Larry Swedroe: Performance Of State Pension Plans

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Random Walker
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Larry Swedroe: Performance Of State Pension Plans

Post by Random Walker » Mon Apr 01, 2019 3:16 pm

https://www.etf.com/sections/index-inve ... sion-plans

State pension plans are between a rock and a hard place. Us individual investors certainly should not follow their example. They have gone from 100% funded to 73% over last 20 years. Part of their problem has been extrapolating past generous returns into the future. In some states at some point someone is going to pay the price. Either pensioners will not get the benefits they expect or some bond holders will see defaults on their bonds. In our own investing, it’s important to take current valuations into account to estimate somewhat future expected returns.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by dmcmahon » Mon Apr 01, 2019 4:34 pm

We've seen in the past that bondholders are put at the back of the line when pensions are on the line. Knowing this makes me leery of using muni bonds in my own personal asset allocation, even though from a tax perspective they make sense. Others here seem more sanguine about munis.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by larryswedroe » Mon Apr 01, 2019 5:19 pm

Re munis, lots of states in good shape and if stick with AAA/AA and only GOs and essential service revenue bonds likely to have no problems, based on historical evidence.
Larry

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Tdubs » Mon Apr 01, 2019 5:37 pm

From Larry, "The risks to state budgets have become so great in some cases that there are now seven states for which my firm, Buckingham Strategic Wealth, will not buy even their general obligation bonds."

And the seven states are . . . .

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Portfolio7 » Mon Apr 01, 2019 5:51 pm

I'm going to guess Colorado, for one. That might be fixed in 30 years if they stick to the plan:

Colorado Gov. John W. Hickenlooper Jr. signed into law on June 4 a pension reform bill designed to reduce investment risk and improve the funded status of the state's public employee retirement system. Among other things, the law increases the contribution rate for most Colorado PERA participants and directs the state to allocate $225 million each year to the pension fund to reduce its unfunded liability. Colorado's pension funding ratio was 46% as of 2016, the fifth lowest in the U.S., according to data from Bloomberg. https://www.pionline.com/article/201806 ... ng-dilemma

Edit: let's add Kentucky and Minnesota, (edit: and New Jersey) from the same article. The details on these two seem less sanguine than Colorado:

Kentucky Gov. Matt Bevin on April 10 signed Senate Bill 151, designed to solve the state's pension funding crisis. Data from Bloomberg show that Kentucky's pension funding ratio was 31.4% in 2016, the second worst in the nation behind New Jersey.

In Minnesota, enacting pension reform proved far less contentious. The state's 2018 omnibus pension bill, signed into law on May 31 by Gov. Mark Dayton, will reduce four of its public pension plans' rate-of-return assumptions to 7.5%.
Last edited by Portfolio7 on Mon Apr 01, 2019 10:23 pm, edited 1 time in total.
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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Random Musings » Mon Apr 01, 2019 8:46 pm

Or the states will try to hose their taxpayers to some extent. You know, they deserve what we promised them. This could result in some fierce battles between the private and public sectors down the road.

RM
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Re: Larry Swedroe: Performance Of State Pension Plans

Post by DB2 » Mon Apr 01, 2019 9:00 pm

This is one of the areas in the next economic downturn that is going to get rather ugly.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by garlandwhizzer » Mon Apr 01, 2019 10:08 pm

I think Larry's and Dave's points on this issue are valid and timely. Munis in the future may not be as safe as they have been in the past in some cases. If investing in funds or individual bonds in this area, it's probably wise not to select the ones with the highest yield (which usually means the highest risk) and stick instead with high quality. 91% of Vanguard's Intermediate Term Tax Exempt Fund's bonds are rated A, AA, or AAA for example. Best to look carefully under the hood of any muni fund or any muni bond you wish to purchase. As is usually the case in the bond market, higher yield translates to higher risk. Some bond funds held risky Puerto Rican bonds to juice their yields in order to attract investors.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by stlutz » Mon Apr 01, 2019 10:21 pm

Federal government bailout is another option.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Big Dog » Mon Apr 01, 2019 10:33 pm

And the seven states are . . . .
Illinois has to be the top of the list.

edited to add:
Buckingham Strategic Wealth, does not buy bonds from Illinois, Kentucky, Connecticut, Louisiana, Alaska, New Jersey and Pennsylvania. (While we won’t buy the states’ GOs, we will buy other highly rated bonds from other issuers within the state.)
https://www.etf.com/sections/index-inve ... nopaging=1

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Skiandswim » Tue Apr 02, 2019 3:54 am

After reading Larry's article, I was wondering what states had done to reform their pensions (and hopefully not drop this on all tax payers). Report on "Significant Reforms to State Retirement Systems by Keith Brainard & Alex Brown" has an overview of the various actions since 2009. Will it be enough?
- Employees required to pay more (fig 1)
- Benefits lowered (fig 2)
- COLA reductions significantly Impacting benefits (fig 3)
- Employees required to work longer
- Two states – Arizona and Oklahoma – closing traditional pension plan and placing newly hired workers into individual account plans!
- Some states even have self-adjusting risk-sharing features that adjust benefit levels or required employee contribution rates without requiring legislation

https://www.nasra.org/files/Spotlight/S ... eforms.pdf

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by larryswedroe » Tue Apr 02, 2019 6:58 am

List of States We Won’t buy Muni bonds (% Funding Ratio end 2017, From S&P report 10/18) and adjusted net pension liabilities from Moody’s
List is as of November, sometimes changes as states act or don't
BTW-California really benefiting from stock market and hot IPO market (of course they never seem to prepare for the next bear and just count on continued revenue)

Illinois-38%/601%
Kentucky-34%/332%
Connecticut-46%/360
Louisiana-65%/107%
Alaska-67%/173%
New Jersey-36%/290%
Pennsylvania – State GOs Only 54%/185%

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by indexonlyplease » Tue Apr 02, 2019 7:23 am

Thank You Florida pension.

6 years ago Gov. Rick Scott twicked the pension system to new employees. Increased years required to work to get penison and took away the COLA and also increase contributions to pension. Also reduced drop interest to 1.25%. So, the pension board realized something had to be done. This adjustment allow Florida to keep a well funded pension.

What I have seen here in Florida is cities giving employess shorter time to work for pension, higher percent of pension and a 8% interest to drop employees and allowing them to earn this 8% if they keep the money in the pension.

So you can see the problem is not the pension system it's the politicians that promise something but then does not fund the liability or make it unrealistic.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by corysold » Tue Apr 02, 2019 7:50 am

indexonlyplease wrote:
Tue Apr 02, 2019 7:23 am
Thank You Florida pension.

6 years ago Gov. Rick Scott twicked the pension system to new employees. Increased years required to work to get penison and took away the COLA and also increase contributions to pension. Also reduced drop interest to 1.25%. So, the pension board realized something had to be done. This adjustment allow Florida to keep a well funded pension.

What I have seen here in Florida is cities giving employess shorter time to work for pension, higher percent of pension and a 8% interest to drop employees and allowing them to earn this 8% if they keep the money in the pension.

So you can see the problem is not the pension system it's the politicians that promise something but then does not fund the liability or make it unrealistic.
Your last line is the exact issue in IL. They've made some changes, added a Tier II system, debating a Tier III system, yet every year they underfund by about $3 billion and the new governor just proposed extending the ramp that had been in place to get to 90% funded by an additional 8 years and shorting the system an additional $800 million a year.

The pension issues seem solvable if someone is willing to make some hard decisions. But, at least in IL, no one is ever willing to make those decisions.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by jeffyscott » Tue Apr 02, 2019 8:33 am

corysold wrote:
Tue Apr 02, 2019 7:50 am
indexonlyplease wrote:
Tue Apr 02, 2019 7:23 am
So you can see the problem is not the pension system it's the politicians that promise something but then does not fund the liability or make it unrealistic.
Your last line is the exact issue in IL.
In contrast, for the Wisconsin WRS plan, the State and local governments are and always have been forced to put in their share year by year to fund the plan, as determined by actuaries. That plus the pensions being comparatively modest, with no guarantee of a COLA or other increases (or health insurance premiums), means the retirees are quite certain to get all the promised benefits and the future taxpayers are unlikely to have very large future increases in their contributions to the system.

I believe on top of not funding, IL also had governments gaming the system? I think I have heard of pay plans that in some way gave large pay increases just prior to retirement to bump up the 3 year average earnings used in pension calculations.
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Re: Larry Swedroe: Performance Of State Pension Plans

Post by cheezit » Tue Apr 02, 2019 8:37 am

corysold wrote:
Tue Apr 02, 2019 7:50 am
The pension issues seem solvable if someone is willing to make some hard decisions. But, at least in IL, no one is ever willing to make those decisions.
Depends on the hard decisions that get made, assuming that nobody makes the especially hard decision to invent a time machine. I live in one of those nominally 40% funded states - the real number is probably worse, the funding ratio the state calculates assumes very optimistic returns for the asset allocation they use - and I can tell you the hard decisions that get talked about all have ways to backfire.

For instance, if you crank taxes up (as they have already done several times) to make up for the shortfall, some people can and will eventually leave the state. My wife and I are working on an exit plan for our family currently; I don't feel any particular sense of duty to bear the burden of fiscal mismanagement that started before I was born so that people who paid very low taxes during their own working years can retire on more money than I make working. I'm not the only one thinking along these lines, as we're first or second in the nation in terms of net population outflow to other states. When people leave, tax revenues decrease and you have a shortfall again.

If you cut services, as they have done for years by raiding the special transportation fund the make up for part of the shortfall, people will eventually get tired of crappy roads and some of them will leave. As above, this tends to increase the shortfall.

If you give the recipients of the pensions a haircut, you will get voted out of office immediately if you aren't straight up lynched by the gerontocracy. On a more serious note, the most common ways of structuring a pension haircut will screw over the little guys, and your labor relations with state employees will be ruined and you will probably end of spending a lot of money in the CBA renegotiation because the union will want to get something in terms of current salaries to make up for what you're taking from the defined-benefit retirement plan.

If you give bondholders a haircut that is large enough to actually make a real dent in your problem, you will increase your future cost of capital massively.

If you try to get everybody in a room so that everyone "shares the pain" so to speak, you risk a worst-of-all-worlds result where people still leave because the taxes went up and service went down, your cost of capital is much higher because you just partially defaulted, and your current labor costs have gone up.

So I don't think it's as simple as politicians simply needing the courage to make difficult decisions. Decades of rosy assumptions and can-kicking can put a state in a deep enough hole that there's no obvious way out, even if your politicians have the political capital and are brave enough to pull the trigger.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Broken Man 1999 » Tue Apr 02, 2019 8:51 am

corysold wrote:
Tue Apr 02, 2019 7:50 am
indexonlyplease wrote:
Tue Apr 02, 2019 7:23 am
Thank You Florida pension.

6 years ago Gov. Rick Scott twicked the pension system to new employees. Increased years required to work to get penison and took away the COLA and also increase contributions to pension. Also reduced drop interest to 1.25%. So, the pension board realized something had to be done. This adjustment allow Florida to keep a well funded pension.

What I have seen here in Florida is cities giving employess shorter time to work for pension, higher percent of pension and a 8% interest to drop employees and allowing them to earn this 8% if they keep the money in the pension.

So you can see the problem is not the pension system it's the politicians that promise something but then does not fund the liability or make it unrealistic.
Your last line is the exact issue in IL. They've made some changes, added a Tier II system, debating a Tier III system, yet every year they underfund by about $3 billion and the new governor just proposed extending the ramp that had been in place to get to 90% funded by an additional 8 years and shorting the system an additional $800 million a year.

The pension issues seem solvable if someone is willing to make some hard decisions. But, at least in IL, no one is ever willing to make those decisions.
It does seem difficult for short term politicians to play a long game. Unfortunately the best game some played is "kick the can down the road."

Governor Scott also helped rein in tuition in the state university system, and I appreciated having my grandchildren's pre-paid tuition plans reduced in price.

Like many solutions, easy things for pension reforms will be done until more dire measures must be taken.

My pension at MegaCorp was frozen several years before my retirement, but I already had the points from years of service to stay whole. Today there are no pensions for new hired management, just a 401k plan. There is also no retiree health insurance for new hired management.

There will be pain ahead, and I'm betting a great deal of it will find end up on the taxpayers.

I was surprised seeing Connecticut on the list. I always assumed (obviously in error) Connecticut's well-heeled residents would provide plenty of resources to keep the state's obligations covered.

Broken Man 1999
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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Theoretical » Tue Apr 02, 2019 2:26 pm

https://www.mercatus.org/statefiscalrankings

This is a great resource for evaluating the fiscal health of various states.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by gmaynardkrebs » Tue Apr 02, 2019 2:58 pm

larryswedroe wrote:
Tue Apr 02, 2019 6:58 am
List of States We Won’t buy Muni bonds (% Funding Ratio end 2017, From S&P report 10/18) and adjusted net pension liabilities from Moody’s
List is as of November, sometimes changes as states act or don't
BTW-California really benefiting from stock market and hot IPO market (of course they never seem to prepare for the next bear and just count on continued revenue)

Illinois-38%/601%
Kentucky-34%/332%
Connecticut-46%/360
Louisiana-65%/107%
Alaska-67%/173%
New Jersey-36%/290%
Pennsylvania – State GOs Only 54%/185%
I suspect (or would hope) that there is a price at which a smart firm like yours would buy them, but the prices are too high. What's wrong with this market?

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by DB2 » Tue Apr 02, 2019 3:01 pm

Theoretical wrote:
Tue Apr 02, 2019 2:26 pm
https://www.mercatus.org/statefiscalrankings

This is a great resource for evaluating the fiscal health of various states.
Thanks - very interesting.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Broken Man 1999 » Tue Apr 02, 2019 3:04 pm

Theoretical wrote:
Tue Apr 02, 2019 2:26 pm
https://www.mercatus.org/statefiscalrankings

This is a great resource for evaluating the fiscal health of various states.
Thanks for the link. Pretty interesting. I knew Florida had started addressing pension issues, looks like my state is in decent shape.

Of course all it takes is one session of the legislature to start us down the wrong path (fingers crossed).

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by fposte » Tue Apr 02, 2019 3:05 pm

corysold wrote:
Tue Apr 02, 2019 7:50 am

Your last line is the exact issue in IL. They've made some changes, added a Tier II system, debating a Tier III system, yet every year they underfund by about $3 billion and the new governor just proposed extending the ramp that had been in place to get to 90% funded by an additional 8 years and shorting the system an additional $800 million a year.

The pension issues seem solvable if someone is willing to make some hard decisions. But, at least in IL, no one is ever willing to make those decisions.
IL has the added complication, though, of having its pension enshrined in the state constitution. When the pols did enact a more drastic plan, the court struck it down.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by mariezzz » Tue Apr 02, 2019 10:36 pm

stlutz wrote:
Mon Apr 01, 2019 10:21 pm
Federal government bailout is another option.
Didn't work for Detroit.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by trueblueky » Wed Apr 03, 2019 2:37 pm

Random Musings wrote:
Mon Apr 01, 2019 8:46 pm
Or the states will try to hose their taxpayers to some extent. You know, they deserve what we promised them. This could result in some fierce battles between the private and public sectors down the road.

RM
Many employees are already hosed. Their state decided years ago against participating in Social Security. No three-legged stool for those workers.

Then the state fails to fund the pension, typically through Rosy Scenario forecasting. Rosy says, "There will never be a recession; our investments will return at a rate only imagined by Dave Ramsey; population growth will.enable the Ponsi scheme." In reality, recessions happen, investment returns tend toward average at best, and no one can grow their way out of this ( see Detroit, USSteel, UMW ).

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Troubled Municipal Borrowers Can’t Hide From Matt Fabian

Post by gmaynardkrebs » Wed Apr 03, 2019 4:09 pm

Matt Fabian is my go-to guy on munis. Consistent with Larry's advice IMO. Worth reading the whole Q&A
BLOOMBERG: Do you expect more defaults?

MF: Because our sector is so lumpy, we have so many tiny credits and so many extremely large credits, it’s hard to know. The default data in the database do suggest that the default rates are going to rise in the near term. For the number of bonds coming into the database and staying there, the number of bonds defaulting is too low right now.....The kinds of munis that default are often the kinds that are financing economic speculation. And areas in the Southeast and in the Midwest have accounted for more disappointment as far as economic speculation than other areas in the country. Speculative capital attracts more speculative capital. In the Southeast, where there has been growth, governments and borrowers will be more prone to overborrowing.
https://www.bloomberg.com/news/articles ... att-fabian

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by FeeMonster81 » Wed Apr 03, 2019 7:23 pm

73% funded average is very poor...

BUT it also hides some states that are much, much worse............ doing this off the top of my head but illinois and new jersey i think are really bad. 30% funded?

i'm not certain about this but i think governments discount their pension liabilities at an expected rate of return figure - something you can't "buy" in the market. corporations i think discount at long-term AA bond rate. a much lower number.

what kind of expected returns are government pensions using these days?

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Theoretical » Wed Apr 03, 2019 10:39 pm

My other concern is that unquestionably safe bonds from municipalities with none of the problems of their mismanaged/overdrawn municipalities and regions are vulnerable to things like tax increases or schemes that change the underlying quality of the municipality, especially if its a General obligation bond. I could see political efforts to raid more solvent parts of the state for the benefit of the whole or the troubled urbans.

If I had at least half a million or million to put in a bond allocation, I’d invest in lone bonds from states like Tennessee, North Dakota, Utah, Nebraska, and Texas Permanent School fund bonds.

I don’t trust even the safest of Illinois bonds for example, because the municipalities are wholly subordinate to the state. Even if there’s not political rubbish done, if one of these train wreck states ends up missing payments, declaring bankruptcy or attempting to default on debt, you can kiss even a road or school revenue bond’s great credit rating goodbye.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by gmaynardkrebs » Thu Apr 04, 2019 7:18 am

Theoretical wrote:
Wed Apr 03, 2019 10:39 pm
My other concern is that unquestionably safe bonds from municipalities with none of the problems of their mismanaged/overdrawn municipalities and regions are vulnerable to things like tax increases or schemes that change the underlying quality of the municipality, especially if its a General obligation bond. I could see political efforts to raid more solvent parts of the state for the benefit of the whole or the troubled urbans.

If I had at least half a million or million to put in a bond allocation, I’d invest in lone bonds from states like Tennessee, North Dakota, Utah, Nebraska, and Texas Permanent School fund bonds.

I don’t trust even the safest of Illinois bonds for example, because the municipalities are wholly subordinate to the state. Even if there’s not political rubbish done, if one of these train wreck states ends up missing payments, declaring bankruptcy or attempting to default on debt, you can kiss even a road or school revenue bond’s great credit rating goodbye.
It sounds like your are worried about idiosyncratic risk at the municipal level, which is valid, but a diversified diversified bond fund would solve that. Funds also eliminate the risks of being in a just few individual states. As you note, even "unquestionably safe" bonds can become unsafe under the right circumstances, and even AAA state GO bonds are not totally immune from that. That said, I think munis are so much safer than stocks, that if risk is a concern, the place to cut is equities. I do agree that hi-yield munis are not worth the risk, however.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Nowizard » Thu Apr 04, 2019 7:26 am

As with most things financial, there is always the profit motive of those involved, though often with accompanying stewardship of the assets by money managers. Concerns are, perhaps, more justified with circumstances that require connections in order to be named the party in charge. Though not intended to be a comment that results in political discussion, politics does deserve a comment in terms of potential difficulty with things such as fees for managing large sums of money. As we know, fees are one of the key factors with ROI.
Tim

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Shallowpockets » Thu Apr 04, 2019 7:52 am

Even before I knew about BHs, it seemed to me ludicrous to hear of pension funds expecting returns way out of line with what was actually happening. In my life I project out worse case scenarios in order to buffer any financial storms that may occur. But, as previous poster noted, politics is the basis of pension funding. All goes well at the beginnings and good times, then not. Kick the can is the best and only philosophy. How long can that go?
Think Greece.
Should it happen sooner or later, because there does not seem to be any light at the end of the tunnel. Now even the best projections and ridiculous returns we and they do not think it can be done. The situation is unable to be ignored. The best can be done, and is, is that talk and procrastination will carry through for a while.
Will this ever come to a head? And if it does what is the impact on the rest of us and the whole economy?

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by gmaynardkrebs » Thu Apr 04, 2019 8:16 am

Shallowpockets wrote:
Thu Apr 04, 2019 7:52 am
Even before I knew about BHs, it seemed to me ludicrous to hear of pension funds expecting returns way out of line with what was actually happening. In my life I project out worse case scenarios in order to buffer any financial storms that may occur. But, as previous poster noted, politics is the basis of pension funding. All goes well at the beginnings and good times, then not. Kick the can is the best and only philosophy. How long can that go?
Think Greece.
Should it happen sooner or later, because there does not seem to be any light at the end of the tunnel. Now even the best projections and ridiculous returns we and they do not think it can be done. The situation is unable to be ignored. The best can be done, and is, is that talk and procrastination will carry through for a while.
Will this ever come to a head? And if it does what is the impact on the rest of us and the whole economy?
It's misleading to blame the states' assumptions, even though they do seem too high. The principal problem that their tax revenues have suffered terribly due to the anemic recovery. The stock market is not the economy, and what better example than what is happening in so many places in the Rust Belt and other stricken areas. Even with a soaring stock market, they can't raise enough revenues from tax receipts to pay what they promised their teachers, fireman, and police, many of whom do not have Social Security. Sad situation...

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Angst » Thu Apr 04, 2019 9:08 am

Broken Man 1999 wrote:
Tue Apr 02, 2019 3:04 pm
Theoretical wrote:
Tue Apr 02, 2019 2:26 pm
https://www.mercatus.org/statefiscalrankings

This is a great resource for evaluating the fiscal health of various states.
Thanks for the link. Pretty interesting. I knew Florida had started addressing pension issues, looks like my state is in decent shape.

Of course all it takes is one session of the legislature to start us down the wrong path (fingers crossed).

Broken Man 1999
I note however that while Alaska is rated "Above Average" (good) at this link, it's also one of Larry's 7 "Won't buy Muni's" states. I'm not sure what's going on there.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Broken Man 1999 » Thu Apr 04, 2019 9:15 am

Angst wrote:
Thu Apr 04, 2019 9:08 am
Broken Man 1999 wrote:
Tue Apr 02, 2019 3:04 pm
Theoretical wrote:
Tue Apr 02, 2019 2:26 pm
https://www.mercatus.org/statefiscalrankings

This is a great resource for evaluating the fiscal health of various states.
Thanks for the link. Pretty interesting. I knew Florida had started addressing pension issues, looks like my state is in decent shape.

Of course all it takes is one session of the legislature to start us down the wrong path (fingers crossed).

Broken Man 1999
I note however that while Alaska is rated "Above Average" (good) at this link, it's also one of Larry's 7 "Won't buy Muni's" states. I'm not sure what's going on there.
Purely as a guess, I would think Alaska's budget gets whipsawed by the rise and fall of oil prices.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by jeffyscott » Thu Apr 04, 2019 9:17 am

gmaynardkrebs wrote:
Thu Apr 04, 2019 8:16 am
It's misleading to blame the states' assumptions, even though they do seem too high. The principal problem that their tax revenues have suffered terribly due to the anemic recovery. The stock market is not the economy, and what better example than what is happening in so many places in the Rust Belt and other stricken areas. Even with a soaring stock market, they can't raise enough revenues from tax receipts to pay what they promised their teachers, fireman, and police, many of whom do not have Social Security. Sad situation...
I don't think that is the principle problem at all, the problem is that they chose not to fund the pension systems. Doesn't matter what the returns or expected returns are, if you did not put the money in to earn the returns.

Look at two neighboring states, WI and IL. One put the money in, one did not. That's the difference.

For 30-40 years or more, IL underfunded their pension system, this problem did not just pop-up in 2008-2019. I would bet that IL had more economic growth than WI and higher average incomes over those 30-40 years, yet they are the ones with the severe pension problem. There is the added factor that IL also has promised much more generous benefits (perhaps, in part, because they kept government employees out of SS, while WI did not).
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Re: Larry Swedroe: Performance Of State Pension Plans

Post by gmaynardkrebs » Thu Apr 04, 2019 3:34 pm

jeffyscott wrote:
Thu Apr 04, 2019 9:17 am
gmaynardkrebs wrote:
Thu Apr 04, 2019 8:16 am
It's misleading to blame the states' assumptions, even though they do seem too high. The principal problem that their tax revenues have suffered terribly due to the anemic recovery. The stock market is not the economy, and what better example than what is happening in so many places in the Rust Belt and other stricken areas. Even with a soaring stock market, they can't raise enough revenues from tax receipts to pay what they promised their teachers, fireman, and police, many of whom do not have Social Security. Sad situation...
I don't think that is the principle problem at all, the problem is that they chose not to fund the pension systems. Doesn't matter what the returns or expected returns are, if you did not put the money in to earn the returns.

Look at two neighboring states, WI and IL. One put the money in, one did not. That's the difference.

For 30-40 years or more, IL underfunded their pension system, this problem did not just pop-up in 2008-2019. I would bet that IL had more economic growth than WI and higher average incomes over those 30-40 years, yet they are the ones with the severe pension problem. There is the added factor that IL also has promised much more generous benefits (perhaps, in part, because they kept government employees out of SS, while WI did not).
The question is why they "chose" not to fully fund them. To do so, the states would have had to increase taxes or curtail spending during a period of weak economic growth, both of which are counter-cyclical and likely to do more harm than good. IL, NJ and CT, I agree with you.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by robertmcd » Thu Apr 04, 2019 3:39 pm

The solution is actually quite simple, to increase their funding ratio all they have to do is increase their expected returns. Voila!

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by BlueEars » Thu Apr 04, 2019 6:06 pm

Thought: the pension funds will be pushing for higher growth in the future. This can work in equity investor's favor.

Will there be the political will to override other concerns and push for more and more growth? Maybe no more "cleansing" by taking a beating in the economy? Will intolerance for recessions and unemployment rise to new levels?

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Michael Patrick » Thu Apr 04, 2019 6:11 pm

I'm a Chicago native who wound up working for the state in WI. I'm glad I didn't move back home for a job, but stayed in WI after grad school at UW.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Theoretical » Thu Apr 04, 2019 6:45 pm

gmaynardkrebs wrote:
Thu Apr 04, 2019 7:18 am
Theoretical wrote:
Wed Apr 03, 2019 10:39 pm
My other concern is that unquestionably safe bonds from municipalities with none of the problems of their mismanaged/overdrawn municipalities and regions are vulnerable to things like tax increases or schemes that change the underlying quality of the municipality, especially if its a General obligation bond. I could see political efforts to raid more solvent parts of the state for the benefit of the whole or the troubled urbans.

If I had at least half a million or million to put in a bond allocation, I’d invest in lone bonds from states like Tennessee, North Dakota, Utah, Nebraska, and Texas Permanent School fund bonds.

I don’t trust even the safest of Illinois bonds for example, because the municipalities are wholly subordinate to the state. Even if there’s not political rubbish done, if one of these train wreck states ends up missing payments, declaring bankruptcy or attempting to default on debt, you can kiss even a road or school revenue bond’s great credit rating goodbye.
It sounds like your are worried about idiosyncratic risk at the municipal level, which is valid, but a diversified diversified bond fund would solve that. Funds also eliminate the risks of being in a just few individual states. As you note, even "unquestionably safe" bonds can become unsafe under the right circumstances, and even AAA state GO bonds are not totally immune from that. That said, I think munis are so much safer than stocks, that if risk is a concern, the place to cut is equities. I do agree that hi-yield munis are not worth the risk, however.
To the contrary, I am concerned about the systemtatic risks within the entire state.

To give an example, the Town of Highland Park in has astronomical property values (near-California in some places). In 1990, the Texas Legislature enacted so-called Robin Hood legislation that forced wealthy districts to give as much as 2/3 of their revenues to other school districts while capping the percentage rates. Leaving aside political questions as to the merits or demerits, from a bondholder’s perspective, if Highland Park had issues some aggressively but reasonably capitalized bonds in 1988, based on school district property revenues, their ability to repay just got cut drastically.

I see the same kind of thing potentially happening to save these pension plans where solvent municipalities are at risk for being raided by the state to cover the pension gap. It’s idiosyncratic by state but very systematic within the state.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by gmaynardkrebs » Thu Apr 04, 2019 9:43 pm

Theoretical wrote:
Thu Apr 04, 2019 6:45 pm
gmaynardkrebs wrote:
Thu Apr 04, 2019 7:18 am
Theoretical wrote:
Wed Apr 03, 2019 10:39 pm
My other concern is that unquestionably safe bonds from municipalities with none of the problems of their mismanaged/overdrawn municipalities and regions are vulnerable to things like tax increases or schemes that change the underlying quality of the municipality, especially if its a General obligation bond. I could see political efforts to raid more solvent parts of the state for the benefit of the whole or the troubled urbans.

If I had at least half a million or million to put in a bond allocation, I’d invest in lone bonds from states like Tennessee, North Dakota, Utah, Nebraska, and Texas Permanent School fund bonds.

I don’t trust even the safest of Illinois bonds for example, because the municipalities are wholly subordinate to the state. Even if there’s not political rubbish done, if one of these train wreck states ends up missing payments, declaring bankruptcy or attempting to default on debt, you can kiss even a road or school revenue bond’s great credit rating goodbye.
It sounds like your are worried about idiosyncratic risk at the municipal level, which is valid, but a diversified diversified bond fund would solve that. Funds also eliminate the risks of being in a just few individual states. As you note, even "unquestionably safe" bonds can become unsafe under the right circumstances, and even AAA state GO bonds are not totally immune from that. That said, I think munis are so much safer than stocks, that if risk is a concern, the place to cut is equities. I do agree that hi-yield munis are not worth the risk, however.
To the contrary, I am concerned about the systemtatic risks within the entire state.

To give an example, the Town of Highland Park in has astronomical property values (near-California in some places). In 1990, the Texas Legislature enacted so-called Robin Hood legislation that forced wealthy districts to give as much as 2/3 of their revenues to other school districts while capping the percentage rates. Leaving aside political questions as to the merits or demerits, from a bondholder’s perspective, if Highland Park had issues some aggressively but reasonably capitalized bonds in 1988, based on school district property revenues, their ability to repay just got cut drastically.

I see the same kind of thing potentially happening to save these pension plans where solvent municipalities are at risk for being raided by the state to cover the pension gap. It’s idiosyncratic by state but very systematic within the state.
Ok, I see your point, but it's been a long time since I thought a AAA state GO muni is anywhere near as safe as a US treasury. That's why Buffet didn't enter the muni insurance market.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by Theoretical » Sun Apr 07, 2019 11:03 pm

Oh sure, I quite agree that they're not truly AAA (or are only AAA in relation to the class as a whole). My concern is that AAA ends up looking more like A- or even BBB+, A as BB and so on down the line, in multiple states at the same time, precisely because the demographic issues are nationwide due to these kinds of needs.

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by AlphaLess » Sun Apr 07, 2019 11:12 pm

I never understood what it means for a pension fund to be x% funded.
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Re: Larry Swedroe: Performance Of State Pension Plans

Post by AlphaLess » Sun Apr 07, 2019 11:13 pm

dmcmahon wrote:
Mon Apr 01, 2019 4:34 pm
We've seen in the past that bondholders are put at the back of the line when pensions are on the line. Knowing this makes me leery of using muni bonds in my own personal asset allocation, even though from a tax perspective they make sense. Others here seem more sanguine about munis.
Do you mean individual munis, or muni bond funds?
IMO it is suicidal to own individual munis: they are even harder to understand and value than individual stocks.
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Re: Larry Swedroe: Performance Of State Pension Plans

Post by cheezit » Mon Apr 08, 2019 7:25 am

AlphaLess wrote:
Sun Apr 07, 2019 11:12 pm
I never understood what it means for a pension fund to be x% funded.

Isn't the funding ratio just the ratio of money actually in the fund to money needed to cover liabilities given an assumed rate of growth for the fund's assets and some actuarial assumptions about future liabilities?

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by goblue100 » Mon Apr 08, 2019 9:42 am

The Dallas Police and Firefighters pension didn't want to be "average"...
https://www.dallasnews.com/news/dallas- ... nvestments

"Gottschalk said the system probably won't hit its 7.25 percent investment return assumption until 2022. She expects the final return number for last year to come in around 4.75 percent."
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: Larry Swedroe: Performance Of State Pension Plans

Post by AlphaLess » Mon Apr 08, 2019 8:19 pm

cheezit wrote:
Mon Apr 08, 2019 7:25 am
AlphaLess wrote:
Sun Apr 07, 2019 11:12 pm
I never understood what it means for a pension fund to be x% funded.

Isn't the funding ratio just the ratio of money actually in the fund to money needed to cover liabilities given an assumed rate of growth for the fund's assets and some actuarial assumptions about future liabilities?
I don't know. Is it?

Also, your description is vague.
Let's dissect your statement:
- the ratio of money. What money?
- actually in the fund. What does "actually in the fund" means? Funds have money? I thought they have assets.
- needed to cover. What does that mean? Need and cover need definition covered (no pun intended).
- liabilities. What is that? Today's liabilities? T+1? T+10? T+50?
- etc

As you can see, even defining the problem is hard, let alone coming up with an answer.
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Re: Larry Swedroe: Performance Of State Pension Plans

Post by jeffyscott » Mon Apr 08, 2019 9:01 pm

Seems clear to me, "the funded ratio of public pension plans by state, calculated by measuring the market value of state pension plan assets in proportion to each state’s accrued pension liabilities".

https://taxfoundation.org/state-pensions-funding-2018/

An assumed rate of return is applied to current assets and actuarial science is applied to the current liabilities.
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