Archive for March, 2013
Why PERA’s Presumptions Are Faulty
Posted by Joshua Sharf in Colorado Politics, PERA, PPC on March 28th, 2013
Did you recognize the faulty presumptions in PERA’s spirited defense of defined benefit plans?
You have been given a false choice about why defined benefits plans are better than defined contribution plans.
In a recent EdNews Colorado Voices column, Colorado PERA Executive Director Greg Smith avers that PERA’s existing defined benefit structure best serves both the teachers and the taxpayers of Colorado. He was responding to a report by the National Council on Teacher Quality that leads the reader to support reforms to move away from the existing scheme and toward a defined contribution plan. Smith’s claims are wrong about the advantages of defined benefit plans in general, and PERA’s actuarial soundness in particular.
Smith cites a National Institute on Retirement Security (NIRS) report that claims three advantages for defined benefit plans over defined contribution plans:
- Less error in the amount saved for retirement,
- Less need to rebalance and re-allocate assets over time, and
- Better returns, largely as a result of lower transaction costs.
Each advantage turns out not to be dependent on having a defined benefit plan, but on having a professionally-managed, aggregated plan. The same advantages would accrue to a similar defined contribution plan that was also aggregated and professionally-managed.
PERA already has such an option, PERA Plus. It’s organized as a three-part 457(b) / 401(k) / Defined Contribution option. Like any set of diversified retirement offerings, it includes a variety of funds with different investment goals. For our discussion, the most relevant set of funds are those with target retirement dates. PERA has nine of these, with target dates every five years from 2015 to 2055, and an Income Fund designed to provide current income for current retirees.
Over time, as the target date for each fund approaches, that individual fund reallocates its assets into more conservative investments, before maturing and merging into the Income Fund. While each individual fund “ages,” all the funds collectively are maintaining a proper average. Taken together, they continue to represent the aggregate ages and target retirement dates of the entire set of members, the very source of the first two alleged advantages. The third, that of lower transaction costs, is completely independent of how liabilities are calculated.
There is no inherent reason why the assets of a DB plan should earn a higher return than those of an identically-invested DC plan. The only mandatory difference is that the defined benefit plan beneficiary has a share only in the specific benefits to be paid – the fund’s liabilities. By comparison, the owner of a defined contribution plan has a property right in the assets. Therefore, while a defined contribution plan is, by definition, always fully-funded, a defined benefit plan may have to seek additional funding, or trim back on its promises, in order to remain so.
The danger of unrealistic promises
It is therefore imperative that the promises being made to future retirees be realistic. All the more so if the promised benefits are being used to attract and retain qualified or exceptional teachers. Unfortunately, it is far from certain that PERA can afford the promises it is making, given its current funding levels. Recent legislative reforms (Senate Bill 10-001 in particular), while welcome and substantial, simply do not close the gap.
By PERA’s most recent published calculations, its unfunded liabilities remain at a staggering $26 billion, and its overall funded level is well below 60 percent, on a par with the chronically ill Illinois public pensions. In fact, a recent study by Barry Poulson suggests that PERA could be in the worst shape of any statewide plan in the country.
Let’s give credit where credit is due. PERA’s adoption of a 401(k)-like portability is indeed commendable. But if it’s designed to mimic the properties of a 401(k), it can hardly then provide an advantage over one.
While PERA is no longer “letting it ride,” as it did with its stock market investments of the late 90s, the 8 percent returns needed for a return to solvency come with risk. Even better-than-average returns during regular years won’t make up for prior losses in bad years, because funds must then catch up, while payments can’t be deferred.
What success SB1 does offer is predicated on both benefit reductions and payment increases. However, a court challenge to the limitation of COLAs to 2 percent has been upheld by a State Court of Appeals, and its future is uncertain at best. Should the lower courts find that limitation not to be justified, most of the immediate reduction in PERA’s unfunded liability will be wiped out.
On the contribution side, PERA plans to require supplemental increases, rising incrementally from 2 percent to 5.5 percent until 2018. School districts have been picking up the tab for these increases, rather than passing them on to the teachers themselves, as they are allowed to do. As a result, PERA now absorbs upwards of 15 percent of annual operating expenses in many large school districts, a number that is expected to rise to 20 percent as the existing plan increases for make-up contributions.
Disclosure of ties to lobbying group needed
It is also worth noting that the institute that issued the favorable DB article (NIRS) is the lobbying and public policy arm of the defined benefit public pensions, with a particularly close relationship with Colorado PERA. Smith sits on the board of directors of NIRS, as does Meredith Williams, PERA’s former executive director. Colorado PERA is both a charter member and in NIRS’s Visionary Circle, along with such other public plans as CalPERS and the Illinois Municipal Retirement Fund.
Inasmuch as NIRS is not an independent think tank, but instead is a creation of interested parties to the debate over public pensions, this relationship ought to have been disclosed.
While there is no doubt that total compensation is an important part of attracting and retaining effective teachers, those promises must be grounded in reality. Until realistic arguments are used, PERA will continue to fail not only its member teachers, but also the schools and parents it is intended to serve.
This article originally appeared in EdNewsColorado.
It’s A National Political Strategy
Posted by Joshua Sharf in Colorado Politics, National Politics, PPC on March 18th, 2013
On Friday’s Grassroots Radio, the discussion of Rep. Mike McLachlan’s (D-Durango) deceptive advertising of his own gun control positions turned to the national agenda being rammed down Colorado’s throat. I pointed out that while other states with Democrat majorities and governors – Illinois and Washington came to mind – had rejected similar proposals, Colorado had seemingly been singled out for lobbying by Mayor Bloomberg and Vice President Biden. Bloomberg has been open about his desire to influence other states’ policies, but traditionally, federal officeholders don’t meddle in state politics. Even Diana DeGette and Ed Perlmutter confined their post-Aurora comments to proposed federal legislation, not what Colorado ought or ought not do.
So something was up. Tomorrow’s New York Times tells us what: “If you can do it here, you can do it anywhere.” This was the article that Hick was waiting for, before announcing his intent to sign these bills on Wednesday.
It has been clear from the beginning that Obama plans to use gun control, not merely as a diversion from governing, but as a battering-ram issue to achieve his major 2nd-term objective: regaining the House of Representatives for the Democrats. To do that, he believes he must isolate the Republican House as being an obstruction to common-sense, practical gun control measures that most of the country agrees on. To do that, he must persuade enough Senate Democrats – especially Western Democrats – to back proposals that they really, really don’t want to even vote on, much less support.
Colorado becomes the key to providing them cover. The proposals – poorly-written, full of absurd outcomes – will have to be portrayed as practical compromises. The debate on the national level will mirror the deceptive line taken here: confusing sales with temporary transfers, or even loans to friends; outlawing magazines of more than 15 rounds, but forgetting to mention that inheriting such a magazine from a deceased parent is a criminal act, a felony, even. Colorado’s reputation as a western, freedom-loving state works in their favor.
This was a repeat of the entire Obamacare political drama, here at the state level. The Democrats in favor barely felt the need to argue for them on the floor, largely because when they did, they embarrassed themselves with references to pens as defensive weapons, whistles as substitutes for protection, and condescending to rape victims. State senators either abandoned, fled, or chastised their own town halls when the issue came up. Democratic leadership openly asked its members to ignore the public. The controversial bills passed without a single Republican vote, but over bipartisan opposition.
But the “If you can do it here, you can do it anywhere,” line of publicity conceals what really happened.
Ultimately, it makes the recalls of Sen. Hudak and Rep. McLachlan – along with whatever other vulnerable Dems can be included – even more important. Those recalls, like the recalls in Wisconsin, take on a national significance and urgency, not merely because of the issues involved, but because of the political implications at the national level. The promise of protection, of resources and money, to vulnerable Dems who backed him on this legislation, is the application of national resources to state races, just as the Blueprint was the application of state resources to local races. It is the Blueprint raised to a national scale. If Obama is able to implement that, then he will indeed have locked in substantial political changes that can change the society for the worse, for the long run.
On the other hand, if those promises can be shown to be empty – before the House of Representatives comes up for election, or has to vote on the national bills – then the entire narrative is turned on its head. Not only does Obama look like an unreliable friend, but the power of the issue dissipates. (That’s one reason why an initiative is more useful in the event that we fail to take back both the legislature and the governor’s mansion: only fiscal issues can be on the ballot in odd-numbered years.)
Hickenlooper, in 2012, specifically avoided charging voters up over this issue. Even in 2010, he didn’t really mention it at all. Colorado has not had a vigorous debate on these bills or these issues. This was not something done by us. It was something done to us.
It’s our move, Colorado.
Hick Nick Chicks’ Boomsticks
Posted by Joshua Sharf in Colorado Politics, PPC on March 18th, 2013
Governor John Hickenlooper (D) has announced that on Wednesday, he will sign the gun control bills passed by the Colorado legislature last week. These include the magazine ban and the background checks, even for temporary transfers between individuals who know each other. A number of women legislators today protested the disparate impact that this law will have on women’s self-defense.
But it wasn’t always thus. This was Hick in the immediate aftermath of the Aurora shootings here in Colorado:
Crowley: When you look at what transpired here – a man with no criminal background, not even any contact with police, a speeding ticket, I think was the only thing found there – when you look, and if you are not familiar with the interior West or the Midwest, obviously lots of rural places here on the East Coast, and don’t totally understand the gun culture, when you look at what this young man was able to acquire over three or four months: an assault weapon, a shotgun, a 9mm Glock, another 9mm, all of these tear gas things, and 6000 rounds of ammo from the internet, people stand back and look at that and say, “Shouldn’t some bell have gone off somewhere,” and you’re looking and saying, “Somebody’s collecting an arsenal.” And yet there was no way to connect all those things. Should there be?
Hickenlooper: Well, I mean I’m not sure there’s any way in a free society, to be able to do that kind of – he was buying things in different places. Certainly, you can try, and I’m sure we will try, to create some checks and balances on these things. But this is a case of evil, of somebody who was an aberration of nature, and, you know, if it wasn’t one weapon, it would have been another. He was diabolical. If you look at what he had in his apartment and what his intentions were. I mean, even now, it makes the hair on the back of my neck stand up. It’s terrifying, just the thought that he could spend so much time planning such evil.
Crowley: And do you see any law anywhere that might have stopped a man with no record, in a society that protects the 2nd Amendment, that might have prevented this?
Hickenlooper: Well, we are certainly looking and that, and trying to say, “How do you prevent this?” I mean, the Virginia Tech shootings, we’ve been looking at the shootings all across the country, and say, “How do we preserve our freedoms, right, and all those things that define this country, and yet try to prevent this from happening again?” Let me tell you, there’s no easy answer.
Crowley: What I hear from you is that you would be open to someone who wanted to suggest a gun law, or something that might prevent this sort of thing, but that at the moment, you can’t imagine what that would be.
Hickenlooper: Yeah, it’s just – I’m happy to look at anything, but again, it’s – this person, if there were no assault weapons available, if there were no this or no that, this guy’s gonna find something right? He’s gonna know how to create a bomb. I mean, who knows where his mind would have gone, clearly a very intelligent individual, however twisted. You know, I don’t know – that’s the problem, I mean this is really – this is a human issue in some profound way that this level of disturbed individual that we can’t recognize it, that the people around him obviously had no idea that this was something that he was capable of.
(Emphasis added.)
As I mentioned in December, when he suddenly changed his tune, these were not the words of a man who wanted to sound as though he were looking to impose new controls. Virtually all of the objections he raises to Crowley’s implications about new gun laws are the very same objections raised by Republicans and a few Democrats during the legislative debates.
The opening for pursuing this agenda now clearly comes from the Aurora and Newtown shootings, in short, the very events that Hickenlooper says earlier in the interview shouldn’t be determining our way of life. In the Denver Post at the time, he said that he “wanted to have at least a couple of months off after the shooting in Aurora to let people process and grieve and get a little space.”
The net result, in fact, was that gun control was barely discussed at the state level during the election, and here in Colorado was treated almost exclusively as a federal issue, as Reps. Perlmutter and DeGette staked out strong positions in favor of reviving the so-called Assault Weapons Ban and even stricter measures. This suited Hick just fine, since any suggestion that he was seriously looking at the sort of laws passed last week might have complicated the Dems’ narrative about te Republican “War on Women” and civil unions.
With the election behind him, and with some pressure from Bloomberg’s Mayors Against Illegal Guns (of which Hickenlooper was Colorado’s sole member in 2010), and a little arm-twisting from Vice President Joe Biden, Hick feels free to go ahead an implement changes he had rhetorically taken off the table only months before.
Copied from the following post: It’s a National Political Strategy
On Friday’s Grassroots Radio, the discussion of Rep. Mike McLachlan’s (D-Durango) deceptive advertising of his own gun control positions turned to the national agenda being rammed down Colorado’s throat. I pointed out that while other states with Democrat majorities and governors – Illinois and Washington came to mind – had rejected similar proposals, Colorado had seemingly been singled out for lobbying by Mayor Bloomberg and Vice President Biden. Bloomberg has been open about his desire to influence other states’ policies, but traditionally, federal officeholders don’t meddle in state politics. Even Diana DeGette and Ed Perlmutter confined their post-Aurora comments to proposed federal legislation, not what Colorado ought or ought not do.
So something was up. Tomorrow’s New York Times tells us what: “If you can do it here, you can do it anywhere.” This was the article that Hick was waiting for, before announcing his intent to sign these bills on Wednesday.
It has been clear from the beginning that Obama plans to use gun control, not merely as a diversion from governing, but as a battering-ram issue to achieve his major 2nd-term objective: regaining the House of Representatives for the Democrats. To do that, he believes he must isolate the Republican House as being an obstruction to common-sense, practical gun control measures that most of the country agrees on. To do that, he must persuade enough Senate Democrats – especially Western Democrats – to back proposals that they really, really don’t want to even vote on, much less support.
Colorado becomes the key to providing them cover. The proposals – poorly-written, full of absurd outcomes – will have to be portrayed as practical compromises. The debate on the national level will mirror the deceptive line taken here: confusing sales with temporary transfers, or even loans to friends; outlawing magazines of more than 15 rounds, but forgetting to mention that inheriting such a magazine from a deceased parent is a criminal act, a felony, even. Colorado’s reputation as a western, freedom-loving state works in their favor.
This was a repeat of the entire Obamacare political drama, here at the state level. The Democrats in favor barely felt the need to argue for them on the floor, largely because when they did, they embarrassed themselves with references to pens as defensive weapons, whistles as substitutes for protection, and condescending to rape victims. State senators either abandoned, fled, or chastised their own town halls when the issue came up. Democratic leadership openly asked its members to ignore the public. The controversial bills passed without a single Republican vote, but over bipartisan opposition.
But the “If you can do it here, you can do it anywhere,” line of publicity conceals what really happened.
Ultimately, it makes the recalls of Sen. Hudak and Rep. McLachlan – along with whatever other vulnerable Dems can be included – even more important. Those recalls, like the recalls in Wisconsin, take on a national significance and urgency, not merely because of the issues involved, but because of the political implications at the national level. The promise of protection, of resources and money, to vulnerable Dems who backed him on this legislation, is the application of national resources to state races, just as the Blueprint was the application of state resources to local races. It is the Blueprint raised to a national scale. If Obama is able to implement that, then he will indeed have locked in substantial political changes that can change the society for the worse, for the long run.
On the other hand, if those promises can be shown to be empty – before the House of Representatives comes up for election, or has to vote on the national bills – then the entire narrative is turned on its head. Not only does Obama look like an unreliable friend, but the power of the issue dissipates. (That’s one reason why an initiative is more useful in the event that we fail to take back both the legislature and the governor’s mansion: only fiscal issues can be on the ballot in odd-numbered years.)
Hickenlooper, in 2012, specifically avoided charging voters up over this issue. Even in 2010, he didn’t really mention it at all. Colorado has not had a vigorous debate on these bills or these issues. This was not something done by us. It was something done to us.
It’s our move, Colorado.
Alert! Georgia More Conservative Than Massachusetts!
Posted by Joshua Sharf in National Politics on March 18th, 2013
Larry Sabato is one of the sharpest political analysts working today. Even 25 years ago, when I was at Virginia, he was a rising star. Now, he is a star. His Crystal Ball blog is a must-read for electoral analysis. Which is why it’s so surprising that he’d publish an article that uses so thin a justification to show the necessity of the Voting Rights Act’s Section 5 reviews.
Today, 50 years after the Voting Rights Act was established, a number of southern states and Alaska and Arizona have their election practices closely scrutinized by the US Justice Department. Essentially this means that redistricting plans, changes to non-partisan voting, etc., need to be passed on by Justice, in order to show that they don’t discriminate against minorities.
Alan Abramowitz, of Emory University in Atlanta, purports to show that such measures are still necessary because whites in Section 5 states vote Republican at higher rates that whites elsewhere. Seriously, that’s his argument. Blacks and other minorities vote Democrat is similar proportions in Section 5 states as elsewhere.
Gerrymandering is as old as the country itself, used to give one party a locked-in electoral advantage in legislative seats or Congressional seats. (While some may claim that the Senate or Electoral College are unfair, the one thing they can’t be is gerrymandered, since state boundaries are immutable.) The majority – or the party controlling the redistricting process – will seek to pack as many of the opposing party as possible into a few high-margin districts, while creating as many lower-margin, but still safe seats for itself. I’ll let you win that one seat 90-10 until the end of time, if I can create two districts weighted my way 60-40.
Long ago, we decided that while redistricting would have to remain an inherently political process, there was no excuse for its being a racial one. Thus Section 5. It would simply not be acceptable to pack minorities into legislative ghettos. (That minorities routinely win races in white districts, while whites rarely win in minority districts, is a paradox beyond the scope of this post, but certainly another indicator that Section 5’s days have past.)
However, it simply stands to reason that if minorities vote more heavily Democrat relative to the state as a whole, gerrymandering that is based on solely on partisan voting will disproportionately affect minorities within that state. Abramowitz’s argument that Section 5 Republicans have an incentive to pack minorities into districts is true, but it’s equally true if they’re doing so only to maintain a partisan advantage.
But state-to-state, one might just as easily say that in more liberal states, whites are disproportionately disenfranchised, since they are more likely to vote Republican, and more likely to be in a partisan minority statewide. It would be beyond absurd to use that fact as an excuse for the Justice Department to protect Republican voters in those states. Neither, should the voting tendencies of minorities be used as an excuse to protect Democratic voters in Section 5 states.
Incidentally, Abramowitz’s division of the country into Section 5 states and non-Section 5 states makes legal sense, but not analytical sense. The non-Section 5 part of the country is hardly monolithic; Illinois looks little, if anything, like Kansas, but we are not treated to a discussion of whether or not minorities in those states suffer disproportionately from what is assumed to be purely partisan gerrymandering.
You wouldn’t think the revelation that Georgians are more conservative than New Yorkers would be news to a political science professor at Emory, in Atlanta. It may not be, but his argument amounts to punishing southern whites not for being racist, but for voting Republican. Presumably, if they voted as Democrat as whites in the rest of the country, Abramowitz would see no need to continue Section 5. He is silent on what he would recommend were minorities to begin to vote more Republican.
Which bring us to the worst, most perverse incentives of Section 5: for the Democrats to continue to pursue the race-conscious policies that have characterized their party since before the Civil War. For if we buy into Abramowitz’s logic, as long as they vote overwhelmingly Democrat, they’ll be gerrymandered unfairly. The Democrats thus consciously help to perpetuate the very problem they claim requires a legal remedy, even though there’s no longer any evidence that it requires a remedy at all.
Conferences
Posted by Joshua Sharf in Basketball on March 17th, 2013
Last night was the last Big East Tournament Championship.
Louisville, which I still can’t think of as a Big East school, won the title for the 3rd time in the last 5 years, defeating a real Big East school, Syracuse. After this year, about half the conference will have fled for the ACC, others will head to the Big 10. Some will remain as sort of a rump conference, nicknamed the “Catholic 7.” But it’s really the end of the conference.
One of the game announcers defied the conventions of his job and offered actual insight: conferences used to be regional associations of like-minded schools, usually of similar size, but not always. So the SEC, the ACC, the Big East, the Big 10, and the Pac 8/10/12 all had personalities. So did the smaller conferences. Now, with all the shuffling to get TV money, they’re really just division of the NCAA. There’s little regional about them (Maryland, enjoy that trip to Lincoln). Syracuse looks nothing like Clemson, except for orange, and the longstanding rivalries have been diminished by not playing home games every year.
I’m not a conference luddite. Adding Georgia Tech made sense for the ACC, and it always seemed like an ACC school. Southern, reasonable size, good academics.
But I freely admit I’m a college sports reactionary. I like the idea of conferences as being incubators for meaningful rivalries. I like the conference tournaments to mean something. In 1976, for example, Virginia won the ACC, and in the field of 32, the conference got two slots: U.Va. and UNC. The Big got two teams: Indiana and Michigan, and they ended up meeting in the Championship. Now, for better or worse, Duke or UNC loses the ACC final, and we’re told it won’t even cost them a No. 1 seed. The conference tournaments are basically reduced to a second-chance lottery for the teams on the bubble, or even those on the outside looking in. In 1976, UNC got in anyway, but Maryland, the #2 seed, probably got bounced by losing the Virginia.
If a conference chose not to pick its champion by having a tournament, that was their call. For decades, the Big 10 and the Pac 8/10/12 didn’t have conference tournaments. Growing up with the ACC, I thought that was weird, but ok, it was also their business.
Conferences also had distinctive styles of play, distinctive personalities. The Big East was a tough, physical conference of big centers and tall front-courts. For a while, they went to 6 fouls per player, and it probably ended up hurting them in the tournaments. The ACC was about guard play and ball-handling. They started the 3-point line experiment. The hated Four Corners (keep-away, really, but it did still require serious ball-handling skills to pull off), could only have come out the ACC, and eventually led to the college shot clock. The Pac-8/10/12 was UCLA, and then not much else for a long time.
Twenty years ago, when the independents started fleeing for cover – Florida State to the ACC, Penn State to the Big 10, Notre Dame to NBC, it should have been clear that something was afoot. What was afoot was that, with the protection of a conference and its TV contracts, teams wouldn’t feel a need to schedule these teams, and lose to them for, well, nothing. Eventually, the same logic extended to conferences. When the “mid-majors” started getting better, the “power conferences” wouldn’t schedule them any more, since that easy payday was starting to look riskier to national title hopes. All those extra NCAA bids which were supposed to go to the #3, #4, #5 power conference teams suddenly started going to the #2 and #3 teams from the mid-majors.
Rather than accept the more level playing field, the power conference solved their problem by luring away the best of the top mid-major teams and expanding. Football was driving the bus on the major conference re-alignment, like sending Utah and Colorado to the Pac-8/10/12, but don’t think Big East basketball didn’t see the advantages of getting Marquette safely under its wing.
So now, in world that supposedly celebrates diversity, conferences, teams, and tournaments will all look more the same than ever.
Rep. McLachlan Hopes His Constituents Don’t Have Internet
Posted by Joshua Sharf in Colorado Politics, PPC on March 14th, 2013
I’m not sure what other explanation there is for this remarkable statement in today’s Durango Herald. Commenting on his eventual vote for HB-1224, the magazine limit that would essentially ban all magazines, McLachlan had this to say to his constituents:
Fields originally wanted the limit set at 10 bullets, but McLachlan successfully amended it in February to raise the limit to 15. He later said he wanted to see a 30-round limit.
McLachlan voted again Wednesday for the 15-round limit and told the Herald he decided to support the bill after no Republicans stepped forward to help him raise the limit to 30.
He asked gun lobbyists to get Senate Republicans to try to raise the limit, but they were more interested in killing the bill than improving it, he said.
“The reason we’ve ended up where we are today is, in part, their fault because they never tried to put a 30-round limit forward,” McLachlan said.
Not so fast. HB-1224 was assigned to the House Judiciary Committee, on which McLachlan sits. The record shows that he introduced Amendment L006, which raised the limit from 10 to 15 rounds, as he says. But there was a proposed amendment to the amendment, which would have raised it from 15 rounds to 31 rounds. That amendment to L006 failed on a 7-4 strict party-line vote, with McLachlan voting against. Eventually, L006 did pass, raising the limit to 15 rounds.
If McLachlan wanted a 30-round limit, that was his chance, and he turned it down. It was also ample evidence that a 30-round limit had little-to-no support among Democrats. He could only hope to blame Senate Republicans, in the expectation that his constituents would be unaware that he had voted to kill just such an amendment, if he believed that his constituents weren’t listening online to the debate, or couldn’t look up his votes in committee.
McLachlan is facing a potential recall over this vote. He only won election in a fairly Republican district by 900 votes in a strong Democratic year here in Colorado. And it’s far from clear that repeating the defensive, condescending tactics of so many Obamacare-burdened Democrats in 2010 will serve him any better than it did them.
Forty Years of PERA
Posted by Joshua Sharf in Budget, Colorado Politics, PERA, PPC on March 13th, 2013
We’ve been here before with PERA. Sort of. Most people following the issue remember that in 2000, PERA was over 100% funded, and that its funding ratio has fallen steadily since then. What they don’t know is that back in 1974, PERA was woefully under-funded, at about the same 60% funded ratio that it is now. It took advantage of the long bull market to pull itself out of that situation:
Note that as the funded ratio rose, so too did the percentage of the portfolio allocated to common stock (both domestic and foreign) rose, as PERA basically decided to let the bets ride, rather than re-allocate to maintain the lower-risk portfolio. When the bubble burst, they ended up paying the price for having stayed too long at the fair. Now, PERA has returned to a somewhat more conservative allocation strategy, targeting 25% of its money for fixed income, and a target of 58% in stocks. Nevertheless, this is a far cry from the 45% or so in bonds that they held up until 1992 or so, and the nebulous “Alternative Investments,” which includes things like venture capital (and in which I’ve included the Lumber investments), suggests that PERA is still chasing yield there:
So this just puts us back where we were before, right? We climbed out of this hole before, we can do it again.
Not so fast. First, as noted before, PERA’s in a less aggressive portfolio now than it was in 2000. This is a good thing, since it takes out some of the volatility from its portfolio. But it also means that it probably can’t count on a run of good luck to lift it out of unfundedness the way it did last time. Also, as we’ve previously noted, the fall from grace in 2001 and 2002 wasn’t just a matter of poor returns, it was also a matter of increasing liabilities with more generous benefits. That hasn’t gone away.
And not all 60% funded ratios are created equal. Here are PERA’s inflation-adjusted, per-capita unfunded liabilities since 1974 (constant 1983 dollars):
On a per-capita basis, the overhang is about 4x what it was in 1974. So in fact, we’re in much, much worse shape than we were 40 years ago when this roller-coaster ride began.
Public Pensions and Real Returns
Posted by Joshua Sharf in PERA, PPC on March 4th, 2013
In the discussion on public pensions, there’s been a great deal of focus on the projected rate of return. I’ve posted on what I think is PERA’s optimistic 8% here, and on the fact that that’s actually an improvement from the 8.75% that they were projecting as recently as 2002. That said, for pension estimates, their inflation assumptions matter as much as their raw return assumptions. The actuarial consequences of poor inflation estimation are too much to summarize here. But even on the basic question of returns inflation matters: the real return on an investment is the nominal return minus inflation.
Over the last 10 years, public pensions have gotten some credit for modestly reining in aggressive growth assumptions. PERA, for instance, has moved from a 8.75% growth assumption to 8%, and CalPERS has made similar adjustments. Overall, the average growth assumption has dropped slightly from 8.04% to 7.86%. But the average inflation assumption for public pensions nationally has dropped from 4.0% to 3.31%. This means that instead of decreasing the real return assumption has actually gone up from just over 4% to just over 4.5%.
For the record, PERA’s inflation assumption was dropped from 4.5% to 3.75% in 2003, where it has stayed. Both the investment return and inflation numbers are higher than the national average and national median, though.
I don’t really think that the inflation numbers here are unreasonable. And my problem with PERA’s 8% return assumption goes beyond the average itself – 8% has been the historic return on stocks, and doesn’t take into account the additional volatility and risk that come with higher return. But it’s clear that PERA and other plans have been dining out on their flexibility on returns, while the increase in real expected returns goes unremarked-on.
The disconnect also highlights the price we’re going to pay – in accuracy, and eventually in dollars – for using the rate of return as the discount rate. Interest rates are closely tied to expected inflation, and here the funds themselves are admitting that the gap between the rate of return and the proper discount rate has been growing.
Sharyl Attkisson Brings Us Up To Date On Benghazi
Posted by Joshua Sharf in Defense, PPC on March 3rd, 2013
Not everyone has forgotten about Benghazi. Among those who’ve been pursuing the story, none has been more dogged than CBS’s Sharyl Attkisson. A few days ago, she tweeted out the current state of affairs. Here are the collected tweets:
As promised, I will give an update on the Benghazi info CBS asked the Admin. to provide last Oct. I tweeted out the outstanding questions a month ago. Since then, while the Admin. hasn’t provided CBS additional info some of the questions were asked by Congress, and some of them were answered. So let’s go through the answered and as-yet-unanswered. This is to the best of my knowledge. Since answers weren’t provided to me, I’ve tried to find them in hearings, etc.
UNANSWERED: What time was Ambassador’s Stevens’ body recovered, what are the known details surrounding his disappearance and death, including where he/his body was taken/found/transported and by whom?
UNANSWERED: Who made the decision not to convene the Counterterrorism Security Group (CSG) the night of the Benghazi attacks?
UNANSWERED: We understand that convening the CSG a protocol under Presidential directive (“NSPD-46”). Is that true? If not, please explain..
UNANSWERED: …. if so, why was the protocol not followed?
UNANSWERED: Is the Administration revising the applicable Presidential directive? If so, please explain.
ANSWERED AT CONG. HEARINGS: Who is the highest-ranking official who was aware of pre-911 security requests from US personnel in Libya? Secy Clinton said she was unaware of Stevens’ security concerns/requests & that Undersecy Kennedy was highest official below her who knew. However, Chmn of Jnt Chiefs Dempsey & Def Secy Panetta testified they knew of the security requests, but State didn’t ask for their aid.
UNANSWERED: Who is/are the official(s) responsible for removing reference to al-Qaeda from the original CIA notes?
UNANSWERED: Was the President aware of Gen. Petraeus’ potential problems prior to Thurs., Nov. 8, 2012?
UNANSWERED: And What was the earliest that any White House official was aware? Please provide details
UNANSWERED: What is your response to the President stating that on Sept. 12, he called 911 a terrorist attack, in light of his CBS interview on that date in which he answered that it was too early to know whether it was a terrorist attack?
UNANSWERED: Is anyone being held accountable for having no resources close enough to reach this high-threat area within 8+ hours on Sept. 11
ANSWERED: and has the Administration taken steps to have resources available sooner in case of emergency in the future? Chmn of Jt Chiefs Dempsey testified that troops in the region were put on higher alert status after the 9/11/12 attacks he said he wasn’t sure how long the higher alert status could be maintained. He didn’t address the alleged lack of certain aircraft at major US naval base very close to libya
UNANSWERED: A Benghazi victim’s family member stated that Mrs. Clinton told him she would find and arrest whoever made the anti-Islam video. Is this accurate? If so, what was Mrs. Clinton’s understanding at the time of what would be the grounds for arrest? If true, what is the Administration’s view regarding other videos or future material that it may wish were not published, but are legal?
PARTIAL ANSWER: We requested timeline of Pres. Obama’s actions and decision making on Benghazi night. Secy Clinton testified Pres. Obama didn’t speak to her that night or throughout the attacks. After the initial briefing on LIbya and other matters at the very outset, Chmn of Jt Chiefs said Pres. Obama didn’t communicate with him and Def Secy Panetta testified Pres. Obama didn’t speak with him either throughout the attacks. Officials have said Pres. Obama was very much kept informed of what was happening.
UNANSWERED: White House still will not respond to our request for any White House photos taken Benghazi nite.
UNANSWERED: Admin. still hasn’t provided Benghazi surveillance video originally promised for public release around last Thanksgiving
UNANSWERED: Admin. hasn’t provided accounting of Benghazi survivors or the transcripts of their interviews done shortly after the attacks.
At a press conference 11/14/12, President Obama stated that his Admin. has provided all info regarding “what happened in Benghazi.” No agency has provided documents responsive to our Freedom of Info (FOI) requests on Benghazi. We’ve asked the NSA, State Dept, Defense Intelligence Agency, CIA. So far, not one piece of paper generated by these public agencies on Benghazi nite is deemed a document the public is entitled to see.
Let’s be real: if enough people in the public, media and Congress don’t ask, then any Administration has the option to not answer. I’m a big fan of FOI (Freedom of Info) but the Administrations I’ve covered (both Dem & Repub) seem to have made an art form out of ignoring
One more thing. The White House reportedly has turned over a stack of Benghazi-related documents to the Senate Intel Committee and there are reportedly a lot of blacked out pages.
Some of these questions, and the lack of White House response, and quite damning in and of themselves. We are evidently supposed to believe that the President was kept fully informed of events on the ground, even as he didn’t communicate with the Chairman of the Joint Chiefs of Staff, the Secretary of Defense, or the Secretary of State as they unfolded.
It also seems that the Pentagon’s highest levels were aware of requests for more security by a State Department embassy, but the Secretary of State was not.
Attkisson is right about the FOI problem. Many Republicans had hoped that Benghazi would prove to be Obama’s Watergate, or at least his Tet Offensive. But even in the case of Watergate, Woodward and Bernstein could only go so far. The fact is that the case only really got moving once Congressional investigators, with their subpoena power, got involved. And even then, it took the intervention of a federal judge to get the most damaging information released. With Congressional Republicans proving to be inept investigators, and the press having lost interest in the story since, oh, September 12, it’s hard to see where additional pressure will come from.
If you’re on Twitter, though, and not following @SharylAttkisson, you should be.
PERA – More Retirees, Fewer Workers
Posted by Joshua Sharf in PERA, PPC on March 3rd, 2013
This chart is more or less self-explanatory. Over the last 20 years, the number of workers per beneficiary within PERA has dropped from about 3.6 to just over 2.0:
PERA’s CAFR includes the following disclaimer:
By itself, a declining ratio of actives to retirees and beneficiaries does not pose a problem to a Division Trust Fund’s actuarial condition. However, to the extent that a plan is underfunded, a low or declining ratio of actives to retirees and beneficiaries, coupled with increasing life expectancy, can complicate the Division Trust Fund’s ability to move toward full funding, as fewer active, contributing workers, relatively, are available to amortize the unfunded liability.
This is about right, although even a fully-funded system won’t stay fully-funded for very long under these conditions. Indeed, PERA was fully-funded as late as 2001. In the 90s, PERA’s long-term problems were masked by a tech bubble, and when that burst in 2000, the fund started to fall into an under-funded state that it’s never recovered from. Since under an underfunded defined-benefit plan, current expenses have to be paid for out of current contributions, and fewer workers are pulling the cart for each retiree, the deficient horsepower will have to be supplied by the taxpayers.