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Wednesday, March 01, 2006

Pay no attention to the coming crisis.

In an Alfred E Neuman-esque "What, me worry?" Council 13 of the American Federation of State, County, and Municipal Employees claims there is no future pension problem in Pennsylvania. "State Pensions Under Attack!" takes aim at our pension study, attempting to discredit it. AFSCME criticism centers around above average returns in SERS investments over the last three years, and accuses the Commonwealth Foundation of "cherry picking data," using the "worst-case scenario for every possible variable", and "twisting the data." Nothing could be further from the truth.

  • Our projection of future taxpayer liability uses SERS data, not Commonwealth Foundation data!
  • SERS, not the Commonwealth Foundation, assumes an 8.5% return on investments. And an investment earning 8.5% return over the past 6 years would be 18% higher today than earning the same returns as SERS.
  • The AFSCME Council 13 news release, in fact, "cherry-picks" its data, citing outstanding SERS returns in 2003, 2004 and 2005. However, it ignores below average returns the three previous years, including losses on investments in 2001 and 2002 -- which are part and parcel to determining the taxpayers' contribution amounts. As a SERS Board Member, the author of the AFSCME critique should know this. This suggests either ignorance or intentional misrepresentation. Which is it Mr. Fillman?
  • While larger than expected returns on investment can lower the future liability, as AFSCME argues, our projections already account for the sizable returns in 2003 and 2004, and even should return consistently outpace expectations, there will still be a ballooning effect in future liability.
  • AFSCME notes that state contributions to SERS have been very low over recent years, but fails to comprehend the meaning of this. Faced with impressive returns in the late 1990s, legislators decided both to increase pension benefits and reduce state contributions. These changes only increased our future unfunded liability. Again, Mr. Fillman is either incredibly ignorant or intentionally misrepresenting the facts. Which is it?
  • Oddly, the AFSCME news release notes "the state's contributions will remain low until 2012." Rather than being a criticism of our study, it seems to be pulled directly from it (See Table 23). The Looming Crisis really begins in 2011-12, when the SERS contribution rate will double - from 5.2% of payroll to 10.9% - followed by increases to 19.4% in 2012-13 and to 22.4% in 2013-14. This represents an increase of 375% in actual SERS contributions in just four years.
It is unreasonable to expect that higher-than-forecast returns can continue indefinitely, or that robust returns alone can solve the future crunch in pension liability. And it is downright myopic to argue that there is no problem whatsoever in our state pension systems.

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