Of course, STRS doesn't want to talk about this, do they? They'd rather cut the COLA, wouldn't they?
U.S. state pensions face overhaul in bad economy
CHICAGO/SAN FRANCISCO, Aug 7 (Reuters) - When Illinois was facing at least $55 billion in unfunded pension liabilities back in March, Governor Pat Quinn outlined what he called "bold reform" for the state's retirement system.
In a move now being replicated in other cash-starved states, the governor proposed a two-tier system, leaving benefits for current workers untouched, but imposing changes such as a higher retirement age and capping cost-of-living increases on new employees.
That would allow the state to reduce its pension liability by $162 billion over the next 36 years, a substantial saving at a time when revenue is being decimated by the recession and the state is struggling to balance its budget.
Quinn's reform effort failed, but lawmakers agreed to create a pension system modernization task force charged with making recommendations by November.
Illinois is not alone in trying to reduce its huge liability.
The National Association of State Retirement Administrators found a nearly $443 billion collective unfunded liability for the 125 state, local government, and teacher pension funds in its most recent survey.
The situation is likely to worsen as the recession punches holes in budgets nationwide and causes big investment losses for defined-benefit pension plans that pay out a fixed income.
But the economic downturn may also lead to more reforms as politicians and taxpayers realize they can no longer afford plush pensions compared to defined-contribution 401(k) plans in the private sector which pay income based on variable investment returns.
"It's an acute issue," said Ron Snell, director of state services at the National Conference of State Legislatures.
STATES MOVE TOWARD REFORM
Laws were enacted this year in Georgia, Louisiana, Nevada, New Mexico, Rhode Island and Texas that reduced benefits for new employees, a report released by the group this week said.
On the local level, New York City has repeatedly trimmed pension benefits for new hires by creating pension tiers.
Mayor Michael Bloomberg in January estimated that adding a fifth and less generous tier would save $200 million in fiscal 2010. By fiscal 2030, the savings would add up to $7 billion.
But the state did not approve the measure and the state financial control board has moved the entire initiative to fiscal 2011.
New York Governor David Paterson has also proposed a money-saving fifth pension tier, which he says would save at least $48 billion over the next 30 years for both the state and local governments that belong to the state retirement fund. Though two major unions for state workers supported the plan, it has not been approved.
CALIFORNIA EYES TWO-TIER PENSIONS
The board of the California Public Employees' Retirement System, the biggest U.S. public pension fund known as Calpers, held a retreat last week to review the two-tier issue. The fund has just seen a record annual loss, adding to the burden of meeting its unfunded liabilities.
The 23.4 percent loss, or more than $56 billion, came just as a public-disclosure campaign uncovered individuals with annual pensions through Calpers of $100,000 and more. It has so far found more than 5,000 six-figure recipients, including one individual receiving just under $500,000 a year.
Snell noted that like Illinois a number of other states created special pension commissions this year that could lead to more action on reforms by 2011.
Still, reforms will be tough to enact as unions usually oppose diminished benefits. That leaves taxpayers, who will ultimately be left to pay the pension tab, to push for changes.
"Taxpayers will demand these (reforms) be enacted," said Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management in Oak Brook, Illinois. "It will become more of a rallying cry at elections."
That is a concern at Calpers. Some of its board members have warned of a voter initiative to force a two-tier system on the fund.
They fear voters who have seen 401(k) retirement accounts dwindle, while public pension payments are guaranteed, would embrace the measure even if it triggers harmful, unintended consequences for the fund, public employees and its retirees.
They point to results of two recent local elections that signal voters are restive.
In November, more than 75 percent of voters in Orange County approved a measure requiring a vote of the public to approve new pension increases for county workers.
That same month, voters in Pacific Grove, California, allowed town officials to study whether the town would be better off withdrawing from Calpers and placing its employees in defined contributions retirement plans like 401(k)s.
Dwight Stenbakken, executive director of the League of California Cities, would not be surprised if other local governments across the state began similar reviews on closer inspection of their generous retirement benefits.
"We haven't been able to say 'no,'" Stenbakken said. "The seeds for change are there."
(Reporting by Karen Pierog and Jim Christie, additional reporting by Joan Gralla in New York)