On June 1, 2015, I will be talking about pension risk management with several other invited co-speakers. Part of the annual meeting of the Government Finance Officers Association ("GFOA"), this panel will address topics that include (a) what risk management means to public pension fiduciaries (b) different board oversight models (c) the role of strategic asset allocation and (d) reasons why numerous government plans are experiencing deficits. Just as important, we will discuss what risk management means when capital-raising solutions or plan design decisions are denied by lawmakers or courts.
Nowadays, it is nearly impossible to pick up a newspaper without reading an article about pension obligation bonds, bond ratings and legislative pressures to create a fix. As Thomas A. Corfman points out in "Weighing higher taxes against the pension deficit" (Crain's Chicago Business, May 16, 2015), Illinois Governor, Bruce Rauner, has to consider fiscal reform in the aftermath of the State Supreme Court decision that prevents a cut in promised benefits. Increasing income taxes and taxing retirement income are two paths with economic potential to address the nearly $105 billion shortfall but likely to upset voters. Notably, Moody's Investors Service announced on May 1, 2015 that "...Chicago's unfunded pension liabilities and ongoing pension costs will grow significantly, forcing city officials to make difficult decisions for years to come." Its related downgrades of certain city-issued debt will increase expenses and widen the gap between inflows and obligations.
Elsewhere, an attempt to issue fixed income securities as a way to lower "the $23 billion unfunded liability of Colorado's Public Employees Retirement Association" did not gain approval by a requisite State Senate committee. Monica Mendoza with the Denver Business Journal wrote on May 5, 2015 that complex covenants were partly to blame. In Pennsylvania, pension obligation bonds may go forward but that has not curtailed Governor Tom Wolf from issuing a vow to "stop excessive fees to Wall Street managers." With approximately $77 billion in assets in 2014 and $50 billion in unfunded retirement plan commitments, the Keystone State has a heavy load to bear.
New Jersey is another state where heated protests focus on pension deficits. According to "Union bashes Christie on pension cuts in new ad" by Samantha Marcus (NJ.com, May 15, 2015), the Governor has cut almost $1.6 billion "from this year's pension payment to balance the budget." Earlier this month, the Garden State highest court heard arguments about whether such cuts are valid under the law.
The list of beleaguered plan sponsors is long as is the set of issues relating to risk management. For example, absent a green light to issue pension obligation bonds and populist disinterest in seeing benefits cut or taxes raised, can a public pension plan asset-allocate its way to better funding? If a focus on investments is the goal, won't that mean that a grossly underfunded plan will end up assuming a lot more risk? Supposing that the answer is "yes," can a cost-effective infrastructure be established to mitigate risks such as less liquidity without sacrificing expected performance?
No doubt our panel discussion will be lively and timely. I hope you can join us on June 1 for the pension risk management panel.