Pension reforms are coming, one state at a time
Illinois Democratic Gov. Pat Quinn amped up pressure on state Republicans to go along with his public pension reforms on Sunday by threatening massive budget cuts for school districts. At the crux of the reforms is a plan to make downstate and suburban school systems pay the pension costs for their work forces.
However, many Republicans oppose the plan fearing that it will burden cash-strapped local schools and increase property taxes.
Illinois isn’t the only state taking up pension reform. Many state and local governments have tried to cut public pensions as long-term fiscal imbalances loom.
Recent studies have estimated the combined public pension liabilities for all 50 states at somewhere between $1.5 and $4 trillion.
Bryan Leonard of State Budget Solutions, a non-partisan group, put out a study in 2011 estimating the funding gap to be $3 trillion. He wrote, “Pension obligations don’t appear on state balance sheets … States with billions in unfunded pension liabilities may technically brag of ‘balanced’ budgets while being swamped by pension debt.”
According to Pew, all 50 states have insufficient funds to pay pension contracts.
The Pennsylvania pension shortfall is so large that a major credit-rating agency downgraded the state’s debt last month. The state’s rating was downgraded from to Aa2 from Aa1 by Moody’s Investors Service in July, two levels below its top-grade triple-A rating.
Illinois has been has also been threatened with a credit downgrade. The threat was a driving force in the push to reform public pensions in the state.
“We have to deal with the credit-rating agencies. They wear green eyeshades. The idea that we have plenty of time is not always the right way to look at it,” Quinn said last Monday.
The pension problem is two-part: there is the pension liability and there is also the percentage of the liability that is unfunded.
Generally speaking, a healthy pension fund should be 80 percent funded. A recent Pew report found that 34 states were below that threshold in 2010.
According to the Pew study, in 2010 only 45 percent of the $138.8.billion Illinois owed in long term liabilities was funded. Illinois was followed by Rhode Island and Connecticut, which only have 49 and 53 percent of pension liabilities funded, respectively.
Wisconsin also has a huge funding gap. A study there found the pension debt amounts to every household being billed $1,500 a year for 30 years just to fund pensions.
Briggs notes that states on average have a 9.9 percent contribution rate while employees on average contribute 5.7 percent to pension plans.
Of the states attempting reforms, Rhode Island has been the most aggressive with a proposed plan to cut benefits for both current and future retirees.
Several other states — including Kansas, New York and Virginia — have already enacted sweeping structural pension reforms in 2012 and California, Michigan, New Hampshire and Ohio have reforms under consideration.
Quinn has called an Aug. 17 special session for lawmakers to deal with pensions. Illinois Republican leaders said in a statement they were encouraged by the call for a special session.
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