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Public pension plans slash benefits due to economy

Decreased funding levels, increased costs hurt plans


At least 24 public pension funds have cut benefits this year as fallout from the financial crisis continues to affect the plans' stability.

The plans have been plagued by decreased funding levels due to asset drops at the same time costs are increasing because of factors such as retirees living longer, said Keith Brainard, research director of the National Assn. of State Retirement Administrators.

“They simply couldn't invest out of it,” he said. “Something else has to change: lower benefits or higher contributions.” The association conducted a survey in May of changes made by public retirement plans this year.

In some states, like Colorado, the impetus for change came from the pension fund itself. Officials of the $35.4 billion Public Employees' Retirement Assn. in Denver launched an 18-month town-meetings program to convince employees and retirees that their benefits must be cut.

In other cases, politicians were behind the changes. Illinois lawmakers pushed through a bill reducing benefits for new participants in the state's five pension plans as rating agencies threatened to reduce Illinois' bond rating over concerns of unfunded liabilities. The bill moved through both houses of the Legislature in just 12 hours. Several weeks later, Gov. Pat Quinn signed the bill into law.

“The changes were driven by the governor and the Legislature,” said William Atwood, executive director of the $13.1 billion Illinois State Board of Investment in Chicago, which has fiduciary responsibility for managing the pension assets of the General Assembly Retirement System, the Judges' Retirement System of Illinois and the State Employees' Retirement System of Illinois.

In California, the controversy over benefit cuts still is playing out. Gov. Arnold Schwarzenegger has vowed not to approve the state budget without pension benefit reform.

But the nation's largest defined benefit plan—the $201.9 billion California Public Employees' Retirement System in Sacramento—used its own authority on June 16 to increase contributions from the state by $600 million.

CalPERS officials set up a Facebook account where it denounced several studies saying the fund will be insolvent in two decades.

On another website—CalPERS Responds ( —CalPERS officials focus on what's right with the pension system. Featured are articles such as a study showing that public employees earn significantly less than private-sector workers and a list of what fund officials call myths, including “public pension benefits are excessive and a drain on the public.”

Patricia K. Macht, director of external affairs, said CalPERS officials are committed to bringing together stakeholders to deal with funding and benefits issues. Fund officials held two day-long discussions as well as webinars with more than 300 participating employers and featuring the chief actuary and chief investment officer.

Officials at the $132.1 billion California State Teachers' Retirement System in West Sacramento, the nation's second-largest defined benefit plan, are planning to launch their own campaign next year to convince state lawmakers to introduce legislation to raise contributions, according to board documents.

CalSTRS spokesman Patrick Hill said fund officials want the Legislature to increase the 8.25% of employee payroll that school districts and community colleges now pay CalSTRS. Mr. Hill said raising employee contributions is not on the table. CalSTRS has not yet said what increase it would seek, but officials said that for its defined benefit program to be fully funded in 30 years, an employer contribution rate of more than 22% would be required.

Without an increase, officials say, the fund will run out of money by 2045.

Most changes implemented by public pension plans this year apply only to new hires, which has critics charging that severe plan underfunding has not been addressed.

“Many pension plans remain critically underfunded,” said pension plan consultant Girard Miller. “This issue isn't going away.”

Mr. Miller, a senior strategist and consultant at the PFM Group in Philadelphia, testified last month before a California commission studying the state's pension funds. He called for changes to the state constitution to allow benefits cuts for state and municipal workers.

The survey conducted last month by NASRA shows that public pension systems in Colorado, Minnesota and South Dakota were the only ones that reduced benefits for retirees as part of their fund overhauls.

Meredith Williams, executive director of Colorado PERA, said the system's funded status dropped to 52% at the end of 2008—when the fund began to feel the effects of the financial crisis—from 76% a year earlier.

He and board members then conducted an eight-city listening tour to explain PERA's fiscal difficulties and to hear the concerns of state employees and retirees. The message to employees was urgent: If nothing is done, the system could be out of money in a little more than two decades.

“Anyone who planned to live beyond 2030 was in trouble,” Mr. Williams said.

The result of the meetings: Changes should affect employees on a “fair and equitable” basis and should have a meaningful impact on the system's finances. “I didn't want to use baling wire or duct tape or bubble gum to create a short-term politically expedient fix,” he said.

A second tour was organized in fall 2009 to explain the proposal to cut benefits. A bill reducing benefits was approved in February 2010, but not before Mr. Williams said he spent at least 15 hours testifying before the Colorado Legislature.

The bill cut the automatic 3.5% yearly cost-of-living increase to a maximum of 2%. It also required new retirees to wait for at least a year before receiving their first cost-of-living increase. Other changes decreased the benefit workers would receive if they retired early and required employees cashing out their benefits to work at least five years to get an employer match.

In Minnesota, the three statewide retirement systems—the Minnesota State Retirement System, the Minnesota Public Employees Retirement System and the Minnesota Teachers Retirement Assn.—all cut benefits for retirees. The systems have combined assets of $48 billion.

The Minnesota State Retirement System in St. Paul also reduced cost-of-living adjustments for retirees to 2% from 2.5% this year. David Bergstrom, executive director, said the system got various constituent groups to support the plan through frank discussion about the severe hit the plan's funding status took from the financial crisis.

“Most of them saw the need to make changes now so they had a solid pension going forward.” he said.

The cuts were more severe for participants in the Public Employees Retirees Assn. and the Teachers Retirement Assn. PERA retirees had their COLAs cut to 1%, from 2.5%. Teachers had COLAs suspended for two years, followed by a permanent reduction of 2% annually from 2.5%.

South Dakota introduced cuts for retirees that vary depending on the plan's funding level. For 2011, cost-of-living increases fell to 2.1%, from 3.1%.

Whether other states try to cut benefits could hinge, in part, on the outcome of lawsuits filed by retirees in Colorado, Minnesota and South Dakota who maintain the changes violated state laws.

William Payne, a Pittsburgh lawyer with Stember Feinstein Doyle Payne & Cordes L.L.C., which filed the suits, said the impact on retirees is severe. He said a Colorado retiree who received an annual pension of $33,374 in 2009 could lose more than $165,000 in benefits over 20 years.

“People earned their pension benefits, but the pension systems aren't holding up their end of the bargain,” he said.

Illinois' changes are among the most extensive. They include cutting COLAs to half of increases in the U.S. Consumer Price Index.

The changes came after a joint legislative pension reform committee studied the dire financial state of Illinois' pensions plans, followed by months of negotiations among stakeholders that went nowhere, said Dan Long, executive director of the Illinois Legislature's Commission on Government Forecasting and Accountability in Springfield.

“The parties involved just couldn't come to an agreement and everyone realized something had to be done,” he said.

Mr. Long said the legislation will lower the projected $551.7 billion pension liability to $295.3 billion by 2045. But critics said it does little to address severe underfunding.

“It's a step in the right direction, but it does not address the over $70 billion in unfunded pension liability,” said Laurence Msall, president of The Civic Federation, a Chicago-based nonpartisan government watchdog group.

In California, Gov. Schwarzenegger scored a victory on June 16 when four labor unions agreed to increase employee payments to 10% from 5% of pay as well as to reduce benefits for new employees. But the unions represent only around 23,000 of the 170,000 state employees.

The governor had said he won't approve the state budget without a new second-tier pension system for new hires. But the state Senate Public Employment and Retirement Committee killed a bill this month that would have required new hires to contribute more and work longer to receive benefits.

Randy Diamond is a reporter at Pensions & Investments, a sister publication of Business Insurance.