Public pension crisis?


Two recent articles about public pensions in America should prompt private- sector taxpayers to sit up and take notice. That’s because we, the employers of the public employees, could end up shelling out more of our money to prop up the pension systems.

The first article comes from Robert Fellner, director of transparency research at the Nevada Policy Institute and author of “Footprints: How NVPERS, step by step, made Nevada government employees some of the nation’s richest.”

In the piece headlined “Shining a Light on the Public Pension Crisis” on the website RealClearPolicy, Fellner opens with this reality check:

“Taxpayer costs for U.S. public pension plans, already up three-fold since 2001, are going up yet again – the necessary consequence of long-term returns plummeting to record-low levels.

“While underperforming investments receive the most attention, they aren’t the real reason for the tax hikes and cuts in government services needed to bail out public pensions. In reality, the culprit is the extraordinarily generous nature of the benefits themselves, whose costs are only now coming to the surface.”

To provide some perspective, Fellner cites a pair of studies by the American Enterprise Institute’s Andrew Biggs showing that the average benefit for full-career public workers is $1.325 million – at least 55 percent greater than that of their private-sector counterparts.

At this point, administrators of Ohio’s five public pension systems are undoubtedly noting that the Buckeye State is not Nevada or California or even Illinois, where the plans are on the verge of fiscal collapse.

Insider’s perspective

But before Ohio’s public- pension managers dismiss talk of a crisis, they may want to read the article by John Damschroder, a member of the late Gov. George V. Voinovich’s administration, published in The News- Messenger of Fremont, Ohio.

The piece, headlined “Ohio taking a reckless gamble with pension funds,” opens with this:

“Gov. John Kasich claims Ohio’s public pensions are ‘rock solid,’ but the math revealed in the Comprehensive Annual Financial Reports (CAFR) and the annual U.S. Census survey of all public pensions shows a system sinking in the quicksand of terrible investment returns and ultrahigh expenses.

“In 2015 Ohio’s five public pensions paid outside fund managers a staggering $734.8 million. These management fees are extraordinarily high because Ohio relies on secretive alternative investments more than any state in America. Census data shows Ohio reduced holdings in hedge funds and private equity funds by more than $10 billion last year but still [owns] more of these high-cost investments than any other state.”

Unfunded obligations

And here’s the kicker in Damschroder’s article that should cause private-sector taxpayers to take notice: Recently released Census data show Ohio’s unfunded pension obligation grew from $35 billion in 2014 to $134.5 billion in 2015.

Three of the five funds have increased employee-contribution rates from 25 percent to 40 percent, and all of the funds have changed the benefit calculations to cut retirement payments, the former Voinovich administration official contends.

As for the ramifications of this crisis, Damschroder argues that the $2 billion state budget surplus that Gov. Kasich boasts about – the “rainy day fund” – does not exist.

“Ohio’s claimed portion of the unfunded liability is more than $26 billion. The state hides the true size of the pension crisis by assigning the rest of the deficit to city, county and school employers on a pro-rated basis, while carefully explaining that once the contribution to the state fund has been made the employer has no control over the funds and no liability for the shortfall.”

If it’s true that the $2 billion rainy-day fund is to be used to bolster the public pension system in Ohio, then the taxpayers of the state are being shortchanged.

Consider what took place in order for state government to have a budget surplus: The Local Government Fund, which provides money for counties, cities, townships and villages, was shrunk in the last two biennium budgets. In addition, funding for higher education also took a hit.

Several years ago, when the pension funds were dealing with deficits, the General Assembly made it clear that the revenue shortfalls would have to be made up by increasing the public employee contributions and cutting costs. Legislators did not want the employers (taxpayers) paying more toward the retirement benefits.

Here’s the reality about pensions in general: A significant number of private sector employers have done away with defined benefits (DB) and are now offering 401-K programs that oftentimes are financed solely by the employees. The companies simply administer such savings accounts.

Indeed, the Great Recession of 2008 resulted in many companies freezing pensions, thus leaving the employees to fend for themselves.

Robert Fellner, writing in RealClearPolicy, provides an insightful analysis of the defined benefit structure.

“The failings of DB plans extend beyond their predisposition to financial mismanagement, however. They’re also an inefficient way for employers to compensate their employees. If DB plans were superior in this regard – as is often claimed by their defenders – one would expect them to be embraced by private firms, which prize efficiency. But just the opposite has happened: the percentage of private workers enrolled exclusively in DB plans fell from 28 percent in 1979 to just 2 percent in 2013, according to the Employee Benefit Research Institute.”

What’s the solution?

Fellner says that shifting to defined contribution plans would provide superior transparency, cost stability, and reliability for both employees and employers.

And he ends with this: “Lawmakers can learn from successful past reforms enacted by the federal government as well as more recent examples in Arizona and Utah.”

There’s no denying that there’s a public pension crisis in America. The only question is how to resolve it – without burdening the private sector taxpayers.