The Public Employee Retirement System of Idaho has 46 percent of the assets necessary to cover promised payments according to a new estimate that relies on a 3.2 percent rate of return rather than the higher returns projected by most public pension funds.
PERSI assumes a 7.5 percent gross investment return rate of present and future assets, according to the fund’s 2012 annual report, which says the retirement plan is 85 percent funded, close to twice the figure from the new report.
Using the more conservative 3.2 percent return (equal to the 15-year Treasury bond yield), Idaho is tied with Florida as eighth-best among the 50 states, according to the study by State Budget Solutions, a non-profit that advocates state and local government budget reform.
PERSI Executive Director Don Drum noted the Idaho system’s average annual return of 8.18 percent during its 48-year history.
Said Drum in an email Tuesday: “Since the middle of the 18th century, any reasonable mixture of stocks and bonds over reasonably long time frames has returned much more than 3.2% (the Treasury bond rate). We contend returns over the next 20-30 years will almost certainly be much higher than the current Treasury bond rate.”
In an article titled, “Promises Made, Promises Broken — The Betrayal of Pensioners and Taxpayers,” State Budget Solutions says public employee pension plans nationwide have just 39 percent of the assets necessary to cover projected benefits.
PERSI is the defined benefit pension plan for state and local employees in Idaho. State Budget Solutions says Idaho has $11.7 billion in assets, $25.2 billion in liabilities and an unfunded liability of $13.6 billion. The new report was picked up by the Tax Foundation, which converted the data to a map.
The seven healthiest pension programs according to State Budget Solutions are Wisconsin (57 percent funded), North Carolina (54 percent), South Dakota (52 percent), Tennessee (50 percent), Washington (49 percent), Delaware (48 percent) and New York (47 percent).
The four worst states are Illinois (24 percent funded), Connecticut (25 percent), Kentucky (27 percent) and Kansas (29 percent).
Among other surrounding states the State Budget Solutions estimates rank Montana as bleakest (34 percent), Nevada (36 percent) Oregon (37 percent), Wyoming (41 percent) and Utah (42 percent).
Here’s Drum’s full reply to my request for comment:
There are a number of entities, experts and interest groups advocating that Pension Systems should change their discount rates. The “discount rate” question is a war between academics and actuaries, and we are caught in the middle. Everyone needs to understand that your rate of return is a key factor to adequately funding any retirement instrument.
For practical purposes, there are only contributions and returns on current assets to pay benefits (whether your retirement instrument of choice is a DB (defined benefit) or DC (defined contribution) plan). If future returns on current assets are low, then one has to pay in more (make current contributions higher)in order to achieve an adequate retirement nest egg .
The 3.2% (current 15 year Treasury) number is close to one extreme, and is functionally equivalent to saying “what happens if you only get 3.2% returns for the rest of the life of the system” (PERSI has averaged 8.18% for its 48 year history).
Since the middle of the 18th century, any reasonable mixture of stocks and bonds over reasonably long time frames has returned much more than 3.2% (the Treasury bond rate). We contend returns over the next 20-30 years will almost certainly be much higher than the current Treasury bond rate.
If any retirement instrument adjusted their assumed rates to the current Treasury rate and subsequently raised required contributions to meet funding needs and they did not adjust their Investment strategies we contend they would earn higher than their assumption and the current generation of tax payers and members will overpay and the resulting surplus will allow the next generation to underpay. The challenge to any governing body is to be able to sustain your system while requiring each generation of participants to pay their fair share. One needs to strike some balance if one assumes that the investment of assets will be in some reasonably diversified portfolio of equities and fixed income.
We use 7% net of investment expenses, and are at the low end of the scale when compared to other state pension systems. Our assumption assumes a 3.75% real rate of return and a 3.75% wage inflation for a total gross return assumption of 7.5%. We contend this is a conservative assumption based on the fact it assumes equities will only make 5% above inflation (they have averaged 6%-7% over 20 year periods) and bonds will only average 1% above inflation (they usually give 2%-3% above inflation).
We understand and appreciate the different funding options and analysis. You have made a key point no matter what discount rate is used Idaho is one of the nation’s best systems. Past Governors, legislators and PERSI Board members have made informed, well thought out and conservative decisions regarding the PERSI system. We find Governor Otter, Lieutenant Governor Little and todays legislature continue to stay informed, maintain their focus and provide good stewardship for Idaho’s Public employees and taxpayers. We see no reason Idaho cannot continue to be a good example of how to properly manage a pension system.