By Thomas Byrne
I'm watching the state pension fund melt as the stock market drops.
The fund is well-diversified but domestic equities are still the largest single exposure. Ironically, the alternative investments which have produced good net results for beneficiaries are unpopular with many labor leaders because we are paying fees to outside experts rather than managing complex investments internally. But that is another story.
The fund balances are declining for two reasons. First, stock markets here and abroad have been bad for nearly a year. Second, our cash flow is negative as over $9 billion in annual benefits dwarf about $3 billion in contributions from the state and its municipalities.
Bottom line -- if I'm a public employee, I'm worried about my retirement and hopeful that politicians come up with realistic solutions before it's too late.
Democrats led by state Senate President Steve Sweeney (D-Gloucester) have proposed a ballot referendum to constitutionally mandate large annual contributions into the pension system. Great for beneficiaries if it passes.
But the odds of passage seem slim; early polling shows that when the public realizes that it is likely to cause huge tax increases and/or major cuts to key programs, a majority would vote no.
Even assuming steady growth of over 3 percent in annual State revenues, and a millionaires' tax raising $650 million a year beginning in 2018, and 60 percent of revenue growth being available for pension funding, and pension assets earning a steady 7.9 percent (unlikely), an additional $2.8 billion in new taxes on people other than millionaires will be needed by 2022 to pay for the current pension and health benefits.
The public will vote "No" on that amount of new taxes, particularly when it is to fund a level of benefits that they themselves could never get. With another year gone post-referendum, we're billions more in the hole and pensions are that much less secure.
Some disagree, saying that the pensions are secure because even if the pension funds were to run dry, the state would be forced to pay retirees out of the state operating budget. It is misleading to represent that as fact. We simply don't know. The state's highest court has never ruled on this issue.
I'd hate to bet my retirement security on the premise that the court would either obliterate crucial state programs or essentially mandate huge tax increases by ruling that over 25 percent of the state budget, $9 billion of $34 billion, must be for pension payments. And even if a court did so rule, the possibility exists that the state would pay out in scrip rather than in cash. That is not far-fetched; Illinois and California have used scrip to some degree in recent years.
It should never come to this. There is another way.
The central tenet is that the state can honor all pensions accrued to date by aligning benefits to those in the private sector, and recycling the cost savings to fill the unfunded liability in the pension funds.
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