States Struggle with a $3 Trillion Pension Fund Shortfall

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February 16, 2011; Source: Institutional Investor | This stunning article from John Keefe of Institutional Investor deserves to be read along with yesterday's Newswire on the impact of underfunded state pension plans on state budgets.

Keefe examines the various analyses and estimates the depth of the pension fund crisis. He contrasts low estimates of $500 billion to $1 trillion from the Pew Center on the States with a $3 trillion estimate from Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester (for the underfinancing as of June 2009, when the markets were still falling in the first full year of the recession).

The aggregate funding of all state pension plans, according to Rauh and Novy-Marx, is 41 percent to 56 percent, in contrast to Pew's estimate, favored by the National Association of State Retirement Administrators, that the aggregate funding level was 84 percent. Wilshire Associates puts the June 2009 funding level at 59 percent. According to one state pension administrator, "If you drop below 40 percent funding, No. 1, you have no ability to survive another market event like 2008 . . . Second, liquidity becomes a major concern . . . Your asset allocation has to become more conservative, and earning less on the portfolio just speeds up the process of hitting bottom."

States are scrambling for fixes such as reducing benefits (like scheduled cost of living adjustments), raising retirement ages, or increasing employee contributions, but most have encountered significant, vocal, and intractable opposition from retirees and those close to retiring. Although Rauh and Novy-Marx suggest that reducing COLAs is the best immediate possible fix on the horizon, it generates tons of opposition from both employees and retirees – and the public employee unions such as AFSCME, who believe that the pension crisis is being exaggerated. AFSCME wants the state sponsors to put in more state revenues, that is, more from the state budgets' General Funds, which are already plunging through negative numbers.

Because he fears that the pension deficits will stimulate governors to ask Congress for yet more federal bailouts, Newt Gingrich is promoting legislation that would "allow states to petition for bankruptcy and force a renegotiation of pension benefits in the federal courts. Whichever way it turns out, either higher state contributions to the pension funds or state bankruptcy filings, the losers will be the citizens, communities, and nonprofits that look to state government spending as a critical safety net for people in need.—Rick Cohen

  • David Cearley

    Rick, you are completely wrong. State programs are being cut primarily because pension liabilities are so high. If the states can’t find a way to reduce those liabilities, they will have to reduce state services even further. See the article in Reason magazine;
    According to a spokesman from the California’s governor’s office, David Crane, This year we

  • rick cohen

    Hi David: Thanks for your insights and the comments from Crane in CA. I’m not sure what you’re saying I’m wrong about. The article from Institutional Investor makes some of the same points, that efforts are needed to deal with the unfunded or underfunded pension liabilities (though the California number seems way too high by any of the estimates cited in the II article). The II article talks about many of the mechanisms that states are exploring to reduce the underfunding–reduced COLAs, higher employee pension contributions, higher retirement ages, etc. The problem is that these “fixes” for the pensions don’t get a lot of support among retirees or near retirees. Thanks as always for your input.

  • David Cearley

    Rick, I’m saying that cutting the pension obligations through removing the right of collective bargaining for benefits (Wisconsin), bankruptcy (in CA, union contracts have been written to survive bankruptcy), or some other restructuring of current liabilities will free up state’s to actually fund needed government programs. I used the Vakifornia example to point out that currently states are having to cut programs (including those performed by non-profits) in order to fund over-generous pensions. If non-profit agencies are serious about maintaining their funding, and bolstering the social safety net for their clients, they should be campaigning against the abuses of the unions. As a prime example, the Obama administration decreed that all federally funded public works projects must use what’s called the “prevailing wage”, but is actually the union wage. The result has been that projects already on the books and funded by the stimulus cost 30% more than before the decree. 30% of a trillion dollars, or three hundred billion dollars that could have gone to non-profits and that social safety net instead flowed to union allies to be kicked back to democrat politicians in the form of campaign donations so that dems will cede even more power to unions. Several state’s even have laws on the books that force workers to join unions, or coerse them to pay union dues in order to secure employment. There are now more public sector union members than private sector, and they exercise enormous power to the benefit of their members at the expense of the taxpayers, and yes, the poor. Where I thought you were wrong was in saying that restructuring or bankruptcy would hurt non-profits. On the contrary, reducing union pension abuses will free up vast sums of money that can be used to pay for essential services. BTW, the teachers in the city of Madison, Wisconsin make an average of $102,000 a year in salary and benefits, cannot be fired, and collect full pensions for life with free medical care starting at age 55. Police officers and firemen can do the same at 45, actually collecting more in retirement than during their entire working career.