Seattle's "Actuarial Valuation" of City Pension Plan Sinks to 62% Funded; I say it's Far Worse

A new Seattle report says the city will have to increase pension contributions to keep its plan solvent. Please consider Seattle's retirement investments plunge deeply.

The City of Seattle will have to substantially increase the amount of money it pays into its employees' retirement system to cover future obligations because its related investments took big hits during the economic meltdown, according to a report presented to the City Council Friday.

This situation will put further pressure on a city budget that is already fracturing.

As of Jan. 1, 2008, the city's retirement "actuarial valuation" funding ratio was 92.4 percent, the report said. That's the ratio of the assets the city had compared to what it owes for benefits earned by employees. As of Jan. 1 of this year, the funding ratio had dropped to 62 percent - mainly because the city's stock market holdings tied to retirement accounts dropped 20 percent and other factors.

The study prepared for Seattle by Milliman says the city will have to increase its retirement contribution rates make sure its retirement plans are fully funded. Workers and the city contribute to the plan, but rate hikes for employees are limited to 2 percent, said the report.

City Councilman Mike O'Brien said it's unrealistic to wait and hope that a Wall Street surge solves the city's retirement funding problem.

O'Brien said City Councilmembers, who will consider the matter in earnest during fall budget talks, will have to determine whether 1 percent bumps are enough to right the retirement ship.

City of Seattle Pension Results

Inquiring minds are digging into the City of Seattle Pension Plan Funding Report.

An increase in contribution rates is needed to maintain actuarial balance.

• Employees and employer share rate increases, but rate increase for employees is limited to 2.00% (10.03% total).
• As of January 1, 2011, employer rate increase needed is 6.97% of payroll.
• Total employer portion would increase from 8.03% to 15.00% of payroll.

Worse Than It Looks

Note the huge increase in payroll funding. Also note that the study was done on January 1, 2010. The stock market is now down on the year. Thus, it is highly likely that 62% is actuarially overstated .

Is the city going to raise taxes or cut services to make that payout? Will it be enough?

Stop Digging More Holes

The first thing Seattle needs to do is stop digging holes. Defined benefit plans need to be scrapped for all new hires and the city should privatize every conceivable service.

Yet that only stops new bleeding. It does not address current bleeding.

Misguided Rate-of-Return Assumptions

A huge (and widely ignored) problem with actuarial projections is forward rate of return assumptions. Seattle is assuming 7.75% per year annualized returns.

That is not going to happen, at least not the way these asset alligators invest - 100% long, 100% in, 100% of the time.

I have pointed out the massive structural problems time and time again. Rather than 7.75% returns, the stock market is not likely to be higher than it is today, five years from now in my estimation.

It is simply unrealistic to expect those rates of return when 10-year treasuries are sitting at 3%, unemployment will be structurally high for a decade, boomers are headed for retirement underfunded and looking to downsize spending plans, housing is in the gutter, there is no driver for jobs, and attitudes towards consumption and spending have changed for good.

Most simply do not understand the ramifications of the Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge.

This is not 1980 where falling interest rates supported the economy. There is no internet boom coming like we saw in the 1990's. There is not another housing or commercial real estate boom like we saw from 2002-2007 waiting in the wings.

Instead the Fed is struggling to gain traction at a time short-term interest rates are at zero percent and no way to go lower.

To top it off overleveraged consumers still struggle to pay down debt. The Fed and Congress acted to pump $2 trillion into the economy and unemployment rate still hovers near 10%.

This is not a good time to have net equity exposure, yet all of the asset alligators and pension plans are hugely in equities. More pain is coming and few are prepared for it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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