MarketNeutral
9th April 2010, 07:28 AM
State governments from New Jersey to California that are struggling to close budget deficits are skipping or deferring payments to already underfunded public-employee pension plans. The moves could help ease today's budget pressures, but will make tomorrow's worse.
New Jersey's governor, a fiscal conservative, has proposed not making the state's entire $3 billion contribution to its pension funds because of the state's $11 billion budget deficit. Virginia has proposed paying only $1.5 billion of the $2.2 billion required pension contribution. Connecticut Republican Gov. M. Jodi Rell is deferring $100 million in payments this year to the pension fund for state employees to help close a $518 million budget gap
"Yes it's wrong," said New Jersey Republican State Sen. Robert Singer. "But the governor "has no other choice."
The deferrals come as pension experts say the funds need the money more than ever, after losses during the financial crisis. Before the 2008 market collapse, 54% of public pensions for states and local governments had assets totaling at least 80% of their liabilities. Last year, only 33% of plans met that criterion, according to a study released Thursday by the Center for State and Local Government Excellence and the Center for Retirement Research, both nonpartisan groups.
The issue of the contributions is heating up right now with legislatures in the thick of budget season. The recession has left states with less means to make their pension payments just as they are rising.
The deferred payments are particularly irksome to some public union employees who say they have been unfairly blamed for the fiscal burden of public pensions on taxpayers.
"The state has kicked the can and now the can has become a 55-gallon drum," said Anthony Wieners, president of the New Jersey State Policemen's Benevolent Association. "But our members have sacrificed, some with their lives, and they deserve and expect to have their full pension."
Of 71 pension plans that submitted 2009 contribution figures so far, the Center for Retirement Research found that more than 50%, or 39, reported not paying their full pension bill.
The "kick the can" approach has surfaced before in times of trouble, for example in years after the Sept. 11 attacks. Sometimes the pain gets alleviated if markets improve and pension funds' assets rise.
But this time funds are expected to face pressure because accounting practices are pushing out some of the pain of 2008's market declines into later years, leading to a jump in pension contributions next year.
The delays mean higher bills in the future, because pension payments—the funds' liabilities—are guaranteed to the government workers whose money the pension funds manage. With 401(k) plans, by contrast, employees can enjoy more upside if markets rise but also stand to lose savings if they decline.
In a worst-case scenario, in which a public pension fund was so underfunded that there were concerns it wouldn't be able to pay benefits, a state could resort to taking funding away from schools, social-service programs or other services to fully pay the pension bill.
While funds on average remain close to the recommended 80% funding level, the ratio is expected to decline further unless contribution levels increase, Thursday's study concludes.
(State public pensions are generally viewed as adequately funded at the 80% level because, unlike private corporate pensions with stricter standards, governments generally don't face the same risks of bankruptcy that companies do.)
In New Jersey, Republican Gov. Chris Christie followed steps of his predecessor to address a budget gap for the coming fiscal year by proposing last month to skip a $3 billion payment to the retirement systems for teachers, state employees and other public employees, valued at $66 billion as of June 30.
New Jersey's prior governor, Democrat Jon Corzine, mostly missed a $2.5 billion payment to the pension system and allowed cities and other local governments to pay only 50% of their share of the pension contribution. The fund is one of the most underfunded in the country.
Illinois, with the worst unfunded pension liability in the country, has failed to pay its full annual contribution for its five retirement systems in the past few years. Democratic Gov. Pat Quinn had proposed that the state pay $300 million less than the total $4.5 billion estimated contribution to the state's pension systems for the next fiscal year. The state last month passed bills to scale back pension benefits; the measures are expected to save $100 billion over several decades, according to legislators.
Even states that had been making their full annual contributions have fallen short this year because of budget issues. Connecticut previously had paid all or a big chunk of its annual required contribution for the state employee fund, but this year it paid less.
"Connecticut has only reduced the contribution as a result of the extraordinary financial situation facing the state," said Jeffrey Beckham, undersecretary for legislative affairs.
Some states, like Kansas, have legal limits on their contributions that prevent them from paying the full amount. That has helped reduce costs for those governments but also hurt the funding status of pensions. Some legislators in Kansas have recently contended that was a dangerous course. A bill currently in the state Senate would gradually increase the employer contributions until it reaches the annual required contribution.
Even states that have traditionally met their full contributions have seen funding levels decrease, largely because of the decline in their pension fund's assets because of investment losses. The $113 billion Florida Retirement System, with strict funding payment policies, had been overfunded since 1997 but dropped last year to 88.5%. The state made more than 100% of its annual pension payment to the system from 2007 to 2009.
A few states have tried to mitigate the impact of their delay. Because Virginia recently decided not to pay $620 million of its annual pension-fund payment for the next fiscal year to help balance the budget,, the state legislature approved a repayment measure earlier this year.
"We understand this is money that has to be replenished," said Republican State Sen. Walter Stosch, an accountant.
http://online.wsj.com/article/SB10001424052702304830104575172262909794220.html?m od=googlenews_wsj
New Jersey's governor, a fiscal conservative, has proposed not making the state's entire $3 billion contribution to its pension funds because of the state's $11 billion budget deficit. Virginia has proposed paying only $1.5 billion of the $2.2 billion required pension contribution. Connecticut Republican Gov. M. Jodi Rell is deferring $100 million in payments this year to the pension fund for state employees to help close a $518 million budget gap
"Yes it's wrong," said New Jersey Republican State Sen. Robert Singer. "But the governor "has no other choice."
The deferrals come as pension experts say the funds need the money more than ever, after losses during the financial crisis. Before the 2008 market collapse, 54% of public pensions for states and local governments had assets totaling at least 80% of their liabilities. Last year, only 33% of plans met that criterion, according to a study released Thursday by the Center for State and Local Government Excellence and the Center for Retirement Research, both nonpartisan groups.
The issue of the contributions is heating up right now with legislatures in the thick of budget season. The recession has left states with less means to make their pension payments just as they are rising.
The deferred payments are particularly irksome to some public union employees who say they have been unfairly blamed for the fiscal burden of public pensions on taxpayers.
"The state has kicked the can and now the can has become a 55-gallon drum," said Anthony Wieners, president of the New Jersey State Policemen's Benevolent Association. "But our members have sacrificed, some with their lives, and they deserve and expect to have their full pension."
Of 71 pension plans that submitted 2009 contribution figures so far, the Center for Retirement Research found that more than 50%, or 39, reported not paying their full pension bill.
The "kick the can" approach has surfaced before in times of trouble, for example in years after the Sept. 11 attacks. Sometimes the pain gets alleviated if markets improve and pension funds' assets rise.
But this time funds are expected to face pressure because accounting practices are pushing out some of the pain of 2008's market declines into later years, leading to a jump in pension contributions next year.
The delays mean higher bills in the future, because pension payments—the funds' liabilities—are guaranteed to the government workers whose money the pension funds manage. With 401(k) plans, by contrast, employees can enjoy more upside if markets rise but also stand to lose savings if they decline.
In a worst-case scenario, in which a public pension fund was so underfunded that there were concerns it wouldn't be able to pay benefits, a state could resort to taking funding away from schools, social-service programs or other services to fully pay the pension bill.
While funds on average remain close to the recommended 80% funding level, the ratio is expected to decline further unless contribution levels increase, Thursday's study concludes.
(State public pensions are generally viewed as adequately funded at the 80% level because, unlike private corporate pensions with stricter standards, governments generally don't face the same risks of bankruptcy that companies do.)
In New Jersey, Republican Gov. Chris Christie followed steps of his predecessor to address a budget gap for the coming fiscal year by proposing last month to skip a $3 billion payment to the retirement systems for teachers, state employees and other public employees, valued at $66 billion as of June 30.
New Jersey's prior governor, Democrat Jon Corzine, mostly missed a $2.5 billion payment to the pension system and allowed cities and other local governments to pay only 50% of their share of the pension contribution. The fund is one of the most underfunded in the country.
Illinois, with the worst unfunded pension liability in the country, has failed to pay its full annual contribution for its five retirement systems in the past few years. Democratic Gov. Pat Quinn had proposed that the state pay $300 million less than the total $4.5 billion estimated contribution to the state's pension systems for the next fiscal year. The state last month passed bills to scale back pension benefits; the measures are expected to save $100 billion over several decades, according to legislators.
Even states that had been making their full annual contributions have fallen short this year because of budget issues. Connecticut previously had paid all or a big chunk of its annual required contribution for the state employee fund, but this year it paid less.
"Connecticut has only reduced the contribution as a result of the extraordinary financial situation facing the state," said Jeffrey Beckham, undersecretary for legislative affairs.
Some states, like Kansas, have legal limits on their contributions that prevent them from paying the full amount. That has helped reduce costs for those governments but also hurt the funding status of pensions. Some legislators in Kansas have recently contended that was a dangerous course. A bill currently in the state Senate would gradually increase the employer contributions until it reaches the annual required contribution.
Even states that have traditionally met their full contributions have seen funding levels decrease, largely because of the decline in their pension fund's assets because of investment losses. The $113 billion Florida Retirement System, with strict funding payment policies, had been overfunded since 1997 but dropped last year to 88.5%. The state made more than 100% of its annual pension payment to the system from 2007 to 2009.
A few states have tried to mitigate the impact of their delay. Because Virginia recently decided not to pay $620 million of its annual pension-fund payment for the next fiscal year to help balance the budget,, the state legislature approved a repayment measure earlier this year.
"We understand this is money that has to be replenished," said Republican State Sen. Walter Stosch, an accountant.
http://online.wsj.com/article/SB10001424052702304830104575172262909794220.html?m od=googlenews_wsj