Lawmakers need to accept real cost of paying off pension unfunded liability

POINT OF ORDER

A Capitolwire Column

By Chris Comisac
Bureau Chief
Capitolwire

HARRISBURG (March 23) – Plenty of questions were asked during Monday’s budget hearings for the state’s pension systems, and, as with any budget hearing, there a few political statements offered as well.

While little new ground was covered during the House and Senate hearings, there were a couple misconceptions expressed during the hearings.

During the early hearing before the House Appropriations Committee, Rep. Mike Carroll, D-Luzerne, took exception to Rep. Warren Kampf, R-Chester, expressing the state pensions systems’ current combined unfunded liability in terms of what the state’s taxpayers will pay during the next few decades to satisfy that unfunded liability, if the pension systems’ assumptions (and there are a lot and some come with plenty of concern) come to pass during the next 24 or so years.

Kampf noted that based on the pension systems’ current assumptions the state’s taxpayers, during the next 24 years, will pay somewhere in the area of $190 billion to erase the two pension systems’ – the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) – overall unfunded liability, currently about $54 billion.

Carroll spun a narrative that our current pension problem is due primarily to ill-advised benefit improvements and chronic employer underfunding, and seemed to gloss over the fact that the loss of tens of billions of dollars in 2008-09 by the pension systems forced a massive increase in employer contributions, which still haven’t been paid at the appropriate level, thanks to Act 120 of 2010’s “collars,” adding to the overall unfunded liability. He called Kampf’s $190 billion assertion “misplaced.”

“A $50 billion unfunded liability, as staggering as that is, is the responsibility of this commonwealth, and a suggestion that it’s four times that amount is patently unfair,” said Carroll, who was at least accurate about the liability being the state taxpayers’ responsibility to pay.

In the afternoon Senate hearing, Sen. Rob Teplitz, D-Dauphin, seemed to downplay that responsibility, and got assistance with his argument from both SERS and PSERS.

“In terms of the unfunded liability itself, am I correct that that amount, whether it’s for SERS or PSERS, is the amount of money if all benefits for all current and future retirees would have to be paid out on the same day at the same time … and is that a situation that is likely to occur?” asked Teplitz.

Both SERS Executive Director Dave Durbin and PSERS Deputy Executive Director Terrill Sanchez said it wasn’t something that would likely happen.

Carroll also noted earlier in the day the debt doesn’t have to be paid off in the short term: “… thankfully it doesn’t have to be repaired in one year, but over the course of time, at least as currently proscribed by Act 120, we have a plan and a path forward to come back to the commonwealth’s PSERS and SERS funds with adequate resources to satisfy the obligation we promised to these folks [SERS and PSERS participants].”

But according to one pension expert, the current unfunded liability represents “the value, in today’s dollars, assuming members retire on their expected dates.”

“Pension systems are designed to be funded as benefits are earned ideally targeting a funded ratio of 100 percent at any point in time,” says Rick Dreyfuss, a retired actuary and senior fellow with the Commonwealth Foundation, a Harrisburg-based conservative-leaning think tank. “As a result this also means the plans will be fully-funded or ‘paid-up’ in the aggregate – since this is a group – when the average member retires.”

Dreyfuss, reacting to Teplitz’s characterization that the $54 billion represents “all benefits for all current and future retirees,” said the present value (the current worth of a future sum of money given a specified rate of return) for both current and future pension benefits payable to all participants is closer to $112 billion.

Regardless of the number, I think it’s interesting that current elected officials are quick to condemn past decisions to underfund the systems and not have fully-funded pensions plans, but not having fully-funded systems now (and for the next couple of decades) isn’t an issue because the state “has a plan” to pay off the debt.

And that plan, over the next 24 years or so, to fully fund the two pension systems is going to cost, if current assumptions by the pensions systems hold true, nearly $190 billion. That’s not some cooked up number, that’s straight from the two pension systems’ most recent annual reports, based upon the anticipated annual employer contributions between now and when the pension systems are expected to hit a 100-percent funded ratio.

To put it in simple terms, when you borrow money to purchase a house, your mortgage company informs you of both what that mortgage will be as well as how much you can expect to pay to satisfy that mortgage during the term of that mortgage (because of the interest charged on the outstanding amount that was borrowed).

So think of the $54 billion unfunded liability as the mortgage, and Kampf was simply expressing the overall cost to satisfy it – something anyone who has to pay it should know.

Sure, it seems a little ridiculous to think that we’ll need that $54 billion immediately, but if you want to think that way about a current debt, then you should acknowledge not paying everything today costs more in the future: $190 billion in about three decades, when we finally get to two fully-funded – or just about fully-funded – pension systems.

There might be elected officials in Pennsylvania’s state Capitol – and others outside its halls – who don’t think it’s fair to express the pension debt in that way, but doing so is being completely transparent with both state lawmakers and the commonwealth’s taxpayers.