State pensions face loss of billions

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State pensions face loss of billions

By Dennis Cauchon

USA TODAY, August 5, 2003

State taxpayers are having to spend billions of dollars to prop up public pension plans hit hard by stock-market losses, which squeezes state budgets at a time when tax collections are growing slowly.

States will contribute $9.6 billion to the nation's 12 biggest state pension plans this year, a USA TODAY survey found. That's a 35% increase in the past two years, but it is still billions of dollars less than what is needed to fund retirement benefits guaranteed to public employees. (Related story: W. Va. in deepest pension peril.)

The 123 public pension funds that operate statewide, covering both state and local workers, have $180 billion less in assets than they need to cover their long-term benefit obligations, reports Wilshire Associates, an investment adviser in Santa Monica, Calif. That amount is almost twice the size of California's state budget.

The stock-market drop shrank pension assets 6% in 2002, while liabilities grew 10%, Wilshire says. Forty-two percent of pension assets are invested in stocks, the firm says.

The benefits of the 23 million public employees and retirees are not at great risk. State courts consistently have ruled that taxpayers must pay all promised benefits, regardless of the financial health of a state or its retirement system. (Related link: States pay millions into retirement funds)

Although public pension funds aren't at a crisis stage now, major problems loom. Some experts say that pension funds are in such bad shape that huge tax increases may be required to pay benefits when baby boomers begin to retire in 2010, says Stephen D'Arcy, an accounting professor at the University of Illinois who has studied public pensions. The tax hikes could be so substantial in some states that they will depress the local economy for a generation, he says.

Aging industrial states — including Illinois, Ohio and Indiana — are especially vulnerable because the number of workers paying taxes is growing more slowly than the number of retirees.

Public retirement systems invest heavily in the stock market. They depend on investments earning about 8% annually to generate the money needed to pay retirement benefits. To make up for recent stock market losses, some states have poured more money into their pension funds. But others have slashed contributions because they are trying to balance their budgets at the same time that a weak economy has cut the growth in their tax revenue.

What some cash-strapped states are doing:

• California plans to borrow to make a required $2.2 billion contribution to its Public Employees Retirement System, the nation's largest. California, facing a $9 billion budget deficit, also is withholding a $500 million payment to a separate retirement system for teachers. That fund has sued to get the money.

• New Jersey, which hasn't contributed to its pension fund since 1996, will spread a $750 million contribution over five years, from 2004 through 2008.

• Indiana abandoned an effort to repair its troubled teacher etirement system. Instead, it raided the plan for $215 million to help balance the state budget.