WASHINGTON – States and cities plagued by underfunding of their public employee pension funds are starting to link them to revenue producing assets as a long-term solution.
New Jersey’s decision last year to link revenues from its state lottery to funding its public employee pensions could be replicated elsewhere, said Michael Belsky, executive director of the Center for Municipal Finance at the University of Chicago's Harris School of Public Policy.
New Jersey’s bipartisan Lottery Enterprise Contribution Act uses lottery money to fund its Teacher’s Pension and Annuity Fund, Public Employees’ Retirement System and Police and Firemen’s Retirement Systems.
Belsky, who spoke Tuesday at a forum on public pension funding held at the Washington, D.C. satellite campus of Pepperdine University, said the Chicago water system could similarly be used to fund the Windy City’s pension plans.
“You could take the water system and put it on the books of the pension fund,” Belsky said. “Get it valued. Right now it’s valued at cost, so it has a higher value than that. You might look at other water systems that were privatized or in public-private partnerships across the country to see how you would value it. Then the unfunded liability goes down so the actuarial required contribution goes down.”
The Australian state of Queensland turned over its toll road network in 2011 to the government’s public pension system as a funding mechanism.
Belsky said another example is Pittsburgh, which dedicated the revenue from its municipal parking to funding its public pension system.
Another approach is to issue pension obligation bonds, although the Government Finance Officers Association recommends against this in one of its advisories.
Illinois has issued pension bonds in the past and Chicago is considering a proposal to also do it.
“It was done quite frequently until you had these scenarios that didn’t work out, where you were borrowing at 5% and not getting 7%,” Belsky said. “If the rates drop to 3% then you are getting negative arbitrage which is a risk to taxpayers.”
Belsky said there are opponents on the Chicago City Council to issuing pension revenue bonds because of the interest rate risks.
He said he recently offered the idea of using assets owned by the city to fund its pension plans in an article published by Crain's Chicago Business and that people are talking about this as a better alternative to pension obligation bonds.
The current underfunding problems of public employee pension plans around the nation share can be traced to 1990s, when actuaries were optimistic about future rates of return because of the booming stock and bond markets, said Joshua Gotbaum, guest scholar at the Brookings Institution and a former U.S. Treasury assistant secretary for economic policy.
The actuaries assumed 8% or 9% investment returns that didn’t happen, Gotbaum said. Canada has escaped having a similar pension crisis because the actuaries there assumed 4% to 5% investment returns, he said.
