States not on equal pension footing
States are facing a $1 trillion discrepancy between the $3.35 trillion they have promised in employee retirement benefits and the $2.35 trillion that they actually have funded, according to a recently released report from the Washington-based Pew Center for the States. But not all states find themselves in a similar situation. While some have failed to make adequate contributions, others have found a way to fund their obligations.
Some states, such as Florida, have fully funded their accrued liabilities and made their actuarially required contribution for the past 5 years, according to the Pew Center report, “The Trillion Dollar Gap: Underfunded state retirement systems and the roads to reform.” Florida has legally mandated that pension surpluses of less than 5 percent of total liabilities will be reserved to pay for unexpected losses in the system. If the surplus is greater than 5 percent of total liabilities, only a fraction can be used to reduce the state’s contributions. “This policy has helped Florida offer a traditionally structured defined benefits plan while maintaining funding at sustainable levels,” the report says.
Illinois, on the other hand, has funded just over half of its obligations and made only 60 percent of its required contributions over the same 5-year time period. “It’s surprising that there’s so much of a gap between states,” says Katherine Barrett, a consultant for Pew Center on the States. “It’s really hard to make a generalization about pension systems because there is such a discrepancy.”
For states that have fallen behind, Barrett says that even relatively small changes can help, citing Minnesota’s actions as an example. Twenty years ago, the state increased the retirement age from 65 to 66, saving $650 million since then. In 2009, 15 states passed legislation making changes to their retirement systems. This March, Utah approved a bill that alters the benefits to retirees who return to work and another reducing benefits to new employees.
With the economy causing dips in investment portfolios and less revenue in general, local governments are making changes as well. “Some cities are looking at pension benefits that haven’t been looked at in 10, 15 and 20 years,” says Chris Hoene, director of research and innovation for the Washington-based National League of Cities. “The key piece we keep trying to reinforce is that for local governments, we are still several years of being out of the deep water fiscally.”
Download “The Trillion Dollar Gap.”