Tag: Pension Reform

States Facing Tough Choices Regarding Retirement Plans

Alabama is not the only state facing tough decisions on retirement plans.  Governors across the country are being faced with decisions about how to get by with less.  Revenues are down and federal stimulus money has dried up and Governors are having to prioritize.

In Alabama, legislation for 2012 may focus on the best way for the state to continue paying pension benefits provided to retirees. The Times Daily reports:

Sen. Arthur Orr, R-Decatur, chairman of the Senate General Fund Budget Committee, believes the state cannot afford to continue paying more each year  toward state and education employee pensions.

“If the employer’s share that the state pays continues to go up, it is unsustainable,” Orr said. “That is revenue that comes out of the education and General Fund budgets that also fund services.”

In one analytic assessment, state pension funds could run out of money by 2023.

The issue of public pension benefits has taken the spotlight as states trying to pull out of the recession still have lower-than-hoped tax revenue.  Several states are weighing their choices on how to adequately provide promised pensions to retirees, including providing optional 401(k)-style retirement contributions with no guarantee of defined pension benefits.  Alabama lawmakers increased the amounts employees will have to pay toward their pensions in this last legislative session.  Whatever route the states’ choose to take, one thing is certain–the current course is unsustainable.

California Now Faced With Pension Reform…Or Else

Update:  Former Chairman of New Jersey Pension Fund warns states of a projected $2 Trillion pension shortfall.

Yet another state is in a dire situation with government pensions.

From today’s LA Times op-ed:

The unfunded pension liabilities of California’s state and local governments exceed $700 billion. We can’t fix the budget without reducing public employee retirement benefits.

I’ve been following the unraveling of extravagant pension plans across the country.   (See here, here and here)  Many states are facing bankruptcy if they don’t do something to address the growing problem.  California, like the others, is facing soaring costs and tough decisions.

During the last decade, California state government payments for retirement benefits have grown at an alarming and unsustainable rate, exceeding $5 billion a year, more than state support for the entire UC system. These huge and growing slices of the budget pie are needed to pay for average state retirement packages now valued at more than $1.2 million. The taxpayers who pay for those retirement benefits have an average of $60,000 saved for their own retirement.

Local governments are facing pension bills that are starving vital services. Faced with mounting long-term budget deficits, Mayor Antonio Villaraigosa recently told labor leaders, “The days of unsustainable pensions are over.” In 2002, Los Angeles taxpayers contributed just under $100 million to the Los Angeles City Employees’ Retirement System, and it was fully funded. Today, that taxpayer contribution is more than $400 million, and the system is underfunded by more than $2.3 billion.

There are not any easy answers here.  It’s going to hurt regardless of how states choose to fix the problem.  For now, it seems like the LA Times is starting to ask the right (I know, I’m surprised too) questions…

Solving the crisis will take an ongoing public discussion of what voters in the state think is fair. Our organization has started asking Californians to consider a series of questions as we begin the work of fixing a broken system. Should public employees have different retirement plans than those available to employees of private companies? Should they pay half the cost of their benefits? Should public safety employees have different retirement plans than other government employees? Should retired public employees receive healthcare for life? These are all questions that need to be answered before the state tackles comprehensive pension reform.

Californians also need to familiarize themselves with the system that exists. Taxpayers are often shocked to learn that they are paying 100% of the cost of pension and retiree healthcare benefits for many public employees. When employees must contribute their own money toward their retirement, they generally opt for benefits they can afford, and if workers are given the opportunity to opt out of retiree healthcare benefits, many will continue to work until they are covered by Medicare. Delaying retirement just five years would, on average, cut pension costs in half.

Alabama’s Pension Problems Get National Attention

For the last few months, we’ve been writing about the problems Alabama’s pension system is facing.  Now, those problems are getting some national attention.  On December 22, the New York Times ran a story about Prichard, AL and its failed pension system.  For once, the NYT got something right–Prichard’s situation is a dire warning to cities and states across the country.

The situation in Prichard is extremely unusual — the city has sought bankruptcy protection twice — but it proves that the unthinkable can, in fact, sometimes happen. And it stands as a warning to cities like Philadelphia and states like Illinois, whose pension funds are under great strain: if nothing changes, the money eventually does run out, and when that happens, misery and turmoil follow.

It is not just the pensioners who suffer when a pension fund runs dry. If a city tried to follow the law and pay its pensioners with money from its annual operating budget, it would probably have to adopt large tax increases, or make huge service cuts, to come up with the money.

The pension problem isn’t confined to a small town in Alabama.  The state itself is lagging behind with it’s pension investments.  According to a nationwide survey by State Street Investment Analytics, Alabama’s public pension system posted some of the nation’s lowest returns over the survey period.

The Teachers’ Retirement System had an investment return of 8.4 percent for the year ending Sept. 30, while the Employees’ Retirement System posted a return of 8.5 percent.

The funds are worth some $25 billion combined, and both did better than their 8 percent target set by actuaries.

But a nationwide survey by State Street Investment Analytics, a division of State Street financial services corporation in Boston, showed the median return for that period was 10.7 percent for 67 major public pension funds with more than $1 billion each in assets. In all, 96 percent of the funds surveyed nationwide did better than Alabama’s.

Returns for those Alabama funds also ranked poorly compared to pension funds surveyed by State Street for the three-year, five-year, seven-year and 10-year periods that ended Sept. 30.

State legislators and policy makers should heed these warnings and start looking at ways to reform our bankrupt public pension systems before we wind up in Prichard’s situation.

Take Action

Let your state legislators know you want this to be a priority in the upcoming legislative session.  You can find your legislators and get their contact information by clicking here.

Public vs. Private Retirement

The New York Post’s Josh Barro and E.J. McMahon highlight the vast differences between public and private retirement plans.  They find public sector retirees on the winning end.  Defenders of public employee pension plans say the average public pension system isn’t that generous, but:

The data, however, tells a different story. According to the Census Bureau, the average New York retiree receiving a corporate or union pension — a retiree from the private sector — was receiving an annual benefit of $13,100 in 2009. For state and local government retirees, that figure was more than twice as high: $27,600. And that average figure includes retirees who were part-time workers or only spent part of their careers in government; full-career retirees often do far better.

Bottom Line:  Retiring from the public sector nets a lavish pension at taxpayer expense.

Public pensions are one of the biggest challenges most state budgets are facing, and Alabama is no exception.  Legislators and policy makers are going to be forced to take a hard look at public retirement and make some tough decisions.

Unfunded Pension Liabilities Are A Growing Problem Nationwide

David Brooks highlights the budget problems states are facing due to unfunded pension liabilities:

New Jersey can’t afford to build its tunnel, but benefits packages for the state’s employees are 41 percent more expensive than those offered by the average Fortune 500 company. These benefits costs are rising by 16 percent a year.

New York City has to strain to finance its schools but must support 10,000 former cops who have retired before age 50.

California can’t afford new water projects, but state cops often receive 90 percent of their salaries when they retire at 50. The average corrections officer there makes $70,000 a year in base salary and $100,000 with overtime (California spends more on its prison system than on its schools).

States across the nation will be paralyzed for the rest of our lives because they face unfunded pension obligations that, if counted accurately, amount to $2 trillion — or $87,000 per plan participant.

Pension reform is going to be one of the most critical issues facing our next Governor/Legislature.  Some tough decisions must be made, and everyone is going to have to face reality.  We should be asking all the candidates how they would address the problem.

Alabama Must Deal With The Coming Pension Crisis

Update:  ATR’s Joshua Culling and Stateline.org point out that pension problems have been a popular topic of conversation on the gubernatorial campaign trail across the U.S.  Both Alabama gubernatorial candidates have acknowledged the problem and agree that something will have to be done.


States across the union, already faced with a steep decline in revenues, are facing yet another economic crisis–public employee pension funds.  Nina Easton points out some of the more egregious cases in Fortune magazine:

California is at the forefront of this voter revolt. In Los Angeles County, the summer of 2010 was defined by populist heat over the disclosure of salaries being collected by officials of the working-class city of Bell. Some of them, including chief administrative officer Robert Rizzo — who stood to collect a $600,000 pension after allegedly writing himself a $1 million-plus compensation agreement — have been arrested on corruption charges.

Even more widespread are troubling legal pensions. In Northern California,Contra Costa Times columnist Daniel Borenstein reported the salary of the city manager of San Ramon (pop. 63,000) at $344,200, and then calculated the pension due this 65-year-old government official: $261,000 a year. And a local fire chief was able to “spike” his base pension to $284,000 a year.

But Alabama has its own share of the pension problem.  As of September 30, 2007, the unfunded liability for the Teacher’s Retirement System (TRS) Pension Fund was 5.2 billion.  That’s in addition to the 12.6 billion in unfunded liability for the Public Education Employees Health Insurance Program (PEEHIP) program.  Total tax revenues are down 22.9%, the education budget is in proration, and the projected budget shortfall for 2011 is $586 million or 8.3% of the total budget.

The bottom line is that our next Governor and Legislature are going to be facing some very tough decisions. They’re going to have to be realistic about where we are and what we must do.  We trust they will be willing and able to work out a solution.