Pension holidays aren’t just “ancient history”

Dec 2010

A “pension holiday” is when a public employer does not make payments into a pension fund because it believes there are enough earnings in the pension system to pay the employer’s annual required contribution.

CBS’ 60 Minutes is one of the highest rated and most respected news programs on television today. Millions of people tuned in to last Sunday’s program, which featured a segment called “State Budgets: The Day of Reckoning.”

Reporter Steve Kroft surveyed the shaky financial footing of many U.S. states and zeroed in on public pensions. Buried in the story was an often-ignored key fact: in good times, public employers in Los Angeles and across the nation took long pension holidays.

Kroft interviewed New Jersey Governor Chris Christie. Incredibly, to Christie the fact that New Jersey failed to make pension contributions for 13 of the last 17 years, leading in large part to his state’s pension deficit, is just “ancient history.” In New Jersey, apparently, history repeats itself. Even though he was fully aware that the state’s failure to make its required annual payments is what caused the problem, Christie refused to make the required payment for 2010 as well! So much for solving the problem, Governor.

Likewise, in California, the University of California pension plan serves as the prime example of why pension plans get into trouble. For 20 years – that’s right, 20 years – the University didn’t make the required annual contribution. Instead, it cannibalized fund earnings to make its payment – despite warnings at the time that it needed to make these payments. The once well-overfunded plan now faces a large deficit – and instead of accepting responsibility for the University’s failure to make payments, the UC Regents, who govern the University system, are cutting pension benefits for new, and perhaps current, employees.

It may be all too common and convenient for politicians to ignore the “ancient history” of bad decisions that led to today’s funding problems – but doing so means letting the old opponents of defined benefit plans mislead the public. Had those annual contributions to the pension systems been made and then allowed to multiply during the great market run-ups of the last 20 years, pension plans would today have substantially more money than they actually do.

Fitch Ratings, an independent agency that grades government debt, noted in a press release last week that the variance in funded ratios for public pension plans is directly tied to the willingness of the underlying employers to make their annual payments. The release states that “Specific examples of the wide variations in pension situations include North Carolina's Teachers' and State Employees' Retirement System, which was funded at 95.9% as of Dec. 31, 2009, down from 104.9% two years earlier due to market losses, but nonetheless very well-funded. The state and other member governments have a demonstrated commitment to fully funding their ARC (annual required contribution). In stark contrast, the State of Illinois' five retirement systems combined had a funded ratio of 50.6% as of June 30, 2009, down from 63.6% two years earlier. The state had consistently underfunded its ARCs even prior to the market downturn and the state's fiscal crisis. This poor funding history is one among a number of reasons that Illinois' credit rating, at 'A', is among the lowest of the states.'”

The good news for Los Angeles is that the Los Angeles Fire and Police Pensions system – even after the economic downturn – is currently 91.6% funded. Police officers and firefighters contribute up to 9% of their pay biweekly, but even with this sizable contribution, the majority of the money funding the pension system comes from returns on investments, not the City’s or employees’ contributions.

The sad part for the Los Angeles Fire and Police Pensions system is that over the past 20 years, the City of Los Angeles took contribution holidays. For several of those years, it added little or nothing to the system. Had the City simply made all its required annual payments, the system would’ve currently been funded at over 100%. During those years, the pension reformers of today remained silent as the government shirked its pension obligations, helping to create the current situation. But that part, of course, is often overlooked in news stories on pension systems – the 60 Minutes piece being no exception. To quote Chris Christie, it’s just “ancient history.”

The fact is that defined benefit systems, properly funded by their employers, provide a secure retirement in an affordable manner for their members. No amount of bluster by politicians like Chris Christie can obscure this fact.

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