Conference Presentation, Panel
Pensions: The Real Fiscal Cliff
- State and local pension deficits are estimated to range from $1 trillion to $3 trillion, with corporate sector deficits in the multi-hundred billion range.
- Illinois faces a potential bankruptcy risk if its pension crisis remains unresolved through funding or structural reform, particularly given that the state has failed to meet funding obligations for the last 30 to 40 years.
- Illinois is ranked 50th out of 50 states for funding levels, and the state constitution's benefit guarantees prevent reforms solely through investment returns, necessitating a shift in funding burdens to employers and modifications to Cost of Living Adjustments (COLAs).
- Without a proposed plan to shift costs to employers, Illinois is predicted to face insolvency or a constitutional crisis, though even with reforms, the existing deficit would likely shrink but not be eliminated.
- New York City's pension contributions have risen from $1.3 billion to $9 billion over the last eight years, representing a budgetary shift from 2% to 11% of total city revenues.
- New York City's pension contributions are forecasted to peak in four to five years due to five-year smoothing mechanisms before declining, with the current cash contribution and outflow balanced to keep investment gains in the fund corpus.
- New York City is projected to have achieved an 8% 10-year rate of return over the last decade, though the target has recently been lowered from 8% gross to 7% net.
- If New York City fails to fund its obligations, the state constitution requires the state to make payments; however, balancing the budget without funding could force cuts to services, tax increases, or increased spending on other items.
- New York City's governance involves five independent boards and 100% outsourced asset management, constrained by an inability to pay market-rate salaries to in-house staff.
- Wisconsin is described as the only fully funded public pension plan in the country, utilizing a unique hybrid structure with a 5% discount rate and no COLA.
- A switch to no-smoothing accounting in Wisconsin would reduce its funding ratio from approximately 99.8% to 92% or 93%, while its current plan increases annuities if returns exceed 5% and reduces benefits to a floor if returns fall below that threshold.
- The Central States multi-employer plan faces a potential funding hole of $20 to $30 billion, prompting UPS to withdraw with a check of approximately $5 billion to ensure equal treatment of employees.
- Corporate pension plans generally cannot solve funding gaps through investment returns alone; achieving a net 7% return will be difficult if risk-free rates return to 2008 levels, though corporate plans are positioned to manage volatility and may shift to more fixed income as bond yields and funded status improve.
- UPS is comfortable with its current position and has the ability to manage liabilities in-house, unlike New York City.
- New York City's pension fund has a liability duration of 50 to 60 years or potentially infinite, and its asset allocation has been adjusted to be more diversified following the 2008-2009 downturn.
- If market conditions do not improve or significant governance reforms are not enacted, New York City and similar entities face a "death spiral" of compounding negatives.
- The "put option" on taxpayers in Illinois is valued as an enormous financial liability, with a corresponding "call option" adding to the complexity, suggesting governance structures fail to price these risks adequately.
- Corporate pensions are viewed as more prudent than in the past, with a focus on avoiding excessive risk, while the future of multi-employer plans depends on modeling well-run, well-funded systems like the Western States plan.