Seven fat cows and WMATA’s pension funds

[Joseph said], Let Pharaoh proceed to appoint overseers over the land, and take one-fifth of the produce of the land of Egypt during the seven plenteous years. Let them gather all the food of those good years that are coming, and lay up grain under the authority of Pharaoh for food in the cities, and let them keep it. That food shall be a reserve for the land against the seven years of famine that are to befall the land of Egypt, so that the land may not perish through the famine.

— Genesis 41:34-36 (NRSV)

Seven summers on the trot were perfect just as Joseph said

Joseph saw that food was gathered, ready for the years ahead

Seven years of famine followed; Egypt did not mind a bit

The first recorded rationing in history was a hit!

— Joseph and the Amazing Technicolor Dreamcoat, “Stone the Crows”

The idea of saving up for a rainy day was around as early as the 1600s BC, but not in WMATA’s budgets. WMATA is actually prohibited by the WMATA compact Board policy from saving up more than small amounts of money for a rainy day. If they spend less than jurisdictions contribute, they have to return the balance. WMATA also spends a significant sum on pensions for its employees. These funds dropped 30-50% in 2008, because management and the union decided to invest them fairly aggressively.

Now, WMATA is on the hook to make up the difference out of this year’s operating budget. WMATA must spend $44 million more on pension contributions in the next fiscal year than in the last one, almost doubling this expense from $49 million to $93 million. That’s a big chunk of the $73 million in service cuts or fare hikes that the agency is facing.

If you hired a personal financial planner, they would almost surely emphasize one central fact: the stock market naturally goes up and down, and basing each year’s spending on that is foolish. When the market is up, it’s extremely unwise to spend more profligately and save little, simply because your savings have grown. Inevitably, the market will drop. Rather than spend based on that year’s returns, the financially prudent spend at a consistent rate from year to year and save regularly.

The stock market grew an average of about 6.5% from 1950 to 2008. But in 2006, it rose 12.8% while in 2008 it dropped over 38% (source). If a household saved nothing in 2006 and spent a lot more because of the big returns, then they’d be facing painful household budget cuts this year. Many households are in this very pickle; the unsustainable adjustable-rate mortgages many homeowners bought and now face foreclosure did exactly this. Our public transit agency, however, ought to plan more prudently.

Federal law prohibits Accounting rules make it very difficult for WMATA to simply hope or expect that the pension funds will go back up, and spreading out the future extra payments over several years. Instead, they have to meet their future obligations in this fiscal year. That means that there’s nothing we can do about the pensions now. But in the future, WMATA should expect ups and downs in the funds. In a fat year, they should put a little more into the funds, to get a little bit ahead in anticipation of the lean years. If the compact prohibits this, we need to change the compact.

A bad year, like our current economic climate, is the worst time to have to put more money than usual into savings. The member jurisdictions are least able to kick in extra money this year. Yet the structure of WMATA’s pensions ensure that the financial pain is greatest in bad years. If the economy booms and governments are flush with cash, WMATA’s pension funds grow and they needn’t (or perhaps legally can’t) put much money into them. Then, when they fall, they have to make up for not saving earlier. Riders suffer from higher fares or lower service, and employees suffer from painful layoffs.

Politically, it’s a lot easier to spend money on new service or pay increases than save for a rainy day, just as it’s hard for many households to save money instead of buying that plasma TV or a bigger house. We need that prudence from WMATA. We need a plan for investing in the pension funds that spreads the cost out evenly over time instead of suffering from wild swings. If that means putting more than necessary into the funds during good times, and foregoing some added service or new rail cars, that’s the price of prudence. We’ll be happy we did it during the next stock market crash.