Weaker PERS Needs Legislative Doctoring

You hear that ever louder sucking sound?

That’s the Public Employees’ Retirement System (PERS) ginning up to suck an extra $270 million out of schools, cities, counties, colleges, and state agencies beginning in July.

Don’t blame PERS though. It has no choice.

Got your attention?

This and other facts got our attention as members of the Governor’s PERS Study Commission. Here’s a view from inside the Commission.

In July, PERS needs to raise the rate schools and other public employers pay to 14.26% of payroll. Until financial problems hit, PERS’ rate was 9.75%. The rate difference sucks up the extra $270 million.

Why must rates go up?

Because PERS’ unfunded liabilities keep growing…up another $1 billion in fiscal year 2011 to $12.3 billion. Pension rules require PERS to fund its shortfall. PERS’ only option is to raise rates.

This will be the sixth rate increase since 2005. But, the shortfall keeps growing. How much more can schools and other public employers’ afford?

Already, this extra expense has contributed to job losses and stagnant wages. For the first time in recent history, total employment covered by PERS fell in 2010, from 167,122 to 164,896. It fell again in 2011 to 161,676. PERS counts on wages increasing 4.25% annually to boost revenues. Wages increased just 0.2% in 2010 and 0.6% in 2011.

Fewer people paying in and stagnant wages further weaken PERS.

PERS’ infirmity came from the Legislature. In 1999, it substantially increased retiree benefits, applied the increases retroactively to retirees and employees, then failed to provide the means to pay for the increases.

Symptoms appeared in 2001. That’s the first time the money paid out to retirees exceeded the money paid in by employers and employees, an annual gap now nearing half a billion dollars.

Also in 2001, investment earnings plummeted. PERS counts on an 8% average investment return. Bad years in 2001, 2002, 2008, and 2009 have pushed the 10-year average down to 5.41%.

By 2003 the funded status had fallen under 80%, the minimum level for stable retirement systems. Now, it’s way down to 62.2%.

PERS’ actuary performs a “solvency test.” In simple terms, liabilities are assigned to three buckets. By the end of 2010, unfunded liabilities had drained one bucket and begun draining the second. Solvency leakage continued in 2011.

These unhealthy trends have not gone unnoticed. In 2010, a PEW Charitable Trusts report said PERS and 18 other systems faced “serious concerns.” Credit rating agencies have begun criticizing PERS’ funded status.

Schools and local governments can’t, and won’t, afford ever-rising rates. If they balk, PERS faces a major crackup.

Those are sounds no-one wants to hear.

The Commission suggested remedies. But only the Legislature can doctor what it impaired in 1999.

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