Unfunded liability drops as committee recommends lower pension rates

Unfunded liability drops as committee recommends lower pension rates
The state Select Committee on Pension Policy has voted to lower the assumed rate of return from 7.5 percent to 7.4 percent. Photo: freepik.com

The state Select Committee on Pension Policy has voted to lower the assumed rate of return for the state’s public pension investments from 7.5 percent to 7.4 percent, though the vote taken at the July 21 meeting is seen by several members as a symbolic gesture that won’t be replicated by the Pension Funding Council later this month.

Meanwhile, the state’s Actuary’s Office 2019 report released June 30 revealed that the pension system’s unfunded liabilities have actually decreased over the past year due to $4.4 billion worth of prior unrecognized gains. In 2018, there was $11.2 billion in unfunded liabilities, compared to $8.5 billion in the 2019 report. In 2017, the unfunded liability was at $12.6 billion.

However, State Actuary Matt Smith has previously said the effects of the economic recession won’t be reflected in the unfunded liabilities until the 2023-25 biennium.

One of the factors that determines the unfunded liability is the assumed rate of return and the subsequent state contribution to the pension plans, which are determined every two years. The new rate would apply to the 2021-23 biennium.

Last month, Smith told the committee that the state faces two options: pay now to the system to cover shortfalls, or pay more later. He favors using the 7.4 percent assumed rate of return for the pension system that is already used with a plan for police officers and firefighters. However, the Pension Funding Council in September voted in a split decision to keep the 7.5 percent rate. Under the 7.5 percent rate, the state and public agencies would have lower contribution rates to the various pension plans.

Several committee members who spoke in favor of the 7.4 percent rate indicated it was a symbolic vote. Rep. Joe Fitzgibbon (D-34) said: “from a policy standpoint, I still think it’s most prudent for us to assume lower rates of returns, but I also know we’re in a pretty severe situation budget-wise.”

Rep. Timm Ormsby (D-3) is a member of both the Pension Policy Committee and the Pension Funding Council. At the July 21 meeting he voted for the 7.4 percent rate, but added “(I) will be making an entirely different assessment at the Pension Funding Council based on these numbers and our fiscal circumstances, as opposed to really wanting to have a conservative approach.”

Former state House Speaker Frank Chopp (D-43) also voted for the 7.4 percent rate, though like Fitzgibbon he added that “we’re in tough budget times.”

The Pension Funding Council’s next meeting is July 29.

LEAVE A REPLY

Please enter your comment!
Please enter your name here