June 21, 2018 / 5:00 PM / 6 months ago

U.S. state reforms not enough to solve pension problem -Fitch

NEW YORK, June 21 (Reuters) - Recent reforms enacted by U.S. states to reduce their pension burdens do not do enough to ease the growing public employee retirement funding crisis facing many of the governments, Fitch Ratings said in a report on Thursday.

Governors in Colorado, Minnesota and Illinois were among those to sign legislation in 2018 that cut public employee retirement benefits, increased contributions or took other measures to reduce their states’ unfunded pension liabilities.

While those measures move the states in the right direction financially, they do not go far enough to stabilize pension obligations and contributions over the long haul, Fitch said.

“Fitch believes funding improvement for many major pensions may not materialize any time soon,” the credit rating agency said. “Pensions in general still face an uphill climb.”

That, in part, is because funding discount rates for nearly all major plans remain higher than the 6 percent Fitch finds reasonable, more retirees than ever are drawing down on their plans and a recent economic expansion has not given state revenue a strong enough boost, Fitch said.

Colorado’s package includes cutting cost-of-living adjustments for retiree payments to 1.5 percent from 2 percent, expanding the state’s defined contribution retirement plan, such as a 401K, and raising employee and employer pension fund contributions.

Minnesota’s plan also reduces cost-of-living annual increases and hikes contributions, as well as lowering the state retirement plans’ funding discount rate to 7.5 percent from as high as 8.5 percent.

Illinois’ 2018 adopted pension measures were not as clearly defined, Fitch said. The lowest-rated U.S. state established a bond-financed buyout program for current and former public employees it expects to yield $423 million in savings for the fiscal 2019 budget.

“Notably, the timing of rollout will be lengthy and the precise fiscal impact will only be known upon conclusion of the program and could vary significantly from the initial estimates,” Fitch said.

Illinois is struggling with an unfunded pension liability that has climbed to $129 billion after years of skipped or actuarially inadequate annual state contributions to its five retirement systems. The state’s contributions are projected to soar over the next five years, potentially eating away at money that pays for education, law enforcement, infrastructure and other public services.

Colorado, Minnesota and Illinois are largely limited in how much they can alter pension programs due to past court precedents, Fitch said. (Reporting by Laila Kearney, Additional reporting by Karen Pierog, Editing by Rosalba O’Brien)

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