With its large and potentially increasing unfunded liability, the Employees Retirement System (ERS) board views favorably the option of using excess general fund revenue to pay down pension obligations.
The state Constitutional amendment appearing on the Nov. 8 election ballot (per Senate Bill 2554) would expand the available uses for excess revenue to include payment of unfunded pension liabilities and/or debt service on the state’s general obligation bonds. A “yes” vote would establish an additional pension funding source with the potential of reducing the long-term costs to taxpayers of paying for benefits which have already been earned and are protected by the state Constitution.
Maintaining the ERS funding path progress is a strategic priority for its board as it seeks to reduce the financial burden to future generations of taxpayers while ensuring that its obligations are met to the more than 120,000 plan members and beneficiaries. After years of funding diversion through the early 2000s followed by the financial crisis, ERS pension funding reached a low of 59 percent in 2012.
A cooperative effort between the ERS, state administration, Legislature and unions supported the ERS call to address the $8 billion unfunded liability through benefits reform and significant contribution increases. Resulting legislative action helped reverse the funding slide which has improved to 62 percent in 2015.
The system’s obligations don’t remain static, however. Recent years of muted investment returns and more significantly, rapidly increasing member longevity are combining to require a material increase in employer contributions. A recent actuarial “experience study” reflecting the specific dynamics of our membership base illustrates the significantly longer life expectancies our state members enjoy as compared to our mainland peers.
This means that our plan, on average, pays more in retirement benefits over longer periods than those of other plans whose members are less long-lived. Overall, life expectancies are increasing across the nation. The advantage we hold is not only expected to remain over time, but evidence suggests further growth.
In the face of these growing demands, we have to prioritize our state’s long-term fiscal management efforts. A good example occurred during the 2016 legislative session when a related liability challenge unrelated to the ERS began to be addressed through prepayment.
For fiscal year 2016-17, the Legislature, at the governor’s initiation, appropriated $81.9 million more than required under the OPEB (other post-employment benefits, such as health care) contribution schedule set by law. According to the state director of finance, that prepayment is expected to reduce the future annual health care contributions resulting in total savings of $188.1 million from fiscal year 2019 to fiscal year 2044. The concept is similar to making an extra principal payment on your home mortgage loan and saving future interest costs.
The ERS board monitors all developments affecting our plan whether legislative, economic, demographic or otherwise. We attempt to develop and recommend thoughtful and effective solutions to the inevitable challenges that our plan and other public pension funds face. Today’s reality is that increased contributions will be required to maintain our current target of full funding within 25 years.
Funding from excess revenues could serve to more quickly lower the plan’s unfunded liabilities, which now stands at $8.7 billion, and strengthen our ability to meet plan commitments while lowering the long-term costs to taxpayers by hundreds of millions of dollars.
The option of allowing excess general fund revenues to be used to pay down existing debt, including pension liabilities, is a flexibility we strongly support. Thus, on Nov. 8, we encourage a yes vote on Amendment 2, addressing bond and pension payments (SB 2554).
Vince Barfield is chairman of the board of trustees of the Employees Retirement System.
