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States Taking a Hard Look at Pensions

February 11, 2012

Many state budgets across the nation are in trouble. And many experts point to state pension plans as the primary cause of the financial headaches.

The nation's state and local pension systems face a $4 trillion unfunded liability, or the gap between the assets each state has and what it promised workers at retirement. It's a gargantuan number, and many states are making this a top priority and working toward solutions. The figure comes from an October 2011 update by Joshua Rauh, a Northwestern University associate professor of finance. His original work is from a 2010 paper titled Public Pension Promises: How Big Are They and What Are They Worth?

"In all my years in and around government, I cannot think of anything that is more threatening and more dangerous than the underfunded nature of our pensions across the country," former Pennsylvania Lt. Gov. Mark Singel said at a December 2011 conference held by the National Conference of State Legislatures.

In 2011, 29 state legislatures made significant retirement system changes, a 38 percent increase from 21 states in 2010, according to the National Conference of State Legislatures. Only six states made pension changes in 2009.

Movement has been slow but gradual, says Ron Snell, senior researcher at the NCSL. That's mostly because when the recession hit so abruptly in 2007, legislatures had to deal with damages to overall state finances.

"It takes a while to work out significant changes, but now state legislatures are taking responsible steps," Snell says. "Their goal is to protect benefits for current employees and move back from benefits that can't be funded in the future."

The most significant movement was with increasing employee contributions. Sixteen legislatures passed laws doing this in 2011, up 45 percent from 11 states in 2010.

Twenty-one states made changes to other plan design elements, including increasing age, vesting and service requirements for retirement, changing how retirement benefits are calculated and revising provisions for cost-of-living adjustments, the NCSL reported.

Meanwhile, seven states considered moving to a pure defined contribution plan, from defined benefit, Snell says. While Kansas recently approved studying the possibility, no new legislatures made the move in 2011. Snell says it isn't a palatable proposal for most states because it doesn't fix the biggest problem: unfunded liabilities.

Patty Kujawa is a writer based in Milwaukee. To comment email editors@workforce.com.

Workforce Management, February 2012, p. 9 -- Subscribe Now!