State And Local Pensions

Happened to be reading the National Association of Bond Lawyers website (you know, as you do) but I was really getting their take on issues out of David Camp’s (R-MI, Chairman of the Ways and Means) latest tax reform proposal.  (Those of you who are upper income taxpayers with any state and local bonds had better check it out. There’s a proposed 10% surtax. They are also going after “corporate inversions” i.e. corporations funneling profits to overseas subsidiaries!) However, I digress, further down the page I saw a report on comments by SEC Commissioner Gallagher expressing concern over unrealistic accounting assumptions in state and local pension plans.

I think we all know that public pensions have problems because of the preponderance of defined benefit (DB) plans, zero interest rates and “aggressive” actuarial assumptions.

In 2007, the total compensation costs for state and local employees were 51.4% higher than employees in private corporations (“The Future of Public Employee Retirement Systems” edited by Mitchell and Anderson, Oxford University Press, July 2009). Now some of this is down to different concentrations of workers and unionization but:

“State and local governments retirement and health insurance costs are two to three times those of private employers.” (Ken McDonnell, ibid)

And, in the same publication, Gold and Latter confirmed the average actuarial discount rate for the two largest plans in each of the 50 states was 8%.

So how are the state and local plans doing and where are they putting the money?

US Census Bureau has that information. I read part of their Public Pension Data for July 2011 to June 2012, that covers all the states.  As they say on their website (and I kid you not) they issue this report quinquennially (every five years in years ending in ‘2’ and ‘7’).  You can check it out here:

http://www.census.gov/govs/retire/

First, the total “pot” was, at that time, $3.051 trillion (can we say “bail ins”) with contribution rates of 30/70: 30% employees and 70% government (personally, I’d like that to say “taxpayer”, but then that’s just me).

Where was the money invested?

Cash/equivalents - 3.6%

Domestic stocks – 36.5%

Bonds - 23.2%

Foreign investments – 17.5%

Other – 19.2%

I did a “quick and dirty” calculation on the investment return and it was about 3.3%.

Quarterly data for of the top 100 pension funds are issued in their Quarterly Survey of Public Pensions. The latest issue (4thQ 2013) is here:

http://www.census.gov/govs/qpr/

It covers all quarters back to 2008. Again, I did a “quick and dirty” calculation in Excel of the year on year earnings and the return on the year start number. The earnings returns look good, in line with actuarial assumptions. Then I calculated the percentage increase year start on year start - lots of retirees?