Despite reforms, many state pensions still strugglingNews added by Benefits Pro on May 5, 2014
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By Lisa Barron

While more than 40 states have enacted some type of pension reform since 2011, some are still in dire straits, bringing the net pension liability into the trillions.

Moody's Investor Services estimates that the liability increased 24 percent, from $998 billion in 2011 to $1.2 trillion in 2012, the latest available data with audited results.

In addition, a 2013 report by the Nelson A. Rockefeller Institute of Government said some economists estimate both state and local pension liabilities could be as high as $4 trillion.

"Some states have been bolder than others. Many are driven by an illusion in accounting. Until they do the real accounting and have an accurate set of numbers, they don't have the full picture," Eileen Norcross, senior research fellow at the Mercatus Center at George Mason University, told BenefitsPro.

"They are trying to make contributions comfortable for themselves, not looking at what do we really have to put in every year. There is also a mismatch using the expected rate of return on assets to cover liabilities."

Among the states feeling the most pain are Illinois and New Jersey.

Illinois, which has the lowest rating in the country, was recently downgraded for failing to properly carry out its pension obligations; its $187 billion pension liability amounts to 318 percent of its revenues, according to Moody's.

Its latest reforms include pauses in cost-of-living-adjustments, raising the retirement age and making greater annual contributions.

"Illinois seems to have tackled this a few times. They are saying the latest attempt will have an effect on liability. But I'd say it's not enough to deal with the liability," said Norcross.
In New Jersey, although Gov. Chris Christie has included a $2.25 billion payment to the state's public pension system in 2015, the pension system is still short by $52 billion.

"The state said it was a fix and would have a huge impact. It turns out it didn't," said Norcross. "They said they would gradually increase contribution to plans by one-seventh a year, but employers should make the full contribution. They said new hires would retire at 65 and they froze COLA. That has the most powerful effect on liability, because for every point you get a 10 percent reduction in liability."

But, she continued, "It is a valuable part of the benefit and has been automatically challenged legally."

Christie is now looking for further concessions from unions and public employees to minimize the cost of retiree benefits, and said he will unveil new plans soon.

Kentucky as well is struggling as it faces the double whammy of decreasing revenues and growing pension obligations. Its $4.1 billion liability is 211 percent relative to revenues, according to Moody's.

Although the latest budget includes a payment of $100 million towards the state employees' pension fund, no money has been allocated to the teachers' pension fund, which faces a shortfall of nearly $600 million and has not received a full payment from the state since 2009, according to the Kentucky Center for Economic Policy.

"The reform in Kentucky is smoke and mirrors. They have a broken system, and they make payments in one by shorting another. So basically all of these reforms are on the surface," Chris Tobe a public pensions consultant and author of the book Kentucky Fried Pensions, told BenefitsPro.
"Until they pay the [actually required contribution] ARC, they don't get out of the hole. If you make half of your mortgage payments for ten years, your house will be under water."

"You can make new employees work until they are 120, but if you don't pay the ARC, the liability grows at $7 million a day in Kentucky. And they claim they have pension reform," Tobe added.

And even in states that have been lauded for pension reform, the road to solvency can be tough. Rhode Island, for example, has undertaken extensive changes, including raising the retirement age, moving to a defined benefits plan and suspending COLA adjustments. Yet the reforms are still being finalized in the legal system.

Still, Moody's anticipates that the numbers could look better in data for 2013. "Interest rates are making their way back up, off of the lows in 2012, and returns were higher in 2012," Marcia Vanwagner, vice president and senior analyst in the states rating team at Moody's told BenefitsPro.

But the ratings agency did acknowledge that it could take some time to feel the impact even of successful reforms.

"Most involve new hires. It's very unusual to change pension promises to those who are already employees and retired. Most changes involve future employees. So it will take a long time for the impact of reforms to show through in the numbers," said Vanwagner.

"But will it help is to get these numbers from getting worse. We're seeing increased liabilities because of the markets but not because of fiscally pinched states adding new benefits. So we do think the headline liability numbers will start looking better."

"But states still have to pay and will feel budget squeeze," Vanwagner acknowledged.

Meanwhile, Leo Kolivakis, an independent Montreal-based analyst who writes the Pension Pulse blog, maintains that little can be achieved in the way of meaningful state pension reform without a major overhaul of the system that involves elimination of big government

"If you don't tackle the real issue, which is a lack of proper governance, it's just cosmetic," he told BenefitsPro.

"In Canada, pensions are governed through an independent investment board that will compensate pension fund managers. There are lower costs and they truly have the best interests of the beneficiaries in mind."

Originally published on BenefitsPro.com
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