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STATE PENSION THREAT LEVELS

LAST UPDATED: June 1, 2006

This report is produced by the AFL-CIO Office of Investment

(202) 637-3900

dpedrott@aflcio.org

THREE ALARMS          Direct privatization threat to public employee retirement security.

 

Alaska            State officials expect to put in place a new retirement plan for government workers and public school teachers hired after July 1, even though the plan as written is not likely to qualify for tax-exempt status under Internal Revenue Service rules.  Unions say they are weighing a legal challenge.  The Alaska Legislature adjourned its regular session last week without approving a 34-page bill that would clean up technical problems with the controversial retirement overhaul that was approved by lawmakers in 2005.  The proposed changes were largely designed to insure that the new plan complied with IRS codes and regulations. Many addressed a provision added late in the session to create a defined benefit plan for death and disability benefits. The hastily-added benefit plan was never fully incorporated into last year's legislation. All new public employees hired after July 1, 2006, will be placed into a 401(k) style, defined contribution retirement plan.

 Montana         According to MEA-MFT, a bill to mandate a DC plan for new employees (LC0013-2007) has already been pre-filed and is in the drafting process for the 2007 session.  Montana has established a committee to address pension issues, which is made up of representatives of the three boards that run the state retirement systems. The goal is to try to close the gap that exists now between managing assets and liabilities.  Two members each from the Board of Investments, the Public Employees Retirement Board and the Teachers Retirement Board sit on the Joint Issues Committee. The panel was created by the governor's office.  Montana has kept the asset and liability sides separate for two decades, but is now seeking a more unified approach.  Unlike other states, Montana split the investing and benefit-administration duties, with the two retirement system boards handling benefit administration and the Board of Investments investing the assets.  Montana's pension funds are an estimated $1.46 billion in the red, and the deficit is said to have been caused by stock market losses, benefit hikes and other factors. In December 2005, state legislators used $125 million in state surplus money to offset the underfunding. 

 New Jersey  Senate Republicans have unveiled a plan to reform public employee pensions.  The legislation proposes studying 401(k)-type retirement plans for new public workers, restricting pension calculations to one job, prohibiting pension boosting through large salary increases and banning public contractors from receiving pensions.  Many of the ideas were proposed last year by a task force created by then-Gov. Richard J. Codey, a Democrat, but the Legislature hasn't acted on any of them. Assembly Democrats have proposed mulling pension reforms this summer and Gov. Jon S. Corzine proposed some as part of his budget plan.  Senate Minority Leader Leonard Lance, R-Hunterdon, said the proposals would make state retirement benefits similar to those in the private sector.  Republicans are outnumbered in the Senate 22-18 and have little influence over what legislation is considered.  Unlike health benefits, which must be negotiated with public worker unions, the Legislature has authority to rework pension benefits. The Public Employee Retirement System and other public worker pension plans in New Jersey are facing a $12.1 billion shortfall that began in 1994 when Republican Gov. Christie Whitman raided pensions to pay for a $1.2 billion tax cut for the wealthy.  Whitman increased employees' contribution to the plan to 5 percent, and through a series of legal maneuvers, she and subsequent governors allowed the state to ride the stock market to cover its pension obligations, deferring payments into the plan.  The state pensions director testified last fall that they had shortchanged the pension funds by $5.5 billion.  In May 2005, Acting Gov. Richard Codey appointed a Benefits Review Task Force that concluded current pension and health benefits cannot be maintained without raising taxes.  Union members turned out for three public hearings and testified for proper funding of the pension plan and against any two-tier schemes that would replace the current defined benefit plan for younger workers and leave them with only a 401(k) savings plan.  Gov. John Corzine, a Democrat, submitted his annual budget to the Legislature on March 21 and included $1.3 billion for the pension system – but whether a sales tax to pay for it will pass remains unclear.

Ohio           State pension systems face $30 billion shortfall.  State Teachers Retirement System of Ohio estimates that at its current status, it would take 55 ½ years to become fully funded, according to a report sent to the Ohio Retirement Study Council. The fund could be 30 years from full funding by 2015 with no changes, but if it makes administrative changes such as increasing employer and employee contributions, it could get to the 30-year mark by 2009. The system had $56.4 billion in assets as of June 30, 2005.

 

TWO ALARMS     Significant threat of undermining retirement benefits.

 

 California        Two initiatives of Republican Mayor Jerry Sanders will appear on November ’06 ballot: to make future pension increases subject to voter approval and to outsource more city jobs.  Hybrid proposal introduced for the ’06 session by Assemblyman Keith Richman—a Republican candidate for State Treasurer. Proposal would offer switch for new employees to DC plan and set restrictions on benefit formula. Ballot initiative unlikely in Nov. ’06 following Schwarzenegger's landslide initiative defeat in Nov. ‘05 special election.

Hawaii          The state’s unfunded liability grew last year to a record $4.07 billion.  Hawaii's government pension fund, operated by the Employees' Retirement System, has more than $9.2 billion in assets and receives funding from the state and counties, as well as returns on its investments and to a smaller extent, employee contributions.  Up until recently the governments could hold off paying their full contribution into the fund, using excess returns from the investments to offset their own payments.  That, coupled with three sub-par investment years this decade, combined to give the ERS its large unfunded liability.  The Lingle administration and the state Legislature have committed to paying down the liability with a 25-year plan.  Rep. Kirk Caldwell, a Democratic state representative, favors paying down the ERS liability and overfunding it so it becomes self-sustaining.  He also believes a discussion of defined-contribution plans needs to take place.

  Illinois              Gov. Rod Blagojevich signed the new state budget into law May 22nd, finalizing a plan to spend more on education and health care by skimping on pension payments and dipping into special funds. The legislature lowered the state's annual payment to pension systems by $1.1 billion after a similar cut last year. That means the underfunded pensions will grow even weaker. A leading Wall Street bond house recently issued a negative outlook toward the state government's finances because of concerns over the billions of dollars owed to Illinois' public pension systems.  The state faces a $39 billion funding shortfall in its pension funds and, under a 1995 law, is committed to an ever-increasing schedule of payments.    A DC bill introduced by state Senator Brady’s bill would give the 401(k) option to all state retirement system members.  Under the proposal, an employee wishing to move into a dc system would receive a check from the state for past employee contributions, past state contributions, and investment return on the money.  No pension benefits would be changed for those staying in the current db system. 

   Kentucky     On February 15, 2006, Representative Joe Bowen (R) introduced a bill that would establish a Kentucky Retirement Systems Task Force to conduct a comprehensive analysis of the current defined benefit plan, study the feasibility of offering a defined contribution plan for new hires, and make recommendations.  HC 173 applies to the Kentucky Employee Retirement System, County Employee Retirement System, and the State Police Retirement System. The teachers have a separate plan, which this bill does not address.   State retirement fund is estimated to be underfunded by $4.5 billion.     Chronic underfunding is in part to blame.  Since the early 1990s, except for a few years of economic prosperity, governors and lawmakers have given the retirement system less than recommended. In his 2006 budget address, Governor Ernie Fletcher proposed a significant increase in the employer contribution rate for the Kentucky Employee Retirement System; a 24% increase in the first year and a 10.9% increase in the second year. 

   Maine           State retirement systems face $2.8 billion in unfunded liabilities.  Legislation was introduced in last year’s session that would establish a new retirement system for teachers and state employees hired after 12/31/2005.  The new system would make participation in the Social Security program mandatory for participants and contain a DC component.  Under a state law passed in 2003, 32% of the state budget surplus must go toward paying down the unfunded liability of the state retirement system.  A frontrunner for the Republican gubernatorial nomination has pledged to focus on changing the pension system.

       Michigan        On January 25, 2006, Gov. Granholm (D) unveiled a proposal to allow small business employees to invest in a state-run 401(k) program.  There are well over 100 public DB plans in the state, with combined assets of more than $60 billion.  Increasingly, these local and county level plans have been targeted for privatization (Wayne and Oakland counties, Ann Arbor, Livonia & Warren).  Michigan Office of Retirement Services administers four DB plans: one each for state employees, school employees, state troopers, and judges.  In 1997, the legislature closed the state employees plan to new entrants.  Current shortfall is $15 billion.

        Minnesota     On March 12th, the House of Representatives began debate on HF 2833, authored by Representative Marty Seifert which is the Omnibus State Government Finance Bill.  The bill would have require a special study of converting Minnesota public pension plans from defined benefit to defined contribution plans.  After union member mobilization, the pension study was removed from the bill.  The motion to delete the study was authored by Representative Steve Smith and supported by a bipartisan group of labor friendly Democrats and Republicans.       

         Oregon         Three years after Gov. Kulongoski worked with the Oregon Legislature to overhaul the Public Employees Retirement System, PERS remains a hot-button issue in the governor’s race.  Republican nominee Ron Saxton is making PERS reform a centerpiece of his campaign for governor. Saxton proposed that all public employees could be fired temporarily, enabling the state to dismantle PERS, replace it with a 401(k)-style retirement plan, then rehire the workers.  Public employees are upset that the governor and Legislature forced state workers to sacrifice more than their share when the state faced a revenue crisis in 2003.  Pension bonds have worked well in Oregon, and the state has seen a projected $17 billion pension gap shrink to $6 billion through bond sales.  But a State Supreme Court ruling in March invalidated other cost saving measures.  Republicans hold a majority in the State House, while the Democrats hold the State Senate and Governor’s mansion.

      Pennsylvania Recently, Pennsylvania Speaker of the House John Perzel announced the creation of a House Panel to review and provide recommendations regarding the crisis facing the pension and retiree healthcare plans for state employees.  The Speaker asked Representatives Craig A. Dally (R-Nazareth), Mike Turzai (R-Pittsburgh), and Stanley E. Saylor (R-Red Lion) to head up this panel and solicit recommendations from public and private sector experts on pension and healthcare benefits.  The right-wing group Commonwealth Foundation recently issued a highly questionable report which found Pennsylvania taxpayers’ costs to fund SERS and PSERS, assuming an annual investment return of 8.5%, will increase from $693 million in Fiscal Year 2005-06 to an estimated cost of $4.742 billion in Fiscal Year 2015-16 and $5.583 billion in Fiscal Year 2020-21.  The group called on legislators to move new employees into a defined contribution system. 

 

ONE ALARM         Potential threat through legislative uncertainty or funding shortfall.

 

   Alabama      State pension system has an unfunded liability of $5.04 billion, according to 2004 Wilshire Report on State Retirement Systems.  The state’s Finance Director, Jim Main, has indicated that a 401(k) pension privatization “may be a direction we have to go one day, but that is not something we’re working on presently.”

   Arizona        Due to a variety of factors, including benefit enhancements in 2001, lower investment returns than expected, and changing demographics, the pension plan contribution rate continues on an upward trend. The actuarially recommended rate for fiscal year 2005-06 is 7.4 percent for both the employer and employee, which includes 6.9 percent for the pension plan and 0.50 percent for the long term disability plan. The contribution rate is scheduled to increase for the 2006-07 fiscal year to 9.1 percent, which includes 8.6 percent for the pension plan and 0.50 for the long term disability plan. Actuarial projections show the contribution rate surpassing the 10 percent range within the next few years.  Legislation passed in 2005 requires the Arizona State Retirement System to provide a report by the end of each calendar quarter during fiscal year 2005-2006 to the joint legislative budget committee on the discussions and actions of the state retirement system board regarding their efforts to minimize the retirement contribution rate.  State pension system has suffered $4.1 billion in pension losses in the past two years.  To make up for the shortfall, for fiscal 2004 state employees and their employers will contribute 5.7% to the retirement fund, an increase of 129%.  The retirement fund’s outside accountant has indicated that to maintain the necessary level of assets, future contribution changes may go above 9%.

    Colorado       After legislators, public-employee unions and the CoPERA struck a   compromise on April 27th to reform the state's largest pension plan, the right-wing group Americans for Prosperity was forced to withdraw their pension privatization ballot initiative.  The legislation emerged in the Assembly's final days as Democrats, PERA and unions hatched a plan to fix the pension plan's $11.3 billion unfunded liability. The governor signed on to the compromise last week.  Current members' benefits are basically untouched, with changes in the plan affecting only members hired Jan. 1, 2007, and after.  Assuming PERA investment managers can average an 8.5 percent return, the pension plan under the bill will maintain about three-quarters of the funding level it needs for the next 30 years before moving toward full funding.  The bill raises the minimum retirement age for new hires from 50 to 55.  Employees can retire at that age with 30 years of service. PERA launched the new year by implementing a DC plan as an alternative to the DB plan to employees hired after January 1, 2006; the move passed at the end of ‘04.

      Connecticut The union for Connecticut teachers continues to lobby for the state to fully fund their pension.  For some time, teachers have pushed for an amendment to the Connecticut constitution that would force the state to make its required contributions to their pension fund each year.  So far, the amendment has not gained traction.  Instead, lawmakers have been urging state officials to use part of this year's budget surplus to make a full contribution this year.  The teachers’ pension fund has a funding gap of more than $5 billion. The pension was only 60% funded as of 2004.      That's compared to 83.5% on average for other states.  Connecticut teachers are not part of the Social Security system, but they contribute 7.25% of their salaries to the retirement fund.           

   Indiana              Teachers Retirement Systems (TRS) faces $8.4 billion deficit.  Legislature recently moved $380 million from pension stabilization fund to meet retirement costs.  Recent editorial echoed the Reason Foundation report and called for moving new employees into defined contribution plans, scaling back benefits and raising the retirement age.

Kansas               PERS system unfunded liability reached $4.74 billion in 2004. 

State is finding more money to contribute to the fund, and pension officials predict the shortfall will start contracting in 2020.  Democratic Governor.

Louisiana        Louisiana State Employees Retirement System (LASERS) faces a $4 billion shortfall.  Pension consolidation bills are likely to be pre-filed for the Louisiana Regular Legislative Session beginning at the end of March. In 2005 Legislative session, state Rep. Pete Schneider introduced a bill that would require state workers hired after July 1, 2006, to contribute 8% of their paychecks toward retirement benefits.  Current members of LASERS contribute 7.5% toward the retirement system.

Mississippi        Public Employees Retirement System (PERS) is facing a $5.7

billion shortfall.  State officials are examining various proposals, from bond debt offers to changes in contribution rates.  Republican Governor, Democratic State House, Republican State Senate.

Nevada               January 8, 2006, editorial in the Las Vegas Review-Journal called for “reforming PERS and eliminating retiree health care subsidies for future employees by instituting defined-contribution retirement plans, such as 401(k) accounts.  That would keep their civil servants around -- and save Nevada taxpayers billions of dollars in the century ahead.”  Republican Governor, Democratic Assembly, Republican Senate. 

      New               Public pension system in 70% funded.  SB 385, up for consideration in

      Hampshire     2006 Legislative session, would re-organize the NHRS Board of Trustees.  Under the bill, the legislature could drastically lower the statutory level of benefits by manipulating assumption rates and acturial assumptions, and decision making power would shift from the Board to the legislature.  

   New Mexico    The New Mexico legislature passed legislation in ‘05 establishing a task force that directed the 70% funded Educational Retirement Board to study the feasibility of switching to a DC plan for state educators.   The task force completed it's mission and a bill will be introduced in ‘06 to make the task force ongoing.  Task force members have become learned on pension and investment issues. Bills are expected to reform composition of ERB board and tinker with contribution rates and years of service formula for ERB as a way to improve funding of ERB DB plan. No anti-DB activists were seen at hearings. No support at all for a DC conversion plan for ERB in ‘06--no bill will be introduced. PERA, with a high funding level, and good reputation was used as a model for support of DB system.

      Oklahoma         Democrats and Republicans unveiled competing solutions in May to the question of how to improve Oklahoma's teacher retirement system. House Democrats suggested putting $25 million a year into the system for the next two decades, increasing its fund size by $500 million.  Interest earned from fund would make the fund fiscally viable.  Senate and House Republicans said they would support a constitutional amendment that would redirect excess mineral income into the system. The extra income is now going to a fund with the Oklahoma Commissioners of the Land Office, which now exceeds $1 billion. Rep. Tad Jones, R-Claremore, said the money should be dedicated to the teacher retirement system until it is funded at a 90% level. The system is currently funded at 49%, he said.  Republicans also announced their support of SB 1894, which seeks to reform the teachers' system, as well as retirement funds for public employees and judges.  Oklahoma's state pension systems are in a serious financial crisis with more than $10 billion in unfunded liabilities, according to a draft copy of an Oklahoma Pension Oversight Commission report.  The state Teachers' Retirement System is in particularly bad shape with $7.1 billion in unfunded liabilities and a ratio of actuarial assets to actuarial liabilities of only 49.5 percent.  It is the third worst-funded public pension system in the nation.  Standard & Poor's recently ranked Oklahoma's pension funds 49th out of 50 states in percentage of unfunded liabilities. Only West Virginia fared worse.  The state has seven pension systems, and their financial conditions vary widely.  The judges pension fund is in great shape.  It is more than fully funded with a funding ratio of 108.7 percent, even though it also has lucrative benefits that allow judges of retirement age with 25 years of service to retire and annually receive 100 percent of their salaries, Meacham said.  Three other pension funds -- the Oklahoma Law Enforcement Retirement System, Oklahoma Police Pension and Retirement System and Department of Wildlife Retirement Plan -- all hover around the 80 percent funding level.

Rhode Island   Citing increased state contributions to the Retirement Fund ($278

million this year from $184 million last year), Republican Governor Don Carcieri proposed several pension measures.  The legislature adopted a package of pension reforms in the ’05 session, which apply to new and unvested state employees: instituting a minimum retirement age, limiting cost of living increases, and reducing the maximum benefit.  Democratic legislature with strong majorities in both bodies.

       S. Carolina     State pension system faces $7.6 billion in unfunded liabilities.  In his 2005 State of the State speech, Governor Mark Sanford referred to the state pension systems as a “ticking time bomb.”  Recently passed legislation increased the employee contribution rate, and requires retirees returning to work to start contributing to the system (this change is being challenged in the State Supreme Court).  On October 1, 2005, a six-member investment commission was appointed to begin overseeing the $25.6 billion investment portfolio.      

 Texas             Actuary hired by the city of Fort Worth recommended that employees pay an extra 2 percent of their salaries, that the city kick in an extra 3 percent and that the city eliminate automatic cost-of-living increases for new hires.  Houston's pension gap at one point was almost $2 billion, forcing the city to take on significant debt to cover the shortfall.  In Dallas, a $20 million shortfall was discovered.

 Virginia          HB 1331 was introduced 1/11/2006 by Delegate Robert Bell.  The bill would create a new optional defined contribution plan for all employees who enter on or after July 1, 2006, into any position covered by any retirement plan administered by the Virginia Retirement System.  The employee would have 90 days after entering into such a position to elect to participate in the defined contribution plan or the retirement plan for which he is otherwise eligible.

 Washington  State pension systems faces $4 billion unfunded liability in covering 339,257 active members and 104,766 retirees.  In order to meet the Legislature's statutory goal of balancing the pension system by 2024, the government should allocate slightly more than $1 billion to the fund in the 2007-09 budget, according to the state actuary.  That's a $712 million increase over the current budget, which runs through June 2007.  Governor Christine Gregoire has proposed adding $176 million for pensions right away, before the next budget cycle, from the state's projected surplus.  In addition to Gregoire's $176 million proposal, leaders in the House and Senate have suggested setting aside as much as $300 million from the projected surplus for a future payment to the pension fund. That idea will be on the table when lawmakers reconvene in Olympia in January, 2006.

West Virginia  Gov. Joe Manchin and lawmakers put almost the entire projected surplus ($718 million) over the next two years toward paying off a $5 billion shortfall in the retirement fund. Lawmakers recently closed a DC retirement plan for teachers and re-opened a long closed defined benefit plan.  In a March election on whether to accept the new db plan, 61% voted to return to a db plan and both Legislative thresholds were met.  A West Virginia teacher has filed a lawsuit to stop the merger of the state’s current Teachers’ Defined Contribution Plan with the Teachers’ Retirement System.

 

OTHER

Maryland      Maryland's teachers and state employees will get better retirement pensions thanks to $120 million in improvements signed into law Tuesday.  The pension bill allows people hired after 1998 to retire with 54 percent of their pre-retirement income, up from about 42 percent.

The new law calls for the workers to contribute more money toward their retirement, from 2 percent to 5 percent over three years. It raises the multiplier, or the percentage of the average salary that is paid for each year of service, from 1.4 percent to 1.8 percent.