The seriously underfunded status of too many public employee pension plans in the Atlanta metro is not a new problem. It’s been around for a long while now.
That makes action overdue, given there are no quick — or easy — fixes to government pension problems. So it’s important to get started now, no matter how tempting it may be to sail IOU’s even further down the fiscal road like so many paper airplanes.
Recent reporting by The Atlanta Journal-Constitution reveals that the assets in metro Atlanta’s municipal pensions are nearly $4.4 billion short of what’s needed to pay the benefits promised to government employees, current retirees and their families. The numbers of people potentially affected number in the tens of thousands. Worse yet, the bill is nearly half a billion dollars larger than it was just two years ago.
It’s easy to see how local governments got here. Anybody who’s shaken their head at red ink on 401(k) balances, or refused even to open the dreaded statements, understands the effect of market downturns on the best-laid plans of taxpayers and government alike. Precious few souls, if any, foresaw the Great Recession and the punch it delivered to both our economy and pension accounts.
Yet, governments must recover from past actions and resolve to do a better job of managing pension plans and their cost. Making the necessary adjustments will require significant changes, as well as honest and difficult dialogue with workers and taxpayers. The end goals are that governments must figure out how to catch up on pension funding shortfalls and create more-sustainable pension systems going forward.
Consider that the AJC reported that Cobb County pensions were only 54 percent funded. That figure measures the expected value of pension assets against the cost of future payouts. Fulton County stood at 68.6 percent and DeKalb County at 65.1 percent. The American Academy of Actuaries suggests that pension plans should strive for 100 percent funding of obligations, even though many public and private pensions operate with much less. Achieving at least 80 percent funding has been bandied about as a decent benchmark standard, though many quibble with that number.
We believe public pension plan officials know better than most anyone else that the workers who serve the public in jobs that sometimes put them at risk of life and limb are deserving of a decent retirement. That likely means different things for different worker groups.
New public workers, for example, should likely expect to sign on to significantly different, less-costly retirement plans, such as 401(k)-style savings plans, or “hybrid” blends of less-generous traditional pensions and 401(k)’s.
The transition to greater fiscal prudence and sustainability won’t be easy, but it is necessary and doable, even given lower salaries often found for government jobs. Private-sector workers have largely seen traditional pensions supplanted by 401(k)-type plans.
Employees are not the only group that must face change. Governments also need to do a better job of forecasting future pension outlays and budgeting to meet them. Gone are the days when consistent go-go returns from booming financial markets and rising property tax collections could pay for too-risky decisions. Pension actuarial projections should be built around more-realistic, if lower, returns. Better to be surprised by pension fund surpluses than shortfalls, in our view.
Ditto for employee contributions to pensions. The old days that saw pension contributions lowered because of surpluses should not return — no matter how healthy markets might seem. Such contribution “holidays”or inadequately funded benefit hikes now seem imprudent, if not foolhardy, given the market volatility we’ve seen.
Hopefully, government decision-makers now realize that markets are good at short-term roller-coaster acts, even though returns have proved healthy over the long-haul. Relying on smoothed-out data like the S&P 500’s 11.1 percent average return between 1962 and 2012 can lead to a risky over-reliance on good times. Bad years like the the S&P’s loss of 36.55 percent in 2008 also have to be adequately factored in. An over-reliance on rosy projections is poor governance, in our view.
Local governments have started taking some needed steps toward shoring up public pension systems. That work must continue, and officials must communicate clearly to taxpayers just what real reform and sustainability looks like — and what it will cost.
