A full pension payment? Don’t be fooled.
Many have reported that the state legislature, in its budget agreement, made its “full” payment to the five state pension systems. While this may be technically true, it is misleading because it ignores the actual contribution that is required to fund the pensions. The state’s action is equivalent to someone paying only the required minimum payment on a credit card and claiming they made the “full” payment.
The state’s fiscal year 2020 appropriation for the Teachers’ Retirement System (TRS) alone, is $4.8 billion, but it should be $7.8 billion. This is a shortfall of $3 billion and follows the trend that the state has perpetuated (or perpetrated) for decades. So how can legislators and others claim a full payment was made?
In the mid-1990s the state legislature, recognizing the underfunding issue, passed a law termed the “ramp.” The law stated that state contributions to the pension plans would be made on a “ramped up” schedule, meaning each year the state contribution would rise until the plans reached a funding target of 90% by 2045. Think of a mortgage where payments start out large and decrease over time – the ramp was designed in reverse, with payments low, especially during the first 15 years, and rising over time.
So, based on this “ramp” plan, yes, the state made its “full” contribution.
But the ramp plan was flawed from the beginning because it ignores actuarial standards – calculations required in the industry. For years the pension plan actuaries and the state actuary have warned legislators of the consequences of continuous underfunding of the pensions.
Since the beginning of the Teachers’ Retirement System in 1939, the state has only paid the actuarial contribution one time. It is important to remember that every teacher and administrator made their annual, required contributions to the system. Every school district made the annual required contributions also.
Using the “ramp” plan, the state isn’t truly making a “full” payment because it shorts the pension systems by billions every year. Money that is required using actuarial standards – a practice used by most states – would have kept us out of the overwhelming pension cost that the state now sees.
Back to your credit card. If you pay the total balance due each month, you avoid any interest charges. If you pay the minimum amount, you incur interest charges that are applied to the unpaid amount. Technically, you have made your “full” payment, since only a minimum payment is required. But doing so just increases what is due later.
That is exactly what the state has done. Each year, with a multibillion-dollar shortfall in the required state contribution, interest charges accrue. That interest charge has continued to accrue, leaving an unpaid bill of nearly $78 billion for TRS (with a total of $134 billion for all five state pension systems).
People decry the huge pension cost. But if the state had made its actuarial payment every year over decades, the pension payment would only be $1 billion – much less than the ramp or the actuarial calculation.
Every $1 not paid today will require $3 down the road.
So, the next time someone says the state made its “full” pension contribution, don’t be fooled. Correct them with the facts.
Cinda Ackerman Klickna has been a trustee on the Teachers’ Retirement System Board for 16 years. Her father, who died in January, one day before his 101st birthday, was a state employee and began writing letters to the editor back in the 1960s about the plight facing pensions. He was so right.