Hoosier State Eyeing Pension Dollars For State Deficit

February 11, 2003 (PLANSPONSOR.com) - Democrats in Indiana's state legislature are weighing the possibility of using pension dollars to ease the current state budget shortfalls.

State House Democrats are urging their counterparts across the aisle to consider using funds from the Public Employees’ Retirement Fund and the Teachers’ Retirement Fund to make up the budget difference.   The latest tender is being offered up in lieu of proposals from Governor Frank O’Bannon that include teacher layoffs, another tax increase, or even deeper budget cuts, according to a report by the Indianapolis Star.

The Indiana Constitution generally prohibits the state from going into debt. In order for the state legislature to tap into the investment funds, a rarely used constitutional exception that permits borrowing “to meet casual deficits” would have to be utilized.

That process has now left many lawmakers asking whether the current $850 million deficit is indeed “casual”?   Under a plan Democrats are studying that would require approval by the state legislature, the state could issue bonds or notes to plug holes in the next two-year budget, then pay the money back to the pension funds as Indiana comes out of the recession.   Indiana law allows the State Board of Finance to take out four-year loans to meet casual deficits. If there’s not enough money coming in, the law says, the board can levy a statewide property tax to pay the money back.

Even the top Democratic brass for the state has some concerns about the plan.   House Speaker Patrick Bauer, D-South Bend, whose party holds a  51-49 edge in the House,   told the Star the plan may prove unworkable. “We have looked into it fairly deeply and widely. It’s a good idea, but the lawyers have run into a few glitches,” he said. 

Pension Debacle

Indiana’s pension funds have not been immune to the plague of underfunding issues that have swept over the country.   The public employees’ fund, which serves more than 250,000 working and retired employees, has seen its value tumble from nearly $11 billion in 2001 to $8.8 billion by the end of 2002.   Prior to last year, the fund had never had any problems meeting its retirement obligations, but an audit of the fund’s financials due soon is expected to show a future funding shortfall of at least $500 million.

Similarly, the teachers’ fund, while being more stable, seeing its worth only fall from almost   $6 billion in 2001 to $5.7 billion at the end of 2002, is also facing future obligations problems.   That fund’s assets, which serve 145,000 working and retired educators, are dwarfed by its future-funding shortfall, an estimated $8.5 billion on 2002.

Hoosiers and Tar heels

The Democrats plan is similar to a plan utilized by North Carolina’s governor Mike Easley in 2001.   In the Tar Heel state, Governor Easley borrowed from the $850 million fund to address state budget shortfalls, promising to pay the money back through issuing state bonds (See  Sharing the Pain ).

However, the plan was met with challenges from the start as The State Employees Association of North Carolina (SEANC) fought to have the money returned.   SEANC claimed from the start the governor illegally diverted $151 million in employer retirement contributions for general use, The group argued that the diversion of the funds was not only unreasonable and unnecessary but unconstitutional as it violated Fourth Amendment provisions of due process.

Legal challenges by SEANC have been met with roadblocks at every turn.   Lower courts have maintained that the group has failed to show irreparable harm that would be suffered by the group through the use of the pension funds (See  NC Workers Denied Again ).   As recently as last week, SEANC announced it would appeal prior lower court rulings against its case to the North Carolina Supreme Court.  The group is joined by fifteen other associations that have also filed friend of the court briefs on its behalf.