Virginia Coalition of Police
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Friday, September 23, 2005

By Kathleen Hunter, Staff Writer

The aging of baby boomers in the state government work force is prompting
fears that pension payouts will bust state budgets and is spurring efforts
from Alaska to Massachusetts to reform public employee retirement systems.

Experts say states, counties and cities are short $292.4 billion in money
promised through their public employee retirement systems, makes them
ticking time bombs for state and local budgets.

"Folks are really not paying that much attention. ... It's something that
warrants far more scrutiny," said Sujit CanagaRetna, a fiscal analyst with
the Council of State Governments <> , a
bipartisan umbrella organization for state government officials.

CSG estimates that the vast majority of states' retirement plans for their
employees are underfunded.  CanagaRetna said state officials are just
beginning to recognize the problems lurking in their pension programs, in
part because states have been preoccupied since the 2001 economic downturn
with balancing their books and closing a $235 billion budget gap. States are
just now regaining solid revenue footing.

To limit their pension debts, five Republican governors this year championed
proposals to mimic the private sector by moving state employees from
traditional pension programs -- with guaranteed payouts
-- to 401K-style programs, where the state contributes a set amount each
month to an employee's investment fund. When employees retire, the money in
the fund is theirs.

Alaska Gov. Frank Murkowski <>  is the only one
of the five to win passage of his pension reforms. Alaska is now the first
state to adopt a mandatory 401K-style retirement program for all state
employees, beginning with those hired after July 1, 2006. A handful of
states offer 401K-style benefits to some workers.

California Gov. Arnold Schwarzenegger
<>  backed away
from his proposal after fierce opposition from the state's teachers,
firefighters and other public employee union members. Schwarzenegger's
proposed change to California's public retirement system pitted him against
union leaders and contributed to a recent drop in his approval ratings.

Govs. Mitt Romney of Massachusetts

d=Agov2> , Donald Carcieri of Rhode Island <> and
Mark Sanford of South Carolina <>
also this year proposed switching to 401K-style retirement systems.

But their proposals also faltered in the face of fierce opposition from
public employee unions, which say the 401K-style plans provide less
comprehensive retirement security for state and local government employees.

Alaska estimates that its public employee and teacher retirement systems
currently are short about $5.7 billion owed to employees when they retire.
Supporters say the new program, which will apply to all state employees from
Statehouse janitors to highway patrol officers to teachers, will help ensure
that the state's pension systems stay in the black.

"Employers know up-front their costs, rather than having costs determined
down the road. ... It adds certainty to the system," said Murkowski
spokeswoman Becky Hultberg.

The Bush administration, which spent much of the first part of 2005 lobbying
for private accounts as the cornerstone of a broad overhaul of the Social
Security system, urged support for Alaska's pension change and likened it
the president's Social Security plan, the Anchorage Daily News
<>  reported.

Fiscal experts and anti-tax activists predict the looming pension shortfall,
caused in part by poor returns on state investments in the economic downtown
after the Sept. 11, 2001, terrorist attacks, will worsen as the baby boomers

At least 40 percent of current state employees in 20 states will be eligible
for retirement by 2015, according to a 37-state survey released earlier this
year by the Government Performance Project <> .
Washington, Maine, Tennessee, Michigan and Pennsylvania will have the most
employees reaching retirement age in the next 10 years, according to the
study by GPP, which like is funded by The Pew Charitable
Trusts <> .

In addition to an aging workforce, CanagaRetna of CSG said other factors are
creating unfunded liabilities in state pension programs. For example, states
such as Illinois, New Jersey and North Carolina decreased payments into
their retirement systems to help balance their books during the fiscal
crisis and are now scrambling to catch up, he said.

Currently, the majority of state and local employees are covered by
traditional "defined-benefit" pension plans.

Richard Ferlauto, director of pension and budget policy at the American
Federation of State, County and Municipal Employees <>
, pointed out that West Virginia and New Jersey recently decided to stop
offering 401K-style plans, opting instead to rely exclusively on
traditional, defined-benefit pension plans.

"A well-managed defined-benefit plan with regular contributions into the
system is actually cheaper for taxpayers than a similar defined-contribution
plan," Ferlauto maintains, adding that 401K-style plans can be expensive to
Ferlauto also challenged the projections that state public pension systems
face an impending funding crisis.

"There is a coordinated ideological movement by several conservative
Republicans that has nothing to do with the financial condition of pension
systems," Ferlauto said.

Anti-tax groups, meanwhile, are rooting for reform. Because many states
added perks to their pension packages during the 1990s, current workers'
contributions to the systems don't cover benefits promised to retirees, said
Daniel Clifton, chief economist with Americans for Tax Reform
<> . Clifton said switching to 401K-style retirement
plans would solve the problem because employers would put aside money for an
individual worker's retirement over the course of the worker's career.

"You're not going to have enough new workers to replace the older workers.
That's a recipe for fiscal disaster. ... I believe personally it's a pension
time bomb waiting to happen," he said.

Other approaches states are considering to shore up their retirement systems
include issuing bonds, trimming benefits and consolidating multiple pension
systems within a state.