After lost decade for pension systems, Midwestern states enact series of reforms aimed at fiscal turnaround

Stateline Midwest ~ July/August 2012

In 2000, more than half of the U.S. states were fully funding their state pension systems. By 2010, Wisconsin stood alone as the only state that had set aside enough money to meet 100 percent of its long-term pension liabilities.

Perhaps most concerning of all, funding levels in 2010 were below 80 percent in 34 states, including Illinois, Indiana, Kansas, Michigan, North Dakota and Ohio. That 80 percent threshold is used as a barometer to gauge the health of a state’s pension system.

As the Pew Center on the States details in a recently released update of its “The Widening Gap” report, the first decade of the 21st century was a lost one for states in their efforts to keep up with obligations in their retirement systems — with the problem punctuated by big investment losses from the financial crisis of 2008.

But the Pew study notes that the 2010 data do not account for many of the cost-cutting changes made by legislatures over the past two years. Those pension reforms, plus investment gains, could help some states get above the 80 percent threshold.

Nearly every Midwestern state has taken actions (some affecting current employees, others impacting only future hires) to shore up their retirement systems: raising contribution rates, lengthening vesting periods, raising the retirement age, reducing cost-of-living increases, capping benefits and changing how a worker’s “final average salary” is calculated.

Some states have also considered alternatives to defined-benefit plans. Michigan already enrolls state employees in a defined-contribution plan, and lawmakers were still considering (as of June) a plan to move newly hired teachers into this type of plan. This year in Kansas, a bill was signed into law (HB 2333) that will place new hires in a cash-balance plan — part defined contribution, part defined benefit. Nebraska already uses a cash-balance model, which has been under consideration in Illinois as well.

The Illinois legislature also took steps this year to reduce the state’s retiree health care liabilities by requiring former employees to pay a portion of their premiums. Liabilities for retiree health care are much higher in Illinois, Michigan and Ohio than in other Midwestern states.

Those three states have traditionally paid for all or a portion of retirees’ premiums. The region’s eight other states do not; their liabilities mostly come from the “implicit subsidy” that retirees receive: access to a state health plan that includes younger current employees with less-costly insurance claims.