Tuesday, March 5, 2013

2012 MPSERS Financial Statement Released

Thirty days late is better than never; the MPSERS Annual Report has been posted. You can view the report here. Upon first review there is good news and bad news. I'll provide a detailed analysis once I've worked through all 111 pages. A few notable items jumped to the front including:

  • Funded ratio (using the "smoothing" accounting trick) has fallen to 64.7% (pg.36)
  • Total unfunded liability of pension fund is $22.4 BILLION and $25.9 BILLION for Other Post-employment Benefits (health care). Total Unfunded position: $48.3 BILLION
  • Investment assumptions continue to remain insupportably high at 8% (pg. 37)
  • Total portfolio returns lagged market indexes but reported a solid 13.5% return (pg. 7)
  • Five year total return on portfolio is annualized at 1.6% (pg. 7)
The one thing that accounting gimmicks (smoothing) and inflated assumptions cannot hide is the demographic wave which continues to threaten the school aid fund... soon there will be more retirees drawing from the pension system than there will be employees paying into the system. The following chart on page 102 of the report is clear:

There is little to no likelihood of reversing this trend. All demographic studies support the fact that Michigan is getting older. There will be fewer school age children added to the system and there will be a declining need for additional teachers. With only 27,108 more active members than retired members, it's likely that the lines will cross in the next two to three years. The recent changes enacted to bolster the system might delay the need for more dramatic actions, but like all political acts it only kicks the can further down the road. 

Saturday, February 4, 2012

MPSERS Unfunded Pension Liabilities Grow to $45.3 Billion, or $53.9 Billion?

Looks like things are getting worse, while we’re told they’re getting better. The just released Michigan Public School Employees’ Retirement System (MPSERS) annual financial statement should dispel any notion of a School Aid Surplus. Remember, most of the unfunded liability (+$45.3 BILLION) has to be paid for by annual transfers from the yearly operating budgets of local schools and colleges that participate in MPSERS. This year that transfer will represent an added cost of 27.4% on top of all employee salaries.  Salaries and benefits are 80% to 90% of a typical school budget so this is significant impact to operating budgets.
The MPSERS unfunded liability is significantly worse than the reported number. Consider, the fund uses an accounting rule (trick, gimmick, game) to “smooth” the data over a five year period. Without smoothing the unfunded liability approaches $53.9 BILLION (current year assets total $34.7 billion, down from $35.9 billion in 2010).
It gets worse. The fund makes some aggressive assumptions about its expected future earnings. The fund assumes it will earn 7% to 8% annually depending on the obligations. Actual performance over the last 5 years has been 2.3% annually, nearly 3.5 times below plan (and 5.1% annually over 10 years, nearly 1.6 times below plan). On a current basis, aggregate assets FELL between 2010 and 2011 by $1.2 BILLION (the second time this has happened in the last three years) making the true unfunded liability hole deeper. 
The fund notes that it had a good year realizing returns of 6.6%  That return sounds good but there are two problems: 1) 6.6% is far below the 8% required in the plan assumptions, and 2) Digging into the details much of the that performance was realized in segments of the portfolio classified as ALTERNATIVE INVESTMENTS and REAL ESTATE which saw returns of 29.9% and 16.9% respectively. 
The ALTERNATIVE INVESTMENTS and REAL ESATE investment pool include limited partnerships and investments in the private equity market. Funds should have these types of assets in their portfolio, that’s not the issue. The problem is measuring returns; who values these investments? Are the assumptions used realistic? When were the values established? By nature these investments are private, so there is no traditional clearing market, there is no public venue to check prices. As such there is significant latitude in how any individual asset is valued; caution should be exercised when these asset class significantly boost total returns as they have in this case. 
This problem has been brewing for years despite my repeated attempts to sound the alarm. It’s been allowed to fester and the price of the problem has exploded. It’s time to fix it. 

Monday, December 5, 2011

MEA 2011 Compensation Comparisons

Today marked the release of the annual LM2 report for the MEA. This report (required by the Department of Labor) details the compensation for all officers and employees of the Michigan Education Association; you can find the simple analysis of the report here, and the complete report here. As has been the case for years, compensation at the parent organization (the MEA is the state level organizing unit of the NEA) is consistently stronger than for the rank and file teachers. What sets this report apart from years past is the first time ever median reduction in median pay. The average increase continues to outpace the CPI but this is influenced by timing issues (some individuals may have come onto the payroll mid year, etc.) and other adjustments. Perhaps the MEA leadership recognized the difficult economy school districts have been dealing with for years, as they say "better late than never." What has not changed is that life is very good at the top of the MEA ladder, in fact all top ten MEA officers earn more than Governor Snyder. So where are the calls to limit MEA top compensation to no more than what the Governor makes? MEA Salaries 10-11 Here is the document which summarizes the top ten earners at the MEA. This data comes directly from the Department of Labors LM2 filings. MEA Top Ten Salaries 2011

Thursday, February 3, 2011

MPSERS - School Pension In Trouble (Part 1 of a Series)

Economic and demographic reality is colliding with the pension and healthcare promises made decades ago in Michigan’s Public School Employees Retirement System (MPSERS). As I’ve discussed, and now Governor Snyder has pointed out, the reality of a $36.9 billion unfunded pension liability (another way of saying the pension is short $36.9 billion) creates a crushing burden on all Michigan taxpayers; this includes the very people that participate in the pension fund. The chart above reveals a simple truth as to why the pension fund is struggling. It shows both the declining active (employed) membership in MPSERS, and the growing number of retired members. The two lines are going to converge and cross if trends continue. The chart below projects a continued fall off in Michigan's student population through 2020, it is a trend that started years ago. Source data here and here.

That measure (total students) is highly correlated to public school employment. Together the charts show how employment has responded to the decline in total students, and how that trend is likely to continue. The implication is simple: the future holds fewer students, fewer public school employees, accelerating payouts from pension funds, and higher percentages of school operating budgets directed to support the pension fund. In fact, the projected contribution rate for next year is expected to increase from 20.66% to nearly 28% That means for each dollar an employee earns, districts will have to divert an additional 28 cents on top of that dollar to support the pension fund. That additional contribution gets larger in future years (source data here). The state does not increase school funding to match this mandate -- it is the ultimate in unfunded mandates. The pension payments are made out of operating funds available for the classroom, for teacher salaries, for equipment and supplies, and for program support.

MPSERS has attempted to address the issue, but the current measures represent bandaids. Some initiatives designed to save the system have been met with legal challenges which, if successful, will have the ironic effect of further crippling the pension system.

Conversations about honest assessments and major reforms are happening, the key to crafting lasting solutions is clarity regarding the nature and scope of the problems -- topics to be explored in future posts.

Saturday, May 8, 2010

How Greek’s Debt Crisis Can Inform Michigan’s Pension Debate

Michigan’s teacher pension fund (MPSERS) is underfunded by nearly $61 billion. This massive debt is split between an unfunded pension liability of $35 billion (supported by Manhattan Institute study) and an unfunded health care promise, known as OPEB, of $26 billion (from MPSERS financial statement). Michigan's total budget is $43 billion (seehere, slide 19). MPSERS unfunded liability equals 142% of Michigan's total budget.

The Greek debt crisis is fueled by debt levels that will exceed 120% of Greek’s gross domestic product. While not an apples to apples comparison the message is clear, spending more than you make is not sustainable.

The debate regarding proposals to mandate new MPSERS entitlements for health care is irresponsible. MPSERS funding requirements are crippling school budgets with a tax on districts approaching nearly 20% on every salary dollar. The proposed amendment to enshrine health care in SB 1227 will add to that burden for generations. Greece, along with the rest of Europe, is paying for its history of financial malfeasance. Unless legislators wake up, Michigan faces a similar fate. Making good on the pension promise will be challenging enough, adding to that burden with a guaranteed health care mandate will make it impossible.

SB 1227, Winners and Losers

Currently the Michigan House is contemplating language which will increase the retirement multiplier from 1.5 to 1.7. This will, without offsetting cuts, add to a pension fund which has seen it’s funded status fall from the high 80% mark to an abysmal 51% (after pulling back the curtain of “smoothing” and the application of realistic investment assumptions). A $60 billion dollar unfunded pension liability is bad, enacting legislation to increase the size of this unfunded burden by $4.3 billion is very bad.

How would this change have an impact on the interested constituents? Here are just a few possibilities.

The Winners:

  • All teachers that choose to retire this year (assuming they were already considering retirement).
  • The MEA which will claim this a “victory” for its members.
  • Legislators that will claim a “cost savings” for schools.
  • Short term school budgets that will see lower cost teachers replace higher cost teachers.

The Losers:

  • All teachers that do not chose the retirement option this year.
  • The MEA because rapidly escalating legacy costs will consume an even higher percentage of operating budgets.
  • New teachers which will be the first to lose jobs as accelerated pension contributions force future teacher layoffs.
  • School operating budgets which will face pension costs approaching 30% per salary dollar.
  • Legislators that will have to unscramble the mess created by adding more burdens to an already overburdened pension fund.
  • Michigan students which will eventually pay for short sighted budget decisions.
  • Taxpayers (which includes working teachers) that will be forced to pay for these unfunded promises.

The House should reject an increase on the pension multiplier from 1.5 to 1.7. While the impact may be a short term “savings” the long term costs will add to the fiscal pain of Michigan’s schools, teachers, tax payers, and students. We cannot afford the pension plan we have, and an unfunded increase to the multiplier will magnify the problem. Call your Michigan House Representative and urge them to NOT INCREASE THE PENSION MULTIPLIER in SB 1227. Click here to get your Representatives phone number.

Saturday, April 17, 2010

Senate Bill 1227 (SB 1227) Is A Fix Worth Implementing

The reforms proposed by SB 1227 are sensible and fair. The changes envisioned by SB 1227 address fundamental structural problems which, if left unchanged, threaten the viability of the Michigan Public School Employees Retirement System (MPSERS). The Senate Fiscal Agency shows that SB 1227 will save over $3.5 billion over the first 10 years. Longer term savings will continue to grow and will help to erode the $35 billion to $60 billion of unfunded liabilities currently embedded in the system. The MEA is fighting this reform with the statement SB 1277 will not solve Michigan's budget crisis. The MEA misses the point; SB 1277 is just one of MANY changes that MUST be made to ensure we address current and future budgetary problems. Encourage our state representatives to support SB 1277, it will be good for MPSERS, and good for our state. Without sensible reforms like SB 1227, MPSERS will drag Michigan’s economy down a fiscal black hole taking tax payers, school districts, and teachers along for the ride.