REASONS TO BE OPTIMISTIC ABOUT YOUR PENSION FUNDS
by S. Randall Weltman
Back in February the authors of a George Mason University research note examined Ohio’s public pension plans and concluded that they faced a future funding crisis and that “the chance of Ohio pensions being above water 20 years from now is less than that of a coin flip.” They believe that Police and Fire pensions are “safe for a decade – but after that, things get dicey.”
The researchers believe that the already underfunded Police and Fire fund will decline to the point where in 20 years it will only have a 25% chance that it can pay its retirees. They blame this on flawed “funding ratios” that rely on assumptions that they say “are not so simple.”
The study does not condemn the Ohio funds’ actuaries who “typically do a good job” with figuring the number of retirees and how long they normally live and thus how much each may cost. Instead they are critical of the professionals who make projections regarding the fund and how much it will earn in the investment markets.
According to the researchers investment returns account for 70 percent of a plan’s funding. They say pension administrators assume that their investments “will earn between 7.75 and 8.5 percent annually.”
Yet, according to the study, over the past 10 years each of Ohio’s funds fell short of those ranges, having averaged returns between 6.6 percent and 7.3 percent. They suggest percent that the next ten years will be no better; hence the funding shortfall.
The George Mason study has been harshly criticized by John Gallagher Jr., the executive director of the Ohio Police and Fire Fund. Gallagher believes the study is biased since it was funded in part by the notoriously conservative Koch brothers, haters of public employees and their unions.
Gallagher believes the survival of your retirement fund’s benefits depend on three factors. The first factor is to maintain a “mandated” funding level. He says that “Ohio has mandated funding and its police and fire fund meets the state mandated funding requirements” and that it is well positioned to meet the obligations of both current and future retirees.
Another factor is the fund’s contribution pipeline and as such, Gallagher argues that the police and fire fund does not have to depend on investment returns alone as it also gets the payroll contributions from working police officers and firefighters and also from the cities and towns that employ them, “a fact he said was ignored by the study.” As you all know these contributions are a set percentage of salary and are required by law, meaning they are permanent until changed….to meet mandated funding.
As to the study’s claims regarding the police and fire fund’s ten-year rate of below needed returns, Gallagher notes that the ten years in review included the 2008-2009 financial crisis. A closer look, he says, shows the fund returning 10.5% over the past 5 years and 8.6% ever since 1998.
From my viewpoint, I credit Gallagher and agree that for many reasons the George Mason study’s doom and gloom warnings are mostly unwarranted.
I believe that your fund possesses vital factors that will always protect it against failure and collapse. The fact that your fund is a “multi-employer” fund and in an industry that should not ever contract or shrink is its savior.
Most of the police funds that have terminated or pulled back their retiree’s benefits are single employer funds, such as the pension funds for the Dallas and Detroit police. Ohio’s only single city retirement fund is the Cincinnati police’s; all other Ohio municipalities – of all sizes – participate in the singular state-wide fund.
Much like an insurance company a pension fund is dependent on maintaining an account with plenty of assets. The bigger the account the greater the probability for it to grow its investment returns and in the reverse situation to protect its assets against extraordinary losses.
Multi-employer funds are able to weather an economic crisis better than a single employer fund, specifically if it’s the single employer that is in financial trouble. If the Detroit officers had participated in a multi-employer fund the diversity and success of the other participating cities in Michigan (the aggregate of the fund) would have kept the Detroit officers’ pensions afloat.
The key to the success of the multi-employers’ funds though, is the staying power of the employers involved in the fund. The U.S. coal industry and the U.S. trucking industry created and maintained very successful and lucrative multi-employer pension funds for a long period until their demise.
Both of those multi-employer funds have essentially collapsed for the same reason – many of the employers in the multi-employer fund went either bankrupt, out of business or non-union. Under each of these circumstances those disappearing employers left behind both the future and current retirees of their own, without adding any more contributions to the fund. Meanwhile, the employers still contributing to the fund are not able to fund their own current and future employees’ retirements, much less those of the defunct employers.
Fortunately, your employers will not ever be closed or otherwise put out of business. By law they, and you, will always provide a contribution to the fund regardless if one of the participating employers (like an East Cleveland) struggles to survive.
With a rock sold funding source there will always be revenue added to the fund, even when its investment returns disappoint. In time, as that funding continues, those returns will improve and average out to match the fund’s investment goal.
The only factor that can disrupt the foregoing certainty is misuse, fraud, or unsuccessful risky bets made with the fund’s resources. This is what happened with the Dallas police’s funds as a few of its trustees decided to invest too much of their funds in speculative real estate, before the real estate bust in 2007-2008.
The Dallas fund’s bad investments were masked to outsiders for several years as the value of the real estate, an illiquid asset, is able to be misstated or misrepresented until the asset is sold. In Ohio, though, Fund Director Gallagher states that “our team of trustees, professional staff and independent consultants review our assets, assumptions and goals on a regular basis and make adjustments as needed.”
You all saw proof of this during July 2012 through July 2015 when your contributions went from 10% to 12.25%. While that was and continues to be painful, take comfort that actions like this are only taken to assist the fund with its mandated funding so that your pension will be there when you are r