By Jon Cassidy | Ohio Watchdog
COLUMBUS — Health-care funding for retired school employees will be eliminated by 2016, according to a new projection.
Under the scenario, the health-care fund would run dry by 2019, according to a report to the Ohio Retirement Study Council, presented last month by three independent actuaries.
The actuaries’ rosier projection is that the fund won’t be insolvent until later in the decade.
Actuaries at KMS Actuaries and Pension Trustee Advisors presented a “worst case” scenario for the School Employees Retirement System of Ohio, which serves 125,000 people now working as administrators and support personnel in the public schools, plus 67,000 retirees.
The actuaries put “worst case” in quotes, and with good reason, as the worst case they allow themselves to envision is annual returns of 5.21 percent over the next five years, and 8 percent thereafter.
Actual stock market performance has been much worse. The Dow Jones Industrial Average has increased an average of 1.53 percent over the past five years.
The actuaries estimate there’s a 75 percent chance returns will surpass 5.21 percent. If that doesn’t happen, absent other reforms “the health care funding would rapidly diminish and be eliminated by 2016. The health care fund would be totally depleted in 2019.”
Lawmakers would then have to choose between stiffing retirees on their promised health care, reducing pension benefits, raising the pension contribution rates paid by municipalities, transferring hundreds of millions of dollars from the already depleted SERS Pension Fund, or some combination of the above.
The Ohio House of Representatives is expected to vote on pension reform next month.
Both funds have big shortfalls, even by Ohio standards. The health-care fund has just $356 million in assets to cover $2 billion in liabilities.
The SERS Pension Fund has $10.5 billion, which is $5.8 billion less than it should now have.
Unlike most states, Ohio has started tackling the problem of unfunded liability for retiree health care. Other states have only recently started moving toward savings and away from a pay-as-you-go system that would be illegal in the private sector.
But it’s not enough to bring the debts down for either pensions or health care. Local governments aren’t paying the actual cost of the promised benefits, and state officials are reluctant to make them pay down the billions in accrued debt.
Statewide, Ohio has some $87 billion in unfunded liability growing at an annual rate of around 8 percent. Like other debt, pension debt can cause insolvency if allowed to spiral out of control.
In Ohio, the actuaries write, “The risk of inadequate funding of retirement benefits is ultimately borne totally or partially by workers and retirees in reduced retirement and health care benefits or increased member (employee) contributions. In most jurisdictions in the United States, this risk is almost entirely borne by the taxpayers. This is a substantial difference in structure between Ohio and most of the country.”
Unfunded pension liabilities have driven a string of municipal bankruptcies around the country, but the term barely makes news accounts in Ohio. New accounting rules will require those debts to be reported on government balance sheets, not buried in footnotes, but that won’t happen until 2015.
The actuaries write that, “While legislation will hopefully pass in Ohio that will ‘solve’ the current pension program funding difficulties, once the new (accounting) provisions become public, it may appear that this was not the case.”
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