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Report: Public pension liabilities represent single largest portion of Idaho debt

Report: Public pension liabilities represent single largest portion of Idaho debt

Idaho Freedom Foundation staff
September 17, 2012

Idaho's unfunded public pension liabilities constitute the vast majority of state debt, according to a new report by State Budget Solutions, a nonpartisan research group that studies fiscal reforms. The report examines data for all 50 states, and uses pension liability figures from 2010 because more recent data is not yet available. In Idaho's case, unfunded public pension liabilities accounted for a full 86.5 percent of the total state debt.

"States and other sources have not yet released market value pension liability figures for fiscal year 2011," wrote Cory Ecualitto, a State Budget Solutions research analyst. "Therefore, this year's report uses the same market-valued pension liability figures first published in 2010 and used in the previous year's report. Even so, growth in traditionally calculated unfunded pension liability totals indicates that were updated numbers available, aggregate state debt would have continued to increase."

For 2010, State Budget Solutions estimated that Idaho had more than $10 billion in unfunded pension liabilities, out of a total state debt of $11.6 billion. This is a much higher number than the $772 million liability that Pew Center for the States calculated for the same year, because each figure was derived using a different actuarial standard.

Andrew Biggs, resident scholar at the American Enterprise Institute in Washington, D.C., and Ecualitto both use fair market valuation for their calculations, which is standard actuarial practice in the private sector, but PERSI uses public-sector accounting practices set by the Governmental Accounting Standard Board (GASB). Critics have suggested that GASB standards drastically understate actual liabilities because they don't fully incorporate the actuarial risk of investment failure for funds that guarantee benefit payments.

"The long and short of it is that if you want to fully fund a guaranteed future payment, the price of doing so is the riskless rate of return," wrote Biggs. "Can a future liability be funded at lower cost by making it nonguaranteed? Of course. Likewise, a guaranteed liability could be financed at lower cost by holding risky assets and imposing on taxpayers the obligation to step in to top up the fund if it falls short of their goals. ... [T]he cost savings to the plan would then be exactly offset by an increase in the taxpayers’ costs. But neither of those are what public-sector pensions purport to do. They claim to fully fund future benefits that are without risk to the beneficiary. The cost of doing that is almost inescapably given by the riskless interest rate."

PERSI’s executive director, Don Drum, said in an email to IdahoReporter.com that 2010 is a non-representative year for PERSI's long-term record.

"The report is based on Fiscal Year 2010 data when PERSI and all pension systems were climbing out of the setbacks created during the Great Recession," Drum said of the report released by State Budget Solutions. "The report uses the FY2010 states’ data and then adjusts for market-valued unfunded public pension liabilities. While I understand the methodology they used, I have not spent a significant amount of time analyzing the results. Determining public pension liabilities based on market value is not a method currently approved by GASB or any federal regulations. I understand it was proposed in the Public Employee Pension Transparency Act (PEPTA) in February of 2011; however, due to significant concerns from actuaries and others, no hearings have been held on the act, and none are scheduled."

Drum said that according to the GASB actuarial valuation it is authorized to use, PERSI had only $1.2 billion in unfunded liabilities for that year, 59 percent lower than in 2009.

"Pension funding is based on long-term projections of 30 years or greater," Drum said. "I believe it is important to understand PERSI’s 47-year average annual return is 8.16 percent. The PERSI board has not yet received any data or expert opinion indicating they need to consider significant changes to PERSI or modify current strategies or planned actions."

State Budget Solutions continues to insist that fair market valuation is the most accurate and transparent means of representing the true public pension liabilities that taxpayers will face. The organization's president, Bob Williams, also told IdahoReporter.com that another significant problem with correctly forecasting future liabilities is that PERSI's fund beneficiaries are predominantly part of defined-benefit plans, which guarantee a given level of payment regardless of fund performance over time. He said that switching to defined-contribution plans, which would guarantee a given level of initial funding rather than a specific eventual payout, is the best way to ensure that Idaho taxpayers aren't eventually saddled with an unpredictably large bill.

"The real thing is to take a risk-free analysis of pensions, instead of assuming they're going to earn a 7 percent rate of return, or an 8 percent rate of return," Williams said. "To really look at the problem, the best solution is to go to a defined-contribution IRA-type model for all employees. Because otherwise, the taxpayers are at risk."

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