Pensions Pose Time Bombs for Budgets
The aging of baby boomers in the state government work force is prompting fears that pension payouts will bust state budgets and is spurring efforts from Alaska to Massachusetts to reform public employee retirement systems.
Experts say states, counties and cities are short $292.4 billion in money promised through their public employee retirement systems, makes them ticking time bombs for state and local budgets.
"Folks are really not paying that much attention. ... It's something that warrants far more scrutiny," said Sujit CanagaRetna, a fiscal analyst with the Council of State Governments , a bipartisan umbrella organization for state government officials.
CSG estimates that the vast majority of states' retirement plans for their employees are underfunded. CanagaRetna said state officials are just beginning to recognize the problems lurking in their pension programs, in part because states have been preoccupied since the 2001 economic downturn with balancing their books and closing a $235 billion budget gap. States are just now regaining solid revenue footing.
To limit their pension debts, five Republican governors this year championed proposals to mimic the private sector by moving state employees from traditional pension programs -- with guaranteed payouts -- to 401K-style programs, where the state contributes a set amount each month to an employee's investment fund. When employees retire, the money in the fund is theirs.
Alaska Gov. Frank Murkowski is the only one of the five to win passage of his pension reforms. Alaska is now the first state to adopt a mandatory 401K-style retirement program for all state employees, beginning with those hired after July 1, 2006. A handful of states offer 401K-style benefits to some workers.
California Gov. Arnold Schwarzenegger backed away from his proposal after fierce opposition from the state's teachers, firefighters and other public employee union members. Schwarzenegger's proposed change to California's public retirement system pitted him against union leaders and contributed to a recent drop in his approval ratings.
Govs. Mitt Romney of Massachusetts , Donald Carcieri of Rhode Island and Mark Sanford of South Carolina also this year proposed switching to 401K-style retirement systems.
But their proposals also faltered in the face of fierce opposition from public employee unions, which say the 401K-style plans provide less comprehensive retirement security for state and local government employees.
Alaska estimates that its public employee and teacher retirement systems currently are short about $5.7 billion owed to employees when they retire. Supporters say the new program, which will apply to all state employees from Statehouse janitors to highway patrol officers to teachers, will help ensure that the state's pension systems stay in the black.
"Employers know up-front their costs, rather than having costs determined down the road. ... It adds certainty to the system," said Murkowski spokeswoman Becky Hultberg.
The Bush administration, which spent much of the first part of 2005 lobbying for private accounts as the cornerstone of a broad overhaul of the Social Security system, urged support for Alaska's pension change and likened it the president's Social Security plan, the Anchorage Daily News reported.
Fiscal experts and anti-tax activists predict the looming pension shortfall, caused in part by poor returns on state investments in the economic downtown after the Sept. 11, 2001, terrorist attacks, will worsen as the baby boomers retire.
At least 40 percent of current state employees in 20 states will be eligible for retirement by 2015, according to a 37-state survey released earlier this year by the Government Performance Project. Washington, Maine, Tennessee, Michigan and Pennsylvania will have the most employees reaching retirement age in the next 10 years, according to the study by GPP, which like Stateline.org is funded by The Pew Charitable Trusts.
In addition to an aging workforce, CanagaRetna of CSG said other factors are creating unfunded liabilities in state pension programs. For example, states such as Illinois, New Jersey and North Carolina decreased payments into their retirement systems to help balance their books during the fiscal crisis and are now scrambling to catch up, he said.
Currently, the majority of state and local employees are covered by traditional "defined-benefit" pension plans.
Richard Ferlauto, director of pension and budget policy at the American Federation of State, County and Municipal Employees, pointed out that West Virginia and New Jersey recently decided to stop offering 401K-style plans, opting instead to rely exclusively on traditional, defined-benefit pension plans.
"A well-managed defined-benefit plan with regular contributions into the system is actually cheaper for taxpayers than a similar defined-contribution plan," Ferlauto maintains, adding that 401K-style plans can be expensive to administer.
Ferlauto also challenged the projections that state public pension systems face an impending funding crisis.
"There is a coordinated ideological movement by several conservative Republicans that has nothing to do with the financial condition of pension systems," Ferlauto said.
Anti-tax groups, meanwhile, are rooting for reform. Because many states added perks to their pension packages during the 1990s, current workers' contributions to the systems don't cover benefits promised to retirees, said Daniel Clifton, chief economist with Americans for Tax Reform. Clifton said switching to 401K-style retirement plans would solve the problem because employers would put aside money for an individual worker's retirement over the course of the worker's career.
"You're not going to have enough new workers to replace the older workers. That's a recipe for fiscal disaster. ... I believe personally it's a pension time bomb waiting to happen," he said.
Other approaches states are considering to shore up their retirement systems include issuing bonds, trimming benefits and consolidating multiple pension systems within a state.