Fund managers argue pensions ‘gradually’ will be ‘fully funded’ at 80 percent
By Darwyyn Deyo | PA Independent
HARRISBURG — Even though state pensions have an unfunded liability of over $23 billion, managers say the funds will “gradually” be “fully funded” at 80 percent, while others point out property tax increases will be necessary.
Contributions from state taxpayers to the State Employees Retirement System, which includes all state government employees, would be $28.5 million in the proposed 2011-2012 budget, down from $29.5 million in the 2010-2011 budget, a 3.5 percent decrease. Rick Dreyfuss, an actuary, argues taxpayers should contribute two to three times more.
Other calculations show taxpayers owe state employees and retirees more than $100 billion
The Public School Employee Retirement System is funded through a 55:45 split between state government and school districts — the state government funds 55 percent of the system and the school districts fund 45 percent.
In the proposed budget for 2011-2012, taxpayers would contribute $664.6 million to PSERS, with $615 million of that coming from the state Department of Education. Through that combination of funds, the state government meets its 55 percent obligation of the $1.2 billion.
Act 120 was passed by the Legislature in 2010 to defer the upcoming spike in pension fund contributions in 2011, “smoothing” the funding increase so every year sees no more than a 3 percent increase.
While school districts will be able to meet the 45 percent obligation this year, district contributions become uncertain after that.
Higher school property taxes?
The only way the school districts will be able to keep funding PSERS is through a property tax increase, said Dave Davare, director of research for the Pennsylvania School Board Association, which represents the school boards for public schools across the state.
“The only way the district can really afford this is if they increase property taxes, which creates another issue,” said Davare.
A 2006 state law limits annual property tax increases, though exceptions can be granted for pension contributions. Legislation pending in the House and Senate would remove those exceptions.
Without the ability to raise property taxes, Davare said, school districts will have few ways to pay the increasing PSERS contributions other than cutting existing expenses.
“What districts went through this year, they’re looking at going through over the next couple years,” Davare said, “because of costs like PSERS and not knowing what’s going to happen with state subsidies going forward.”
State Rep. Glen Grell
, R-Cumberland, said the school districts and the state government will just have to meet the increasing contributions, even if that means higher property taxes.
“We have to, we don’t have any choice,” he said. “(School districts) don’t have any choice but to pay their pension obligations either. They’re going to have to either work it into their budget … or they’re going to have to put their budget to a vote by their constituents.”
Dreyfuss, who also is a fellow of the Commonwealth Foundation, a Harrisburg-based state government policy nonprofit, said what the state government and school districts are paying now does not address the existing pension liability.
State government pension contributions that cover only the current year’s benefits do not address pension benefits or retiree medical care for all state employees and public school employees, he said.
Dreyfuss said state government should contribute another $1.65 million to PSERS to cover those costs.
PSERS officially is funded at 71.4 percent, but that number goes down to 68 percent under the pending budget proposal and falls into the 50 percent funded range by 2016. PSERS does not recover current funding levels until 2028, at 71.7 percent. It means the state and school districts cannot pay pension benefits without cutting other spending, increasing taxes, or both.
But to recover by 2028, state taxpayers would be forced to contribute nearly $6.8 million to the fund, and to reach 80 percent funding, taxpayers would have to contribute nearly $8 million by 2032.
PSERS, along with SERS, has a set market rate of return of 8 percent, which most pension analysts argue is unrealistic. PSERS is reducing its expected market return, also known as the discount rate, from 8 percent to 7.5 percent in July. The lower the discount rate, the more money taxpayers must contribute.
“By their actions, they say their priority is not reducing the unfunded liability or getting these plans better funded anytime soon,” said Dreyfuss. “They have lower expectations in terms of the investment earnings … which puts lower liability into the plan because it makes (the situation) worse because they’re going to earn less in the future.”
Evelyn Tatkovski, spokesperson for PSERS, said the contributions to PSERS would be going up and that if the earnings were less than the projected 7.5 percent rate of return, the liability would continue to grow.
“Are the contributions increasing? Yes they are,” said Tatkovski. “There’s no way we’re going to earn our way out of it, but the numbers will be impacted by the payroll (of employees) and the market rate of return.”
Tatkovski said the earnings for the fund should be viewed over the long-term, while also pointing to strong market returns this past quarter. The most recent data released by PSERS is for 2010.
SERS also is in serious financial trouble, said Dreyfuss, though not as much as PSERS. While he said state government should triple or quadruple its contributions to PSERS, the contributions to SERS need only be doubled or tripled.
“(State government is) already contributing more right now so proportionally they don’t have as big a gap to close,” said Dreyfuss.
Pamela Hile, spokesperson for SERS, said the fund would “gradually” be “fully funded” again.
“A pension system is well-funded at an 80 percent funded status,” said Hile, “if the Legislature funds that system as outlined in Act 120. Current projections show the fund at that level in 2027-28, and rising to 98 percent funded in 2043-44. While that is very gradual, what actuaries evaluate is whether a pension fund has a plan in place to meet its financial obligations.”
But why would a pension plan be “fully funded” at 80 percent?
“I’m sure you can find an actuary that believes an 80 percent funded ratio is well funded, just like I’m sure I can find a doctor who believes high blood pressure isn’t something to worry about,” said Dreyfuss. “It used to be that 100 percent represented a healthy plan and when all the plans started not being 100 percent funded … they moved the goal post.”
At present, SERS is funded at 75.2 percent, but that number goes down to 70.2 percent under the pending budget proposal and dips into the 60 percent funded range. The fund does not reach 75 percent funding again until 2022, assuming all financial targets are met every year. SERS was last “fully funded” in 2009.
Dreyfuss said those projections means the current budget proposal is a “failure.”
“Funding pension plans has a very low rate of political return,” said Dreyfuss. “Someone who’s working on state budgets, they’ve got to figure out where to cut $1.65 million to reallocate to the pension system. That’s not a question they really want to answer. Or you say, now I’ve got to increase taxes (and) that would go against the governor’s no tax increase pledge.”
But Grell stood by the budget and did not see higher contributions to the pension systems as necessary right now.
“(The budget) fully funds our pension obligations,” said Grell. “We were very insistent the pension be fully funded as required by the formula that was included in last year’s legislation so we don’t get further behind,” but added the budget “doesn’t eliminate the problem, and the increases in future years are going to be substantial.”
“(The budget is) making the payments,” he said. “If the system is going to survive, it’s going to require the governor and the legislature to make those payments.”
Republicans hold a majority in both the state House and state Senate.