- The Washington Times - Saturday, April 11, 2009

SANTA FE, N.M. | Massive investment losses sustained by public pension funds are pressuring state lawmakers from New Mexico to New York to spend more taxpayer money to shore up their programs, boost the retirement age for newly hired government workers and seek more from employee paychecks.

Pensions need $270 billion in additional contributions over the next four years, and more than $100 billion annually for two decades hence, according to the Center for Retirement Research at Boston College.

The pension trouble is just one more economic challenge for states. Income and sales tax collections are dropping fast as unemployment rises. Jobless-benefits funds are running dry, requiring federal borrowing. And because of substantial budget holes, states are cutting back on a wide range of services, including child-care subsidies for low-income families and aid to public schools. In some cases, they are laying off workers.

But as bad as the budget picture looks, it is dwarfed by the size of the gaps in states’ pensions, which have collectively lost at least $1 trillion as financial markets swooned over the past year. Public pensions cover about 14 million state and local employees and paid out almost $163 billion to seven million retirees in 2006-2007, according to the Census Bureau.

Because pensions involve long-term obligations and investments, there’s no immediate risk that states will be unable to pay retiree benefits. But replenishing pensions could squeeze states for years to come, forcing lawmakers and governors to juggle their spending priorities — pitting pensions against schools, colleges, health care, prisons and other government services.

“What you hear concern about out there right now is, ‘We the taxpayers are going to be stuck with a bill paying for public pensions. And we don’t want taxes raised to pay for public pensions.’ And that is understandable,” said Mike Burnside, executive director of the Kentucky Retirement Systems.

Pensions covering state and local workers, police and teachers in Kentucky have unfunded liabilities of $27 billion. In response, lawmakers agreed last year to increase taxpayer funding and change eligibility for newly hired employees. But budget problems, Mr. Burnside said, could undermine the state’s ability to boost pension funding.

It’s up to legislatures to appropriate money to cover pension funding for state workers. With questions swirling around the future of public employee pensions nationally, legislation is pending in at least 28 states to change funding and benefits.

Two states — Alaska and Michigan — have dropped defined benefit programs for at least some newly hired public employees, according to the National Association of State Retirement Administrators. But slashing benefits for current workers isn’t an option for states because statutory or constitutional provisions usually safeguard an employee’s earned benefits.

Private-sector pensions are also hurting. There was a $400 billion funding deficit at the end of 2008 for pensions at 1,500 U.S. companies of all sizes representing about 85 percent of the stock market, according to Mercer, a global consulting firm.

The gap is likely to accelerate a trend of corporations dropping defined benefit plans in favor of defined contribution plans, according to Adrian Hartshorn, a principal in Mercer’s Financial Strategy Group in New York. Companies also will be forced to make higher pension contributions. Workers usually don’t pay in to private pensions.

Public employees and their unions are fighting measures that would reduce the value of their compensation packages, such as higher payroll contributions for health care or pensions.

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