States Shrink `Unaffordable' Benefits to Bridge $1 Trillion Gap

Janet and Mark Hartmann, a New Jersey couple with 68 years of government jobs between them, may retire ahead of plan because the state is $102 billion short of funds needed to pay all the benefits it owes.

New Jersey and 20 other states are urging early retirements, cutting benefits and demanding employees contribute more in the face of what the Pew Center on the States says is a $1 trillion gap between available assets and what’s owed workers.

Declining tax revenue has left governments unable to make up the $724 billion of market losses suffered by the 100 largest state retirement plans in the two years that ended last June, according to the U.S. Census Bureau. Some states have skipped payments to retirement accounts or borrowed to make them, endangering their credit ratings.

“This, in my opinion, is the public issue of this decade,” New Jersey Governor Chris Christie said at the Manhattan Institute for Policy Research on May 25. “Things that used to be sacred cows, that used to be the third rail, no longer are. They’ve been replaced by the unaffordability, absolute unaffordability.”

The deepest recession since the Great Depression cut state tax revenue by $67 billion during the fiscal year ending last June 30, the most on record, according to the Census Bureau. That’s combined with rising costs to leave only four states with assets considered sufficient to cover promised benefits in the year that ended in June 2008, the last period with complete figures, the Pew Center said.

Short of Assets

States had $2.35 trillion set aside to cover $3.35 trillion of pension, health-care and other retirement obligations in fiscal 2008, Pew said in February. Assets at 125 state plans surveyed by Wilshire Associates, a consultant in Santa Monica, California, covered only 65 percent of liabilities on June 30, 2009, down from 85 percent in 2008.

Private industry is doing little better. Pensions at companies in the Standard & Poor’s 1500 Index had median assets in 2009 to cover only 75 percent of what they owed, said a June 1 report from the consulting firm Mercer, a unit of Marsh & McLennan Cos.

“It’s primarily due to the effects of the 2008 market downturn,” said Keith Brainard, chief researcher for the National Association of State Retirement Administrators, based in Baton Rouge, Louisiana. The S&P 500 Index lost 38 percent in 2008. “That raised the plans’ unfunded liabilities and, therefore, the amount of contributions needed to pay for them.”

Market Losses

In New Jersey, the pension system lost $15 billion in the year ended June 30, 2009, a period in which the S&P 500 dropped 28 percent. That left state funds, which cover about 800,000 teachers and government workers, with $89 billion of assets to pay $135 billion of benefits, according to the most-recent actuarial report. The state has set aside nothing to cover $56 billion in health-insurance benefits promised to retirees.

In response, Christie, a 47-year-old Republican who took office Jan. 19, proposed that employees still working after Aug. 1 contribute to health care and get lower benefits, encouraging those like the Hartmanns to retire now under current terms.

“The pension for our retirement was part of the reason we took these jobs,” said Mark Hartmann, 59, a business manager in the Treasury Department’s tax division in Trenton, the state capital. His wife, Janet, 58, a reading teacher since 1976 in Hillsborough in central New Jersey, wants to keep working, he said at a retirement seminar last month. “But if it’s going to cost her in her retirement, how can she?”

Added Costs

The 3,294 teachers who began collecting benefits last year through New Jersey’s Teachers Pension and Annuity Fund, the largest of the state’s seven retirement systems, receive on average $49,378 a year, the fund’s latest report says. Christie’s plan to charge retirees 1.5 percent of their benefits to pay for health care would cost each about $741 a year.

Christie also has proposed rolling back a 9 percent benefit increase that was approved by state lawmakers in 2000, a change that would cost retirees of the age and experience of the Hartmanns about $2,500 a year, based on the most-recent actuarial reports.

“We need to get to the problem of present employees,” Christie said in his Manhattan Institute speech. The state must “say no” to unions that assert they have “a birthright to ever-increasing benefits,” Christie said.

Christie and others unfairly blame public workers for pension-funding gaps caused by poor investment returns and deferred state payments, said Robert Master, legislative and political director in New York and New Jersey for the Communications Workers of America, New Jersey’s largest state- worker union.

Private Destruction

“You’ve seen the destruction of the defined benefit almost completely in the private sector,” he said in a telephone interview, referring to pensions with guaranteed payments. “So it becomes very easy to whip up resentment against public employees.”

Michigan, whose school-employee pension fund lost almost $5 billion in the year ended Aug. 31, according to its most-recent report, is trying to lure 28,000 of its 270,000 teachers and other education workers into early retirement. Those who leave by June 11 would receive enhanced benefits, saving school districts $681 million this year by replacing higher-cost veterans with entry-level staff.

New York, the second-largest public pension fund after California, cut benefits for those hired in 2010 after assets declined $45 billion in the year that ended March 31, 2009, to $109 billion. In Nevada, where the $19 billion pension lost $3.5 billion in the year that ended June 30, 2009, benefits were lowered for new hires and the retirement age went to 62 from 60 for most.

25 Percent Loss

U.S. public pension funds posted a median loss of 25 percent in 2008, according to Wilshire Associates. As the value of assets declined, benefit payments to retirees grew 8 percent, to $175 billion in 2008 from $162 billion a year earlier, according to the Census Bureau.

New York’s pension costs rose 16 percent annually between 1999 and 2009, faster than any area of spending except property- tax relief and almost triple the overall growth rate, documents for a recent bond sale show. Pennsylvania’s payments will rise to $4.6 billion in 2013 from $561 million this year without changes, Governor Edward Rendell’s February budget proposal showed.

New Jersey’s $3 billion payment for the fiscal year that starts July 1 is almost four times what it contributed in 2004 and more than 10 percent of its entire $29.3 billion budget, according to documents for a 2010 bond offering. The state will skip the payment, as it did with $4.6 billion of installments due in 2009 and 2010, to balance its budget.

Borrowed Payments

Illinois, which finished the 2009 fiscal year with less than 40 percent of the funds needed to cover promised benefits, borrowed $3.5 billion this year to make its payments. The state will borrow a similar amount for pensions next fiscal year under Governor Pat Quinn’s proposed budget.

To protect its credit rating, the second-lowest of any state after California, Illinois cut benefits and raised the retirement age for future employees to save its pension $250 billion over 35 years. States that don’t do likewise “could be setting themselves up for greater hardship,” Standard & Poor’s said last month.

The decline in tax revenue for states continued into the second half of 2009 before moderating this year. Collections rose 2.4 percent in the first quarter from a year earlier, the Nelson A. Rockefeller Institute of Government said yesterday.

Most of the gains came from increased tax rates in New York and California. Excluding those states, collections fell 2.2 percent, leaving governments little relief in their need to wring pension savings from employees like the Hartmanns.

“There’s a lot of animosity between the teachers and the current administration,” Mark Hartmann said. “It just does not seem like an atmosphere for somebody who puts in 10-hour days.”

To contact the reporter on this story: Dunstan McNichol in Trenton, New Jersey, at dmcnichol@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.