State Treasurer plants head in sand regarding state pension plans
Posted by Amber Gunn - July 09, 2010Yesterday, State Treasurer James McIntire publicly blasted credit rating agency Standard & Poor's latest nationwide pension report which cast Washington in a negative light.
The Treasurer was upset because S&P did not review all of Washington's pension plans, but chose only to review the state's largest and oldest plans, which also happen to have multi-billion dollar unfunded liabilities.
The plans S&P originally reviewed were limited to PERS 1 and TERS 1. However, in 2008, the state "changed accounting methods and began reporting actuarial information" for PERS 2/3 and TERS 2/3. After S&P was contacted by the Treasurer, the credit rating agency agreed to include PERS 2 and TERS 2 and the defined-benefit portion of PERS 3 and TERS 3. That changed the combined funded status for the defined-benefit plans from 73.5% to 88%.
Here is the problem with the Treasurer's "righteous" wrath: Assets are not transferable among pension plans. What that means is that when you have a $5.8 billion hole in two of the state's pension plans (as is the case with PERS 1 and TERS 1), it doesn't magically get balanced out by the other plans' surpluses.
The Treasurer is rightly concerned about the state's credit rating in light of the S&P report, however, his concerns only appear to go so far as public perception, rather than fiscal reality. State Actuary Matthew Smith has been sounding the alarm regarding the state's pension system for well over a year. Last September, in a presentation to the state Pension Funding Council, he warned that the unfunded pension problems have grown due to "delayed and suspended contributions, increased benefits, and investment losses." He recommended "a shift in focus to identifying, measuring, and managing retirement system risks. Without such a plan to manage these risks, the retirement systems as we know them may not be sustainable." He recommends tripling contributions from all employers and the state general fund for the next twelve fiscal years. He also added that "previously healthy plans remain healthy, but are now at risk of becoming unhealthy. Previously unhealthy plans are now at risk of running out of assets before all benefits get paid."
Read more about this in Bob Williams’ Financial State of the State.
A little over three weeks ago, the actuary's office updated the Senate's pension committee on the status of the plans. Some highlights from that report:
· Washington lost $16 billion in the stock market over two years. This does not consider any losses--or gains--in investments from July 1, 2009 through December 31, 2009.
· Because the state is writing off its pension losses over eight years (the “smoothing method”) the funded status of PERS and TERS plans 2 and 3 is expected to drop 25 to 30 percent during that time, along with a 15 to 20 percent drop in Plans 1 and PSERS.
· All units of government, all teachers and PERS employees will have large increases in contribution rates until at least 2024.
· The state will need to double the current biennium’s recommended contribution rate of $770 million to $1.48 billion during the 2011-13 biennium. Compare this to recent years when the legislature had trouble making any payments whatsoever to the pension system, and sometimes elected to skip them altogether.
· Local governments need to contribute $1.71 billion next biennium, as opposed to $950 million this biennium.
· PERS 1 and TERS 1 are at risk of running out of assets prematurely (below 50% funded status).
If you’d like a digestible version of the state’s pension problems, check out King 5 Investigators’ 5 minute video on Washington’s ailing pension system, released last November.
I don’t know about you, but I’m seeing red flags all over the place. As made clear by our State Actuary, our state’s pension system is in trouble, and it will soon begin to affect state and local budgets.
Just because S&P agreed to modify its report, doesn’t mean the state isn’t in trouble. In fact, as the report points out, “The key issue for our credit analysis regarding pensions and state budgets is to assess the budget impact and affordability of higher pension contributions.” The need to triple our state pension contributions, especially in the context of yet another $3 billion deficit, will put a mighty strain on our budget. The likelihood that this will impact our state’s credit rating is high.
It's a safe bet that Treasurer McIntire would serve state residents far better if he focused on actually improving the financial solvency of the state, rather than engaging in public relations battles with credit rating agencies.
Thoughts? Add Comment -
NWconservative said on Jul 09 2010 at 5:52pm
Awfully wonkie, but you were talking about this stuff a few years ago. The phrase on state pensions has been, "trust me" for years now. Trust is coming due.
It appears that trust will lose because of the paramount priority and all that. Time for the state to inform the unions that if you only have $20 to spend in the grocery store, you can't spend $40 and tell the clerk, "trust me."
Just Sayin' said on Jul 11 2010 at 10:03am
Take a step back. Isn't an employer who provides a pension saying that the employees are too stupid to provide for their own? I can plan my own retirement, thank you. I can buy my own health insurance, thank you. I can save for a rainy day in case I lose my job. Therefore I'm too capable to work for the State of Washington which assumes that all of its employees are incapable of these things.
erheaullt said on Jul 12 2010 at 9:25am
a lot of the problems in WA could be solved by cutting State and Local government in half,, But do not worry the new income tax will solve all of the problems,, Whats this you say only high income will pay< Care to bet if it is passed within 2 years all of us will be milked with the income tax do you really trust the WA government to keep its word?