State of Midwest's Pensions Systems and Policy Responses Highlighted in Pew Report

Stateline Midwest, a publication of the Midwestern Office of the Council of State Governments: Vol 19, No. 3: March 2010.

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In Wisconsin, the state’s $77 billion in long-term pension liabilities was almost completely funded as of the end of fiscal year 2008. In neighboring Illinois, a little more than half of the $119 billion in liabilities was funded.

Those and other striking differences are highlighted in a Pew Center on the States report examining the condition of state retirement systems. The title of the study, “The Trillion Dollar Gap,” reflects the disparity between what states have set aside to pay for employees’ pensions and other retirement benefits ($2.35 billion) and the costs associated with these benefits ($3.35 trillion).

Most Midwestern states are funding their pension systems at or above 80 percent, the threshold generally used to indicate whether enough money is being set aside to meet current and future benefit obligations.

Wisconsin is one of only four U.S. states that entered the recent recession with a fully funded pension system. Pew highlights one unique aspect of that state’s plan: a risk-sharing component that replaces the standard cost-of-living increase for retirees used in many states. Instead, Wisconsin retirees’ pensions go up or down from year to year depending on investment returns. Other examples of risk-sharing include Michigan’s move to a defined-contribution plan and Nebraska’s use of a hybrid defined-contribution/benefit plan.

Wisconsin’s system is in good shape because the state has consistently made contributions at actuarially required levels. In some states, constitutional or statutory requirements are used to ensure that pension systems are funded adequately.

Pension reform has emerged as a top priority in many states, particularly in light of the investment losses resulting from recent volatility in the stock market. Common approaches have included reducing benefits, raising the retirement age and increasing employee contributions.

States, meanwhile, are just beginning to deal with non-pension liabilities such as retiree health benefits. On average, non-pension liabilities are funded at only 7.1 percent. Pew singles out Ohio as a national leader in this area of fiscal management. In that state, maximum pension contributions are set at 14 percent of payroll for the Ohio Public Employees Retirement System; any extra money is used to fund non-pension benefits. There are significant variances in the non-pension benefits that states provide to retired workers. Consequently, total non-pension liabilities vary widely from state to state. For example, Indiana, Iowa and South Dakota have “very limited long-term retiree health care and other benefit liabilities,” Pew found.