Published: Wednesday, December 29, 2010
State must dig through more than spending
Digging out the driveway after a winter blizzard builds character. At least that’s what Dad used to say. He usually shoveled more snow than I did, so I couldn’t complain. Northern Iowa winters gave us plenty of opportunity for character development.
When we finished, there was satisfaction in a job well done. And then came the city snowplow, clearing the streets and dumping another five feet of snow back onto our no-longer-passable driveway. Having been packed down by passing cars, this new deposit was wetter, dirtier and heavier than what we had just cleared. Exhausted, we tackled it with more resignation than enthusiasm.
State Auditor Brian Sonntag just snowplowed Gov. Chris Gregoire and the Legislature. As they struggle to clear a path through an accumulation of unaffordable state spending, Sonntag comes by and deposits several layers of unfunded liabilities to the mix.
The auditor uses his annual review of the state’s financial statements as the vehicle for pointing out unfunded liabilities of more than $24 billion. The stark accounting is a useful reminder of what Sonntag delicately calls “challenges ahead.”
About half the unfunded liability stems from benefits to retired state workers. Although the private sector has largely adopted “defined contribution” pension programs, where the employer and employee pay into a retirement account, government clings to “defined benefit” systems, where the pensioner is guaranteed a monthly payment.
The legacy of too-generous benefits promised in two older pension plans casts a long shadow. PERS 1, the plan for retired state workers, carried a $4.2 billion unfunded liability as of June 30, 2009. For TRS 1, the corresponding plan for teachers, the unfunded liability was $2.7 billion.
Sonntag points out the consequences of the large unfunded liability: “Significant increases in future contributions will be needed to maintain sufficient assets to pay these benefits in the future.” Put more simply, funds will have to be diverted from other priorities or taxes will have to go up to bridge the gap.
Both plans were closed to new entrants in 1977, as Washington lawmakers acted more swiftly than most states’ legislatures to control pension costs. The pension programs put in place after 1977 are fully funded and, though generous by private sector standards, they are structured more reasonably. The causes of the unfunded liability in the earlier plans are manifold: lousy investment returns, avoiding or reducing recommended pension contributions in several recession years, and unsustainable pension enhancements.
There are legal and political obstacles to curing the liability by reducing benefits. But lawmakers do have some control. Gov. Gregoire recommends eliminating automatic benefit increases put in place by lawmakers in 1995. It’s a proposal that makes legal and political sense.
Remarkably, the increases are unrelated to inflation. Instead, the law provided for annual benefit bumps based on retirees’ years in state employment. Lawmakers reserved the right to suspend the bonus payments. Gregoire’s recommendation would save state and local government $9 billion over the next 25 years.
Sonntag also reports that the state’s post-employment benefit plan has an unfunded liability of $3.8 billion. That’s the cost of providing subsidized medical, dental, life and long-term disability insurance to workers who choose to maintain coverage when they retire. Unlike the pension liability, the health care benefits are not a contractual right, although a recent state Supreme Court decision may cloud what was formerly a clear understanding of the law. The politics of messing with pensioners — and their union reps — is, however, always a problem.
A $12.8 billion unfunded liability in the state’s workers’ compensation program associated with cost-living-increases for injured workers accounts for the other half of the problem. The auditor notes that the liability “puts pressure on (the state) to raise employer and employee premium rates or revamp benefits.” Either that or get out of the business entirely.
Sonntag also flags a problem with the state’s popular Guaranteed Education Tuition (GET) program, established in 1998 to help families save for college and lock in tuition costs. Because tuition has increased dramatically and investment earnings have lagged, the program now faces a $255 million shortfall. With more tuition hikes anticipated, the gap will continue to grow.
There’s $24 billion more shoveling left to do.
Richard S. Davis, president of the Washington Research Council, writes on public policy, economics and politics. E-mail: rsdavis@simeonpartners.com.
When we finished, there was satisfaction in a job well done. And then came the city snowplow, clearing the streets and dumping another five feet of snow back onto our no-longer-passable driveway. Having been packed down by passing cars, this new deposit was wetter, dirtier and heavier than what we had just cleared. Exhausted, we tackled it with more resignation than enthusiasm.
State Auditor Brian Sonntag just snowplowed Gov. Chris Gregoire and the Legislature. As they struggle to clear a path through an accumulation of unaffordable state spending, Sonntag comes by and deposits several layers of unfunded liabilities to the mix.
The auditor uses his annual review of the state’s financial statements as the vehicle for pointing out unfunded liabilities of more than $24 billion. The stark accounting is a useful reminder of what Sonntag delicately calls “challenges ahead.”
About half the unfunded liability stems from benefits to retired state workers. Although the private sector has largely adopted “defined contribution” pension programs, where the employer and employee pay into a retirement account, government clings to “defined benefit” systems, where the pensioner is guaranteed a monthly payment.
The legacy of too-generous benefits promised in two older pension plans casts a long shadow. PERS 1, the plan for retired state workers, carried a $4.2 billion unfunded liability as of June 30, 2009. For TRS 1, the corresponding plan for teachers, the unfunded liability was $2.7 billion.
Sonntag points out the consequences of the large unfunded liability: “Significant increases in future contributions will be needed to maintain sufficient assets to pay these benefits in the future.” Put more simply, funds will have to be diverted from other priorities or taxes will have to go up to bridge the gap.
Both plans were closed to new entrants in 1977, as Washington lawmakers acted more swiftly than most states’ legislatures to control pension costs. The pension programs put in place after 1977 are fully funded and, though generous by private sector standards, they are structured more reasonably. The causes of the unfunded liability in the earlier plans are manifold: lousy investment returns, avoiding or reducing recommended pension contributions in several recession years, and unsustainable pension enhancements.
There are legal and political obstacles to curing the liability by reducing benefits. But lawmakers do have some control. Gov. Gregoire recommends eliminating automatic benefit increases put in place by lawmakers in 1995. It’s a proposal that makes legal and political sense.
Remarkably, the increases are unrelated to inflation. Instead, the law provided for annual benefit bumps based on retirees’ years in state employment. Lawmakers reserved the right to suspend the bonus payments. Gregoire’s recommendation would save state and local government $9 billion over the next 25 years.
Sonntag also reports that the state’s post-employment benefit plan has an unfunded liability of $3.8 billion. That’s the cost of providing subsidized medical, dental, life and long-term disability insurance to workers who choose to maintain coverage when they retire. Unlike the pension liability, the health care benefits are not a contractual right, although a recent state Supreme Court decision may cloud what was formerly a clear understanding of the law. The politics of messing with pensioners — and their union reps — is, however, always a problem.
A $12.8 billion unfunded liability in the state’s workers’ compensation program associated with cost-living-increases for injured workers accounts for the other half of the problem. The auditor notes that the liability “puts pressure on (the state) to raise employer and employee premium rates or revamp benefits.” Either that or get out of the business entirely.
Sonntag also flags a problem with the state’s popular Guaranteed Education Tuition (GET) program, established in 1998 to help families save for college and lock in tuition costs. Because tuition has increased dramatically and investment earnings have lagged, the program now faces a $255 million shortfall. With more tuition hikes anticipated, the gap will continue to grow.
There’s $24 billion more shoveling left to do.
Richard S. Davis, president of the Washington Research Council, writes on public policy, economics and politics. E-mail: rsdavis@simeonpartners.com.
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