Wha t I f We Are Wro ng ? NCPE RS 2016 Pub lic Sa fe ty E mplo - - PowerPoint PPT Presentation

Wha t I f We Are Wro ng ?

NCPE RS 2016 Pub lic Sa fe ty E mplo ye e s Pe nsio n & Be ne fits Co nfe re nc e , L a s Ve g a s, NV Oc to b e r 26, 2016

• 1. We Don’t Deser

ve T hem

• 2. T

hey Ar e T

• o E

xpensive

• 3. We Can’t Manage T

hem Our selves

My Ba c kg ro und

• 28 Ye a rs in Pub lic Se rvic e
• Ve ste d Me mb e r o f T

wo Pe nsio n Pla ns

• T

ruste e o n Pe nsio n Bo a rd fo r 8 ye a rs

• F
• rme r Unio n E
• Bo a rd

Me mb e r

• Ma ste rs De g re e in Pub lic

Administra tio n

• CPPT

fro m F lo rida Pub lic Pe nsio n T ruste e Asso c ia tio n

• CAPPP fro m I

F E B

• NCPE

RS Ac c re dite d F iduc ia ry Pro g ra m (NAF )

• 7 Me mb e r Bo a rd
• Po lic e And F

ire

• 2 Ac tive F

ire fig hte rs E le c te d By Me mb e rs

• 2 Ac tive Po lic e Offic e rs E

le c te d By Me mb e rs

• 2 Appo inte d By T

he Ma yo r

• 1 E

le c te d By T he Bo a rd

• Appro xima te ly 1500 Me mb e rs And

$850 AUM

• F

unde d Ra tio I n T he Uppe r 90%

• Assume d Ra te Of Re turn Of 7.5 %
• Ado pte d NCPE

Rs Co de Of Co nduc t

• 1. We Do n’ t De se rve T

he m

• 1. We Do n’ t De se rve T

he m

• We 100% De se rve Our Be ne fits
• T

he Ca lifo rnia Supre me Co urt Uphe ld this (Ma rin Assn. o f Pub lic

E mplo ye e s v. Ma rin Co unty E mplo ye e s’ Re tire me nt Assn.)

• “While a pub lic e mplo ye e do e s ha ve a ’ ve ste d rig ht’ to a

pe nsio n, tha t rig ht is o nly to a ’ re a so na b le ’ pe nsio n—no t a n immuta b le e ntitle me nt to the mo st o ptima l fo rmula o f c a lc ula ting the pe nsio n,”

• “Re a so na b le ” o r “F

a ir” sho uld b e de te rmine d b y ma rke t fo rc e s

• F

a irne ss is unq ua lifia b le a nd disc o unts inta ng ib le s suc h a s PSM

Public Ser vic e Motivation (PSM)

• Public Ser

vic e Motivation (PSM) is a the o rize d a ttrib ute o f

g o ve rnme nt e mplo yme nt tha t e xpla ins why individua ls ha ve a de sire to se rve the pub lic a nd link the ir pe rso na l a c tio ns with the o ve ra ll pub lic inte re st. Unde rsta nding the the o ry a nd pra c tic e o f PSM is impo rta nt in de te rmining the mo tiva tio ns o f individua ls who c ho o se c a re e rs in the g o ve rnme nt a nd no n- pro fit se c to rs de spite the po te ntia l fo r mo re fina nc ia lly luc ra tive c a re e rs in the priva te se c to r.

• PSM Dividend is o ne o f the fa c to r why pub lic se c to r pe nsio n

sho uld b e hig he r the n the priva te se c to r.

NOT PSM

OF F T I L T

• We Ha ve F
• c use d T
• o Muc h

Atte ntio n De fe nding Our Wo rth

• We Are Sta rting T
• Appe a r L

ike We Ha ve “E ntitle me nt Diso rde r”

• T

he Othe r Side Ha s Mo ve d On And I s No w F

• c using On T

he Mo re Qua ntifia b le Arg ume nt Of “T

• o E

xpe nsive ”

• 2. T

he y Are T

• o E

xpe nsive

Moving fr

• m Paper

Cr isis to R eal Cr isis

As Pe nsio n F unding T a ke s Mo re And Mo re Re ve nue F ro m T he ir Ge ne ra l F unds, Mo re GO Bo nds Will Ha ve T

• Be I

ssue d F

• r E

sse ntia l Se rvic e s:

• Sc ho o ls
• Ro a ds
• We lfa re
• T

he Ho me le ss, E tc .

Ag g re g a te F unde d Sta tus

Ca sh F lo w I mb a la nc e s

Admitting T ha t Our Pe nsio ns Are E xpe nsive I s No t Admitting T ha t We Are T

• Bla me F
• r I

t, Or T ha t We Do n’ t De se rve T he m

• I

t I s Ha rd T

• Me e t T

he Assume d Ra te Of Re turn T a rg e ts I n T he Ne w No rm

• L
• we ring Assume d Ra te Of Re turn Only Wo rse ns T

he I ssue

• De mo g ra phic s Are Wo rking Ag a inst Us
• Wo rking T

hro ug h E xc e sse s T ha t We re Cre a te d “F a irly” Via Co lle c tive Ba rg a ining

Ne w No rm

One Side E ffe c t Of Ag g re ssive Mo ne ta ry Po lic y I s An I nc re a sing Stra in On Pub lic Pe nsio ns, Whic h Re ly Upo n Co nsiste nt I nve stme nt Re turns I n Orde r T

• Me e t T

he ir Ob lig a tio ns.

Ma c ro I mplic a tio ns F

• r

Ca pita l Allo c a to rs

• One T

he o ry Sug g e sts T ha t Due T

• T

he E ffo rt T

• Be a t

Our Assume d Ra te Of Re turn During T his L

• w Re turn

E nviro nme nt, T he F

• rc e

E xe rte d By T he Va st Amo unt Of Pub lic Pe nsio n F unds Co uld Ca use A Se rio us Disto rtio n T

• F

ina nc ia l Asse t Pric ing .

• T

his Ma ke s Our Pla ns No t Only E xpe nsive F

• r Us, But

F

• r So c ie ty As A Who le .

• 3. We Ca n’ t Ma na g e T

he m Ourse lve s

• We Ha ve T
• Re -E

va lua te Our Bo a rd Go ve rna nc e

• We Ha ve T
• Re c o g nize Our Own I

mplic it Bia s

• We Ha ve T
• Co ntro l Po litic a l Pre ssure On

Sho rt- T e rmism

• F
• rma l And De F

a c to Risk-sha ring I ssue s with Se lf-Ma na g e me nt

We Ha ve T

• Re c o g nize Our Own I

mplic it Bia s

• Bo a rds T

a ke T

• o Muc h Risk
• Bo a rds Ge t T
• Se t T

he ir Own Ra te s o f Re turns a nd Asse t Allo c a tio ns

• Cre a te Artific ia l “Ca ll Optio n”
• Re ly On T

he Advic e Of Pro fe ssio na ls

• “Pub lic DB pe nsio n funds with a hig he r pe rc e nta g e o f

sta te -po litic a l a nd pa rtic ipa nt-e le c te d truste e s inve st mo re in risky a sse ts a nd use hig he r lia b ility disc o unt ra te s.”

Pe nsio n F und Asse t Allo c atio n and L iab ility Disc o unt Rate s, Ma rc h 2016, Ale ksa nda r Ando no v, E ra smus Unive rsity Ro tte rda m, Ro b Ba ue r Ma a stric ht Unive rsity a nd Ro tma n I CPM, Unive rsity o f T

• ro nto , Ma rtijn Cre me rs, Unive rsity o f No tre Da me

Study Sho ws Bo a rds T a ke T

• Muc h Risk

Sho rt T e rm “Ca ll Optio n”

 “pa rtic ipa nt-e le c te d truste e s re pre se nt the c urre ntly

e mplo ye d a nd re tire d pla n me mb e rs a nd e ffe c tive ly ho ld a sho rt-te rm “c a ll o ptio n” o n the pe nsio n fund a sse ts tha t ma y inc e ntivize the m to inc re a se risk-ta king . I n the sho rt-te rm, pla n pa rtic ipa nts a re no t o b lig e d to pa y hig he r c o ntrib utio ns if inc re a se d risk-ta king re sults in lo w re turns a nd unde rfunde d lia b ilitie s, b ut the y c o uld b e ne fit fro m inc re a se d b e ne fits if risk-ta king yie lds g o o d re turns. I t is o nly a fte r re po rte d unde rfunding pe rsists fo r a pro lo ng e d pe rio d tha t pla n me mb e rs ma y b e e xpo se d to re duc tio ns o f future b e ne fits”

“I nve stme nt c o nsulta nts a dvise institutio na l inve sto rs o n the ir c ho ic e o f fund ma na g e r. F

• c using o n U.S. a c tive ly ma na g e d

e q uity funds, we a na lyze the fa c to rs tha t drive c o nsulta nts’ re c o mme nda tio ns, wha t impa c t the se re c o mme nda tio ns ha ve

• n flo ws, a nd ho w we ll the re c o mme nde d funds pe rfo rm. We find

tha t inve stme nt c o nsulta nts’ re c o mme nda tio ns o f funds a re drive n la rg e ly b y so ft fa c to rs, ra the r tha n the funds’ pa st pe rfo rma nc e , a nd tha t the ir re c o mme nda tio ns ha ve a ve ry sig nific a nt e ffe c t o n fund flo ws. Ho we ve r, we find no e vide nc e tha t the se re c o mme nda tio ns a dd va lue , sug g e sting tha t the se a rc h fo r winne rs, e nc o ura g e d a nd g uide d b y inve stme nt c o nsulta nts, is fruitle ss.”

Pic king winne rs? I nve stme nt c o nsultants' re c o mme ndatio ns o f fund manag e rs T im Je nkinso n, Ho wa rd Jo ne s, a nd Jo se Vic e nte Ma rtine z, Se pte mb e r 26, 2014

Sho rt T e rmism

• Pe nsio n Pla ns Are De sig ne d T
• Ha ve Ve ry

L

• ng T

e rm Ho rizo ns

• We Me a sure Pe rfo rma nc e Qua rte rly
• Pla n Spo nso rs Me a sure Annua lly
• Sho rt T

e rm Bia s I s Affe c ting Our I nve stme nt De c isio ns.

F

• rmal a nd de fac to risk-sharing
• F
• rmal and de fac to risk-sharing plans in the c a se o f

fo rmal risk-sharing fe a ture s, c ha ng e s to pla n b e ne fits a nd c o sts a re kno wn a nd unde rsto o d in a dva nc e , whe re a s de fac to risk-sharing is intro duc e d a fte r pa rtic ipa nts a lre a dy a re in the pla n.

• De fac to risk-sharing b e ne fit re duc tio ns o r c o st

inc re a se s a re impo se d upo n c urre nt e mplo ye e s, re tire e s, o r b o th.

Wha t Ca n We Do

• Ge t Ove r Po int One
• K

e e p An Ope n Mind Ab o ut Po int T wo

• E

xa mine Yo ur Bo a rd Go ve rna nc e

• K

e e p Do ing Wha t Yo u’ re Do ing

Co nc lusio n

T

• de a l with this c ha lle ng e ,

po lic yma ke rs a nd unio n le a de rs ne e d to a dmit tha t the sta tus q uo is po ssib ly unsusta ina b le ; a nd a lso , tha t c ling ing to stric t a dhe re nc e to c urre nt pla n de sig ns tha t we re e na c te d fo r a wo rld tha t no lo ng e r e xists will o nly le a d to g ro wing pe nsio n inso lve nc y. I ro nic a lly, the unio ns a nd pla n spo nso rs fa iling to de a l with the se issue s a re ultima te ly je o pa rdizing the re tire me nt se c urity o f the ir o wn me mb e rs a nd fe llo w g o ve rnme nt wo rke rs.

Yo u T ub e L inks

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PPT A- https:/ / yo utu.b e / 4-dxhl6Dk8k

• Da lla s Po lic e Chie f: https:/ / yo utu.b e / 3RtnQ2Gq Be g
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E DE X: https:/ / yo utu.b e / J97knhJQc ug

• Cra zy Ra nt: https:/ / yo utu.b e / 04s448a 5_OU
• Me e ting : https:/ / yo utu.b e / K

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1. Ac tuarial Ove rb e aring ,Pe nsio ns & I nve stme nts | Se pte mb e r 5, 2016 http:/ / www.pio nline .c o m/ a rtic le / 20160905/ PRI NT / 309059999/ a c tua ria l-o ve rb e a ring 2. Uninte nde d Co nse q ue nc e s, Mic ha e l Ha yho e , E xc ha ng e Ma g a zine .c o m, 9/ 13/ 16 3. Califo rnia Case Ope ns Do o r fo r Pe nsio n Be ne fit Re duc tio ns, Ro my Va rg he se Se pte mb e r 6, 2016 Blo o mb e rg .Co m http:/ / www.b lo o mb e rg .c o m/ ne ws/ a rtic le s/ 2016-09-06/ c a lifo rnia -c o urt-c a se -o pe ns-do o r-fo r-pe nsio n-b e ne fit-re duc tio ns 4. Ho w fle xib le is the “Califo rnia Rule ” fo r pub lic -e mplo ye e pe nsio ns, Sasha Vo lo kh Se pte mb e r 27, T he Wa shing to n Po st,https:/ / www.wa shing to npo st.c o m/ ne ws/ vo lo kh-c o nspira c y/ wp/ 2016/ 09/ 27/ ho w-fle xib le -is-the -c a lifo rnia -rule -fo r-pub lic - e mplo ye e -pe nsio ns/ ? utm_te rm=.14d086581e 6d 5. NASRA I ssue Brie f: Share d-Risk in Pub lic Re tire me nt Plans, June 2014 6. Onc e -Ce le b rate d Dallas Pe nsio n F und Runs Risk o f Go ing Bro ke – Blo o mb e rg .c o m 7. F

• r Pe nsio ns S

yste ms, Past Pe rfo rmanc e I s No Guarante e Of F uture Re sults, By L E ONARD GI L ROY 8-05-2016,Ora ng e Co unty Re g iste r, http:/ / www.o c re g iste r.c o m/ c o mmo n/ printe r/ vie w.php? db =o c re g iste r&id=724808 8. Pub lic Pe nsio n Plans’ Risky I nve stme nts Co uld Co st T axpaye rs Billio ns |,MONE Y,Aug . 11, 2016 9. Rising U.S. State Po st-E mplo yme nt Be ne fit L iab ilitie s Sig nal An Unsustainab le T re nd Ca ro l H Spa in, Jo hn A Sug de n, Sussa n S Co rso n, WWW.ST ANDARDANDPOORS.COM/ RAT I NGSDI RE CT

• 10. T

he I mpac t Of Pub lic Pe nsio ns On S tate And L

• c al Budg e ts, Alic ia H. Munne ll, Je a n-Pie rre Aub ry, a nd L

a ura Quinb y ,Ce nte r fo r Re tire me nt Re se a rc h a t Bo sto n Co lle g e , Numb e r 13, Oc to b e r 2010

• 11. Pe nsio n F

und Asse t Allo c atio n and L iab ility Disc o unt Rate s, Ma rc h 2016, Ale ksa nda r Ando no v, E ra smus Unive rsity Ro tte rda m, Ro b Ba ue r Ma a stric ht Unive rsity a nd Ro tma n I CPM, Unive rsity o f T

• ro nto , Ma rtijn Cre me rs, Unive rsity o f No tre Da me
• 12. Opinio n: T

ime to fo c us o n pe nsio n liab ilitie s, Oc to b e r 02, 2016, http:/ / www.c ra insde tro it.c o m/ a rtic le / 20161002/ OPI NI ON01/ 161009978/ o pinio n-time -to -fo c us-o n-pe nsio n-lia b ilitie s

• 13. Payme nt I

mb alanc e s, Cha rle s Mc Gra th Pub lishe d: Se pte mb e r 13, 2016,Pe nsio ns & I nve stme nts Http:/ / www.pio nline .c o m/ a rtic le / 20160913/ I NT E RACT I VE / 160919969/ pa yme nt-imb a la nc e s? te mpla te =print

• 14. Unpac king T

he Pub lic Pe nsio n 'Crisis': I s Yo ur State At Risk? Se p. 23, 2016 E va n Po we rs, http:/ / se e king a lpha .c o m/ a rtic le / 4008052- unpa c king pub lic pe nsio nc risissta te ris 15. Pic king winne rs? I nve stme nt c o nsultants' re c o mme ndatio ns o f fund manag e rs T im Je nkinso n, Ho wa rd Jo ne s, a nd Jo se Vic e nte Ma rtine z, Se pte mb e r 26, 2014 http:/ / ssrn.c o m/ a b stra c t=2327042