Financial Advisor Sees More Public Pension Trouble

Online, April 7, 2011 (Newswire.com) - Dennis Tubbergen is a financial advisor, advisor to financial advisors, author and radio talk show host. One of his recent topics in his online blog and his Moving Markets™ monthly newsletter has been where pension funds in the U.S. could be headed.

"As I wrote previously, one of the symptoms of overspending and excessive debt accumulation will likely be trouble with public pension funding," explains Tubbergen. "Rather than use realistic actuarial assumptions based on current economic reality, many pensions are using asset return assumptions that are entirely too optimistic. In case you're not familiar with actuarial work, pension plans hire an actuary to calculate to what level the public entity needs to fund the pension in order to guarantee that future benefits will be paid."

Tubbergen refers to an article in The Wall Street Journal from March 23, 2011 which states that due to overly-optimistic assumptions, many pension plans around the country are now underfunded.

"This underfunding exacerbates an already serious debt problem in many states and municipalities since pension underfunding is simply debt," adds Tubbergen.

In part, The Wall Street Journal article reads, "Some public pension funds are finding themselves caught in a squeeze between actuaries worried about future benefit costs and local governments worried about immediate budget strains."

The article goes on to discuss California pension fund Calpers and how the fund's actuary had asked the California Public Employees' Retirement System to "adopt a more conservative long-term investment expectation" but the dozen or so government officials urged Calpers to leave the rate unchanged. Calpers left the rate as it was, but if investment goals are not hit in the future, the fund will eventually cause a burden on its associated governments at some point in the future.

According to the WSJ article, Calper's chief actuary had suggested lowering the return rate to 7.5% from its current 7.75% rate. Doing so would have increased the amount local governments paid to the pension fund by anywhere from 1.5% to 3%. The recommended rate would have increased the contributions of Santa Maria, California by up to $1.9 million per year.

"Here's my take on this," explains Tubbergen. 'By keeping investment return assumptions at a higher level, these politicians are simply kicking the can down the road in order to pass on today's problem to a future group of politicians to deal with when the problem is much larger. Of course, this outcome is assuming that future investment returns are lower than the returns projected which is, in my view, the most likely outcome."

Tubbergen believes ignoring these debt problems and refusing to deal with them realistically at the present time creates larger problems down the road.

"Take for example what recently occurred in Prichard, Alabama," cites Tubbergen. "About 150 retired city workers who were all receiving pensions suddenly found that their monthly pension check quit showing up in the mailbox."

Tubbergen quotes The Militant from January 16, 2011 with the above statistics, saying the city of Prichard declared bankruptcy and simply quit sending the retirement checks.

"Imagine that," invites Tubbergen. "You're a city retiree who worked for many years for the city. One day, you wake up to find that a pension benefit that you expected to receive for life is no longer there due to mismanagement and/or underfunding. Unfortunately, I believe that there will be many more stories like this one as time passes by."

Dennis Tubbergen has been in the financial industry for over 25 years and has his corporate offices in the USA Wealth Management Building in downtown Grand Rapids, Michigan. Tubbergen is CEO of USA Wealth Management, LLC and has an online blog that can be viewed at www.dennistubbergen.com. His weekly talk show The Everything Financial Radio Show is simulcast on two Michigan metro stations and also airs to over 600,000 financial advisors, with recent podcasts available at www.everythingfinancialradio.com.

The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.