Report: Ohio pensions 'hanging by a thread'

Press Release from Buckeye Institute - note that there is a new Retirement Comparison tool featured on their website which allows you to compare your potential retirement to those of public employees. As the release says, you "will be shocked."

Buckeye Institute Releases "Hanging by a Thread" Report on Ohio Pensions and a New "Pensions 101" Website

COLUMBUS - Today, the Buckeye Institute for Public Policy Solutions released another groundbreaking report focusing on Ohio's five government defined benefit pension systems. The report, titled "Hanging By a Thread: Big Payouts and Promises Leave Ohio Pension Plans on the Brink of Collapse--or a Massive Bailout" highlights the dire shape of each of the pensions and offers several options for reform that would prevent Ohio taxpayers from being forced to foot the bill for expensive bailouts of an unsustainable system.

The study finds that the combined unfunded liabilities from all of Ohio's pension systems have reached over $66 billion in 2010. That's $5,725.82 owed by every Ohioan and 118 percent of Ohio's biennial budget. Overall, Ohio's pension funds are only 67 percent funded, leaving only 67 cents of assets to pay for every one dollar of liabilities.

Several funds have seen double digit increases in the size of their retiree pension pools over the past decade. Further, monthly pension benefits for career employees also have increased over the past decade anywhere from 12 to over 40 percent.

"The numbers do not lie, there is no way that the current structure of Ohio's pensions is sustainable," said report author Adam Schwiebert. "Should the pensions not earn their assumed 8 percent rate of return, which seems increasingly likely given current global events, taxpayers will inevitably be asked to pick up the difference."

The report concludes by arguing that minimal reform will at best earn a temporary reprieve and that real reform would entail shifting from defined benefit plans to defined contribution plans similar to the 401(k)s that are almost exclusively what is available in the private sector.

Along with the report, the Buckeye Institute is launching a dedicated website page, "Pensions 101," aimed at providing Ohioans with a compilation of information concerning Ohio's government pensions and their potential cost to taxpayers.

Included on this page is another innovative Buckeye Institute tool--the Retirement Comparison tool. This simple, but powerful, tool allows users to see the amount of cash they already need today and the amount of cash they will need at age 60 to fund the yearly retirement they'd like to have. To put these figures in perspective, data on the average yearly pension paid by the five government pensions to career retirees, as well as the total payout government retirees could receive over their retirement, is also provided.

"When taxpayers realize exactly what kind of benefits they are on the hook guaranteeing for government workers, they will be shocked," stated Buckeye Institute President, Matt Mayer. "Government workers should have solid retirements; they should not be retiring before the vast majority of private sector workers while getting benefits that far eclipse what the average private sector worker can expect."

###

Ohio taxpayer contributions to public pensions higher than national averages

Press Release from the Buckeye Institute:

For more information, contact:
Matt Mayer, President
E-mail: mmayer@buckeyeinstitute.org
Phone: 614.224.4422

BUCKEYE INSTITUTE STUDY FINDS TAXPAYER CONTRIBUTIONS TO PUBLIC PENSIONS HIGHER THAN NATIONAL AVERAGES

September 2, 2011- Columbus, OH - The Buckeye Institute for Public Policy Solutions has released a report that finds that taxpayer funded employer contributions to most of the state pension plans exceeds both the national average and national median for comparable systems in other states.

The report, titled Taxpayers on the Hook, further finds that despite these generous contribution rates, none of the pensions are fully funded. In fact, the best-funded plan only has 75 cents in assets for every dollar in liabilities. This means that, ultimately, taxpayers would be on the hook to pony up additional dollars if pension investment returns decline.

By contrast, if the state were to simply pay a matching rate in line with the national median for the Ohio Public Employee Retirement System (OPERS), State Teacher Retirement System (STRS) and the Ohio Police and Fire Pension Fund (OP&F) it is estimated that $748 million in taxpayer dollars could be saved annually.

Breaking down the ranking, Ohio ranks 14 out of 50 states with a 14 percent of salary matching rate for its main state employee pension, OPERS. The national median is 11.94 percent and the average 12.17 percent.

For state's with separate teacher pension funds, Ohio ranks 9th in the nation with a 14 percent taxpayer contribution rate compared to a national median of 9.8 percent and an average of 11.85 percent.

For states with a specific state pension for police officers, Ohio ranks 10th in the nation with a 19.5 percent taxpayer contribution rate compared to the national median of 11.36 percent and average of 14.7 percent.

Ohio ranks 6th nationally when it comes to taxpayer funded pension contributions for firefighters, with a rate of 24 percent. The national median is 12 percent and average 15.61 percent.

The report also reaffirms that previous research done by the Buckeye Institute, the Impact of Shifting State Workers to Defined Contribution Plans, on the benefits of shifting from a defined benefit pension plan, as Ohio currently has for all state employees, to a defined contribution plan. Such a shift would eventually remove taxpayers from the hook of contributions above and beyond already high rates.

An appendix that includes all state contribution rates is also available.

###

The Buckeye Institute for Public Policy Solutions is Ohio's premier free market think tank. Based in Columbus, Ohio, the Buckeye Institute has provided the research and solutions to Ohio's toughest public policy challenges in economic freedom and competitiveness, job creation and entrepreneurship, and government transparency and accountability for over 21 years.

www.buckeyeinstitute.org

Where Ohio stands in economic competitiveness

Several reports have been released lately that rank state standings on a variety of items.

The first is not good news. The Institute for Truth in Accounting released their analysis of the 'true' fiscal condition of states. In a press release, they write:

Only four U.S. states have sufficient assets to pay their debt and obligations related to pension and retirees' healthcare

Chicago, (June 27, 2011) -- Today, the Institute for Truth in Accounting (IFTA) announces completion of a significant, comprehensive study of all 50 states' assets and liabilities, including pension and retirement healthcare obligations. The study determined that six states had a per taxpayer burden over $20,000: Connecticut ($41,200), Illinois ($26,800), Hawaii ($25,000), Kentucky ($23,800), Massachusetts ($20,100) and New Jersey ($34,600). The Taxpayer Burden represents the funds that will be needed to pay the commitments the state has already accumulated divided by the state's taxpayers.

'If governors and legislatures had truly balanced each state's budget, no taxpayer's financial burden would exist,' said Sheila Weinberg, Founder and CEO of the Institute. She continued, 'A state budget is not balanced if past costs, including those for employees' retirement benefits, are pushed into the future.'

The study found four states (Nebraska, North Dakota, Utah and Wyoming) have assets available to pay their debt and obligations related to pension and retirees' healthcare.

The study reviewed each state's Comprehensive Annual Financial Report to offset assets against liabilities. For the first time, a detailed analysis of pension and healthcare liabilities uncovered the states' actual obligations. From these calculations, the Institute was able to determine the Taxpayer's Burden.

Employee compensation packages include retirement benefits. A portion of these benefits is earned each period and should be included in the current budget as a portion of current employee compensation costs. Instead most states handle many of benefits on a 'pay-as-you-go' basis. This obligates future taxpayers to cover these past costs - without receiving any benefits or services.

'Though 49 of the 50 states have constitutional or legal requirements to balance budgets, most states employ a variety of financial maneuvers to circumvent this requirement,' said Roger Nelson, chair of IFTA and former vice chair of Ernst & Young. 'The largest of these maneuvers is related to employee compensation.'

Ohio does rank 20th in the list, putting us in the top half of the nation, but the money needed to pay our bills is just under $18.1 billion which equals a $4,700 burden for each taxpayer in the state.

While Gov. John Kasich and the Ohio legislature are taking steps to address these financial burdens, I'm not sure the proposed fixes to date will be enough to cover the obligations.

But if that wasn't enough, the 2011 ALEC-Laffer State Economic Competitive Index was also published and it puts Ohio 49th out of 50 states in terms of our economic performance ranking (see page 101 of the linked report). The good news is that they rank us 38th in terms of our economic outlook, "a forecast based on a state’s standing (equally weighted average) in the 15 important state policy variables shown below. Data reflect state + local rates and revenues and any effect of federal deductibility." It's still in the bottom half of the nation but at least our outlook is better than our performance.

A quote from Gov. Kasich included on the last page of the report:

“The data and analysis from ALEC on state economic conditions is a powerful resource for policymakers who care about reducing spending so they can begin reducing taxes. It’s both a report card and a score card. Frankly, Ohio’s not doing as well as it needs to do. The information that ALEC provides helps us understand our competitive position and helps spur us to do better.”

Fully-funded public pensions could cost Ohioans $2,541 more per year

If states and local governments are going to pay pensions under current policies, contributions would have to immediately increase by a factor of 2.5, which represents a tax increase of $1,398 per U.S. household per year.

That's the finding of a new report from Northwestern University by Robert Novy-Marx (University of Rochester and NBER) and Joshua D. Rauh (Kellogg School of Management and NBER).

The report, The Revenue Demands of Public Employee Pension Promises, states:

We calculate the increases in state and local revenues required to achieve full funding of state and local pension systems in the U.S. over the next 30 years. Without policy changes, contributions to these systems would have to immediately increase by a factor of 2.5, reaching 14.2% of the total own-revenue generated by state and local governments (taxes, fees and charges). This represents a tax increase of $1,398 per U.S. household per year, above and beyond revenue generated by expected economic growth. In thirteen states the necessary increases are more than $1,500 per household per year, and in five states they are more than $2,000 per household per year. Shifting all new employees onto defined contribution plans and Social Security still leaves required increases at an average of $1,223 per household. Even with a hard freeze of all benefits at today’s levels, contributions still have to rise by more than $800 per U.S. household to achieve full funding in 30 years. (emphasis added)

According to the report, Ohio would require one of the largest increases relative to GSP (gross state product) and "would need the immediate increase to be several hundred dollars larger per household" than other states. Based upon their analysis, Ohio's required tax could be as high as $2,541 per household.

They also say:

At sufficiently high parameterizations there would be no level of taxation sufficient for Ohio or Oregon to amortize their legacy liabilities. The tax burdens and service cuts become so onerous on residents that decide to stay in the state that everyone immediately moves out.

Only New Jersey, New York, Oregon and Wyoming would require a higher tax per household than Ohio to fully fund the pensions, if there are no policy changes.

While some of the writing is technical, I hope you'll take the time to read the entire report and understand the dire situation Ohio is facing with its public pensions.

Buckeye Institute: Pension reform could save billions

Press Release:

Pension Reform Could Save Billions

The Buckeye Institute released an analysis of Ohio's state pension using the transition trend data from Michigan after it switched from defined benefit plans to defined contribution plans for new state workers in 1997. The analysis shows that Ohio could see budget savings up to $6 billion over the next 30 years by shifting new employees to defined contribution plans, while still providing workers with decent pensions.

To view the report click here.

Police and Fire Retirees become millionaires?

The following press release was sent by The Buckeye Institute. I know that many of our Toledo Police officers are in the DROP program and I know that Toledo faces the loss of many good officers because participants are required to retire after the set period of time. But the financial impact of participation, as detailed below, surprised me.

PRESS RELEASE
October 13, 2010

POLICE & FIRE RETIREES BECOME PUBLIC-SERVICE MILLIONAIRES

COLUMBUS - The Buckeye Institute for Public Policy Solutions today released "Dipped in Gold: Upper-Management Police and Fire Retirees become Public-Service Millionaires." Through the Deferred Retirement Option Plan (DROP), public safety officials are eligible to retire on paper, yet continue to work for up to eight years while their pensions (along with three percent cost-of-living allowances and five percent interest payments) accumulate in untouchable accounts. When the officers exit DROP, it is not uncommon for them to collect lump sum payments totaling roughly $1 million dollars. Since they are treated as if they are in year 9 of retirement when they exit DROP, many in upper management also collect yearly pension payments in excess of $100,000 for the rest of their lives.

Since the Ohio Police & Fire Pension Fund (OP&F) is a highly secretive entity, the report details DROP payouts and pensions for hypothetical Columbus and Cincinnati police officers. Supposing the average DROP participant is a Columbus police officer, taxpayers would save nearly $1.2 billion if the DROP program were eliminated and the retirement age were raised from 48 to 55. The report also suggests several other money-saving options such as terminating cost-of-living allowance increases during DROP, tying the interest payments to market rates, and disallowing participants to keep their required employee contributions to OP&F.

Mary McCleary, Buckeye Institute Policy Analyst, stated: "Making public servants millionaires when they retire is not the bargain you agreed to as a taxpayer. Ohioans bear the seventh highest state and local tax burden due to expensive programs like DROP. Private-sector taxpayers, many of whom have experienced job losses, pay freezes or cuts, and benefit reductions, cannot afford to finance the gold-plated compensation packages of their police officer and firefighter neighbors."

The report can be viewed on The Wire at www.buckeyeinstitute.org.


###