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Pension Preparedness

When it comes to retirement systems, levels of funding and liability are all over the map.

It is no secret that public pension plans across the country are underfunded. The Pew Center on the States estimates that all funds combined currently operate at a $1 trillion deficit, leaving many state public pensions funded well below the 80 percent level suggested by the U.S. Government Accountability Office (GAO). There is some expectation that the $1 trillion deficit actually is much higher -- the Pew estimate does not include the stock-market losses of late 2008, nor does it take into account the recent oil spill in the Gulf of Mexico. Some of the nation's largest pension plans -- including California, New York and Florida -- invest some of their pension funds in BP stock, which has significantly declined in value as cleanup costs grow.

Further raising pension concerns are the Governmental Accounting Standards Board's proposals to revise the way pension liabilities are calculated. Based on the changes in the discount rate and amortization period the board is proposing, the annual contribution to a fund required by state governments could double or triple, resulting in the possibility that some state pension obligations could increase 20 percent.

Regardless of how the liability is calculated, states will need to take quick action to shore up retirement accounts. The Kellogg School of Management at Northwestern University estimates that if state funds continue to earn annual returns of 8 percent (a lofty goal in today's fiscal environment), 20 plans will run out of money by 2025.

(-) California
Pension liability: $454 billion
Percent funded: 86.89%
Employees in Pension Plans: 1,995, 169
California finds itself at the bottom of the list with the highest unfunded pension liability: $59.49 billion. Although the Golden State has the largest outstanding balance, it's still funded above the GAO-recommended 80 percent level. The state also has the highest amount of assets with $394.46 billion, with New York in a not-so-close second of $151.68 billion. Although these numbers may paint a rosy picture, the state's liabilities have been growing about twice as fast as its assets in the past decade. Making pension reform a do-or-die issue, Gov. Arnold Schwarzenegger has been negotiating deals with labor unions to reform pension plans. Halfway through 2010, six unions have agreed on deals to roll back pension benefits.

(-) Illinois
Pension liability: $119 billion
Percent funded: 54.33%
Employees in Pension Plans: 781,117
With $54.43 billion in unfunded liabilities, Illinois' pension deficit almost matches California's -- which has a population about three times larger than the Midwestern state. With pension liabilities essentially doubling the assets, the state ranks dead last in its pension funding percentage. Not only have the state's pensions not been fully funded for more than a decade, the pension liabilities have been growing twice as fast as the assets. In 2010, Gov. Pat Quinn signed a reform bill that raises the retirement age for full benefits, caps the pensionable salary and prevents workers from receiving a pension while also receiving a salary. The plan is estimated to save more than $200 billion over the next 35 years. However, if the state continues with its current contributions, it is estimated that it will run out of money by 2018.

(-) New Jersey
Pension liability: $126 billion
Percent funded: 72.63
Employees in Pension Plans: 740,594
Funded below the recommended 80 percent level, the Garden State's pensions are short $34.43 billion. With a 72.63 percent-funded pension -- and being in a pension hole that's $20 billion shallower than California and Illinois -- New Jersey's situation seems almost acceptable. But a closer look at pension funding in the past decade shows that the state's liabilities have been growing about three times faster than the assets. In fact, the state's pensions were fully funded as recently as 2001. Trying to remedy this situation in 2008, the state Legislature increased the eligibility age for benefits and salary threshold for new hires to join the pension systems. In 2010, Gov. Chris Christie signed three bills that amend public pension benefits. These measures include barring part-time worker enrollment, stopping workers from having more than one pension-eligible position, and capping unused sick, vacation and personal days.

(+) Florida
Pension liability: $129 billion
Percent funded: 101.39%
Employees in Pension Plans: 956,632
Since 1997, Florida has made at least 90 percent of the required annual contribution to its plan, maintaining a funding level of more than 100 percent. It even has kept a reserve to cover unexpected losses, even though its pension liabilities grew 20 percent more than assets between 1998 and 2008. This has not always been the case, as Florida spent the 25 years prior to 1997 at an underfunded status. To ensure that it maintains appropriate funding levels while enduring financial downturn, the Florida Legislature has looked at various plans to restructure expectations recognizing that returns on plan investments a decade ago can no longer be replicated today. While the state is celebrated for its ability to maintain current funding levels, its estimated long-term liability for retiree health-care costs and other benefits is $3.1 billion, not counting pensions, and Florida has failed to set any money aside to cover those costs.

(+) New York
Pension liability: $141 billion
Percent funded: 107.38%
Employees in Pension Plans: 1,343,524
New York is the nationwide pension leader, with the country's highest-funded public pension at 107 percent. Though the state has long been in fiscal turmoil, it has met its necessary funding level every year since at least 1997. State Comptroller Thomas DiNapoli made it his goal to increase the plan's transparency and ensure it maintains a high level of funding. To make good on this, in 2009, New York passed reforms that raised the retirement age for most new government employees from 55 to 62, and increased the amount public employees are required to contribute to the pension plan.

(+) Washington
Pension liability: $54 billion
Percent funded: 100.33%
Employees in Pension Plans: 428,474
Although Washington state maintains funding higher than 100 percent, it has failed to make the required amount of contributions to the plan since 2001. This has resulted in a drop from a high of 126 percent funded in 2000 to a little more than 100 percent at the end of 2008. To get back on track, the state has been working since 2006 to stabilize its level of funding and prevent further drops. That year, Washington appropriated $350 million for the fund and increased the amount state employees are required to contribute. However, the reforms have so far failed to boost the fund back to 2000 levels. Washington, previously the envy of public pension plans, was once named a "daring, cutting-edge investor" because of its level of investment in private equity (often higher than that of other states). However, the fiscal crisis has meant that the Legislature did not make payments to the fund in the fiscal years ending in 2003, 2004 and 2005.

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Andy Kim

Andy Kim is a former GOVERNING staff writer.

Twitter: @governing

Heather Kerrigan

Heather Kerrigan is a GOVERNING contributor. She pens the monthly Public Workforce column and contributes to the print magazine.

Twitter: @governing

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