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Old 03-18-2013, 10:39 PM  
banyon banyon is offline
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Brownback seeks pension reform advice from Nobel prize winning Wall Street bailee

Texas financial firm pushes for 401(k) KPERS
By Andy Marso
THE CAPITAL-JOURNAL

Monday, March 18, 2013

Nobel laureate Robert C. Merton, a Massachusetts Institute of Technology professor and an economist affiliated with a Texas financial firm, left, former U.S. Sen. Bill Bradley and Lt. Gov. Jeff Colyer, right were before the House Pensions and Benefits Committee Monday morning talking about the states public pension plan.

Former U.S. Sen. Bill Bradley and a Nobel laureate economist affiliated with a Texas financial firm told legislators Monday they should separate Kansas' public pension system's past from its future in order to prevent the risk of further state debt.

Robert C. Merton, a Massachusetts Institute of Technology professor who shared the Nobel prize for economics in 1997, told the House Pensions and Benefits Committee the estimated $9 billion in state debt in the Kansas Public Employee Retirement System is actually larger because it assumes an 8 percent investment return.

"They treat the 8 percent as risk-free, in the long run,” Merton said. “That means the $10 billion, $9 billion that you are underwater is an understatement.”

Merton acknowledged that the 8 percent historical return assumed by actuaries is fairly standard, but said the only truly risk-free investment is U.S. Treasury bonds, which pay 3 percent.

Merton also acknowledged several times that he is not an actuary.

"This has nothing to do with actuarial science," Merton said. "This is common sense.”

KPERS serves 281,000 total Kansans, including 155,000 active employees in state, local and school governments.

Alan Conroy, the executive director of KPERS, said the 8 percent assumed rate of return is set by a board of trustees based on complex investment calculations and has held true in recent decades despite swings in either direction.

"For the last 20 to 25 years, we've made it," Conroy said.

Merton and Bradley are affiliated with Austin-based Dimensional Fund Advisors, a firm led by major University of Kansas donor David Booth that handles the kind of 401(k)-style "direct contribution" retirement plans that Merton said the Legislature should switch new public hires to in order to "stop digging" the unfunded liability hole.

"You really need to separate it into two parts," Merton said of KPERS. "The legacy and the future.”

Merton's direct contribution plan, while not addressing the current projected deficit, would place all risk for future market losses on new employees.

DFA officials met earlier this month in Austin with Gov. Sam Brownback, Lt. Gov. Jeff Colyer, House pensions committee chairman Steve Johnson, R-Assaria, and other state financial leaders. Though the Administration is also bullish on moving new and non-vested hires into a direct contribution plan, Colyer told legislators that Merton and Bradley were only there to provide advice, not to bid on a possible state contract to administer such a plan.

“From the administration’s perspective and talking with chairman Johnson, I think everybody believes we should give people choices," Colyer said. "This is not an exclusive sort of thing."

The Legislature passed a bill last year to slide new hires into a cash balance plan, seen as a compromise between the direct contribution and a traditional pension. If investment projections hold, Conroy's department calculates the current unfunded actuarial liability will be paid by 2033.

Sen. Laura Kelly, D-Topeka, said the Legislature should give that plan — which was approved after more than a year of study — a chance rather than scuttling it in favor of a hastily-reviewed direct contribution plan.

"I would be very cautious," Kelly said. "I certainly hope we don't railroad this thing through in the last couple weeks of the session."

Ernie Claudel, a leader of the Kansas Coalition of Public Retirees, said traditionally the most stable payments that bring down the unfunded liability in the KPERS trust fund have come from employee contributions and those contributions would gradually cease if new hires are moved to a direct contribution plan because such plans are individual, not part of the trust fund.

"The way I understand it is, they are just running up the bill," Claudel said after watching Merton and Bradley's presentation Monday. "They want a quick fix and they want to transfer all of the risk to the employee."

Johnson told the committee members they would discuss other ways to pay down the KPERS debt this week, including low-interest bonds.

Merton, in response to a committee question, said private companies currently participate in DFA's direct contribution plan, but no public entity has tried it yet.

As Merton fielded a question from Rep. Kathy Wolfe Moore, D-Kansas City, about the relatively short track record of the plan, Bradley tapped him on the shoulder and took over. Bradley told the committee about the initial skepticism when he helped negotiate a new pension plan for NBA players as a member of the New York Knicks and the laughter Dick Fosbury faced when he first leaped over a high jump bar backwards, only to later win a gold medal using the now-standard technique.

"When something is new, it’s pretty difficult to have a track record of 30 years," Bradley said. "But that’s how every innovation has ever been.”

Colyer told legislators that Merton and Bradley would be available over the noon hour in Colyer's ceremonial room, where lawmakers would also be able to take pictures with the original rules of basketball, which Booth purchased at auction in 2010 for about $4.3 million.

Merton and Myron Scholes were awarded the Nobel prize for developing a new method for evaluating derivatives. One year later, Merton's hedge fund, Long-Term Capital Management, lost $4.6 billion and had to be bailed out by other Wall Street firms.

A DFA official said Monday the company's retirement plans are completely different than the derivative-trading strategies employed by Long-Term Capital Management.

http://m.cjonline.com/news/2013-03-1...hes-401k-kpers


This guy just keeps coming up with the best plans.
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Old 03-18-2013, 10:42 PM   #2
banyon banyon is offline
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Join Date: Aug 2005
Location: Dodge City, Kansas
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Hard to say if there is a real, structural problem here.

The guys' numbers have all been faked so far, so it's hard to tell.

Plus, the revenue hole doesn't help. I wouldn't be opposed to going 401k, since at least I'll be in control of it instead of these guys.
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banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.banyon wants to die in a aids tree fire.
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