Public Sector Pensions in Peril

Most employees look forward to the day they can hang up their hat and start retirement. For decades, many employees have relied on the promise on a steady income following leaving the workforce through pension plans. However, times are changing and the pension system is in a state of dire distress. For young employees, there is still plenty of time to secure retirement through smart investments with Thrift Savings Plans (TSP), 401(k) accounts and other means of saving. However, for employees who can see retirement on the horizon, times are scary. Many employees who have given decades of dedicated work may never see their promised pensions come to fruition.

According to a new report from The Pew Charitable Trusts, there is an epidemic of public sector pensions, with a combined deficit for all states estimated to be close to $1 trillion. Leading the deficit are Connecticut, Kentucky and Illinois.

Among the three states, they all fall well below the standard 80 percent funded standard. Connecticut is ranked at 48 percent, Illinois at 39 percent and Kentucky ranked at an astonishing 23 percent. On the heels of the report, all three states have taken drastic steps to attempt to correct their saving habits and build up a healthy pension fund for their employees – some are succeeding, others are not.

Connecticut has taken steps in recent years to improve its pension savings habits. “It’s clear that Pew is trying to get the attention of governors who haven’t gotten it yet that they need to deal with their pension liabilities,” said GianCarl Casa, spokesman for Governor Malloy’s budget office. “Here in Connecticut, Governor Malloy gets it and has been acting consistently to take care of the problem over the last four-and-a-half years, under Governor Malloy, Connecticut has been funding 100 percent of its annual required contribution, something that was not always the case before he took office. Taken in combination with changes in benefits that he negotiated, Connecticut is on track to fully fund our pension system in about 15 years. We have made our pension system more affordable and we are keeping our commitments – at a time when other states are not.”

While all eyes have been on Illinois, Kentucky’s Employee Retirement System is at a dismal 23 percent and is $14 billion in the hole. The state has been paying around 50 percent of the actuarially required contributions (ARC) and 75 percent for teachers over the last 10 years – creating the present day situation. While Governor Beshear implemented a reform in March 2013, the deficit was only slowed down its growth. The reforms were recently ridiculed by a bankruptcy judge, stating, “the solvency of the fund to meet future requirement obligations is dependent upon consistent payment of the ARC…will almost certainly result in a fund that insufficient to pay future retiree benefits.” Areas of Kentucky have seen 6 percent property tax increases to help slow down the deficit. While there are very positive signs of financial gains in Kentucky, Governor Beshear says that the economy is gaining momentum, but the $14 billion liability will need to be handled by the next elected governor.

The state of Illinois has struggled to ease their monumental public pension deficit, and seem unable to gain their financial footing. Recently, the state has received a downgraded credit rating and have the worst-funded pension system in the country with $105 billion unfunded liability. Governor Rauner’s sweeping changes have included the option for the state to file for municipal bankruptcy to save billions of dollars for the local and state government – which is not a possibility, only insolvency of the pension payments can occur. However, if the state is able to obtain insolvency there will be massive layoffs in the public sector which is nothing short of catastrophic itself.

Most recently, Illinois, more specifically Chicago received another piece of bad news. Cook County Circuit Court Judge Rita Novak has deemed Mayor Emanuel’s pension reform act, void, unconstitutional and adding that “A public worker’s pension is a contract that cannot be diminished or impaired.” While many public sector employees rejoice over the ruling, one scary truth remains the same, without some type of reform to the current pension systems the funds will run out of money and Chicago cannot borrow any more money or continue to raise taxes. Currently, the city has a hefty $20 billion pension deficit that is only growing.

Compounding the Illinois’ dire financial situation is the recent downgrade of the state’s credit score.

Throughout the country 15 states have an overall funded ratio of 80 percent or higher, according to the Pew report. Many experts say a healthy pension program should have enough funds to cover at least 80 percent of its long-term obligations. South Dakota and Wisconsin ranked among the highest, each with 100 percent funding.

Lisa Grasso Egan, undersecretary for the Office of Policy and Management’s labor relations unit.

This debt “will remain higher as a percentage of U.S. gross domestic product than at any time before the Great Recession,” the Pew report states. “State and local policymakers cannot count on investment returns over the long term to close this gap and instead need to put in place funding policies that put them on track to pay down pension debt.”

Overall, if the state pension programs are unable to implement a stable legislation that has a solid path back to financial health then it could be disastrous. According to the Voya Retire Ready Index, nearly half of all public sector retirees (48 percent) say pension plans are a vital and major source for their retirement income.