Bad decisions and a sour economy combined to leave 31 states below the safety line set for investing money to meet future pension costs, according to a study released Monday.
The double-whammy also has increased the chance that officials may eventually have to fix the problem by cutting benefits or raising taxes.
Many experts recommend states save at least 80 percent of the money they’ll eventually need to pay the pensions promised to government employees. Twenty-two states failed to previously meet that threshold and nine more fell short in fiscal 2009, according to the Pew Center on the States.
Illinois had the largest shortfall, with only 51 percent. New York was in the best shape at 101 percent.
“Far too many states are not responsibly managing the bill for their employees’ retirement,” said the report, “The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs.”
But Keith Brainard, research director for the National Association of State Retirement Administrators, said it can be misleading to look at a percentage at any one moment. Markets rise and fall, states put more money or less into pensions, and benefits can be adjusted up or down.
He called the funding percentages “a snapshot of what amounts to a decades-long motion picture. There’s nothing magical about any particular funding level.”
States promise their employees monthly pension checks after they retire and pay for them by joining with their employees to contribute money that is then invested. But states risk getting into financial trouble when they fail to put aside money as they go while promising employees bigger pension checks.
There’s little danger of an immediate crisis, according to the Pew study, such as a state being unable to send out pension checks. Already, though, Illinois retirement systems have had to sell assets to come up with the money they needed because state government wasn’t meeting its obligations. The longer states delay, the bigger the actions needed to fix the problem.
The Pew study found that state retirement systems in fiscal 2009 had assets to cover 78 percent of long-term costs, down from 84 percent the previous year. States were supposed to contribute $115 billion to keep from falling further behind, but they provided only $73 billion.
The study looked at figures from 2008 and 2009, when the economy and the stock market were at their worst.
Susan Urahn, managing director for the Pew Center on the States, said the problems go beyond a temporary drop in the value of state investments. Facing tight budgets, states are choosing to skip their annual contributions to pension funds, like families skipping a credit card payment, she said, and that makes the ultimate debt even bigger.
When the pension shortfall is combined with the cost of retiree health care, states face a gap of $1.26 trillion between money on hand and what they’ll eventually owe. That’s about $9,500 for every household in the United States. The study did not include many local government pension plans, which face similar problems.
States basically have two options: Come up with the money or reduce what they owe. Coming up the money could mean raising taxes or making deep cuts elsewhere in the budget.
“This growing bill increasingly competes for dollars with other important priorities like education, human services and infrastructure,” Urahn told reporters.
Reducing what states owe would require cutting the benefits they’ve promised to employees — by giving them less money, making them work longer before retiring or perhaps requiring them to contribute more toward their pension and health costs.
That option is filled with legal and contractual complications. Reducing benefits for future employees can be done relatively easily, while reducing them for people who have already retired is almost impossible, Urahn said. Cutting benefits for current employees is a gray area that some states are exploring, she said.
She and Brainard, from the pension administrators group, agreed that states are taking steps that will cut their long-term costs. “Those changes are having, or will have, a meaningful impact,” Brainard said.
But both said the key is for states to make their full contributions to pension systems each year. That’s what let New York reach 101 percent funding, Urahn said.
“Given the size of the problem and the challenges of reform, there are no quick fixes,” she said. “But there is considerable momentum for change.”
Source: The Associated Press.