Thursday, April 28, 2011

Are States' Pensions the Next Crisis?

Virginia's News & Advance reports, Are States' Pensions the Next Crisis?:

Just as America is finally showing signs of digging out of the financial meltdown and the Great Recession of 2008, there are already warning bells being sounded for the next possible scare: government pension programs.

Earlier this week, the Pew Center on the States issued the results of its “fiscal stress test” of the 50 state pension programs, and the results are troubling to say the least.

All told, the Pew center estimates that government pension funds and health care programs are underfunded by more than $1.2 trillion today, a clear sign that something must be done now to avoid a great deal of misery down the road.

Though the Pew study looked at pension funds during 2008 and 2009, the depth of the Great Recession, the results should serve as a wake-up call to political leaders across the nation, including here in the Commonwealth of Virginia.

The Pew center reports that 31 states are funding their government pension funds at levels below the point most experts consider safe, 80 percent of the plan’s expected needs.

Several states — California, Illinois and Ohio are among the worst — have shortfalls dangerously below safe levels. Illinois, the worst state, has only 51 percent of its plan’s projected needs currently funded.

Here in Virginia, while we’re not as bad off as some, there’s not much to be proud of.

The Virginia Retirement System, with about $56 billion is assets, currently has a projected shortfall of $17.6 billion. While that doesn’t mean that VRS, the source of retirement income for thousands of state and local government workers, is in any danger of becoming insolvent, it’s not a sign of long-term health.

Leaders of the General Assembly and the governor recognize the long-term problem of underfunding the VRS, but that hasn’t stopped them from dipping into the plan’s reserves in the past to cover holes in the commonwealth’s budget.

Such was the case during the 2010 session of the Assembly, when more than $620 million was shifted from the VRS coffers to the General Fund in order to balance the budget.

The Assembly promised to repay the VRS, with interest, but, to date, their promise remains just that: words.

Virginia’s not alone in “borrowing” from its pension funds, according to the Pew study. Many states decided to skip their payments to their employees’ pension plans in order to shore up their current cash reserves.

But what they don’t want to admit is that, sooner or later, the bill will come due. And the longer they wait, the higher the bill will be.

There is still time for state leaders, here in Virginia and across the country, to own up to the magnitude of the problem and take the actions needed, whether that’s cutting benefits or raising taxes and cutting spending in other areas to cover their obligations.

And they need to do it sooner rather than later.

You can read details on the Pew study by clicking here. Below are the highlights on The Trillion Dollar Gap Growing Wider:

The gap between the promises states have made for public employees’ retirement benefits and the money set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009—a 26 percent increase in one year—according to a Pew report.

The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs analyzes 2009 and 2010 data on states' funding of pensions and retiree health care. The report shows how states’ retirement systems—many of them already on shaky ground—were affected by the Great Recession:

  • Pension funding shortfalls accounted for $660 billion of the $1.26 trillion gap, and unfunded retiree health care costs accounted for the remaining $635 billion.
  • States had only about $31 billion, or 5 percent, saved toward their obligations for retiree health care benefits.
  • State pension plans were 78 percent funded, declining from 84 percent in 2008.
The decline in states' funded status isn't shocking. Assets got hit during the financial crisis and liabilities exploded up as interest rates hit historic lows. It's important to remember that funded status will vary considerably year-to-year but swings a lot less over a four-year period. It took pensions many years to recover after the tech meltdown back in 2000, and this time it will take longer.

The problem now is that state pension funds still hold onto rosy investment assumptions, still use a high discount rate and states are still not topping up pension plans, increasing the retirement age and contribution rate or cutting benefits. Sooner or later, the chicken will come home to roost. Nonetheless, I don't buy all the fear mongering going on right now, all in an effort to weaken traditional defined-benefit plans. US state pensions need to be reformed, and new governance standards need to implemented at many state plans, but let's not blow things way out of proportion. This isn't the next crisis and anyone who thinks so is completely out to lunch.

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