By Jon Cassidy | Ohio Watchdog
Ohio’s outstanding pension debt is now half the size of the state economy.
The average household in the state would have to pay $2,051 every year for the next 30 years to get funding back on track, according to a recent white paper by two economists.
And that’s if authorities take action now.
They won’t, of course, and you can take a look at the Cleveland City Council if you want to know why.
Nothing underscores so well the perfect selfishness of so many elected officials as the 13-3 vote taken Monday. That night, the council voted to reappoint a council colleague who had just resigned for the express purpose of double-dipping — collecting a pension in “retirement” while earning a full salary for continuing to work in the same job.
Ken Johnson, the 33-year representative of Ward 4, resigned at the very end of 2012, with a year to go in his term. His goal: to start collecting his pension before a Jan. 7 change in the law would have marginally reduced his retirement package. Because he resigned, Johnson will get an automatic 3 percent annual pension increase for life under the old rules; under the new rules, that raise would’ve been cut to around 2-2.5 percent starting in 2019, when Johnson will turn 72.
The rules are changing because Columbus tinkered with the margins last year and called it reform. But even those mild adjustments were too much for this (cough) community leader to bear. So now he’ll get his pension and — thanks to his colleagues’ Monday night vote — a $74,000 salary.
Only three members of the 19-member council opposed the move. Council members Brian Cummins, Dona Brady, and Mike Polensk all voted no, although Polensk himself is a double-dipper who once “retired” just before he was re-elected.
“It may be legal but it is not what the majority of the public expect,” Cummins wrote on his blog. “It is an act of self-enrichment that should not be allowed. Public pensions should be intended to provide retirement security, not pre-retirement wealth — double pay. Because it is legal doesn’t make it ethical. [Just] because Council had the votes to make this happen doesn’t make it right.”
Johnson didn’t respond to a request for comment, but told the Cleveland Plain Dealer, “I didn’t have any choice because of what the state did to the retirement system…. I worked 47 years to earn my retirement benefits and then someone comes along and changes them.”
When columnist Mark Naymik pressed him, Johnson said he needed the two paychecks to support his children, one of whom is in medical school.
The City Council just threw away whatever little moral standing it had in asking for concessions from employees. Not that the council was so inclined: A recent study found that the top 50 pensions for Cleveland employees are all worth between $3.8 million and $11.4 million.
In a sane world, our elected officials would make it their job to hold the line on exploding costs. Instead, too many would rather profit from the corruption than do something to stop it.
A study by the American Enterprise Institute concluded that Ohio’s pension system has $188 billion less than it’ll need to fund its retirement obligations. That’s third highest in the nation, just a hair better than Illinois’ famously disastrous system. And it doesn’t include another $29 billion in unfunded retiree health care costs, or other general state debt that brings the total figure to more than $236 billion, more than four times the size of the annual state budget.
A U.S. Census survey for the same year put the size of the unfunded liability at $66 billion, reflecting assets of $132 billion and liabilities of $198 billion. But the official numbers are calculated in a way that artificially shrinks the size of the debt. Officials take the future debt figures and shrink them by around 8 percent per year back to the present date, because they figure their investments will earn 8 percent annually. Calculating the time-value of money that way would be illegal in the private sector.
The AEI study took a risk-free discount rate of around 4 percent and applied it to 2010 numbers to reach its figure of $188 billion. Union leaders and apologists generally argue that calculating liability with a risk-free rate is some sort of ivory tower exercise that has no bearing on financial planning, and portray such figures as exaggerations.
But exaggerated is one thing it’s not. The actual debt due is bigger than the discounted figure of $188 billion. In other words, $188 billion is the present value of the unfunded liability if you reduce the debt by about 4 percent for every year remaining until it comes due.
That’s what gets overlooked in the tired argument about discount rates: the supposedly exaggerated figures are still less than the actual face value of the money going out the door.
Put another way, if all the public employees and retirees in the state sold their pension rights today for cash up front, they’d get around $320 billion; or, $188 billion more than the $132 billion the state’s pension funds had set aside.
All those investors would be recording assets worth $320 billion the state owed them. But the state, using soon-to-be-reformed government accounting rules, would be booking its debt at under $200 billion.
Of course, nobody’s selling his pension, but the state still needs to come up with the money, and a $132 billion in investments isn’t going to cover it.
Even if you’re unconvinced that a risk-free rate of return is the right one to use, consider this: however you present the numbers, when Ohio ($188 billion) owes more than New York ($182 billion), you’ve got a problem.
Robert Novy-Marx and Joshua Rauh, economics professors at the University of Rochester and Stanford, respectively, recently calculated “how much additional money would have to be devoted annually to state and local pension systems to achieve full funding in 30 years, a standard period over which governments target fully funded pensions. Or, to put a finer point on it, we researched: How much will your taxes have to increase?”
They found that, on average, a tax increase of $1,385 per U.S. household per year would be required, starting immediately and growing with the size of the public sector.
Ohio’s taxes, would need to rise an average of $2,051 per household, the fifth-highest figure in the nation.
Once you begin to fathom the depth of this hole, you understand why officials like Ken Johnson are more interested in cashing in than doing something about the problem.