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A favorite quote: "TRS' fixed-income investments also are riskier than they seem. The portfolio includes the sale of hundreds of millions of dollars' worth of credit default swaps obligating TRS to guarantee payment on debt issued by governments including hot spots Italy and Spain. Such investments, which TRS says equal less than 1% of its portfolio, were reported last year by Northwestern University's Medill Reports."
All y'all can laugh at Illinois but that's just the tip of the iceberg. The real problem with underfunded pensions is with the cities and counties around the country. Most states don't have this much of a problem with their state pension systems because 'most' states didn't over promise and underdeliver.
In Michigan, we switched to a DC pension back almost 20 years ago at the state level. Our DC pension contributes 4% plus will match 3% so that 3 buys you 10. Lot's of investment options and they just increaded the premium on health insurance to 20%. Our DB pension was set up as age + avg annual salary * 1.5 (i.e. I was making about $65K when I retired at 30 years and wound up with a pension of ~$35K/year.
However, at the county and local level, you have DB pensions with multipliers of 2 or 2.5 or even 3.0. Also, a great trick is to not take a 3 year avg salary but only the last year. Oh, yeah. That allows you to juice that last year with OT and vacation and sick leave, so that even though your greatest salary was $65K, your last year for pension calculations is $100K or more. This can equate to an annual pension of around $100K or even more. Now that is a recipe for disaster and that's the disaster you're starting to see manifest itself.
Comments
http://www.zerohedge.com/news/2013-03-11/last-laugh-illinois-pension-system-charged-not-disclosing-structural-underfunding
They got a response back then saying they were wrong and everything is fine.
Another good article from 2011.
http://www.chicagobusiness.com/article/20111217/ISSUE01/312179972/pension-peril-illinois-trs-goes-higher-risk-with-investments
A favorite quote: "TRS' fixed-income investments also are riskier than they seem. The portfolio includes the sale of hundreds of millions of dollars' worth of credit default swaps obligating TRS to guarantee payment on debt issued by governments including hot spots Italy and Spain. Such investments, which TRS says equal less than 1% of its portfolio, were reported last year by Northwestern University's Medill Reports."
In Michigan, we switched to a DC pension back almost 20 years ago at the state level. Our DC pension contributes 4% plus will match 3% so that 3 buys you 10. Lot's of investment options and they just increaded the premium on health insurance to 20%. Our DB pension was set up as age + avg annual salary * 1.5 (i.e. I was making about $65K when I retired at 30 years and wound up with a pension of ~$35K/year.
However, at the county and local level, you have DB pensions with multipliers of 2 or 2.5 or even 3.0. Also, a great trick is to not take a 3 year avg salary but only the last year. Oh, yeah. That allows you to juice that last year with OT and vacation and sick leave, so that even though your greatest salary was $65K, your last year for pension calculations is $100K or more. This can equate to an annual pension of around $100K or even more. Now that is a recipe for disaster and that's the disaster you're starting to see manifest itself.
and so it goes,
peace,
rono