|"We Can't Sustain Public Pensions"
September 7, 2010
The Chester County Retirement Board has struggled with two competing goals: meeting our state-mandated responsibility to provide government employees with defined-benefit pensions, and minimizing the burden on taxpayers. I believe these two goals are no longer compatible.
Much has been written about the growing pension crisis facing America's public sector. Crisis is not too strong a word. A recent Pew report estimates the nation's unfunded pension liabilities at $452 billion. Some think the number is much higher due to unrealistic pension-fund assumptions.
Since being elected Chester County controller and joining the Retirement Board in 2006, I have become increasingly concerned about such assumptions. Elected officials are often reluctant to cut spending, and they can use unrealistic assumptions to defer government obligations to fund pension plans. Such gimmicks pass the burden on to future policy-makers and, ultimately, future taxpayers.
Fortunately, the Chester County Retirement Board has avoided using unrealistic assumptions to defer obligations. And it's worth noting that counties' pension benefits are generally more in line with the private sector than those of school districts and the federal and state governments.
However, all taxpayers should remain vigilant about the pension crisis. Even in Chester County, where elected officials have been conservative in their approach, there are challenges ahead.
Our advisers say the county must maintain a rate of return of 7.5 percent on its investments, year in and year out, to maintain the status quo. If we earn less, we will fall behind on our obligations, and the taxpayers will have to make up the difference.
Earning 7.5 percent on a well-diversified portfolio of stocks each year is never easy. In this economy, it would require extraordinary skill and a good deal of luck.
It's even more difficult for governments, which must keep sizable portions of their retirement funds liquid to pay current retirees. In Chester County, we must maintain up to 35 percent of the fund in bonds and cash, which traditionally yield much less than 7.5 percent. Thus, the remaining 65 percent of the fund has to earn better than 11 percent. If we fall short of that, we must make up the difference with contributions from the general fund - that is, taxpayers.
Another area of concern is postponement of pension obligations. Recent state legislation allows counties to extend payment of pension liabilities by up to 30 years. This is like refinancing a 15-year mortgage with a 30-year mortgage: The monthly payments are lower, but the payment schedule extends another 15 years, with the additional interest costs that entails. Again, this passes the burden to future policy-makers and taxpayers.
The Chester County Retirement Board makes assumptions about other factors, such as the rate of growth of county salaries and the life expectancy of retirees. If these assumptions are wrong, the liability to taxpayers can be dramatically understated, forcing future taxpayers to foot the bill current officials aren't paying.
All the factors I've mentioned give elected officials opportunities to "hide the ball" by lowering contributions to pension funds and passing the burden to future generations. While not prevalent in Chester County, such practices have been going on in the public sector for years.
Pennsylvania needs real pension reform allowing state and local governments to provide defined-contribution plans, like the 401(k)s that most private sector employees have. In the meantime, taxpayers must understand how the pension process works so that, come budget time, they can ask their elected officials the right questions and make sure they don't "kick the can down the road" to our children and grandchildren.