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SKARBECK: State should tap surplus to boost teacher pension

August 8, 2015

Ken SkarbeckPlenty of voices are chiming in with ideas on what to do with the state’s $2.14 billion reserves. So, here is another suggestion—make a sizable contribution to the Indiana Pension Stabilization Fund to help offset the woefully underfunded Indiana State Teachers’ Retirement Fund.

While the majority of Indiana’s nine public pension funds are reasonably funded, the Teachers’ Retirement Fund needs serious attention. The original TRF was created in 1921 as a pay-as-you-go plan. Pay as you go means no funds are set aside and invested in the early years to eventually pay for the future retirement benefits. Instead, each year, you have to come up with the entire amount of money to make the required retirement payments. As more Indiana teachers worked and retired over the years, the state’s annual contribution to pay for the TRF pension payments ballooned.

So in 1995, the General Assembly closed the pay-as-you-go plan to new hires and called it the Pre-1996 Account. Beginning June 30, 1995, all newly hired teachers became members of the new 1996 Account, which is actuarially funded and invested like a typical pension plan. The PSF was established with an initial $425 million and is used to offset the annual costs of the Pre-96 Account. It receives funding from the state general fund and the lottery and now has a $2.9 billion balance.

Indiana’s nagging pension problem lies with this legacy Pre-96 Account, which is still responsible for the future retirement of 19,000 active teachers and 53,000 retired and vested teachers. The obligations must still be met on a pay-as you-go basis since there never were funds set aside to pay their benefits.

In fiscal 2014, the Pre-96 Account cost Indiana taxpayers a whopping $776 million out of the state’s general fund. The lottery kicked in another $30 million and the PSF added $110 million, for a total benefit payment of $916 million to teachers who retired before 1996. That’s a big “line item” number in the state budget considering Indiana’s general fund raises about $15 billion from taxpayers to run the state each year.

Nyhart, the actuarial firm for the state’s pension funds, projects that the annual retirement cost for Pre-96 teachers will peak in 2026 at $1.12 billion. The state intends to increase its general fund contribution to the Pre-96 Account 3 percent annually, which would allow it to meet those costs before the number of teachers begins to taper off after 2026.

The Indiana Public Retirement System has suggested that another option would be to bolster the PSF with contributions to mitigate the annual cost to the general fund.

Around us—in Illinois/Chicago and Detroit—we see examples of neighbors who neglected pension funding and now have underfunded pensions causing severe financial problems. Farther away, stressed state and municipal budgets due to pension mismanagement can be found on both coasts.

Indiana has followed a sound fiscal and monetary path over the past decade and has more than $2 billion in the bank to show for it. A meaningful contribution to the PSF would help alleviate the underfunded liability of the TRF and reduce those unwieldy annual pension costs to Indiana taxpayers over time.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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