Is Federal Supervision the Silver Bullet to Pension Underfunding?

(May 4, 2012) — Public pensions in the United States are guilty of a series of broken promises, according to Chris Tobe of Stable Value Consultants and a former trustee at the Kentucky Retirement Systems (KRS).

While corruption may be a portion of the problems that public pensions face, the majority of the problems come from self-inflicted yearly underfunding, according to Tobe.

Tobe, who recently published a whitepaper on the state of public pensions in the US, concludes that from a policy point of view, there are various basic choices to follow to address the massive level of underfunding. With the vast majority of public plans whose sponsors make the actuarial required contributions that has kept their funding ratios above 50%, public schemes can and should stay the course and weather the storm which can include major benefit changes, Tobe says.

“However, there are a number of large state plans that have essentially broken the buck,” Tobe asserts. “These states have not paid the full actuarial required contributions and are endangering the solvency of both their plans and states as this shortfall combined with down markets. These plans with self-inflicted wounds demand a different solution. Both of these solutions involve the federal government, one the Federal Bankruptcy Court, the other some type of Federal Supervision.”

In other words, Tobe concludes that there are no magic solutions. While the majority of public pension plans who have played by the rules making their full actuarial required contribution payments can survive intact with perhaps some benefits changes, these changes will not be painless — many workers may have to work more years than planned and all retirees will probably see limited cost of living adjustments for many years.

Meanwhile, a minority of plans have shown that they have been unable to provide long term stability. In this case, Tobe says: “I think a Federal solution can make a smoother transition for this current crisis. The threat of a Federal Solution hopefully will deter plans who currently make the full ARC payments from going back on this promise.”

Tobe added: “There are no good solutions to this problem. I just think Federal Supervision is a less bad solution than Federal Bankruptcy.”

Read all of Tobe’s whitepaper here.