(Don’t) Send in the Sharks

JUNE 21, 2012

The pension funds for most counties (and states) in this nation are vastly underfunded. This is not news; or at least, it shouldn’t be. Especially not if you’re a regular reader of this blog. If you want a quick snap-shot of how ours are doing in Maryland, check out our Pension Map, which displays pension and benefit debt by county and includes a downloadable spreadsheet with a lot more data than is shown on the map.

More worrisome than our pension funds, however, are our OPEBs (Other Post Employment Benefits). From our Pension Map mini-glossary:

OPEB can refer to any deferred compensation that an employee earns besides pensions, including (but not limited to) healthcare benefits and life insurance. In some cases, these benefits can actually far outstrip pensions in terms of costs to employers, due to the rapidly increasing cost of health care, and the fact that employees are required to contribute only a fraction of the cost of providing OPEB. This is, unfortunately, the case with Maryland state and local county employees.

The pension problem was created by politicians who promised too much to public unions and then allocated too little funding to keep those promises. When the market tanked a few years ago, things got even worse. If we want to solve the problem without substantially raising taxes, we’re going to have to do three things:

1) Switch from defined-benefit plans (which have been abandoned in the private sector because they are unsustainable) to defined-contribution plans for public employees.
2) Increase the mandatory contributions from public employees for their pensions, and increase the amount that state and local governments set aside each year to match those contributions.
3) Revise our estimated rates of return downward so we’re not underfunding year after year.

The OPEB problem is a horse of a different color, unfortunately. You can’t really switch to a defined-contribution healthcare system. People’s medical expenses are what they are – and, unfortunately, they’re only going to increase.

When most counties started to offer such generous health benefits to their retirees, they would pay for current retiree expenses with current employee contributions. That worked for some time, but gradually the expenses outstripped what was available because there were too many retirees seeking too much expensive medical care. So funds (similar to the counties’ pension funds) were established late in the game, and now they’re even more woefully underfunded than the pension funds.

Most states and counties are reluctant to simply raise taxes on everyone else to fix the problem, so they’re turning to slick fund managers that promise above-market returns. Here’s a lengthy (but worthwhile) article about one such manager in South Carolina that should be a warning to Maryland.

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