Cites ‘Fictitious’ Dangers To Bond Rating

MAY 15, 2008: Striking a body blow to the Association’s hopes of raising the base, to which the annual cost-of-living-adjustment (COLA) is applied, state Treasurer and Receiver General Timothy Cahill has come out against the proposed $16,000 base, passed by the House and contained in the Senate’s FY09 budget. Specifically, the treasurer, who chairs the state’s pension board, is against extending the pension funding schedule by three-years to accommodate this modest increase in the COLA base.

For the past five years, the Association has led the fight to increase the base from its current $12,000 level, which was set in 1997. Our proposal, based on a 2005 report by the Public Employee Retirement Administration Commission (PERAC), increases the base to a reasonable $16,000. To accommodate the $4,000 increase without an untenable increase to the state’s pension appropriation, the Association has advocated for a three-year extension of the Commonwealth’s pension funding schedule.

In 1997, the state lowered its date of full pension funding from 2028 to 2018. Then in 2002, during the last recession, the Legislature added five years to the pension schedule bringing the date to 2023, significantly lowering the annual budget appropriation. In addition, the schedule has also been adjusted to take advantage of investment gains, again acting to lower the state’s annual contribution to the fund.

“Retirees have sat by patiently over the past five-years as the fund was used by the state as a budget tool, relieving pressure off the general fund. Funding dates and actuarial assumptions have been changed, but to no direct benefit of retirees,” replied Association President Ralph White. “The idea that the bond rating is in danger is fictitious at best. Since 1988, we have made great progress at the state and local level to address our unfunded pension liability.

“With due respect to the treasurer, our bond rating was not in danger in 2002 when the schedule was last extended and it is not in danger now. I agree with Senate Ways and Means that there is no impact with this proposal. It is a fact that we are meeting our obligations, at both the state and local level. The base has stayed unchanged for eleven years, while at the same time studies clearly show that public employees are funding their own pensions.

“House and Senate leaders, from both parties, realize retirees are struggling to keep pace with the modern economy and are doing the right thing to modestly increase the base to $16,000. Tim Cahill has known of our proposal for over three years and this eleventh hour objection is unacceptable retirees.

Association officials first filed their most recent plan to raise the base in 2006, following PERAC’s detailed study. Legislation was refiled in 2007, which was endorsed by the Joint Committee on Public Service and sent to the Senate Committee on Ways and Means last October.

Even if the current pension funding schedule is extended by three years to 2026, the Commonwealth will still be on course to retire its pension debt two years earlier than originally planned. The original funding schedule, adopted in 1988, called for the unfunded pension liability to be paid-off by 2028 and assumed an 8.25% investment return over forty-years. Since inception in 1985, the state’s PRIT Fund has returned an average investment return of 11.41%, a full 3.16% above the assumed rate of return.

“Until the treasurer can put forth a creditable plan that raises the COLA base without changing the funding schedule, then I have to view his opposition as serious hindrance to the cause of our retirees,” continued White. “With the average state pension now over $20,000 and teachers over $32,000, some would argue that this proposal does not go far enough. But I know the constraints of our funding schedule and this modest proposal, that has been endorsed by the Legislature, is affordable and can be implemented without endangering our bond rating. Claims to the contrary are unfounded.”