Saturday, October 26, 2013
Ind. Gov't. - "Case in Detroit Highlights Costs of ‘Extra’ Pension Payments" - What about Indiana?
Mary Williams Walsh wrote Oct. 22nd in the NY Times about the Detroit pension system. Parts of the story caught the ILB's attention:
The city’s pension system made extra payments for decades to thousands of people, on the thinking that the base pensions were too small. The pension board thought it found the money for the extra payments by skimming off “the excess” when returns on investments exceeded the plan’s target — 7.9 percent in Detroit.The Detroit Free Press had the Detroit story on September 8th. Nathan Bomey and John Gallagher reported at length. Some quotes:
But the pension fund also had years when its investments fell short of the target. And with millions of dollars being paid out each year in the extras, the fund missed out on all the investment income that money would have brought in. So the extra payments fundamentally undercut the health of the pension plan.
Nor is Detroit alone in making the extra payments — known variously as “the 13th check,” “the skim fund,” “the bump up,” “the waterfall” and so on. New York City; Phoenix; San Jose, Calif.; and Tampa, Fla., along with some of the public plans in Illinois, Indiana, Texas and Mississippi also have the add-ons. * * *
Cities and states around the country are watching Detroit’s case closely. Many of them are struggling with pension plans that are overwhelming their finances, and a surprising number also make the extra payments. * * *
“We were saving the city money,” said Tina Bassett, a spokeswoman for Detroit’s pension trustees.
But a study in 2011 by an outside actuary showed that the extra payouts were actually costing Detroit billions of dollars, although it was hard to see because the city’s disclosures were sketchy. Actuaries model pension costs over the long term, and when trustees find “excess” money year by year and spend it, they defeat the fundamental premise of the plan — that investment gains, not local taxpayers, will pay most of the cost.
“This sounds like San Diego,” Mr. Levitt said when told about Detroit’s program. “It appears to lack transparency, and it appears deceptive, in terms of not defining the true cost of the pension.”
In San Diego, officials also decided that the “excess earnings” of the pension fund allowed the city to reduce its required annual contributions. In fact, that worsened the damage because after making all the extra payments, the pension fund needed more money from the city, not less.
One of Detroit’s two pension funds handed out nearly $1 billion in bonus cash payments over two decades to retirees and active employees’ retirement accounts instead of reinvesting the extra earnings for the future, according to a Free Press review of city records.So here is a valuable story from June 24, 2012, reported by Niki Kelly of the FWJG, about the "13rd check" granted last year. (It was also granted this year, but there are no detailed news stories this year.) The headline: "State pensioners may get a raise: Healthier funds could trigger cost-of-living adjustment." Some quotes:
The payments, often referred to as a “13th check,” contributed to Detroit’s financial crisis and its historic Chapter 9 bankruptcy filing by increasing the amount the city needed to contribute each year to keep the pension fund solvent.
INDIANAPOLIS – While a number of public retirees including judges and some police and firefighters receive a cost-of-living adjustment every year in their pensions, other retirees have to seek help every year from lawmakers for some increase in benefits.ILB: Using the example above:
Often that help comes in the form of a one-time payment, also known as a 13th check, which generally is less expensive for the state. * * *
[ILB:] I do not recall the last time, if ever, that retired teachers and state employees covered by PERF received a cost-of-living raise, as opposed to a 13th check. (Keep reading for the answer.)]
A number of individual pension funds make up the state’s entire pension obligation. The largest is the Public Employees’ Retirement Fund, or PERF. There are also separate funds for retired teachers, judges, prosecuting attorneys and police and firefighters.
Only two have automatic annual hikes – the judges and a police and firefighter fund.
Otherwise, the legislature has to step in every year and decide between a 13th check and a cost-of-living adjustment. [ILB: or nothing]
The 13th check is essentially a one-time payment given to all retirees based on years of service. It typically ranges from $125 to $400.
But the key is this one-time payment doesn’t affect the base benefit amount for the future.
A cost-of-living adjustment increases the base and has a compounding effect every year. So if someone gets $300 a month, a 1 percent cost-of-living adjustment (often called COLA) would give them an additional $3 monthly.
But over time, any additional adjustments are on that new higher amount.
Steve Russo, executive director of the Indiana Public Retirement System, said a cost-of-living adjustment doesn’t cost the state as much money during the first year, but over the long haul it’s a huge amount of money.
“Hypothetically, if we do the 13th check every year, it’s still cheaper over any time period,” he said.
Rep. Jeff Espich, R-Uniondale, chairman of the House Ways and Means Committee, agreed that both choices cost the state money, but the one-time payment costs less overall and doesn’t deepen unsound deficits in the fund.
He also said it’s better for some of the retirees, mostly those who are older and retired at much smaller salaries. He said that for a retired teacher who was making $25,000, a 1 percent cost-of-living adjustment is $250, compared with a one-time check of more than $400. * * *
This year’s 13th check cost roughly $55 million, and lawmakers put in a general fund appropriation to pay for a portion of it so the overall health of the fund wouldn’t worsen.
Lawmakers gave retired teachers a 13th check the past three years and cost-of-living adjustments from 2003 through 2008. Before that, there were several years with both benefits depending on retirement dates, Thomas said.
Bill Murphy, executive director of the Retired Indiana Public Employees Association, said public retirees received a 13th check from 1991 through 2011 except for one year, in 2004.
That year there was a cost-of-living adjustment. The last one was approved in 2008, and it was 1 percent.
He said that for a retired teacher who was making $25,000, a 1 percent cost-of-living adjustment is $250, compared with a one-time check of more than $400.So the retired teacher receiving $25,000 + $400 each year as a "13th check" receives a total of $254,000 over 10 years.
The retired teacher receiving $25,000 plus a 1% cost-of-living raise each year receives a total of $264,177 over 10 years.
In the 10th year, the teacher receiving a $400 13th check each year will received a total of $25,400. The teacher who has received a 1% cost-of-living raise each year will receive $27,616 in her 10th year.
Using the example again:
He said that for a retired teacher who was making $25,000, a 1 percent cost-of-living adjustment is $250, compared with a one-time check of more than $400.
That $250 vs. $400 comparison only favors the 13th check approach in the first year. The second year it is $503 vs. $400, the third $758 vs. $400 ... and by the 10th year, it is $2,616 vs. $400.
Finally, exactly what funds go to finance the 13th checks in Indiana each year is unclear to the ILB, as is their impact in the long run to the viability of the fund.
Posted by Marcia Oddi on October 26, 2013 06:04 PM
Posted to Indiana Government