Many States Face Hard Choices Because of Market Declines

Massive market declines are causing financial woes for states across the country.

States and municipalities are facing difficult choices. In Pennsylvania, the state employees and public teachers’ pension funds both have warned that employer contribution rates could surge seven-fold from about 4% of payroll to 28%, starting in 2012. The Detroit police and fire pension plan might have to double employer contribution rates to 50% of payroll by 2011, according to the funds outside actuary.

Two of the nation's biggest public pension funds, New York State Common Retirement Fund and the California Public Employees' Retirement System, also have warned state employers to brace for future rate increases.

The specter of higher pension bills comes as many states and cities are struggling to balance their budgets or, in some cases, avoid drastic measures, such as filing for bankruptcy protection, amid falling tax revenue, foreclosures and rising unemployment costs.

In most states, retirement benefits for public employees are guaranteed by law, so governments have little choice but to pay them in full. During bull markets, that wasn't a problem. But with the median rate of return for a public plan of negative 25% in 2008, according to Wilshire Associates, many plans now may be unable to meet their obligations without further injections unless markets rebound significantly, analysts said.