Despite funding recovery, Idaho public pension system still has a deficit

Despite funding recovery, Idaho public pension system still has a deficit

by
Idaho Freedom Foundation staff
June 22, 2012
Idaho Freedom Foundation staff
Author Image
June 22, 2012

Idaho's public pension system faced a $3 billion gap between funding and benefits in 2010, the most recent year for which comprehensive data was available nationwide, according to a new study by the Pew Center on the States, a nonpartisan research arm of the Pew Charitable Trusts. Although the Public Employee Retirement System of Idaho (PERSI) was 79 percent funded in 2010, the widening gap between state contributions and beneficiary payouts led Pew to revise its rating of Idaho's system from "solid performer" in 2008 to "needs improvement."

The report also noted that Idaho's $137 million bill for retiree health care was funded at only 12 percent in 2010. Despite these shortfalls, 33 other states fared even worse.

Pew reports that Idaho's pension contributions exceeded by 13 percent the amount recommended by the state's actuarial valuations, but despite the extra payments, PERSI still fell short of the 80 percent funding level that is regarded as sustainable by many actuarial experts. The 2008 financial collapse resulted in a drastic downturn for Idaho's pension investment returns, although 2011 investment performance rebounded to a 20.7 percent return, the best profit for the system in 25 years. PERSI officials reported in July 2011 that the overall funded status for that fiscal year exceeded 90 percent.

"I understand those numbers are absolutely accurate, but they're a little outdated right now," said PERSI executive director Don Drum about the Pew report. "In 2010, we were just starting to come back out of the Great Recession, and our number from 2009 was 74.8 percent funded. In 2010 we climbed up to about 79 percent funded, and then we made a big climb last year. In 2011, we climbed all the way up to 90.2 percent funded. So, we made a very healthy recovery in 2011."

One factor leading to such drastic swings in the funding level of public pension systems is the use of defined benefit plans, which mandate a specific level of pension payout, based on duration of employment and wage level and disregarding broader economic factors. When the economy slumps, this can compound funding problems because the state's tax revenue and pension investment values decline simultaneously, requiring an outlay of a much larger percentage of state expenditures in order to meet required benefit payouts.

Defined contribution plans, in contrast, mandate a specific level of state funding regardless of widespread market performance. This difference allows officials to budget predictable amounts for pension contributions, significantly decreasing the likelihood that an economic downturn will wipe out fund solvency. Some worry, however, that defined contribution plans place too much risk on retirees themselves.

"The risk really gets passed to the investor, and let's use the recent market downturn as an example," said Drum. "If you were retired or nearing retirement, and you did a calculation of your 401(k) plan and you had adequate money there to sustain yourself in retirement, and then you had to absorb a market downturn with, let's say, a 25 to 30 percent loss, you would no longer be able to retire. Or, if you can still retire, you won't have the same income level that you would have."

Out of the four public pension funds that PERSI includes, only two are defined contribution plans, the Public Employee Retirement Fund Choice Plan 401(k) and 414(k) funds, also known as PERSI Choice. The other two, encompassing the majority of state workers, are defined benefit plans that guarantee pension outcome levels even when state funds have dried up.

"With the defined benefit plans, the taxpayers are on the hook," said Bob Williams, president of State Budget Solutions, a nonpartisan research group that studies fiscal reforms. "If you go to a defined contribution plan, it's more like an IRA, more like the private sector is doing it. States can't continue on defined benefit plans—it's just totally unsustainable."

Another factor contributing to mounting long-term expenses for PERSI is the ability that Idaho legislators have to significantly spike the size of their pensions by spending a few years as highly paid state employees after leaving part-time office as lawmakers, leaving taxpayers on the hook for much larger payouts for years to come. PERSI benefits are determined both by length of time spent as a state employee and the average monthly salary received for the highest consecutive 42 months. So, if a recently departed state legislator works for three and a half years as a state employee, all previous years spent as a part-time lawmaker count toward employee duration, but the only salary level that determines pension benefits is the significantly higher pay earned during those final months.

Rep. Dennis Lake, R-Blackfoot, sponsored a bill during the 2012 legislative session that would have ended the practice of pension spiking, but it was scuttled in late March by House Speaker Lawrence Denney, R-Midvale, who said he thought it was improper for lawmakers to directly determine the stipulations of their own salary and benefits, citing a clause in the Idaho Constitution that leaves such matters to a citizen committee.

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