latimes.com
RETIREMENT COSTS
California, other states face problem of growing pension liabilities
State governments can help ease a $1-trillion shortfall by reducing future
benefits, requiring greater employee contributions and raising retirement ages,
a Pew report says.
By Marc Lifsher
9:00 PM PST, February 17, 2010
Reporting from Sacramento
California has plenty of company when it comes to not being able to pay its
growing public pension costs, a Washington think tank says in a report to be
released Thursday.
Coming up with the money to pay for future obligations
is expected to burden state and local governments and school districts with huge
retirement costs that could translate into higher taxes and fewer basic services
for the next generation of taxpayers.
In all, state governments face a
$1-trillion shortfall, the difference between what they owe current and future
retirees and what they expect to have available to pay promised
benefits.
California's two big systems accounted for $122 billion of the
deficit as of June 30, 2008. Unfunded pension costs totaled $59.5 billion while
unfunded healthcare costs were $62.5 billion.
But the outlook has
darkened in the last 18 months with the onset of the recession of 2008 and
2009.
Both the California Public Employees' Retirement System and the
California State Teachers' Retirement System lost more than a fifth of their
portfolio values in the 2008-09 fiscal year, when they had about 87% of needed
pension funds in their portfolios.
Since then, CalPERS' funding ratio
dropped to 61% on June 30, 2009, while CalSTRS' was 77%.
"California has
a troubling pattern of not paying its annual required pension contributions in
recent years," said Susan Urahn, managing director of the Pew Center on the
States.
And pensions are only part of the problem: The two retirement
funds have set aside less than 1% of the $62 billion they need to cover lifetime
health insurance benefits for retirees.
California and other states need
to act quickly to address their pension liabilities that they are contractually
obligated to pay.
"They are not going to go away," Urahn warned. "States
can defer payments and that liability will still be there.
"But, states
do have the opportunity to make changes for new employees coming in. That might
not necessarily have an immediate impact, but over a period of time, [it] will
have a substantial impact."
States could trim future obligations by
reducing benefits for future employees and requiring greater employee
contributions to retirement funds, the Pew report says. They also could raise
retirement ages and improve the way pension funds are managed.
Minnesota
has saved $650 million over the last 10 years by raising the retirement age for
new hires by one year, the report notes.
Calls for similar changes are
growing louder in California. Three proposed initiatives are gathering
signatures for the November ballot. The ballot measures, among other things,
would limit the amount of pension a retiree could draw. They also would raise
the minimum retirement age and reduce benefits for newly hired state and local
government workers.
Raising full retirement from the current 60 years to
66 would save California $500 billion over the next 30 years, said Marcia Fritz,
president of the California Foundation for Fiscal Responsibility, a Sacramento
group that is sponsoring two of the initiatives.
What's more, actuaries
estimate that the change would increase a public worker's lifetime earnings by
more than 10%, she said.
CalPERS, the teachers retirement system and
public employees unions are expected to wage vigorous campaigns against the
initiatives should they make it to the ballot. CalPERS already is holding
informational sessions with its 1.6 million members to give them more
information about the health of their system and its benefits.
The
teachers retirement system is readying a yearlong educational and lobbying
campaign ahead of a planned legislative drive next year to ask lawmakers and the
governor to raise employer pension contributions by 14% to fill a $43-billion
funding gap.
Some combination of those benefit reductions or contribution
hikes needs to happen soon, Urahn said.
"We have a significant problem
now that can be solved by taking modest steps," she said. If not, "we will have
an unmanaged crisis on our hands."
marc.lifsher@latimes.com
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