Wednesday, April 14, 2010

Dawn Goodman

Observer-Reporter

Teacher pension funding gaps are three times greater than states report and have become the nation's next greatest unfunded liability, according to a study by the Manhattan Institute and the Foundation for Educational Choice.

The two groups released their jointly sponsored report Tuesday titled, "Underfunded Teacher Pension Plans: It's Worse Than You Think."

According to the financial statements of each of the 59 funds, their unfunded liabilities are $332 billion. But the authors of the report say that those liabilities actually total about $933 billion. Pennsylvania's officially stated funding gap is $9.4 billion, while the report estimates it at $43.2 billion.

Josh Barro, a senior fellow with the Manhattan Institute, an organization that fosters economic choice and individual responsibility, said governments are doing nothing illegal in their estimates, but that it's different from how the private sector completes its estimates.

State and local governments estimate that investments will increase about 8 percent a year and use that figure to discount their future pension obligations, Barro said. It is the method prescribed by the Government Accounting Standards Board, but the authors of the report say it is not a reasonable way to estimate long-term pension payments because the risks cannot be passed on to the retirees, he said. GASB is considering whether to revise its rules on public pension accounting.

Evelyn Tatkovski, press secretary for the Pennsylvania Public School Employees' Retirement System, said she couldn't comment about the report because she hadn't read it. She said PSERS is focused on funding the retirement system and doesn't have the resources to determine if every report about pension systems is accurate.

However, she said PSERS assumed investment rate of return assumption is 8 percent, the current median for public pension plans across the country. Each year PSERS reviews this number with its general investment consultant and the actuaries and structures the asset allocation accordingly.

PSERS has met this assumption over the long term, she said. For example, over the past 25 years the fund earned an annualized rate of return of 9.23 percent.

Each year PSERS' actuaries determine the actuarial funded ratio of the system. PSERS funded ratio is 79.2 percent as of June 30, 2009, she said. The total funded ratio of the plan is based on the accrued liability and actuarial value of assets calculated under the funding requirements the retirement code. Qualified actuaries complete the annual valuation in accordance with accepted actuarial procedures as prescribed by the Actuarial Standards Board, she said.

Essentially, GASB rules allow governments to set aside less money than private companies, Barro said. Private companies must estimate the present cost of future liabilities on the basis of lower returns that high-quality corporate bonds pay.

The bottom line, Barro said, is that governments should account for their liabilities the same way private companies do.

However, those changes will not eliminate what states already promised to pay out in pensions, Barro said. Retirees have a legal claim on promised pension benefits that supersedes schools' budgetary needs, the report states.

"Consequently, Americans can look forward to higher taxes and cuts in services, resulting in few teachers, bigger classes and facilities that are allowed to deteriorate," the authors write.

Barro said the pension costs have grown so large because elected officials have not been held accountable for them: The cost of higher pension benefits is in the future while higher wages happen immediately.

"States can start by accounting honestly for the current costs of future benefits," the authors write. "If they did so, they would reduce the temptation of their elected officials to be overly generous in awarding benefits."

Barro said states should consider shifting from defined-contribution plans to 401-k like plans or hybrid plans for new and young employees.

The history of the state pensions over the past decade is one of irresponsibility, hubris and lack of foresight, the report states.

The booming stock market of the 1990s resulted in stronger than expected asset performance, leading to pension fund surpluses. Instead of setting aside those gains for future pension payments, state governments shortened vesting periods, increased multipliers used in determining benefit amounts and shortened the years of service needed to qualify, the report states.

School boards in Pennsylvania are lobbying the state Legislature to modify the pension plan so projected costs aren't so steep. Currently, districts pay 4.78 percent of employee salaries into the system. Next year, they will pay 8.22 percent. By 2014-15, that number is projected to be 33.6 percent.

A majority of Pennsylvania teachers union members have contributed 7.5 percent since 2001. Over the past decade, teachers have paid more than $7.3 billion into the pension system, while the state and districts combined paid $3.765 billion.

Read the report at http://www.observer-reporter.com/OR/sourcedoc/.