Pew Center Shows States Boost Effort to Combat Rising Public-Sector Pension Costs

(November 18, 2010) — A new report issued by the Pew Center on the States has shown that more states are taking action to reduce pension liabilities in the first 10 months of the year.

The brief, posted on the center’s website, showed that nineteen states made an effort to reduce their schemes’ liabilities by reducing benefits or upping employee contribution requirements. While 11 other states took similar action in 2009, eight did so in 2008.

Yet, states continue to be in a severe fiscal crunch because they’ve been promising more in retirement benefits than they’re able to pay, resulting in an alarming $452 billion total deficit for state and local governments in fiscal 2008. To deal with the large deficits, states are weighing proposals that range from switching from defined benefit to defined contribution plans to upping the retirement age. Illinois, for example, took action on improving its pension system, the worst-funded in the nation according to Pew, by raising the retirement age to 67, the highest of any state. The inaction to tackle the deficit in Illinois has reportedly boosted the state’s borrowing costs by as much as $551 million a year.

“Illinois is much like other states not keeping up with its annual payments to their fund,” Pew spokesman Stephen Fehr told aiCIO. “They’ve been increasing benefits to public employees without thinking how they are going to pay for them in the future,” he said. “It’s not just the recession that caused this problem — Illinois didn’t manage their pension bill in good times and bad, and its not a problem that will get better anytime soon,” noting that the pension deficit around the nation has led to severe underfunding in other state programs to make up for mismanagement.

“It took years for states to get into their current pension predicament, and it will take years for reforms and fiscal discipline to get them out,” the brief indicated. Pew said winners in state legislatures and governor mansions following this month’s elections “will take office having promised to improve how their states will handle these bills coming due.”

According to Pew’s research, Arizona, California, Illinois, Maryland, Michigan, New Jersey, New Mexico, Rhode Island, South Dakota, and Utah have all reduced employee benefits this year. States that increased employee contribution requirements and reduced benefits were Colorado, Iowa, Minnesota, Mississippi Missouri, Vermont and Virginia.

In February, the Pew Center on the States issued another survey that showed that with a combined $2.35 trillion in assets for pensions, health care and non-pension retirement programs for current and retired workers, states needed $1 trillion to match their liabilities. According to Pew’s report, detailed in “The Trillion Dollar Gap,” Pew said pension deficit would have to be paid over the next 30 years by state and local governments, amounting to more that $8,800 for each household in the US.

“While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states’ inability to save for the future and manage the costs of their public sector retirement benefits,” said Susan Urahn, managing director of the Washington-based policy research organization, in a news release. “The growing bill coming due to states could have significant consequences for taxpayers — higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms.”