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* The AP ran a series of stories over the weekend about Illinois’ pension debt problem. Here’s the first lede…
The state’s pension debt will exceed $44 billion this summer, increasing at a rate of about $120 per second, according to Gov. Rod Blagojevich’s administration. The debt already tops $42 billion — enough to give every one of Illinois’ 12.8 million residents a check of $3,300 or buy 937,000 Cadillacs at $45,000 a pop.
The combination of debt in terms of both money and percentage gives Illinois the infamous distinction of having the nation’s worst pension problem, according to an Associated Press review of records and interviews with experts. And there’s no solution in sight.
* A lot of very important numbers were buried in the middle of the stories. Like this…
State pensions will be paid whether the systems are 60 percent funded or 90 percent funded, lawmakers say — the funding percentage only matters if all state employees would retire at once.
The argument that we don’t need to have all the money on hand right this minute so that if everyone retires at once they can all get paid immediately isn’t a bad one.
* And then there’s this…
A 50-year plan adopted in 1995 has the state on track to be up to 90 percent funding by 2045.
But here’s the rub: The state agreed to pay the pension systems 8.5 percent interest — the estimated return on investments the systems would expect to get if they had all the money they were owed — for essentially borrowing money from the payments they should receive.
Those two factors (besides the complete lack of political will to change the very system itself) are what’s really driving this pension funding mess. We’re in a huge hole and we’ve deliberately rigged the system against ourselves.
* As the AP notes in another pension story…
The state owes the pension systems 8.5 percent interest on debt that it carries over every year. That amounts to $3.6 billion in interest - enough to give all public schools and colleges a 40 percent funding increase this year.
That interest rate is criminal.
* So far, investment returns are keeping us above water. Check out this report from the Illinois Commission on Government Forecasting and Accountability.
Last fiscal year, the state pumped $737.7 million into the Teachers’ Retirement System. Employees contributed another $826 million. However, the fund had to pay out $3.2 billion in benefits and refunds. Without a very strong investment return of $6.8 billion, the pension fund would have had to dip into existing assets, which totaled $41.9 billion as of the end of last fiscal year.
* What we need are different numbers. For example, how much do we have to pump in every year so the pension funds don’t deplete their assets to the point that they go broke? That’s a question for which I’ve yet to see an answer. The rapid aging of our teacher corps is readily apparent by looking at the numbers. Last fiscal year’s payout was almost three times what it was in Fiscal Year 1998.
Also, is it really necessary to stay on this 2045 timeline? The payoff date was essentially pulled from thin air. It was 50 years after the bill passed, so it probably seemed like a nice, round number.
* If something isn’t done soon, the pain is just gonna increase. The state contribution to the Teachers Retirement System jumped about $300 million from last fiscal year to this one, and will rise almost $400 million next fiscal year. The state’s Fiscal Year 2011 payment will be over $2 billion. And that’s just one pension fund. Add over a billion dollars for the State Employees Retirement System, close to $600 million for the university system and close to $90 million total for the judges’ and legislative systems. We’re looking at a scheduled $3.7 billion payment in that year alone. And it only goes up from there.
The governor’s people want to do another pension obligation bond plan. The $16 billion proposal would reduce this year’s payment by $500 million, and by a like amount in the near future.
The longterm impact on annual payments hasn’t been fully explained yet, and if the investments crash (the pension funds lost a bunch of money on the stock markets in 2001, 2002 and 2003) we could end up paying bondholders as well as the pension funds.
* The political viability of moving away from a guaranteed benefits plan is basically nil. Also, since teachers are not in the Social Security system, the employer share would likely negate any difference if we moved away from the current system. Discussion centered on those topics is wishful thinking, at best.
With all that in mind, what are your thoughts on this?
posted by Rich Miller
Tuesday, May 27, 08 @ 8:45 am
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If I’m a pension fund manager, I love owning an 8.5% bond with the state as a counterparty. If I understand you correctly, the yield is so high because everyone assumed–for no good reason–that the fund would return 8.5%?
You’d only have to give me a 6% high grade bond in exchange for forsaking an expected 8.5% return on my portfolio. Crazy.
Comment by Greg Tuesday, May 27, 08 @ 8:52 am
The biggest problem in State government is that $3.6 billion in interest. That is money that can be spent on roads, schools, health care, or even gym shoes.
Now, it goes to nothing.
The problem is that legislators patted themselves on the back last year when they “fully funded” the pension system, according to the arbitrary and broken funding plan.
They didn’t fully fund anything, they just put a whole bunch of money toward interest. But not even all of the interest, and NONE of the principle, so the debt still grew.
You have to do something about the principle. A large up-front payment is the only thing you can do to get rid of that enormous debt and the burdensome interest.
Comment by problem Tuesday, May 27, 08 @ 8:59 am
Why the obsession with pensions being “fully funded” if that becomes a problem ONLY if every single employee in the system retires at the same time? We know that couldn’t happen unless every single state employee were hired in the same year and at the same age.
A better approach would be: what percentage of funding is needed to accomodate all EXPECTED retirements in the next 30 - 50 years, assuming that every current state employee stays in the system until retirement age?
Comment by Anonymous Tuesday, May 27, 08 @ 9:12 am
===assuming that every current state employee stays in the system until retirement age?===
You don’t even need to go that far.
Comment by Rich Miller Tuesday, May 27, 08 @ 9:19 am
Problem, I’m not sure that the interest rate argument is valid. Especially not that high of an interest rate.
Comment by Rich Miller Tuesday, May 27, 08 @ 9:23 am
Pension funds do not have to be fully funded, though it would be nice if they were. The key is to have enough money on hand to pay them when they come due.
However, if the unfunded liability continues to grow without any pay down of the principle, at some point there won’t be enough money to pay pensions.
Comment by Fan of the Game Tuesday, May 27, 08 @ 9:27 am
The last time we did a pension obligation bond was 2003 or so. Our current pension funding ratio is now lower than it was BEFORE we did the last bond. And this time they are talking about using the bond to pay CURRENT AND FUTURE pension obligations, not to pay for old obligations. It’d be one thing to bond out a chunk of the $44B, it’s an entirely different problem to bond out paying their future obligations.
As far as staying in the system, bear in mind when you leave state employment you can take a lump sum of all your contributions (and if you’re vested) the state match also, in cash, with all the interest that should have been paid. And I know many people here and in the state will deal with that 10% federal tax hit and take the money now (or just roll it over into another non-state investment fund with no penalty) than to ride this train to the bottom.
The problem is that the state promises a ~8 percent match with guaranteed interest of ~8 percent but never in 40 years put the required money in. Now it’s coming due. In the last 40 years, our debt has grown 77x because of this.
Comment by John Bambenek Tuesday, May 27, 08 @ 9:34 am
Rich, with the private sector having essentially abandoned guaranteed benefits plan, and the economy shedding jobs, I would think that now is a politically viable time to migrate towards a employee-funded/employer-matched plan. The Carol Ronen story could be exhibit A for pension reform.
Comment by The Doc Tuesday, May 27, 08 @ 9:34 am
For the beleagured middle class Illinois taxpayer who has to save for his or her own retirement in addition to paying for those of government employees, it’s also worth considering the costs to us of state retiree medical care..paid for out of ongoing revenues, I believe, and the impact of rising life expectancy on the projected pension costs. After all, if there is rising life expectancy for state employees, there is rising life expectancy for the rest of us, meaning we have to save increasing amounts for our own retirements. There is no “Rule of 85″ out here in the real world.
Changes in government accounting rules require that governments provide a public accounting of
expected retiree medical expenses and a plan for paying for them. We haven’t heard much about that
in Illinois but the information would be well worth knowing.
As our feckless legislators prepare to plump for yet another run on middle class pocketbooks, at least we should have all the numbers so we know what we are paying for.
Comment by Cassandra Tuesday, May 27, 08 @ 9:35 am
As a 31 year employee I have paid my contribution every year at the rate I was told. There were several years that I would have loved a pension holiday but that didn’t happen. The legislature has been underfunding the pension for almost as long or longer than I have been an employee. There are several problems–the underfunding, the pension holidays as well as the many bills that are passed that allow certain groups into certain pension calculations adding to the burden; politicians that work for a time at a higher salary as a department head then cashes in at the better legislative pension that takes from the fund. All of this contributes to the problem. Obviously I have a stake in seeing what I have contributed to for 31 years to pay off as planned. It would be interesting to know and have some decent press on whether or not the legislator’s pension is fully funded and compare their benefits to ours.
Comment by lifer Tuesday, May 27, 08 @ 9:58 am
Nice job of summing up the problem Rich. The problem as I see it is that we complain about how much we awe in the same paragraph as we cry about how little is left over for other programs if we pay what we owe. The solution is clear pay it and address the revenue problem in this state. Pensions have been cut in favor of other programs
Comment by Las Vegas Kid Tuesday, May 27, 08 @ 10:01 am
===Pensions have been cut in favor of other programs===
Not ever has that happened.
You want to sell an income tax increase to pay the pension funds their mobster-level interest? Good luck with that.
Comment by Rich Miller Tuesday, May 27, 08 @ 10:03 am
Hey Doc if we go to a 401 (k) type of system the school ditricts will be hit with a 6.25% social security tax. The largest unfunded mandate in this states history. Then what?
Comment by Las Vegas Kid Tuesday, May 27, 08 @ 10:04 am
===There were several years that I would have loved a pension holiday but that didn’t happen.===
Wrong. AFSCME negotiated a contract years ago that got rid of state employee pension payments.
Comment by Rich Miller Tuesday, May 27, 08 @ 10:05 am
And Rich, it’s not just the high interest rate, it’s the laughable assertion that a practically-AAA bond at X% is necessary to compensate for an (unreasonably) expected X% portfolio return. If only Bear could have pulled such a stunt; it’s like owning a printing press.
Comment by Greg Tuesday, May 27, 08 @ 10:09 am
Like the grapefruit in the snake, the baby boomer bulge is moving to retirement. The state will have to pay one way or the other. It may take a tax increase down the road. There’s no choice. The state can’t run in hide in bankruptcy court like United Airlines.
Comment by wordslinger Tuesday, May 27, 08 @ 10:17 am
AFSCME did negotiate a contract in which the state agreed to pay our pension payment instead of the state giving us a COLA one year. The last contract reversed that and we are now paying our portion of the pension payment.
Having just enough money in the pension system to cover current liabilities doesnt work anymore because recent federal rule changes means that our pension debt affects our bond rating making it more expensive for the state to do lots of things. Also it means our debt will grow and we will have to pay more in interest.
The state did borrow money from the pension system for years to fund other programs. It did this by not paying their contribution to the retirement system. This ended under Ryan and was reinstituted for a short time under the current administration.
Comment by pension issues Tuesday, May 27, 08 @ 10:23 am
Capt. Fax:
Speaking of Pensions, have you dropped a dime on GARS to see what the real story on how long the Attack Hippo needed to be on the payroll?
Comment by Wild Bill Tuesday, May 27, 08 @ 10:29 am
LVK - What about a 403(b) plan? I admit to being unfamilar with the fundamentals. But it’s quite obvious that a tax-free pension system, as currently constructed, is reckless and growing increasingly dire according to the governor’s office statistics. And if the Blago administration can’t put a positive spin on this albatross, you know it’s bad. Real bad.
Comment by The Doc Tuesday, May 27, 08 @ 10:33 am
I thought that when AFSCME negotiated that pension contribution they also negotiated some type of pay increase which would have the effect of compensation for the pension deduction. I can’t find details in a brief search but I remember newspaper coverage at the time.
Comment by Cassandra Tuesday, May 27, 08 @ 10:37 am
First of all, the 8.5% rate is based on the historical performance of the funds which, with some occasional exceptions, are very well managed and typically outperform their benchmarks, if not the market as a whole. If the state feels that the rate is too high they should probably refinance or pay up the principal.
As for the nonsense about a defined contribution plan, keep in mind that that type of plan would cost the state MORE money than the current plan. The state would have to pay social security for every employee which is somewhere over 6%. SS would have to be paid ON TIME every quarter. No pension holidays for the feds! In addition, the state would have to do some kind of match. The two together would exceed the 8-9% that the state should be paying to match employee contributions into the plans. Also, remember that switching to this kind of plan would do nothing to alleviate the 43 billion in current debt. It is not going to just go away. It has to be paid sometime, somehow.
The only real solution is for the state to live up to its debt obligations just like all of us have to do. Pay up!
Comment by Bill Tuesday, May 27, 08 @ 10:48 am
The articles and the comments here are a mix of good information, misunderstanding, and ignorance.
In my mind the biggest basic error in the articles was the constant thread of “we need a solution” for the pension problem. No we don’t. We have one, it works, and after one more painful year, it will fit easily within the state’s budget.
The administration’s POB proposal is one that makes sense financially. I assume the biggest problem is again, the trust issue. If Eden Martin
really said what he was reported to have said in the articles, about POBs just pushing the problem off on future generations, it would represent a gross misunderstanding. The problem is already pushed off (statutorily) on future generations (2045), and as I understand it the POBs would shorten that horizon by some 9 years, not extend it.
The other big issue is this concept of 8.5% interest. That’s not an interest rate the systems are charging the state. That’s simply an actuarial calculation of what, on average, the undeposited state money would be earning if it was on deposit like it should be. Before everyone goes crazy here and tells me the systems can’t earn anywhere close to that, take a look at the rolling 5 and 10 year returns of the systems’ investments.
On the concept that the employees got a “pension holiday” when the state picked up the employee contribution in the first Edgar contract, that pick-up was in return for no COLA for state employees that year, and, if one can do the math, was a better deal for the state than a comparable wage increase. The employees traded a “salary holiday” for their “pension holiday”.
And on and on. Again, to quote the great Casey, “don’t anybody here know how to play this game”.
Comment by steve schnorf Tuesday, May 27, 08 @ 10:49 am
why are ourpension payouts so high? Two or three rounds of early retirements, and system abuses such as the recent Carol Ronen farce where she works for the Executive Branch for 30 days or more and kicks her legislative pension up from $67k to $102/yr.
Pension earnings are important, but the pension payout games have to end as well.
Comment by Capitol View Tuesday, May 27, 08 @ 10:53 am
Cassandra there were increases to offset the pension contribution but all that did in effect was replace the COLA that was given up years ago when the state agreed to pay the employees contribution. So, taking the lost COLA into account and the fact that it was replaced with a new increase, it was still a net negative for state employees.
Comment by pension issues Tuesday, May 27, 08 @ 10:54 am
I think that the state needs a 1-5 year buyout. Where if you buy 4 years, you have to work the next 4 years to utilize the years bought. And i think that our wonderful house and senate is to blame for the pension issue. THEY CAN’T MANAGE A HORSE TO WATER!!!!!!!!
Comment by ironman Tuesday, May 27, 08 @ 10:54 am
The “regular” employees and teachers are miffed that the press does not report the lack of accounting accountability of their contributions.
It is time to admit that there is no credible pension 10 years out. Soon there will be an “emergency” and benefits will be cut 50% except for the politicians and “exempt” positions.
It is like watching paint dry. You know what is happening but it is hard to put your finger on it.
Comment by gg Tuesday, May 27, 08 @ 10:55 am
Mobster-level interest? When the state fails to make their ‘employer’ contribution, they not only owe the principal, but they also owe the “assumed rate” - the rate set by the system that they feel their fund can generate in income ‘over the long term’. Before hanging “mobster level” on it, please take a look at what the three funds have generated over the 10 or 15 years prior. If its at or above 8.5, their assumed rate is dead on…
Assumed rates need to be adjusted both infrequently and gently, because they impact both sides of the equation - they’re the basis for projecting the fund’s ability to meet its liabilities into the future, hence they help define the unfunded portion of the liability.
If your use of “mobster-level” indicates a sense of the systems taking advantage of the state, the reality is exactly the opposite. The systems are the victim of the GA’s lack of will. In a properly funded system, the investment program does the heavy lifting - doesn’t happen in those systems to which the GA issues IOU’s.
And don’t be concerned of the funding ratio of the Judges or the GA systems - they’re small enough that if they approach not being able to deliver, someone will “find” the necessary millions to make the problem go away.
Comment by countryboy Tuesday, May 27, 08 @ 10:59 am
Cassandra and all-
I believe in 1998 the unions negotiated the state carrying 4% of additional pension cost in lieu of a raise that year. Employees did get an approximate $550 lump sum check that year.
Then in 2004(?) the current contract was negotiated. The entire raise package was worth about 17%, minus the 4% that they agreed for the employees to pick up once again. So on average, AFSCME’s contract (which the other unions pattered their agreements on) resulted in a 3 1/4% per year net raise for unionized employees. Not too bad. There were many non-politically connected middle managers that got 0% raise during much of the AFSCME contract period, but who also had the additional 4% deducted from their take home pay for their pensions.
Comment by IDOT'er Tuesday, May 27, 08 @ 11:03 am
Steve and Bill,
I’m not disputing the 8.5% historical return, but no manager would consider that anything but far inferior to a 8.5%-paying high-grade bond. I promise you that I would get fired if I were on the state’s end of that trade. I’m just objecting to equating historical portfolio return to bonds that right now are probably worth 3%.
Comment by Greg Tuesday, May 27, 08 @ 11:14 am
I’m not sure I follow why the 8.5% figure is so outrageous. It’s not like we’re paying that amount in interest to some outside entity–it all goes into the pension fund. And whatever is paid to the pension funds ultimately just ends up increasing the funding ratio, right? So it boils down to a need to determine what funding ratio we want to have and when we want to get there.
And again, I think the 6.2% employer contribution to Social Security (at least for SURS employees, and TRS too according to the post) pretty much negates any benefit of moving to a 401(k)/403(b) type retirement plan. Not to mention that the employees would also have to contribute 6.2%, decreasing the effective net pay to employees.
Comment by Anonymous Tuesday, May 27, 08 @ 11:27 am
Capitol View-
The early retirements in 1991 and 2002 were not necessarily bad things in and of themselves. If the employees had not been replaced, the state would save a boatload of money, minus the added pension cost. If the average salary was $50,000 a year and 10,000 retired early, it would save half a billion dollars off the payroll. My understanding is that in 1991 many employees were eventually replaced, but in 2002 relatively few were. So those payroll savings are permanent, unless the savings are squandered “elsewhere”. This is a simplistic explanation, but any early retirement program that is designed to save money needs the discipline to be carried through at the re-hire and “other” spending end.
Private early retirement initiatives can and do provide a net benefit to the employer when managed properly. One would be suspicious of the state’s discipline to do the right thing when it comes to managing such a program. And for those who propose a “buy and carry” retirement enhancement program for current state employees as a means to bail out the system, the benefits to the state would be small, and the liability on the back end would likely eat up all the benefits and then some unless the employee contribution were jacked up to a fairly high rate.
Comment by IDOT'er Tuesday, May 27, 08 @ 11:27 am
Too bad Cellini, Kjellander,Levine, Hurtgen, Glennon, Rezko and the rest can’t help them outa this one- they could just siphon off some more millions for themselves and put the state further in debt so that they can re-fi the program again. It was a revlovling door, a kind of continous ATM, for those guys.
Maybe without the graft/corruption Illinois really can’t operate.
Comment by GofGelnview Tuesday, May 27, 08 @ 11:48 am
Can you say, “Ponzi scheme.”
Comment by Disgusted Tuesday, May 27, 08 @ 11:51 am
“That interest rate is criminal.”
This may be flogging a dead horse given the explanations others have made, but the 8.5% rate is the predicted return on the pension fund used by the actuaries to determine how much needs to be in the pension fund today in order to pay off the predicted liabilities in the future. The higher the rate is, the less you have to put into the fund today in order to meet a liability 20 years from now. If the actuaries determined that the rate really should be 5%, you would have to put MORE money into the fund today to meet the obligations. And, of course, if you delay a deposit for a year, you’ve missed the 8.5% in earnings on that deposit for the year, and you have to make it up to catch up. Finally, if you don’t fund the plan at all, you just have to come up with the payments out of current revenues or other savings when they come due.
All that being said, the idea of the state borrowing at 3% or 5% in order to invest in assets making 8.5% to meet is obligations is close to a no-brainer, which may be why the earlier bonding program was about the only thing this current administration has done right. When the State later decided to skip two payments rather than borrow the money needed to balance the budget, we were choosing to borrow at 8.5% to avoid borrowing at 3%.
Comment by Anon Tuesday, May 27, 08 @ 11:57 am
When the State later decided to skip two payments rather than borrow the money needed to balance the budget, we were choosing to borrow at 8.5% to avoid borrowing at 3%.
Looks like we have a winner here.
Comment by Six Degrees of Separation Tuesday, May 27, 08 @ 12:07 pm
For those who are interested, here are the actual investment rate of return results for SERS from 1999 to now. I’m sure the other systems have this type of info available.
1999 12.9%
2000 11.8%
2001 -7.1%
2002 -6.9%
2003 0.3%
2004 16.4%
2005 10.1%
2006 11.0%
2007 17.1%
Averaged, it’s 7.3%. Not too far off from the benchmark rate of 8.5%, although it would need to do 19% this year to hit a 10 year average of 8.5%. 9/11 had a dramatic effect on stock prices and investment results, obviously.
Comment by Six Degrees of Separation Tuesday, May 27, 08 @ 12:20 pm
Looks like this post (on an issue that has serious financial repercussions for the state) is slightly ahead of the “Captain Tollway” caption post (an amusing diversion) in comments (37 to 29 as of 3:45 PM). So I guess the CapFaxBloggers have their priorities straight, at least by a small margin.
Comment by Six Degrees of Separation Tuesday, May 27, 08 @ 3:46 pm
++++
Wrong. AFSCME negotiated a contract years ago that got rid of state employee pension payments.
++++
Huh? For as long as I was a state employee — up until last year — I paid into my pension on a monthly basis. There was one point — many years ago — where the state funded 100% of pension payments for employees.
Not sure I follow what you’re saying is wrong, Rich.
Comment by Macbeth Tuesday, May 27, 08 @ 4:08 pm
I’m not an actuary, but I deal with a lot of actuarial reports in my day job. First of all, the 8.5% isn’t an interest rate the state pays.
It is the actuarial assumption of investment returns. This is based on numerous underlying assumptions that only an actuary could explain, and most of us probably wouldn’t understand anyway.
Actuarial reports are really only estimates of future liabilities. Unfunded ratios can change annually, for no apparent reason. For instance, in 2001, IMRF was overfunded. In 2002, it was slightly underfunded, now its down to close to 85% funded. No significant pattern of underfunding emerges, just changes in assumptions that caused the funded ratio to drop off over the 25 year remaining amortization period.
Actuaries make a number of assumptions, which may prove incorrect. Some assumptions IMRF’s actuary makes are that there will be a 4% annual COLA over the amortization period for all participants. A .4% to 10% merit pay increase, depending on position, seniority, and other stuff. A 7.50% investment rate of return. Post retirement benefit increases of 3% a year.
Actuarially estimated unfunded amounts are only estimates. The most basic assumption is that everyone in the current system will retire at normal retirement age, with salary increases as noted above.
This isn’t how it works. Some employees retire early. Some leave and go to the private sector. Some benefit from super shady deals where their salaries are rapidly increased over their last couple of years in public service.
The last one needs to be shut down. If there was a huge increase in an employee’s salary over the last 5 years of their employment, their pension should be cut down to an appropriate level.
I imagine that cash strapped governments and school districts are the most common abusers, promising a big pension if the employee will take a lower salary (or retire early).
Comment by jerry 101 Tuesday, May 27, 08 @ 5:12 pm
One caveat for Anon 11:57
And, of course, if you delay a deposit for a year, you’ve missed the 8.5% in earnings on that deposit for the year, and you have to make it up to catch up.
The Investment Board would look like geniuses if they took money that was borrowed at 3% and invested it in 2004 and 2007. They would look like dunces if they took the same borrowed money and invested it in 2001 and 2002. I agree, over the long haul, that the investments made by the state pensions are really the liferaft of the pension system as opposed to employer/employee contributions, which play an important but smaller part in funding the systems. When the current oxygen is cut off to making investments, it throws the whole system back (unless a cash infusion is made to take its place), although the accumulated cash of yesteryear is still available to generate some investment income.
Comment by Six Degrees of Separation Tuesday, May 27, 08 @ 5:23 pm
To address the errata & leftovers first:
GofG, bite me. Find one line in an indictment, proffer, transcript, interview, overhear or any other record from the Feds that says the pension funds lost one penny because of that gang of thieves. Don’t bother, you won’t find one. The closest thing is Big Bob’s $809,000 “advice fee” paid from the ‘03 bond money. In the end, that’s likely legal, but devious, to borrow a phrase.
-Macbeth, your recollection is correct. However, setting the annual employer pension contribution equal to the current year’s benefit payout only works when a) the pension plan is fully funded (and there’s no unfunded liability to pay off) and b) the mix of active to retired members is not skewed toward one group. Those conditions are rarely, if ever, present, and that’s why the “last year’s benefit payments” funding method that Dr. Bob Mandeville was enraptured with for several years in the 80s caused (in % terms) a substantial increase in the unfunded liability.
-Bambenek, the ability to leave State service and take your contributions with an interest-accruing State match is unique to a subset of SURS employees, those who elected “Portable SURS” when they joined the system. This option is not available in TRS or SERS.
-The 3% bond rate is a farce. These bonds, if they were to be issued, would have an estimated TIC (total interest cost) across all maturities just under 6%, or almost a full point higher than the 2003 issue. This in turn reduces the “margin for error” in the arbitrage play at the heart of pension bond programs.
-jerry101, AA could have this wrong, but IMRF was just recently bleating their bugle about being 100% funded fo the second year in a row-who’s right?
-Greg, this transaction is not a bond trade and you can’t view or diligence it through that lens. Drop it.
To the current proposal; AA strongly agrees with Bill on this one. It’s past time for the State to pay up. The funds, like any long-term investor, enjoy the best returns over the very long term if its cashflows are predictable and stable. Receiving big slugs of cash to invest several years apart with reduced periodic contributions in the interim plays havoc with cash management, asset allocation, investment pacing (for investments like private equity and some types of real estate where the cash is invested over a period of time) and ultimately, the performance of the fund.
COGFA has previously reported that TRS and SURS have consistently outperformed ISBI over the past 10 years. IIRC, TRS’s private equity and real estate investments and SURS’s overweight to international investments have helped them outperform. ISBI has just been plain mediocre, good markets and bad. That’s beyond the topic here. The point to be made is that none of these funds have the option to sit out a bad market or stuff the money in a mattress. They have to stay fully invested in the asset allocations their Boards have approved.
The 2008 POB has a new gimmick that would allow the funds, at their option, to request that GOMB purchase “Guaranteed Investment Contracts” as a sort of parking place for POB $$ until the funds have long-term investments ready to go. Based on past experience, one would expect to see in the near future..”Mesirow Investment Contracts, LLC, Ron “Nose” Picur, Managing Director.”
Comment by Arthur Andersen Tuesday, May 27, 08 @ 7:06 pm
Arthur Andersen- Judging by your response that bite maybe sort of bitter…
Follow my logic on how it cost the state millions: You actually kind of make the case with the nearly $1 million kjellander pulled out in fees (half of which went, by the way, to rezko controlled entities)- the “fees” that were paid to these guys for “placing” investments come from the management fees and by proxy the investments themselves. That is how those scoundrels cost the pension millions. If they were receiving 1-2% of monies put to work through the pension then those monies were effectively being charged- via management fees- to the pension. At least that is how it typically works.
If that thought process is worth a “bite” then, please excuse me for not taking you up on it. However, I do appreciate your sensitivity and excuse me if you were offended.
Comment by GofGelnview Wednesday, May 28, 08 @ 10:50 am