Public pensions

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Public pensions are plans that provide monetary benefits to public workers when they are no longer employed, either because of retirement or disability. Most public pension plans are "defined benefit" pension plans pre-funded by the public employer, either state or local, and contributions from workers. They are meant to provide retired workers with a steady income stream that is guaranteed for the remainder of the retiree’s life, and is funded primarily by investment income. The amount of tax revenue that goes into pension funds is determined by legislators and included in each state's budget. In recent years, many public pensions have been revealed to be underfunded, incurring massive liabilities on the states and causing major budget problems.[1] Some state and local governments are increasing the role of defined contribution plans for employee retirement security.[2] [3]

Plans

See also: Types of pension plans

There are two primary types of public pensions, defined benefit plans and defined contribution plans.

Defined benefit plans

Defined benefit plans provide a guaranteed life-time retirement benefit based on an employee's years of service and salary, the amount of which is calculated differently by different states, using a fixed multiplier that is set out by the plan. Although most statewide plans require employee contributions, the retiree's benefit is not tied directly to his/her contribution amount. The majority of public pension plans are defined benefit plans.[4]

In 2009, governments provided defined benefit plans to 84% of state and local workers, compared to 21% of private-sector employees.[5]

Defined contribution plans

In contrast, in defined contribution plans both employers and employees contribute to the employee account. Then, the employee determines how the contributions are invested, usually selecting from options presented by the plan administrator. At retirement, the amount of money in the fund is the basis of the employee's retirement benefit. The sponsoring public entity does not ensure a particular benefit amount, and usually does not provide post-retirement benefit cost of living increases.[4]

In 2009, Michigan, Nebraska, and Alaska had mandatory defined contribution plans for general state employees, and Alaska was the only state to have a mandatory defined contribution plans for teachers.[4] In 2012, Michigan added an optional defined contribution plan for public school employees.[6]

Hybrid plans

Cash balance plans are a kind of hybrid plan and, like defined contribution plans, they provide each member with an individual account to which, in the public sector, both employees and employers make contributions. Funds in the members’ accounts are pooled for investment purposes, members’ balances are guaranteed, and members are guaranteed an annual rate of return.[7]

The other kind of hybrid plan members eligible for both a defined benefit and a defined contribution plan. In Indiana, Oregon and Washington, for example, both components are mandatory. Employer contributions finance the defined benefit annuity and employee contributions accumulate in an individual retirement account. In Utah, employer contributions fund both components of the plan. The Virginia plan adopted in 2012 makes both components mandatory, and employers and employees will contribute to both components of the plan.[7]

States offering optional or hybrid defined contribution plans to state employees include: Colorado, Florida, Indiana, Montana, North Dakota, Ohio, Oregon, South Carolina and Washington.[4][8] In 2012, Kansas, Louisiana and Virginia also replaced defined benefit plans with cash balance or hybrid plans for new employees.[6]

State Defined benefit plan available to full-time state employees Optional or mandatory defined contribution plan Other
Alabama X
Alaska Mandatory
Arizona X
Arkansas X
California X
Colorado X Optional
Connecticut X
Delaware X
Florida X Optional
Georgia Mandatory DB/DC hybrid
Hawaii X
Idaho X
Illinois X
Indiana Optional Optional DB/DC hybrid
Iowa X
Kansas Mandatory cash balance plan
Kentucky X
Louisiana as of 7/1/13 Mandatory cash balance plan
Maine X
Maryland X
Massachusetts X
Michigan Mandatory
Minnesota X
Mississippi X
Missouri X
Montana X Optional
Nebraska Mandatory cash-balance plan
Nevada X
New Hampshire X
New Jersey X
New Mexico X
New York X
North Carolina X
North Dakota X Optional
Ohio X Optional Optional DB/DC hybrid
Oklahoma X
Oregon Mandatory DB/DC hybrid
Pennsylvania X
Rhode Island as of 7/1/12 Mandatory DB/DC hybrid
South Carolina X Optional
South Dakota X
Tennessee X
Texas X
Utah Optional Optional DB/DC hybrid
Vermont X
Virginia as of 1/1/14 Mandatory DB/DC hybrid
Washington X Optional DB/DC hybrid
West Virginia X
Wisconsin X
Wyoming X

Deferred compensation plans

All states offer employees and teachers optional deferred compensation plans, like Section 457 plans, as a means of augmenting their primary pension coverage.[4]

Public pensions in NevadaPublic pensions in AlaskaPublic pensions in HawaiiPublic pensions in ArizonaPublic pensions in UtahPublic pensions in New MexicoPublic pensions in ColoradoPublic pensions in WyomingPublic pensions in CaliforniaPublic pensions in OregonPublic pensions in WashingtonPublic pensions in IdahoPublic pensions in MontanaPublic pensions in North DakotaPublic pensions in South DakotaPublic pensions in NebraskaPublic pensions in KansasPublic pensions in OklahomaPublic pensions in TexasPublic pensions in MinnesotaPublic pensions in IowaPublic pensions in MissouriPublic pensions in ArkansasPublic pensions in LouisianaPublic pensions in MississippiPublic pensions in AlabamaPublic pensions in WisconsinPublic pensions in IllinoisPublic pensions in TennesseePublic pensions in KentuckyPublic pensions in IndianaPublic pensions in MichiganPublic pensions in OhioPublic pensions in GeorgiaPublic pensions in FloridaPublic pensions in South CarolinaPublic pensions in North CarolinaPublic pensions in VirginiaPublic pensions in West VirginiaPublic pensions in PennsylvaniaPublic pensions in New YorkPublic pensions in VermontPublic pensions in New HampshirePublic pensions in MassachusettsPublic pensions in Rhode IslandPublic pensions in ConnecticutPublic pensions in New JerseyPublic pensions in DelawarePublic pensions in MarylandPublic pensions in District of ColumbiaPublic pensions in MaineUS map.png

Benefits

See also: Public employee benefits

Individuals receiving a state pension receive a financial benefit, and most are adjusted annually with a cost of living increase (COLA.)[4] Public pension plan COLAs may be statutory "automatic" pension COLAs, or statutory "ad hoc" pension COLAs. Only "ad hoc" public pension COLAs may be reduced by plan sponsors for vested plan members. They also typically receive other benefits, including disability, life, health and dental insurance coverage.[9][4] For health insurance benefits, employers make a contribution towards the member's monthly premiums, with members covering the difference between the employer's contribution and the actual premium amount.[10] Health insurance in many states is now available to the children of recipients until the child reaches age 26.[11]

In West Virginia, state employee and teacher retirees receive a monthly subsidy to defer the cost of their health insurance premiums. The average subsidy is $333 per retiree. New hires, however, will not receive the subsidy.[12]

Public pension funds also typically provide death benefits for active and retired members paid to eligible beneficiaries or survivors.[13]

In addition, some states offer supplemental benefit plan options to those receiving pension benefits. In Delaware, for example, supplemental benefit plan options include: auto/home Insurance, long-term care insurance, legal insurance, vision insurance and pet insurance.[14] In California, CalPERS recipients may take advantage of three different long-term care benefits.[15] A Member Home Loan Program offers members security, protection, and choice when purchasing or refinancing a home.[16] CalPERS recipients are also eligible for health insurance, disability and death benefits.[17]

An estimated 30% of public-sector workers across 12 states are not part of the Social Security system.[18]

Employee eligibility

See also: Public pension eligibility

When employees become eligible for benefits varies by state. The average retirement age for public employees is nearly 60 years old, whereas the average is around 63 years old for private sector employees.[19] In New York, the Department of Civil Service estimates that state employees retire at an average age of 58.[20]

Ten states in 2010 upped the number of years that new employees must work before they can retire with a full pension. States have done so for several reasons: longer lifespans add pressure to pension systems, lawmakers have demanded more years from employees given the fiscal crises facing their states and, as many states cut services, citizens are scrutinizing the compensation of public workers more than in prior years.[19]

Experts say changes are less likely with firefighters and police due to the beliefs that older workers should not or cannot be in these positions and that people who do hold these often-dangerous jobs deserve long pensions. Some police and firefighters New York can retire after 20 years of service.[19]

Service requirements

Only a few state plans provide for normal retirement benefits when a person reaches a specified age without an accompanying service requirement. As of 2011, four plans provided benefits without a service requirement after the age of 65.[21]

Twenty plans allowed normal retirement with longer service requirements than earlier and generally increased age requirements to 65 or 67.[21]

Nine plans required 10 years of service and one required 25 years of service. Four plans, however, allowed retirement when a member reaches 65 regardless of length of service.[21]

Retire/rehire

A "loophole" in the pension system is that in many of the systems, employees can retire for day, return to work at full pay and a year later start collecting retirement benefits and salary. This "double dipping" was becoming a drain on pension funds in Louisiana and the governor signed a law in July 2010 ending the overused "retire/rehire" provision in state law.[22]

Funding pensions

When gauging the fiscal health of state and local pension plans, the two most common metrics used are the funded ratio and the annual required contribution (ARC) levels.[23] The annual required contribution is the amount the employer would be required to contribute for the year to pay off the liability in full over the prescribed amortization period. State and local governments are not legally required to contribute the prescribed annual required contribution for their pension plans. Therefore, the ARC is used as an indicator of assessing how well the employer is actually funding their pension plan.[23]

Tax dollars

Taxpayer dollars fund public pensions. Taxpayers are obligated to pay government workers’ pension benefits as promised through collective bargaining agreements, and in accordance with statutory contracts, implied contracts, state case law, or state constitutional provisions.[24]

The amount of tax dollars that go to pension funds is determined by legislators and included in each state's budget. In Maine, 10% of each tax dollar goes toward the pensions for state employees and public school teachers, and estimates say that could rise to 20% within the next five to six years.[25]

Employee contributions

Whether state employees must contribute to their pension, and how much, varies by state.[26]

In Florida, public employees have not contributed to their pensions for the past 30 years. Lawmakers rejected a proposal to have employees contribute one quarter of one percent of their salary after it generated opposition from police, teachers, firefighters and thousands of other government employees.[27]

The contribution of employees varies by state. Some instances of where employees do contribute and those contributions being raised include:

State Contribution increase
Alabama Act 377 of 2012 creates a new tier of membership for the ERS, TRS, and ERS plan for state police, effective January 1, 2013. It reduces benefits by lengthening the period over which final average salary is calculated and by increasing required employee contributions for all Tier II members, except state police members, in comparison with rates for Tier I members. The changes are estimated to save approximately $5 billion for FY 2016 through FY 2043
Arizona Chapter 304 reverses employee contribution increases enacted in 2011 that have been declared unconstitutional by the Arizona Superior Court, reversing requirements for the ASRS to require that employees contribute 53 percent of benefits and costs of administering the program, an increase of 50 percent. The excess contributions are to be returned to employees, amounting to approximately $40 million in reimbursements.
California The Board of Administration of the California Public Employee Retirement System (CalPERS) approved a proposal to increase state government contributions to the retirement fund in the fiscal year beginning July 1, 2010. The state contribution was projected by CalPERS staff to be approximately $600 million more than the state contribution of $3.3 billion in the then-current fiscal year. School districts would pay an additional $108 million to cover retirements of non-teaching personnel.[28]
Colorado The legislature increased the employee contribution rates to the Public Employee Retirement Association for state employees, troopers and judges for fiscal year 2011 by 2.5% and lowered the employer contribution by the same amount, raising the state employee contribution rate from 8% to 10.5% of salary, while the employer rate went from 10.15% to 7.65%. Local government members and teachers were not affected.[28][29]
Hawaii Act 153 assesses the last employer for those employees who meet the criteria of high compensation levels due to overtime and other non-base pay (pension-spiking) in the last years of employment. The unfunded portion attributed to these significant pay increases are required to be paid by the last employer by the next fiscal year after the employee retires.
Illinois Senate Bill 1946 sets contribution amounts from the Chicago Board of Education to the Chicago Teachers Retirement System at $187 million for FY 2011, $192 million for FY 2012 and $196 million for FY 2013, which provides budget relief for the school district of roughly $400 million a year for each of the three years. The bill also extends the period in which the retirement system is scheduled to reach 90% of funding from 2045 to 2059.[28][30]
Iowa The state increased contribution rates for employees and employers for the Peace Officers Retirement System (PORS) so that the 2010 contribution rates ere 21.00% for the employer and 9.35% for the employee. The employee contribution would increase at a rate of 0.5% a year to 11.35% in FY2013. For the Iowa Public Employees Retirement System (IPERS), the contributions of most members, excluding public safety officers, EMT members and jailers, under existing law would increase to a total of 11.95%, with members paying 4.7% of salary and employers paying 7.25% on July 1, 2011.[28][31]
Kansas Chapter 171 re-enacts certain modified changes in contribution requirements for active members of the KPERS enacted in 2011. Tier I members are provided contribution options to either increase employee contribution from 4% to 6% over two years or freeze the employee contribution rate at 4% and reduce multiplier for future services. All Tier II members continue the existing contribution rate of 6% of salary. The legislation eliminates their post-retirement COLA benefits and increases their annual multiplier for all past and future services from 1.75% to 1.85%. The legislation also raises the annual rate of increases in statutory caps on employer contributions to KPERS. Under current law, employer contributions are allowed to increase 0.6% annually. This legislation increases the rate at which employer contributions may increase. The 0.6% rate cap is increased to 0.9% for FY 2014 and by increments to 1.2% for FY 2017. The same changes will apply to local government employers on a calendar year basis.
Louisiana The legislature increased the contribution for the School Employees Retirement System from 7.5% of salary to 8%. The employment categories that will be grouped in the hazardous duty provisions of LASERS currently have contribution rates ranging from 8% to 9.5%; all in the future will be at the 9.5% rate. The contribution rate for the Judges’ Plan will increase from 11.5% to 13%. Future members of the State Police retirement system will also contribute 9.5% under Act 992, up from 8.5%.[28][32]
Maryland Chapter 485 increased the member contribution for Judicial Retirement System members from 6% to 8% of earnable compensation. The increase matches the two-percentage point increase in member contribution rates enacted in 2011 for members of the Teachers’ Pension System and the Employees’ Pension System (EPS). Chapter 1, Acts of the 2012 Special Session (Senate Bill 1301), the Budget Reconciliation and Financing Act of 2012, in the article on state personnel and pensions, provides for shifting a portion of the employer contribution for teachers who are members of the Maryland State Retirement and Pension System from state government (which has paid the full employer contribution for members until now) to local school boards.
Minnesota The state increased contribution amounts for various Minnesota state and local government retirement plans. The State Patrol Retirement Plan employer contribution went up by 2 percent of salary; employee contribution increased by 3 percent of salary. The Public Employee Retirement Association (PERA) General Employee Plan: employer contribution increased from 6 percent to 6.25 percent; employee contribution from 6 percent to 6.25 percent. The PERA Police and Fire Plan: employer contribution increased from 14.1 percent to 14.4 percent; employee contribution increased from 9.4 percent to 9.6 percent. The automatic PERA-General contribution adjustment provision enacted in 2006 is modified to cover larger potential contribution increases in the event of large contribution deficiencies. Teachers Retirement Association (TRA): employing unit contribution rates will increase 0.5% a year for four years beginning July 1, 2011, as will member contribution rates, which were 5.5% in 2010. Duluth Teachers Retirement Fund Association (DTRFA): employer contribution rate will go up from 5.79% to 6.79%, with the member rate rising from 5.5% to 6.5%. The St. Paul Teachers Retirement Fund Association (SPTRFA) basic program member contribution rate will increase from 8.0% to 9.0%, with the coordinated program member contribution rising from 5.5% to 6.5% over four years. The basic program employer contribution is increased from 8.0% to 9.0%, and the coordinated program employer contribution is increased from 4.5% to 5.5% in four steps.[28][33]
Michigan Senate Bill 1040 makes changes in contribution requirements for two closed tiers of the Public School Employees’ Retirement System. Employees hired prior to 1990 who never transferred into the Member Investment Plan (MIP) were in a noncontributory plan called the Basic Plan and contributed 0% for their pension benefits. Employees hired since January 1990 but before July 2010 or former Basic Plan members who transferred into the MIP plan contributed between 3% and 6.4%, depending on their level of compensation and their hire date, in return for an enhanced pension benefit compared to the original Basic Plan. The bill required that employees currently in either the Basic or MIP Plans choose (by October 26, 2012) among the following options, which would take effect in December, 2012:

1. Increase their contribution to 4% for the Basic Plan and 7% for the Member Investment Plan (MIP) and maintain the current 1.5% pension multiplier.

2. Maintain current contribution rates, freeze existing benefits at the 1.5% multiplier, and receive a 1.25% pension multiplier for future years of service.

3. Freeze existing pension benefits and move into a defined contribution (DC), 401(k)-style, plan with a flat 4% employer contribution for future service.

Senate Bill 1040 offered new members of the Public School Employees’ Retirement System, as of September 4, 2012, the option of choosing between the existing DB/DC hybrid plan (enacted in 2010) and a defined contribution plan. The latter would provide employees a 50% match on employee contributions up to 6% of the employee’s salary. The maximum employer match would be 3% of salary. Members would be automatically enrolled in the plan at the 6% contribution level, but could choose to contribute less or to make no contributions. There would be no employer contribution in the absence of employee contributions.

Mississippi The legislature increased the pension contribution of state workers from 7.25% of monthly earned compensation from 7.25% to 9%, effective July 1, 2010.[26]
Missouri The legislature passed pension reform legislation at the end of July 2010 requiring state workers to contribute for the first time.[34] Workers hired after January 2011 must contribute 4% of their pre-tax salary.[28][35][36]
New Hampshire Chapter 261 repeals legislation of 2008 scheduled to take effect July 1, 2012, which states that if a municipal public employee's final average pay is greater than 125 percent of the employee's average base pay, cities and towns must pay the part attributed to "spiking." According to the New Hampshire Retirement System, the anti-spiking law was enacted to "discourage employers from allowing extreme end-of-career spikes in earnable compensation." Municipal governments sought the repeal to ward off unanticipated charges from the retirement system.
New Jersey Senate Concurrent Resolution 110 proposes a constitutional amendment that clarifies the legislature’s authority to enact laws that deduct contributions from the salaries of Supreme Court Justices and Superior Court Judges to help fund their employee benefits, which include their pension and health care coverage. The amendment specifically concerns only these justices and judges, as only their salaries are referenced and protected from various reductions, during their terms of appointment, under the current provisions of Article VI, Section VI, paragraph 6 of the New Jersey Constitution. The amendment adds language to that provision to clarify that benefit contributions may be deducted from justices’ and judges’ salaries during their terms, as set from time to time by law. It would become part of the New Jersey Constitution immediately upon approval by the voters, and make the higher benefit contribution requirements of P.L.2011, c.78, applicable to all current and future justices and judges as of that date.
New York Chapter 18, Laws of 2012 (Senate Bill 6735) establishes Tier VI retirement plans affecting most new members of the state and New York City retirement plans as of April 1, 2012.

As it relates to new members of the New York State Teachers’ Retirement System and the New York State and Local Retirement System, the legislation requires 3.5% contributions regardless of salary until April 1, 2013. Thereafter, the contribution rate in a given year is based upon regular compensation in the year two years previously, as follows:

  • Wages of $45,000 or less - 3%
  • More than $45,000 to $55,000 - 3.5%
  • More than $55,000 to $75,000 - 4.5%
  • More than $75,000 to $100,000 - 5.75%
  • More than $100,000 to $179,000 - 6%

No contribution on earnings in excess of the governor’s salary, currently $179,000 For comparison, the Tier V state and local employee contribution is 3% and the teacher’s system’s employee contribution is 3.5%.

Rhode Island The Rhode Island budget bill (Rhode Island House Bill 7397 HB 7397, Article 6, removed a statutory obligation to make certain payments to the state retirement system for state employees and for teachers.[28][37]
South Carolina Act 278 Laws of 2012 (House Bill 4967), increases employee and employer contribution rates for the South Carolina Retirement System. The increases affect current members and new hires. Employee contributions will increase from the current rate of 6.5% to 8% in 0.5% increments beginning on July 1, 2012 with the final increase effective on July 1, 2014. Employer contributions will increase from 10.6% to 10.9% over the same period. If additional contribution increases are required, both employee and employer contribution rates are increased to maintain a 2.9 percentage point differential between the rates. No decrease in contribution rates may be made until the system is at least 90% funded.

For current and new members of the Police Officers’ Retirement System, member contributions will change as above. Employer contributions will increase from 12.3% at present to 13% on July 1, 2014. The 5 percentage point differential will be maintained if additional increases are required.

For current members of the General Assembly Retirement System, employee contributions will increase from the current 10% to 11% on January 1, 2013. This legislation closes the plan to people first elected to the General Assembly in November 2012 and after.

Vermont The legislature increased the employee contribution rate for all members of the Teachers Retirement System from 3.54% of compensation to 5%.[28]
Vermont Member contribution rates for the Vermont Municipal Retirement System for FY 2011 for group C members rose from 9% to 9.5%.[28]
Virginia Act 702 of 2012 (HB 1130/Senate Bill 498) establishes a hybrid plan applicable to most new state and local government employees as of January 1, 2014. General plan provisions are summarized in Part 6 of this report. Mandatory employee contributions for the hybrid plan will total 5% of salary, the same as the member contribution for Virginia Retirement System (VRS) defined benefit plans. Employees must contribute to both the DB and the DC component of the hybrid plan. The employee contribution will be 4% to the DB component and 1% to the DC component. Employees may contribute as much as an additional 4% of salary to the DC component to earn an additional partial employer match. Employer contributions for the DB plan will be actuarially determined at the rate set for the legacy defined benefit plans. After employers’ matches for employee DC plan contributions are satisfied, any excess employer contribution will be credited to the accrued unfunded liability of the VRS defined benefit plans. The fiscal note to HB 1130 says: “Because the legacy defined benefit plan is not being closed in order to implement the hybrid plan, the more significant contribution rates that would otherwise result from a complete shift to a defined contribution plan are avoided.”

Employer contributions to each employee’s DC account will be as follows: For the 1% mandatory employee contribution, 1% of salary. For the first 1% voluntary employee contribution, 1%. 0.5% for each additional 1% voluntary contribution, up to the full 5% that is subject to match. The total possible employer contribution would be 3.5% on a 5% employee contribution. Vesting of employer contributions to the DC account will begin at 25% after an employee has participated continuously in the program for one year, increasing at 25% a year until the employee is fully vested in the employer contribution after four years of continuous membership.

Act 822 of 2012 (Senate Bill 497) affects contributions to the Virginia Retirement System from local governments and local government employees. It provides that: School division and political subdivision employees whose employers currently pay all or part of the 5% Plan 1 or Plan 2 member contribution will begin paying the contribution on a salary reduction basis on July 1, 2012. Employers may, at their option, phase in the member contribution over five years, except that new or returning employees as of July 1 must make the entire 5% contribution. Localities and school boards are required to increase employee compensation on 7/1/12 to offset the member contributions. The offsetting raise is to be effective July 1 unless a government is phasing in the member contribution. Plan 1 or Plan 2 employees who were paying the member contribution or some portion of it as of January 1, 2012, will not receive an offsetting raise for the amount they were already paying as of that date. As enacted, the legislation will allow all local government employers to phase in the offsetting salary increases it requires for local government employees over five years.

Virginia New state employees are required to contribute 5% of creditable compensation (only local employers would be allowed to pick up this contribution) to the Virginia Retirement System.[28][38]
Wyoming Chapter 23 Laws of 2012 (Senate File 30 /Senate Enrolled Act 11) increases the contribution rate for the Warden, Patrol & DCI Plan by 3.25 percent. The increase was split between employers and employees, with the employer share increasing by 1.63 percent and the employee share increasing by 1.62 percent. The 1.62 percent increase in the employee share will be deducted from employee pay as of July 1, 2012.
Wyoming Public employees have not made monthly contributions to their retirement plan since 1991 but a new law, Chapter 85, laws of 2010 (Senate File 72), requires public employees, with the exception of public safety and EMT employees, contribute on average $60 a month toward retirement effective September 1, 2010. For state employees, the agency will continue to pay the 5.57%, but the employee must pay the additional 1.43%[28][39]

Pension funding levels

Funded ratios declined for almost all plans in 2011. Of the 149 state-level plans with funded ratios for 2011, the average funded ratio was 73%, and only 58 had funded ratios of 80% or above.[23] Fitch ratings considers public pension plans with actuarial funded ratios of 80 percent or higher to be "adequately funded." Of the 31 local-level plans with funded ratios for 2011, the average funded ratio was 66%, and only 11 had funded ratios of 80% or above. On a weighted average basis, 16 states (and the District of Columbia) were considered funded, while 34 were not.[23]

The average funded ratio for cities is lower than states.[23] In the 1950s, public pension funded ratios (actuarial) in the U.S. as low as the 50-60 percent range were common. Since public plan sponsors exist in perpetuity, public pension plan benefits never have to be "paid off."

Rate of return

Pension funding levels typically report an expected return on investment of 8 percent, and returns have not been anywhere close to those levels since the financial crisis began in 2008.[40][41] Since the 2008 financial crisis, at least 19 state and local pension plans had cut their return targets, while more than 100 others held rates steady, according to a survey of large funds by the National Association of State Retirement Administrators.[42]

The defined benefit plans pay full benefits even if those returns don't pan out. (Plan participants bear no "market risk.") In effect, public employees as a group are guaranteed an 8% return on both their own contributions and those made by their employers—at a time when private-sector workers with 401(k) plans receive a yield of only 2%-3% on comparatively risk-less investments. The difference in retirement benefits is stark.[43]

State unfunded pension liabilities

State government pension liabilities are the unfunded liabilities that state governments take on when they provide pension and other post-employment benefits to state government employees without simultaneously accumulating the funds to pay for those eventual liabilities.

Economist Andrew G. Biggs of the American Enterprise Institute found in July 2012 that the average public employee pension plan in the United States was only around 41 percent funded while total unfunded liabilities as of 2011 were roughly $4.6 trillion.[44]

Economist Joshua Rauh and Robert Norvy Marx estimated in October 2011 that the total unfunded liability of state and local pensions was $4.4 trillion.[45]

Below is a chart detailing the unfunded pension liabilities for each state according to PEW and AEI.[46][47]

State unfunded pension liabilities (figures are in thousands)
State PEW (2012) AEI (2010) Kellog (2009)
Alabama $12,882,630 $43,544,880 $40,400,000
Alaska $6,637,105 $14,192,229 $9,300,000
Arizona $11,625,169 $45,004,090 $48,700,000
Arkansas $5,955,628 $20,026,314 $15,800,000
California $113,587,413 $398,490,573 $370,100,000
Colorado $20,174,971 $71,387,842 $57,400,000
Connecticut $21,068,643 $48,515,241 $4,900,000
Delaware $633,774 $5,688,663 $5,100,000
Florida $26,661,043 $98,505,110 $8,980,000
Georgia $12,163,959 $58,742,784 $57,000,000
Hawaii $7,208,643 $18,533,398 $16,100,000
Idaho $2,643,753 $10,022,613 $7,900,000
Illinois $76,336,866 $192,458,660 $167,300,000
Indiana $13,651,917 $33,756,655 $30,200,000
Iowa $5,140,992 $21,266,226 $17,000,000
Kansas $8,304,438 $21,827,991 $20,100,000
Kentucky $17,023,220 $47,016,382 $42,300,000
Louisiana $18,197,065 $43,797,899 $36,400,000
Maine $4,439,760 $13,227,289 $11,800,000
Maryland $19,619,375 $48,199,258 $43,500,000
Massachusetts $18,541,856 $60,476,274 $54,200,000
Michigan $21,797,440 $72,187,197 $63,600,000
Minnesota $11,520,849 $59,354,330 $55,100,000
Mississippi $11,592,447 $32,225,716 $28,700,000
Missouri $13,157,351 $56,760,147 $42,100,000
Montana $3,308,986 $8,633,301 $7,100,000
Nebraska $1,595,054 $7,438,589 $6,100,000
Nevada $10,549,127 $33,529,346 $17,500,000
New Hampshire $3,695,641 $10,233,796 $8,200,000
New Jersey $35,738,045 $144,869,687 $124,000,000
New Mexico $8,451,775 $27,875,180 $23,900,000
New York $9,394,320 $182,350,104 $132,900,000
North Carolina $3,182,330 $48,898,412 $37,800,000
North Dakota $1,393,700 $4,099,053 $3,600,000
Ohio $57,871,585 $187,793,480 $166,700,000
Oklahoma $16,002,025 $33,647,372 $30,100,000
Oregon $7,712,835 $42,203,565 $37,800,000
Pennsylvania $29,541,357 $114,144,897 $100,200,000
Rhode Island $6,824,870 $15,005,840 $13,900,000
South Carolina $14,947,465 $36,268,910 $43,200,000
South Dakota $300,092 $5,982,103 $4,700,000
Tennessee $3,519,874 $30,546,099 $23,200,000
Texas $27,781,032 $180,720,642 $142,300,000
Utah $4,628,098 $18,626,024 $16,500,000
Vermont $1,022,634 $3,602,752 $3,300,000
Virginia $21,248,920 $53,783,973 $48,300,000
Washington $3,087,361 $51,807,902 $42,900,000
West Virginia $6,294,141 $14,378,914 $11,100,000
Wisconsin $0 $62,691,675 $56,200,000
Wyoming $1,083,686 $6,628,204 $5,400,000
Total $760 billion $2.86 trillion $2.49 trillion


Although states do not show their pension obligations in their audit statements, Moody’s Investors Service announced in February 2011 that it would calculate states’ debt burdens in a way that includes unfunded pensions. The calculation would include adding states’ unfunded pension obligations together with the value of their bonds, and consider the totals when rating their credit.[48]

State pension underfunding

See also: Public pension crisis

State and local workers face retirement systems that may be short of funds by as much as $4 trillion (disputed).[49][50][51] Experts predict insolvency of some pension funds within a decade. Since their inception "some" public pension funds have periodically become insolvent.[52]

State pension funding levels vary dramatically in the nation. Several states have pension plans with high levels of funding, but the many states have pensions that are underfunded.[53] The underfunding is due to an aging workforce, delayed and suspended contributions, increased benefits and investment losses. In the 1970s, public pension plan actuarial funded ratios in the 50-60 percent range were common. Many public pension systems paid contracted public pension benefits out of current revenues.

Demographics are exacerbating the budgetary burden of the public-sector workforce. Current retirees leave work at an earlier age and live longer, thus drawing substantially more retiree health care and pension benefits than their predecessors. Currently, every private sector worker in America would have to pay $12,000 to support the current pension promises to public sector workers.[54] This figure does not include health benefits. However, the funding of public pension systems consumes just a few percentage points of all state and local government revenues in the United States.

The current pension underfunding started in the late 1990s when the stock market was booming. Growing stock prices increased the value of pension funds to such levels that many state and local governments reduced or eliminated the annual actuarially required benefit payments made by employers.[55]

According to the Pew Center on the States, in 2000, states only needed to pay $27 billion total into their pensions funds. That amount more than doubled to a $64 billion deposit required in FY 2008 when an economic recession had reduced states' revenues.[9]

The pension crisis is worsened the failure of public plan sponsors to make actuarially required pension contributions, by the large numbers of retirees and the recovering economy, and also by financial institutions. The Ohio Public Employees Retirement System saw a decline in value from $441.4 million in December 2007 to just $73.3 million in December 2008, three months after Lehman Brothers, which managed the system’s investments, filed for bankruptcy protection.[56] In the second quarter of 2010, state and local pension funds lost $58 billion on investments, the worst loss since 2008.[57] Note that state governments cannot petition a court for bankruptcy under federal law.

In response to bad financial performance, many states are also considering lowering their assumptions of pension fund earnings, which will further hurt revenues for future state budgets.[58]

Cost of living adjustments (COLA)

Cost of living increases in pension benefits (a structural feature of pension plans) also result in public pension plan sponsor liabilities, but no more so than public pension "base benefits." Rhode Island included in its FY2011 budget a limit on the cost-of-living adjustments (COLA) provided to future retirees to the pensioner's first $35,000 in benefits and required eligible individuals to wait until age 65 to begin collecting the annual COLAs (this COLA-taking is under appeal.)[59] Other states that have limited cost of living adjustments include Maryland, Michigan, Minnesota and South Dakota.[28] Only statutory "Ad Hoc" public pension COLAs may be legally diminished by plan sponsors. "Automatic" COLAs are contractual plan obligations, identical to plan "base benefits."

State pension plan executives and state legislatures increasingly are turning their attention to cost-of-living adjustments (under legal challenge) to pensions for current and future retirees as a way to get immediate and dramatic results in retirement program reforms.[60] Public pension COLAs may be "automatic" or "ad hoc." Only "ad hoc" COLAs may be changed at the discretion of the plan sponsor. State legislative COLA takings have been struck down by courts in Arizona, Colorado, and Florida, and have been enjoined by courts in Illinois and Montana (GABA.)

COLA changes for current retiree benefits were made by the Arizona State Retirement System (overturned,) Public Employees' Retirement Association of Colorado (overturned on appeal), Kansas Public Employees Retirement System, Maine Public Employees Retirement System, Massachusetts State Employees Retirement System, Public Employees Retirement Association of Minnesota (based on that state's unique promissory estoppel protection,) Public School Retirement System of Missouri, New Jersey Division of Investment, Oklahoma Public Employees Retirement System, Employees' Retirement System of Rhode Island (remains under appeal) and South Dakota Retirement System.[61]

COLA changes affecting the retirement benefits for current employees were made by the Florida Retirement System, Kansas public employees' plan, Maryland State Retirement & Pension System, Virginia Retirement System and Washington Public Employees' Retirement System.[62]

Future hires' benefits were changed by the Employees' Retirement System of the State of Hawaii, State Employees' Retirement System of Illinois, Kansas public employees' plan, State of Michigan Retirement Systems and Utah State Retirement Systems.[63]

Cost of health benefits

Of the unfunded pension and other post-retirement promises made to workers by states, $587 billion is for retiree health care, according to Pew, with less than 6% of that amount funded as of fiscal year 2008.[12][64] Only two states, Alaska and Arizona, have set aside at least 50% of the needed assets.[64] On average, states have a 7.1% funding rate of their non-pension benefits.[64]

Delayed and suspended contributions

States have stopped paying into pension funds. The economic downturn isn't the only cause of the current pension funding crisis. "Over the last 10 years, many states have shortchanged pension plans in good times and bad," said Susan Urahn, the managing director of the Pew Center on the States, who called the beginning of the century a "decade of irresponsibility."[9] The levels to which states opt to fund pension benefits seem to depend largely on budgetary convention and the appropriation levels of previous legislatures, experts say.[52]

Impact on local governments

See also: Local government public pensions

Local governments also face pension problems. The pension crisis is "the largest single financial issue facing state and local governments," according to David Crane, Gov. Arnold Schwarzenegger's special adviser for jobs and economic development.[55]

A majority of states have relatively few locally-sponsored plans. Hawaii, Maine and Montana have none. A few states have more than 100 local plans. Illinois reported having 365 local plans, and Pennsylvania reported that it had 928, as of 2002.[65]

One of every five dollars collected in local taxes is now going to pay benefits for government employees.[66] Rising retiree costs are likely to have a large impact on local governments, which not only employ more workers than the state, but also dedicate most of their payrolls to police officers and firefighters, who enjoy the best benefits and earliest retirements.[55]

Transparency

See also: Public pension disclosure

The Ohio News Organization reported that at least 21 states considered financial benefits for retirees to be public records, including New York, Florida and Illinois, but at least 26 states prohibited the release of such information.[67]

Public pension accounting

See also: Governmental Accounting Standards Board

Public pension accounting standards are set by the Governmental Accounting Standards Board (GASB). In June, 2012, GASB approved updated accounting and reporting standards.[68]

Public pension reform

According to the Loop Capital Markets 2012 Tenth Annual Public Pension Funding Review:[23]

  • The public pension plan problem is state specific, and not systemic in nature.
  • The pace of improvement across the states is uneven, with some states making little or no progress while others advance.
  • Each state has its own unique path to recovery.
  • Confusion remains about the problem and its severity, with states doing essentially nothing to confront the general anxiety or provide appropriate reassurance that progress has been, or will be, made.

Is reform legally possible?

As many states face billions in unfunded liabilities, some are attempting to change pension systems themselves. In seven states—New York, Illinois, Louisiana, Michigan, Alaska, Arizona and Hawaii—state pension benefits cannot be "diminished or impaired."[69] Some believe this applies strictly to those who have already retired and not to existing workers. State and local public pension benefits are protected under contract clauses in state constitutions, and in the United States Constitution. These benefits are also protected in state case law as statutory or implied contracts.

Many states, including Arizona (struck down), Colorado (overturned by Colorado Court of Appeals,) Minnesota and South Dakota, have been sued by public employees for passing laws that trim the benefits for current pensioners.[69] Colorado and Minnesota courts found that cost of living raises can legally be reduced (overturned in Colorado by Court of Appeals.)[41] The Colorado Court of Appeals has overturned the Denver District Court. In Arizona, the Maricopa County Superior Court held that the law changing the contribution scheme of pensions was unconstitutional, and thus a violation of the state constitution and state statutes.[70]

Many states have avoided reducing benefits for current workers or retirees because the plans are legally protected.[41]

Reform for new employees only

Changes made to the retirement plans of newly hired workers are expected to reduce pension costs by 25% over the next 35 years, according to Boston College estimates.[41]

Many of the reforms passed by state legislatures apply only to new hires and not to retirees or current employees.[41] For example, in September 2012, California passed pension reform that Gov. Jerry Brown called the "biggest rollback to public pension benefits in the history of California pensions." The changes are mostly aimed at newly hired workers, and thus the measures do not reduce the state's current unfunded pension liability, said spokesman for CalPERS, the state pension fund.[41]

Enacted reforms

Since 2009, 45 states have rolled back pension benefits for teachers, police, firefighters and other public workers, but those changes have reduced by only $100 billion the gap between what the states and their workers put into their retirement plans and what the states owe in retirement benefits, with at least $900 billion, or as much as $4.6 trillion remaining, depending on the method of calculation.[41]

  • Cost of living raises decreased or no longer given;[41]
  • Shifting more pension costs to employees (as of 2010, state workers were paying 10% more toward their retirement plans compared with three years earlier);[41]
  • Increase in retirement eligibility age.[41]

The Bureau of Economic Analysis has announced that, beginning in 2013, the National Income and Product Accounts of the United States will calculate defined-benefit pension liabilities—and the income flowing to employees in those plans—on an accrual basis that reflects the value of benefits promised, regardless of the contributions made by employers today.[71]

Union resistance to change

Some unions have resisted changes to public pension funds and the age of eligibility. In Colorado, the teachers' union prevented an increase in the retirement age. In addition, fire and public safety workers struck down a proposed 15-year increase in required years of service in Utah. Instead, the change adopted was an added five years.[19]

Six public employee unions in California reached a tentative contract agreement with Gov. Schwarzenegger that raised the retirement age for new hires by five years. The retirement age was a sticking point with the remaining six public employee unions that had not reached an agreement with the governor.[19]

See also

External links

References

  1. 'State Budget Solutions, "Latest studies show growing pension peril," accessed July 18, 2014
  2. NAGDCA, "The Evolving Role of Defined Contribution Plans in the Public Sector," September 2012.
  3. 'National Institute of Retirement Security, "Public pension basics," accessed July 18, 2014
  4. 4.0 4.1 4.2 4.3 4.4 4.5 4.6 National Conference of State Legislatures "State Retirement System Defined Contribution Plans" Sept. 2009
  5. American Economic Association (AEA), Will public sector retiree health benefit plans survive? Economic and policy implications of unfunded liabilities, January 2009
  6. 6.0 6.1 National Conference of State Legislatures "Pensions and Retirement Plan Enactments in 2012 State Legislatures" Aug. 30, 2012
  7. 7.0 7.1 National Conference of State Legislatures "Checklist of State Defined Benefit, Defined Contribution and Hybrid Plans for State Employees and Teachers" Aug. 2012
  8. Center for State and Local Government Excellence "State and Local Government Pensions" October 2009
  9. 9.0 9.1 9.2 Reuters "U.S. state pension funds have $1 trillion gap: Pew" Feb. 18, 2010
  10. CalPERS Health Benefits Overview
  11. National Conference of State Legislatures "Covering Young Adults Through Their Parent's or Guardian's Health Policy" April 2010
  12. 12.0 12.1 Stateline.org "In graying West Virginia, a mountain of retiree health bills" July 13, 2010
  13. "CalPERS Retirement Benefits"
  14. State of Delaware Supplemental Benefits Program
  15. CalPERS Long-Term Care Benefits
  16. CalPERS Member Home Loan Program
  17. CalPERS Retirement Benefits
  18. CNNMoney.com "Will having a public-sector pension affect my Social Security?"
  19. 19.0 19.1 19.2 19.3 19.4 The Wall Street Journal “Stressed States Are Forcing Workers to Retire Later“ August 2, 2010
  20. Empire Center for New York State "Early retirement for state workers: Money-saver, or costly sweetener?" May 2010
  21. 21.0 21.1 21.2 Changes in Age and Service Requirements for Normal Retirement in State Retirement Plans, 2009–2011, National Conference of State Legislatures
  22. [1]
  23. 23.0 23.1 23.2 23.3 23.4 23.5 Loop Capital Markets 2012 Tenth Annual Public Pension Funding Review
  24. The Hawaii Reporter "Hawaii Employees Retirement System $6.2 Billion in the Hole – Will Taxpayers Have to Make Up the Difference?" July 9, 2010
  25. The Lewiston Sun-Journal "Pensions to eat up larger share of state budget" Jul 28, 2010
  26. 26.0 26.1 "State Workers, Long Resistant, Accept Cuts in Pension Benefits" June 29, 2010
  27. "Lawmakers won't make state employees contribute to pension, but reduce early-out benefits" April 26, 2010
  28. 28.00 28.01 28.02 28.03 28.04 28.05 28.06 28.07 28.08 28.09 28.10 28.11 28.12 National Conference of State Legislators "Pensions and Retirement Plan Enactments in 2010 State Legislatures" July 19, 2010
  29. Colorado Senate Bill 10-146 2010
  30. Teachers Retirement System Legislative Information
  31. Iowa House file 2518
  32. Louisiana House Bill 1337 Regular Session, 2010
  33. Minnesota Senate File 2918
  34. "Pension overhaul treats lawmakers, other state workers differently" July 29, 2010
  35. Missouri House of Representatives Bill Tracking
  36. Missouri House Bill 1 Effective Oct. 12, 2010
  37. Rhode Island House Bill 7397 January 2010
  38. Virginia House Bill 1189 2010 session
  39. Wyoming Senate File No. SF0072 2010 Session
  40. Huffington Post, 'Borrowing In Disguise': For Pension Funds, Lowering Expectations Could Cost Billions, Nov. 4, 2010
  41. 41.0 41.1 41.2 41.3 41.4 41.5 41.6 41.7 41.8 41.9 The Wall Street Journal "Pension Crisis Looms Despite Cuts" Sept. 21, 2012
  42. The Wall Street Journal "Pensions Wrestle With Return Rates " Oct. 10, 2011
  43. Wall Street Journal, Overpaid Public Workers: The Evidence Mounts, April 11, 2012
  44. State Budget Solutions "Public Sector Pensions: How Well Funded Are They, Really?" July 18, 2012
  45. State Budget Solutions "Shortfall for State and Local Pension Systems Today: Over $4 Trillion" Oct. 10, 2011
  46. "The Widening Gap Update,” PEW Center on the States, accessed September 25, 2012
  47. Biggs, Andrew, “The Market Value of Public-Sector Pension Deficits,” AEI Outlook Series, no. 1 (2010)
  48. The New York Times "Moody's to Factor Unfunded Pension Gaps in States’ Ratings"
  49. “Chamber of Commerce confers on public pensions”
  50. Government Accountability Office, STATE AND LOCAL GOVERNMENT RETIREE HEALTH BENEFITS, November 2009
  51. Watchdog, Pension panel: Have we hit bottom?, Sept. 24, 2010
  52. 52.0 52.1 Watchdog.org "Illinois faces second pension battle"
  53. National Public Radio "U.S. State Pension Funding Levels" February 18, 2010
  54. Watchdog, Despite gains, public pensions crashing, July 2010
  55. 55.0 55.1 55.2 San Francisco Chronicle "Public pensions put state, cities in crisis" July 25, 2010
  56. ABCNews.com "Ohio Pensions Took $480M Hit After Lehman Collapse" April 19, 2010
  57. Watchdog, Biggest state, local public pensions lose $58 billion in 2nd quarter, Oct. 13, 2010
  58. Watchdog, States study pension assumptions, Aug. 20, 2010
  59. Colorado's taking of the Colorado PERA "automatic" COLA has been overturned by the Colorado Court of Appeals. The Providence Journal "R.I. House, Senate put $7.86B budget plan on fast track to governor" June 5, 2010
  60. PI Online, Strapped state pension funds take scalpel to COLAs for relief, June 11, 2012
  61. PI Online, Strapped state pension funds take scalpel to COLAs for relief, June 11, 2012
  62. PI Online, Strapped state pension funds take scalpel to COLAs for relief, June 11, 2012
  63. PI Online, Strapped state pension funds take scalpel to COLAs for relief, June 11, 2012
  64. 64.0 64.1 64.2 The Wall Street Journal "States Press Workers on Healthcare " Aug. 27, 2010
  65. National Conference of State Legislators "State Government Subsidies for Retirement Plans Sponsored by Local Governments" Jan. 2010
  66. Capitol Beat OK “San Francisco pension reform initiative qualifies for November ballot” August 2, 2010
  67. The Cleveland Plain Dealer "Ohio public retirement systems refuse to release records to newspapers analyzing benefits and possible abuses" Aug. 8, 2010
  68. "GASB Improves Pension Accounting and Financial Reporting Standards," Governmental Accounting Standards Board, June 25, 2012
  69. 69.0 69.1 Huffington Post, Pension Benefits For Current Employees Could Face Legal Challenges, Oct. 15, 2010
  70. State Budget Solutions "Pension Litigation Update" Aug. 2012
  71. Wall Street Journal, Overpaid Public Workers: The Evidence Mounts, April 11, 2012