US public retiree benefits gap grows to $1.38 trln

Mon Jun 18, 2012 5:14pm EDT

* Gap widened by $120 billion since last year

* State public pensions are having 'day of reckoning'

* More states, more radical reforms

By Lisa Lambert and Hilary Russ

June 18 (Reuters) - The funding gap for U.S. state public employee retirement benefits climbed by $120 billion to $1.38 billion in fiscal 2010, according to a report released on Monday.

The report comes at a time when many voters and politicians already claim that compensation for public employees is bloated.

The Pew Center on the States said that public pension systems in 34 states were funded at less than the 80 percent level that is considered the threshold for a healthy pension. That's in stark contrast to 2000, when more than half of the states' pension plans were 100 percent funded.

"The larger (the shortfalls) are, the higher the cost for taxpayers today and for many years to come," said David Draine, a Pew senior researcher, who compared many states to credit card holders who hadn't paid their bills in full but kept racking up charges.

Since 2009, the dire lack of funding has led at least 43 states to enact some reforms, many of which may not go far enough. Reforms passed after 2010 were too recent to be reflected in the new study, the Pew Center said.

The 2010 pension data was the most current that Pew said it could gather from all 50 states. For most states, the fiscal 2010 year ended on June 30, 2010.

The study comes as members of AFSCME, the largest public employees union, elect a new president to chart the union's course during the current rocky times. One candidate, Danny Donohue, said he has never seen such skepticism toward public employees in the 30 years he has been in the American Federation of State, County and Municipal Employees.

For years, many states and local governments underfunded pensions and other benefits for retirees, particularly healthcare. During the 2007-09 recession some cut contributions further to deal with shrinking revenue.

New Jersey, for example, failed to consistently make full required payments to its pension plan in previous years, Draine said. Now its annual required contribution to close the gap for its pension fund is at least $2 billion more than neighboring New York, even though New York's pension plan is larger.

"Back when the market was going like blazes, people didn't put money into pensions," said Donohue, who also heads the union's New York branch. "Just like anything, there was a day of reckoning."

PENSION GAP AT $757 BLN

Pension systems could see further strains. The Baby Boom generation could swell the ranks of retirees drawing benefits, at the same time that public employees, who provide about 10 percent of pension fund revenue, are losing their jobs.

In fiscal year 2010, the gap in public pension funding rose by nearly $100 billion to $757 billion, with the shortfall in retiree healthcare benefits increasing by more than $20 billion to $627 billion, Pew found.

The Pew Center provides the most widely cited estimate of the gap between how much money public pension and retiree healthcare funds have and how much they must pay in future benefits.

Investment earnings provide about $6 out of every $10 in pension funds. In fiscal 2008, at the depth of the recession, those investments lost 25 percent, Pew found.

Recently, investments have rebounded, but those gains may not be enough. According to the U.S. Census, pensions' cash and security holdings rose to $2.61 trillion in the fourth quarter of 2011, still below their end-of-2010 levels.

Healthcare costs have also soared over the last few years, but 17 states have set aside no funds for these additional benefits. According to Pew, states currently have only 5 percent of what is needed for these non-pension benefits.

Despite strict legal protections that make pension reforms difficult to enact, many states have begun doing just that.

Rhode Island - which has one of the worst-funded pension systems along with Connecticut, Illinois and Kentucky - has enacted the "most far-reaching and comprehensive reforms we've seen," Pew's Draine said.

Last year, Rhode Island suspended cost-of-living adjustments, raised the retirement age, and moved employees onto a hybrid pension benefit plan, among other changes expected to cut its unfunded liability by $3 billion.

In 2010, Illinois limited retirement benefits for new employees, but pressure is mounting for a bigger solution to a problem that Moody's Investors Service describes as "staggering."

Wisconsin Governor Scott Walker and the state's legislature in 2011 slashed pension benefits and curbed public employee unions' rights to organize. The moves were so controversial that they triggered a recall vote for Walker, which he survived earlier this month.

Wisconsin's pension was 100 percent funded in 2010, making it the best funded state pension in the nation.

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