Ohio’s public pension systems could be in big trouble, according to a recent study, but that outlook can vary greatly depending on how much money they will make from the stock market over the years.
The study, released Oct. 13 by the American Legislative Exchange Council, found given annual investment returns of 2.5 percent, Ohio’s pensions would face a crisis-level $331.4 billion funding shortfall that would cost every man, woman and child in Ohio $28,538 to pay off.
Ohio’s pension systems, however, predict annual investment returns of between 7.75 percent and 8.25 percent — expectations that are generally in line with most pension systems nationally and that put the systems in fairly good shape financially.
The differing views of Ohio’s pension finances reflect a growing debate with broad implications for the 1.3 million Ohioans who rely on the pension systems for their retirement benefits. On one side is a growing number of academics and analysts calling for a very conservative investment outlook that would gird against a long-term economic slowdown. Pensions, however, largely continue to expect the higher returns necessary for keeping financial promises to teachers, public employees and others around the state without requiring big increases in contributions.
“The expected rate of return is probably the preeminent topic in the pension world,” said state Sen. Bill Beagle, R-Tipp City, who chairs the Ohio Retirement Study Council, a state-sponsored body put in place to ensure the financial stability of the pensions.
While it’s unlikely that pension systems will reduce expectations to the 2.5 percent level of the report, the pensions are cognizant of the potential for lower long-term results, Beagle said. Some have reduced expected returns slightly, while others continue to look at the issue, he said.
“In a world of assumptions, the rate of return is a significant assumption,” he said. “Between the length of time we’re talking about here and what dollars we’re talking about, that lever can really whipsaw things.”
The economy is growing, albeit slowly, and investment returns are unlikely to boom for long periods in coming years, said study co-author Jonathan Williams, vice president of the American Legislative Exchange Council’s Center for State Fiscal Reform.
“We’re in a new normal now when it comes to future market returns,” he said. “There is weak GDP growth nationally, it’s the weakest recovery out of recession since WWII.”
To account for that, pensions must lower expectations for the long term, he said.
“They are using some pretty rosy assumptions about future returns,” Williams said.
Indeed, over the past ten years pension system returns haven’t met expectation. Despite expected returns for the pension systems ranging between 7.75 percent and 8.25 percent, actual annual returns over the past 10 years have ranged from 5.27 percent and 6.67 percent, according to data from the Ohio Retirement Study Council.
But pensions are hesitant to lower expected returns in part because the consequences of doing so are very unpopular, Williams said.
“When you reduce the assumed rate of return, you dramatically increase the annual required contribution to the system,” he said.
Currently, all of Ohio’s pension systems are in financial compliance with state’s financial stability requirements. But a change in investment outlook could change that. The pension systems have the leeway to study and set their own expected rates of return, Beagle said.
“I’m comfortable that they’re looking at it,” he said. “They’re trying to strike that balance.”