Friday, March 13, 2015

Look in the Mirror: Public Pension Funding

Look in the Mirror:  Public Pension Funding

New Jersey schoolteachers should put out an all-points-bulletin concerning $13.5 billion that is missing from their pension plan.  Of course if they were to go to the police, they’d learn that the New Jersey state police are missing $2.5 billion in funds.  Since 2002, four elected governors, two Republicans and two Democrats, have been responsible for limiting the state’s contribution to only 38% of the amount required to properly fund the plans.  Their record is even worse because the governors and the legislature have fiddled with the formula to further lower the required contribution.  In any event, New Jersey’s pension crisis is largely the result of inadequate funding.  As I’ve written many times before, those critics who blame public unions or money managers are missing the largest component of the pension-funding shortfall.  Unions and money managers aren’t blameless, but their contributions to the crisis are small in comparison to the damage done by governors and legislatures. 

National Association of State Retirement Administrators issued a report the other day that examines the funding practices of 112 public pension plans.[1]  The report shows that on average most states are making a good faith effort to fund their pension obligations.  The average state has funded 95% of the required contribution since 2002.  However, some of the largest plans in the country, like New Jersey, have manufactured a crisis by systematically shirking their responsibility.  Still other plans have masked the problem by funding their pension requirement with debt, or by manipulating the accounting formulae.  While the average pension plan is sustainable, opponents of defined benefit plans have used the crises in states such as New Jersey, Illinois, Pennsylvania, and Kentucky to attack all public pensions.

For example, in North Carolina opponents of the state’s public pensions have attacked the supposed huge burden posed by these plans.  However, the data shows that these concerns are unfounded.  State and local government in North Carolina only spend 1.6% of their budget on public pensions.[2]  The national average is 3.9%.  Overall, North Carolina’s public pensions are 95% funded.  The national average is about 72%.[3]  North Carolina has made 97% of its required contributions.  Had our legislature appropriated all the required funds, our plans would be fully funded.  This doesn’t mean that North Carolina or other strong plans don’t face challenges.  However, it’s clear that we can continue to offer our state troopers, teachers, and other public servants the prospects of a reasonable retirement in exchange for their long-term service.

At the other extreme, you can see why Illinois’s teachers are worried.  They are paying 9.4% of their salaries for pension benefits (5% to 6% is about average)[4], and their pension is only 44% funded.[5]  While the teachers have pumped part of their salary into the pension system, Illinois has only appropriated 70% of its required contributions over the last 12 years (and a chunk of that money was borrowed).  If all of this weren’t bad enough, Illinois already spends 7.1% of its budget on state and local pensions.   The problem is so bad in Illinois that it’s hard to see how the teachers’ pension can operate over the long haul.  One thing is clear in Illinois.  Taxes are too low, and reasonable tax rates would go along way to helping preserve at least some of Illinois’s pension responsibilities.  However, Governor Bruce Rauner is a former private equity executive, so it’s reasonable to expect that he’d sooner gut the pension than raise taxes.

The politicians in states with pension problems shouldn’t be looking at public employees or money managers as the primary source of the problem or the solution to the problem.  Instead they should look in the mirror.  They are the source of the problem and the solution.


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