Ohio’s unfunded pension liability more than $25K per resident

By Maggie Thurber | For Ohio Watchdog

Ohio’s public pension plans have so much debt that paying it off today would cost each resident $25,080.

According to a new report, “Promises Made, Promises Broken 2014,” by nonprofit State Budget Solutions, the amount of unfunded pension obligations in Ohio has grown to nearly $290 billion, fifth highest in the nation.

That’s despite recent changes in the pension plans that were supposed to address the unfunded liability.

“That’s a very scary place for Ohio. The national average is $15,000, so $25,000 is just terrible,” said Joe Luppino-Esposito, SBS editor and general counsel and the author of the report.

He said the $25,080 places Ohio third regarding highest per capita debt. Alaska, due in part to its low population, was first, in front of Illinois.

Ohio has several individual plans — for teachers, police and fire, state employees, school employees and the State Highway patrol. Participants and the public employer contribute to the plans like non-public workers, and employers contribute to Social Security.

The plans are categorized as defined benefits, with the amount of payment upon retirement based on the three highest years of earnings while working.

That’s part of the problem, Luppino-Esposito said.

It’s hard to know the exact amount the plans will have to pay out years in the future when current employees retire, because there is no way to know for sure how much will be owed, he said. People are working longer and more likely to have higher earnings. They’re also living longer, so they’re collecting pensions longer.

Such factors contribute to an increased liability, Luppino-Esposito said.

The way the states project how much money they need to contribute to the funds every year also contributes to the problem, as most will estimate how much the plan investments will generate. In Ohio, the discount rate ranges from 7.75 percent to 8.25 percent.

But Luppino-Esposito said it’s not realistic to base projections on such a high number.

The Ohio Public Employees Retirement System has met its earnings goal for the past 19 years, he said, but they’re not counting on the liabilities increasing.

He said Moody’s, the bond credit rating business, examined the top 25 plans in the country, which included two Ohio plans and found the unfunded liability of those top plans off by $2 trillion.

Figures from the report shows even though assets in the Ohio plans increased by more than $6 billion in the past year, the liabilities increased by $8.5 billion, leading to a $2 billion increase in the unfunded liability amount.

Ohio’s pension plans are 34 percent funded, according to the report.

“If a fund is 100 percent funded, that is ideal because that means all money it owes will be able to be paid,” Luppino-Esposito said. “The lower the ratio, the worse off the pension plan is.”

The study then compared the unfunded liability to each state’s gross product.

“It’s an indicator to show how much of an effect pensions can have on the state,” he said. “Many politicians think you can just raise taxes, but when the liability is so large, you realize you can’t raise enough.”

Ohio’s unfunded liability is 51 percent of the GSP.

Luppino-Esposito warned that the consequences of ignoring the unfunded liabilities could lead to a situation similar to Detroit’s.

“When the money starts running out and you have to pay more for pensions, you start cutting back on essential services,” he said. “The result in Detroit was bankruptcy for the city, and then pensioners had to end up taking a cut in benefits. The sooner the unfunded liabilities get addressed, the better for everyone.”

Luppino-Esposito had two suggestions for Ohio: Adjust the discount rate and move to a defined contribution plan.

“Adjusting the discount rate will mean an initial cost up-front in terms of putting more money into the system today,” he said, “but it will result in better long-term viability.”

But he doubted if any state has the political will to move from a defined benefit plan to a defined contribution plan. In a defined contribution plan, the amount contributed to each employee’s account is a fixed amount and the payout, upon retirement, is based upon the final amount in the account, which includes the contribution and any interest earned.

“If they can’t do that politically,” he continued, “at least offer defined contribution plans to state workers. Some university employees have defined contribution plans, so why not make that available to all and trust employees to make their own decisions with the plan?”

Luppino-Esposito said the report helps reveal the solvency — or insolvency — of state pension plan systems.

“It helps policymakers today figure out how much money they’ll need in the future to pay off the obligations,” he said. “Because it’s pensioners and retirees and taxpayers who will have to make up the difference — one way or the other.”