States Can Take Action on Pensions
States know they’re in trouble with their public employee pension plans. But Girard Miller, a senior strategist for Public Financial Management Group who is considered an expert on public pensions, said states can take steps to dig themselves out of the hole with their defined benefit plans.
And that’s important, he told attendees at The Council of State Governments’ policy session, “Buy Now, Pay Later: Transforming Public Retirement Systems” Dec. 3, especially during this economic downturn.
“If you think about the security of a retirement promise … the only promise that has actually provided security to anybody in this country is the public pension fund,” he said. “Even though they’re going to have problems, I think we need to step back and remember that this need for fundamental retirement security has probably been better done through the governmental pension world than any other place, if not in the world, certainly in the United States.”
The chronic underfunding of the pensions by state and local governments has contributed to the problems of these pension plans, he said. And the recent problems in the market have pounded those funds; stocks have declined about 45 percent since the value at the peak in October 2007, Miller said.
That was when public pension funds were at levels, on average, of 85 percent funding. Miller estimates the market meltdown has caused that level to hit at near 65 percent funding levels. And those are the ones that were doing well. Many states had far lower levels of funding when stocks were at their peak.
But there are actions states can take to shore up these pensions, or at least stop the problems that have contributed to demise in the past to happen again, Miller said.
First, he said, states should try to avoid things like retroactive pension increases or allowing employees to use sick time and accumulated overtime to inflate salaries that affect higher pensions. And that’ll take changes in the collective bargaining process, he said.
“You’re basically passing on to future taxpayers for giving awards to people at the bargaining table who are providing services in the past so that your children end up paying the bill for workers who provided services in the past … retirees who will be dead before the bills are paid for,” Miller said.
Miller said states need to perform sustainability audits of their pension plans—a long-term analysis of fiscal affordability and capacity to provide current benefits. There also need to be accounting reforms and redesign of retirement and other post-employment benefits plans. He also suggested states eliminate ad hoc cost of living increases until the plans are 110 percent funded, a tiered benefits reduction and cost shifting, as well as legislation to require proper long-term financing.
States can take one big action to shore up pension funds: Require proper funding by state law. Miller suggested that all employers in the system—whether state or local governments—must meet their required contribution for defined benefits plan, and said those who don’t should be required to perform sustainability audits, raise taxes or reduce benefits to meet the promises of the plans.
He also said if a state’s current plan is not sustainable, that state should make changes for new employees. In addition, Miller suggested any retroactive benefits increases and those increases funded by taxpayers go before voters for approval.
Miller also recommended other legislation to allow:
Supplemental fiscal authority to raise sufficient revenues for past retirement obligations, both pensions and other post-employment benefits, or OPEB;
Investment authority for OPEB plans—most states, he said, currently have a legal vacuum;
Authority for prudent issuance of pension and OPEB obligation bonds;
Pension plan funding be limited to 85 percent of total liabilities to prevent overfunding;
Restrictive covenants on future benefits increases; and
Required certifications by financial advisers on timeliness and efficiency of debt strategies.
Read more about pensions and the challenges states are facing in the January 2009 State News magazine.