Underfunded Pension Plans Force Tough Choices for Cities, States

2:57 PM, May 2, 2011   |    comments
Photo Courtesy: Associated Press
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Gannett Washington Bureau

WASHINGTON - Two reports released in the past week suggest alarming problems with underfunded public pension plans that are causing some state and local governments to choose between cutting services and raising taxes.

The problems - identified in reports by the Pew Center on the States and the Census Bureau - are mostly temporary ones caused by stock-price drops during the Great Recession, according to supporters of the public employee pension system.
But they acknowledge a few states such as Illinois and New Jersey have badly managed plans that are in serious trouble.
Some Republican members of Congress want to impose new uniform disclosure standards on all public employee pension plans.

Pension experts say a bill proposed by Republican Rep. Devin Nunes of California would significantly increase the cost of operating such plans, requiring them to lower projections of future returns to match the rate of returns on Treasury bonds.

Many state and local governments would respond by switching to defined contribution plans - similar to 401k plans - whose costs are more predictable and controllable, critics of Nunes' bill say.

That would impact New York's eight public employee pension plans, which cover 1.38 million retirees and workers, including police officers, firefighters and teachers. Five of those plans cover workers in New York City, while the remaining three cover those working elsewhere in the state.

New York's plans aren't underfunded, but the cost of keeping them healthy has increased significantly.

On Thursday, the House Ways and Means Subcommittee on Oversight will hold a hearing based on concerns Illinois will seek a federal guarantee of the debt it needs to maintain its pension funds.

The subcommittee's chairman, GOP Rep. Charles Boustany of Louisiana said in a statement the hearing will "consider possible approaches to ensure that no such federal bailout is ever needed.''

The Pew Center report released Tuesday found public employee pension funds in 31 states were less than 80 percent funded as of June 30, 2009.

And the Census Bureau reported Wednesday that assets held by state retirement systems fell $641.3 billion, or 24 percent, in 2009 following a $152.2 billion loss in value in 2008. Pension plans are heavily invested in financial markets, which dropped precipitously during the recession.

New York's statewide pension plans remained funded above 100 percent during 2009, but only because local governments and school districts increased contributions to offset drops in the value of the plans' investments.

According to the Empire Center, tax-funded employer contributions to New York state and New York City public pension funds rose from under $1 billion in 2000 to $17.3 billion in 2010.

"This was just the beginning of the pension explosion,'' the center warns.

Local government pension contributions for municipal workers rose from 7.4 percent of salary in March 2010 to 11.9 percent of salary this year, and will rise to 16.3 percent of salary in March 2012, according to the state comptroller's office.

Contributions for police and firefighter pensions rose from 15.1 percent of salary in March 2010 to 18.2 percent this year, and will rise to 21.6 percent in March 2012.

And school districts outside New York City face a sharp increase in employer contributions to the state teacher retirement system.

Over the past 15 years, school districts have paid an average of 4.16 percent of a teacher's pay toward their pensions. That jumped to 8.62 percent in the current school year and will rise to 11.11 percent in 2011-2012.

How much future obligations will rise is in dispute.

The National Association of State Retirement Administrators says the value of state retirement plans has rebounded 25 percent since the date in the Pew Center report.

And 20 states took steps last year to rein in future costs, said Keith Brainard, the association's research director. Three states - Colorado, Minnesota and South Dakota - reduced future cost- of-living adjustments awarded to retired state workers.

New York also made changes effective January 2010. Newly hired teachers, state employees and municipal workers must stay on the job for 10 years instead of five to be vested in their pension plans.

In addition, those new hires will be limited in their use of overtime to increase the final average pay used to calculate pension benefits. And new teachers will have to wait until age 57, up from age 55, to qualify for retirement.

New York State United Teachers spokesman Carl Korn said the teacher concessions will save $35 billion over 20 years. At the local level, members of his union in one-third of the state's 700 school districts have agreed to other concessions over the last 18 months.

NYSUT, with 600,000 members across the state, predicts a resurging stock market will relieve pressure on school-district contributions to the state pension plan.

"We expect the employer contribution has hit a plateau,'' Korn said. "We expect the contribution rate to come back down.''
Other statewide unions - including the Civil Service Employees Association - have been working without a contract since April 1 as negotiations continue on compensation issues.

Negotiators are discussing a Tier 6 benefit for new hires that would eliminate overtime from the pension formula, increase the employee's share of pension contributions, and put elected officials into a separate defined-contribution retirement plan.

Traditional pension plans are less costly for state and local governments than defined-contribution plans such as the 401k if they're supported by more workers than retirees and if government revenues are increasing annually, said Eli Leher, vice president of The Heartland Institute, a think tank that advocates a market-based approach to public policy issues.

"Of all the problems New York State has, pensions are not the biggest,'' Lehrer said. "It's a problem, but not the problem.''

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