Unfunded retiree health benefits threaten Georgia’s pension plans.
By Allen Buckley
The media often reports about the funding problems of state and local pension plans, such as the plans maintained by Illinois, California and New Jersey. Georgia’s pension plans have also received significant press as well, although most of it has been positive. Regularly overlooked are liabilities relating to post-retirement medical obligations.
In a 2006 press release, Gov. Sonny Perdue boasted: “I am proud of Georgia’s high pension fund ratio.” Perdue asserted the pension funding ratio was 101 percent, trailing only Florida and North Carolina.
Like most pension plans, Georgia’s plans have been hit hard by the recession and the stock market drop. According to the state’s June 30, 2010, financial statements, the overall funding ratio for the state’s two major plans, the Employees Retirement System of Georgia (ERS) and the Teachers Retirement System of Georgia (TRS) had dropped to 86.9 percent on a combined basis. This figure is still well above the minimum funding ratio of 80 percent recommended by the U.S. Government Accountability Office.
But to complete the analysis, other post-employment benefit (OPEB) obligations must be considered. OPEB benefits are benefits provided to employees outside pension plans; the majority relate to post-retirement medical coverage.
In a Feb. 3 Governing article (“Misplaced Pension Hysteria”), Girard Miller states that while the state and local pension funding deficiency hysteria is overblown, the “OPEB cancer continues to metastasize, unabated and untreated.”
For perspective, Miller observes, the pension deficits accrued to date will cost every man, woman and child in America about $2,000 over the next 15 years (about $10 per month per capita), based on current funding ratios.
For OPEB, where half the nation’s public workers receive a substantial retiree medical benefit and half do not, the $2 trillion national liability works out to six times that number for the unfortunate 75 million taxpayers who bear the burden of these bills.
Miller has proposed three steps to deal with the problems. Step one is ramping up employer contributions over the next five years. Step two is charging employees up to half the normal actuarial costs of the benefits. Step three is to adopt new policies for surplus funds.
How does Georgia’s OPEB liability situation stand? According to the state’s financial statements for the fiscal year ended June 30, 2010, the funding ratio was 4 percent. Thus, considering OPEB on its own, Georgia is doing very poorly in terms of funding.
The Pew Center on the States examined underfunded state health care obligations in its March 2010 national study, “The Trillion Dollar Gap.” Pew reported the latest numbers showed Georgia with a $19.1 billion retirement health care liability and nearly all of that, $18.3 billion, was an unfunded liability. Pew said Georgia needed a $1.58 billion annual required contribution to meet the obligation. For perspective, Georgia tax revenue was less than $15 billion in 2010.
Instead of increasing, state funding has declined. From 2008 to 2010, funding of OPEB obligations was cut from $242.5 million to $19.5 million. Considering the funded ratio, this reduction is unfathomable.
Combining the pension and OPEB figures, total assets of $69.2 billion and total liabilities of $99 billion were reported. Thus, the combined funded ratio is 69.9 percent — well below the GAO’s recommended 80 percent funding ratio.
The recession is over. Assuming no benefit cuts are planned (and a lawsuit would ensue if a cut was made), funding now means much less funding later.
The question is whether now is the time to eliminate the deficiency by substantially increasing funding. It would seem prudence requires, at a minimum, an enforceable plan to cause the combined pension/OPEB liability to be on track to hit the 80 percent funding standard sometime within the next decade. It must be done without doing what we see at the federal level — fiscal debauchery now with promises of prudence later.
Allen Buckley is an Atlanta attorney and CPA, specializing in pension benefits.
State and public sector workers should share pension obligations.
By Cherian S. Thachenkary
The recent national and local attention to government pensions has prompted calls for governments to drop defined-benefit plans in favor of 401(k) contribution plans, similar to what millions of private-sector employees now hold.
I’d like to suggest another alternative: a combination of both.
Known generally as DB(k) plans, these plans would allow an employer to provide both a guaranteed defined benefit but also encourage employees to participate in a 401(k) plan to supplement their traditional pension.
Such a hybrid plan would share risk and protect the employee from sudden downturns in the financial markets, such as we witnessed in 2008.
In the private sector, there has been a steady shift away from traditional defined benefit to defined contribution plans. The 401(k) legislation was first passed in 1978, and the plan soon became widely adopted in the private sector as a means to reduce employers’ future liabilities. According to reports, in 1985, 85 of the Fortune 100 companies offered DB plans; today only 17 do.
Both employer and employees contribute to 401(k) plans, but the assets are managed by the individual employee, and the accumulated balance at time of retirement would determine the amount available to endow one’s income in old age.
Of the three legs of the so-called retirement stool, for most Americans today only two remain: the 401(k) and the potential income from social security payroll taxes paid during one’s working life.
The 401(k) makes eminent sense in a theoretical sense; but as a practical matter, there’s recognition among experts now that it has failed to deliver on its promise. There are many contributing factors, but the dot-com bust and the global financial crisis have drastically cut account balances of millions of participants.
According to one mutual fund company which analyzed 11 million 401(k) accounts held under its management, the average balance at the end of 2010 was only $71,500! Not enough to fund one’s retirement life.
Georgia’s own Teachers Retirement System has lost over $7 billion, or 13 percent from its peak value of $53 billion in June 2007.
However, the latest independent actuarial report on TRS cites it as “operating on an actuarially sound basis.”
Relying solely on 401(k) plans exposes the employee to too much risk. That’s why a hybrid pan that combines this approach with a traditional, defined-benefit plan makes sense.
Traditional plans typically use a 2 percent factor to compute one’s pension annuity by multiplying it with years of service and final average salary.
In the DB(k) plans, that figure would be reduced by, say, half to 1 percent. This would dramatically reduce an employer’s future pension liability but does not leave the employee in the lurch, having to rely solely on the vagaries of the stock market as they do now in 401(k) plans. Both parties have a stake in sharing the risk of providing support in old age.
In 2008, the state Legislature passed a bill to make such a program available to state employees. It became effective on Jan. 1, 2009, and covers all new employees who previously would have joined the Employees Retirement System.
This new plan is known as the Georgia State Employees’ Pension and Savings Plan (GSEPS). The name itself is telling as to what a good plan should be all about: “pension” and “saving.” But the new plan provides only a 1 percent guaranteed pension and automatically enrolls employees in a 401(k) plan.
Why not consider expanding this hybrid plan to all new state of Georgia employees including teachers and university personnel?
Congratulations to Mayor Kasim Reed for taking on the challenge of reforming the city’s pension plans. The two options he has announced in public do not include a DB(k) feature. Perhaps the mayor should consider including this enhancement before finalizing his reform agenda.
Cherian S. Thachenkary is a professor in the J. Mack Robinson College of Business at Georgia State University.
