Posted on 02/15/2007 4:48:24 PM PST by truth49
In the last five years, Washington has seen its unfunded liability for pensions increase dramatically. According to the June 2006 Comprehensive Annual Financial Report, the total unfunded actuarial liability has seen an eight-fold increase from $778 million to $6.4 billion. The Public Employees Retirement System (PERS) Plan 1 unfunded liability increased from $584 million to $3,997 million between 2000 and 2005. In the same period the Teachers Retirement System (TRS) unfunded liability increased from $194 million to $2,444 million.
PERS & TRS Plan 1 Unfunded Actuarial Liability
(Dollars in millions)
|
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
PERS Unfunded |
$584 |
$1,098 |
$1,803 |
$2,465 |
2,927 |
$3,997 |
TRS Unfunded |
$194 |
$553 |
$869 |
$1,239 |
$1,673 |
$2,444 |
Total |
$778 |
$1,651 |
$2,672 |
$3,704 |
$4,600 |
$6,441 |
Source: June 2006 Comprehensive Annual Financial Report
Tracing the origins of Washingtons unfunded pension liability
State contributions to the state retirement systems have fallen substantially since 1999 (see below chart). In essence, the legislature skipped the last two plan 1 payments and rolled them back into the actuarial liability. By not properly funding pensions, Governors Locke and Gregoire and the legislature were able to superficially balance their budgets. Taxpayers will have to make up not only the funds that were not put into the pensions, but also lost interest and/or stock gains.
Source: Washington State Retirement System and Pension Contribution Rates, January 2007, Office of Program Research
In addition to the under-funding of pensions, gain-sharing has also increased future contribution requirements. The benefit was approved in 1998 during the stock-market boom when double-digit returns seemed routine. When investment returns exceeded expectations, part of the excess was supposed to be returned to state workers through the pension system.
The state assumes an 8% annual rate of return on pension investments. This is the long-term average that must be achieved in order to fully fund pensions. Gain-sharing skims off high returns during good years, making the long-term average unreachable. Those periods of high returns are needed to off-set low interest years. If gains are trimmed during good years, state & local governments are forced to make up the difference.
In addition to gain-sharing and skipped payments, the state has chosen to ignore the state actuarys mortality assumption recommendations. In his most recent report, the actuary recommended adjustments to the mortality assumptions used in the states funding models. The state had been using static mortality tables, meaning longer life-spans were not taken into account. The actuary recommended increasing contribution rates to ensure the system could cover the increased pension costs that accompany longer life-spans.
The Pension Funding Council (charged with adopting biennial contribution rates) rejected the actuarial funding recommendation, choosing not to include the mortality improvement costs. The implication of the Councils rejection is that the governor and the legislature will not have to include the cost of mortality improvements in their budgets.
Using Priorities of Government to pay down pensions
With a budget surplus of nearly $2 billion, there is no reason the governor and legislature could not stop the growth of unfunded pension liability.
Using the Priorities of Government process, the state should:
apply the funds to pension debt before creating new or expanded programs;
repeal gain-sharing; and
move surplus funds into pensions so that the interest income reduces future payments.
In addition to these actions, the state should adopt the state actuarys mortality assumption recommendations. Increasing contribution rates now will ensure the pension system can cover the increased pension costs that accompany longer life-spans.
Conclusion
The state has skipped payments, added gain-sharing, and ignored the state actuarys recommendations. These actions have dramatically increased pension costs for taxpayersa problem that will only continue to swell if deliberate steps are not taken to correct it. Using the Priorities of Government process, the state can and should reduce Washingtons pension debt.
What is this "unfunded" of which you speak?
As long as there are still taxpayers with further blood to be drained, the word will never apply to public employee pensions.
taxpayers bend over
EFF - a sane voice.
Is that one of the states wanting to legally recognize 'gay marriage'?
The ultimate Ponzi scheme!
Say, does anyone know if TIAA-CREF has any unfunded liability?
What do you mean we, kemosabe? When push comes to shove, an alternative to confiscatory levels of taxation may be retroactive modification of the pension agreement. It can happen, there is no Constitutional guarantee of those programs to my knowledge. The retired bureaucrats will raise hell, but will get a haircut nonetheless.
It wasn't clear to me until I was well into the article that Washington was the state not the Feds. I should have realized that it's not a problem for the Feds since they can print money.
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