Pew: States must fill widening pension gap

HARRISBURG, Pa. -- States may be forced to reduce benefits, raise taxes or slash government services to address a $1 trillion funding shortfall in public sector retirement benefits, according to a new study that warns of even more debilitating costs if immediate action isn't taken.

And though Nevada's lawmakers, unions and business interests received praise for recent compromises on public workers' benefits, the Pew Center on the States report still placed the Silver State among the states facing serious pension-funding issues.

Pew's survey, released today, examined state-administered pension plans, retiree health care and other post-employment benefits in all 50 states, and concluded that a decade's worth of policy decisions left benefits plans shortchanged.

The result for some states will be "high annual costs that come with significant unfunded liabilities, lower bond ratings, less money available for services, higher taxes and the specter of worsening problems in the future," the study said.

The cost of the trillion-dollar shortfall, which will be paid over the coming decades, is about $8,800 for each American household. The study did not include many city, county and municipal pension plans, which are thought to have similar underfunding.

"We have a significant problem now, but it's a problem that can be solved by taking relatively modest steps," said Susan Urahn, the center's managing director. "If they don't do anything, if they wait, eventually they will have an unmanageable crisis on their hands."

As of 2008, states had $2.4 trillion to meet $3.4 trillion in promised pension, health care and other post-retirement benefits, according to the report.

The true gap may even be wider, because the study did not account for the full impact of investment losses in late 2008, during the stock market downturn, and because many plans employ multiyear smoothing techniques to lessen the effect of a single year's losses. But more recent stock market returns could help -- on Wednesday, for example, Pennsylvania's $47 billion public school pension plan reported it had earned about 12 percent on investments in the 2009 calendar year.

Pew deemed 16 states solid performers in how they fund pensions, 15 needing improvement and 19 are considered to be facing serious concerns.

"Meanwhile, more and more baby boomers in state and local government are nearing retirement, and many will live longer than earlier generations -- meaning that if states do not get a handle on the costs of post-employment benefits now, the problem likely will get far worse, with states facing debilitating costs," the study said.

Nevada ranked among the 19 states with the biggest problems, because the amount of pension liabilities funded fell from 82.5 percent in 1999 to 76.2 percent in 2008. Any number below 80 percent will land a state on the serious list.

What's more, the state's pension liabilities grew roughly 127 percent from 1999 to 2008, while fund assets expanded just 110 percent.

"Nevada's management of its long-term pension liability is cause for serious concern, and the state needs to improve how it handles its retiree health care and other benefit obligations," the report stated.

But Katherine Barrett, a senior adviser to the Pew Center on the States, noted that Nevada's data included stock market performances through Dec. 31, 2008, while many other states' analyses featured stock market statistics only through June 30, 2008. The markets took a major turn for the worse in the latter half of 2008, so Nevada's expanded numbers look comparatively bleak.

Barrett also said Nevada experienced a smaller decline than other states in the percentage of pensions funded.

The report, which quotes sources as diverse as Las Vegas Chamber of Commerce President and Chief Executive Officer Kara Kelley and state Senate Majority Leader Steven Horsford, D-Las Vegas, credited Nevada with key benefit reforms.

Nevada requires a 50-50 benefit-contribution split between public employers and employees, for example -- a compromise most other states lack. Nevada made the reform in the late 1970s and early 1980s.

And in the 2009 legislative session, lawmakers made changes in the criteria outlining qualifications for retirement benefits. Police officers and firefighters hired after Jan. 1 will have to work 30 years before they can retire with full benefits, up from the 25 years the law previously mandated. Future public employees who retire early would be docked 6 percent of their retirement pay for each early year, up from 4 percent under prior regulations. All told, the changes should eventually save the state Public Employees Retirement System $142 million a year.

The Pew study said unions might show a greater willingness to accept pension changes because of the budget problems facing most states.

The exploding financial burden could be a bitter pill for taxpayers, many of whom will not be collecting similar pensions or other benefits when they retire, said David Kline with the California Taxpayers' Association. About one in five private sector workers have traditional defined benefit pensions, compared with about 90 percent of public sector employees -- including some who do not get Social Security.

"Taxpayers in the future will be paying for people who worked decades before they may have even lived in the area or begun paying taxes, because the obligation for these benefits is just snowballing," Kline said.

The study graded states on how well they have managed employees' retirement benefits. Florida, Idaho, New York, North Carolina and Wisconsin began the current recession with fully funded pension systems, while eight states have left more than one-third of their pension liability unfunded.

Illinois was rated the most troubled pension system during the study period, with a 54 percent funding level and a total liability of more than $54 billion.

In Pennsylvania, a series of decisions by the Legislature and governor have shielded taxpayers from much of the pain for the past decade, but costs of less than $1 billion a year now are projected to climb to about $6 billion annually in the coming three years.

The report said policymakers have exacerbated the problem by expanding benefits, relying on overly optimistic assumptions about investment returns and failing to sufficient fund the programs.

"Even though the actuaries tell the states what they should be doing, the states feel free to ignore that," said Olivia Mitchell, director of the Pension Research Council at the University of Pennsylvania's Wharton School. "So putting some teeth behind the requirements is really the problem."

Pew calculated a $587 billion national cost for current and future retiree health care and other nonpension retirement benefits, with only about 5 percent of that amount funded as of 2008. The cost of health care and the number of retirees are both on the rise, adding to the pressure on states.

The study found that 15 states made some legislative changes to their state-run systems last year, 12 did so in 2008 and 11 in 2007. About a third of states had formal efforts to study potential reforms under way last year.

"Pension plans work when they are allowed to work, and part of that dynamic is that sometimes adjustments have to be made," said Keith Brainard, research director with the National Association of State Retirement Administrators. "It's important not to take away decent retirement benefits for some of the few people that have them."

Pew said states should consider changes that have proven to be effective and politically viable. Among them: setting minimum contribution levels that are actuarially sound, sharing some of the investment risk with employees, cutting benefits, increasing the minimum retirement age, making employees pay more into the system and providing more robust oversight and investment rules.

Review-Journal writer Jennifer Robison contributed to this report.