An unfunded liability exists in the State Health Plan and the state’s retirement plan, which means the systems are forecasted to require more money than currently available. It is a serious problem that needs the right solution.
Serious problems often generate knee-jerk reactions, and we see that today in impulsive proposals that ignore key facts, blame program beneficiaries, mischaracterize benefits as exorbitant, and assume that cuts to state employees’ benefits are the only way forward.
That’s a misinformed reaction, not a viable solution.
Decades of poor decisions and bad deals by politicians — not overly generous benefits — created this unfunded liability.
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From 2000 to 2010, the state deliberately underfunded the retirement system. As employees faithfully paid in their 6 percent, lawmakers did not match it. This means that a state employee with 20 years of experience spent over half their career putting more money into their retirement plan than their employer.
Previous state treasurers gave away billions to managers of so-called “alternative” investments at the expense of state employees, retirees and taxpayers. Since 2001, fees paid to Wall Street fund managers increased by more than 1,100 percent, even though the retirement system’s assets increased by only 50 percent.
In exchange for outrageous fees and risky strategies, we got lackluster returns. Had the state retained its asset allocation from 2000 and avoided alternative investment contracts, there would be more than $20 billion of additional funds in the retirement system today. That’s more than enough to satisfy the system’s unfunded liability.
Some people claim that moving from a defined benefit pension plan to a defined contribution 401(k) system is the right solution, but research and experience show they are wrong. A study by the National Institute on Retirement Security found that costs to fund a target retirement benefit under a pension plan is 12.5 percent of payroll. The cost to provide the same benefit under a defined contribution plan is 22.2 percent of payroll.
Moving employees over to a 401(k) plan isn’t like flipping a switch. The state cannot legally dissolve its pension system for vested employees. Converting to a defined contribution plan involves significant upfront investments and an ongoing, unnecessary administrative cost of running dual systems. West Virginia tried it. After 15 years, substantial costs forced a move back to a defined benefit system.
Fixing the unfunded liability is not difficult. It’s simply a matter of refusing to waste money, and State Treasurer Dale Folwell is doing just that. Folwell has cut fees and is on track to save $344 million over four years. Furthermore, the treasurer is committed to further reductions in expenses as these bloated contracts expire. Combined with full funding of the employer share of retirement costs and the recently passed Unfunded Liability Solvency Reserve Act, these actions should fill the unfunded liability in the retirement system within a decade.
Treasurer Folwell is also bringing strategies and solutions to the table for the State Health Plan. At the top of his list is using the State Health Plan’s size to negotiate provider contracts that benefit plan members as well as taxpayers. Renegotiations have already resulted in savings of $55 million, and it is clear that Folwell is just getting started.
Blaming state employees and retirees for the unfunded liability is illogical and unsupported by facts. Knee-jerk responses like cutting benefits is not the answer. The right solution is to prudently manage the State Health Plan and retirement system, and that’s exactly what Treasurer Folwell is doing. Let’s allow him to do his job.