Some states may face a severe pension-fund reckoning, but the problems are manageable if lawmakers act now to address them through a combination of increased contributions and benefit cuts, according to Loop Capital Markets LLC.
The pension-funding solution is politically challenging for some states. It involves raising contribution levels at a time when many are still grappling with budget shortfalls, and extending the benefit cuts some states have enacted for future employees to current pensioners and vested employees. “States need to recognize the funding problem and contribute as much as possible this year, and all future years,” Mier said. “Pension-contribution 'holidays’ must be a thing of the past.”
In its report, Loop reviews a total of 244 of the largest state plans and finds that the funded ratios have worsened for almost all the plans that submitted funded ratios. About 93% of the 145 state plans reviewed in both 2008 and 2009 that submitted funded ratios saw declines. Only 58 of a total of 149 plans reviewed for fiscal 2009 reached the 80% funded ratio that is considered adequate.
The report found that 25 states — up from 23 a year earlier — failed to meet the actuarially based annual required contribution needed to work towards an adequately funded plan. Alaska, California, Colorado, Delaware, Illinois, Iowa, Maryland, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Pennsylvania, Vermont, Virginia, and Washington did not meet their contribution levels for all plans for the last three years.
In 2009, 14 states shifted away from a defined-benefit plan to a defined contribution or hybrid plan in hopes of reducing long-term liabilities, and Loop expects that trend to continue. The change limits future costs but does little to bring down current liabilities.
Many states have moved to alter benefits for future employees by limiting cost-of-living adjustments and increasing retirement ages. Those steps may reduce future costs but don’t bring down current liabilities. Cuts for current retirees and employees pose more difficult legal and political challenges even though such steps are needed, according to Loop. Retirees in Colorado, Minnesota, and South Dakota have filed lawsuits challenging recent legislation that curbs expected benefit increases for current retirees.