The Ohio Retired Teachers Association

Thousands of public employees rally at Utah State Capitol to protest DC switch proposal

Thousands rally at Capitol to protest retirement bills
February 6, 2010  www.ksl.com

SALT LAKE CITY -- Thousands of public employees including teachers, police officers, firefighters and retirees rallied at the Utah State Capitol Saturday, urging lawmakers against a massive restructuring of retirement benefits.

Several bills will go before the Legislature this session with proposed cuts to the current pension system, 401(k) matching and changes to the practice known as "double dipping."  A lawmaker sponsoring two of those bills says changes are needed to prevent a catastrophe, but those at the rally have huge concerns.

Public employees who gathered at the Capitol Saturday are worried lawmakers are proceeding too quickly with those changes without really studying the issues. They feel the changes could hurt the recruitment of quality employees in the future.

The theme of the rally was "Proceed with Caution," something the thousands in attendance hope is heeded by the legislature. "We're saying let's slow it down, let's let it right out, let's study the issues before we bite off all these changes," says elementary school teacher Sharon Gallagher-Fishbauth.

At issue is the state retirement system for public employees, a group of 180,000 current employees as well as retirees.

Sen. Dan Liljenquist, R-Bountiful, has proposed a set of bills that would cut pension system benefits for new employees and do away with the existing 1.5 percent 401(k) match.

If these bills pass, public employees hired after July 1, 2011 would not be eligible for the current pension system plan. Instead, they could either put 8 percent of their salary into a 401(k) type of program or put part of it into a defined benefit pension plan with greatly reduced benefits.

For many Utah teachers who deal with some of the lowest salaries in the nation as well as some of the largest class sizes, further cuts would be too much.  "We want to make the teaching profession an attractive career, an attractive place to be," says Tom Neberberg, technology director for the Tintic School District. "We want people to want to be teachers. If you take away benefits it's hard for teachers to want to come and commit to the profession."

Chad Soffe, president of the Utah State Lodge of the Fraternal Order of Police, spoke to the crowd, expressing frustration at what he sees as a lack of research by legislators sponsoring the bills.

"The system is not on the verge of failure and will not collapse from the recent unfortunate economic events," Soffe says.

However, Sen. Liljenquist, a sponsor of two bills, disagrees.  "The losses that we took in 2008 blew a $6.5 billion hole into the retirement system," he says.

Liljenquist says his bills would ensure the longevity of a retirement system for public employees. He believes wages would need to increase to make up for the cut to benefits.  "But wage, we'll know what we're getting up front and won't be putting our state budgets at risk based on what happens on Wall Street," Liljenquist says.

The bills in question are scheduled to go before the Senate Retirement and Independent Entities Committee Wednesday. Those at the rally want lawmakers to appoint a special task force to consider all sides of the issue before moving forward.

Liljenquist says an independent actuary review is scheduled for May or June.

Pennsylvania School Boards Association pushing switch to 401k plan for teachers

Teachers fear cost-cutting measure will hurt their retirements

Pittsburgh TRIBUNE-REVIEW Monday, February 8, 2010

As an impending spike in required contributions for public school pensions weighs on the minds of school directors, teachers are worried that a move to mitigate the cost to school districts could hurt their retirement.

"I get questions from members every day, no matter where I go in the state," said Butch Santicola, a spokesman for the Pennsylvania State Education Association, the state's largest teachers' union. "Everybody's concerned."

"It's frightening," said Peg Torbich of North Braddock, who retired from the Woodland Hills School District in 1998. "We're all on alert. We've called our legislators, and we're doing a writing campaign."

The employer contribution rate for Pennsylvania's Public School Employees' Retirement System, commonly known as PSERS, is predicted to increase sixfold between this year and 2012.

For the Hempfield Area School District, for example, the increase would mean an additional $5 million per year, on top of its $80 million budget.

School directors and administrators say they cannot possibly afford such increases, and many are looking to Harrisburg for a solution.

In December, Rep. Glen Grell, R-Cumberland, and Sen. Gene Yaw, R-Lycoming, introduced pension reform legislation drafted by the Pennsylvania School Boards Association. House Bill 2135 would create a new retirement system similar to a 401(k) plan for newly hired school employees. Current employees and retirees would continue to receive benefits defined by their years of service and highest salary.

In the Franklin Regional School District, for example, a teacher with a master's degree can make a maximum of $82,100. Under the system, which would continue to apply to all current teachers, if the teacher retired after 30 years' service, his pension would be $61,575 per year.

Under the system proposed by the school boards association, which would apply to teachers hired after this summer, the annual amount for a Franklin Regional teacher who retired at a top salary of $82,100 would be between $43,500 and $51,700, depending on how much of his salary the retiree contributed and how well the investments performed in the market.

The bill would limit increases in school districts' payments, linking them to the Act 1 Index, which determines how much districts can raise taxes every year. Any additional increase needed to keep the system solvent would be paid by the state.

While the school boards association and the sponsoring legislators say the bill would have no effect on current employees or retirees, teachers unions are skeptical. Union officials note that that current employees and retirees would continue to draw their pensions from PSERS, while future employees would pay less into the system.

"The way we can fund current retirees is that I pay 7.5 percent of my income into the system," said Dom Colangelo, president of the Franklin Regional Education Association and a math teacher at the middle school. "My concern is that, in addition to changing the pension system for new employees, (the proposed change) would undermine the system for current employees."

Union officials point out that school employees have paid more than 7 percent of their salaries into PSERS for most of this decade, while the employer contribution rate was kept artificially low by the General Assembly, which reimburses school districts for half of what they put in.

In 2001-02, for example, the employer contribution rate was only 1 percent, and that was a year when PSERS lost money in the stock market. The fund, which depends on income from market investments to stay solvent, quickly recovered from that drop, but it then took a major hit during the current recession.

"We've been paying all along," Santicola said. "They got this free skate, and now the bill is coming due. They should have budgeted. Their obligation is to fund the system."

Most school districts have not budgeted for the spike, however, and Act 1 prevents them from raising taxes enough to cover the deficit. Without action from Harrisburg, districts will be forced to cut programs. "If they cut education because for the past 10 years they've been underfunding the pension system, that would be a shame," said Joe Scheuermann, president of the Hempfield Area Education Association.

"Where this is going to end is a darn good question," Santicola said, acknowledging that budget cuts would also hurt teachers. "It's going to have an impact, no doubt about it."

Minnesota teachers pension board proposes higher contributions, COLA freeze, and lower auto-COLA

Fix sought for Minnesota teacher pension fund

Legislators must OK increased employee, district contributions

The board that oversees pensions for teachers and administrators is asking legislators to increase employee and employer contributions and reduce annual increases for retirees.

Last year, the Teachers Retirement Association fund dropped from $18.1 billion to $13.8 billion because of falling investments and increasing benefit costs. Its assets could be exhausted by 2032 if nothing is changed.

"Doing nothing is not an option," said John Wicklund, assistant executive director of administration for the TRA. "Investments are up, but we just can't count on that. We're not going to invest our way out of this. The hole is just too deep."

A bill was introduced this week in the Senate to make the changes. The TRA is not looking for state funds, but the changes would cost local school districts millions of dollars and reduce paychecks for thousands of teachers and retirees. It will be difficult for school districts to pay for increased contributions, said Bob Meeks, executive director of the Minnesota School Boards Association. "But it has to be fixed. The more we put it off, the more it's going to cost."

The TRA covers about 50,000 retirees and 77,000 active teachers across the state. Teachers in St. Paul and Duluth are covered by their own pension funds. Employees and employers each put 5.5 percent of the employee's salary into the fund. The association's board wants to increase that amount incrementally to 7.5 percent over four years. Retirees get a 2.5 percent cost-of-living increase annually. That would be frozen for 2011 and 2012. In 2013, the increase would be 2 percent. Benefit payouts are determined by salary and years of service. Wicklund said members who retired this past summer on average received a monthly pension of about $2,200.

Meeks said his group supports the fix, but he hopes lawmakers will give school districts additional levying authority to help pay for their increased contributions. He also would like to see a more stringent freeze on retiree payouts until the fund is stabilized. "We need access to some property-tax dollars," Meeks said. "Otherwise, we'll have to cut more employees to save employees' retirements."

The TRA's $4.3 billion fund drop in 2009 is mainly due to falling investments — $3.3 billion to be exact. Benefit payments made during that time totaled about $1.4 billion. The fund brought in about $453 million in employee and employer contributions last year. As of last June, 23 percent of the pension's long-term liabilities were unfunded.

Pensions of the Minnesota State Retirement System, which represents state workers and those at the University of Minnesota and the Metropolitan Council, and the Public Employees Retirement Association, which represents city, county and nonteaching school workers, experienced similar declines in 2009.

Sen. Don Betzold, DFL-Fridley, said each fund has a unique situation, but the funds share some problems: fewer active employees paying into the system, more retirees who are living longer and a bad economy. All three funds will need to be fixed this session, he said. "There is not going to be any state money to do it," said Betzold, who chairs the Legislative Commission on Pensions and Retirement. "But the stakeholders recognize that it needs to be done and are on board, as long as everyone involved shares in the pain."

Tom Dooher, president of Education Minnesota, said the statewide teachers union is not endorsing any specific solutions at this time. In a statement, Dooher said stable pensions, equitable contributions and competitive benefits are critical to attracting and retaining the best teachers. Dooher said previous legislative actions played a part in weakening the pension fund and any remedy should include state contributions. "Minnesota's pension plan for teachers already significantly lags behind most other states, and it's important that we address these issues," he said.

There is a major sticking point that observers say could crumble the whole deal — disagreement over whether the fix should include better benefits for teachers hired after 1989. Those teachers are not eligible for full retirement benefits until age 66, unlike those hired before 1989, who can qualify for retirement when their age and years of service add up to 90.

Charlie Kyte, executive director of the Minnesota Association of School Administrators, said changes need to be made now to stabilize the fund, and better benefits can be dealt with later. "It would be irresponsible not to fix this," Kyte said.

Alaska contacts former workers to inform them that retirement benefit window is closing

Former state workers get last chance for retirement plan

  Anchorage Daily News  February 7, 2010

Attention ex-government workers: You've got one last chance to get back into the state's old -- and much more generous -- retirement system.

A deadline of June 30 is approaching for tens of thousands of former state, municipal and school district workers who cashed out their retirement accounts under the famed Tier 1 system, as well as the two retirement plans that followed.

If former workers land another job covered by the state retirement system by the deadline, and work or pay back the required number of years, they can tap into their original retirement plan with all its perks, including guaranteed pensions. The real golden egg? Health coverage for retirees.

Under the most desirable of the plans, Tier 1, someone who put in just five years as a public employee can get medical coverage with system-paid premiums at age 50, plus a small pension.

Public employees not in that plan "look at it real enviously," said Bruce Ludwig, business manager for the Alaska Public Employees Association/AFT.

And now those who left the system early are scrambling for a second chance.

People who left state jobs, but didn't cash out their retirement funds, aren't under any such deadline, said Kathy Lea, retirement manager for the state Division of Retirement and Benefits.

Alaska ramped up retirement benefits during the pipeline boom to hold onto workers tempted by better paying construction jobs, Ludwig said.

But since 1986, lawmakers have been scaling back. The biggest overhaul, intended to salvage a retirement system underfunded by billions, took effect in July 2006. The state Legislature did away with pensions and system-paid medical insurance for retirees.

The new retirement plan works more like private industry's 401K system. Individual employees and their employers contribute to the person's retirement fund, but all the risk is on the workers. If their investments tank, money available for retirement will be meager. But it could go the other way, too, note state officials who take exception to descriptions of the old plans as "golden."

Still retirees generally must work much longer to get medical care under the current system, and they must pay at least a portion of the premiums. That will eat away at whatever money they've put away.

"I don't know how a person could live on it," Ludwig said.

NEW URGENCY

The state is mailing a letter reminding the ex-workers of this last opportunity.

In the years since a similar letter went out in 2006, more than 2,000 former employees trickled back to public jobs in Alaska. There was no huge surge, state and municipal officials say.

But "now there's a sense of urgency for some folks who didn't really give it much thought until this year," said Robert Pearson, special assistant in the state Department of Administration.

The deadline nudged Tami Frank into doing what she always planned to do: Return to Alaska.

"It's just my home. I'm an Alaska girl. I missed it. Too crowded, too hot down there," Frank said. She worked for the state in two stints starting in 1993, cashed out her retirement, and moved Outside for six-and-a-half years.

She said she would have moved back anyway, but the deadline prompted her to do so now.

"Some of us younger ones were not really thinking about retirement," said Frank, now 42.

In July, she was hired as a Department of Transportation accounting technician in Juneau and now is covered by her original state retirement plan, which is more generous than what new hires get. She figures she'll repay what she cashed out, though that's not necessary, according to retirement manager Lea.

Frank doesn't expect to retire early, though.

"I'll be working 'til I croak," she joked.

A PLEA FOR STATE JOB

William Satterberg, a Fairbanks lawyer who worked nearly five years as an assistant attorney general starting in 1976, made no secret of his desire for a state job -- and the accompanying retirement perks, especially health coverage.

He made a pitch in the Alaska Bar Rag last year in his humor column. In a piece titled "Will Litigate for Retirement," Satterberg wrote about the coming deadline and his odyssey of trying to get back on as a state lawyer. He just needed another 10 more months of service to be vested under the most desirable plan.

<snip …>  Read the remainder of the story and reader comments, here:  http://www.adn.com/news/government/story/1128207.html#Comments_Container

Letter to the editor: Alaska public employees have only a 401k plan and do not participate in Social Security

Retirement needs a safety net

Anchorage Daily News  February 10, 2010

I want to thank Lisa Demer for getting the news about the state retirement plan on the front page ("Calling all former state workers," Feb. 7). However, this is just the tip of the iceberg regarding this story.

She correctly notes that current Tier 4 employees are getting only a 401(k) type retirement investment benefit in lieu of a defined retirement benefit. But to me that is not the worst of it; few realize that the state does not have to pay any Social Security benefits for these workers as well, leaving them without any safety net for retirement whatsoever. I do believe that in private enterprise the company must still pay into Social Security, thus helping to keep that program afloat and available for those retirees.

There have been proposals in the state Legislature to correct the lack of a safety net by retracting the loss of a defined benefit. This is the rest of the story that needs to be told.

-- Beverly Churchill  Anchorage

Oregon Legislature approves bill protecting retirees from PERS benefit calculation errors

Veto override shields retirees from PERS errors

Gov. Kulongoski had rejected the 2009 bill

Oregon Statesman Journal   February 9, 2010

Public employees will be shielded from state agency math errors that could have forced them to repay retirement benefits under a bill that the Oregon Legislature repassed over Gov. Ted Kulongoski's veto.

The House repassed Senate Bill 897 on Monday by a vote of 44-15, four more than the required two-thirds majority. The Senate voted for it 27-1 last week.

The bill from the 2009 session will compel the Public Employees Retirement System to verify retirement benefits — up to two years before an employee's projected date — and guarantee them even if they are found later to be inaccurate. A verification statement must take into account specified factors, which an employee can dispute.

The verification provision takes effect July 1, 2011, so that PERS has time to update its records. It has had previous problems with a computer system that would enable the agency to do just that.

An employee now gets a statement 90 days after retirement.

"The purpose of this bill is to ensure fair and equitable treatment of all employees' benefits — benefits that employees who have dedicated their careers to public service have earned — and to preserve the long-term solvency of PERS to protect employees and taxpayers alike," said House Majority Leader Mary Nolan, D-Portland.

In the past, the discovery of misapplied formulas has changed benefit calculations after the fact, leaving retirees with lower retirement income than their plan selection promised. In some cases, retirees have been ordered to pay back the difference months after the error.

Rep. Dennis Richardson, R-Central Point, said the current practice was unfair to employees. But he said the proposed guarantee went too far the other way.

"In the private sector, that would never happen," he said. "If a bank or an annuity company mess up, they're going to come forward and say we put $100,000 in your account, but you can't spend it just because we put it there by mistake," said Richardson, who in 2003 sat on the House committee that revamped the public-pension system.

Richardson said he took note that the veto came from Kulongoski, who was the target of public-employee unions for advocating the 2003 legislation, although the unions eventually supported the governor's re-election in 2006.

The bill that becomes law also allows more PERS retirees to buy health insurance benefits, allows all eligible service to be credited toward retirement, and allows a retiree to occupy the board position designated for a PERS member.

In his veto message Aug. 7, Kulongoski said there are legal challenges pending in the courts related to data verification and guarantee provisions. He said they should be decided before lawmakers acted. "This is a democratic process," said Anna Richter Taylor, his chief spokesman, after Monday's House vote. "He chose to veto, and the Legislature chose not to go along."

NIRS posts Pension Resource Guide

The National Institute on Retirement Security has developed a pension resource guide. An excerpt from the NIRS website:

The Guide is comprised of the following educational materials:

·         A Pension Primer

·         Three Modules (Pension Basics, Why Pensions Matter, and Strong Public Pensions for Today and Tomorrow)

·         Fact Sheets (Pension Basics Fact Sheet, Why Pensions Matter Fact Sheet, and Strong Public Pensions for Today and Tomorrow Fact Sheet, Who Has A Pension Fact Sheet)

·         Key Stats

·         a Glossary

·         a PowerPoint

·         A FAQ

Access these resources directly here:

http://www.nirsonline.org/index.php?option=com_content&task=view&id=338&Itemid=116

Editorial: CalPERS’ characterization of average retirement benefit is misleading

CalPERS needs honesty with its `facts'

  Merced Sun-Star    02/08/2010

The California Public Employee Retirement System has launched a public relations campaign intended to tone down the rhetoric in the increasingly raucous debate over public employee pensions.

Speaking at the first of two CalPERS- sponsored "California Retirement Dialogue" forums, pension board President Robert Feckner said the goal is to "separate fact from fiction."

But the facts CalPERS has trotted out so far do more to distort than clarify the issue.

For example, CalPERS' official Web site says the average retirement of all fund retirees is $2,101 a month, or a modest $25,212 a year.

That's a dishonest figure.

It includes an unknown number of local, state and school district employees who worked as few as five years in public service, the minimum number of years required to be vested in the CalPERS system.

It also includes employees who retired before 1999, when the Legislature passed Senate Bill 400, the bill that substantially boosted benefit levels retroactively and prospectively for all state workers and pegged those benefits to a worker's single-highest year's pay.

Local governments adopted similar enhancements. In many cases, those were even richer than the state benefits.

Any honest effort to separate "fact from fiction" would separate obligations for post-1999 retirees from pre-1999 retirees. It would also separate pensioners who worked full careers in public service - that is, 30 years or more - from those who worked just five or 10 years.

An honest appraisal would also separate the public safety retirees, police, firefighters and prison guards from all other other categories of workers.

Safety workers enjoy the most generous pensions available to almost any government workers in the country. Most retire in their early 50s with 90 percent of pay.

The average annual pension for all prison guard retirees is $36,000 per year, 40 percent higher than the average for all CalPERS pensioners. California Highway Patrol retirees collect $59,000 per year on average, more than twice the average.

An honest appraisal of public employee pensions would include a discussion of the actuarial assumptions, particularly the 7.75percent rate of return on investments that CalPERS predicts.

David Crane, the governor's economic adviser, says that assumption is overly optimistic. Speaking at a seminar last August, CalPERS chief actuary Ron Seeling said, "We are facing decades without significant turnarounds in assets, decades of unsustainable pension costs."

Seeling was not among the panelists chosen to speak at the CalPERS forum. Why not?

Rob Feckner is right. It's time to separate fact from fiction but to do that, CalPERS needs to facilitate an honest dialogue with real numbers.

California state controller reports higher state OPEB liability

Gap for Calif. retiree health care grows to $52B

Tuesday, February 9, 2010  (AP)

The state controller's office on Tuesday found that California taxpayers are on the hook for more state government retiree health benefits than previously thought.

Controller John Chiang's office issued a report showing the growing divide between what the state owes retirees for health and dental benefits and what it has saved so far.

The gap has grown to nearly $52 billion, about $3.6 billion over last year's estimate.

Chiang, a Democrat, suggested the state can reduce its obligation by switching from a pay-as-you-go formula to a full-funding approach, which involves setting aside more money now so the state can use investment income to pay for future benefits.

The report comes as the state is struggling to pay for core services such as public schools and universities. "Even as we try to claw our way out of the recession and provide needed cash to the state's coffers, we cannot ignore the promise that we made to pay health and dental benefits for current state employees," Chiang said in a statement. "I urge lawmakers to reduce the impact on future generations by putting additional dollars into the annual payments so that we can invest those funds."

According to the controller's office, California should have set aside $3.9 billion this year to cover its annual obligation. But the current budget only provides $1.3 billion for retirees' health and dental benefits.

Chiang estimated that switching to a full-funding approach would mean the state would only have to contribute $2.8 billion to meet its obligations for the year.

Gov. Arnold Schwarzenegger has advocated changing retirement benefits for new state workers to help reduce the cost to taxpayers. Under his latest budget, the Republican governor wants state workers to contribute 5 percent more to their pension plans.

Republican state lawmakers would like to take a step further by moving from public pensions to defined contribution plans, such as 401k plans widely used in the private sector. In the meantime, they recommended increasing contributions.

"It's prudent that we look for ways to bump current contributions by $1 billion if possible," said Assemblyman Roger Niello, R-Fair Oaks, who serves as vice chair of the Assembly Banking and Finance Committee. "But it's obviously extremely difficult because of all the other pressing calls on money that isn't there."

Opinion: Rating agency says discussion of municipal bankruptcy wears off its stigma

Bankruptcy Bloodbath May Hit Muni Owners: Joe Mysak

Feb. 10 (Bloomberg) -- Public officials shouldn’t think about filing for Chapter 9 municipal bankruptcy to solve mounting labor costs and pension liabilities.  Even talking about this action will invite an inquiry from Fitch Ratings, the company said in a report published Jan. 27.

“The more bankruptcy is publicly discussed as an option for financial relief, the more its tarnish wears off, increasing the likelihood of its actual use,” Fitch said.

The biggest financial crisis since the Great Depression is squeezing municipalities across the country. Since Vallejo, California, successfully petitioned for bankruptcy protection in May 2008, California’s towns, Detroit’s schools and Pennsylvania’s capital city of Harrisburg have all talked about Chapter 9.

That should make bondholders nervous because it “questions whether a local government’s labor contracts would be surgically undone with bondholders’ rights left intact,” Fitch said.

Or as John H. Knox, a partner with Orrick, Herrington & Sutcliffe in San Francisco, which is counsel to Vallejo in its bankruptcy, said in an interview: “Any plan is going to impair all classes of creditors, including bondholders.”

Share Losses

Vallejo, a city of 117,000 on San Francisco Bay, wants to roll back salary and benefits, cut services -- and reduce debt payments. “No interest would accrue for four years, and general fund principal and interest payments would be suspended for three years,” the city’s workout plan states.

This might save the municipality, or, depending upon your point of view, cost investors, $13.4 million.

Fitch is concerned that if Vallejo’s plan is approved, it may set a precedent. “At least some classes of bondholders must share in losses along with other creditors,” the rating company’s statement said.

Stiffing bondholders, even a little bit, would be unusual in the tax-exempt market, said James E. Spiotto, a partner at Chapman & Cutler in Chicago and a municipal bankruptcy specialist. That’s because most municipalities don’t go out of business in bankruptcy and need ready access to the credit market in order to borrow money. Reducing interest rates and extending repayment terms to bondholders are the usual strategies.

Hard Choices

Investors have long taken for granted municipalities’ ability and willingness to make bond payments. More Chapter 9 bankruptcies might force buyers to cast aside such assumptions. Public officials’ capacity to make unpopular decisions might become as important as the state of a community’s finances.

Local governments have been reluctant to reduce headcount during the recession. Since employment peaked at 115.6 million in December 2007, businesses have cut 8.5 million jobs, a 7.4 percent reduction. Local governments, by contrast, continued adding employees through September 2008, to a high of 14.6 million and have since fired 141,000 workers, or 0.96 percent, according to the U.S. Bureau of Labor Statistics.

“In most states, labor laws applicable to public employee contracts place numerous restrictions on revising labor agreements, even if the agreements are pushing the municipality toward bankruptcy,” Orrick’s Knox and colleague Marc Levinson wrote in “Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress,” a booklet published in 2009. “However, if all parties realize that failure to modify extant agreements would likely land the municipality in bankruptcy court, all parties should be willing to work very hard to achieve consensual modification of burdensome agreements.”

Rare Option

Chapter 9 bankruptcy is rare, according to the American Bankruptcy Institute in Alexandria, Virginia.

Only six occurred during the first three quarters of 2009, the latest period for which data is available. There were four in 2008. Since 1980, we’ve seen 227 instances, the peak year being 1991, with 18. Most have involved utilities or special districts, according to Spiotto, not cities or counties.

States can’t enter Chapter 9 bankruptcy, and 26 of them prohibit their municipalities from filing, according to Knox and Levinson. “A municipality in those states must seek enactment of a specific statute particular to it authorizing the filing. It goes without saying that a floundering municipality faces an uphill battle in such states.”

That hasn’t stopped municipalities from talking about it more than they have since 1994, when Orange County, California, suffered through the country’s biggest municipal bankruptcy. Bondholders have to worry if it’s more than just talk.

Below is the list of 26 states.

Alaska

Delaware

Georgia

Hawaii

Illinois

Indiana

Iowa

Kansas

Maine

Maryland

Massachusetts

Mississippi

Nevada

New Hampshire

New Mexico

North Dakota

Oregon

Rhode Island

South Dakota

Tennessee

Utah

Vermont

Virginia

West Virginia

Wisconsin

Wyoming

GASB Newsletter, December 2009: The Users Perspective

GASB newsletter: The Users Perspective

December 2009

Touring the Financial Statements, Part IV: Note Disclosures

“You can’t tell the players in a ball game with a scorecard,” and you cannot fully understand the information in the financial statements without reading the notes. This fourth installment of the overview of the financial statements explains what note disclosures are, how they work with the financial statements, and what types of information they communicate.

 Reporting on Fiscal Sustainability

In December 2009, the GASB moved the Economic Condition Reporting: Fiscal Sustainability project from its Research Agenda to the Current Technical Agenda. This article focuses on the research performed by the GASB and others that led to this decision.

The GASB’s Core Values

Since the creation of the Governmental Accounting Standards Board more than 25 years ago, its mission has been to establish standards for financial reporting that are designed to provide interested individuals with information that is decision-useful and assists those individuals in assessing the government’s accountability to the public. Encoded in the GASB’s DNA are four core values—independence, integrity, objectivity, and transparency—that underlie everything the organization is engaged in. This article discusses the four core values and how they will continue to help guide the GASB’s mission into the future.

2010 Calendar of Constituent Group Events, and GASB Speaking Engagements

This calendar provides a selected list of upcoming GASB constituent group events and GASB speaking engagements for the first-half of 2010. GASB speakers are noted where applicable.

Access the full newsletter here: http://www.gasb.org/newsletter/gasb_newsletter_dec2009.html

Callan posts annual periodic table of investment returns

Periodic table for investment shows case for diversification

10 February 2010

The latest ‘periodic table’ of investment returns – which ranks the performance of key equity and credit indices over two decades – from Callan Associates reinforces a lasting rule for long-term investors: diversification works.

By ranking the returns of eight major equity and credit indices across the globe, the table shows the uncertainty inherent in all capital markets by listing the turnover of the best-performing indices of each year from 1990-2009.

This includes the long-running phases of capital markets, such as the strong outperformance of US large-caps in the five years to 1999, when the US equity market enjoyed one of its strongest five-year runs, followed by their lagging performance from 2000-2006.

Following the dotcom crash, large-caps fell from 2000-2002, declining in consecutive years for the first time since the crash of 1929-32. >From the market peak of March 2000, the S&P 500 suffered its largest fall since 1974, shedding 40 per cent until the end of 2002.

Equity markets then rallied for five years, driven by strong growth in non-US markets, before collapsing again, falling by 37 per cent in their second-worst annual decline since 1926.

This was when bond markets shot to the lead, with no great improvement in performance after ranking last in four of the five previous years, by returning 5.24 per cent for 2008, before falling to last place in 2009, with a return of 5.93 per cent, as equity markets rallied.

In its commentary on the table, the asset consultant notes that the modest return of the Barclays Capital Aggregate Bond Index (BC Agg), the only credit index listed in the table, disguised the vastly divergent performance of its segments. While US Treasury's fell 3.6 per cent, bringing the government component of the index down 2.2 per cent, corporate bonds rebounded sharply from their 4.9 per cent loss in 2008 to gain 18.7 per cent. The mortgage-backed component of the index rose to 5.9 per cent, supported by ongoing intervention in the mortgage market by the US Federal Reserve.

Even though high-yield bonds are not included in the BC Agg, the wild turnaround in their performance was staggering, Callan notes: after plummeting 25 per cent in 2008, they soared 58 per cent in 2009.

Some other interesting trends in the relative performance of market segments can also be observed. In 2009, for the ninth year out of the last 11, small-cap equities beat large-caps, returning 27.2 per cent against 26.5 per cent. In both the small- and large-cap markets, growth equities outperformed value.

The indices featured in the table, which can be downloaded here, http://www.callan.com/research/periodic/ were:

S&P 500 Index

S&P/Citigroup 500 Growth and S&P/Citigroup 500 Value Indices

Russell 2000 Index

Russell 2000 Value and Russell 2000 Growth Indices

MSCI EAFE

BC Agg

Note: The report also is accessible from the NASRA web page, Reports on the Public Retirement System Community, here: http://www.nasra.org/resources/reports.htm. kb

Opinion: In his new book, Burton Malkiel endorses use of index funds

Index Funds, Dowdy to Some, Get a Notable Endorsement

  Paul Sullivan  New York Times February 6, 2010

FOR the wealthy, index funds have an image problem. They are considered the economy cars of the investing world: they’ll get you there but not in style and you’re always worried they may break down. Anyone at a serious level of wealth, the thinking goes, needs the equivalent of a luxury sedan, with strategic stock choices, hedge funds, private equity, real estate.

Burton G. Malkiel says this is all hogwash.

Best known for his classic investment treatise, “A Random Walk Down Wall Street,” Mr. Malkiel has just published “The Elements of Investing” with Charles Ellis, an investment consultant (Wiley, 2009). The book, an unabashed homage to “The Elements of Style” by William Strunk Jr. and E. B. White, is focused on the cleanest, simplest ways for people to invest their savings. He argues that while people of modest means are hurt by not saving regularly, wealthy people lose out by chasing the latest, greatest investment.

Mr. Malkiel, a professor of economics at Princeton University, has long advocated index funds. What’s striking now is his belief that the wealthiest would have fine returns without the volatility and high fees if they simply used indexes to diversify their money across asset classes.

“This is still a strategy that is good for people of all income levels,” he said. “If I took all the mutual funds that existed in the early 1970s and asked the question how many really beat the market through 2009, you can count them on the fingers of one hand.”

There are plenty of dissenters to this view. James T. Tierney Jr., a senior vice president at W. P. Stewart & Company, which has $1.6 billion invested in 15 to 20 stocks, equated indexing to judging baseball players against the league average. “It’s like saying all hitters hit .275,” he said. “That’s not the case. Some hit .325 and some hit .200. If you find the ones with the higher average, you’re adding real value.”

The argument between advocates of the two approaches — indexing versus active managing — is an old one and will not be resolved here. But Mr. Malkiel’s assertion that even the wealthiest investors should use indexes is intriguing. What follows are his main arguments in favor of indexing and the rebuttals from advisers who earn their livings doing the opposite.

INACTIVITY STRATEGY Mr. Malkiel has long said that no one can consistently pick winning stocks and bonds. He argues that index funds are the best, low-cost ways to invest money you will need. “We say to people in the book, ‘Don’t try to time the market,’ ” he said. “It’s not that you can’t do it; it’s that you won’t do it. The emotions will get a hold of you.”

He pushes everyone to stick instead to a balance of stocks and bonds that are right for their age and to rebalance this annually so the proportions remain the same. Yet in this sense, his advice is not so different from what strategists at wealth management firms do.

“Asset allocation is the most important decision — 90 percent of returns extend from that,” said Joseph Jennings, director of investments in Baltimore for PNC Wealth Management.

On the other hand, Mr. Tierney argued that W. P. Stewart’s concentrated approach to stock picking serves high-net-worth investors better. “We’re selecting high-quality companies with earnings streams and eliminating all the bad stocks in the S.& P. that you have to own because it’s an index,” he said.

Mr. Tierney pointed out that his strategy has consistently beat the Standard & Poor’s 500-stock index. Since the fund’s inception in 1974, it has outperformed the S.& P. in its 28 positive years, 23.3 percent to 19.9 percent, and in the index’s seven down years, negative 2.9 percent versus negative 13.7 percent.

FEES Of course, all of W. P. Stewart’s returns were reported with its average management fee of 1.2 percent. And this is the area where Mr. Malkiel’s feelings are strongest.

While the old adage says you get what you pay for, Mr. Malkiel argues the opposite. “The one thing I’m absolutely sure about is the less I pay to the purveyor of the service, the more that will be left for me,” he said. “Whatever bad things happen with buying index funds, things are worse with actively managed funds.”

This makes sense for the modest investor with a straightforward portfolio. But the counterargument is that the wealthy need more advice because of the complexity of their assets, and that the advice is worth the fees. (Mr. Malkiel would say the rich just need more tax-planning advice.)

“I understand Malkiel’s argument about fees; they should not be overlooked,” Mr. Jennings said. “But there are other factors, too. What is the client trying to accomplish? What are they looking to do?”

When it comes to fees, Mr. Malkiel reserves his harshest words for those favorite pre-recession investments: hedge funds. He contends that no one — except university endowment managers — should invest in them, mainly because of their fees — typically a 2 percent management fee and 20 percent of gains. Hedge funds, he said, are “great deals for the hedge fund managers but not super deals for the investors.”

NO ALTERNATIVES Even Mr. Malkiel’s admirers disagree with his stance against alternative investments. They argue that wealthy, sophisticated investors are shortchanged if they do not have the ability to, say, bet against the stock of a company, as some hedge funds do.

“Being able to short stocks is a very important tool,” said Rex Macey, chief investment officer of Wilmington Trust, who calls himself an admirer of Mr. Malkiel. “If you’re long only, all you can do is not hold a stock. If you have an opinion and insight into a company that is not good, you have to be able to short it.”

But Mr. Macey added, “Burton is absolutely right that you have to be careful of fees.”

Still, even if hedge funds’ fees were not so high, Mr. Malkiel has another objection to them. “There are very few that are any good,” he said. He added that his research had shown the good hedge funds of one era were not the good ones of another. And even if the hedge fund is a good one, he said, it’s likely to be selective in its investors or simply be closed to new ones.

This comes back to his argument for indexing broadly and avoiding alternative investments. “You don’t need a commodities fund if you’re really well diversified and into emerging markets,” he said. “You’re going to have some investments in Brazil, which is natural resource rich. It’s simple.”

HIS PORTFOLIO Unlike most advisers, Mr. Malkiel was willing to divulge his own investments. Through his best-selling books and his various board seats Mr. Malkiel, 78, is wealthy enough to have a top adviser. But he said he indexes all the money he needs for his retirement.

“My investments are broken down almost exactly as I indicated,” he said. He has put in index funds the money from his individual retirement account, his 403(b) plan — for teachers the equivalent of a 401(k) — and the fees he receives from sitting on various boards.

In addition, he said, he invests in municipal bonds. “I don’t buy a fund for that because I think I’m capable of doing that myself, but most people should buy a fund,” he said. “Beyond that, I buy a few stocks because it’s fun.”

“All the serious money,” he added, “is indexed.”

The Economist: Employers must rethink how to manage an aging workforce

The silver tsunami

Business will have to learn how to manage an ageing workforce

Feb 4th 2010

MARTIN AMIS and Christopher Buckley are writers who are entering their silver years and are worried about the costs of an ageing population. Mr Amis, who has a new novel out (see article), recently compared the growing army of the elderly to “an invasion of terrible immigrants, stinking out the restaurants and cafés and shops”. Mr Buckley devoted a novel, “Boomsday”, to the impending war of the generations. They have both touted the benefits of mass euthanasia, though Mr Amis favours giving volunteers “a martini and a medal” whereas Mr Buckley supports more sophisticated incentives such as tax breaks.

Novelists will have their jokes. But Messrs Amis and Buckley are right to warn about the threat of the “silver tsunami”. Most people understand about the ageing of society in the abstract. But few have grasped either the size of the tsunami or the extent of its consequences. This is particularly true of the corporate world.

Companies in the rich world are confronted with a rapidly ageing workforce. Nearly one in three American workers will be over 50 by 2012, and America is a young country compared with Japan and Germany. China is also ageing rapidly, thanks to its one-child policy. This means that companies will have to learn how to manage older workers better. It also means that they will be confronted with a wave of retirements as the baby-boomers leave work in droves.

Most companies are remarkably ill-prepared. There was a flicker of interest in the problem a few years ago but it was snuffed out by the recession. The management literature on older workers is a mere molehill compared with the mountain devoted to recruiting and retaining the young.

Companies are still stuck with an antiquated model for dealing with ageing, which assumes that people should get pay rises and promotions on the basis of age and then disappear when they reach retirement. They have dealt with the burdens of this model by periodically “downsizing” older workers or encouraging them to take early retirement. This has created a dual labour market for older workers, of cosseted insiders on the one hand and unemployed or retired outsiders on the other.

But this model cannot last. The number of young people, particularly those with valuable science and engineering skills, is shrinking. And governments are raising retirement ages and making it more difficult for companies to shed older workers, in a desperate attempt to cope with their underfunded pension systems. Even litigation-averse Japan has introduced tough age-discrimination laws.

Companies will have no choice but to face the difficult problem of managing older workers. How do you encourage older people to adapt to new practices and technologies? How do they get senior people to take orders from young whippersnappers? Happily a few companies have started to think seriously about these problems—and generate insights that their more stick-in-the-mud peers can imitate. The leaders in this area are retail companies. Asda, a subsidiary of the equally gerontophile Wal-Mart, is Britain’s biggest employer of over-50s. Netto, a Danish supermarket group, has experimented with shops that employ only people aged 45 and over.

Many industrial companies are also catching the silver wave. Some are rejigging processes to accommodate older workers. A forthcoming article in the Harvard Business Review by Christoph Loch of INSEAD and two colleagues looks at what happened when BMW decided to staff one of its production lines with workers of an age likely to be typical at the firm in 2017. At first “the pensioners’ line” was less productive. But the firm brought it up to the level of the rest of the factory by introducing 70 relatively small changes, such as new chairs, comfier shoes, magnifying lenses and adjustable tables.

Some companies, particularly in energy and engineering, are also realising that they could face a debilitating loss of skills when the baby-boomers retire en masse. Bosch asks all retirees to sit down for a formal interview in an attempt to “capture” their wisdom for younger workers. Construction companies such as Sweden’s Elmhults Konstruktions and the Netherlands’ Hazenberg Bouw have introduced mentoring systems that encourage prospective retirees to train their replacements.

Older and poorer

Companies will have to do more than this if they are to survive the silver tsunami. They will have to rethink the traditional model of the career. This will mean breaking the time-honoured link between age and pay—a link which ensures that workers get ever more expensive even as their faculties decline. It will also mean treating retirement as a phased process rather than a sudden event marked by a sentimental speech and a carriage clock.

There are signs that this is beginning to happen. A few firms have introduced formal programmes of “phased retirement”, though they usually single out white-collar workers for the privilege. Some, notably consultancies and energy companies, have developed pools of retired or semi-retired workers who can be called upon to work on individual projects. Asda allows employees to work only during busy periods or take several months off in winter (a perk dubbed “Benidorm leave”). Abbott Laboratories, a large American health-care company, allows veteran staff to work for four days a week or take up to 25 extra days of holiday a year.

But there is one big problem with such seemingly neat arrangements: the plethora of age-discrimination laws that have been passed over the past few years make it harder for companies to experiment and easier for a handful of malcontents to sue. It would be an irony worthy of Messrs Amis and Buckley if laws that were passed to encourage companies to adapt to the demographic revolution ended up having the opposite effect.

The Economist: A financial opportunity to reduce longevity risk

Live long and prosper

Plans are afoot to create a new capital market in longevity risk

Feb 4th 2010

DEATH comes to everyone. The timing is much less certain. Longevity risk, the risk that people will live longer than expected, weighs heavily on those who run pension schemes and on insurers that provide annuities. Actuaries have a track record of systematically underestimating gains in life expectancy, and more old people means a bigger bill for benefits providers. Every additional year of life expectancy at age 65 is reckoned to bump up the present value of pension liabilities in British defined-benefit schemes by 3%, or £30 billion ($48 billion).

Demand for ways to offload longevity risk is increasing, particularly in Britain, which has lots of annuities and defined-benefit pensions. Solvency 2, a pending set of rules governing European insurers, is one source of pressure: it will force annuity providers to hold more capital against unhedged longevity risk. Pension schemes, fed up with filling in deficits only to see them widen again, are desperate to manage away as much risk as they can. Many schemes have now hedged against interest-rate movements and inflation; longevity is the next thing on the list.

Simply offloading liabilities onto pension buy-out firms, which take on responsibility for schemes in return for a premium, is one option. But higher pension deficits in the wake of the financial crisis have made buy-outs more expensive. It is much cheaper to try to break off longevity risk and manage it separately. An army of bankers, insurers and consultants is at work figuring out ways to do just that.

Longevity swaps, in which investors take on the risk of paying for longer-living pensioners in return for an agreed stream of payments from the seller, are emerging as a favoured answer. Last year Babcock International became the first company to complete a longevity swap, with Credit Suisse, for three of its schemes. Others have followed. Nick Horsfall of Towers Watson, a consultancy, thinks the pipeline of potential deals could push the British swaps market to £10 billion this year, up from around £3 billion-4 billion in 2009.

Some are thinking further ahead. On February 1st a group of banks and insurers launched the Life and Longevity Markets Association (LLMA), a trade body based in London, to try to spur the development of a liquid longevity market. To date the end-buyers of longevity risk have mainly been insurers and reinsurers. They have the expertise to price the risk, but they do not have anything like the financial clout to cope with potential demand. In Britain alone, the total exposure to longevity risk is estimated by the LLMA to exceed £2 trillion. Soaking up that amount of business would require the capital markets to become interested in longevity risk, just as a market for catastrophe bonds has developed to hedge issuers against the risk of natural disasters.

Some steps toward the goal of a longevity market are easier to take than others. The LLMA wants to speed up swaps transactions (which can currently take as long as a year) by standardising documentation, for instance. It should be possible to disseminate better data on past mortality experience. But other problems are much less tractable. Predicting life expectancy accurately is the biggest obstacle to pricing longevity risk. The risk of big jumps in life expectancy may be pretty low for people who have already retired, but underwriting longevity risk for young people in defined-benefit schemes or with deferred annuities is a shot in the dark.

Nor is the scale of demand from mainstream investors clear. According to Christian Mumenthaler of Swiss Re, one of the LLMA’s founder members, reinsurers have an incentive to take on longevity risk, because they are already exposed to mortality risk (the risk of people dying too soon) through life-insurance policies. So if people live longer than expected, these businesses will see offsetting benefits elsewhere. High levels of interest from these natural buyers are thought to be suppressing prices at the moment. But they will run out of capacity eventually. What premium other investors will demand for taking on longevity risk is the question that will decide the success of this nascent market.