Sudden Stop

The second shoe of a three legged problem

The second shoe of a three legged problem has dropped.  The PBGC, the ultimate insurer of private pension plans was investing heavily in stocks.  That is, the PBGC was investing in the same investments in which the pension plans with PBGC insurance were investing.  Plans dropped in value, that was the first shoe.  PBGC assets dropped in tandem.

The third shoe: States will complete their pension fund audits, either at December 2008, or as is most common June 30, 2009.  Massachusetts Pension Investment Trust Fund, one of the largest in the US, has a June year end. (2008 statements are here).  Through June, 2008 the investments were down 1.8% but in the period from July 1, 2008 to November 30, 2008 the value dropping another 20% from $50 billion at June 30, to $37 billion at November 30. 

As the actuaries and sundry green eyeshades finish the audit and actuarial calculations, to no one's surprise, except politicians, underfunding will likely be terribly large, exacerbated by not only the asset value drop but the consideration that a lower future earnings rate projection other than the current 8.25% ought be used. (Anyone know where to get a long term 8.25% on investments?)  

Politicians will react with dismay, blaming the other party, citing years of neglect.  The Director's salary will be dragged into the discussion along with some high level money managers; elected officials will call for tax increases or budget cuts, all acting surprised at the extent of the problem. 

It's a problem that is here, right now, which ought to be addressed as part of the administration's purported effort at pension reform, otherwise the Governor's current pension reform effort (which ignores i) the underfunding ii) the other 105 disparate pension funds littered across the state which are also possibly put in peril by the equity drop of 2008-09)  is window dressing while the rest of the pension house is on fire.

Stop it with the Loopholes Stopping

"Patrick targets pension loopholes", which naturally follows the corporate loopholes  closing, the telephone pole tax loopholes closing. A regular Don Quixote.  Great press: Governor tilts at evil loophole doers, much the same as Congress is after those evil AIG bonuses.

The trouble is --and he knows this-- he's after the small stuff that catches the emotion, while letting the big systemic stuff slide.  The trouble with the Massachusetts pension system is simple; the fix is complicated.  Here's what makes the problem hard to solve:

i) The pension is a defined benefit system, meaning there are a set of rules to determine the retiree's pension.  The rules don't have much to do with how much the employee contributed, but rather are a system for determining a "fair" payout.   And because "fair" is in the eye of the beholder, the rules are complicated and the rule that one person may think is unfair is a "loophole" to the person who did get to take advantage of that particular rule.

ii) The largest pension funds in the state are terribly underfunded.  Not merely underfunded, but horribly, horrendously, obnoxiously underfunded.  Officials will tell you that we're on target to have the fund fully funded in a decade or so, but whoever says that is basing his statement on 2008 numbers.  When  actuaries and accountants finally calculate the 12/08 funding or the 6/09 funding the underfunding in these plans will be epic.

iii) Unless the pension rules change for the entire population of pensioners, the underfunding will have to be made up, of course, by the taxpayer.  The same taxpayer who lost 1/2 of his 401(k) will have to make sure that the state employee doesn't suffer a dime of pension loss, despite the fact that the fund supporting the pensioner dropped at least as much as the taxpayer's 401(k).

iv) The biggest pensions belong to the largest number of pensioners who also make up the States' largest public unions: Teachers and state workers.  Is there a politician who is tough enough to cut into that 3rd rail known as Union collective bargaining and attempt to reverse that which was bargained for?

v) There are hundreds of pension plans and funds throughout the state. Governor Patrick talked large about consolidating the various pensions, but at the last minute caved to the pressures of these little pension fiefdoms and left them alone.

The problem is therefore two-fold, a little problem and the big one.  The little problem is that some of the defined benefit rules produce agregious outcomes-big emotion, little bucks.  These are the outcomes that make the news, the pensioner that makes 100K, etc... Fixing that problem is a matter of eliminating some of the excessive perk which ought never to have been allowed to begin with: stop counting pensionable service that includes Library trustees, stop counting part time service;  stop counting pensionable wages that includes housing or parking allowances.  Easy stuff.

The big problem is the systemic problem of underfunding.  We're paying more than we can afford.  That's the problem best addressed by a one-termer (Mr. Patrick?).  Frankly and idealistically, shouldn't all politicians govern as if they were not running for re-election? 

Confront the unions for concessions, shift new hires to a defined contribution plan, increase the term for vesting, move from 'high 3' or 'high 5' to a pension payout that is based on 'average of last 10'. The problem is big, the solution must be broad.

Only a cup of coffee

It's only a large cup of coffee per week.  That's the Governor's sell job on the gas tax.  Don't drink coffee you say?

Then don't buy the Boston Globe on, say, Friday.  How would the Globe react to that?

School lunches are about $2.75.  Tell your kid to not eat lunch on every other Monday.

Tip your wattress 10%; she doesn't need 15%.  She'll get by.

Stiff your paperboy at Christmas. No tip for you sucka.

Lipitor is about 50 cents a pill.  Lay off that for a couple of days a week and hopefully the cholesterol will understand. 

Or insulin.

A hungry animal is a happy animal.  Sorry Fluffy, Monday is Gas tax day.  No food for you.

And how about people avoiding that one coffee per week.  Suck it Dunkin Donuts.  The State needs the cash more than you.  Just lay off an employee or two.