Ohio pensions: Time bomb for state, local governments
BY JESSICA ALAIMO
CentralOhio.com • July 26, 2010
The good news first: We're all living longer.
The bad: It's costing the state and local governments a ton of money.
Since the average person spends many more years in retirement than in years past, there is a looming question of how to pay for it.
Most private sector employers have responded by dropping the traditional pension plan in favor of a 401(k) system, in addition to Social Security benefits. However, public employees still pay a determined amount into one of Ohio's five public pension funds throughout their working careers. Then they are guaranteed a pension for the rest of their life, the amount based on their earnings and years in public service.
That guarantee comes at a price -- one that cash-poor state and local governments are struggling to pay for. Unless substantial changes aren't made to Ohio's pension systems, the funds will need to come from somewhere. For taxpayers, that could mean fewer government services, higher taxes or both. For retirees, it could mean working longer before they are eligible to retire, and lower payouts when they do.
State law dictates each pension fund should plan for the worst. In the event that government shuts down tomorrow, the funds should be able to pay off all outstanding promises within 30 years.
If a pension fund can't meet that threshold, it must submit a plan to the Legislature on how it will recoup costs.
Two of Ohio's pension funds, which cover public employees and school workers other than educators, meet this benchmark.
The other three, covering Ohio's teachers, police and fire and highway patrol employees, not only are below the threshold, they also have attained "infinity" status. That means they never will be able to pay off their existing obligations unless changes are made.
Given an aging and shrinking work force, increasing costs and a longer life expectancy, retirees will almost certainly get more out of the system than they and their employers pay into it, which means the state is slipping behind. The Ohio Retirement Study Council, made up of legislators and three gubernatorial appointees, asked all funds to come up with a plan to cut costs in coming years.
The pension funds and labor unions are now in agreement on plans that will cut costs down the line, but a battle is looming. The Legislature must approve any changes to the pension funds, and lawmakers have wide-ranging ideas as to what will bring more sustainability to Ohio's pension system.
The wake up call
In 2008, the financial earthquake hit. The stock market crashed and Ohio's pension funds lost billions. PERS, the largest pension fund, lost $24.4 billion, according to the fund's annual report.
There had been talk of pension reform before the crash, but when investments declined, public officials had a greater sense of urgency.
Last year was a better year. PERS made slightly less than half of its losses back.
The pension funds recently got another boost. Earlier this month, three of the state's pension funds reached a $725 million settlement with American International Group Inc., which the state had accused of fraudulent accounting practices and stock price manipulation, which caused the investments to plummet.
Now, the biggest problem facing Ohio's pension systems are an archaic system and "apocalyptic demographics," said Marianne Steger, director of health care and public policy for AFSCME Council 8.
"We never expected someone to retire at 65 and live another 50 years," Steger said.
To make ends meet, Ohio's public employees will need to work longer and contribute more to and expect less from their pension systems.
Public pension system officials have made various recommendations to the General Assembly to fundamentally change how benefits are administered. Officials from two of Ohio's biggest unions, the Ohio Education Association and AFSCME Council 8, said they support their respective systems' recommendations.
Three of the systems are recommending increased contributions from employees and taxpayers, although this recommendation is not likely to go over well in the Legislature. That's assuming the proposal even makes it into proposed legislation at all -- the lawmaker drafting the bill said he has reservations about contribution hikes.
All are asking that workers spend more time in public service. The Public Employees Retirement System wants to raise the normal retirement age to 67, or require that employees spend 32 years in public service.
Currently, an employee's pension is based on his or her highest paid years in public service. All pension systems want to change this to five years to better reflect a worker's salary throughout his or her career.
Retirees collecting pensions also get a 3 percent annual cost-of-living increase. All but one pension fund wants to either defer or lower this guarantee.
Chris DeRose, executive director of PERS, said his system's recommendations were made after consulting with a number of stakeholders, including retirees and labor unions.
He and Steger are involved in campaigns to explain the changes to their members. Both say members have questions about the proposals, but they generally accept the proposals once they see the need.
Bill Leibensperger, vice president of the Ohio Education Association, said he has faced challenges explaining to his members why the State Teachers' Retirement System must be fixed.
"We have to recognize the hard facts that real changes need to be made to preserve the system," he said. "In STRS we will have to work longer, pay more, and get less."
The hard truth
By law, Ohio must pay the promised retirement benefits for all employees.
However, the state does not have to provide retirees with health care, although all five pension systems do. This means if public pension funds start to run out of money, health care for retirees could be the first to go.
PERS currently has the assets to fund health care for 11 years.
The threat that retiree health care could go is the wake-up call some need to agree to the changes, DeRose said.
"We get strong feedback on the changes after explaining the need, that by making these changes we can continue to fund health care," DeRose said.
Right now the recommendations are being reviewed by the General Assembly's Retirement Study Council, chaired by Rep. Todd Book, D-McDermott.
Book could not go into detail about what will be included in the bill. However, he did say he has strong reservations about any proposal to increase employer contributions. The teachers, police and fire and highway patrol pension funds are seeking such increases.
Retirement council members Reps. Lynn Wachtmann, R-Napoleon, and Dan Dodd, D-Hebron, were more candid. Wachtmann said he would oppose any measure that will increase employer contributions. Dodd said he would use it only as a last resort.
Pensions, Wachtmann said, already are strangling local government budgets.
Dodd said he is also concerned about the formula for determining payments. Under the current system, a retiree's pension is based on the top three highest paid years. There is concern that some employees are loading up on overtime as they approach retirement so they can collect a higher pension. This "spiking" is legal but can add hundreds of thousands to a retiree's total pension payments.
Four of the five funds are recommending the average needs to be taken over the highest five years.
"The retirement needs to reflect the salary you were making," Dodd said.
Sen. Sue Morano, D-Lorain, also a member of the council, said another X-factor in the debate is how the new federal health care law will impact Ohio's public employees and retirees.
The opposition
Pooled pension plans used to be common in the private sector, but they were abandoned in favor of defined contribution plans, such as a 401(k).
Some conservatives are saying public employee retirement should mirror the private sector.
"The private sector has long said 'no' to defined benefit plans," said Matt Mayer, head of the Buckeye Institute, a conservative think tank.
The Buckeye Institute recently released a report calling for deep cuts to public employee pensions to save the state money. The institute calls for elimination of longevity pay, cost-of-living increases, a lower employer contribution, and a move to a 401(k)-like plan. The moves would save $2 billion in the next two-year state budget alone, the report concludes.
In Mayer's opinion, the proposed changes by the retirement system don't nearly go far enough, and he doesn't see the political will to do more in the Legislature.
"Politicians always do this nibbling on the margins to not address the real problem," Mayer said.
Wachtmann agrees with some of Mayer's sentiments. He said final average salary should be based on a 30-year average, and that the state should move to a defined contribution plan.
In California, a referendum campaign is under way to cut pension benefits.
"Taxpayers are starting to wake up to the (pension) issue," Wachtmann said. "Doing nothing could cause a couple people to fund a referendum, though I have not heard of an effort."
The Buckeye Institute's conclusion is that Ohio public employees' actual compensation is much higher than those in the private sector. However, a competing study says otherwise.
The National Institute on Retirement Security released a report this April also comparing public sector employment to private sector employment on a national scale. Its conclusion? Public employees do get better benefits, however their base pay is much lower, evening things out.
"Although the current recession calls for equal sacrifice, the long-term pattern indicates that state and local workers are not, on average, overcompensated," the study concludes.
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