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The Honolulu Advertiser
Posted on: Thursday, February 18, 2010

States facing $1T pension shortfall


By BRIAN TUMULTY
Gannett News Service

WASHINGTON States underfunded their pension plans and retiree health benefits by $1 trillion in 2008, a new report says.

The report, released today by the Pew Center on the States, said 21 states had less than 80 percent of the money they needed to pay for future government employee pensions. In 2006, that was true of 19 states.

Illinois had 54 percent of the future pension money it needed, the lowest percentage among states, while New York was the best at 107 percent.

Other troubled states included Oklahoma (60.7 percent), Rhode Island (61.1 percent), Connecticut (61.6 percent), Kentucky (63.8 percent) and Hawai'i (68.8 percent).

The report also said only two states Alaska and Arizona have pre-funded more than 50 percent of their obligations to pay retiree health benefits. Twenty states address retiree health benefits on a pay-as-you-go basis instead of setting up trust funds.

Since 2006, the Governmental Accounting Standards Board has required states to estimate their future liability for retiree health benefits.

In 2008, states' collective liability totaled $587 billion, with only 5.4 percent prefunded by a small number of states.

How big is the annual cost of pensions and retirement health benefits for public employees at the state level? According to Pew, it's more than states spent on higher education: $108 billion versus $102 billion spent for colleges and universities.

States that don't address their legal obligations to pay future pensions and retiree health benefits may have to raise taxes, according to Susan Urahn, managing director of the Pew study.

"States have built up a substantial balance that becomes harder to pay down the road," Urahn said.

15 STATES ACT

Fifteen states enacted reforms last year to address future retiree expenses.

Some merely began making bigger payments to their pension funds, but six states Kentucky, Nevada, New Jersey, New York, Rhode Island and Texas took steps to cap the future growth of pension benefits.

Unlike the private sector, where employer-provided pensions are increasingly rare and the normal age for full benefits is 65, public employees with office jobs in many states are eligible for full pensions much earlier.

Beginning this year, new hires in Nevada won't be eligible for full pensions until age 62, up from 60. And the formula used for calculating the pension will be less generous.

A new pension plan approved by the New York Legislature late last year postpones full retirement benefits for most new hires from age 55 to age 62 after 30 years of service. For new teachers, it will kick in at age 57 after 30 years on the job.

Changing the retirement age can result in big savings, according to Pew. In Minnesota, where the retirement age for new hires was increased from 65 to 66 in 1989, the state has saved $650 million over the ensuing 20 years.

Michigan and Alaska, meanwhile, have shifted from traditional pension plans to 401(k)-style plans. Michigan made the change in 1997. The new plan now covers about half of state employees.

Pew also reports some states are requiring employees to help pay for retiree health benefits. In New Hampshire, state employees who retire before age 65 must pay a $65 monthly premium.