How sustainable is the Yukon government pension plan?

This column has everything: actuaries, unfunded liabilities, C.D Howe Institute reports….

Pension accounting is boring, but pension fund implosions are not.

Soaring pension costs contributed to both Detroit’s bankruptcy and Puerto Rico’s financial crisis. Even governments that dodge the bankruptcy courts can still be badly damaged. According to The Economist, Sarah Anzia of the University of California Berkeley looked at over 200 U.S. cities for the period 2005 to 2014. Average pension costs increased 69 per cent over the period. Cities that took bigger hits also tended to cut current government jobs and capital spending more than others. Professor Joshua Rauh of Stanford University estimates the the city of Chicago’s unfunded pension liabilities equal 19 years of tax revenues.

Could it happen to us? I decided to look into the health of the Yukon government’s employee pension plan. As the examples above show, when a government gets into pension troubles the expense of fixing it can quickly eat into funding for other important programs.

There are four main factors to consider. First is rapid growth in employee numbers. Back in 2000, the Yukon government had around 3,000 jobs according to a chart from the Yukon Financial Advisory Panel. This has now increased to around 5,000. That will eventually mean thousands more retirees to support.

The second is that the average government salary has increased steadily over the last decade or two, which results in increased pension costs.

The third factor is years employed. I don’t have data to prove this, but my hypothesis is that today a higher percentage of employees stay at the Yukon government long enough to retire than 20 years ago. Back then, there was probably a higher mix of people who worked in the Yukon for a few years and then moved back Outside to eventually retire and collect pensions from some other employer.

The final factor is accounting. Many of the governments that got burned by pensions did not realize how much trouble they were in until too late. Pension accounting is complex and requires lots of assumptions about longevity, future pay rates and investment returns.

Furthermore, some think government accounting rules are more likely to understate the size of the problem than the rules applied to companies. The C.D. Howe Institute, a Toronto think tank, said in a recent report that there are “large differences between the fair values of the pensions earned by public-sector employees and the ‘cost’ of these pensions according to public-sector financial statements.”

So you have four things that multiply together into a potentially major long-term problem: more employees, making more money, who are more likely to stay with the Yukon government until retirement, and whose true pension costs may be substantially understated in government accounting.

I looked first at the most recent budget. Neither the budget speech nor the financial information supplement mention the word “pension.” Pension costs are not broken out separately from each department’s budget.

The Yukon Financial Advisory Panel interim report did not dive into the topic either. Pensions were not included in their terms of reference.

Then I looked at the public accounts for the last full fiscal year. The main pension plan, which covers most territorial government employees, is a holdover from pre-devolution days and is administered by the federal government. The Yukon government contributed $35 million to the fund that year.

But the Yukon government does not publish what the experts call an actuarial valuation, which estimates the future costs given the age and other characteristics of the workers and their benefits. This is unlike the pension plans for Yukon College and the Yukon Hospital Corporation. The public accounts report shows, for example, the hospital fund had a surplus of $22 million on a going concern basis and a deficit of $32 million if it had to be wound up now. (The difference is because if you wrapped up the plan now it would miss out on future earning on its investments, among other things).

But no such estimates were published for the main Yukon government pension plan. The public accounts go on to say, “the Government is not currently required to make contributions with respect to any actuarial deficiencies of the pension plan.”

If the phrase “any actuarial deficiencies” doesn’t make your blood run cold, then you haven’t listened to actuaries swap stories around the campfire.

And I haven’t even mentioned yet the liabilities for employee severance, the cashing in of sick leave or other post-employment benefits. These are also substantial. The latter cost $17 million in 2015-16.

So do we have a potentially ginormous pension problem?

It is a huge question.

So I made a phone call to a veteran actuary and pension expert in the Big Smoke, also known as Toronto.

The good news is that he didn’t think we were in particular trouble. He thought it was good the territorial government was still part of the federal pension plan (which also explains why a separate actuarial valuation is not published). It gets assessed contributions each year based on its current employees. This means its contributions have been rising as it hired more staff since 2000, and the fund is administered by some of Canada’s top pension professionals.

It seems likely that the Yukon government’s pension obligations will rise modestly each year, but we are very unlikely to get hit with demands for crippling top-up payments.

Furthermore, the Yukon Department of Finance pointed out to me that changes were made in 2013 that resulted in higher contributions by employees. These changes, which will be fully phased in this year, reduce the cost and risk to the government. Yukon government contributions were $24 million in 2005-06 and rose to $38 million in 2013-14, but have since fallen slightly.

That’s the good news. The bad news is that pensions carry a financial risk that, if things go wrong in the future, could wreak havoc with the Yukon’s financial stability.

I think citizens require more transparency on the pension topic to fully understand their government’s financial position. We have avoided crisis so far, so it’s understandable that governments of all political stripes over the last 20 years have not focused on it.

But escaping trouble in the past doesn’t automatically mean we are safe for the future. I hope the financial advisory panel puts a bonus chapter in its final report on the topic, covering the pension plans of the Yukon government and all its corporations. If it doesn’t, the spring budget should include an expert report so citizens and MLAs can get in on the actuarial fun too.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.

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