The Sixteen States That are Killing Their Pensions

For decades, public employees have had pension plans identical to those provided by most large American companies. These are defined benefit plans that pay workers a fixed sum each year after they have retired based on the amount of years they have worked and their salaries at the time of retirement. The trouble this causes for governments is that these funds often do not grow as quickly as the obligations they have to pay out, creating a budgetary crisis. It is not unusual to for a plan to have an obligation to offer its members a guaranteed level of growth which allows retirees to be able to rely on future payments, no matter how the funds perform financially. During a period like the market collapse of 2008,  the value of many large pension funds plunged.  Pension fund obligations also crippled many large corporations such as General Motors so badly that they filed for Chapter 11 bankruptcy to escape their obligations.

As the Pew Center for the States reported earlier this year, “$1 trillion. That’s the gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.” Pew says  states wound up in this predicament for a number of reasons including :

  • failing to make annual payments for pension systems at the levels recommended by their own actuaries;
  • expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
  • providing retiree health care without adequately funding it.

Elected officials are pushing government employees into defined contribution plans, which are nearly identical to 401(k)s, because of the funding issues associated with pensions.  Just like in the private sector, employee contributions to these plans are sometimes matched by their employers. They  fluctuate in value based on the securities in which they invest. Government employees can lose most of the value of his or her plan in a bad market, such as the one triggered by the Great Recession, potentially delaying their retirement plans for years.

The battle over pensions is not unlike the one over collective bargaining or salary caps. States and cities have begun to run large deficits because the recession has robbed them of their expected tax receipts. Most local governments get the majority of their funds from property taxes. Florida and Arizona face 50% drops in the value of homes, and prices have fallen even further in some cities in these states.

24/7 Wall St. looked at the pension status of workers in all 50 states. We choose those in which pension plans have already been converted from defined benefit plans to defined contributions plans. In some of the cases we examined, states have set up hybrid plans which are a blend of the two traditional types. Other states allow employees who have been in defined contribution plans to keep them. Newer workers are forced to accept 401(k) plans.

The current battle between public unions and states is about financial power. Many governors and state legislators want almost unlimited control over how public workers are paid, what their bargaining rights are and how their health and retirement levels are set. Naturally, workers want to keep their pension funds that guarantee pay-outs and leave the risk of funding those payouts to states and municipalities.

This is the 24/7 Wall St. Sixteen States That Are Killing Their Pensions. These states are those in which governments have gained the upper hand in the war over what public workers will be paid and over what time.

1. Alaska

In 2005, the State Legislature voted to enter all new state employees into defined contribution plans.  Employees enrolled in defined benefit plans are also allowed to transfer to 401(k) type plans or keep their pension plans. This move, which also has been done in other states such as Utah and Michigan, has been largely unpopular among state workers. Lawmakers have been asked during every legislative session to consider repealing their decision.

2. Colorado

Colorado established a defined contribution plan as an option for all state employees in 2004. In 2010, the state increased the amount that the employer and the employee are required to contribute to their pension fund and raised the minimum retirement age from 55 to 60 for people who join the government payroll after the law was passed. Citing U.S. and state constitutional protections against reducing benefits to existing pension plans, a group of retirees have filed a lawsuit challenging the state’s cost-of-living reduction.

3. Florida

Florida began moving away from its defined contribution plan in 2000 with the implementation of the optional Florida Retirement System Investment Plan. Public employees then, and now, could choose which system they would like to be included in, the defined contribution plan or the traditional defined benefit plan. Existing members of the original plan were also given a third option of a combined plan. The state’s defined benefit program has been aided by a mandate that pension surpluses of less than 5% of total liabilities be reserved to pay for unexpected losses in the pension system.

4. Georgia

In 2008, Georgia established a mandatory, hybrid defined benefit and defined contribution retirement plan for public employees.  Under this program, the defined benefit plan provides about half of the payout of the previously existing plan and a defined contribution plan that requires a 1% employee contribution, which is then matched by the employer. Employees may opt out of the contribution plan after 90 days.

5. Indiana

Indiana has offered state employees a combined pension plan for decades.  The state, however, only funds 70% its total pension obligation, due largely to gaps in the funding of the state teacher retirement plan.  In 2007, Indiana established an additional retirement medical benefit account to pay expenses after retirement.  Annual contributions for the account are based on the age of the participant.

6. Michigan

New state employees have had to join a mandatory 401(k) type plan since 1997.  Under this plan, the State government contributes4% of the employee’s salary to their retirement account. Employees, if they so choose, may contribute as much as 12% of their salaries, 3% of which will be matched by the state in addition to the original 4%.  In 2010, a hybrid program was created to include new teachers, who are offered a combination (defined contribution and defined benefit) plan.  The defined contribution component, however, may be opted out of.

7. Minnesota

Minnesota offers a defined contribution plan as the primary plan for physicians, elected officials, city managers, and volunteer ambulance personnel.  The state recently approved higher worker and employer contributions.  It reduced the rate of cost-of-living adjustments and froze those adjustments in 2010 and 2011 for current and future retirees.  This decision has been challenged in a lawsuit filed by a group of retirees.  Politicians, such as former Governor Tim Pawlenty, have called for a greater shift to 401(k)-type plans.

8. Montana

In 2002, Montana created an optional defined contribution plan for state employees who were not teachers.  Newly hired employees are initially placed in the original defined benefit plan and are then given one year to transfer to the 401(k)type plan if they choose.  Employees contribute 7.17% of their salaries, and employers contribute 7.37% of those salaries, to the defined contribution plan.  Lawmakers will consider proposals to raise the retirement age from 60 to 65, boost employee and employer contributions, and increase an employee’s highest average compensation this year.

9. Nebraska

Nebraska operated on a defined contribution retirement system for public employees from 1967 to 2002.  In 2003, that system was replaced by a cash balance plan for new employees.  In this system employees and employers contribute a portion of the employees’ salaries to an account.  The employees do not control the investment of the account, but are guaranteed an annual return of at least 5% a year, minimizing their risk. The account can also receive a higher return, depending on investment earnings. The public employees are given access to the money in these accounts upon retirement.

10. North Dakota

In 1999, North Dakota created a partial optional plan for “non-classified” public employees, most of which are part of the higher education system. Like many of the states on this list, North Dakota, which has a relatively balanced budget otherwise, faces a pending pension budget crisis, in which funds are expected to run out by 2030. The current legislature is considering raising both employee and employer contribution rates.

11. Ohio

Ohio had an optional defined contribution in place when, In 2002, a non-mandatory defined contribution plan was created for education employees and all other state and local government workers. Those who had not joined this plan also can move to the new plan. A third hybrid option also became available to workers which combined defined benefit and defined contribution.

12. Oregon

Oregon’s hybrid public employee retirement plan, a defined benefit plan, began in 2003. “The pension program,” as it is called, is funded by employers as well as public employee contributions. The employee contribution aspect is called the “individual account program.” Recently, state legislators ruled that the employee contributions would double beginning this year.

13. South Carolina

In 2000, South Carolina began 401(k)-like optional defined contribution plans both for current and any new non-federal government employees. In 2002, the state extended the option to teachers as well. In 2005, the state increased contribution rates and set a 1% cost-of-living adjustment. That rate can be up to 2% if the funding-to-cost ratio stays the same.

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14. Utah

Facing a severe pension budget crisis after being hit by the worst of the recession, Utah underwent major changes to its pension plan in 2010. The state replaced its traditional defined benefit plan with a two tier plan that public employees could choose between. These two options are a defined contribution plan or a hybrid plan.

15. Washington

Washington began a hybrid plan called the Teachers’ Retirement Plan Tier 3, which has components of defined contribution and defined benefits. This plan applies to all teachers, but is only mandatory for teachers who have been hired since 1998. For all other public employees on the local and state level, Washington created a similar hybrid plan called the Public Employee Retirement System. This plan, however, is not mandatory.

16. West Virginia

West Virginia began its defined contribution plan for teachers in 1991, terminating enrollment for its prior defined benefit plan at the same time. In 2005, this defined contribution plan was also closed to all but existing members. The next year, current members of the defined contribution plan opted to merge with the defined benefit plan. After several years of legal battle, it became optional for those who wanted to switch to the new defined contribution plan, called the West Virginia Teachers Retirement System.

-Charles B. Stockdale, Douglas A. McIntyre, Michael B. Sauter

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