House Bill 42 under consideration permits retirees of the four state-sponsored retirement plans to receive a 1.5 percent permanent increase in their pension payments. This bill should be rejected for the simple reason that the plans cannot afford it.
All of the plans are in a similar situation: The largest, TRSL, is currently 57 percent funded. At a personal level, this means that for a retiree receiving a monthly benefit of $1,000, there are only enough assets to afford $570. HB42 now adds another benefit layer which, again, is not funded.
After many years of chronic underfunding, legislation in 2014 established a funding schedule to pay off the unfunded accrued liability (unpaid pension promises) by 2044. This envisioned that the benefit structure remained unchanged. Now, barely one year later, HB42 threatens to undo last year’s promised financial sobriety by adding to the unfunded accrued liability to the tune of $350 million.
The bill’s accompanying actuarial note also says the annual cost to service this debt is $18 million paid in level installments over 30 years. The average duration of cost-of-living-adjustment payments is said to be 15.5 years. Not only is the duration an accounting mismatch, it is also unfair for today’s retirees to receive extra benefits only to burden their children with the cost. The not so pleasant alternative is that if the next generation of taxpayers refuses to pay, retiree benefits could be reduced, or catastrophically, eliminated.
Proponents of the bill say that there are sufficient funds in the Experience Account to pay for the cola. This is merely a gimmick in which funds ordinarily used to lower the unfunded accrued liability were siphoned off for a special purpose. Since plan assets exist for the benefit of all participants, HB42 only favors current retirees to the detriment of all others.
Yes, it’s nice to offer a benefit increase to retirees, but only if it is paid for. Accordingly, if the Legislature still feels compelled to permit a retiree cola, the only responsible course of action is to fund the $350 million immediately as part of this year’s budget, and of course, in addition to regular retirement plans’ costs.
Paying off the unfunded accrued liability debt requires unwavering financial discipline. It will not be easy and it will take 10 to 15 years before it feels like any progress is being made. But progress will be made as long as the state remains firmly on course. HB42, and any other such increase, is a step in the wrong direction. It is ill-advised to incur $350 million of additional debt when the state is currently facing $1.6 billion budget shortfall.