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Home / Washington Business - January/February 2007 / Points of View - Gain sharing: It's 4th and 20 - and punting is not an option |
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Points of View - Gain sharing: It's 4th and 20 - and punting is not an option |
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Written On: January/February 2007 |
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Written By: by Sen. Joseph Zarelli |
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Sen. Joe Zarelli, R-Ridgefield, is the ranking Republican and former chair of the Senate Ways and Means Committee. He serves on the Economic and Revenue Forecast Council, the Caseload Forecast Council, the State Expenditure Limit Committee, the Pension Funding Council and the State Actuary Appointment Committee.
Among the many issues lawmakers will deal with during the upcoming 2007 legislative session, few can evoke more glassy-eyed stares and yawn-inducing explanations than the issue of gain sharing. Yet, few issues will have a more profound effect on future state budgets.
The problem is, twiddling thumbs and positive thinking have yet to provide a solution to this budgetary dilemma.
In 1998, the Legislature passed a pension benefit concept called gain sharing. The idea was supposed to use "extraordinary investment gains" in the stock market to enhance government employees’ pensions, ostensibly at no additional cost to taxpayers.
In principle, when the pension system’s average investment return over four years exceeds 10 percent annually, half of the excess returns are used to increase employees’ benefits. Doesn’t sound so bad, does it?
However, even though it was originally portrayed to the Legislature as having no fiscal cost, it was determined by a new state actuary that gain sharing does have a material liability. In other words, there is a cost—and it’s a big one.
You see, the state assumes an 8 percent annual rate of return on pension investments. This is the long-term average the pension system must receive in order to be fully funded. But by skimming off the high returns in the good years, the 8 percent assumed rate of return becomes unreachable. As explained by the state actuary:
"What is apparent from history is that these periods of high returns are needed to balance the similarly frequent low returns so that the average rate of return is close to the actuarial assumption."
Again, the higher-interest good years are needed to offset the lower-interest bad years, thus reaching our expected 8 percent rate of return. If you skim off the top in the good years, what’s left to make up the difference during the bad? Increased contributions by state and local governments. In other words, taxpayers pay for it.
But, how much will gain sharing cost? If you’re talking about a long-term payment into a long-term system, doesn’t the wonder of compounded interest work in our favor?
Well, yes and no. While the cost over 25 years is estimated to be nearly $7 billion in state and local taxpayer dollars, the immediate payment is more reasonable, but still substantial: $147 million if the Legislature and the governor had made the payment last session. The problem is, they didn’t. They punted on the issue, and we’re once again faced with it in 2007.
Ignoring the issue does not make it go away. The governor and the Legislature need to address the issue of gain sharing. Do we fund it? Do we repeal it? Or do we replace it with another benefit?
These are questions that need to be answered before the gavel falls in April and the Legislature adjourns for the year. We need leadership from the party in power to make a decision. Punting the problem once again will only lead to an increasingly underfunded liability, an increasingly disenfranchised public employee base, and increasingly nervous taxpayers.
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