Unfunded liabilities a problem in Texas as elsewhere.

by Mary Scott Nabers

Local and state government entities could be headed toward a $1.5 trillion financial catastrophe. Public-sector pension programs are hemorrhaging and experts see no relief in sight.

In 2014, the funding gap between promised benefits and funding to pay for the benefits topped $934 billion. The Pew Charitable Trusts, in a recent study, reported that gap is continuing to escalate.

This is a nationwide problem. In 2014, the average increase on state pension investments was 17 percent. In 2015, that rate fell to only 3 percent. And for the first part of FY 2016, state investment returns crossed over into the negative column.

Last year, public pension liabilities were underfunded by more than $1 trillion. This very serious problem has the potential for impacting millions of people.

Pew listed Texas as one of the 10 worst performing states in the study. The state’s Pension Review Board says that the more than 90 pension systems under its umbrella have about 29 percent of their liabilities unfunded. That amounts to more than $60 billion.

In Houston, where pension problems led to a downgrade in the city’s credit rating this year, city officials are talking reform. The mayor recently announced a 30-year plan he says will pay off the more than $7 billion that the city owes the pension plan. His proposal would cut annual costs and still meet the city’s annual contributions to the fire, police and city employee pensions. The plan includes changes to benefits – such as future cost-of-living adjustments and benefit accrual rates – but the new proposal would not impact paychecks, according to the mayor.

Dallas is facing similar problems that could have its Police and Fire Pension Fund headed toward insolvency. That fear has prompted a rush of retirements from the ranks of the fire and police departments as eligible officers leave to preserve their pensions.

In the last six weeks alone, retirees took lump sum payments which are allowed in the program and the outflow totaled $220 million. That happened as pension officials were considering the possibility of benefit cuts as a way to save the retirement program. Officials say that if withdrawals continue, assets may have to be sold – probably at a loss – to continue to meet obligations.

Because of changes to its pension plan in 2000, which allowed some public employees to retire at age 55, California taxpayers are now facing billions of dollars in unexpected costs. Pension benefits will cost taxpayers $5.4 billion this year.

Public-sector workers in South Carolina can currently take early retirement but continue to work at their current salary. That adds significantly to state pension costs. When cost-of-living increases and poor investment returns are added in, the state is left with $16.8 billion in unfunded liabilities. Changes are likely to occur.

During the last legislative session in Texas, lawmakers approved an increase in state contributions as well as employee contributions to the Employees Retirement System (ERS). However, the unfunded liabilities still total more than 23 percent of what has been promised to state employees.

The Chicago City Council recently approved a tax of almost 30 percent on water and sewer bills to bail out the Municipal Employees Pension Fund because it faced $18.6 billion in unfunded liabilities. The taxpayers in Chicago who were still reeling from an increase of $838 million in property taxes were certainly not pleased.

The public pension situation is dire. Funding solutions must be found. Watch for major public pension program reform – something government employees and retirees greatly fear.

 

As President and CEO of Strategic Partnerships, Inc., Mary Scott Nabers has decades of experience working in the public-private sector. A well-recognized expert in the P3 and government contracting fields, she is often asked to share her industry insights with top publications and through professional speaking engagements.

Courtesy of Texas Government Insider, a publication of Strategic Partnerships, Inc. www.spartnerships.com

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