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Commentary

Struggling Ohio Pensions Seek Ways to Cut the Growing Costs

The Ohio Public Employee Retirement System (OPERS)—the largest of Ohio’s five state pension plans and 12th largest in the county—has announced that it will be pegging cost-of-living (COLA) benefits to the Consumer Price Index, with a 2.25% cap and two-year delay for when the first COLA payments are issued, beginning in 2019. The current COLA rate is 3.0%, so the peg-and-cap approach will be a reduction in the value of benefits, but a reduction intended to minimize the growth in budgetary costs that OPERS is experiencing.

“You should know we are considering this action while our system is healthy – we must proactively assess our fund so we can remain that way.” OPERS Executive Director Karen Carraher wrote in a statement, addressing OPERS members and retirees. OPERS estimates the COLA cap changes will eventually produce approximately $4 billion in savings.

“Healthy” may be too strong of a word to describe OPERS, however. Ohio passed sweeping changes in 2012 which ranged from contribution increases to post-employment benefit changes. These clearly were not enough to fix OPERS on their own, otherwise there would not be a need for more adjustments. OPERS is also planning to make changes to healthcare benefits.

So, this begs a question: are we sure that the proposed changes will make a sufficient difference this time around?

With a funded status of just 77.4% (measured on a market value basis) OPERS is certainly not in a strong position. (This funded status may be somewhere above the national average, but that does not mean the system is healthy.) Just a decade ago OPERS was fully-funded. Last year, however, funding of the plan’s defined benefit portion fell for the third straight year in a row. And since when did being short more than 20% of the assets needed to pay constitutionally guaranteed pension benefits be considered healthy?

In the decade between 2007 and 2016, Ohio’s combined unfunded pension liability increased almost sevenfold—from $10.7 billion to $69.3 billion. (And that is probably underselling how large the unfunded liabilities are because Ohio does not use a market valued discount rate to price its obligations.) Unfunded health care benefits would add roughly another $15.5 billion.

Ohio needs additional reform, and it should look to improving the funding policy and redirecting savings from benefit changes towards lowering its assumed rate of return, for example, that would help pay down the mounting debt.

Still, keeping Ohio state pensions afloat won’t be an easy task. The Mercatus Center finds that the likelihood of OPERS paying all its pension promises will fall to just 31% within the next 30 years. Other plans in Ohio are even less likely to meet their obligations.

The probability of maintaining solvency is reduced whenever plans pursue riskier portfolio allocations, such as hedge fund and private equity investments. As a result of riskier portfolio allocations, OPERS’s expected year-to-year return fluctuations has risen from 8.8% in 2007 to 14.1% by 2015, says Andrew Biggs of the American Enterprise Institute. Naturally, securing stable income given such volatile returns becomes increasingly difficult.

So, are the proposed COLA changes and potential adjustments to healthcare benefits going to be enough? Based on the causes of challenges for OPERS it is unlikely. Public pension debt per each Ohioan could now be anywhere from $5,500 to more than $28,500, and growing. And while cutting COLAs and health care benefits can benefit plans in the short- to near-term horizon, it would likely fall short of meaningfully addressing their long-term solvency concerns or help keeping plans afloat.

Anil Niraula is a policy analyst at Reason Foundation.

Niraula holds a BS in Business Management and Administration from Touro University (Moscow), MS in International Business from The University of Edinburgh (Scotland, UK), and MS in Applied Economics from Johns Hopkins University.

He is based in Washington, DC.