Pension Meltdown: Blame it on Wall Street?

Nicole Bullock of the FT reports, States warned of $2,500bn pensions shortfall:

US public pensions face a shortfall of $2,500bn that will force state and local governments to sell assets and make deep cuts to services, according to the former chairman of New Jersey’s pension fund.

The severe US economic recession has cast a spotlight on years of fiscal mismanagement, including chronic underfunding of retirement promises.

“States face cost pressure, most prominently from retirement benefits and Medicaid [the health programme for the poor],” Orin Kramer told the Financial Times. “One consequence is that asset sales and privatisation will pick up. The very unfortunate consequence is that various safety nets for the most vulnerable citizens will be cut back.”

Mr Kramer, an influential figure in the Democratic party and still a member of the investment council that oversees the New Jersey pension fund, has been an outspoken critic of public pension accounting, which allows for the averaging of investment gains and losses over a number of years through a process called “smoothing”.

Using data from the states, the Pew Center on the States, a research group, has estimated a funding gap for pension, healthcare and other non-pension benefits, such as life assurance, of at least $1,000bn as of the end of fiscal 2008.

Chris Christie, the Republican governor of New Jersey, said in his state of the state speech last week that, without reform, the unfunded liability of the state’s pension system would rise from $54bn now to $183bn within 30 years.

Mr Kramer’s estimates are based on the assets and liabilities of the top 25 public pension funds at the end of 2010. The gap has risen from an estimate of more than $2,000bn at the end of 2009. He also used a market rate analysis based on the accounting used by corporate pension funds rather than the 8 per cent rate of return that most public funds use in calculations.

Pension liabilities are not included in state and local government debt figures.

Concerns about the financial health of local governments have sparked warnings of a rise in defaults for cities and towns and a sell-off in the $3,000bn municipal bond market where they raise money. Last week, the interest rate on 30-year top rated municipal debt rose above 5 per cent for the first time in about two years. Amid the volatility, New Jersey had to cut the size of a planned bond sale.

Although Mr Kramer said some local governments would experience “severe strain”, he did not foresee mass defaults.

“I don’t assume that you will have that level of defaults just because there are various remedies, including asset sales, that you can engage before you have to default,” he said. “States have an interest in their major municipalities not defaulting.”

The state of Pennsylvania, for example, last year advanced money to Harrisburg, its capital, so that the cash-strapped city could avoid a default on its general obligation bonds.

In February, Illinois, which is facing an unfunded pension obligation of at least $80bn, plans to sell $3.7bn of bonds to pay for its annual contribution.

Mr. Kramer is right to sound the alarm on public pensions, but "smoothing" is only part of the problem. Besides, marking everything to market, including private markets, would wreak havoc by causing unnecessary volatility.

Some think a larger part of the blame lies squarely with Wall Street. In an op-ed article for USA Today, Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees, writes, Opposing view on public pensions: Blame Wall Street:

With revenues plummeting during the economic crisis, states and cities across the country face real budget challenges. It is simply wrong, however, to suggest that modest retirement benefits paid to public service retirees are a cause, or even a part, of the budget problems facing governments.

[OUR VIEW: Lavish public worker benefits add to state financial woes]

Pension payments account for less than 4% of the average state's spending, while the annual pension for AFSCME retirees averages $19,000. Critics of the pension system conveniently ignore the fact that our members contribute to their pensions with every paycheck, and that more than 85% of their pension benefit is a result of those contributions and investment income.

Current challenges are not a result of excessive benefits. For every story about someone who gamed the system to obtain an unfair payout, there are tens of thousands of workers whose annual pensions are $10,000 or less.

Let's be clear: Underfunded pension systems resulted from unprecedented losses of asset values caused by reckless behavior on Wall Street and the refusal of some politicians to make their required payments. As recently as 2007, pension funds had, collectively, 96% of the assets required to meet future expenditures. But Wall Street drove America's economy and retirement security into a ditch. And now both pension and 401(k) accounts alike must be rebuilt.

Pension funds can be replenished over time at a modest cost. It is projected that states must increase pension spending from about 4% of their budgets to just 5% in the future. Surely, this is manageable.

The "401(k) solution" promises cost-savings that just don't materialize. A recent study in Nevada concluded that conversion to a 401(k)-style system would cost $1.2 billion more over the next two fiscal years. 401(k) plans are not less expensive, just less efficient and less secure than traditional pensions.

Most public pension systems have been in existence for 60 years or more. They have persevered during market downturns and enjoyed surpluses when the good times rolled. They predated public employee bargaining rights, and few plans are subject to the bargaining process today. They have traditionally enjoyed broad support as a cost-effective compensation and retirement security policy.

That support deserves to continue.

Mr. McEntee is right, Wall Street's reckless behavior and politicians foregoing pension payments significantly contributed to the huge pension deficits, but that too is only part of the problem. The other problem is that public pensions were using rosy investment rates of returns to discount their liabilities, which we now know are much higher than what is publicly stated.

There is plenty of blame to go around. It's not just Wall Street. Poor governance, rosy investment assumptions, and bad political decisions all played a role too. But Wall Street's reckless behavior remains one of the biggest factors behind the pension meltdown. This behavior hasn't changed much post-crisis, which means private and public pensions remain very vulnerable in this wolf market.

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GM Loosening the Pension Noose?

Christina Rogers of The Detroit News reports, GM pays down its pension debt with $2B stock contribution:

General Motors confirmed today that it has made a $2 billion contribution to its underfunded U.S. pension plans, giving it 60.6 million shares in common stock.

The payment, which GM previously announced it would make, adds to the $4 billion cash the Detroit automaker contributed to its pension plans last fall. The plans are underfunded $29.4 billion globally, a liability Chief Financial Officer Chris Liddell says he wants to wipe off the books over the next few years.

GM's U.S. pension plans, which cover about 688,000 U.S. hourly and salaried retirees, are underfunded by $17.1 billion.

"We continue to take the steps necessary to lower our risk profile, so our focus can be on designing, building and selling the world's best vehicles," Liddell said, in a statement this morning.

Liddell has said the company has made paying down debt a priority. GM wants a stronger balance sheet to weather sudden, sharp downturns in the marketplace without having to borrow large sums of money - a trend that sank the old GM into financial peril.

Once the $100 billion pension plans are fully funded, he said the company will move assets into less risky investments, such as bonds.

GM also said this week it will pump $7 billion into product engineering and development this year - up from $5 billion during bankruptcy - and keep it a constant level. Liddell said the company has wasted billions of dollars starting projects in good times, only to abandon them in tougher years.

GM reported profits of $4.2 billion for the first three quarters of 2010.

The automaker returned to the public markets Nov. 18 and its initial stock sale raked in $23.1 billion making it the world's largest IPO.

In another Bloomberg article posted on Pensions & Investments, Mr. Liddell said it is “reasonable to think we’re in an interest rate-increasing environment over the next three to five years,” which would help GM to fund its pension. He said GM “is not relying on that.” The “first call” on GM’s cash is engineering and marketing, he said, while repaying debt and making pension plan contributions are secondary.

Finally, Joann Mueller of Forbes reports, GM Loosening The Noose From Its Massive Pension Plan:

As General Motors has shrunk, its pool of U.S. retirees has swelled. Today there are almost 700,000 GM retirees and just 70,000 active workers, a 10-1 ratio. The company’s $100 billion pension fund is twice the market capitalization of the automaker itself, and keeping up with funding obligations acts like a ball and chain on GM’s core car-making business. Small swings in the value of the pension plan can have massive effects on the value of the company. “That’s no way to run a company,” said GM’s chief financial officer Christopher Liddell.

I met with Liddell during the Detroit auto show this week, and he talked extensively about GM’s more conservative financial philosophy since emerging from bankruptcy in July 2009. GM’s objective is to carry no debt, fully fund its pension plan, and pay for its day-to-day operations using cash generated from the sale of cars and trucks. It sounds so simple, but that’s not the way GM has been run in many years.

GM took a big step in that direction Friday, announcing it had contributed $2 billion in newly minted GM stock to its U.S. pension plan, on top of $4 billion in cash it had contributed a couple of months back to try to bring that pension fund closer to fully funded status. As of the end of 2009, the portfolio was $17.1 billion short of what it should have, under government rules, to cover its current and future pension obligations.

The gap likely closed some in 2010, thanks to strong market returns, but the gains could be offset by further swelling in the retiree ranks. GM plans to give an annual update on the health of its pension plan next month when it announces its fourth-quarter financial results.

Three factors determine the health of any pension fund: asset returns, company contributions and the discount rate, which is used to calculate the present value of pension liabilities and is tied to interest rates. In the past, market swings and interest rates would cause GM’s pension fund to fluctuate wildly between being overfunded and underfunded. In the 1990s, GM borrowed heavily to pay off its pension plan, saddling itself with hefty interest payments. As long as the stock market remained high, the value of the assets in GM’s portfolio exceeded its liabilities. But even a change in the discount rate could cause big swings in the plan’s funding status.

Between 2005 and 2007, GM’s pension plan was in great shape, and the company didn’t need to make any contributions. But then the equity and credit markets collapsed, coupled with declines in the discount rate (which made the present value of GM’s pension liabilities rise significantly) and more early retirements at GM, increasing the number of beneficiaries. Suddenly, the pension plan was $17.1 billion in the hole.

“We’ve got to get this company to where the economics, everything, is driven around designing, selling and producing cars,” Liddell said. “Things like the pension plan don’t enter into the equation.”

Liddell said he believes GM can fully fund the pension plan within three years at which point, he plans to “de-risk” the portfolio by investing less in equities and real estate, and more in fixed income assets, which generally provide a lower rate of return. “Perfection to me would be where the assets exactly equal the liabilities in both their maturity and their risk profile,” he said.

He’s not expecting perfection, but he is expecting GM to operate debt-free in the future. It seems like forever that GM has been up to its neck in debt, including its pension and health care obligations to retirees. But it’s only in the past 15 years or so that GM has been highly leveraged. Before that, it was a AAA-rated company.

Now it’s working to get back there. It off-loaded retiree health care to a union trust fund in 2009, is working on the pension problem, and restructured the rest of its debt during its government-controlled bankruptcy. In 2010, GM lowered its debt from $14.2 billion to $5 billion, and reduced its $9 billion preferred share obligation to $7 billion. It obtained a $5 billion revolving credit loan, but Liddell said he doesn’t think GM will have to tap into it.

Perfection? No. But progress, yes.

I agree, it's not perfect but it's progress. GM is doing the right thing by topping up its pension plan now that times are good. If they can reach fully funded status in three years, so much the better. Of course that entirely depends on where markets are heading. In the meantime, GM can focus on its core business and hope that car sales pick up steadily in the next few years.

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Pension Reforms Not Filling Retirement Gap?

Stefania Moretti of QMI Agency reports in the Toronto Sun, Pension reforms won’t fill retirement funding gap:

Pension reform options currently on the table will do little to address the retirement problems facing the vast majority of middle-class Canadians without an employee-sponsored pension plan, experts from Mercer say.

Neither the introduction of the new Pooled Retirement Pension Plan (PRPP), nor enhancements to the Canada Pension Plan (CPP), will be enough to fill the gap in retirement income, Paul Forestell, a senior partner at Mercer consulting, told a crowd of investment managers in Toronto on Thursday.

In the private sector, 75% of companies offer no pension plan at all and only 38% of Canadians contributed to a RRSP in 2009, according to Statistics Canada.

In December, Finance Minister Jim Flaherty announced he was moving ahead with the PRPPs. The plans will offer defined contributions administered by a third party, probably a financial institution. The savings vehicle is supposed to be relatively low-cost because of its sheer size and simplicity.

With low fees, prudent management and a flexible nature, PRPPs are hard not to support, Forestell said.

“It sounds great and, if implemented, will be a positive step for retirement savings in Canada, but probably just a very small step.”

The notion that small businesses will join a PRPP because it’s simpler than existing employee-sponsored options is a bit of pipe dream, he suggested.

“I’m not certain that this will be enough incentive for employers who do not currently provide any retirement savings options to join a pooled RPP.”

That’s because many of the defining characteristics of the PRPP can also be attributed to the typical RRSP or the tax-free savings account, and many small business owners simply don’t have the time or money to offer such a plan.

Those who already offer group RRSP or a defined contribution pension plan may opt to switch to a PRPP and that could dilute retirement income of plan members.

Under the new regulation, provinces can choose to mandate PRPP automatic enrolment for small businesses and the self-employed, but that’s unlikely to happen, Forestell said, since setting base-line contribution level would be nothing short of a nightmare.

If it’s too low, the plan won’t do much to address the funding gap. It it’s too high, employees are more likely to withdraw from the program.

“It’s starting to sound a lot like the story of Goldilocks and the Three Bears. You need to set a contribution plan ‘just right’ to make a mandatory plan work.”

The “just-right” contribution level, of course, depends on age, income, retirement needs and other factors.

Increases to the CPP have also been discussed.

Combined CPP, government income supplement and old-age security payments do a pretty good job of replacing the pre-retirement wages of low-income earners.

It’s the middle-income earner that’s the problem.

If the maximum pensionable earnings were were doubled from to $48,300 to $96,000 and employers and workers made larger contributions based on higher earnings levels, coverage issues for middle-income Canadians would be at least partially addressed.

Still, the changes would take 25 years to have much of an impact and that’s too little, too late considering the country’s massive baby boom generation is now entering its golden years.

“Probably even more problematic is that changing the CPP is not a simple task,” Forestell said.

It requires approval from at least two-thirds of the provinces, representing two-thirds of the population. With Alberta and Quebec vehemently opposed to changes, that seem unlikely.

Pension reform will remain at the top of the agenda in 2011, 2012 and beyond, Forestell said.

On Wednesday, I had a discussion on PRPPs with Jean-Pierre Laporte, a lawyer at Bennett Jones who is an expert on pension issues. Jean-Pierre sent me the Liberal Party's white paper on pension reforms. He isn't for mandatory contributions because he thinks that people shouldn't be forced to contribute more to their pensions, especially if they can put the money to better use such as paying down a mortgage. He alluded to the success of tax-free savings accounts (TFSAs) and told me that voluntary plans can work. Moreover, a voluntary enhanced or supplemental CPP is better than any TFSA or RRSP, so people might opt out of these tax-free savings vehicles to get into a better managed fund that offers them true diversification across public and private markets.

We both agreed was that PRPPs are no substitute for large defined-benefit plans and they're just a giveaway to banks and insurance companies. But here is the kicker: if banks and insurance companies really wanted to make more money -- a lot more money -- they would have asked the Conservative government to opt for enhanced CPP and figure out a way to compete for a piece of the pension pie. In the end, they got what they wanted, but in my opinion it wasn't thought out properly at all (remarkably shortsighted).

And these pension reforms are not filling the retirement gap. I consider pensions an apolitical issue. I can sit down with representatives from all major parties and show them exactly what needs to be done to bolster our retirement system without hurting the economy. Politicians need to recognize that Canada has some of the best public pension plans in the world and build on their success. Only then will they address coverage in a serious and meaningful way.

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New Jersey Gains While Illinois Sells Bonds

Terrence Dopp of Bloomberg reports, New Jersey Pension Fund Gains as Christie Seeks Fixes:

New Jersey’s pension fund has gained 8.7 percent so far this fiscal year, as Governor Chris Christie calls on lawmakers to overhaul the system to whittle down a $53.9 billion deficit.

The fund for retired teachers and government workers had $70.03 billion in assets as of November, as performance since the July 1 start of the fiscal year beat a gain of 8.53 percent for its benchmark, according to a report presented to the State Investment Council today in Trenton. Robert Grady, chairman of the panel, said the fund returned 13.4 percent in the prior fiscal year, which ended June 30.

Christie, 48, a Republican, has proposed rolling back a 9 percent pension-benefits increase enacted in 2001, raising the retirement age and suspending cost-of-living adjustments to narrow the funding gap. The governor said he intends to restart payments into the system this year with a partial contribution of $512 million if lawmakers act on his plan.

“Unless there are unprecedented returns over many years, there will certainly not be a significant dent made in that unfunded liability,” said Andy Pratt, a spokesman for treasurer Andrew Sidamon-Eristoff. “Investment skills alone aren’t going to dig us out of this hole.”

‘Sustainable’ Pensions

New Jersey’s fund had assets to cover 62 percent of its obligations as of June 30, down from 66 percent a year earlier, according to Treasury Department data. The value of the fund was $71 billion as of Oct. 31.

The state’s pension deficit increased 18 percent to $53.9 billion as of June 30 as the state failed to make contributions for most of the past decade. The state also faces an unfunded liability of $66.8 billion for retiree health-care costs, the treasury department said last month in a statement.

Christie has argued with public employee unions and Democrats who control the Legislature over his pension proposals. Senate President Stephen Sweeney and Assembly Speaker Sheila Oliver have released a competing set of measures. Sweeney said his plan would create new labor-management oversight boards modeled after the private sector and force employees to pay more to preserve the 9 percent increase.

“If we cannot make the promises of our pension system more realistic, there will be no pensions for those who have earned them,” Christie said yesterday in his State of the State speech.

Underfunded Pensions

Twenty U.S. states including California and Illinois skipped or underfunded their pensions from 2007 to 2009, Chicago-based Loop Capital Markets said in an October report. Reduced funding and investment losses left 91 of 145 systems studied by Loop with less than the recommended 80 percent a partial payment of $1 billion.

The state Treasury’s Investment Division manages money for New Jersey’s seven pension plans, which provide benefits to 728,000 working and retired teachers, police officers and government employees.

The division this month invested another $40 million in Centerbridge Credit Partners, according to a memo to the council from investment director Timothy Walsh. Its initial $100 million investment in the hedge fund in November 2007 has returned 47 percent, according to the memo.

Readers who would like to know more can visit the New Jersey Division of Investment website. I also recommend reading the investment plan for fiscal years 2010-2011. The returns were all about beta, which is why the fund's performance basically matched its benchmark (private assets might help them boost returns in year-end).

But the reality is that investment performance alone cannot get New Jersey and other states out of their unfunded liability hole. Timothy Inklebarger of Pensions & Investments reports, Illinois governor expected to OK $4.1 billion pension bond sale:

Illinois Gov. Pat Quinn was expected to sign a bill approved by the Illinois Senate early Wednesday to sell up to $4.1 billion in pension obligation bonds to help the state pay for required contributions to its statewide pension plans.

The legislation passed by a 42-16 vote. The bill had been approved by the state House on May 25.

John Patterson, a spokesman for state Sen. John Cullerton, who sponsored the Senate bill, said in a telephone interview that actuaries for the pension plans — the $33.2 billion Illinois Teachers’ Retirement System, $12.9 billion Illinois State Universities Retirement System and $10.2 billion Illinois State Board of Investment — will have to recertify the amounts needed to cover their 2010 contribution before a final number is determined.

Early estimates put the contributions at $2.358 billion for the teachers’ plan, $960 million to ISBI and $777 million to ISURS.

“The Senate president acknowledges that borrowing to make the pension contributions is not an ideal move. But it was the best of the difficult choices,” Mr. Patterson said in an e-mailed response to questions. “That, combined with the revenue moves that were approved, will put the state back on track to restoring sound financial footing for our pension systems, our budget and all those who do business with Illinois.”

Kelly Kraft, Mr. Quinn’s budget spokeswoman, said: “The governor proposed pension borrowing (as) the least costly option for taxpayers to make their required pension payments. We are pleased with the action of the legislators on this bill. The governor is committed to paying the pensions. We continue to look at the pension systems to see what can be done to make them work better.”

A lot can be done to make Illinois' pension systems work better. Most of the problems in Illinois stem from poor governance. Risks were taken with pension monies that should have never been approved if there was proper oversight and people were held accountable for their decisions. The financial crisis exposed serious governance flaws. It's not just about poor markets. Some funds were able to adjust more quickly than others and some were better prepared to manage downside risk. That's the key -- managing downside risk.

Unfortunately, the 2008 financial crisis ravaged most global pension plans. The effects were more pronounced on mature pension plans that were already in a precarious situation. And now Illinois is responding with pension obligation bonds. It might be the "least costly option for taxpayers", but it's not enough. Sooner or later, New Jersey, Illinois and other states suffering from serious unfunded pension liabilities will need to take more drastic measures to shore up their public pension plans. It's foolish and irresponsible to think that markets and investment decisions will generate the required rate of return to get them out of this mess.

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UK's DB Plans Back in Black?

The UKPA reports, Defined benefit pensions 'in black':

December's stock market rally helped the UK's defined benefit pension schemes end the year back in the black, figures have shown.

The country's 6,560 defined benefit schemes, including final salary pensions, collectively had a £21.7 billion surplus at the end of December, according to pensions safety net the Pension Protection Fund.

The funding position was a considerable improvement on the £1 billion deficit at the end of November, while it was also up on the £6.6 billion surplus in December 2009.

The change was driven by a strong performance from global stock markets during the month, with the FTSE All-Share Index rising by 7%, contributing to a 3.4% rise in the value of pension schemes' assets.

This gain was enough to offset a 1% increase in the liabilities pension schemes face due to a fall in index-linked gilts during the month.

But despite the overall improvement, 60% of defined benefit pension schemes still have a funding shortfall, with a collective deficit of £61 billion.

Defined-benefit pensions have become increasingly expensive to offer in recent years in the face of investment volatility and increased life expectancy.

The majority of companies have closed the schemes to new members, with many shutting them to existing ones as well.

They are being replaced with less generous defined contribution schemes, under which the individual shoulders all of the risk of investment volatility and increased life expectancy.

Meanwhile, Investments & Pensions Europe reports, UK roundup: Russell Investments, Pension Protection Fund index:

Russell Investments has warned pension funds that lack of good governance on their part can lead to a loss of return.

The asset manager said the ever-growing problem of underfunding, as well the increasing number of sources of risk, posed problems for schemes.

Sorca Kelly-Scholte, managing director of consulting and advisory services, said: "If governance structures are to match the investment ambitions of a pension fund, funds first need to be able to review their existing decision-making structure from an informed standpoint.

"Poor governance can cost pension funds up to 3% per annum. Our research has shown a clear 'confidence bias' amongst pension funds about their current decision-making processes."

Kelly-Scholte said 86% of respondents felt their current decision-making structure was effective, "despite evidence of non-conformity with agreed principles of best practice".

Meanwhile, schemes in the Pension Protection Fund (PPF) index closed the year with a surplus of £21.7bn, an improvement from its £1bn deficit in November.

While aggregate liabilities rose by £9bn between November and December, overall assets increased by more than £30bn.

Funding ratios across all 6,500 schemes also rose to 102.3%, despite the majority of schemes still being in deficit and only 40% being fully funded.

However, compared with the previous month, almost 250 fewer schemes are in deficit.

Poor governance can cost pension funds up to 3% per annum? That sounds right but poor governance can really clobber pension funds when the beta tide starts receding. Importantly, it's in down markets that you really get to see the ravaging effects of poor governance on a pension fund's performance. If there is no oversight and accountability, all the risk management in the world won't protect pension funds from suffering huge losses. Good governance is the cornerstone of excellent pension fund management.

As far as UK and global pension plans, all seems stable for the time being, but that can shift abruptly. Bloomberg reports that Luigi Buttiglione, head of global strategy at Brevan Howard, Europe’s biggest hedge-fund firm, said the greatest risk to global economic growth would be the failure of European Union leaders to tackle the sovereign-debt crisis:

The cost of insuring European sovereign debt has climbed to a record on concern backstopping the region’s banks will overwhelm government finances.

“The only hope, if there is real risk of getting out of hand, is to be ahead of the curve and try to surprise” the markets, Buttiglione told a conference at the headquarters of asset management firm Notz Stucki & Cie. “The alternative could be a disorderly one in which the market forces you to do something and the consequences could be unpredictable.”

The European Commission said last month that Europe’s financial aid funds for distressed governments will sell bonds to raise as much as 34.1 billion euros for Ireland in 2011 and 14.9 billion euros in 2012.

As I stated before, I strongly doubt European leaders and the ECB will sit idly by and watch the euro zone sink. However, the environment in Europe is ripe for policy blunders. If they don't tackle the sovereign debt crisis, markets will react and pension funds around the world will slip back into the red.

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Florida Pension Fund Broke?

Mary Ellen Klas of the Miami Herald reports, Florida pension fund is not broke, AFL-CIO:

The war of words over reforming state and local pension funds heated up Monday as the head of one of the state's largest unions said that the system is not broken and doesn't need fixing.

``Information that continues to circulate is not based on verifiable fact,'' said Rich Templin, political director of the AFL-CIO, which represents 600 local unions and 500,000 workers. He said, evidence shows, Florida'as state and local retirement system ``is actually functioning quite well.''

But Sen. Jeremy Ring, D-Margate, the Senate committee chairman who is preparing legislation to impose new limits on cities and counties pension plans, said he disagrees with Templin that no problem exists.

``They can either come to the table and be part of the solution and offer suggestions or they can simply be obstructionist and say the system is fine and doesn't need reform and they won't be welcome at the table,'' Ring told the Miami Herald/St. Petersburg Times.

Gov. Rick Scott has joined House and Senate leaders in calling for sweeping reform of state and local public pension systems in the face of increasing costs. Ring will continue hearing from stakeholders at a meeting of the Senate Governmental Oversight and Accountability Committee on Wednesday.

While the Florida Retirement System continues to face a drag from the stock market losses of 2008, Ring said he is especially alarmed by the poor health of many municipal pension funds.

``We've got cities paying close to 70 percent of their overall budget on pensions. It's not sustainable,'' he said.

Chad Little, a Merritt Island actuary that works with public pension systems, said at a news conference called by Templin that the average Florida city and county spends only 2.37 percent of its revenue from tax dollars on paying retirees, lower than the national average of 2,89 percent.

``The health of the pension fund has more to do with the willingness and the ability of the plans' sponsors to make the contributions than it does whatever the current level of the funding percentage might by,'' Little said.

Templin also tried to dispel the notion that public sector pensioners get a better deal than those in the private sector, receiving on average $16,000 to $23,000 a year. ``Would anybody think that's a lavish amount to spend on your retirement and look after your grandkids?''

The James Madison Institute also released a report Monday that concluded that while the ``Florida appears to be in better shape that the typical state,'' many local governments have pension accounts that are severely underfunded.

Ring said he urges them help find consensus. Among his ideas: develop a model that bases an employee's contributions based on the performance of the market. If the pension account is fully-funded, then participants pay less but if it is not then their contribution would rise.

In his article, Bill Kaczor of Bloomberg reports, AFL-CIO disputes 'myths' about Fla. pension funds:

The AFL-CIO and two outside experts Monday disputed what they say are "myths" that Florida's public employee retirement plans are underfunded and provide lavish benefits.

Also, during a news conference they disagreed with claims that public pension costs are too high and eating up state and local budgets and that they hurt local economies.

The pension plans have drawn those kinds of criticisms from Gov. Rick Scott, lawmakers and a conservative think tank.

Florida AFL-CIO legislative and political director Rich Templin said the union is troubled by such comments although details of proposed legislation are hazy and nothing has yet been filed.

"We can't find any verifiable information to indicate that those claims are true, that those claims are anything other than political rhetoric and ideological posturing," Templin said.

He said pension benefits averaging $16,000 to $23,000 a year cannot be considered extravagant.

Scott has called the $122 billion Florida Retirement System "a ticking fiscal time bomb" because he doesn't think it can sustain its current high rate of return on investment. He's also worried about its unfunded liability.

As of last June 30, the closing date for the plan's last annual report, it had $109 billion in assets and an unfunded liability of about $15 billion, or 12 percent.

That percentage is one of the lowest of any public pension funds in the nation.

"You are one of the shining stars of pensions systems throughout the United States," said Ray Edmonsdon, CEO of the Florida Public Pension Trustees Association, a nonprofit educational organization for local plans.

The state plan, which isn't a member of Edmonsdon's organization, covers state and some local employees including teachers. Florida also has 488 local government pension funds.

Unfunded liability is the difference between a plan's assets and liabilities assuming it had to pay out benefits all at once.

"To say that a pension fund that has an unfunded liability is underfunded is not true," said Chad Little, a partner in Freiman and Little Actuaries of Merritt Island, which specialized in public pension plans. "Unfunded and underfunded are not the same thing."

In response, the James Madison Institute, a Tallahassee think tank, issued a news release acknowledging underfunded public pensions have not yet reached a crisis in most Florida municipalities but saying that possibility should be addressed now to prevent future problems.

"Underfunded public pension liabilities are economic sinkholes waiting to collapse," said the institute's president, J. Robert McClure III.

Florida is one of very few states that don't require state employees to pay into its pension fund. Scott has proposed compelling them to contribute although they've gone five years without an across-the-board pay raise.

Little acknowledged that would save taxpayers money but said it also would reduce the plan's financial health. That's because employee contributions must be returned if a worker leaves the system before being vested or dies early. The state's contributions stay in the fund under all circumstances.

Scott also wants new hires to be placed in a defined contribution plan similar to a 401K. That would allow employees to take their individual plans with them if they move to a new job not covered by the state system. They'd also be responsible for managing their own investments and would not be guaranteed lifetime payments that they get under the present defined benefits plan.

Edmonsdon, a retired Fort Lauderdale police officer, said switching to defined contributions could cost taxpayers more because retirees who exhaust their pension benefits would qualify for welfare at taxpayer expense.

The investment track record for such plans also has been poor compared to defined benefit systems, which are more diversified and run by professional money managers, he said.

Edmonsdon is right, the switch into defined-contributions could cost taxpayers more if retirees exhaust their pension benefits. And an unfunded liability of $15 billion or 12% is not bad at all, especially when compared to other states that are in far worse shape. But Florida should introduce measures to have state employees contribute to their pension fund and the contribution rate shouldn't be based on rosy investment assumptions. Finally, all these state pension plans should improve on their governance. Without proper governance, the rest is meaningless.

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Public Pension Funds Seek Foreclosure Reviews

Ilaina Jonas of Reuters reports, Public pension funds seek foreclosure reviews:

A coalition of seven major public pension systems, led by New York City Comptroller John Liu, has asked the boards of four of the largest U.S. banks to examine their mortgage and foreclosure practices.

In a letter dated January 6, the pension fund coalition urged the Audit Committees of Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co, and Wells Fargo L& Co to launch independent examinations of their loan modification, foreclosure, and securitization policies and procedures.

"This will help to prevent future compliance failures and restore the confidence of shareholders, regulators, legislators and mortgage markets participants," the coalition said in the letter.

Bank representatives could not be reached for immediate comment on Sunday.

On January 7, in a decision that could slow foreclosures nationwide, Massachusetts' highest court voided the seizure of two homes by Wells Fargo & Co and US Bancorp after the banks failed to show they held the mortgages at the time they foreclosed.

That sent fears through the market as investors worried that decision could threaten lenders' ability to work through hundreds of thousands of pending foreclosures.

The Supreme Judicial Court of Massachusetts' unanimous decision upheld a lower court ruling and was among the earliest cases to address the validity of foreclosures done without proper documentation.

That issue, including the use of "robo-signers" who approved foreclosure documents without reviewing them, last year prompted an uproar that led lenders such as Bank of America, JPMorgan Chase and Ally Financial Inc to temporarily stop seizing homes.

Courts in other U.S. states are considering similar cases, and all 50 state attorneys general are examining whether lenders are forcing people out of their homes improperly.

The pension fund coalition represents more than $430 billion in pension fund investments, including $5.7 billion invested in the four banks.

Liu represents the five NYC pension funds. The coalition also includes the Connecticut Retirement Plans and Trust Funds, the Illinois State Board of Investment, the Illinois State Universities Retirement System, the New York State Common Retirement Fund, the North Carolina Retirement Systems, and the Oregon Public Employees Retirement Fund.

The coalition called for the banks to report the findings of their independent examinations in their 2011 proxy statements this spring.

At the end of the last year, the coalition's combined holdings in each bank included: 97.1 million Bank of America shares valued at $1.3 billion; 226.6 million Citigroup shares valued at $1.1 billion; 40.7 million JPMorgan Chase shares valued at $1.7 billion, and 50.6 million Wells Fargo shares at $1.6 billion.

It's about time public pension funds get involved and use their clout to pressure banks to examine their loan modification, foreclosure, and securitization policies and procedures. I'm not sure anything will come out of this but the foreclosure crisis has sounded the alarm bell and banks need to respond to make sure that measures are in place to prevent this type of abuse from ever happening again.

Finally, I leave you with some thoughts from Graham Turner of GFC Economics, one of the best independent economic consultancy shops for institutional clients:

The rise in interest rates is not sustainable. However, this is very typical of what happened in Japan during the 1990s. The promise of fiscal support/stimulus and an uptick in growth will be a toxic mix for bond markets, causing more of a sell-off. But this in turn will increase the risk of a second crash in housing.

This goes to the heart of the Fed's failure to use QE to control the bond market, and again shows how little the authorities have learnt from either Japan (1990s) or the US/UK (1930s). (The US economy is recovering because of a refi wave, which has now already ended. The Fed has failed to get traction on the housing market from QE2. Eleven out of the 20 cities in the S&P/Case Shiller's 20-city composite hit a new low in October.)

Combine that with Congressional inaction on the Fed deficit, and you have the perfect set-up for a bond market panic. Their only (potential) hope is that the current improvement in the labour market will loop back into a lower delinquency rate and in turn support the housing market. I am sceptical of such a scenario, because of the serious arrears/foreclosure backlog, which is vast.

It is a all a question of balance. Perhaps, just perhaps, if rates had been held at the low levels reached in the Fall of 2010, we might then have had a more durable recovery.

The US is likely to head into trouble just as Ireland/Greece/Spain run into more difficulties. Yesterday's EU Commission Survey showed an extraordinary divergence between Germany on the one hand, and Ireland/Spain/Greece on the other. This single currency is in gettiing deeper into trouble. Bond yields are reflecting this.

My advice is to go with the flow / sell off and look for an opportunity to re-enter fixed income markets in the Spring.

I thank Graham for sharing his thoughts with me and also fear that if yields rise too fast, you'll get a second crash in housing, which means more foreclosures. This underscores the need for promptly reviewing foreclosure rules and policies.

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