Massive Pension Shortfalls Drive Demand For Strong Financial Management

From Marv, our founder and CEO --

If you haven’t seen it, we strongly recommend you take a look at a stunning new report, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform,” from the Pew Center on the States, a project of the Pew Charitable Trusts. You can see the report by clicking here.

We recommend everyone in the public sector look at this report. It documents the challenges facing underfunded public sector pension systems as well as some pathways to closing the gap and backing away from the abyss of financial failure.

Richard Greene and Katherine Barrett, who are familiar to many of you for their work of long standing on improving government performance, were Senior Consultants on the project. If you don’t already subscribe to the B&G Report, their regular feature in Governing Magazine’s free Management e-newsletter, you should -- it’s a great resource. You can sign up for it by clicking here.

How did some pension systems get in such trouble? The answer rests in the decisions made by the retirement systems which are on the ropes. It’s useful to look at the choices they made, particularly in comparison to the choices made by those which are solvent and managing strategically.

National Public Radio’s “Morning Edition” news program followed up on the Pew report with stories about individual states; you can listen to their stories by clicking here. A recent report focused on the Pennsylvania Teachers’ Association Retirement System, which has unfunded liabilities of $20 billion currently and expects to see that grow to $55 billion over the next few years. As has been true in many other cases, overly optimistic projections of investment performance are responsible for much of the problem. Benefit increases based on pre-recession assumptions haven’t helped, either.

A senior official with the Pennsylvania Teachers’ Association Retirement System said that “some of the worst things happen during the best of times.” We agree -- it is easy to be overly optimistic when times are good, and even easier to spend when the money is there.

Taking a more strategic view, though, can take the white caps off the tops of the fiscal waves and keep the troughs from being quite so deep. Those states whose retirement systems are not in trouble are living by rules that require them to take the long view – for example, some are required to fund any deficits in the year in which the deficit occurs. Local governments are responding as well – our home city of Austin, Texas, is taking steps right now to make sure that the retirement system for City employees hits the 80% funded rule.

We believe the long view is the best view - pay as you go.

Back in the day in Iowa in the 1990s, the Governor and Legislature agreed to fiscal notes of at least three years for all legislative proposals. This was very successful in forcing decision makers to take the longer view and never be surprised by the impact of current decisions on future budgets.

Requiring fiscal notes of at least three and preferably five years for any funding proposal – as well as any proposal to delay funding of deficits – is an important element of sound financial management.

Our economic recession surprised almost everyone – and particularly surprising was the depth and breadth of the impact in nearly every sector of the economy. Government revenues will be affected by it at least three years running. Many senior officials we speak with in local government see this as a permanent restructuring of their organizations and a fundamental change in the roles government will play going forward.

In making those tough decisions, time is of the essence. The longer government leaders wait to act, the deeper the cuts will need to be. In Hawaii, the Governor and Unions are still negotiating a deal to handle what was identified in July 2009 as a needed $700 million reduction in personnel costs. As a result, school children are still taking furlough Fridays from school and the problem is literally multiplying as the decision is delayed.

Expenditure reductions should be enacted as quickly as possible, as soon as it is known that a problem exists. This is critical to minimizing the impact of a loss of revenues.

Our dear friends in Maricopa County, AZ, have been dealing with truly extraordinary political battles between elected officials – but this has not distracted them from the focus and discipline that continue to make them one of the best managed governments in the nation. At a time when the State of Arizona is facing a budget deficit in excess of $3 billion, Maricopa County has balanced its budget and is paying cash for a new Court House/Criminal Justice Tower. They have set strong fiscal policies and they adhere to them even in difficult times.

More governments should follow Maricopa’s example: establish fiscal policies and principles that will serve the government and taxpayers in good times and bad.

It’s painful for everyone when revenues are short, services are being cut and employees are being laid off. It takes real courage and real leadership from both administrative and legislative officials to take the long view -- but that is exactly what’s needed, especially now.