CalPERS Joins Big US Pensions in Urging Obama, Congress to Act Swiftly on Federal Deficit

Public pension funds have called on the President and Congress to act immediately on the US deficit to avoid a downgrade.

(July 26, 2011) — The California Public Employees’ Retirement System (CalPERS) — the nation’s largest public pension — has joined other pension schemes in urging a fix to the issue of sustained Federal deficits, warning of the risk of long-term damage to the country’s retirement savings.

In a joint letter to President Obama and America’s elected leaders, Chief Executive Officers, Treasurers and Chief Investment Officers from 10 pension funds wrote that the nation’s deficit poses a threat to the US economy. The pensions serve 7.7 million active and retired workers in California, Florida, Colorado, New York City, Maryland, Ohio and North Carolina. Along with CalPERS, the signatories included the $154.2 billion California State Teachers’ Retirement System; the $146.5 billion New York State Common Retirement Fund; the $119 billion New York City Retirement Systems; the $76.5 billion Ohio Public Employees Retirement System; the $41.4 billion Colorado Public Employees’ Retirement Association; and the Florida State Board of Administration. The total of 10 pensions joined a group including asset managers, such as BlackRock and Legg Mason, that previously voiced a similar aim to ward of a US default.

“America is now a debtor nation and it must show the world that the nation’s word is its bond. It is critical that the debt ceiling be raised to avoid a default. But raising the debt ceiling just addresses the immediate problem of default. The huge budget deficit, both current and long-range, is the real problem,” the letter stated.

“‘Deficit’ (federal budget) and ‘debt’ (U.S. federal debt) are short- and long-term issues,” CalPERS spokesman Clark McKinley confirmed with aiCIO. “The debt ceiling with the problem of immediate default is short-term. The debt issue with the threat of the credit rating downgrade is long-term.”

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“We work on behalf of millions of Americans – firefighters, teachers, nurses, policeman, government workers and others, who save for their retirement through our pension funds,” the letter from the pension chiefs including CalPERS said. “Our country faces threats to its economic well-being that will inflict pain and hardship on all our citizens for many years to come if we fail to act – and act now.”

The funds warned that a downgrade from America’s AAA rating would leave it behind six countries on the credit scale, the consequences of which would be “very real and very serious.”

Additionally, the letter indicated concern among investors over inflation risk, highlighting that the US inflation rate has been much lower than that of other countries because of the fact that the US dollar is a reserve currency for investors worldwide. “If we are no longer among the highest rated government borrowers, investors will seek other currencies to store their wealth. The decline in the value of the dollar will intensify inflation risk in the future, which will further erode our standard of living.”

Last week, amid bond-focused corporate and public pension funds grow increasingly concerned over the federal government’s inability to come to an agreement on raising America’s self-imposed debt ceiling, ratings agency Moody’s suggested that the US eliminate its limit on government debt altogether to lower uncertainty among bondholders. “We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty,” Moody’s analyst Steven Hess wrote in a report.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Public Pensions Mull Shift from DB to DC

Are many American public pension plans moving toward adopting defined contribution plans?

(July 26, 2011)—A commission appointed by Arizona Governor Jan Brewer has recommended that the state enroll new employees in 401(k)-type plans rather than in the traditional defined benefit pensions—a step indicative of what some have called an inevitable nationwide trend towards defined contribution plans for public employees.

Governor Brewer, however, is set to table the proposal, although she will consider the commission’s other suggestions, the Verde Independent has reported, underscoring the resistance that public pension plans face as they weigh a move to defined contribution (DC) from defined benefit (DB).

Many American public pension plans face staggering liabilities because of decades of mismanagement, with politicians from both parties making promises to unions without making an effort to pay for them, aiCIO has reported. Even in states like New York, where pensions cannot legally go underfunded, pension liabilities are consuming larger and larger portions of the budget. The 2008 financial crisis exposed the dire situation that many states were in. The public, outraged over stories of lavish pensions when their own wallets were being squeezed, in 2010 elected in several states reformist governors eager to tackle the pension problems.

The governors have grappled with the issue in several ways, particularly by raising the retirement age, requiring workers to pay more toward their healthcare, and by ending the practice of pension spiking, the process in which public employees work overtime in their last year of employment to receive an inflated pension that is linked to their final year’s pay. Others have gone farther, such as in Ohio and Wisconsin, where Republican governors moved to strip public unions of the ability to collectively bargain for their benefits.

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Even the most aggressive reformers, however, have shied away from a full-fledged adoption of a DC system, a move many analysts say is the inevitable solution to the long-term pension liabilities problem. That reluctance may soon change. A few states already have defined contribution systems in place, either as a mandatory program or as, in what is called a hybrid plan, an option for new employees. Alaska, Colorado, Georgia, Michigan, Ohio, Utah and several other states offer some form of defined contribution pension system for their public employees. Recent studies trumpeting the fiscal wisdom of the DC plans are seductive, placing pressure on state leaders sitting on the fence. A report in June by the Mackinac Center for Public Policy demonstrated that Michigan’s 1997 shift towards a DC system for its new employees has saved the state up to $4.3 billion in unfunded pension liabilities. In April, Governor Sam Brownback of Kansas predicted that the state would move to a DC system for new public workers. Even in California, Governor Jerry Brown has recently proposed a plan to give the California Public Employees Retirement System (CalPERS) $1.5 million to study the possibility of introducing a hybrid system for its new beneficiaries.

American corporate pension plans, with a few holdouts clustered around the auto and the defense industry, long ago abandoned DB for DC plans. But opposition to public adoption of DC plans remains intense, for the same reason why DC plans are so appealing to reformist governors—DC plans provide individual investment accounts, so if the stock market bottoms out, the individual, not the state, is left scrambling to make up the shortfall. But states may be reluctant to adopt DC plans for another reason: a move to DC would rob the old DB plan of contributions, thereby actually exacerbating the funding problem, at least in the short-term.

The current economic and political environment, however, means that DC plans for state employees will look increasingly desirable to governors and to the public that funds them. In Arizona, Governor Brewer is reportedly waiting to see how pension reforms passed by state lawmakers earlier this year will affect the state’s pension liabilities. If they prove inadequate, Brewer will likely reconsider the commission’s proposal.



<p>To contact the <em>aiCIO</em> editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a></p>

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