Pension system liabilities: the train at the end of the tunnel

It will be worth your time to check out Better, Faster, Cheaper, a blog produced by former Indianapolis Mayor Steve Goldsmith for the Kennedy School of Government. Among its gems is an excellent article by William Eggers, The Pension Time Bomb — Part I. Even Eggers, co-author of a book on the subject, has a hard time understanding the cost implications of public pension plans:

The hole in which most states and municipalities find themselves in is massive. How massive? It is difficult to tell with any precision…There is no disputing, however, that the scope of unfunded pension and retirement health care obligations facing the public sector is enormous.

Eggers has a firm grasp on how we got here. Governments, including many in Oklahoma, have failed to contribute enough to retirement plans to fund all earned benefits and haven’t asked employees to contribute enough. They’ve expanded benefits when the stock market was strong and offered lucrative early retirement packages. And they’ve decided to worry about the imbalance later.

In Oklahoma, we pointed out that the funding needed to keep retirement systems afloat is sinking state budgets.

In the case of retirement costs, the employer contribution rate will rise to 15.5 percent in FY ’10, up from 14.5 percent in FY ’09 and 10.0 percent as recently as FY ’05.

This year, state agencies are paying $216 million–more than double the amount in FY ’04–for their share of pension funding. This is one reason state agencies cannot continually get flat funding and still maintain their services. There’s little alternative but to increase the contributions, however. The state’s FY ’08 Comprehensive Annual Financial Report reports that benefits already promised from the Oklahoma Teachers Retirement System are $9 billion more than current and future funding. It would take 54 years of contributions to pay for all of these benefits. Most other state and local pension systems are not sustainable in their present form, though we have made some progress. Oklahoma, like most other governments, will have to¬† increase funding and reform benefits. If we fail to do so, we’ll have two choices: raise taxes or cut into core public services that already fall short of the needs of a prosperous state. Here’s an earlier issue brief with the full rundown on Oklahoma’s state pension systems.

For now, Eggers leaves us peering over the cliff without a hang glider. When Part II, which promises options for fixing the problem, comes out, we’ll point it out.

ABOUT THE AUTHOR

Paul Shinn

Paul Shinn served as Budget and Tax Senior Policy Analyst with OK Policy from May 2019 until December 2021. Before joining OK Policy, Shinn held budget and finance positions for the Oklahoma House of Representatives, the Department of Human Services, the cities of Oklahoma City and Del City and several local governments in his native Oregon. He also taught political science and public administration at the University of Oklahoma, University of Central Oklahoma, and California State University Stanislaus. While with the Government Finance Officers Association, Paul worked on consulting and research projects for the U.S. Environmental Protection Agency, the U.S. Department of Transportation, and several state agencies and local governments. He also served as policy analyst for CAP Tulsa. He holds a Ph.D. in Political Science from University of Oklahoma and degrees from the University of Oregon and the University of Maryland College Park. He lives in Oklahoma City with his wife Carmelita.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.