Contribution collars give politicos cover from higher costs
By Eric Boehm | PA Independent
HARRISBURG — Legislative leaders say no plans exist to increase funding for the state employees pension system beyond legislatively created contribution caps, even though analysts say the caps are artificial and result in underfunding the plans.
State Employee Retirement System, or SERS, reported a 4.7 percent return on investment for the first quarter of 2011, and the gain puts the plan on pace to exceed the required 8 percent annual rate of return. However, after a decade of low state contributions and severe investment losses in the recession, the pension fund will need more than a few strong quarters to get back to full health, pension experts said Thursday.
SERS will need higher state contributions, which begin to kick in this year, from spending cuts or higher taxes or both. From 2001 to 2009, Pennsylvania never contributed more than $253 million to SERS — and in many years the contributions were less than half of that total. The contributions were less than required. Starting in 2011, contributions will jump to $700 million and exceed $1 billion by 2012, still below what is necessary to pay earned benefits.
During the next decade, the state’s contributions to SERS are scheduled to increase by nearly $2 billion.
"They go up a great deal, having been artificially held way down,” said Robert Gentzel, spokesman for SERS. “The size of the jump is a factor of the fact that even now, the rate doesn’t cover the cost of the current employees.”
But even as the contributions increase, they are less than needed, thanks to so-called "rate collars" instituted by the General Assembly in Act 120 of 2010. The collars act as ceilings on the amount of money the state can put into the pension plans even when more is required. The law, Act 120 of 2010, was intended to postpone a scheduled “spike” in pension costs by "smoothing" the increase over a longer period and pushing the cost onto future taxpayers and state workers.
For this year, the state budget proposal moving through the General Assembly funds the pension plans as allowed by the 2010 law, said Mike Stoll, spokesman for House Appropriations Committee Chairman Bill Adolph.
Top Republicans and Democrats in the state House and Senate echoed the sentiment Thursday, saying the pension funds were "fully funded" in the new budget proposal.
But pension experts say a discrepancy exists between what the law allows and what the funds require to pay benefits.
“What I find ironic is that people are going around saying they are resolving this issue, and they are stepping up to the plate,” said Rick Dreyfuss, a retired actuary and pension expert. “It creates the illusion of a balanced budget.”
Dreyfuss said the Legislature only was meeting the artificial standards it had set for itself, not the standards set by pension actuaries who work with the funds. Lawmakers can say they are fully funding the pensions under the lower rates created by the “collars,” but the numbers say more funding is needed.
In a fiscal analysis tied to the legislation that became Act 120, actuaries for the pension plan warned of that diversion between the “rate collars” and the needs of the pension plans.
“It should be noted,” the analysts of the bill wrote in November, “that the employer (taxpayer) contribution collars proposed in the bill represent a departure from the norms of actuarial funding practice. The effect of the bill as amended would be to suppress the employer contributions to both PSERS (Public School Employees Retirement System) and SERS, resulting in significant underfunding of both retirement systems.”
Gentzel agreed with that assessment.
“The collars are an artificial device, and they are overriding the actuarial evaluations,” Gentzel said. “On the bright side, they do expand each year, so the collars get looser each year.”
And as the collars get looser, the state contributions will increase to deal with the underfunded pension systems. In fact, current projections show the state contributions to SERS will increase more than seven times in little more than a decade — from about $290 million in 2009 to more than $2.1 billion by 2021.
If investment returns fall below the high rates needed to average 8 percent a year, contributions from state taxpayers or through spending cuts will have to increase further.
Although the collars will result in underfunding the pension system in the short term, Gentzel said the plan contained in Act 120 will work in the long run — provided the state makes the higher contribution levels in the coming years, and average investment gains never fall below 8 percent a year.
State Sen. Patrick Browne, R-Lehigh, one of the chief architects of Act 120, agreed.
“The challenge is making sure that over the next 10 years we get in there and set aside the amount we need,” Browne said. “The payments are set by statute, and if they are met by the General Assembly and the governor, it will result in the full payment of debt over time.”
Browne admitted the rate collars are not an ideal arrangement from an actuarial point of view, but stressed the importance of meeting the obligations as laid out in the law.
Those obligations will continue to increase in the next five years as the rate collars keep the state contributions artificially low.
Gentzel said several factors contributed to the projected higher pension costs: a decade of poor investment performance; low contributions from the state and an increase in the number of retirees in the system while the number of current workers remains flat.
The hit in 2008 was particularly difficult, as the fund lost $11 billion, nearly a third of its total value.
The good returns in the first quarter of 2011 are in line with strong investment performance during the past year. During the past 12 months, the pension system has seen a 13.8 percent return on investment. During the past five years, however, the rate has been 3.3 percent, when 8 percent was required.
