Pension Matters
State Employees Retirement Fund
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June 2011
Actuarial Update
I attended the State Employees Retirement System Board meeting today where they received the actuarial pension and healthcare valuations for the period ending 9/30/10. It was presented by Alan Sonnanstine of Gabriel Roeder Smith & Company who has been providing the pension and healthcare valuations for the State. While the full reports are not on line as yet, you should be able to find them on the ORS website under Board Information and then Special Reports soon.
The average annual pension for 2010 was listed as $18,511. For the FY ending 9/2010 the pension fund had paid out $917 million in pension benefits. The fund is funded at 60% based on market value and 73% on actuarial value. Meeting the actuarial assumptions would require average future market returns over 8% or the State must increase its funding requirements.
Unlike our pensions, health benefits are not pre funded. Additionally, with no funds set aside for health benefits there is also no investment income generated (“$5.6 billion represents some of the lost investment income from not pre-funding”) to help cover the costs as with the pension plan. Health care costs are rising. According to the report $346 million was spent in FY 2010 for retiree health benefits. It would take a lump sum of $9.1 billion to fully fund the unfunded liability for 2010. This unfunded liability shows up on the State’s balance sheet which could affect the State’s bond rating. Suggested solutions are to increase employer health care contributions but it seems inevitable that benefits will be cut and/or employee contributions increased. While a proposal to increase employee contributions is in the legislature now, it does not affect retirees. However, the “trickledown” effect has historically connected retiree’s benefits to employee benefits.
Pew Again
The latest study by The Pew Center on the States shows not only that states have not funded the promises they made to their employees when they retire, but that the gap between those promises and the states' contributions to pay for those promises is widening.
According to Pew, the shortfall is at least $1.26 trillion (with a t), but could approach $5 trillion depending upon rate of return assumptions. Because of the precipitous decline in revenues in 2009, states were able to pay only $73 billion into their plans when their actuaries said they needed to contribute $115 billion. In 2008, states made contributions of $72 billion, when they needed to contribute $108 billion. So while states continue to underfund their pension plans, the shortfall is growing more quickly than they can contribute.
Thirty one states were below the 80% funded threshold in FY09 — Michigan was one of them. Only seven states have funded at least one quarter of their health benefit liability — Michigan is listed as having paid 33% of its liability for FY09. To read the full report go to www.pewcenteronthestates.org/uploadedFiles/Pew_pensions_retiree_benefits.pdf
Private Pension Protections
A private company that is underfunded could be taken over by the federal government’s Pension Benefit Guaranty Corp. Through this protection 85% of private company retirees continue to receive their full pension. However there is a cap of $54,000 a year for 65 year olds whose pension is taken over. (Kiplinger Money)
My understanding is there is no such protection for public pensions because it’s not supposed to happen. Yet our pension fund is underfunded and not protected in any way. And please notice the cap for private pensions. That is over twice the average pension for a state employee.
Snyder signs tax reform bills
Governor Snyder signed the eight-bill package tax package on May 25, 2011. Under this legislation public pensions are subject to state taxes as of Jan. 1, 2012. The bills now are Public Acts 38 - 45 of 2011. The new laws take effect Jan. 1, 2012.
Just so you know, the corporate income tax accounted for 5.4% of state tax collections last year, according to the Census Bureau. The personal income tax made up the largest portion of state tax collections, about one-third 33.5%), followed by sales taxes at 31.9%.
Revenues Up $602.6M From Last Year
Here’s a welcome change.
“State revenue collections for the first and second quarter of Fiscal Year (FY) 2011 are up $602.6 million or 7.2 percent from the first two quarters of FY 2010, the House Fiscal Agency (HFA) report today. The collections from the second quarter alone are up $478.3 million or 15.4 percent from the second quarter in FY 2010 due to higher than expected income tax collections.
Net income tax collections so far in FY 2011 are $2.7 billion, up $545.3 million or 24.9 percent from a year ago. The second-quarter change is a 183.5 percent increase from the second quarter of FY ’10.
Sales tax collections for FY ’11 are, so far up 4.9 percent from this point in FY ’10, according to the HFA.” (MIRS)
“Without raising pension taxes or lowering business taxes” A healthier Michigan economy is churning more tax revenue than was expected and will produce a $429-million windfall for the state this fiscal year, economists agreed Monday.
“Another $234 million in extra revenue was predicted for 2012. It means a $1.4-billion deficit that Gov. Rick Snyder faced when he took office in January could be cut to about $740 million.”
“The Michigan economy is in the early stages of a sustained recovery,” proclaimed George Fulton, director of the Research Seminar in Quantitative Economics at the University of Michigan. A resurgent U.S. auto industry, which saw its employment level in Michigan drop by 60% since 2000, is the key reason for the turnaround. Fulton said the Detroit Three automakers are making bigger profits selling fewer cars than they did during the 1990s, thanks to reduced production costs and concessions by workers.
During the next three years, Michigan’s economy will add about 183,000 jobs, after losing 300,000 in 2009-10, Fulton said. But he said it will be at least 10 years before Michigan’s employment levels bounce back to 2000 levels.” www.freep.com/article/20110517/NEWS06/105170362/Michigan-s-improved-economy-bring-state-an-added-429-million-revenue
An Interesting Dichotomy
The following is a section of an article written for Dome Magazine by Maxine Berman which says a lot about our political “condition”.
“Nor may they (Michigan residents) be pleased that Michigan Republicans have also redefined wealth. In Michigan, if you are a joint-filing married couple with three or more children earning $50,000 per year ($20,000 per year for a joint-filing married couple with no children), you are too rich and will have to have your state Earned Income Tax Credit slashed. Ironically, at the same time, their Republican counterparts in Washington are adamant that people making $1 million a year are too poor to lose even a portion of their current very generous income tax credit.” Click the link to read the whole article. www.domemagazine.com/mberman/mb051611?utm_source=Dome+e-bulletins&utm_campaign=b94b6eac8a-Dome_E_Bulletin_05_16+11_5_2011&utm_medium=email
Social Security and Medicare Reports
The bad economy has shortened the life of the trust funds that support Social Security and Medicare, the nation’s two biggest benefit programs, the government reported Friday.
The annual checkup said that the Medicare hospital insurance fund will now be exhausted in 2024, five years earlier than last year’s estimate. The new report says that the Social Security trust fund will be exhausted in 2036, one year earlier than before.
The trustees for the funds said in their annual report that the worsening financial picture emphasized the need for Congress to make changes to avoid disruptive consequences in the future for millions of people who depend on health and pension benefits.
To read the SSA Trustee Annual Report go to www.socialsecurity.gov/OACT/TR/2011/tr2011.pdf
You can find the Medicare report at www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf
To find a summary of both reports go to www.ssa.gov/oact/TRSUM/index.html
Editor’s note: June Morse is the Lansing SERA Chapter President. She may be contacted at jmorse10@comcast.net or 517-886-9323.
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