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Underfunded Public Pensions?
With stock prices plummeting, the housing market in the basement, and banks and automakers seeking bailouts, what else can go wrong in today's economy?
For many public employees, the next shoe to drop could be their retirement pensions. Across the country, public employers -- from states to school districts -- have lost billions of dollars that cover the liability of their pension funds. The worst hit has been the California Public Employees' Retirement System (CalPERS), whose pension fund lost 31.1 percent in a year, or $81.4 billion; Pittsburgh's pension fund has lost $124 million, or 25 percent over 11 months; Florida's pension fund lost 27 percent over 13 months; and New York state's pension fund has lost 20 percent of its value since April 1. The good news, say experts, is that the losses at this point exist only on paper. Yes, public pension funds have been hit as hard as anyone. But fortunately, pension funds are "smoothed out," an actuarial strategy that averages out gains and losses over a three- to five-year period. So, by the time most baby boomers retire, the market should be doing better and pension funds will be back in shape, they say. "Public pension funds are large investors affected by the market decline like [others]. There's no getting around that fact. [However], public pension plans employ various methods and strategies to smooth out market volatility. ... Pension funds exist essentially in perpetuity. The liability comes due over decades," says Keith Brainard, research director for the National Association of State Retirement Administrators, based in Baton Rouge, La. Most public pension plans are funded 80 percent to 90 percent; which means that the assets equal 80 percent to 90 percent of the promised benefits. And that's pretty good, experts say. In fact, since the mid-1990s, government employers have been on a formal regimen to fully fund their pension funds. "They're only one-third of the way. ... Pension funds are in relatively good shape. Assets are 87 percent of their liability," says Alicia Munnell, director of the Center for Retirement Research at Boston College.
Unfunded Options Thus, government employers don't have to take drastic actions to make up for unfunded pension liability. The fund most likely to react is CalPERS, which has warned it might ask the state for more money in July 2010, and ask local governments in July 2011, according to the San Francisco Chronicle. Government employers have three options to cover their unfunded pension liability: raise taxes, increase workers' contributions or cut costs. Any tax hike will depend on how big the pension fund was to start with, and the government's overall budget, but keep in mind that pension contributions are less than 3 percent of state and local budgets, Brainard says. Employers are far more likely to increase employee contributions to the pension fund. Unlike most private pension funds, public pension funds rely on payroll deductions. Government employers can also change the rules for new employees, such as increasing the vesting period. Finally, employers can resort to hiring freezes, layoffs or attrition to cut overall costs.
Public employees are actually far more secure than many private workers with defined-contribution plans such as 401(k)s. Public pensions are protected by state law and have the power of contracts; one-quarter of public employees receive pensions instead of Social Security, says Brainard. And while public pension funds are not insured, no one expects states, cities or school boards to go bankrupt. "For large pension funds, [public employees] are in a much better position than [private workers] out there on their own with a 401(k)," says Beth Almeida, executive director of the National Institute on Retirement Security. "When you see these kind of losses in the stock market, they're obviously shocking and dramatic, but ... because [pensions] don't all come due immediately, you have time to make up for losses. I don't know of a single case where [the fund] doesn't have the money to pay benefits."
Healthcare worries Public workers should be far more worried about their healthcare retirement plans, which are poorly funded. "There is $1.5 trillion in unfunded liability for post-retirement healthcare and [only] $500 billion [unfunded] for pension plans. On the healthcare side, it is three times larger," says Adam Reese, senior consultant with the Hay Group in Arlington, Va. "There is very little advance funding for healthcare." Fortunately, employers' hands are not tied when it comes to adjusting healthcare plans, experts say. Many states have already lengthened the vesting period, and some have even eliminated their plans. Employers are also encouraging retirees over 65 to rely on Medicare. While the financial experts wrangle with the budgets, it's left to HR to communicate the situation to employees, attract new talent and make sure employees make the most of their options. "The HR professionals are the unsung heroes of the public sector. They have leadership posts that give them a long-term view of what to do to keep the organization healthy," says Elizabeth Keller, executive director of the Center for State and Local Government Excellence in Washington. "They see long-term needs, look at changing demographics and are on top of employment and recruitment. ... HR can make sure employees have choices, and they're pretty savvy about these things."
December 17, 2008 Copyright 2008© LRP Publications |
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