Tag: amortization

Ohio State Teachers can’t invest its way to permanent COLAs, former chief actuary says

Mary Pat Campbell

Link: https://www.pionline.com/pension-funds/ohio-state-teachers-retirement-system-cannot-invest-its-way-permanent-cola-former

Excerpt:

The Ohio State Teachers’ Retirement System cannot invest its way to a permanent COLA, Brian Grinnell, former chief actuary of the $97.3 billion pension fund, told Pensions & Investments.

Grinnell left the pension fund in May after more than 10 years as its chief actuary. In a Sept. 27 interview, he said his responsibilities were primarily to help STRS staff and the board understand the risks the pension fund has faced and help develop a forward-looking plan to make decisions with long-term outcomes in mind.

In his interview, he said, “I was not comfortable with the direction the plan was headed, and I didn’t feel like my continued participation would be positive.”

….

The pension reform law, SB342, was one of five laws that addressed funding issues at all five of Ohio’s state retirement systems and was drafted as a result of severe stock market declines that came from the Great Recession in 2008 and 2009. Among all the state systems, STRS was the worst off in 2012 with a funding ratio of 57.6% as of June 30 of that year. Additionally, the amortization period for the retirement system’s unfunded pension liabilities under the STRS defined benefit plan had become infinite — meaning that it would never become fully funded.

Grinnell said STRS has had to contend with the challenge of being an extremely mature pension fund: Essentially, there is more money being sent out to retirees receiving benefits now relative to the future contributions the pension fund can expect from current and future teachers.

“Here’s where STRS is a little bit of an unusual situation because it is a fixed-rate plan,” Grinnell said, “so both the benefits and the contributions are essentially fixed by statute. So most plans, if they have a bad year in terms of investment performance, the contribution rate goes up the following year to fill that hole. That doesn’t happen at STRS.”

Grinnell said when a pension fund is both a mature plan and has that fixed-rate contribution and fixed benefits, it’s very difficult to recover from any kinds of market downturns. He noted that all five of Ohio’s state retirement systems have that fixed-rate structure.

“Most other public pensions do not have that kind of structure,” he said, “and I think that tends to work all right for an immature plan, a plan that’s growing and not paying out a lot of benefits relative to the contributions.”

Author(s): Rob Kozlowski 

Publication Date: 2 October 2024

Publication Site: Pensions & Investments

Detroit police, fire pensioners push back on bankruptcy ruling to extend payments

Mary Pat Campbell

Link:https://www.detroitnews.com/story/news/local/detroit-city/2023/07/11/detroit-police-fire-pensioners-push-back-on-ruling-to-extend-payments/70401452007/

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Excerpt:

The Police and Fire Retirement System of Detroit filed on Monday a motion for reconsideration, pushing back on a federal bankruptcy judge’s ruling in favor of the Duggan administration’s plan to extend the city’s pension payment obligations over 30 years rather than 20 years.

The city’s police and fire retirees are continuing litigation that has been ongoing since August when the city administration initially filed suit against the pension system to enforce a 30-year pay-out schedule. On June 26, Judge Thomas Tucker ruled in the city’s favor, stating that a 30-year amortization period is “indeed part of the (bankruptcy) Plan of Adjustment and that the Police Fire Retirement System cannot change it.”

The new motion seeks clarification of the court’s possible imposition of a 6.75% rate of return that was specifically set to expire after 10 years under the Plan of Adjustment, the bankruptcy exit plan. After June 30, the pension fund’s rate of return and its amortization funding policy are within the purview of the Police and Fire Retirement System’s Board of Trustees and Investment Committee, according to the pensioners’ filing.

At the 30-year determined rate, the city will complete its debt obligations in 2054. Police and fire retirees want their pension fund to be made whole sooner.

Author(s): Sarah Rahal

Publication Date: 11 July 2023

Publication Site: The Detroit News

Citizens must be accurately informed for government to work

Mary Pat Campbell

Link: https://www.news-gazette.com/opinion/columns/sheila-weinberg-citizens-must-be-accurately-informed-for-government-to-work/article_5d93e9cf-73c5-54c9-b762-133f91a94824.html

Excerpt:

An example of questionable disclosure practices is found in the Illinois budgeting and financial reporting process, specifically regarding pension contributions. In 1994, then-Gov. Jim Edgar led an effort to pass a bipartisan bill to solve the state’s $15 billion pension deficit. The plan would resolve the deficit within 50 years. The plan was structured to pay down the debt very slowly in the first 15 years and accelerate at the end. This ensured that sitting politicians in the early days of the plan would not be required to make the necessary tax increases or budget cuts to pay down the debt in a meaningful way.

This program is shown in charts to look like a skateboard ramp, appropriately named the “Edgar Ramp.” The problem is, the plan doesn’t work.

It is so unsuccessful that the Illinois pension deficit has grown from $15 billion to $317 billion as of June 30, 2020, according to Moody’s Investors Service. The state’s latest bond offering document emphasizes, “The state’s contributions to the retirement systems, while in conformity with state law, have been less than the contributions necessary to fully fund the retirement systems as calculated by the actuaries of the retirement systems.”

The latest Illinois Annual Comprehensive Financial Report discloses cash-flow problems, significantly underfunded pension obligations, other post-retirement benefit deficits and multiple references to debt-obligation bonds.

Author(s): Shiela Weinberg

Publication Date: 7 Aug 2022

Publication Site: News Gazette

Legacy Debt in Public Pensions: A New Approach

Mary Pat Campbell

Link: https://crr.bc.edu/briefs/legacy-debt-in-public-pensions-a-new-approach/

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The inclusion of “legacy debt” – unfunded liabilities from long ago – with current liabilities impedes effective pension policy.

A new approach would separate legacy debt from other unfunded liabilities in order to:

spread the legacy cost over multiple generations; and

properly identify fixed vs. variable costs.

It would also use the municipal bond yield – rather than the assumed return on assets – to calculate liabilities and required contributions.

This approach, by properly allocating costs, would improve intergenerational fairness, government resource decisions, and public credibility.

Author(s): Jean-Pierre Aubry

Publication Date: June 2022

Publication Site: Center for Retirement Research at Boston College

Illinois reaches funding milestone with its second-largest pension fund

Mary Pat Campbell

Link:https://capitolfax.com/2022/01/13/illinois-reaches-funding-milestone-with-its-second-largest-pension-fund/

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* The State Actuary issued a report on December 22nd entitled “Actuarial Assumptions and Valuations of the State-Funded Retirement Systems.” Yeah, I didn’t read it, either.

But one of my very smart readers did go through it and reached out to me yesterday…

Hi Rich,

Long time follower, first time writer. In full disclosure, I recently retired from the [redacted] after more than [redacted] years. I just read the COGFA article today and was encouraged about the State’s finances yet again.

Another report that came out in late December that received no coverage was the State Actuary Report (see link below). The unheralded news in this report was that there were several State pension systems that passed the “Tread Water” point in FY21; meaning we are now paying in more than we owe and reducing the liability for those systems.

Author(s): Rich Miller

Publication Date: 13 Jan 2022

Publication Site: Capitol Fax

No, Lightfoot’s Chicago Budget Does Not Make An ‘Actuarial’ Pension Contribution

Mary Pat Campbell

Link:https://www.forbes.com/sites/ebauer/2021/10/10/no-lightfoots-chicago-budget-does-not-make-an-actuarial-pension-contribution/

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Now, what she identifies as an “accomplishment,” having finished the climb up the pension ramp, is actually a state law that left her no choice in the matter. But that’s not the only incorrect part of her statement. Even having finally left the ramp behind, the plans are not funded on an “actuarially determined basis.” They are funded based on the Illinois legislature’s decision of a funding schedule which, for the police and fire plans, is sufficient to attain 90% funding in the year 2055, and for the Municipal and Laborers’ plan, not until 2058. Yes, if you do the math, that’s 34 and 37 years from now.

In fact, the plans’ actuarial valuations calculate a figure that’s labelled the Actuarially Determined Contribution. For the Fire plan (19% funded), the city’s contribution was only 79% of the ADC; for the Police plan (23% funded), the city’s contribution was only 75% of the ADC. And these are the two plans which reached the top of the ramp last year!

Author(s): Elizabeth Bauer

Publication Date: 10 Oct 2021

Publication Site: Forbes

Municipal Pension Funding Increased in Recent Years, but Challenges Remain

Mary Pat Campbell

Link: https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2021/05/municipal-pension-funding-increased-in-recent-years-but-challenges-remain

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The first metric is net amortization, which measures whether total contributions to a public retirement system are sufficient to reduce unfunded liabilities if all actuarial assumptions—primarily investment expectations— are met for that year. Plans with positive net amortization are expected to retire pension debt over time and therefore improve their funded status. 

Pew reviewed the three-year average for net amortization. This figure provides a more complete picture of contribution adequacy given the impact of volatile investment performance and demographic experience on plan assets. In total, the 33 cities in Pew’s analysis achieved positive amortization (104% of the benchmark) from 2015 to 2017. However, individually, more than half of the cities had negative amortization. Notably, Chicago and Dallas contributed less than 50% of the benchmark. In contrast, New Orleans contributed 174%, or $132 million, which was well over the city’s benchmark over the time period. For cities that are poorly funded, net amortization can indicate that they are on a path toward sustainably funding their pension plans. For example, New Orleans and Philadelphia have both increased their contributions significantly in recent years to achieve positive net amortization and decrease unfunded liabilities. On the other hand, better funded cities that fell short of the benchmark may face growing pension debt absent a policy change or adjustment.

Author(s): David Draine

Publication Date: 18 May 2021

Publication Site: Pew Charitable Trusts

NJ To Make “Full” Pension Payment

Mary Pat Campbell
NJ To Make “Full” Pension Payment

Excerpt:

That $6.4 billion is what the actuaries hired by New Jersey for the specific purpose of providing absurdly low contribution amounts came out with for the 7/1/21 to 6/30/22 plan year. It includes a massive amortization portion to make up for decades of absurdly low contribution amounts (some of which were not even deposited). 

Author(s): John Bury

Publication Date: 22 February 2021

Publication Site: Burypensions