Some state pensions in dire straits
Shortfalls on rise as budgets pinched despite overhauls
New Jersey Gov. Chris Christie doesn’t waste an opportunity to raise the specter of Detroit when talking about his state’s finances.
Christie, a Republican, has included a $2.25 billion payment to New Jersey’s public pension system in 2015, the highest in the state’s history and more than his predecessor, Democrat Jon Corzine, allocated in his entire fouryear term. But it does little to narrow the gap left by years of poor accounting, deferred payments and, according to Christie, ignorance of state leaders.
New Jersey’s pension system is still short by $52 billion, and Christie, who successfully pushed through pension overhauls in 2011, is looking for another round of concessions from unions and public employees to rein in the soaring cost of retiree benefits.
At recent public appearances, Christie told his audience to look at Detroit, the largest American city to file for bankruptcy.
“Ladies and gentlemen, that’s where we’re headed,” Christie said at a town hall meeting in Burlington County on March 13.
Three years after a wave of pension overhauls swept across America, many states find themselves still hemmed-in by ballooning retiree costs and budget-sucking liabilities, setting the table for more battles between states and public workers.
More than 40 states have enacted some sort of pension changes since 2011, yet for all states in aggregate, the net pension liability increased 24%, from $998 million in 2011 to $1.2 trillion in 2012, the latest data available, according to Moody’s Investors Service. A 2013 Nelson A. Rockefeller Institute of Government report said some economists estimate both state and local pension liabilities to be as much as $4 trillion.
These mounting bills expose many states’ history of counting on higher returns and not making required payments to pension funds, but also show that the overhauls to this point have not been enough, said Eileen Norcross, senior research fellow at the Mercatus Center at George Washington University.
Norcross said that many states “absolutely” must enact more reforms, and soon.
“The math is just unforgiving,” she said. “It’s sort of like telling yourself you weigh less, even though you’re not getting on the scale. There’s kind of an illusion
“Ladies and gentlemen, (Detroit’s bankrupcty filing is) where we’re headed.”
New Jersey Gov. Chris Christie there. Under the surface of the illusion is the truth.”
For some states it is, and has been, a painful reckoning.
In Illinois, which has the lowest credit rating in the U.S. and was most recently downgraded for failing to properly fulfill pension obligations, its $187 billion pension liability represents 318% of its revenues despite a range of overhauls, according to Moody’s. Connecticut’s $57 billion liability is at 243%, and Kentucky’s $41 billion liability is 211% relative to revenues, according to the service.
Kentucky is still struggling with drops in revenue and mounting pension obligations. In delivering his latest budget, Gov. Steve Beshear titled a slide “Bad News.”
Although the budget calls for paying $100 million toward the state employees’ pension fund, there is no money allotted for the teachers’ pension fund, which has a nearly $600 million shortfall and has not received a full payment from the state since 2009, according to the Kentucky Center for Economic Policy.
“You have to fund. Even when the budget is strained, you have to fund,” said Tim Blake, a managing director at Moody’s.
Not making payments to the pension funds, or only paying a portion of what an actuary has recommended, is largely what got these debt-burdened states to where they are today, experts say.
New Jersey provides a classic example. In the last 20 years, the state’s payments to the pension system have fluctuated — in 1999 it paid $286 million, but the next year paid just $62 million, according to the state treasury. Even the record-high payment included in the 2015 budget is just a fraction of the $3.9 billion recommended by the state’s actuary, Christie spokesman Kevin Roberts said.
“It’d be like making half your mortgage payments for the last 10 years, and all of a sudden, your house is under water,” said Chris Tobe, a public pensions consultant and the author of the book Kentucky Fried Pensions.
The journey back to solvency is long and painful. Rhode Island, for example, has enacted some of the most extensive pension changes in the country — raising the retirement age, shifting to a defined benefits plan and suspending cost of living adjustments — but changes are still being finalized in the legal system.
“They were literally in a pension abyss,” said Leo Kolivakis, an independent analyst who runs the blog Pension Pulse. Despite sweeping reforms, he added, “They’re still in dire shape.”
There are many states in far better shape — Nebraska, Ten- nessee and Wisconsin, for example, mainly because they made a commitment to making recommended pension payments, said Tom Aaron, a pension analyst for Moody’s.
“It’s not all concentrated on one end,” Aaron said. “There are some good stories out there.”
But Blake said, “It’s become clear that the amount of defined-benefits pensions has become much higher than any governments had anticipated,” adding, “that’s true across the board.”
Although many state might be facing another round of overhauls in the coming year, Kolivakis and Norcross are skeptical that significant changes can be achieved as long as governments still have control of pensions, because politics inevitably end up mixing with policy.
“The major problem in the U.S. is you have major government interference. It’s all wrong,” said Kolivakis, who is based in Montreal.