September 18, 2013
State revenue forecast is positive, but looming pension cases could have big impact
The state's latest quarterly budget forecast was released this morning, and the news is positive. From the AP:
The Economic and Revenue Forecast Council projected that tax collections over the next two years will be more than $200 million greater than expected when state lawmakers adjourned at the end of June. Total revenue over that time period is now forecast to be nearly $33 billion -- 7.6 percent more than the previous two-year budget period.
Helping fuel the increased state revenues are higher vehicle sales, an improved housing market, an upswing in commercial property sales, and strong retail sales growth. The forecast does not include taxes collected from future marijuana sales.
Hanging over the positive revenue report is the possibility that the state's pension obligations could take a dramatic jump if the state loses a pair of pension-related lawsuits. The Olympian's Brad Shannon explains:
At issue are two of the Legislature's decisions in recent years: one, to repeal automatic cost-of-living increases for participants in several first-generation pension plans; and two, to repeal a law that once let employees share in stock gains when investment returns on pensions were red hot over several consecutive years.
Gain sharing, as the second policy is known, was a catastrophically stupid idea. "Sharing the wealth" when the economy was hot meant those funds were not available to prop up the pension funds in a downturn. The Department of Retirement Systems explains explains the history behind the lawsuits:
The original gain sharing provisions, approved in 1998, allowed members of PERS and TRS Plans 1 and 3 and SERS Plan 3 to share in "extraordinary investment returns" under certain conditions. The law also stipulated that gain sharing was not a contractual right and that the Legislature reserved the right to amend or repeal it.
When the Legislature repealed gain sharing in 2007, it provided certain benefits as a replacement, including new provisions for early retirement. Those early retirement reduction factors (known as ERFs) allow members of PERS, TRS and SERS Plan 2 and Plan 3 with at least 30 years of service to retire at age 62 (instead of 65) with no reduction in their benefit. They can also retire before age 62 with less of a benefit reduction than had previously been provided.
A report by the Office of the State Actuary estimated that an adverse ruling on both court cases, which are now consolidated and will be argued before the state Supreme Court in October, could hit state and local governments to the tune of over $1.3 billion in the next biennium. The report also noted that investment returns over the past six years have been 2.95%. The possibility of several lean years in a row is precisely why the state should not have instituted gain sharing in the first place.
Posted by Adam Faber at September 18, 2013
06:51 PM | Email This
1. Get real and join the rest of the corporate world and revert to the defined contribution plan and get away from the give-a-way archaic defined benefit plan that sooner or later bankrupts. Classic having your cake and eating it too...DOESN'T WORK (run the numbers) when will you realize that.
Duffman@1, your comment makes no sense. First of all, a defined benefit program doesn't necessarily "sooner or later bankrupt"; it depends on how generous the plan is. You say "run the numbers" but you can't do that without knowing the numbers! Furthermore, even if a defined benefit program runs out of money, that's not the same as being bankrupt, since it can reduce the benefit or increase contributions.
Finally, your comment is ironic in this thread, which talks about the state's budget surplus which is threatened by a provision that makes it slightly more like the defined-contribution model you prefer.
Of course it is true that a defined contribution plan is more predictable for the contributor, while a defined benefit plan is more predictable for the recipient. They are optimized for different things. One is not intrinsically better than the other.
Duffman@1 rails against the "archaic defined benefit plan that sooner or later bankrupts".
Hey, sooner or later we are all dead. But anyway, pensions are not the only form of defined benefit in which there is financial risk. A salary is a defined benefit; so is an insurance policy. Defined benefits have an important role in our economy.
4. A 3% return over the last six years for the state's pension fund???? I realize that they just lowered expected returns from the set-in-stone 8% mantra we continually hear about from FP's to 7.5%, but that, too, is still very optimistic in these era of ZIRP. After all, who makes up the difference between the actual return and the baseline return? The tax-payer (you and me). The return on these pension funds, especially public pension, funds should be set at a realistic 5%, which is the historic return over time of the 'market' since the beginning. These pension assumptions for public retirement programs are mathematically unrealistic and will end up breaking states and municipalities in the end.
5. Woo Hoo, 200 million is a cost over run to be sniffed at derisively by our transportation planners, it's really not taxpayer's dollars.
Re:Transportation planning. Transfer as much funding from transit to roads and bridges as it takes to repair existing roads and bridges. Maybe that is $500 M, but it is more important to maintain safe roads and bridges than to build highly subsidized light rail, high speed trains that can never pay for themselves.
Pensions even in the public sector are on their way out. Younger workers are having 401K plans replace pensions. Some larger private companies have their own pensions, not directly funded by taxpayer money, but they are also replacing pensions with 401K investment plans.