Pension "reform" and the governor's race

08 August 2018

[Remarks delivered at a Matt Brown for Governor event, August 6, 2018 -- We heard a bunch of stories from people who had relied on the state to uphold its promises to them, but who now find themselves stuck, rethinking career decisions made 30 years ago on the basis of trust in the government.]

The stories you're hearing hear are sad - and infuriating, but let's not leave things at that, and I want to tell you about the larger effects. And I'm not even talking about the story in this morning's New York Times about how bankruptcies among elderly Americans have tripled since 1991.

Since the 1980s, public pension funds across the country have amassed around $4~trillion in assets. The total GDP of the US is around $20~trillion. But it took 400 years of growth to get to $20~trillion, and less than one-tenth the time to get to more than one-fifth that amount in pension fund assets. This means that there have been years in my life when the bulk - if not all - the economic growth in the country was poured not into productive investments in our children, our roads, our citizens, but into sterile financial assets. This was great for stock market investors, but not so much for the rest of us.

If there were no other way to fund these benefits, one might say oh, our nation can't possibly afford these benefits, but there are other ways. We have chosen - our accountants have chosen - a very expensive way to pay for these benefits, and only a few politicians are bold enough to push back against the radical choices they have made for us.

I first wrote about pensions and the funding of pensions in 2005. When I was doing that, I kept reading things that didn't make a lot of sense to me. I wrote a little bit about how arbitrary the rules are way back then. How they seem to exaggerate the degree of crisis and how following the rules is more expensive than it needs to be just to pay benefits. And I heard a lot about it as a result.

Last year, the Haas Institute published a paper I wrote - a critique of the goal of fully funding a pension. I wrote that it's not necessary for a permanent enterprise like a government, that it's politically risky to be at 100% funding, that the urgency of the debt is exaggerated by the rules, that the size of these debts should be compared against the 50 years over which they're due, not the next year's budget. There were eight separate arguments, the legal, chronological, actuarial, mathematical, financial, economical, political, and philosophical.

And I heard a lot about that, too. John Arnold personally insulted me on Twitter, which was indeed an honor, though I don't think he actually read the paper. And right now I am working on a small research grant from the National Conference of Public Employee Retirement Systems to write a report about a broader critique of the accounting rules - full report is due in September, stay tuned. The research project included a substantial amount of solicited feedback from experts in the field, at workshop events in California, Illinois, and here. I had two actuaries come to one of the feedback events in California, just to tell me how wrong I am.

So I've heard a lot of response about my views on the accounting rules. But here's the funny thing, nobody refutes my points. Eight of them. I haven't seen one critic take on any of them with an actual argument - something that would say, here is what refutes that argument you're making. Not those actuaries, not the twitter critics, nobody. Instead they say, "Yes, but that's not the way we do it," or "Yes, but this makes the accounting work better," or "You're not an actuary." Or they say, "It's only fair to do it our way." Which is pretty funny to say to these teachers: that we're slashing their pension benefits in the name of fairness. But I kid you not, this is the quality of the responses that I've received.

And they say stuff like "You don't want us to end up like Detroit, do you?" Which is pretty funny, because pension debt didn't bankrupt Detroit, cuts in state aid did. Long-term debt might be worrisome, but it can't create a cash-flow problem, which is what actually sent Detroit into receivership. Besides, they can't even say who this debt is to. That is, unlike any other public debt you can name, nobody gets to book that pension debt as an asset.

Pretty strange, isn't it? Time is short, and last year's article is online. I'll just run through a few other weirdnesses, like being forced to put a number in the balance sheet whose potential error is larger than all the rest of the numbers in the same balance sheet. I'm a data guy -- you don't do that if you want good data. Or the way that you can pay off every dime of a debt and never be at full funding. These numbers just do not mean what they are widely supposed to mean.

So what do I want in a governor? I'll tell you what I don't want: just someone who is the best in the class at coloring between the lines. I want someone who questions why the lines are there and what they mean. If you're not doing that, you're not leading, you've just scrambled to the front of the pack. There is a difference.

What I want in a governor is someone who, when faced with a policy decision to make that could cause great pain to tens of thousands of citizens, will ask ALL the important questions. I want someone who will question the experts about their assumptions and make sure that there is no other way before inflicting that pain. We don't have that now, but we could. And that's why I'm happy to be helping Matt Brown today.

Someone agrees about pension funding

15 September 2017

From the San Diego Union-Tribune, an article about pension funding that cites my article:

If you’re a homeowner, you probably have a 30-year mortgage. Your mortgage allows you to own your home without fully funding the purchase. If, for example, you have a $300,000 home with a $150,000 mortgage, it might be said that your homeownership is at a 50 percent funded ratio. That’s not reckless; it’s prudent use of debt.

...

Some people speculate that future investment returns will be lower than past returns, requiring higher contributions from workers and taxpayers to sustain pension funds. In truth, no one knows.

The prudent course is to review returns each year and make gradual course corrections, as needed. That’s why independent auditors regularly evaluate and advise public pension funds on necessary course corrections.

So when you hear concerns about public pensions being underfunded, understand that ensuring 100 percent funding isn’t critical to the healthy functioning of a public pension system, and it can be very expensive.

 

Planning for another rainy day

29 August 2017

Seems like time to remember that this kind of thing doesn't only happen in Houston, and Houston isn't the only place where out-of-control land use makes a bad situation into a disaster.

Good story about the problem. Money quote: "Storms are natural events, but floods are usually man-made disasters."

Older story here

I visited the floodway last year, and it was easy to feel sympathy for the people who live nearby. It's not fair, they said. Every other town has a levee. Why should we have a gap?

The original answer, of course, was that the river in flood needs outlets for its excess water. That some areas need to be sacrificed so that more populated areas can be protected. That a levee would destroy even more wetlands along the river while encouraging even more development in a flood plain that wasn't supposed to be developed in the first place.

But it is developed. Almost the entire basin is developed.

Now what are we going to do about it?

Rhode Island BankLocal Succeeds

17 August 2017

As received from Treasury (yay!):

Treasurer Magaziner's BankLocal Program Moves $15 Million to Local Banks and Credit Unions to Support 150 Small Business Loans

PROVIDENCE, RI - Rhode Island Treasurer Seth Magaziner today announced that his BankLocal program has moved $15 million in state deposits to local banks and credit unions, matching loans to more than one hundred fifty small businesses in Rhode Island.

"I am committed to using the Treasurer's Office to encourage economic growth and job creation in Rhode Island," said Treasurer Magaziner. "Our BankLocal program is improving access to capital for Rhode Island small businesses by depositing cash at local banks and credit unions that are supporting Rhode Island entrepreneurs."

The BankLocal program moves a portion of the State's cash into secure accounts at local banks and credit unions. The amount deposited in each lending institution is determined based on loans made to small businesses in Rhode Island.

"For over 100 years, Navigant has been delivering on our commitment to serve the communities where we operate," said Gary Furtado, CEO of Navigant Credit Union. "The early success of this innovative program highlights the value of collaboration between government and the business community."

Eight Rhode Island banks and credit unions have joined the BankLocal program. To date, more than $15 million has been deposited to local banks and credit unions, matching over 150 qualifying local small business loans.

Jairo Echeverry, owner of Budare Grille in Central Falls, RI is a small business owner who received a BankLocal supported loan from Navigant Credit Union. "As a small business owner, working with Navigant has been a great experience. Their loan officer took the time to really understand my business needs," said Echeverry. "I am happy that the Treasurer's Office is working to provide financial support to small businesses through the BankLocal program."

Deposits into participating banks and credit unions will typically match the amount lent to qualified small businesses in Rhode Island, who employ fewer than 100 employees. Loans to women and minority-owned businesses and businesses founded by first-time entrepreneurs are eligible for a 2-to-1 matching deposit into the lending bank or credit union - up to $250,000 per loan.

"Bristol County Savings Bank is pleased to be part of the BankLocal program," said Patrick Murray, President & CEO of Bristol County Savings Bank. "The Bank's new collaboration with Treasurer Magaziner's office supports small businesses, which are the backbone of the local economy."

Participating financial institutions must meet minimum requirements for financial soundness, including proof of FDIC or NCUA insurance, and all state cash deposits must be fully collateralized.

No pension money is used for the BankLocal program and the Rhode Island Treasury has no role in selecting or approving small business borrowers. Lending decisions are made solely by participating banks and credit unions. Participating lenders include BankRI, Bristol County Savings Bank, Centreville Bank, Customer's Bank, Home Loan Investment Bank, Navigant Credit Union, People's Credit Union, and Washington Trust.

More information at www.treasury.ri.gov/banklocal

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