Most large state and local government pension plans have enough assets to cover benefit payments to retirees for a decade or more, according to a new General Accounting Office report. But they still face challenges because of the gap between their assets and liabilities.
Investment losses due to the economic downturn and plan sponsors neglecting to make adequate plan contributions have widened the gap between the two. This has increased the amount of money plans are required to contribute to sustain their pension plans at the same time state and local governments are facing other fiscal pressures.
The mounting problem has forced many states and localities to attempt to strengthen the financial condition of their plans for the long term. “State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability” found that since 2008, 35 states have reduced pension benefits, mostly for future employees since they have provisions in place to protect the benefits of current employees and retirees. A few states, like Colorado, reduced postretirement benefit increases for all members and beneficiaries of their pension plans.
The report also found that half of the states have increased member contributions, shifting a larger share of the pension plan costs on to the employees. Georgia, Michigan and Utah implemented hybrid approaches, which incorporate a defined contribution plan component, shifting some investment risk to employees.
At the same time, some states and localities have also adjusted their funding practices to help manage pension contribution requirements in the short term by changing actuarial methods, deferring contributions, or issuing bonds, actions that may increase future pension costs. Going forward, growing budget pressures will continue to challenge state and local governments’ abilities to provide adequate contributions to help sustain their pension plans.