States still stuck when it comes to pension plan fixes

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I spoke recently with Bill Howell, the longtime speaker of Virginia’s House of Delegates. While he is not standing again for election, he is the kind of person who wants to use the last portion of his authority with the state government to work on the most important issues facing his state.

Number one on his list is pension reform. Nobody will be able to pin on him the consequences of inaction today or the failure of an unsustainable system over time. Making the choice to spend the last months of his time in office with a virtual shovel on his shoulder is leadership one doesn’t see much across the Potomac these days.

Other places will certainly provide awareness through “canary in the coal mine” warnings about the fiscal challenges of our retirement security system, but our political system and culture are generally less responsive to these kinds of virtually certain problems than they are to perceived future environmental hazards. As one example, due in large part to the one-child policy instituted in 1979, China is now contemplating the “4:2:1” situation of one grandchild in the workforce struggling to support two parents and four grandparents. For perspective, China is physically roughly the same size as the United States, with five times its population. That country alone is projecting a population over age 60 of more than 300 million people by 2024. The pressure on offspring to care for this number of elderly is mirrored in public programs.

Somewhere in my files is a page of dates in the not-so-distant future that represent each state’s technical bankruptcy, if something isn’t done in the meantime to alter the math. There is also Medicaid, of course, the budget issue du jour, but these dates are only based on pensions and state employee health care. In those jurisdictions where local governments participate in the state systems, their figures are included.

Pennsylvania is a good example of the political and financial pressures on governments to keep promises to their employees. Having barely celebrated passage of needed reforms a few days ago, there is already serious discussion of allowing the state to borrow the money it just required itself to put aside to fund the reforms.

Not even a month ago, Pennsylvania lawmakers enacted bipartisan legislation that required them to fully fund the employer (state) share of their defined contribution plan. When Gov. Tom Wolf signed the bill his public comment was: “Here in Harrisburg we can get important things done in a way that I think a lot of other places cannot.”

The new law provides that only hazardous-duty state employees, such as law enforcement, will stay eligible for the once-ubiquitous defined benefit plans that defined public pensions for decades but have been mostly phased out in the private sector. Both state and school employees who start jobs in 2019 will have three retirement options, and current employees will have to choose one, as well. Two of the new plans combine features of a guaranteed pension amount with an investment vehicle similar to private-sector plans. The third is a full defined contribution plan like a 401(k) plan, where the state pays 2 percent of salaries into the plan for school employees and 3.25 percent for other state workers to match their 7.5 percent minimum contributions.

Now there are rumblings that the state will authorize—as Illinois and other states with shaky financials have—sales of pension obligation bonds to lay against a portion of its share. It is theoretically possible to earn a rate of return on the bonds more than the pension contribution owed, but successes are few, and the risk to future workers and taxpayers accordingly great. Both Illinois and New Jersey have sold billions of dollars of pension obligation bonds. This year, 80 percent of the money paid out by Illinois for state teacher pension payments is going toward the unfunded liability. The state has never paid its full share, according to the Teacher’s Retirement System. Racking up long-term losses on these instruments, Illinois jacked up its income tax by 66 percent in 2011, and another 32 percent increase was over Gov. Bruce Rauner’s veto this past week. These are not unrelated stories.

New Jersey has suffered the indignity of being sued by federal regulators for securities fraud in its pension bond sales. The Garden State’s pension system was rated dead last among the 50 states in the most recent Pew Charitable Trust national study. State workers have been paying in higher amounts since 2011 reforms, but the state has not kept up its commitment. Ironically, the latest reform proposal for the worst-funded pension system among the states is to give it the billion-dollar lottery. This would increase the funded rate immediately to 65 percent – a dramatic improvement. If there is a better metaphor for a New Jersey solution, I don’t know what it would be. People in the Garden State will be encouraged to keep on gambling.

Pennsylvania should stay the course, and allow the reforms to nudge the retirement plans for state workers and teachers back toward stability.


Image by Aaban

 

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