Beware of Dunleavy plan treating short-term stock market gains as permanent

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On Aug. 10, Revenue Commissioner Lucinda Mahoney told legislators that the state could save money by cutting funding for state retirement systems, based on one good year of investment returns.

The state retirement board had the good sense to be skeptical enough about this plan that Mahoney was forced to withdraw it Monday.

As the trustees of the board heard from financial experts and discussed the Mahoney plan, it appeared that there was little enthusiasm to “reset” the value of the funds as of the end of the last fiscal year and treat the 28 percent gains of the last fiscal year as permanent.

The board did approve a reduction in the state health care contribution for one year, arguing that because that portion of the investment account is “overfunded,” even when the strong returns of the last year are excluded, the state can afford to cut that part to zero.

The reduction is on the order of $88 million for the next fiscal year, acting on amendments approved on a 6-3 vote late in the meeting Monday with calculations put forward in a back-of-the-envelope atmosphere.

It is possible that with this action on health care, the administration achieved its overall goal to cut support for the state defined benefit pension systems, but did so in a different manner. 

Two months ago, Mahoney was pitching a reduction in state appropriations for pension debts as one of the miracle cures of the Dunleavy administration. Mahoney recently served as a co-host of a Dunleavy reelection fundraiser, along with nearly every other cabinet member. 

We have “anticipated some savings associated with the state’s contribution to the retirement program and this is largely as a result of the high markets and the increase in some market value of the retirement fund,” she said.

“I want to qualify my statement, that it is mostly funded based on the fair market value of the accounts at the end of June. And so the way that we’ve been doing the actuarial asset valuation is essentially over a five-year smoothing. So the five-year smoothing result is significantly lower in regard to a funding status. However, recognizing that the funds are very highly funded at this point, it warrants an analysis.”

“Five-year smoothing” means using a five-year average of the fund value, a prudent way to avoid the volatility of investment returns, which always go up and down.

Mahoney and the governor want the state to focus on the record returns in the last fiscal year and use that as a benchmark, not as a volatile level subject to decline with the next stock market correction and recession.

Experts on pension plans and most of the other members of the retirement management board showed no enthusiasm for this thinking as they discussed the idea. Mahoney withdrew the plan before it could be rejected.

Mahoney and Dunleavy want to take a similar approach to the Permanent Fund because the high returns of the last fiscal year created volatility on the upside that creates a chance to spend more while they can.

That is the basis of their claims that the state can afford to withdraw extra billions from the Permanent Fund, never admitting that some of those gains are the product of  a volatile market.

Had the last fiscal year not been such a strong one for the stock market, they wouldn’t be taking that position because it would not be to their political advantage.

This was all about putting short-term political gain above all else for Dunleavy.

David Kershner, an executive with the Buck consulting firm, said the projection that the pension funds will earn 7.38 percent over the long term is likely to be reduced to 7 percent or lower because of changes in the investment climate.

Only time will tell if the market value numbers continue to justify the overfunding estimates or if a stock market correction will change the situation in a significant fashion. Or if the reduction in health care usage created by the pandemic will reverse itself and lead to a big increase.