the state of unfunded state pension obligations

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Beagler
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Re: the state of unfunded state pension obligations

Post by Beagler » Thu Aug 29, 2013 8:59 am

Professor Emeritus wrote: The intelligent way to deal with my pension is to pay it....
When the jockey weighs more than the horse, the ride becomes untenable.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

Mitchell777
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Re: the state of unfunded state pension obligations

Post by Mitchell777 » Thu Aug 29, 2013 10:17 am

Beagler wrote:
Professor Emeritus wrote: The intelligent way to deal with my pension is to pay it....
When the jockey weighs more than the horse, the ride becomes untenable.
Thank you. You said it so much nicer than I would have

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Ricola
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Re: the state of unfunded state pension obligations

Post by Ricola » Thu Aug 29, 2013 10:35 am

These are merely symptoms of the larger systemic problems we are experiencing with our economic system.

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Re: the state of unfunded state pension obligations

Post by technovelist » Thu Aug 29, 2013 1:37 pm

Professor Emeritus wrote:
staythecourse wrote:It will be interesting to see how things work out. The problem is NOT finding an intelligent way to deal with these issues. The problem is you are dealing with the HIGHEST levels of beuacracy and special interest that exist in the local/ state legislatures, i.e. politics and unions.

Good luck to see any appreciable advancement in many of these issues.

I see more delaying the inevitable in delaying benefits, increased contributions, pay into healthcare after retirement, etc... from the new hires. Will not be surprised the whole pension system start looking more like Ponzi scheme.

Good luck.
I'm sorry but you have veered into the political nonsense sphere. State employee pensions are not in any way shape or form a Ponzi scheme...
Correct. A Ponzi scheme pays off old "investors" with the proceeds from new "investors" who are promised a payoff later, whereas a state employee pension plan pays off old "investors" with proceeds from taxpayers, who aren't promised a payoff at any point.

The sustainability of such a plan is another matter, of course.
In theory, theory and practice are identical. In practice, they often differ.

Professor Emeritus
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Re: the state of unfunded state pension obligations

Post by Professor Emeritus » Thu Aug 29, 2013 3:37 pm

Beagler wrote:
Professor Emeritus wrote: The intelligent way to deal with my pension is to pay it....
When the jockey weighs more than the horse, the ride becomes untenable.
Slogans and jokes are not public policy. I began "earning" my pension in 1977. Certainly the obligation to me is equitably "senior" to any bondholder who loaned the state money knowing of the obligation to retirees. So we work backwards, and default on obligations in reverse order.

Professor Emeritus
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Re: the state of unfunded state pension obligations

Post by Professor Emeritus » Thu Aug 29, 2013 3:49 pm

technovelist wrote:
Professor Emeritus wrote:
staythecourse wrote:It will be interesting to see how things work out. The problem is NOT finding an intelligent way to deal with these issues. The problem is you are dealing with the HIGHEST levels of beuacracy and special interest that exist in the local/ state legislatures, i.e. politics and unions.

Good luck to see any appreciable advancement in many of these issues.

I see more delaying the inevitable in delaying benefits, increased contributions, pay into healthcare after retirement, etc... from the new hires. Will not be surprised the whole pension system start looking more like Ponzi scheme.

Good luck.
I'm sorry but you have veered into the political nonsense sphere. State employee pensions are not in any way shape or form a Ponzi scheme...
Correct. A Ponzi scheme pays off old "investors" with the proceeds from new "investors" who are promised a payoff later, whereas a state employee pension plan pays off old "investors" with proceeds from taxpayers, who aren't promised a payoff at any point.

The sustainability of such a plan is another matter, of course.
More political nonsense. The taxpayers got the services of state employees. In return for those services taxpayers promised to pay the pensions.

rnitz
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Re: the state of unfunded state pension obligations

Post by rnitz » Thu Aug 29, 2013 7:32 pm

Herbert Stein - "If something cannot go on forever, it will stop."

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AustenNut
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Re: the state of unfunded state pension obligations

Post by AustenNut » Thu Aug 29, 2013 8:40 pm

This report (http://www.nea.org/assets/docs/PensionP ... ions04.pdf) seems to indicate that some pensioners will have more safety than others. Though it's written from a union perspective, the information on the guaranteeing of pension is the most relevant part to this discussion:
Six constitutions (Alaska, Arizona, Hawaii, Illinois, Michigan, and New York) set out a two-part articulation of this right. First, membership in a retirement system is a contractual relationship. Second, because of that relationship, pension benefits cannot be reduced or impaired. In Louisiana, the provision is slightly different. It makes membership a contractual right and guarantees payment of the benefit.

New Mexico’s provision lacks the strength of the others. It creates a property right, not a contractual right. The property right ensures due process protections, but not the strong guarantee of a contractual right. The Missouri provision affects the transfer, a number of years ago, of employees from one retirement system to another. It deals with a unique situation and is, therefore, different from the other provisions.

In those states without a constitutional guarantee, statutes or judicial interpretations provide similar protections, but can always be changed by the legislature. Placing the guarantee in the constitution best insulates it from adverse changes.
Since Michigan is one of those states with some constitutional protections for its pensioners, it will be interesting to see what happens with the Detroit situation. It seems that Louisiana pensioners might be in the strongest position constitutionally, which is good news for those of us working in it (my spouse and I are both in TRSL). My own personal belief is that they will not be able to change what has already been "earned," but that they will change the provisions for future years worked. This is incredibly annoying because after having worked in the system so long, I've foregone earning Social Security for all of that time. So even though the pension is risky, I feel it's our best bet to continue working in it as long as the current retirement benefits are in place.

YttriumNitrate
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Re: the state of unfunded state pension obligations

Post by YttriumNitrate » Thu Aug 29, 2013 8:50 pm

AustenNut wrote:Since Michigan is one of those states with some constitutional protections for its pensioners, it will be interesting to see what happens with the Detroit situation.
Federal Bankruptcy law vs State Constitutional law...I'm going with Federal Law as the winner on this one.

Beagler
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Re: the state of unfunded state pension obligations

Post by Beagler » Thu Aug 29, 2013 11:44 pm

Professor Emeritus wrote:
Beagler wrote:
Professor Emeritus wrote: The intelligent way to deal with my pension is to pay it....
When the jockey weighs more than the horse, the ride becomes untenable.
...Certainly the obligation to me is equitably "senior" to any bondholder who loaned the state money knowing of the obligation to retirees.....
Each State has its own bankruptcy rules re: repayment seniority. And we'll see if State law trumps Federal, where judges have great leverage in unwinding obligations.
All of this dovetails with muni rates: if some States are perceived as riskier, investors will demand a higher premium, of course.

Underfunding is not rare, and has obvious potential implications for muni bond investors. http://finance.yahoo.com/news/nine-stat ... sions.html
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

stlutz
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Re: the state of unfunded state pension obligations

Post by stlutz » Fri Aug 30, 2013 12:31 am

One note--for those who prefer to stick with AA and above rated bonds but also prefer funds, the State Street muni ETFs (SHM and TFI) are worth a look.

Intheheadlights
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Re: the state of unfunded state pension obligations

Post by Intheheadlights » Fri Aug 30, 2013 1:12 am

I’m retired from the University of California. If memory serves, UCRS was funded at 160% twenty years ago. Currently it is at 60% This sad state is the result of many bad management decisions. The worst of which was suspending both employee and employer contributions to the system in 1990; they have only recently resumed. Other bad decisions included lowering the maximum benefit retirement age, using all the “extra” money for buyouts during bad times, and rejiggering the benefit curves to increase pensions. I don’t fault the California taxpayers for this: only recently has the media made the populace aware of the public pension mess. I’m in my seventies, maybe I’ll escape a haircut, but if I live to ninety, probably not. No, the state can’t bail us out. It’s only anecdotal, but I suspect that the death spiral has already begun: I have several wealthy friends who have already moved to avoid the 50% state/fed rate. Fortunately, my late wife---also employed by UC---and I lived the Boglehead life, even before we knew the term, so I’ll survive. My only message from all of this long-windedness is save, live below your means, and don’t only count on your pension!

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Re: the state of unfunded state pension obligations

Post by richard » Fri Aug 30, 2013 1:48 am

Why is the caption "the state of unfunded state pension obligations" rather than "the state of inadequate tax revenue" or "the state of underfunded education and police" or "the state of our crumbing infrastructure" or "the state of a too slow economy" or ...? I still remember Governor Whitman in New Jersey deciding to balance the budget by combination of too low taxes and not making pension contributions, a strategy which has caught on.

Dean Baker has written extensively on pension funding. http://www.cepr.net/index.php/blogs/bea ... c-pensions and https://www.google.com/search?q=beat+th ... e+pensions

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Methedras
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Re: the state of unfunded state pension obligations

Post by Methedras » Fri Aug 30, 2013 5:04 am

Is there any way I can turn this information about under-funded pensions into actionable advice?

I have access to a defined benefit pension plan through my employer, but this is the only available retirement account option? Is it wiser to simply defer investing in the pension and invest the money myself in taxable? It would be different if the plan were defined contribution and I could get matching funds from my employer, but my defined benefit is already relatively anemic as it is, and if they press forward with any cuts to benefits, it seems like I would be better suited to manage my own money.

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Re: the state of unfunded state pension obligations

Post by ProfessorX » Fri Aug 30, 2013 6:49 am

So does no one believe there is a promising way out of this crisis for state employees paying into defined benefit Pension plans?

Professor Emeritus
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Re: the state of unfunded state pension obligations

Post by Professor Emeritus » Fri Aug 30, 2013 7:05 am

Intheheadlights wrote:I’m retired from the University of California. If memory serves, UCRS was funded at 160% twenty years ago. Currently it is at 60% This sad state is the result of many bad management decisions. The worst of which was suspending both employee and employer contributions to the system in 1990; they have only recently resumed. Other bad decisions included lowering the maximum benefit retirement age, using all the “extra” money for buyouts during bad times, and rejiggering the benefit curves to increase pensions. I don’t fault the California taxpayers for this: only recently has the media made the populace aware of the public pension mess. I’m in my seventies, maybe I’ll escape a haircut, but if I live to ninety, probably not. No, the state can’t bail us out. It’s only anecdotal, but I suspect that the death spiral has already begun: I have several wealthy friends who have already moved to avoid the 50% state/fed rate. Fortunately, my late wife---also employed by UC---and I lived the Boglehead life, even before we knew the term, so I’ll survive. My only message from all of this long-windedness is save, live below your means, and don’t only count on your pension!
To try to put this on something even remotely relevant to the Boglehead forum , here are the ratings of various state's bonds http://www.treasurer.ca.gov/ratings/current.asp
The 37 rated states range from A to AAA for General Obligation GO bonds (you know the type people buy)

By definition all go bonds are unfunded

So the reviewers and the market believe that states are paying their GO bonds. State Pensions stand "at least" in the same level as GO bonds.

yes there is a problem with municipal pensions but not State pensions unless someone tries to pay bondholders ahead of pensions

Jfet
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Re: the state of unfunded state pension obligations

Post by Jfet » Fri Aug 30, 2013 7:55 am

Professor Emeritus wrote: To try to put this on something even remotely relevant to the Boglehead forum , here are the ratings of various state's bonds http://www.treasurer.ca.gov/ratings/current.asp
The 37 rated states range from A to AAA for General Obligation GO bonds (you know the type people buy)

By definition all go bonds are unfunded

So the reviewers and the market believe that states are paying their GO bonds. State Pensions stand "at least" in the same level as GO bonds.

yes there is a problem with municipal pensions but not State pensions unless someone tries to pay bondholders ahead of pensions
I think the relevant topic for Bogleheads is are bondholders overlooking a risk of default or haircut that they are not being reasonably compensated for. If pensions are in all cases senior to bonds, and people feel pensions are at some risk of a haircut, then what does that mean for bonds? Is a 4% or 5% return really worth interest rate risk PLUS default risk?

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Re: the state of unfunded state pension obligations

Post by Valuethinker » Fri Aug 30, 2013 9:23 am

larryswedroe wrote:here's the problem called the death spiral, which hit Detroit
You raise tax rates and property taxes and wealthy people leave the state as do businesses, and then you have to raise them even more. The state is eventually left with high percentage of lower income people who need benefits and the state cannot provide. This is the problem for Illinois, and the longer they delay the worse it will get. It's already impacting California as wealthy people leave and so are businesses--even DFA left the state.

Larry
If we are going to philosophize about political economy and discuss politics and policy it's worth noting that a business could move 5 miles and be outside of Detroit.

That is not the case in Illinois. Particularly Chicago.


And so the problem of businesses and wealthy people moving out of state is just not as great. For example, it has not really hit California. Nor is New York in particularly bad shape in this regard, despite immediately adjacent states like New Jersey etc. and high city taxes.

The problem in Illinois appears to be pathological and a long time coming. Its resolution will require a break in the political deadlock. That reminds me very much of California, where such movements now appear to be happening.

And Illinois is the worst of any state, as I understand it.

I worry more about municipalities then, than state governments.

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Re: the state of unfunded state pension obligations

Post by Ged » Fri Aug 30, 2013 9:52 am

Valuethinker wrote:And Illinois is the worst of any state, as I understand it.
Probably. But watch out for territories. Puerto Rico issues muni bonds and is in worse shape than any of the states. Most bond funds have only small allocations to these, but some maybe have juiced up on this junk.

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Phineas J. Whoopee
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Re: the state of unfunded state pension obligations

Post by Phineas J. Whoopee » Fri Aug 30, 2013 10:03 am

YttriumNitrate wrote:
AustenNut wrote:Since Michigan is one of those states with some constitutional protections for its pensioners, it will be interesting to see what happens with the Detroit situation.
Federal Bankruptcy law vs State Constitutional law...I'm going with Federal Law as the winner on this one.
If I may:

There is no bankruptcy for sovereigns. There is default, there is even renunciation, but no third party can have the power to relieve a sovereign of its obligations.

For bankruptcy law (which is inherently federal, the Constitution explicitly granting congress the power to regulate it) to apply to states would require a fundamental change in the nature of the relationship between the states and the federal government. States would have to give up sovereignty.

Detroit, of course, is not a sovereign.

PJW

Intheheadlights
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Re: the state of unfunded state pension obligations

Post by Intheheadlights » Fri Aug 30, 2013 10:30 am

One might wish to check out recent changes in property values in Incline Village, on the Nevada side of Lake Tahoe. My only reason for my long-winded history of UCRS was to give a concrete example of how mismanagement of a pension system can make things go from good to bad quickly: hence, bond holders and pensioners need to be careful. I suspect that my little tale has been repeated across the U.S. Eight per cent per year assumptions won’t cut it. Others can judge its relevance. Google for the Stanford studies of California pensions. If bondholders are forced to take a haircut to protect us pensioners, the state will not be able to borrow: what was a spiral could turn into a dive.

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Re: the state of unfunded state pension obligations

Post by Professor Emeritus » Fri Aug 30, 2013 10:45 am

Jfet wrote:
Professor Emeritus wrote: To try to put this on something even remotely relevant to the Boglehead forum , here are the ratings of various state's bonds http://www.treasurer.ca.gov/ratings/current.asp
The 37 rated states range from A to AAA for General Obligation GO bonds (you know the type people buy)

By definition all go bonds are unfunded

So the reviewers and the market believe that states are paying their GO bonds. State Pensions stand "at least" in the same level as GO bonds.

yes there is a problem with municipal pensions but not State pensions unless someone tries to pay bondholders ahead of pensions
I think the relevant topic for Bogleheads is are bondholders overlooking a risk of default or haircut that they are not being reasonably compensated for. If pensions are in all cases senior to bonds, and people feel pensions are at some risk of a haircut, then what does that mean for bonds? Is a 4% or 5% return really worth interest rate risk PLUS default risk?
If you are cynical you can argue that it is an attempt by the rich and powerful to to put the default risk on the weakest parties, the retirees.

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Re: the state of unfunded state pension obligations

Post by Professor Emeritus » Fri Aug 30, 2013 10:48 am

Intheheadlights wrote:One might wish to check out recent changes in property values in Incline Village, on the Nevada side of Lake Tahoe. My only reason for my long-winded history of UCRS was to give a concrete example of how mismanagement of a pension system can make things go from good to bad quickly: hence, bond holders and pensioners need to be careful. I suspect that my little tale has been repeated across the U.S. Eight per cent per year assumptions won’t cut it. Others can judge its relevance. Google for the Stanford studies of California pensions. If bondholders are forced to take a haircut to protect us pensioners, the state will not be able to borrow: what was a spiral could turn into a dive.
bond buyers can be careful. They can sell the bonds Pensioners CAN"T sell their pensions.
States guarantee annuitants their annuities at least up to a certain level for EXACTLY that reason .
PBGC was set up for EXACTLY that reason

So if we want to run the government like the private sector we provide guarantees

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Re: the state of unfunded state pension obligations

Post by Professor Emeritus » Fri Aug 30, 2013 11:08 am

Phineas J. Whoopee wrote:
YttriumNitrate wrote:
AustenNut wrote:Since Michigan is one of those states with some constitutional protections for its pensioners, it will be interesting to see what happens with the Detroit situation.
Federal Bankruptcy law vs State Constitutional law...I'm going with Federal Law as the winner on this one.
If I may:

There is no bankruptcy for sovereigns. There is default, there is even renunciation, but no third party can have the power to relieve a sovereign of its obligations.

For bankruptcy law (which is inherently federal, the Constitution explicitly granting congress the power to regulate it) to apply to states would require a fundamental change in the nature of the relationship between the states and the federal government. States would have to give up sovereignty.

Detroit, of course, is not a sovereign.

PJW
It is not my area of legal expertise but at least some my colleagues tend to believe that any attempt by any Michigan state appointee (i.e. teh trustee) to avoid the pension obligations is governed by the Michigan constitutional provision. Chapter 9 specifically prevents the federal court from"interfering" with the state action. it can only act at the request of the state. If the request is unlawful under state law the bankruptcy court must respect it. The normal procedure in federal courts is for the federal court to refer the question to the state Supreme court for a decision on the law See for example http://publicdocs.courts.mi.gov:81/OPIN ... son-op.pdf

wastenot
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Re: the state of unfunded state pension obligations

Post by wastenot » Fri Aug 30, 2013 11:11 am

The central question for me is: Why didn't the unions complain loudly or file lawsuits during the years and even decades when state legislatures were shortchanging their mandated pension contributions?

And for those who believe that they can get blood out of the fiscal onion, read Kotlikoff and Burns's "Coming Generational Storm."

To summarize their thesis: There will be hell to pay when the vast and ever-growing unfunded liabilities of state, local and federal governments have to be paid. It seems that the large majority of developed countries have been similarly irresponsible.

With regard to the U.S., the (literal) future hell to pay was expressed by Thomas Jefferson: "I tremble for my country when I reflect that God is just; that his justice cannot sleep forever."

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Re: the state of unfunded state pension obligations

Post by manwithnoname » Fri Aug 30, 2013 11:54 am

ProfessorX wrote:So does no one believe there is a promising way out of this crisis for state employees paying into defined benefit Pension plans?
Solution is greater contributions by both employees and the state governments and reduction of benefits. NJ passed legislation two years ago mandating increased contributions from 7.5% to 9% of comp by employees and mandatory funding by the state. This year's state contribution is $1.6B which will increase to $3.5B by 2018. Also COLAs are suspended until 2040.Retirement date for many employees increased by three years to 65.

Employees are also required to make increased contributions to health insurance.

http://nytimes.com/2011/06/24/nyregion/ ... ation.html
Last edited by manwithnoname on Fri Aug 30, 2013 12:18 pm, edited 2 times in total.

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Phineas J. Whoopee
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Re: the state of unfunded state pension obligations

Post by Phineas J. Whoopee » Fri Aug 30, 2013 11:57 am

Professor Emeritus wrote:
Phineas J. Whoopee wrote:...
Detroit, of course, is not a sovereign.

PJW
It is not my area of legal expertise but at least some my colleagues tend to believe that any attempt by any Michigan state appointee (i.e. teh trustee) to avoid the pension obligations is governed by the Michigan constitutional provision. Chapter 9 specifically prevents the federal court from"interfering" with the state action. it can only act at the request of the state. If the request is unlawful under state law the bankruptcy court must respect it. The normal procedure in federal courts is for the federal court to refer the question to the state Supreme court for a decision on the law See for example http://publicdocs.courts.mi.gov:81/OPIN ... son-op.pdf
We're skirting the limits of my knowledge too, but yes, it may well be a matter for a Michigan court or even an Article 3 federal district court to decide whether the obligation is borne by the city or the state.

It isn't a matter for an Article 1 court, such as a bankruptcy court (a creation of congress in pursuit of its enumerated powers - Article 1 courts are not a separate, coequal branch of government).

PJW

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Re: the state of unfunded state pension obligations

Post by bobcat2 » Fri Aug 30, 2013 12:02 pm

ProfessorX wrote:
So does no one believe there is a promising way out of this crisis for state employees paying into defined benefit Pension plans?
The Canadian province of New Brunswick has had to deal with serious shortfalls in its pension obligations. New Brunswick’s new Shared Risk pension model is designed to respond to future shocks in an orderly and predictable way and to help head off trouble in advance.

New Brunswick’s Shared Risk program has three key elements: 1) a new design that splits plan benefits into highly secure “base” benefits and moderately secure “ancillary” benefits; 2) protocols that require pre-determined actions to change future benefits, contributions, and asset allocations in response to changes in the plan’s financial condition; and 3) a new risk management regulatory framework to keep these plans on track. The “base” and “ancillary” benefit design is based on the widely admired approach developed in The Netherlands. The new regulatory framework is largely based on Canada’s “stress test” methods for supervising banks and insurance companies. The key innovation is to combine these elements into a coherent pension program.

The Shared Risk plan guarantees base benefits, but only grants ancillary benefits if allowed by the plan’s financial condition. The funding program is then designed to ensure that both base and ancillary benefits will be paid with a high degree of likelihood. But the plan sponsor also specifies protocols for responding to changes in the plan’s financial condition: how to increase contributions, change asset allocations, and reduce benefits in response to funding deficits; and how to reduce contributions, change asset allocations, and restore benefits, including restoring previous benefit reductions, and grant ancillary benefits when the plan’s financial condition improves.

Link to article - http://crr.bc.edu/wp-content/uploads/2013/07/slp_33.pdf

Notice the similarity in this plan to the life-cycle approach to individual retirement planning where the household plans for both a safe floor level of retirement income as well as a higher aspirational level of retirement income that is not as secure as the floor income goal.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: the state of unfunded state pension obligations

Post by manwithnoname » Fri Aug 30, 2013 12:04 pm

wastenot wrote:The central question for me is: Why didn't the unions complain loudly or file lawsuits during the years and even decades when state legislatures were shortchanging their mandated pension contributions?
Unless the state contractually agreed to make contributions to the plan, the unions have no standing to sue for failure to make contributions since pension benefits are guaranteed by state obligation to pay debts. In most cases state pension plans are instrumentalities of the states so if they run out of money to pay benefits they will cease operation and pass their pension obligations to the state government which cannot declare bankruptcy.

Federal court dismissed law suit by unions to force NJ to make contributions in prior years on grounds that state has no obligation to fund plan.

manwithnoname
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Re: the state of unfunded state pension obligations

Post by manwithnoname » Fri Aug 30, 2013 12:15 pm

Phineas J. Whoopee wrote:
Professor Emeritus wrote:
Phineas J. Whoopee wrote:...
Detroit, of course, is not a sovereign.

PJW
It is not my area of legal expertise but at least some my colleagues tend to believe that any attempt by any Michigan state appointee (i.e. teh trustee) to avoid the pension obligations is governed by the Michigan constitutional provision. Chapter 9 specifically prevents the federal court from"interfering" with the state action. it can only act at the request of the state. If the request is unlawful under state law the bankruptcy court must respect it. The normal procedure in federal courts is for the federal court to refer the question to the state Supreme court for a decision on the law See for example http://publicdocs.courts.mi.gov:81/OPIN ... son-op.pdf
We're skirting the limits of my knowledge too, but yes, it may well be a matter for a Michigan court or even an Article 3 federal district court to decide whether the obligation is borne by the city or the state.

It isn't a matter for an Article 1 court, such as a bankruptcy court (a creation of congress in pursuit of its enumerated powers - Article 1 courts are not a separate, coequal branch of government).

PJW
While bankruptcy courts are Article I courts, the judges have discretion under Bankruptcy Act to act broadly to benefit the affected parties. And decisions made by a Bkcy judge are appealable to federal Article 3 courts including the Supremes. Expect any decision on Detroit's pension obligations to be decided by the Supremes in 5 years.

Professor Emeritus
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Re: the state of unfunded state pension obligations

Post by Professor Emeritus » Fri Aug 30, 2013 12:32 pm

PJW[/quote]

While bankruptcy courts are Article I courts, the judges have discretion under Bankruptcy Act to act broadly to benefit the affected parties. And decisions made by a Bkcy judge are appealable to federal Article 3 courts including the Supremes. Expect any decision on Detroit's pension obligations to be decided by the Supremes in 5 years.[/quote]

FWIW they have much less authority under article 9 than other bankruptcy provisions. e.g. They cannot force the city to sell assets to pay creditors.

for one view
"A key requirement to confirmation, however, is that "the debtor is not prohibited by law from taking any action necessary to carry out the plan[.]" This has been traditionally interpreted to mean that the debtor's actions, as proposed by the plan, must conform with state laws. In In the Matter of Sanitary & Improvement Dist., #7, for example, this meant that the debtor could not confirm a plan which would issue bonds whose provisions violated Nebraska state law. For Detroit, this could mean not being able to confirm a plan that potentially violates the Michigan constitution."http://jurist.org/dateline/2013/08/igor ... ruptcy.php

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Phineas J. Whoopee
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Re: the state of unfunded state pension obligations

Post by Phineas J. Whoopee » Fri Aug 30, 2013 12:45 pm

manwithnoname wrote: While bankruptcy courts are Article I courts, the judges have discretion under Bankruptcy Act to act broadly to benefit the affected parties. And decisions made by a Bkcy judge are appealable to federal Article 3 courts including the Supremes. Expect any decision on Detroit's pension obligations to be decided by the Supremes in 5 years.
Thanks, manwithnoname.

I defer to your superior knowledge. In so doing may I ask a question?

Bankruptcy courts can make broad decisions, within the law, regarding the creditors, but can they, in a single case, make decisions regarding who the debtor is?

[Edited to add] And does it make a difference whether one of the candidates for debtor is a sovereign?

It seems to me as if that would be the issue in any Detroit obligation vs. Michigan obligation question.

Detroit has applied for protection under Chapter 9. Can the bankruptcy judge decide, with respect to pensions, it's Michigan's obligation? I'm not questioning whether the judge can rule lack of jurisdiction, which obviously s/he would have to do in that event were it allowable.

Thanks for continuing to shed light rather than heat.

PJW

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Re: the state of unfunded state pension obligations

Post by Valuethinker » Fri Aug 30, 2013 12:58 pm

I am still questing for practical investment advice in this one.

As opposed to a general opportunity to vent political views against evil trade unions and venal politicians.

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Re: the state of unfunded state pension obligations

Post by Valuethinker » Fri Aug 30, 2013 1:01 pm

wastenot wrote:The central question for me is: Why didn't the unions complain loudly or file lawsuits during the years and even decades when state legislatures were shortchanging their mandated pension contributions?

And for those who believe that they can get blood out of the fiscal onion, read Kotlikoff and Burns's "Coming Generational Storm."
And take it with a huge grain of salt. They play games with their numbers.
To summarize their thesis: There will be hell to pay when the vast and ever-growing unfunded liabilities of state, local and federal governments have to be paid. It seems that the large majority of developed countries have been similarly irresponsible.

With regard to the U.S., the (literal) future hell to pay was expressed by Thomas Jefferson: "I tremble for my country when I reflect that God is just; that his justice cannot sleep forever."
And to summarize the counter thesis. The US has pretty good demographics and it is demographics that causes the pension issue.

Total US public sector pensions are to swing from 1.5% of GDP to 2.5% of GDP (from memory- -Krugman had a blog post about it) -- not an insupperable swing by any means.

The Thomas Jefferson quote whilst a good one, has nothing to do with pensions-- I believe he was writing about slavery? And indeed justice did not sleep forever, and the Civil War that took place was long bloody and divisive, and still scars the USA now.

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Re: the state of unfunded state pension obligations

Post by Phineas J. Whoopee » Fri Aug 30, 2013 1:03 pm

Valuethinker wrote:I am still questing for practical investment advice in this one.

As opposed to a general opportunity to vent political views against evil trade unions and venal politicians.
There's been a lot of that.

But there's also been a lot of discussion regarding legal financial obligations of states and municipalities, which is directly actionable by anybody considering purchase of tax-exempt bonds.

PJW

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Re: the state of unfunded state pension obligations

Post by manwithnoname » Fri Aug 30, 2013 1:21 pm

Professor Emeritus wrote:PJW
While bankruptcy courts are Article I courts, the judges have discretion under Bankruptcy Act to act broadly to benefit the affected parties. And decisions made by a Bkcy judge are appealable to federal Article 3 courts including the Supremes. Expect any decision on Detroit's pension obligations to be decided by the Supremes in 5 years.[/quote]

FWIW they have much less authority under article 9 than other bankruptcy provisions. e.g. They cannot force the city to sell assets to pay creditors.

for one view
"A key requirement to confirmation, however, is that "the debtor is not prohibited by law from taking any action necessary to carry out the plan[.]" This has been traditionally interpreted to mean that the debtor's actions, as proposed by the plan, must conform with state laws. In In the Matter of Sanitary & Improvement Dist., #7, for example, this meant that the debtor could not confirm a plan which would issue bonds whose provisions violated Nebraska state law. For Detroit, this could mean not being able to confirm a plan that potentially violates the Michigan constitution."http://jurist.org/dateline/2013/08/igor ... ruptcy.php[/quote]



Prof:

Your argument is ignoring the limitations of Chapter 9. Unlike a corporation which can liquidate and dissolve under Chapter 7, a municipal government can not dissolve and cease performing its government functions. Therefore a Bankruptcy judge will not divert municipal revenues to pay pension benefits if it eliminates the ability of the municipality to perform government functions such as police, fire, garbage collection, courts, jails, municipal hospitals, welfare, etc. Detroit is not going to be able to pay 100% of pension benefits from its existing revenue stream if it will result in the elimination or substantial reduction of essential governmental services and will not become the next governmental scenario for Escape from NY.

The bkcy courts are going to test the limits of a municipality's ability to cease making pension contributions now that the Fed bkcy court has allowed San Bernardino, CA to file for Bkcy under Ch 9. In order to continue essential government functions San B. has ceased making contributions to the CALPERs which is attempting to use CA state constitution to force the city to make its agreed to contributions.

http://www.nytimes.com/2013/08/29/us/sa ... uptcy.html

All parties will have to accept less than what they have ben getting in the past.

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Re: the state of unfunded state pension obligations

Post by YttriumNitrate » Fri Aug 30, 2013 1:31 pm

Valuethinker wrote:If we are going to philosophize about political economy and discuss politics and policy it's worth noting that a business could move 5 miles and be outside of Detroit. That is not the case in Illinois. Particularly Chicago.
You're right, a business would need to move 13 miles (measured from Soldier Field) to be out of Chicago, and Illinois for that matter. :D

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Re: the state of unfunded state pension obligations

Post by manwithnoname » Fri Aug 30, 2013 1:50 pm

Phineas J. Whoopee wrote:
manwithnoname wrote: While bankruptcy courts are Article I courts, the judges have discretion under Bankruptcy Act to act broadly to benefit the affected parties. And decisions made by a Bkcy judge are appealable to federal Article 3 courts including the Supremes. Expect any decision on Detroit's pension obligations to be decided by the Supremes in 5 years.
Thanks, manwithnoname.

I defer to your superior knowledge. In so doing may I ask a question?

Bankruptcy courts can make broad decisions, within the law, regarding the creditors, but can they, in a single case, make decisions regarding who the debtor is?

[Edited to add] And does it make a difference whether one of the candidates for debtor is a sovereign?

It seems to me as if that would be the issue in any Detroit obligation vs. Michigan obligation question.

Detroit has applied for protection under Chapter 9. Can the bankruptcy judge decide, with respect to pensions, it's Michigan's obligation? I'm not questioning whether the judge can rule lack of jurisdiction, which obviously s/he would have to do in that event were it allowable.

Thanks for continuing to shed light rather than heat.

PJW
Who is the debtor or obligor of a municipal pension plan depends how the pension is structured under state law. For example, in NJ the state has established 5 pension plans for municipal and state workers. So the NJ govt is ultimately responsible for paying pension benefits not the 600 or so govt entities and school districts.

While NY has established pension plans for local government workers, some municipal govt such as NYC maintain and fund pension plans for their employees. NYC has 5 distinct and separately funded plans. I don't know if NYS would have any obligation to pay pension benefits if NYC defaulted but I don't think the state would allow that situation to arise. When NYC was on the brink of filing for bankruptcy IN 1975 NYS created a governmental entity called MAC which took over all finances of NYC, collected all the revenue from NYC taxes, paid all creditors and gave what remained to NYC to run the city govt. The reduction in revenue led to layoffs of thousands of city workers but NYS avoided a downgrade to it its credit rating that would have occurred if NYC had filed for Chap 9.

There was an issue of Buffalo skipping pension contributions a few years ago but I have forgotten what happened.

NY like MI has a provision that prohibits a reduction in pension benefits but I don't think its clear whether either state government would be liable if a pension fund operated by a municipal government becomes unable to pay pension benefits. We may find out soon.

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Re: the state of unfunded state pension obligations

Post by Professor Emeritus » Fri Aug 30, 2013 2:02 pm

manwithnoname wrote:
Prof:
Your argument is ignoring the limitations of Chapter 9. Unlike a corporation which can liquidate and dissolve under Chapter 7, a municipal government can not dissolve and cease performing its government functions. Therefore a Bankruptcy judge will not divert municipal revenues to pay pension benefits if it eliminates the ability of the municipality to perform government functions such as police, fire, garbage collection, courts, jails, municipal hospitals, welfare, etc. Detroit is not going to be able to pay 100% of pension benefits from its existing revenue stream if it will result in the elimination or substantial reduction of essential governmental services and will not become the next governmental scenario for Escape from NY. The bkcy courts are going to test the limits of a municipality's ability to cease making pension contributions now that the Fed bkcy court has allowed San Bernardino, CA to file for Bkcy under Ch 9. In order to continue essential government functions San B. has ceased making contributions to the CALPERs which is attempting to use CA state constitution to force the city to make its agreed to contributions.

http://www.nytimes.com/2013/08/29/us/sa ... uptcy.html

All parties will have to accept less than what they have ben getting in the past.
I'm not ignoring the limits of Article 9 I'm focusing on them. Do you really think as municipality can continue public services if the people performing those services lose confidence in being paid? This includes current pay and deferred payment in the form of pensions. Under article 9 a bankruptcy judge has no authority over pensions (or any other asset or claim) unless state law provides for it.
Lets assume for example that the city owns a ton of gold. The judge has no authority to tell them to sell the gold and pay the pension, unless the state agrees. .

So the issue of subject matter jurisdiction is critical. Can a state official give the judge a jurisdiction that the the state itself lacks?

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Re: the state of unfunded state pension obligations

Post by Jfet » Fri Aug 30, 2013 2:16 pm

Interesting timing with this thread. Worst sales of muni bonds in 12 years:

http://www.reuters.com/article/2013/08/ ... ews&rpc=43

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Re: the state of unfunded state pension obligations

Post by LadyGeek » Fri Aug 30, 2013 2:41 pm

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