The Government Accountability Office recommends that states should have a funding level of 80% at least. According to a recent report from the Pew Centre on the States, only one state was fully funded in 2010, the most recent year examined, and 34 were funded at below 80%, up from 22 in 2008. Between 2009 and 2011, 43 states made some effort to change by increasing employee contributions or cutting benefits (see map). About 17 states increased employee-contribution requirements last year. Sixteen states increased age and service requirements and 11 states revised their COLAs. Deval Patrick, the governor of Massachusetts, increased the retirement age by five years, to 60. Dannel Malloy restructured Connecticut's plan, helping to save the state nearly $6 billion over the next two decades. But there is still a long way to go. Pew found that the gap between promised benefits and the money set aside to pay for them increased by 9%, to at least $1.38 trillion, in 2010.
The gap, however, is actually more than $4 trillion, according to Josh Rauh of Kellogg School of Management. Pew relies on the states' own actuarial assumptions of how much money pension funds are expected to earn. For most states this rate of return is about 8%, a fantastical figure given the current low rates on cash and bonds. The Government Accounting Standards Board (GASB) will decide on June 25th whether to impose new rules that would require states to use a more realistic rate. The Centre for Retirement Research at Boston College found that if the proposed rules had been in effect in 2010, funding levels would have dropped from 77% to 57%.
Many states that try to bring in pension reforms are ending up in court. Unions argue that to take what has been promised to them is unfair and illegal. There are three different types of court cases, says Alicia Munnell of the Centre for Retirement Research. The first involves COLAs. Some courts, including a New Jersey superior court last month, have upheld COLA cuts and suspensions. The second sort involves changing the contribution rate for current workers; courts in New Hampshire and Florida have ruled against the states in these cases. The third sort is the kind that might arise in Rhode Island, concerning benefit changes for current workers and current retirees. It is not yet clear which way these last decisions might go.
For decades, states cut their workers' pension contributions while at the same time increasing their benefits. Now, according to Josh Barro, a fiscal-policy analyst, many will not be able to meet all their obligations. Rhode Island's changes, he says, could be a template for other states grappling with pension obligations: Illinois, for example, which was only 45% funded in 2010.
