by Harris’s editor, would the public unions prefer for the media to cover what happened to the pension plans after they fail? Because some reporters have done that job elsewhere. And it did not call the pensions of Prichard, Alabama to come back into being. Fancy that.

I do agree that the motives of some in the public pension debate are questionable — specifically, all politicians. I saw someone recently recommending that elected officials not get pensions at all which I fully agree with.

Both big “C” (illegal) and little “c” (legal but still bad) corruption have sullied our state’s reputation.

Abuses of pensions for elected officials represent an example of little “c” corruption.

When I was active in government and politics, I recall that near the end of each biennial legislative session, a pension bill would move quietly, on cat’s paws, along the legislative process.

The bill contained “sweeteners” that provided pensionable credits in a well-paid system like that for legislators and judges for unvested service earlier in a local government such as an assistant state’s attorney, park board official or sanitary district commissioner.

In the 1980s, such a bill included the change in a constitutional officer’s (governor, secretary of state and others) base for pension benefits from that of the pay of the Speaker of the House to the much higher base of their own salaries. This action more than doubled retirement benefits for such elected officials, and at significant cost to the state in terms of unfunded liabilities.
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One of the more egregious of these abuses occurred in 2011 when, according to the Chicago Tribune, Chicago Ald. Edward Burke more than doubled the annual pension of his buddy, former state representative Bob Molaro, to $120,000.

Burke had Molaro work for just one month in his city hall office, at $12,000 per month or $144,000 per year. This qualified Molaro for a legislative pension based on that six-figure amount, rather than one based on his much smaller legislative salary.

What did Molaro do to earn his $12,000? He wrote a paper about the sorry state of our public pension systems, basically laughing at the taxpayers who will pay the extra pension benefits for Molaro.

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So my associate Tom Johnson came up with a simple proposal: Eliminate all pensions for state and local elected officials in Illinois going forward, maybe excluding judges, whom we do want to serve many years.

Eh, I’d include judges. Mainly because they’re the ones who keep having to rule on the constitutionality of pension changes. If they have these pensions, too, then they may think that their own pensions will be next on the chopping block. Yes, I know, conflict of interest, but it’s not like they can draft any judges from other states to rule on a different state’s constitution.

But back to the first article. Disaster is coming for many public pensions, and there are no real bailout mechanisms other than trying to soak taxpayers (and bondholders, but generally one can screw bondholders only once. So you’d better make that first screwing worth it, because it will be a long time before you get another shot at it.)

And soaking the taxpayers has some issues as well.

It is better for public employees to know exactly what is going wrong with their pensions ahead of time, so they can plan to protect themselves as best as possible (some of the Prichard, Alabama pensioners were essentially destitute when the pension fund ran out and no pension payments to current retirees were made, at all, for over a year). As well, they can collectively get together in their unions to try to figure out how they can change their pensions to something that is sustainable. Then the transition can be smoother and people will not find that there is much, much less than they need when they retire.

Too many public unions think they can brazen it out, sue money for pensions into existence, and it will all be hunky-dory. Or that they can negotiate for pay increases now while waving hands at inadequate pension contributions, thinking that the pensions will always be made whole. Somehow. Eventually.

Of course, reality doesn’t work like that. But convincing people also doesn’t work like a mathematical proof. It takes people like Craig Harris methodically going through issues, and reporting on them for years — or taking other people’s investigations/studies and promoting them, like at Pension Tsunami.

It is good to see that some public employees are taking these issues seriously and are trying to work on practical solutions before undeniable bankruptcy comes.

Sounds like there is hope for Arizona.

Mary Pat Campbell is a life/annuity actuary in New York. She has been digging into public pension issues since 2008, and now blogs at STUMP from which this was cross-posted with permission.

From a New York Times story yesterday by reporter Steven Yaccino:

A vote by retirees to approve the city’s plans would help close a $3.5 billion shortfall in the pension system, and it would result in as much as a 4.5 percent cut to most pension checks. If the plan is rejected and the outside funding is lost, some retirees could lose as much as 27 percent.

To read the story, click here.

By Mary Pat Campbell | No, not my law — Donald T. Campbell’s law:

“The more any quantitative social indicator (or even some qualitative indicator) is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.”

Okay, that’s not necessarily the pithiest way of putting it. Let’s look at Seth Godin’s version of Campbell’s Law:

Campbell’s Law tells us that as soon as a number is used as the measurement for something, someone will get confused and start gaming the number, believing that they’re also improving the underlying metric, when, in actuality, they’re merely making the number go up.

Ah, much better.

So I’ve been stewing over a bunch of numbers lately. This is my natural state, btw, but I have something particular in mind.

First, there’s FiveThirtyEight and my long-running one-sided feud with Carl Bialik. In particular, I have been underwhelmed by the supposed numbers analysis going on at 538. I cannot speak to their sports analysis – maybe it’s great, but given what I’ve heard about Nate Silver’s old outfit, and what happened after he left, I have a feeling that the sports data analysis is not much better than the analysis I actually know quite a lot more about.

I assume people who actually know how to deal with numbers have more lucrative options than 538.

Then I came across this amusing website with spuriously highly-correlated data sets.

Here’s a taste (correlation: 0.947091 — love the too-many-sig-figs here):

Now, what happened at the spurious correlation site is that the person has a lot of relatively short time series. When you’ve got hundreds, probably thousands, of 10-point data sets covering 2000 to 2009, you’re pretty much guaranteed that some of them are highly correlated, probably based on a pigeonhole principle argument (note: this is left as an exercise for the reader).

The problem is that a lot of “Big Data”, what used to be called data mining, is going to dig up all sorts of spurious correlations. This happens a lot with regards with research into health claims.

Oh look, here’s something that popped up recently with respect to Romneycare and mortality:

A different team of researchers has looked at mortality rates in Massachusetts after Romneycare. And they found what is, for mortality rates, a huge decrease: 8.2 per 100,000 per year for adults 20 to 64. Doesn’t sound like a lot, but your risk of dying in any year between 20 and 64 isn’t that high. So a big, fat decline like 8.2 per 100,000 makes you sit up and take notice.

I’m traveling this week, so you’re unlikely to get three posts on the subject. But here’s my basic take: The study looks pretty good. It is hard to reconcile these results with Oregon. Good Bayesians will update their beliefs accordingly. People who are just looking for studies that confirm what they believe will either celebrate this study and find reasons to discount the Oregon results, or vice versa.

I can think of reasons to believe Oregon rather than Massachusetts: It’s a real RCT [randomized controlled trial], rather than a comparison of counties that are supposed to be similar but might not actually have been in practice. There are surprising results that might be red flags about the data: For instance, cancer mortality dropped, even though the study only ran four years. If the benefit is coming from early detection, I would expect it to take longer to have a significant impact on the data. And if it is coming from chemotherapy and radiation treatments, then cutting-edge chemotherapy and radiation treatments are much more effective than studies had previously led me to believe. Corollary: Hog-wild American-style spending on expensive cancer treatments is a lifesaver, and we will and should probably ignore any calls for European-style cost control.

McArdle followed this up with another post which had a bit more response from other people as well as more skepticism for the results.

All that said, there’s a strong tendency, widely on display with the Oregon study, for people who see results that don’t suit their policy preferences to start hunting as hard can be for reasons that those results couldn’t possibly be true. So I am suspicious of my suspicions, so to speak.

I generally keep digging into numbers that I do like, btw, because I have to figure out if I’m seeing something really real. There are so many things I look at I never post about – and perhaps I should be posting more about the negative results. This is a big problem — people don’t want to publish negative results, but they’re very important because they keep us from going astray.

Thing is, as per Campbell’s Law, there are often things pushing us astray. And those in charge of getting “good results” are usually rewarded for good numbers, not the real ultimate goals.

And now we come back to my favored topic: public pensions. There are huge incentives to make the numbers “work”. And this leads to all sorts of perverse incentives.

This past weekend, there was a “Room for Debate” feature at the NYT site on the issue of lack of transparency in the running of public pensions. Ted Siedle attacked private deals for public pension funds — good read, check it out. He makes a very good case for forcing public plans to have open books with rigorous oversight (and no, he doesn’t mean the pension trustees). I will skip over the next two respondents (a pro forma “defense” that was really weak and one that plumps for index funds, etc.)

The last one really got into that all this dive into the deep, murky pool of private equity and hedge funds is not merely for kickbacks, graft, etc. (though that’s a nice sideline for unethical politicians): the incentive to play with the numbers to make public pensions look cheaper than they really are.

An excerpt from Attack the Motive by Nicole Gelinas of the Manhattan Institute:

Why are many state and local public pension funds putting more taxpayer assets into hedge funds and other “alternative” investment vehicles – inviting not only overall high fees for humdrum returns, but also instances of pay-to-play corruption and accusations of misgovernance? Because public pension funds are desperate for high returns — or at least the illusion of high returns.

The reason public pensions need outsized profits is that they have promised far more in benefits to current and future retirees than they can possibly pay. Good-government advocates can’t fix public pensions until they go to the source of the problem and pare back unsustainable promises to retirees.
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And a second reality, too: even in-house managers will face pressure to take undue risk to earn high returns, and thus avoid asking taxpayers to shell out more money each year for public-sector pensions.

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Fixing public pension funds – and retirement savings for everyone isn’t that hard. But when the government and the Wall Street firms that do its bidding can continue to accrue power and money maintaining the poisonous illusion that impossible promises to retirees are reasonable, it won’t happen.

A lot of people write about the state of public pensions. The go-to site is Pension Tsunami from Jack Dean — I think that aggregating these stories is very important, and I’ve been doing the same on the Actuarial Outpost going back to at least 2009.

But others do a better job of the aggregation, especially in talking about the politics.

My comparative advantage is in explaining math, and I’ve decided to do a deeper dive into the numbers issues and how the way the numbers are calculated for public pensions have caused all sorts of perverse incentives.

(I also intend on writing on other misleading numbers issues separate from pensions, but public pensions will remain my One True Love… at least with regards to blogging.)

So stay tuned for further digging, and I will start out by talking about present value – how it’s calculated, what it means, and what happens when you get it wrong.

Mary Pat Campbell is a life/annuity actuary in New York. She has been digging into public pension issues since 2008, and now blogs at STUMP from which this was cross-posted with permission.

By Mary Pat Campbell | CalPERS, the large California public pension plan, has filed an amicus brief in the case of Detroit’s bankruptcy.

CalPERS does not like the Detroit pension plans being treated like unsecured creditors in a bankruptcy proceeding, and cites the constitutional (state constitutional, that is) protections for pensions. Thing is, there’s law, and there’s reality.

But let’s see what CalPERS had to say on this matter:

U.S. Bankruptcy Judge Steven Rhodes ruled last year that Detroit was entitled to creditor protection under Chapter 9 of the U.S. Bankruptcy Code and could try to alter the terms of workers’ pensions. The decision, which would let a bankrupt municipality fail to meet its pension obligations in spite of state prohibitions, was “wrong on several levels,” CalPERS said.

“Congress did not envision that Chapter 9 would become a haven for municipalities that seek to ignore and break state laws and constitutional provisions in order to adjust their debts,” the pension fund said.

CalPERS, which has been involved in disputes with the bankrupt city of San Bernardino, California, said the judge’s decision raises issues of critical importance to its 1.7 million members. If a municipality in bankruptcy is allowed to break state laws and ignore its obligations to the pension system, it “may threaten the actuarial soundness of the system as a whole,” CalPERS said.

I do not agree.

What actually threatens the actuarial soundness of public pension plans is behavior like the following:

- Not making full contributions.

- Investing in insane assets so that you can try to reach target yield. Or even sane assets that have high volatility to try to get high return, forgetting that there are some low volatility liabilities that need to be met.

- Boosting benefits when the fund is flush, and always ratcheting benefits upward.

CalPERS should be extremely familiar with that sort of behavior.

Here is the problem: all sorts of entities directly involved in public pensions have thought that the pensions can’t fail. Because of stuff like: constitutional protections of benefits (so paying pensions would take precedent over other spending needs, like paying for current services), “government doesn’t go out of business”, the supposedly infinite taxation power of the government, and so forth.

Because they thought that pensions could not fail in reality, that gave them incentives to do all sorts of things that actually made the pensions more likely to fail. Because, after all, the taxpayer could always be soaked to make up any losses from insane behavior.

Public employee unions have been pretty quiet over the years as states and municipalities have undercontributed to pensions. Take a look at this graph:

That’s the components of the changes to unfunded pension liability for Illinois from 1996 to 2013. Far and away, the biggest reason for the extremely low funded ratio in Illinois is that Illinois made far less than the full contributions needed to keep the plan at full funding. Note that the second highest component comes from not meeting investment targets (8% return for that period, iirc).

If the employee unions in Illinois knew that it was possible that they might actually only get 40% of what was promised, they might not have been so blasé about the undercontributions. They might have asked for more realistic investment targets.

The explicit ability to renege on pensions (known by all parties) would make them less likely to fail, because employee unions would then have some incentive to make sure pension contributions are made, and they would be less likely to ask for benefits that may make their pension plan insolvent. If they knew that no, the taxpayer wouldn’t be there to bail them out of stupid investment decisions, they might not be so happy with all the opaque investments.

Detroit’s bankruptcy is making it clear that pensions are not safe, and that they can go down with the ship. They really aren’t much different than any other creditor. It may not be fair that they get whacked, but then, it’s not the bondholder’s fault either (though, really, bondholders are more faultless than those directly involved in boosting pay and benefits…and bondholders always knew they could be defaulted on.)

CalPERS does not like this veil being lifted.

It was one thing when it was a puny place like Prichard, Alabama, where the pensions actually failed (and the bankruptcy itself was ultimately rejected, but the pension was gone anyway. Reality always trumps law.) Central Falls, RI, was also troubling but similarly puny. In both these cases, the pension plans were in horrid shape, and the direct cause of bankruptcies.

Detroit is much larger, and the pension plans supposedly were in good funded status. CalPERS is in a similar position. And Detroit is very big. CalPERS is even bigger.

CalPERS may very well win the legal argument. In the short run.

But they’re not going to win the argument with reality. It always wins.

If they only knew that ahead of time.

Mary Pat Campbell is a life/annuity actuary in New York. She has been digging into public pension issues since 2008, and now blogs at STUMP from which this was cross-posted with permission.

How much would you have to save to match a government pension?

Yesterday the Manhattan Institute launched an impressive new online public pension calculator that allows users to more clearly compare the difference in retirement benefits between public and private sector workers. It also allows Americans in all 50 states to compare their state’s retirement plans to those of other states. The calculator is part of the Institute’s PublicSectorInc.org project.

The online calculator was developed in part because it’s difficult to compare the value of a defined benefit retirement plan with that of a 401k-style defined contribution plan; this calculator automatically performs that comparison for users.

In addition to calculating the monthly and yearly benefit for different states and occupational groups, users can also determine how much it would cost to buy an annuity that would generate the same level of benefit as that of a given defined benefit pension plan. For example, to generate annual income equivalent to last year’s median CalSTRS retiree pension, a teacher would need to save $868,000-$950,000.

Pensions are one of the most hotly-debated topics in public finance, due to their rising costs and generosity in comparison to what most taxpayers receive in retirement. When defenders of the status quo argue that pensions are modest, they often cite figures for the average benefit. But these figures are misleading because averages are weighted down by the pensions of short term employees and also those who retired decades ago. The pension calculator allows users to determine benefit levels for full-career employees, which is a more accurate measure of a pension plan’s generosity.

According to the Institute’s press officer, Ray Niemiec, this pension calculator tool “is intended to better inform the pension debate by allowing users to easily compare benefit levels across all 50 states. With a few clicks on the calculator map, a user can view an estimate of the pension that he or she would collect after a career in government.”

To try the calculator, click here.