States' pension fund rules examined
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Nothing elevates the blood pressure of taxpayers like dipping into their pockets to make good on pension promises made to government employees by the very local and state government officials they voted into office.
A new report from Boston College's Center for Retirement Research is unlikely to soothe these savage beasts -- despite the authors' warning not to make too much of their findings.
The report centers on the impact that proposals being circulated by the Government Accounting Standards Board would have on state and local government pension funds. As with much pension news these days, the picture is not pretty.
GASB makes the rules for how governments keep their books.
Its proposals would change the way public pension funds value their assets -- money that governments and their employees contribute to pension funds as well as the funds that pension investments earn -- and how they value their liabilities, or the benefits retirees are entitled to based on their pay and years of service.
Pension fund assets would be valued based on current market prices, rather than the current practice of "smoothing" the value by spreading out market gains and losses over a longer period, typically five years. Using market prices would cause bigger yearly changes in the value of funds, making them look healthier in years when investments did well and weaker when returns soured.
Boston College researchers examined 126 large public pension funds and determined that the proposed rules would dramatically change our understanding of how well they are funded. In 2010, those 126 funds were 77 percent funded based on current rules; that is, they had 77 cents for every $1 owed.
But if the proposed accounting rules were in place, the same funds would have been only 53 percent funded.
The researchers estimated Pennsylvania's $24 billion State Employees' Retirement System, which was about 80 percent funded in 2010 under current rules, would have been 51 percent funded under the proposed standards. The state's $47 billion Public School Employees Retirement System would have been 34 percent funded vs. 75 percent under existing accounting rules.
What really drew attention was the researchers' estimates of when the funds would run out of money if the new rules were implemented. According to the report, the state teachers fund would be tapped out in 2024 and the other pension fund would be broke four years later.
"It is really inaccurate and really wrong. The fund is not running out of money," said Evelyn Tatkovski, spokeswoman for the state teachers pension fund.
She pointed out that the study assumed pension plan contributions would average what they did over the last decade when in fact they will increase as a result of legislation enacted last year. Among other things, the law raised the retirement age for future employees and gave employees the option of contributing more to the plan or having their benefits reduced.
The impact of the increased funding requirements is evident in budget debates at the state and local government level. Last week, Upper St. Clair's school board gave preliminary approval to a budget that would raise taxes to cover, among other things, contributions to the teachers' pension fund.
Even with the new law, the condition of the state pension funds will get worse before it gets better. Based on projections developed by Buck Consultants, the teachers' fund will go from a deficit of $19.7 billion in 2010 to a $43.6 billion deficit in 2018, when it will be 59 percent funded. The pension plan would not get up to current funding levels until 2028 and not be fully funded until the 2040s, Buck estimated.
Pamela Hile, spokeswoman for the state employees pension fund, said the new law means that instead of being out of money in 2028 as the report suggests, the fund will have enough to cover 78 percent of its obligations -- slightly more underfunded than it was last year. As long as the state and its employees make the contributions required by the new law, pension promises will be fully funded sometime after 2040.
The state's projections are based on current accounting standards, not the rules being proposed by GASB. Officials of both pension funds said they could not estimate how their forecasts would be affected if the proposed standards were adopted.
While the Boston College report does not take into account measures Pennsylvania and other states have already taken to address the issue, the researchers said all they wanted to do was give those involved a "heads up" about the impact the proposed changes would have.
"It would be unfortunate if the press and politicians characterized these new numbers as evidence of a worsening of the crisis," the authors concluded.
No matter what the accounting, projections of how healthy pension funds will be down the road are based on assumptions about how much a pension fund's investments will earn; how long workers will stay on the job and what pay increases they receive; and how long they and current retirees will live. Being aggressive or conservative with any of these guesses can change the picture dramatically.
Forecasts are also based on the premise that politicians -- and the taxpayers who elect them -- will not have a change of heart when it comes to funding these promises. Moreover, they assume elected officials will resist making new retirement benefit promises they cannot keep.
Based on the pension benefits increases that Pennsylvania's lawgivers gave to themselves and others in 2001 and their decision a few years later to defer pension contributions because of a budget shortfall, that may be the biggest assumption of them all.
First Published December 18, 2011 12:00 am
