The directors of the four state retirement plans (Teachers, LASERS, State Police, School Employees) are promoting increases in retirees’ monthly amounts based on funds being available in the “employee experience account.” The Legislature has final approval and should reject this proposal because each of these plans is significantly underfunded and any increase will aggravate the underfunding.
The four plans, with slight differences, generally have the same requirements for allowing cost-of-living increases. These increases are to be paid from the employee experience account. Funds flow into the account when investment returns for a particular year exceed a stated threshold. Reading from each plans’ annual report for the fiscal year ending June 30, 2013, the average returns for the year, in aggregate, were just over 13 percent. Good news indeed. A more appropriate reaction is to feel relieved, particularly when considering that the average return for the prior year was barely positive (negative, in fact, for Teachers’ Retirement, the largest plan). What the directors apparently fail to realize is that occasional strong returns are necessary to counteract weak returns from years past.
The annual reports also show that long-term investment performance has typically lagged behind the assumed rate of return used to value plan liabilities. Merely because assets have a favorable experience for a particular year is not reason enough, or prudent, to grant permanent benefit increases. The plans may be legally allowed to increase benefits but that doesn’t mean they should.
No matter how much money is in the employee experience account, the only correct standard for evaluating whether increases are appropriate is if the plan’s funded ratio (assets divided by accrued liabilities) approaches or exceeds 100 percent. The most recent funded percentages vary from 56.4 percent (Teachers) to 62.1 percent (School Employees). Collectively, this translates to a $19 billion asset shortfall compared to $45 billion in accrued liabilities.
With percentages such as these, the plans are already in a perilous state, putting into question the long-term viability of payments to current and future retirees, even without the benefit increase. A solvency exhibit in the Teachers’ report prioritizes claims against current assets as: 100 percent to cover refunds of employee contributions, 64 percent to cover future payments to current retirees, and zero percent for active employees. Ironically, this means the near-term benefit bump for retirees is at the expense of those very same retirees’ prospects for receiving full benefits for their lifetime. All this, before actively employed participants receive a dime more than the return of their own contributions.
The recent creation of the employee experience account is merely a gimmick. The true measure is the accumulated experience represented by the unfunded liability. Accordingly, the Legislature has a fiduciary obligation to dismiss this proposal.