Public Employees Retirement Benefits In Crisis?

Now’s the Time to Address Benefit Funding - authored by Amy Brown, a lobbyist specializing in labor law, public employee retirement and local governments. She is a partner in the firm of DiMare, Van Vleck and Brown and can be reached at abrown@lawpolicy.com

The GAO recently presented a report to the Senate Finance Committee[1] finding that only 58 percent of large public pension plans across the nation are at least 80% funded.  California is doing better—the Public Employee Post-Employment Benefits Commission (PEBC) learned through its survey that the aggregate funded ratio for California pension plans is 89 percent, a respectable figure, with a total statewide unfunded liability of $63.5 billion.  Sounds good; nothing to worry about, right?  Wrong.

Since those numbers were released, the financial markets have suffered a huge downturn during the first quarter of this year.  This difficult investment market is likely to lead to poor returns for the year, putting renewed pressure on employer rates.  While some employers may have seen some rate relief as a result of positive returns in 2007, many others have not. 

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[1] State and Local Government Retiree Benefits:  Current Funded Status of Pension and Health Benefits, Government Accountability Office, GAO-08-223, http://www.gao.gov/new.items/d08223.pdf

PERS, for example, has kept employer rates relatively the same as a result of a new rate stabilization policy, but it’s yet to be seen whether adequate reserves have been set aside to allow employer rates to remain stable in the event of a prolonged market downturn.  Economists aren’t willing to speculate on where we’re headed.

Always seemingly focused on the present moment, however, Legislators are seeing the current health of our state pension systems as a sign that it’s ok to begin dictating how those funds are invested.  The past few years have shown an increasing trend in legislation requiring divestment of pension funds in an attempt to shape international foreign policy.  It’s hard to tell whether Legislator’s have forgotten the “perfect storm” we found ourselves in just a few short years ago, or if this is a desperate attempt to claim credit for accomplishing something with a “cost neutral” bill. 

Yes, in legislative speak, that means a bill doesn’t require the Legislature to directly appropriate funds – not that the bill won’t eventually create higher costs.  Meanwhile, PERS and STRS are expending millions of dollars just to maintain compliance with all of the new legislation… millions that are being absorbed through higher employer rates.

The PEBC issued numerous recommendations designed to increase cost transparency of public employee benefits, as well as the process by which benefit increases are adopted; to protect our pension funds from fraud and abuse; to ensure that pension fund assets aren’t being manipulated and that employers continue to budget regular contributions towards these benefits; and to help employees find other ways to supplement their pension income in retirement.  As bills to implement these recommendations work their way through the Legislature, these issues will remain on the forefront, requiring your attention.

And while everyone is enjoying the (perhaps temporary) health of the state’s pension systems, nobody can ignore the issue of retiree health care funding.  Because of the new GASB reporting requirements, governments are being forced to confront this “new” liability.  In its survey, the PEBC found that the unfunded liability associated with OPEB benefits is at least $118 billion statewide, but is likely to be much, much higher once all agencies are required to complete their OPEB valuations.  The Commission wasn’t comfortable speculating about what the total liability might be, but in its report, the GAO noted that some have predict OPEB liabilities nationwide will exceed a trillion dollars (multiply the total PERS pension by four!). 

The GAO found that while the total liability of retiree benefits is much smaller than overall pension liabilities, health care costs are increasing much more rapidly and unpredictably than are pension costs.  As health care costs continue to increase, the GAO notes that pay-as-you-go funding may become “daunting fiscal challenges” for state and local governments.  In California, last year’s remarkable efforts to adopt meaningful healthcare reform have fallen apart as a result of political division and increasing budget strains.  This means that employers’ healthcare costs are likely to continue increasing year over year, ensuring that the burden of pay-as-you-go funding for retiree health care will also be ratcheted up with each year that passes. 

After studying this issue, the PEBC strongly encouraged prefunding of OPEB liabilities, noting that prefunding retiree health care is just as important as prefunding pensions.  Everyone seemed to agree (it’s hard to argue with the math), and everyone got in line to applaud the PEBC for taking a strong stance on this issue. 

Then everyone returned to their day jobs and began hearing about the current budget woes facing public employers throughout the state.  With talks of potentially huge cuts in public services, all of a sudden this hardly seems like the appropriate time to begin prefunding health benefits.  Unfortunately, tabling this issue for another day may be the wrong solution.  The momentum on this issue is now.  When our budgets finally return to a place of health, will any of our decision makers be thinking about today’s hot topic or will they be focused on tomorrow’s hot topics?  It is imperative that this issue stay on the table regardless of our budget situations.  While it will, however, require that we all look for more creative solutions to finding a source of funding, it is important that we at least start down this path and put a long-term plan in place.

So are pension and OPEB issues resolved?  No, certainly not.  Now is not the time to stop paying attention to these important funding issues. 

California’s pension community dodged a bullet a few years ago by avoiding the termination of our defined benefit programs.  Now is the time to ensure that we’re not once again standing at the end of a barrel a few years into the future, when the full scope of our OPEB liabilities become public and voters are looking for answers about how those liabilities will be addressed.