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Solvency Ratios - Can They be Applied to Pension Funds?

By November 19, 2012

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I recently read an article about the Ohio pension fund for government workers and teachers. The Ohio governor, John Kasich, has proposed using contributions to this pension fund to help the Ohio budget instead of funding the pension fund. His proposal is to decrease the state contribution to state and local employees' pensions by 2 percent and requiring employees' to make up that 2 percent out of their paychecks. Obviously, this is not a popular proposal among employees who haven't gotten a raise in several years.

Economists that have looked at the proposal say that it is not viable for a number of reasons, including the fact that many employees leave the system before becoming vested, taking their contributions to the pension fund with them. This threatens the solvency of the pension fund if Kasich's proposal is passed. If the Ohio state finance department would analyze Kasich's proposal using solvency ratios. If they would use, for example, the Debt/Asset ratio, along with their other forms of financial analysis, and look at the pension fund's solvency over the 30-year period that it has to be funded, Kasich might make a different decision.

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