Monday, March 29, 2010

Pennsylvania State Employee Retirement System Riskiest in the Country

This headline was a story reported on NPR on March 23rd.

Is this what happens when your pension gets underfunded? How does a pension fund try to game returns back into its favor? There are two answers: First, you can increase risk. Second, you can increase leverage.

PSERS is banking on better than 8% returns going forward to meet its obligations. With just 13% of its funds in bonds and cash, this is a portfolio allocation better suited for a 20-something whippersnapper, not a system that is expected to pay out billions of dollars of pension payments for generations! When your investment returns (or lack thereof) are guaranteed by taxpayers, why not leverage everything? Essentially, the system is one which encourages risky behavior because the pension obligations are backed by the Commonwealth (that's me an you).

To see how we got here, please take a look at this article from Mainline Media News. It presents a good history of the situation and also walks through the PSBA and Rendell proposals about how to "fix" the problem. This article points out that there is no easy solution.

See this post from 2008 on how PSERS had changed its investment philosophy to favor more private investment placements (hedge funds and real estate development).

The Day of Reckoning (see the article in that link) for the Pennsylvania plan is 2023. This is when the pension payments are scheduled to run out. From the article:
If we are going to keep providing generous pensions to state workers, taxes will have to rise dramatically in the near future to pay for them. Alternatively, public employee benefits could be limited to the extent possible under the law, and other spending could be cut. The most equitable solution is probably one in which both taxpayers and public employees share in the pain to some extent. One thing is for certain: to continue ignoring the problem until states run bankrupt is not in anyone’s interest.
This is why I asked the Board to pass a resolution urging the PA House and Senate to get pension reform on the front burner now.

Thanks for reading.

James