States work to revive dwindling public pension plan funding levelsReprints
Alarmed by escalating costs and deteriorating funding levels, lawmakers in dozens of states have passed measures to shore up public pension programs in the past several years.
Several surveys have brought home just how much the funding levels of public pensions have slumped.
For example, plans covering just over 20 million employees and retirees — or 85% of state and local plan participants — had an average funded ratio of 73.5% in 2012, the most recent data available, according to a survey by the National Association of State Retirement Administrators and the National Council on Teacher Retirement.
By contrast, the plans were slightly more than 100% funded on average in 2001, with funding levels declining nearly every year since then, the survey found.
Benefit experts have numerous explanations for the decline in funding levels, with the most frequently cited reasons being rich benefit formulas, the inability or unwillingness of lawmakers to boost contribution levels and a growing pool of retirees collecting benefits as the baby boomer generation retires.
“In many states, there has been a failure to make contributions to the plans as recommended by plan actuaries,” said Sheldon Gamzon, a principal at PricewaterhouseCoopers L.L.P. in New York.
“In 15 of the last 22 years, state lawmakers have not put in what our actuary and board recommended,” said William A. Thielen, executive director of the Kentucky Retirement Systems in Frankfort, Kentucky.
In addition, when state lawmakers improved benefits, funding often was not increased to pay for the enhancements, said Keith Brainard, research director for the state retirement administrators in Georgetown, Texas.
Others say, before the current reform movement, that lawmakers gave into union demands to increase benefits.
“If your constituency is unionized state employees, you have an incentive to provide generous pension benefits,” said Christopher Mier, managing director of the analytical services division of Loop Capital Markets L.L.C., a Chicago-based global investment services firm.
But the growing costs of the plans have not gone unnoticed.
“It is fair to say that a majority of public retirement systems have made changes to make them more financially sustainable for the future,” said Greg Mennis, project director in Washington for The Pew Center for the States, a policy research organization.
For example, Kentucky lawmakers passed legislation last year covering the $14 billion Kentucky Retirement Systems that bars cost-of-living adjustments for retirees unless the COLA or pension plan is fully funded.
Given the plan's funding levels, “there will be no COLAs for the foreseeable future,” said the retirement system's Mr. Thielen.
In addition, the law boosts the amount of state contributions going into the plan each year and authorizes a lower-cost cash balance pension plan for future employees of the state of Kentucky.
In Kansas, legislation passed in 2012 requires employers participating in the Kansas Public Employees Retirement System in Topeka to make an additional $500 million in contributions over the next 10 years.
At the same time, state employees will make higher contributions to their pensions. Employees who joined the plan prior to Jan. 1, 2009, this year contributed 5% of pay, up from 4%, and will contribute 6% of pay in 2015.
“It is fair to say that a majority of public retirement systems have made changes to make them more financially sustainable for the future,” said David Driscoll, a principal at Buck Consultants L.L.C. in Boston.
But not all legislative efforts aimed at improving the funding levels of public retirement plans have been successful.
In Illinois, for example, a circuit court judge last month put a 2013 pension reform law on hold until lawsuits filed by various employee organizations are decided. For example, the plan would gradually increase to age 60 from 55 the age at which teachers can retire and collect a full benefit.
Still, observers are optimistic that most states eventually will resolve their pension funding problems.
“I do believe the lion's share of the problems will be resolved because they have to be resolved,” Loop Capital Markets' Mr. Mier said. “It is a problem that can be confronted and dealt with,” though that will require leadership by elected officials.