How many pencils can $7 million buy?

Walmart sells 72 Paper Mate pencils for $8.97, so the answer is about 56 million writing sticks.

But, why does that matter?

Because of Idaho’s pension system, Gem State students lost out on $7 million in funding this year.

Sure, school districts likely wouldn’t have spent that extra cash on pencils, but perhaps some classrooms around the state need new textbooks or desks. Or, possibly that money could have funded some new teachers.

Many taxpaying Idahoans might not see the correlation between the state’s retirement system and their local school districts. But, the correlation between the two is important and, at times, expensive.

The state’s pension program, officially called the Public Employee Retirement System of Idaho (PERSI), several years ago approved an increase to the contribution rates public employers pay for worker pensions. That change, which formally took effect on July 1, 2013, meant governments across the state would pay more toward retirement costs.

According to PERSI calculations, governments will spend about $50 million more on retirement this year compared to last year.

For Idaho’s schools, the simple change meant $7 million in lost money, funds that could have otherwise been spent on classroom costs.

Observers might blame the retirement situation on the market, noting that the state’s pension system took an absolute beating during the recession years in the last decade. When the markets perform poorly, Idaho’s pension returns decline accordingly.

Others, though, blame the system as a whole. Idaho, like a good number of other governments across the nation, utilizes a defined-benefit pension system, which guarantees beneficiaries a certain monthly retirement payment for life, regardless of how the market performs. If a fund performs poorly, taxpayers make up the difference to ensure pension payments are made whole.

Cory Eucalitto, a pension analyst with State Budget Solutions, told IdahoReporter.com that he believes defined-contribution plans are the answer to stop pensions from gobbling up taxpayer money that could be used for other services such as schools and roads.

“Defined-contribution plans allow employers to contribute a level, knowable percentage of payroll and take taxpayers off the hook for covering up unfunded liabilities,” Eucalitto wrote in an email.

Defined-contribution plans allow governments to contribute a set amount to an employee’s 401(k) account each month. Many government watchdog groups see this system as beneficial to taxpayers, who don’t have to make up pension shortfalls. For government workers, a defined-contribution plan would allow them to take their retirement funds with them should they switch jobs.

If Idaho doesn’t examine some sort of reform, Eucalitto said the Gem State will continue to spend more and more on public pensions, which would either mean deep cuts in government services or tax hikes. “The best way to stop this from happening in the future is to close the state's defined-benefit pension plan and switch to a defined contribution system,” he wrote.

Kelly Cross, PERSI’s communication director, noted that the state’s pension system is one of the strongest in the nation, with enough assets to meet 90 percent of its obligations. The state’s unfunded liability is about $1.4 billion, according to PERSI calculations.

Eucalitto disagrees, telling IdahoReporter.com that market-based account practices say that Idaho’s pension deficit sits at a staggering $13 billion. The difference between the two figures, he explained, stems from using different accounting methods. State Budget Solutions estimates more conservative return rates on investments, which Eucalitto said, offers a more accurate picture.

The $13 billion figure, he warned, should force decision makers to seriously consider changes to the state’s retirement plan. “Once people grasp that the scope of the problem is greater than the state admits, lawmakers should seriously explore defined-contribution alternatives,” he said.

In October, the PERSI oversight board delayed another rate increase set for July 1, 2014. Because of the delay, Superintendent of Public Instruction Tom Luna dropped his 2015 budget request by $7 million.

The next retirement cost hike is tentatively slated for July 1, 2015, but could be delayed again if the fund performs well.