State pension crisis

In the wake of numerous pension scandals and swindles since the 2000 market crash, it should come as no surprise that many U.S. state retirement plans are seriously under-funded. The breadth and depth of the refinancing efforts highlight speculative abuses and miscalculations by many pension fund managers in the 1990’s boom years.

The Pension Benefit Guarantee Corporation reported large under-funding issues for both private and public defined benefit plans. Public plans are not subject to ERISA’s funding, vesting, disclosure and fiduciary rules, insufficient as they are. Public employees in many states will now have to struggle to protect their retirement systems from the same kind of disaster that hit private funds.

• California, Illinois, Kansas, New Jersey, Oregon, West Virginia and Wisconsin have authorized bonds, i.e. deficits, to address state or local unfunded liabilities.

• New York authorized local governments to bond for any contributions in excess of 7 percent of salaries for FY 2005.

• Connecticut, Florida, Kansas, Massachusetts, Missouri, Nebraska and Washington increased mandatory contribution rates by statute. Many states do not require legislation to increase contribution rates.

• Colorado, Missouri, New York and New Jersey limited the mandatory contributions of state agency employers and local governments in order to phase in substantial increases in contributions. (The Colorado legislation was vetoed.)

• Missouri and New Jersey prohibited benefit increases until pensions systems’ finances improve.

• Oregon completely reorganized the Public Employee Retirement System to address an unfunded accrued liability of $15 billion as of October 2002.

• Illinois cut contributions to five state pension plans by $3 billion through 2005 to avert a budget crisis. But this is expected to have a $20 billion tab down the road.

Instead of counting on another boom in the stock market to rescue them, the $8 billion Maine State Retirement System shifted the bulk of its $3 billion fixed-income allocation to Treasury inflation-protected securities (TIPS), which are adjusted to reflect inflation. This approach is tailored to more closely match the fund’s liabilities, lessening the opportunity for high-flying returns, but also substantially lessening risk of an underfunded plan.

Because public pension funds typically have assets in the billions of dollars, they are often a subject for unethical dealings and inappropriate behavior by public pension officials. The Securities and Exchange Commission documented “pay-to-play” allegations in 17 states and drafted a stringent rule as a result. “Pay-to-Play” is the pervasive practice of requiring municipal securities participants to make political contributions to municipal officials in order to be considered as an underwriter or advisor the municipality’s pension fund.

The proposed rule received so many “negative responses” from public fund officials and investment firms that the SEC backed off of the regulation.

The at-risk pension plans discussed here are all “defined benefit” pension plans. They put the burden of satisfying pension promises on the plan sponsor or employer. What’s “defined” is the benefit, not the contribution. Most workers do not have resources to risk in the stock market. Employers, and thus public pension plans, are clearly feeling the pain of a real social liability. They are charged with making contributions sufficient to satisfy fund liabilities.

Despite the growth of the economy at the end of the 1990s, public plans’ liabilities were increasing at a faster pace than the economy. Since 2000, matters have worsened. In the short term, managers passed expenses on to future generations by issuing Pension Obligation Bonds. These POBs allow the plans to engage in classic arbitrage, postponing a reckoning in the hope of being saved by another boom.

The Bush administration would like to relieve investors of the liability of actually paying pensions owed to workers. Forget “defined benefit” plans – they sound too much like an “entitlement.” Following Maine’s example would give them a headache thinking of all those forgone “huge returns.” Why not put everyone’s future in the IRAs and Keogh plans (the stock market). In fact, why not put Social Security there too. Do nothing about reforming ERISA to protect Enron workers, or steel workers, of course.

Bush to workers: Work till you’re dead, or nearly so. Then die on the steps of private “for profit” hospital begging for treatment. Well, it solves the impending pension crunch!

The author can be reached at jcase@steuber.com.