States Changing Pension Promises

e-Newsletter, Issue #51, July 22, 2010

Colorado expected its state retirement fund to go broke in 30 years. And that’s if the fund’s investments generated the expected 7 percent annual return.

The state made changes in 2004 and 2006 to the benefit structure for new hires, said Meredith Williams, chief executive of the Colorado Public Employees’ Retirement System. “We knew we had issues; we didn’t think we would fail,” he said.

That changed after the 2008 stock market collapse. “It was quite clear that if we didn’t do something immediately, we were going to run out of money,” Williams said. Data demonstrated one portion of the fund would run out of money by 2024, and the state division would fail in 2029, he said.

So Colorado lawmakers took action, and Gov. Bill Ritter signed legislation to again address the state’s pension shortfall in February. The changes include cutting the system’s cost-of-living adjustment—commonly referred to as COLA—for not only new hires but also current employees and retirees. That means those folks expecting the contracted 3.5 percent increase this year get nothing. They could see an adjustment in future years, but the law caps any increase at 2 percent.

And current employees will have to work longer and pay more into the retirement fund before reaping any benefits.

“While our retired members said ‘I’m not going to get a COLA next month,’ our people who will retire in the future will never have a COLA as high as current retirees have,” Williams said.

Colorado isn’t alone in making drastic changes to its retirement plan. States across the country hit with rising numbers of retirees and rising costs for employee retirement plans are altering plans, requiring higher employee contribution and raising the age at which an employee can retire with full benefits, according to Sujit CanagaRetna, senior fiscal analyst with The Council of State Governments Southern office, the Southern Legislative Conference.

“This is one of the sizable expenditure categories that are looming on the horizon,” said CanagaRetna. “You’re going to see a greater sharing of the burden of pension plans being allocated to employees because states are not going to be able to afford to continue giving them the packages they’ve been giving them in the past.”

Those generous benefits are, in part, to blame for the dismal state of state pension plans. A Pew Center on the States report released in February found a $1 trillion gap between the amount states have set aside for employees’ retirement benefits and the $3.35 trillion pricetag of those benefits.

Those gaps have states scrambling to deal with the looming shortfall. Minnesota, for example, this year increased the amount of time it will take for employees to be vested; Virginia, which has since 1983 paid the full employee contribution into the retirement plan, is now requiring employees to fork over 5 percent of their salary for pensions; and Iowa has changed the final average salary period, which sets the pension payout amount, from three years to five years.

But the fix won’t be a quick one.

Girard Miller, an authority on investing public funds, told Capitol Ideas earlier this year that the changes will eventually accumulate and become significant. But it will take 10 to 15 years before new employees outnumber incumbent ones, he said, so the changes will take some time to be effective.

CanagaRetna said the actions states are taking will lead to a payoff down the road. “Unfortunately, states need to see these benefits now,” he said.

“What you’re going to see is more and more states pushing the envelope and trying to expand these cutbacks to current employees and retirees,” he said.

That’s what Colorado did.

CanagaRetna said Colorado will see immediate benefits from its changes this year … if they hold up in court. Retirees have filed suit challenging the changes. They point to a 2004 attorney general’s opinion that said a retired public sector worker’s pension “becomes a vested contractual obligation of the pension program that is not subject to unilateral change of any type” by the legislature, according to an article in The Wall Street Journal.

Williams contends Colorado case law and its constitution set a legal environment that allows such a change. While other states may not have that same environment, they’ll have to find some way to address the problem, he said.

“We have a crisis coming as people retire in this country, and I think it’s going to be very difficult to grapple with,” Williams said.


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