KEEGAN: State lawmakers finally hear the ‘U’ word on pensions

By   /   August 8, 2012  /   No Comments

By Frank Keegan | State Budget Solutions

Frank Keegan

CHICAGO — “Unsustainable” is the word state officials heard from experts for the first time at their annual National Conference of State Legislatures gathering here, where one of four sessions on the pension crisis drew a standing-room only crowd of more than 300.

Kil Huh, director of the States’ Fiscal Health Project at the Pew Center on the States, said politicians treating pension accounts “like credit cards” means “they have designed a system that is fiscally unsustainable over the long run.

Pew initiated studies using official optimistic numbers that culminated in the most recent update, showing a $1.38 trillion gap in funding for retirement benefits promised to municipal and state employees as of 2010.

Using accurate data and accounting universally accepted by economists, the gap for pensions alone was $4.6 trillion last year, with another $600 billion to $2 trillion for Other Post Employee Benefits, mainly health care, depending on how high medical cost inflation is during the next 30 years.

In his opening remarks, Huh admitted “the picture is getting worse” despite pension reforms passed by 44 states in the past three years.

“Reform alone cannot replace fiscal discipline,” he said.

Rhode Island state Sen. M. Teresa Paiva Weed, a fellow panelist for the “Pension Policy: What the states and feds are up to?” session, talked about her state’s pension system implosion and difficult reforms required to give it a chance for survival.

“There is no near-term prospect to grow out of the problem,” the 20-year senator and current state Senate president told fellow legislators. She admitted Rhode Island’s hard-fought reforms only got the pension system’s funding ratio to 60 percent, a level a panelist in a later session rated as “death spiral.”

She urged all the legislators to return to their states and get a professional, outside “experience” study of their pensions systems “or you will be dealing with a false reality.”

That is a false reality politicians have propped up for years with accounting gimmicks and by keeping retirement debt off the books, when they claim “balanced” budgets. That allowed them to spend tax money on other things instead of contributing to retirement funds. However, the retirement debt continued to grow.

Soon they will have to show at least part of the pension and OPEB debt on state balance sheets, which will overwhelm many, revealing for the first time that they are technically bankrupt whether they declare it.

Asked by a member of the audience if pension reform is “a race to the bottom; an attempt to undercut the middle class,” Paiva Weed said, “I absolutely do not believe it is.”

Reform is possible “if you do it with the realization that in 10 years there will be no money to pay pensions. The system is unsustainable,” she said.

At the “Pensions and Intergenerational Equity” session, panelist Girard Miller opened by suggesting audience members who could not see the presentation screen should move, unless “what I am about to tell you will terrify you.” It did.

Miller, a longtime reform advocate who just became chief investment officer for the Orange County, Calif., pension system after a career in finance, acknowledged that “the private sector figured out how to raid the pension fund cookie jar first,” but politicians were not far behind.

He said his estimate of public pension unfunded liability is $750 billion to $900 billion, but he put the OPEB deficit at more than 1,500 to 2,000 times bigger between $1.5 trillion and $2 trillion.

He said recent reforms “have picked the low-hanging fruit of cutting benefits of new employees, and the impact on unfunded liability? Zero!”

Miller warned, “We are going to have another recession, and if you don’t get your pension problem fixed now, you never will after the next recession.”

He told legislators that new accounting guidelines for public pensions “will swamp your balance sheets.”

He detailed the inexorable arithmetic of pension finance in a series of slides that will be available on the NCSL website.

Another Pew expert David Draine confirmed that “some plans have unfunded liabilities that there is no feasible way to pay.”

As for reforms that affect only new hires, Draine said the funding deficit is so large, “you cannot balance it on the backs of new employees.”

That means some current employees and retirees must sacrifice benefits, because the debt is beyond any capacity to pay through increased taxes, current service cuts and pension fund investment earnings.

These NCSL sessions for the first time reinforced for state officials what many pension reform advocates have been saying for years, and what recent studies confirmed: On their current course, all public pension systems will run out of money, some sooner, some later, but all eventually.

Miller cited one study this year comparing U.S. public pension policy to other nations’ that called for “drastic reform.”

Links to those studies are here:

Cities and states bleed out while politicians dither

Study calls for “drastic reform” of public pension system

Fed screams softly in warning about public pension crisis

Municipal, state employees should take their money and run, fast

Frank Keegan is editor of Statebudgetsolutions.org a project of sunshinereview.org. The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.

frankkeegan@statebudgetsolutions.org

 

 

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