Pensions might look like a pot of gold to politicians right now, but they should go follow another rainbow if they want extra funds to pay state bills. Public pension funds need to stay right where they are.
Public pensions are in a good place. A recent study from NCPERS found that pension funding levels went up again in 2016, to an average of 76 percent. The Center for Retirement Research at Boston College noted similar trends and expects average funding levels to approach 77-81 percent by 2018. Pensions have weathered the 2008 economic crisis, as they’re designed to do. But healthy pension systems now face another challenge with local governments.
In Kansas, severe tax cuts have resulted in years of declining revenue for the state. In response, the state legislature has cut about every program it can find to cut. Reducing state aid to schools has resulted in larger class sizes for Kansas children. Library support was slashed by 30 percent. Local health services also hit the chopping block; state funding there has declined by 12 percent.
Out of areas to cut, in 2016 Governor Sam Brownback used money that should have gone into the state’s pension system to fill yet another budget hole. His loan from the pension system was due back in September of last year, but he is yet to repay the money. In Brownback’s 2017 budget, he proposes to not repay the $100 million he took in 2016 and wants to cap payments going forward so the state can use that money for something else.
West Virginia has spent the last decade restoring the funding health of its Teachers Retirement System. Now that the system is back on more solid financial footing, politicians in the State House are debating a “refinance” of pension debt to give them more cash in the short-term.
Similar to Kansas, West Virginia faces a budget deficit due to ill-advised tax cuts. To reach full funding of its pension system, West Virginia needs to keep making dedicated payments for eighteen years. Politicians are pushing to extend that to thirty. Sure, it will save some money in the short-term, but over the long-run it will cost West Virginia taxpayers billions.
While there is a lot of complicated math associated with pensions, some of the basics are quite simple. Pension funds get their money from three sources: employer contributions, employee contributions, and investment returns. Employees in West Virginia and Kansas do not get the option to skip or delay their payments. The money to pay for their pension is deducted out of each and every paycheck.
When politicians shirk the state’s responsibility to make pension payments it hurts the fund immediately and in the long-run: the money that should be in the system gaining investment returns is not there. Investment returns cover as much as 75 percent of the cost of a pension. The Kansas Public Employee Retirement System (KPERS) estimates that the fiscal irresponsibility of the Governor and legislature will cost the system $6.5 billion over the long run.
This is not the first time politicians and special interests have looked greedily at the millions and billions in pension funds and asked how the money could be used for their own purposes.
After the recession, Wall Street interests made a push to convert pension systems to individual 401(k)-style accounts. The fee structures in 401(k) plans are much more favorable to lining the pockets of Wall Street than professionally managed pensions. Management fees for 401(k)-style plans are 2.4 to 6.8 times higher than those for pensions. Largely unsuccessful in these attempts, most states have opted to keep defined benefit pensions because of the superior benefits they provide at a lower cost to the state.
Pensions are not a pot of gold for Wall Street and politicians. They are the deferred wages of teachers, police officers and firefighters. In some cases, a pension is all a public employee will have in retirement as many are not eligible for Social Security. As tempting as it may be to raid pensions for short-term priorities, that is the wrong course to pursue. Politicians must be responsible and protect the deferred earnings of workers.
Bailey Childers is the executive director of the National Public Pension Coalition.
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