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  #261  
Old Yesterday, 06:52 AM
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Mary Pat Campbell
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RATE OF RETURN

https://reason.org/commentary/map-co...m_medium=email

Quote:
Map: Comparing State Pension Plans’ Assumed Rates of Return
This visualization shows how states have been gradually adjusting their assumed rates of return down to more realistic levels.
Spoiler:
Each pension plan uses an assumed rate of return to estimate how much current assets—made up of contributions from both employers and employees plus any investment gains/losses—will be worth when promised pension benefits are finally due. This assumption plays a major role in a pension plan’s ability to maintain long-term solvency and to live up to the promises made to public employees.

Any time annual investment returns fall below the assumed rate of return (ARR), a plan must find ways to make up the shortfall between expected and actual assets. Sustained experience below a plan’s ARR results in growing pension debt, which has been a significant contributor to the funding shortfalls in public pension plans across the nation.

In response to decades of investment performance below expectations, most public pension plans have been gradually adjusting their assumed rates of return down to more realistic levels.

This map (click to zoom) shows the changes in assumed rates of return held by state pension systems from 2001 to 2018, along with the national average rate for comparative purposes. And this visualization highlights the different ways states have responded to the ubiquitous challenge of lower long-term returns. [Note: for cases of states with multiple public pension plans, the analysis uses each plan’s accrued liability to weight the state’s combined assumed rate of return.]



As an example, North Carolina lowered its ARR well before most other states. As a result, they experienced fewer unexpected costs over the studied timeframe, which helped them become one of the nation’s healthiest states in pension funding — with a 90 percent funded ratio at this time.

Colorado, on the other hand, was slow to adjust its ARR. Market returns below the state’s expectations were the largest contributor to Colorado’s pension debt over the past two decades, adding $8.4 billion in unexpected costs. Now, the state only has 60 percent of the funding needed to cover the retirement promises already made to its public servants.

States have been lowering their assumed rates of return across the board, but most maintain assumptions that are still too high. Many financial advisors believe that investors can expect to see continued overall investment performance that is below the levels experienced in the past. With this in mind—and the unignorably turbulent market results as of late—state policymakers should consider reducing the risk of future pension debt accrual by lowering their ARR even further.

The sooner government pension plans adopt more conservative return assumptions, the better off they will be down the road. More importantly, acting early can help ensure that promised pension benefits will be available for their public workers.


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  #262  
Old Yesterday, 06:54 AM
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Mary Pat Campbell
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LIQUIDITY
ASSET DEATH SPIRAL

https://www.ai-cio.com/news/terrible...paign=CIOAlert

Quote:
It’s a Terrible Time for Pensions to Have Weak Liquidity
Market downturn could force some public pensions to sell assets for a loss.

Spoiler:
A market downturn is a difficult time for any investor, but it’s particularly bad for public pensions with weak liquidity. Because pension funds have long-term investment horizons that span decades, they often claim to be undisturbed by market turmoil as they have time to ride it out. But public pensions with liquidity stress don’t have that luxury in the kind of market we have right now.

“Given the current market downturn, US public pension plans may experience liquidity stress to cover benefit payments,” S&P Global Ratings said in a research note. “Assets in plans with weak liquidity are likely to be sold at a loss and may contribute to decreasing funded ratios. In our opinion, poorly funded plans and high discount rates may be indicators of excessive liquidity risk.”

According to S&P, US public pension plans have an average of 1% of their target portfolios held in cash and short-term investments to pay ongoing expenses, such as benefit payments and administrative costs. The firm said a liquidity-to-assets ratio can help determine how much liquidity risk a pension plan is carrying. A pension plan with a negative liquidity-to-assets ratio needs additional money to maintain operations and make benefit payments. And the further below zero the ratio is, the more assets that may have to be converted to cash.

In a typical year, weak liquidity isn’t a major problem because investment returns can supplement cash flow. However, this is not a typical year, and selling non-cash assets during the current market downturn could mean large losses for pension funds. Additionally, plans with weak funded ratios and high discount rates translate to increased liquidity risk. S&P said there is a direct correlation between the discount rate—which is usually the assumed rate of return in the public sector—and the underlying target portfolio.

“A high assumed return indicates a high level of risk accepted in investments, which sometimes indicates a low percentage of cash,” S&P said. “Plans with already weak funded ratios and limited cash might need to liquidate longer-term investments to meet annual benefit payouts, thereby eroding earning power and sinking into even weaker funded status.”

S&P said some public plans could completely run out of money to fund pension benefits. To demonstrate what happens at asset depletion, it provided examples of severely underfunded US pension plans, which the firm defines as under 40% funded. Five of the plans have ratios below zero, which signals possible negative available cash that would require either additional financing or a drawdown of assets for short-term support. This “could expedite their path to insolvency,” S&P said. Meanwhile the other plans are likely to experience significant deterioration during a prolonged and severe market downturn.

Liquidity Risk Heightened For Large Plans Under 40% Funded

Pension plan

Liquidity-to-assets ratio (%)

New Jersey Teachers

(7.46)

Chicago Police

(2.77)

KERS Non-Hazardous

(2.77)

Chicago Municipal

(1.39)

Illinois SERS

(0.68)

Connecticut SERS

0.34

Providence ERS

3.19

Pittsburgh

5.51

Source: S&P

Additionally, other post-employment benefits (OPEB) costs, such as retiree medical costs, are expected to increase because of the COVID-19 pandemic and may hurt pension sponsor liquidity, according to S&P. Because these costs are pay-as-you-go, that means that there is no room to reduce or delay contributions unless benefits are reduced.

To make matters worse, further pension deterioration is likely even when the market eventually turns around.

“Employer and plan sponsor budgets are going through a concurrent period of stress, so as sponsor and pension plans adjust budgets, they may look to defer contributions for budgetary relief,” said S&P, which added that steps that might be taken at the expense of funding the pension plan could include extended amortization payments, temporary changes to asset smoothing, or other means of contribution deferral.

“State and local governments with limited fiscal flexibility and weak economic metrics are more likely to consider these options,” S&P said. “Similar to the years following the last recession, many US public finance entities are likely to emerge seeking plan design and benefit changes in an effort to gain budgetary relief.”


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  #263  
Old Yesterday, 07:30 AM
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Mary Pat Campbell
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PHILADELPHIA, PENNSYLVANIA

https://www.pewtrusts.org/en/researc...irement-system
Quote:
How Will the COVID-19 Pandemic Affect Philadelphia's Underfunded Retirement System
Pew stress test may hold clues

Spoiler:
The COVID-19 pandemic will have a vast and far-reaching impact on cities’ budgets, in terms of both reduced revenues from a widely shuttered economy and increased expenditures for essential services. And in Philadelphia, those expenses include financing the underfunded retirement plan for city workers.

In late 2018, The Pew Charitable Trusts conducted a stress test analysis of the plan to help policymakers evaluate how it would fare under various economic conditions. Among the tested scenarios, as we reported in April 2019, was an asset price shock simulating a recession, with market returns initially declining by approximately 26 percent in year one, followed by a three-year recovery and then low, 5 percent equity returns over the long term—lower than the city’s current assumption of a 7.55 percent return.

How accurately that scenario simulates the current situation and near-term economic future, of course, remains to be seen. But the stress test showed that, even in an asset shock scenario, the city would still be able to sustainably pay down the plan’s accumulated pension debt over time. Under our simulation, the plan, which was 47 percent funded as of July 1, 2018, would be about 80 percent funded by 2035.

As Figure 1 shows, the pension plan’s funded ratio would fall in the first year or two, then recover relatively quickly, with the figure rising steadily thereafter. Over time, the results were similar to those of a scenario that assumes a steady 5 percent return on the plan’s investments.


These projections assume that city officials maintain their existing funding formula, which has been changed in recent years to increase payment levels. The formula pays the full actuarial determined contribution and also sets aside a portion of sales tax revenue and employee contributions as pension plan payments above and beyond the actuarial contribution. In the past few years, contributions from the city and its employees have been roughly equal to the payments going out. The recent adoption of a so-called stacked hybrid plan for new, nonuniformed employees also plays a role, reducing the plan’s exposure to investment risk.

Under the asset shock scenario, employer contributions to the retirement plan, expressed as a percentage of overall revenue, initially would rise as part of the downturn, then fall gradually in subsequent years. (See Figure 2.) In the current situation, however, near-term pressure on revenues is likely to be higher than in past downturns.


In the current environment, keeping to the existing formula will be a real challenge for officials, who may want to divert some of the money to more immediate needs. The proposed city budget, drafted prior to the COVID-19 pandemic, called for taxpayers to contribute $760 million to the plan, nearly 15 percent of the general fund budget. If that contribution and future contributions were to be reduced, the plan’s path toward fiscal well-being would become a longer one.

The city’s pension reforms, in terms of both contributions and benefits, have set the retirement plan on a path to sustainably deliver on pension promises as long as policymakers remain committed to their current contribution policy now and in the years to come. But maintaining those policies will have real costs for taxpayers and city services—and pose tough choices for officials at a challenging time.

Larry Eichel is project director of The Pew Charitable Trusts’ Philadelphia research and policy initiative.


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  #264  
Old Yesterday, 08:47 PM
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Mary Pat Campbell
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NEW JERSEY

https://www.pionline.com/pension-fun...7#cci_r=158332
Quote:
New Jersey Pension Fund returns -13% since July

Spoiler:
New Jersey Pension Fund, Trenton, sustained a negative return of more than 13% from the beginning of its fiscal year on July 1 through Monday, according to preliminary estimates, due to the plunging stock market's reaction to the coronavirus outbreak.

CIO Corey Amon described the pension fund's performance Wednesday at a meeting of the State Investment Council, which formulates policies for the division of investment, the state Treasury Department unit that manages investments for the pension fund. Mr. Amon is director of the division.

"It will be some time" before the division can assess the full impact of COVID-19 on the pension fund, Mr. Amon said. The meeting was held via telephone rather than at its normal Trenton location.

See more of P&I's coverage of the coronavirus
Although Mr. Amon offered the brief comment about preliminary data, the division of investment provided more detailed information about the pension fund during the first two months of 2020 as well as for the fiscal year through Feb. 29.

For the first two months of the year, the pension fund's return, net of fees, was -3.81% vs. a benchmark of -3.55%.

For the eight months of the current fiscal year, the return was 0.93% vs. a benchmark of 1.95%. Given Mr. Amon's comments about preliminary results through Monday, these figures illustrate the extreme volatility over just a few weeks.

For periods ended Feb. 29, the pension fund posted a 12-month return of 5.5% vs. a benchmark of 6.1%; three years, 6.78% vs. benchmark's 7.31%; five years, 5.9% vs. 6.09%; 10 years, 7.97% vs. 7.64%.

The report said pension fund's assets totaled $74.2 billion at the end of February. At year-end 2019, assets were $79.7 billion.

Also at the meeting, Assistant Treasurer Dini Ajmani said the state remains committed to making its fiscal third-quarter and fourth-quarter contributions to the pension fund despite the economic and investment uncertainty caused by COVID-19.

"Nothing has changed" for fiscal 2020, Ms. Ajmani said.

Gov. Phil Murphy's budget for the fiscal year ending June 30 calls for a $3.75 billion state contribution. The third-quarter contribution is due March 31.

Ms. Ajmani repeated the comments issued late Monday by Treasurer Elizabeth Maher Muoio in a notice to bondholders that the economic fallout from the COVID-19 will be significant, but still hard to accurately measure for the current fiscal year and the next fiscal year. For the 2021 fiscal year, Mr. Murphy has proposed a $4.6 billion state contribution to the pension fund.

The letter noted among other things that New Jersey will experience "precipitous declines in revenues" for the current fiscal year ending June 30 as well as the next fiscal year affecting revenue collections.

The letter said the state expects state lottery revenue to decline. This revenue has represented about $1 billion a year in the state's contribution to the pension fund. According to a state revenue report covering the first eight months of the current fiscal year, lottery proceeds were $629.5 million, or 9.8% below the same period for the previous fiscal year.

Also at the state investment council meeting Wednesday, the division of investment announced a commitment of up to €100 million ($107 million) to CVC Capital Partners VIII, which will pursue leveraged buyouts of medium to large businesses in Europe and North America, according to the division. CVC Capital is an existing relationship with the New Jersey Pension Fund.

The state investment council members also voted to allow the division of investment to temporarily exceed the regulatory allocation cap of 12% for private equity assets in the pension fund. The allocation was 12.8% as of March 20 due to the decline in equities' values. A formal proposal to raise this cap to 15% is still subject to public comment through April 6.

In addition, Mr. Amon said the division has hired an executive search firm to seek candidates for the jobs of deputy director of the division and head of alternative investments.



https://www.njspotlight.com/2020/03/...first-of-year/
Quote:
COVID-19 Hammers Public-Worker Pension System, Sheds $6B Since First of Year
JOHN REITMEYER | MARCH 26, 2020 | BUDGET, CORONAVIRUS IN NJ
Returns likely down more than 10% in the current fiscal year, but Treasury says it has no plans to skip upcoming pension contributions

Spoiler:
New Jersey’s public-worker pension system is getting walloped by the financial-market turbulence caused by the coronavirus pandemic, with at least $6 billion in market value lost since the beginning of the year.

But so far, the Department of Treasury says it has no plans to skip any of New Jersey’s upcoming employer pension contributions, even as the state budget is also being ravaged by the economic upheaval.

Members of the New Jersey State Investment Council assessed some of the initial damage done to the pension system during a public meeting on Wednesday that was held entirely by phone. It was the panel’s first meeting since the financial markets took a major tumble in mid-February.

Pension-fund freefall
Overall, pension-fund investment returns that were running in the double digits just last year have now significantly plummeted during the first part of 2020, according to the latest figures from the Division of Investment (DOI).

Returns for fiscal year 2020, which runs through the end of June, fell to below 1% as of the end of February, and they appeared to be down by more than 10% according to the preliminary fiscal-year figures that include the first few weeks of March, said Corey Amon, who serves as the director of DOI.

The value of the pension system has also dropped, from a high of nearly $80 billion at the end of December to $74.1 billion at the end of February, according to documents released ahead of the public meeting. And that two-month period doesn’t capture additional losses that have likely been suffered over the past three weeks.

“Clearly we are in the midst of a near-term public health crisis that is central to market turmoil, and we are focused on navigating through this,” Amon said during the meeting.

Meanwhile, a Treasury official who also addressed council members said the state is still planning to make its next quarterly pension contributions, even as the full damage that’s being done to the state budget is being assessed. Nearly $1 billion in fiscal 2020 discretionary spending was put in reserve late last week due to ongoing upheaval, including funding for things like property-tax relief and opioid initiatives.

In all, the state pension system covers the retirements of an estimated 800,000 current and retired workers across seven different funds. It is financed with contributions from workers; payments made by their respective state and local government employers; and from revenue that flows in on a monthly basis from the state Lottery.

The pension system also benefits from any returns that are gained from the investment of fund assets managed on a day-to-day basis by the DOI, which is a division of Treasury. The pension funds operate under a 7.5% annual assumed rate of return.

More bad news for troubled pension system
Heading into the recent market trouble, New Jersey’s pension system was already ranked as the nation’s worst-funded state retirement plan. That comes after governors and lawmakers from both parties over the past two decades have regularly shorted the state’s annual pension contributions as they’ve prioritized things like tax cuts or new spending initiatives instead.

The practice of shorting full, actuarial-required pension payments has continued during the tenure of Gov. Phil Murphy, a first-term Democrat, who has chosen to follow a gradual funding ramp-up started under Republican Chris Christie. Under that plan, the state is scheduled to make what actuaries would consider a full payment during the 2023 fiscal year.

A bond disclosure issued by the Murphy administration earlier this week alluded to the stress that recent market conditions have put on the pension system, and it also suggested that the state’s payment obligation may grow larger as the market value of the fund drops.

In the past, the state has responded to its own budget problems by delaying or even skipping planned pension contributions. But assistant State Treasurer Dini Ajmani said during Wednesday’s meeting that right now there are no plans to do so. The state’s next quarterly payment totaling $684 million for fiscal 2020 is due to go out on schedule on March 31.

“We are committed to making state contributions into the pension fund,” Ajmani said. “Nothing has changed in that.”

She did, however, raise concerns about the portion of the pension funding that flows directly into the retirement system from the state Lottery. A number of retail outlets statewide that sell lottery tickets have been shuttered by a Murphy executive order aimed at slowing the spread of the disease..

“So far, it hasn’t been catastrophic,” Ajmani said. “We’re keeping a close eye on that.”

Arguing to delay pension contribution
But at least one Republican lawmaker is faulting the Murphy administration for not holding back the March 31 quarterly pension contribution until more is known about how the state budget will endure the economic upheaval. Sen. Declan O’Scanlon (R-Monmouth) said delaying the payment, but not skipping it, would be a more prudent course of action.

“We can’t ignore as a safety valve everything that still has to go out the door the last few months of the (fiscal) year,” O’Scanlon said in an interview Wednesday afternoon.

He also said if any expenditure should still be allowed to go forward amid the current budget uncertainty, it should be $142 million in funding to cover this May’s Homestead property-tax relief. Instead, that funding is among the $920 million in appropriations that were frozen by the Murphy administration late last week.

“If we’re trying to maintain people’s liquidity, that’s something that puts money directly into people’s pockets,” said O’Scanlon, who serves on the Senate’s budget committee. “That money should go out the door before the pension payment.”

Asked for a response, Treasury spokeswoman Jennifer Sciortino said: “The decision to freeze funds in reserve during this unfolding crisis is designed to help us exercise all available options to ensure we can meet our statutory, debt, and health-related obligations during this unprecedented time of great uncertainty.

“We are awaiting more information and closely monitoring the federal stimulus bill and other actions that may impact the state’s revenue position,” she said.

During his presentation to the investment council, Amon, the DOI director, detailed several ways the financial markets have taken a hit in recent weeks. He said anything related to the travel and leisure sector, including hotels and airlines, has really taken a beating.

But Amon also highlighted preparations that have been made by the state heading into the likely economic downturn and preached an overall message of confidence to members of the council. And the pension system should have no problem paying out benefits to retirees in the short term, in part due to a decision made last year to move assets out of hedge funds and into U.S. bonds.

“Despite the challenges of the current market, it’s important for the division to look forward and to determine the best course of action to ensure the pension fund’s portfolio is well-structured into the future,” he said.

During fiscal 2019, which ended on June 30, 2019, pension-system investments returned more than 6% gains. While that marked the third year in a row of net-positive returns, the 2019 fiscal year investment gains still fell short of the assumed rate of return even as the total value of the pension system rose from $78 billion to $80 billion.

When annual investment returns fall below the pension system’s assumed rate, it puts more pressure on the government employers — and ultimately taxpayers — to come up with more cash to cover long-term liabilities, since employee-contribution rates are fixed by law. The pension system’s overall long-term unfunded liabilities are over $100 billion by some recent estimates.

The last time the state pension system failed to generate net-positive returns for an entire fiscal year was in fiscal 2016, when returns came in nearly 1% in the red.


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