Thread: Stock losses hit public pensions

Stock losses hit public pensions: U.S. Census

Reuters – 1 hr 13 mins ago

(Reuters) - The value of investments held by U.S. public pensions fell in the third quarter for the first time in a year, battered by stock losses and a plunge in international securities, the U.S. Census said on Wednesday.
Total investments held by pension systems administered by state and local governments fell 8.5 percent from the second quarter, although investments did inch up 1.1 percent from the same period a year earlier.
The total holdings reached $2.5 trillion in what was the eighth consecutive quarter of year-on-year growth.
After being battered by the financial crisis and recession, public pensions had seen four straight quarterly increases starting in 2010.
But in the third quarter, pensions' corporate stock holdings fell 14.9 percent from the second quarter to $769.6 billion. That marked a 6.6 percent drop from the third quarter of 2010.
And international securities declined for the first time since the second quarter of 2010, falling 14.2 percent from the second quarter to $448.9 billion. It was the largest decline in international securities since the fourth quarter of 2008, in the midst of the Great Recession, according to the Census.
Public retirement systems depend on contributions from employees and employers to pay benefits, but the lion's share of their revenues comes from investment returns.
A year ago, concerns about public pensions' soundness reached a fever pitch. Conservative members of the U.S. Congress called for the systems to lower their expected rates of return -- a metric that is used to determine the systems' abilities to meet their obligations -- and for states to have the unprecedented option of filing for bankruptcy to escape public employee contracts.
The bankruptcy idea has largely disappeared, although earlier this month a leading Republican U.S. senator hinted other legislation changing public pensions could be coming soon.
In the third quarter, corporate stocks comprised less than a third of the total cash and security holdings of major public-employee retirement systems, according to the Census. International securities made up 17.7 percent.
Corporate bonds made up about 16 percent of holdings. They too decreased, falling 8.6 percent from the previous quarter and 9.4 percent from the third quarter of 2010 to $398.4 billion.
Treasuries and direct contributions provided some shelter for the public retirement systems.
Holdings of federal government securities dropped 2.4 percent from the second quarter to $177.8 billion, but were up from a year earlier by 6 percent. It was the eighth straight quarter in which federal government securities increased over the year.
The Census said a 33.6 percent drop in employee contributions in the third quarter from the second was typical, "continuing a cyclical pattern that shows the third calendar quarter as having the lowest employee contributions each year."
Nonetheless, employee contributions were up 6 percent from the year before, reaching $7.2 billion.
Contributions made by employing governments dropped 13.4 percent from the second quarter to $18.1 billion. Still, they rose 3.4 percent from the same quarter in 2010.
(Reporting By Lisa Lambert; Editing by Kenneth Barry)

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Report: 82% Chance California Pensions Are Going Under

http://www.alipac.us/threads/246598-...light=pensions

CA. Pension reform hindered

By DANIELBORENSTEIN
Created: 12/28/2011 12:31:21 AM PST

When it comes to public-employee pensions in California, what goes up usually can't come down.

At least that's the prevailing legal theory, severely restricting reform options across the state. As the state pension squeeze intensifies, we soon could see those limits tested.

Pensions typically are based on the number of years an employee works. Each additional year adds to future retirement payments. Starting in 1999, most public agencies in California increased that annual accrual rate.

For example, pensions for some police and firefighters were increased from 2 percent of final salary for each year worked to 3 percent. Thus, the pension for a 30-year employee went from 60 percent of final salary to 90 percent.

But what if pension benefits become too costly? In the private sector, the answer is simple: Reduce the formula. For future years of employment, the multiplier might be cut to 2 percent, or lower.

Note: Benefits already earned for past labor are protected, as they should be. The issue is the future rate of accrual. Smart business people know that when they are in a financial hole, they should stop digging.

The California public-sector rules are different. Once employees start working, they usually are guaranteed that initial multiplier their entire careers, many lawyers say. If, for example, that 2 percent per year is increased to 3 percent, it cannot be subsequently reduced.

The protection stems from the state and federal constitutions, which say government agencies shall not impair contract obligations. In California, the state Supreme Court ruled that a public employee with a pension holds a "vested contractual right" that is "in effect not only when employment commences, but ... thereafter conferred during the employee's subsequent tenure."

Public agencies can reduce pension plans for future employees. To attain sufficient savings, changes are needed for current workers. That's tougher.

In 1991, the state Supreme Court blocked a voter-approved move to end pension accruals for legislators. The provision was part of Proposition 140, which set term limits for state lawmakers. Although the initiative amended the state constitution, the court ruled the current legislators' pension accrual rights were protected by the federal Constitution.

Hence, California pension reform that challenges vested rights will probably require voter-approved change to the state Constitution and a U.S. Supreme Court ruling blessing the move as permissible under the federal Constitution.

The U.S. Supreme Court has said the federal constitutional protection is not absolute, that contracts may be impaired if "reasonable and necessary to serve an important governmental purpose." Therein lies a narrow legal opening for pension reformers.

Changing the rate at which employees accrue retirement benefits is not the only issue. Some argue that contractual protections also limit how much workers can be required to contribute toward their pensions.

Gov. Jerry Brown's reform proposal does not attempt to change benefit accrual rates for current employees. Rather, he would increase their contributions. Similarly, California Pension Reform, a group gearing up for a ballot initiative fight, targets the contribution side for current employees.

To be sure, the details of the particular "contract" are critical to the legal analysis and make it difficult to structure a single statewide reform plan. Contract promises might be stated in statutes or labor agreements, or they might be implied by other communications.

For example, state law explicitly permits contribution rate changes for members of the California Public Employees' Retirement System, but it limits contribution rates for members of the California State Teachers' Retirement System.

In San Jose, city leaders are considering a ballot measure that would force employees to choose between contribution increases or reduced benefit accruals. The move there is buttressed by a charter provision that specifically allows pension plan amendments. The University of California has a similar provision, but administrators have opted not to exercise it despite a huge pension shortfall.

With all the fighting over the legal sanctity of pension accrual and contribution rates, there are no constitutional guarantees for salaries and job preservation. At some point, public employees might recognize the irony of that painful trade-off and voluntarily give up some of their pension protections.

http://www.dailydemocrat.com/guestopinions/ci_19630405