The retirement benefits of Delaware state and local government employees are at risk. The governments of both the state and New Castle County have been playing financial games with their employees pension funds, but the chickens are coming home to roost.
For more than two years groups like the Pew Center on the States and Millman have provided analysis about the serious underfunding of state and local government pension funds across the nation. This analysis has been mostly ignored...until now.
Moodys, the major credit rating agency, is making adjustments to its pension methodology calculation that will double or even triple the amount of unfunded government pension debt. This will, in turn, lower the bond ratings of state and selected local governments. Lower bond ratings mean the cost to borrow will rise.
Of the four adjustments made by Moodys, two are very significant. First, instead of the commonly assumed 7.75% earnings rate on pension fund assets, Moodys will apply the corporate bond rate of 5.5%. Second, government contributions to the pension funds must be adjusted to reflect this lower earnings rate.
In the latest financial report from the Delaware Office of Pensions, the state assumes an earnings rate of 7.5% and arrives at an unfunded liability of $1.03 billion. The change to 5.5% and a 17 year accountability period proposed by Moodys will boost underfunding to between $3 and $4 billion, an amount greater than the current General Fund budget.
The latest estimates of Delawares unfunded state pension from other sources (e.g., Pew Center on the States, Millman, the Mercatus Center) range from $7.6 billion to $11 billion.
The states problem has been compounded by below recommended annual contribution to the pension fund over the past four years. This has shifted the fund from being 103% funded to at best being 90% funded even with current accounting rules.
New Castle County governments pension plan has its own set of issues. During fiscal year 2012, the benefit payments from the fund were almost double the contributions to the fund from employees and government.
The outlook isnt good. The number of individuals receiving pension benefits now exceeds the active County employees contributing to the plan. The County plans estimate of its unfunded liability ($105 million) is based upon a 7.5% earnings rate and a 20 year accounting period. On top of all this, all retirees are guaranteed a 2% to 3% annual increase in benefits.
The County Executives response to all this is to use the most recent $7.7 million drop in investment income to criticize the investment fund manager and the plans board of directors, avoid consideration of serious reform (such as an increase in member contributions), increased retirement ages, and elimination of the automatic annual hike in benefits.
The intent of the County executive appears to be to shift control of the Countys pension plan back from the independent pension board to his office. Under attack by the County executives office, three out of the four pension plan outside board directors have resigned. The fund manager has been discredited with spurious data.
The lack of action by the state of Delaware and New Castle County with regard to the serious underfunding of their pension plans should raise concern among current government employees. Perhaps employees would be better served by moving to a defined contribution plan where each employee has direct control of his or her retirement fund rather than having politicians in control.
Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis