“Proposals’ goal: avoid insolvency” was the kicker under the headline last week in the Columbus Dispatch reporting that representatives of all five of Ohio’s public pension systems had signed off on reforms passed this week by the Ohio General Assembly. Our state Senate had passed the reform package before the summer break, sponsored by the Democratic and Republican Senate leaders on the basis that the largest of the systems, the Public Employees Retirement System, estimated that it was losing $1 million every day that the current law and system is in place.  The changes take effect Jan. 7, 2013 of next year.

Ohio faces the same kind of problem that many other states are currently engaging.  What the Legislature has done is to tweak the cost-of-living adjustments and to increase the retirement ages, the number of years looked at for determining the highest average salary and the employee contribution rate.  By doing this, the five bills, one for each of the Ohio public retirement systems, can now justify a calculation that the plans can pay off their unfunded liabilities within 30 years.  This is what state law mandates for the 1.3 million active and retired public workers in Ohio’s systems. The bills also give four of the five pension boards the authority to make future benefits adjustments without coming to the Legislature for approval.

Those unfunded liabilities total roughly $70 billion – an amount that Greg Lawson of the Buckeye Institute pointed out in his House committee testimony is equivalent to 126% of the state’s biennial budget. Taken together, the funds are approximately 67% funded, where 80% is considered to be the minimum standard for fiscal soundness.  This is actually not bad, considering where some of our sister states are sitting, but this kind of yardstick will not prevent a day of reckoning.

What the Legislature did not do is to use real world assumptions about the rate of return on investments.  The use of high assumed rates of return worries both House Speaker Bill Batchelder, R-Medina, and Sen. Keith Faber, R-Celina, chair of the Ohio Retirement Study Council.  Both of these gentlemen and anybody working in this area of government right now are fully aware that the biggest California public pension fund earned 1% on its investment portfolio this last fiscal year, but their assumption for the gigantic plan is still 7.25%.  Ohio’s assumed rates are even higher.

Neither did the Legislature redefine the plans to base them on employee and taxpayer contributions, instead keeping the current structure of having taxpayers guarantee the benefits.  The private sector has moved away from defined benefits plans its earnings could no longer support, and many states with problems have moved in the same direction.  Michigan was one of the first, saving its taxpayers approximately $2.3 billion since the reforms became effective in 1997.

Utah, hearing from its actuarial consultants that its pension system for state employees now had a 30% hole in it (which had been 100% funded until the market collapse in 2008) and that it would take 10% of its general fund for 25 years to repair if changes were not made, began offering its employees either a defined contribution or a hybrid model in 2010.

Rhode Island and Virginia have established mandatory hybrid plans for all future state employees.  Many other states are grappling with their pension costs and the quickly rising cost of retiree health benefits.  (There appears to be considerable savings available to states that are conducting comprehensive recovery audits for improper payments, and that is an issue for a future article.)

One reasonable set of calculations estimates that Ohio could save $3.3 billion for its taxpayers over the course of the same 30 years that our new legislation embraces, by doing what these other states and the private sector have done.  Before this reform and after it, public employees assume no risk in earning their retirement income.  The guaranteed benefits are the responsibility of the taxpayers.

The average Ohio government employee receives a contribution from the taxpayers of about 14% of his or her salary.  The average private sector worker in Ohio receives a 6.2% contribution toward Social Security from their employer, and in some cases, an average 4.0% contribution to a 401(k) plan, totaling 10.2% of the salary.  This is already a pretty significant difference, and is the reason that public pension reform is a hot item in the legislatures and has appeared on some ballots across the country for voters to decide directly.

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