Taxpayers across the U.S. owe public school teacher retirement accounts about $933 billion, nearly triple the amount reported by the plans themselves, a study says.

The $332 billion gap estimated by teacher retirement funds between what they have on hand and the cost of promised benefits is low because it includes an “aggressive” 8 percent assumption on future investment earnings, the Manhattan Institute for Policy Research said in the study, released today. It also doesn’t reflect the full cost of stock market losses suffered in the past two years, the New York-based research organization said.

The report, covering 59 plans for 13 million working and retired educators, found that California had the largest unfunded teacher pension liability at almost $100 billion, more than the $42.6 billion reported by the system in January. It’s the third study in less than two months to suggest that pension costs of about $1 trillion threaten to overwhelm state and local budgets already crimped by declining tax revenue......

Future U.S. economic growth may be threatened by increases in public-employee pension liabilities, according to Hawaii Governor Linda Lingle.

“Until the public rises up and says, ‘Enough is enough, you have to stop this spending,’ it won’t stop, and our quality of life will degrade,” Lingle, 56, said of government-paid retirement benefits.

U.S. public-worker retirement systems are underfunded by more than $2 trillion, according to a January estimate by Orin S. Kramer, chairman of New Jersey’s State Investment Council and manager of the Boston Provident Partners hedge fund. California’s three biggest state pension funds are as much as $500 billion short of meeting promises made to future retirees.....

May 21 (New York Times) -- An article in The Times today
details how "errors, misunderstandings and wishful thinking" have
caused public pension costs in New York State to explode. The
problem is not limited to New York or to the fiscal crisis poster
state, California, whose ballooning pension obligations have
stoked battles between anti-tax crusaders and public sector
unions, with the legislature paralyzed in between. Even states
like Kansas, where retirees' payouts are relatively small, are
facing grim forecasts.
Stories about $150,000-a-year pensions for retired officials
are fueling anger and demands for action, but there seems to be
little that officials can do about existing contracts, for legal
and other reasons. The focus has turned to reforming the state
systems, to make sure they are fiscally sustainable in the
future. What states have led the way? And what political
obstacles have arisen in other places?
Girard Miller, Governing magazineAlicia H. Munnell, Center
for Retirement ResearchE.J. McMahon, senior fellow at Manhattan
Institute Teresa Ghilarducci, New School for Social Research
Steven Greenhut, author of "Plunder!"
No More Magic TricksGirard Miller is the public money
columnist for Governing magazine and a senior strategist at the
PFM Group, a financial services company with government clients.
The pension crisis in New York state parallels others such
as those in Illinois and California that also require serious
solutions. Each has its own historical roots, which usually
involved funding malpractices and awarding retroactive benefits
on the naive assumption that investments would magically pay the
bills.
Without depriving retirees and incumbent employees of
benefits they have already earned, many states must fix their
pension laws to enable public employers to install lower-cost
benefits for future service by incumbents and new employees.
Where employees pay less than half the current costs of
their benefits, the underfunded plans need to split the tab more
fairly. This includes retiree medical benefits plans that are 95
percent underfunded nationally.
States looking to reform their plans for new employees
should look at Washington State's hybrid plan, which is half
pension and half defined contribution. That design shares the
investment risks and rewards equitably.
South Dakota's moderate pension plan formula limits the
pension payment multiplier at 1.7 percent times years of service
times final compensation -- and they avoid using investment
surpluses to buy into irrevocable higher benefits. Illinois'
recent remedial reforms to align the retirement ages for new
civilian employees with Social Security's age 67 and cap the
maximum pension benefit at $106,000 should be followed by others.
Giving all new employees a statutory right to elect into a
competitive defined contribution plan will also prevent future
"pension creep" as more workers take that option. States and
local governments should be conducting formal sustainability
analyses to quantify their capacity to bear current obligations
and any proposed enhancements, taking into account future reforms
in governmental accounting rules that will only heighten the cost
increases facing public employers.
Hysteria Now Won't HelpAlicia H. Munnell, a former member of
the Council of Economic Advisers, is the Peter F. Drucker
professor of management sciences at Boston College's Carroll
School of Management and director of the college's Center for
Retirement Research.
Public pension plans - like the rest of us - are suffering
from the financial crisis and ensuing recession. States and
localities were on a path toward full funding, but they were
seriously knocked off track with the collapse of asset prices.
Between 2008 and 2009, the ratio of assets to liabilities
for a sample of 126 plans in a report conducted by the Center for
Retirement Research dropped to 78 percent from 84 percent, and
ratios are likely to continue declining for the next five years
as actuaries average in the losses.
It is true that the financial numbers would look worse under
more appropriate accounting. Discounting liabilities by a low
rate that reflects the riskless nature of the liabilities (that
is, the benefits being guaranteed) would reduce the 2009 funded
ratio to 55 percent.
Better accounting in the past would have led to more assets
today and may have helped avoid the benefit liberalizations that
took place in the 1990s when many plans appeared to be
overfunded.
For example, in 1997 CalPERS, the California public
employees pension system, reported that assets equaled 111
percent of liabilities. In response, the California legislature
enhanced benefits for current and future employees. If CalPERS
liabilities had been valued at a riskless rate, the plan would
have been only 76 percent funded.
Although the present value of promised benefits depends on
the choice of the discount rate, the promised benefits themselves
do not. When teachers or firefighters retire, they will get the
amount calculated under the plan provisions, and how that future
amount is reported today has no impact on the ultimate payment.
Moreover, an average ratio of assets to annual benefits of
15 (among the sample of plans in the Center's study) suggests
that plans - with notable exceptions such as most Illinois plans,
Oklahoma Teachers and New Jersey Teachers - have enough on hand
to pay benefits for decades. So liquidity is generally not an
issue.
The key question is what should be done. A major increase in
contributions is not realistic at this time. Because of court
rulings, states and localities have virtually no ability to cut
benefits for existing employees and may have only limited ability
to increase employee contributions. And any changes for new
employees will take a long time to have any substantial effect.
That means if funding levels are to be restored quickly, the
money must come primarily from taxes. But the recession has
significantly reduced tax revenues and increased the demand for
services. Thus, finding additional taxes will be extremely
difficult. The only real option is to wait for the market and the
economy to recover.
Stop the BleedingE.J. McMahon is a senior fellow at the
Manhattan Institute and director of the institute's Empire Center
for New York State Policy.
New York's latest stab at pension reform, which created a
new "tier" of slightly reduced benefits, was an enormous missed
opportunity. While the plan shaved away a few of the most costly
sweeteners added to pension benefits since the early 1990s, it
preserved the basic defined benefit plan structure. This is the
core of the problem: a huge and growing financial risk for
current and future taxpayers.
That risk is likely to be compounded by the next state
budget. Gov. David Paterson and legislative majorities apparently
have agreed to cap rising pension bills by "amortizing" them,
which essentially means borrowing $2.5 billion from the pension
fund in the next four years alone. Of course, this won't reduce
costs - it will merely push them into the future. Meanwhile, as
documented in this recent Manhattan Institute report, public
pension obligations are grossly understated to begin with.
Unfortunately, there is no way to reverse the pension cost
spiral in the short term. The state Constitution is generally
interpreted as locking in all current employees' retirement
benefits - even those not yet earned.
But this should not be an excuse for paralysis. The first
order of business should be to stop the bleeding - by closing
existing defined-benefit pension plans to new entrants and
enrolling newly hired general employees in defined-contribution
plans. A ready-made model is the Optional Retirement Program
favored by employees of the State University of New York.
Republicans and Democrats alike in Albany have long treated
fundamental pension reform as a political third rail. But there
is at least one tiny crack in the wall of fear. State Assemblyman
Jack Quinn, a Buffalo-area Republican running for state Senate,
just unveiled the most far-reaching and comprehensive pension
reform proposal we've seen from any member of the New York
Legislature in decades. Mr. Quinn's plan represents the kind of
approach New York needs - before it's too late.
The Right Pension PlanTeresa Ghilarducci, director of
economic policy analysis at the New School for Social Research,
is the author of "When I'm 64: The Plot Against Pensions and the
Plan to Save Them."
Most public employees have pensions plans most every worker
wants and should have. The defined benefit plans provide a
benefit credit for every year of service tied to an employee's
wage.
Employers and employees contribute, professionals invest the
money for a low fee and the benefit is paid out as a pension for
life. Even better, the funds are invested in the economy to
promote growth and public pensioners provide consumer demand when
they retire. And, unlike 401(k) plans workers can't spend the
funds before retirement.
The core benefit design is good. But cheating is not.
I was a trustee of the Indiana public employees' pension
plan in the late 1990s and early 2000. We made mistakes but we
had good bones. Today the fund is not hugely underfunded, which
means cities and the state do not have to make large and
unexpected contributions in a recession.
Indiana public employers and employees always contributed --
there were no pension holidays. In the go-go years we didn't
invest in what we didn't understand. No Enron, no derivatives,
very little private equity, no hedge funds. We kept the assumed
interest rate assumptions on the low side.
In contrast, in good times many states and municipalities
speculated that their funds would earn high rates of return so
they could contribute less: their taxpayers, by the way,
benefited in the short-term and shouldn't complain now that it is
payback. Pension funding should work the opposite way: employees
and employers should pay more in good times and less in bad
times. The funding status should range from about 120 percent to
80 percent. There are technical ways to do that; they have to be
embedded in the funding design.
California's MessSteven Greenhut is the author of "Plunder!
How Public Employee Unions Are Raiding Treasuries, Controlling
Our Lives And Bankrupting the Nation."
There's no denying that California's pension problem has
turned into a full-fledged fiscal crisis. Unfunded pension
liabilities are soaring - as high as one half-trillion dollars,
according to a recent Stanford University estimate - as the
result of a market downturn, followed by years of absurdly
generous pension increases for government employees. The state's
$100,000 pension club has more than 15,000 members from all
retirement systems - and the numbers are growing rapidly.
Not only libertarian and conservative government critics
have been noticing. Former Democratic Assembly Speaker Willie
Brown wrote in his San Francisco Chronicle column early this year
that "[W]e politicians - pushed by our friends in labor -
gradually expanded pay and benefits . . . while keeping the job
protections and layering on incredibly generous retirement
packages." The chief actuary for the California Public Employees'
Retirement System (CalPERS) called the current pension system
"unsustainable."
Gov. Arnold Schwarzenegger's pension adviser, David Crane,
recently told a state Senate hearing on pension reform, "One
cannot both be a progressive and be opposed to pension reform.
The math is irrefutable that the losers from excessive and
unfunded pensions are precisely the programs progressive
Democrats tend to applaud. Those programs are being driven out of
existence by rising pension costs."
Yet the modest reform legislation Mr. Crane backed, which
would have provided a still-generous second retirement tier for
new hires, was dead on arrival in the Democratic-dominated
Legislature, which has simply ignored these compelling "depletion
of services" arguments. In California, there is no hope of reform
coming from the Legislature, period. California voters - who are
showing signs of agitation at the pension debt and the unfairness
of the current system - are going to have to take matters into
their own hands, through the state's clumsy initiative process.
Courts have ruled that current pension deals are vested
benefits that cannot be reduced, but there's no reason not to fix
the problem going forward. No initiative has so far gotten the
backing necessary, but that's only a matter of time. When unions
complain about their vilification in a coming battle, they and
their political allies will only have themselves to blame for
ignoring the words of progressive Democrats like Willie Brown and
David Crane.

WASHINGTON—U.S. lawmakers are laying the groundwork for a possible federal bailout of some faltering pension plans that are jointly run by companies and unions.

The effort reflects a worrisome new problem in the nation's troubled retirement-savings system: the grim financial condition of such pension plans, known as multi-employer plans. They are common in the hotel, construction, trucking and other industries, and cover about 10 million workers, or almost one in four workers who have a private pension.

Many multi-employer plans are struggling after years of financial hits and relatively light regulation. In the past two years, almost 400 plans have announced they are in bad condition, according to lawmakers.

In response, some lawmakers are pushing a plan that would provide federal aid to a few of the ailing pension funds. But some conservatives and anti-union groups oppose the aid effort, arguing it could lead to a broader taxpayer bailout of the whole class of pensions, costing tens of billions of dollars.

A 2009 study from ratings firm Moody's Investors Service estimated that the country's largest multi-employer plans have long-term deficits of about $165 billion. Some employer groups that are supporting efforts to help the plans question whether that estimate accurately reflects the government's potential exposure, however.

At a Senate hearing Thursday on the matter, Sen. Mike Enzi (R., Wyo.) termed the possibility of a broader taxpayer bailout "extremely dangerous." While expressing concern for workers, Mr. Enzi added: "We have to ensure the taxpayer is not on the hook."

Legislation sponsored by Sen. Bob Casey (D., Pa.) would provide federal financial assistance to a few of the more troubled multi-employer plans, including a Teamsters Central States fund and another Teamsters pension plan in western Pennsylvania. Labor officials said another 10 to 20 smaller plans also could benefit, though they would add relatively little to the proposal's cost.

Mr. Casey said his approach is not a federal bailout. He said troubled plans taking advantage would have to pay the first five years' worth of retiree benefits themselves.

His bill would make a federal agency, the Pension Benefit Guaranty Corp., responsible for the longer-term costs, and would cost taxpayers an estimated $8 billion over the next decade. It would cover workers in the plans whose employers have gone out of business. It also would boost benefits available to affected retirees to about $20,000 a year. Currently, when the PBGC helps a beneficiary of a multi-employer plan, the benefits are limited to $12,870.

A separate provision moving through Congress would buy time for struggling private pension plans through accounting changes that would let them spread recent losses over longer periods. That provision is part of a bigger economic-relief package sitting in Congress.

Although the outlook for Mr. Casey's proposal is uncertain, Congress likely will be forced to address the problem soon. The Moody's study estimated that multi-employer plans in the construction industry are only about 60% funded, with long-term liabilities of $158 billion versus assets of $85.5 billion. In the transportation industry, including many Teamsters plans, the overall funded status was 58.6%.

Multi-employer plans sprang up in industries where workers shifted jobs frequently and employers were typically small—hotels, retailers, trucking and construction firms. In recent years, multi-employer plans have been hurt by changes in the U.S. economy, such as deregulation of trucking, as well as by the financial crisis of 2008 and other factors.

Many employer groups are supporting lawmakers' efforts. A letter on Thursday from a wide array of employer groups, including the U.S. Chamber of Commerce and a number of construction and transportation groups, encouraged lawmakers to "continue to work…to find appropriate solutions. … Without a real resolution to this problem, more employers will be forced into bankruptcy and more workers will be left without a secure retirement."

A number of conservative groups, including the Alliance for Worker Freedom and the Competitive Enterprise Institute, wrote in a letter to lawmakers this week: "Using taxpayer funds to pay for private pensions would be a first" for the federal government.

Joe Dear is giving a pep talk to more than two dozen colleagues at the California Public Employees’ Retirement System. As Dear paces before his people on this July afternoon in Sacramento, he implores them to shake off the funk of the pension fund’s recent troubles.

For the next three hours, he says, they’re going to figure out how to solve some of the most daunting problems dogging Calpers, the largest public pension fund in the U.S., with $200 billion in assets. Dear, its chief investment officer since March 2009, wants results on his desk in 100 days.

“We can take control of our destiny,” Dear, 59, says as a lunchtime band in the plaza outside plays the rock anthem “Freebird.” “We can make concrete improvements. Let’s get to work.”

Dear, an impatient man who trots down Calpers’s halls to meetings, is racing to rebuild an institution that lost $70 billion in the credit wipeout of 2008 and 2009, Bloomberg Markets magazine reports in its October issue. Rather than rely on safe bets such as U.S. Treasury bonds, Dear is embracing investments in private equity, emerging nations, hedge funds and public works projects in his pursuit of market-beating profits.....

Corporate pension plans in the U.S. are falling behind future payouts to retirees by the most in a decade amid a slowing economy and the lowest bond yields on record.

The gap between the assets of the 100 largest company pensions and their projected liabilities widened by $108 billion in August from the previous month to a $459.8 billion deficit, actuarial and consulting firm Milliman Inc. said today in a statement.

The shortfall is “like a silent heart attack,” said Kenneth Hackel, president of research and consulting firm CT Capital LLC. “People aren’t recognizing the symptoms until the patient falls on the ground.”

Corporate pension plans are a casualty of Federal Reserve efforts to keep interest rates low to prevent the economy from slipping back into recession. As AA rated company bond yields, a benchmark in determining future liabilities, last month reached the lowest ever, obligations increased $91 billion to $1.54 trillion, Seattle-based Milliman said, without disclosing company names.

AA corporate bond yields fell to 2.81 percent last month from 3.9 percent at the end of 2009, according to Bank of America Merrill Lynch index data. That compares with the average of 5.8 percent in 2008.

While lower bond yields help companies borrow cash more cheaply, the “dark side” of the “low-yield environment that is projected to persist over the near term” is that companies may have to divert more money to their pension plans or make riskier investments, such as leveraged loans, real estate and private-equity, Fitch Ratings said Aug. 23 in a report.....

U.S. state pensions such as Illinois, Kansas and New Jersey are in a “death spiral,” with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains.

Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled for the Cities and Debt Briefing hosted by Bloomberg Link in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent.

Benefits paid by funds in at least 14 states equaled more than 10 percent of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pensions can earn their way back to financial health.....

Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget.

Actuaries, including some who serve on the profession’s governing boards, got wind of what Illinois was doing and began to look more closely. Many thought Illinois was using an unorthodox maneuver to starve its pension fund of billions of dollars, while papering over a widening gap between what it owed and how much it had. Alarmed, they began looking for a way to discourage Illinois’s method before other states could adopt it.

They are too late. The maneuver, and techniques that have similar effects, are already in use in Rhode Island, Texas, Ohio, Arkansas and a number of other places, allowing those states to harvest savings today by imposing cuts on workers in the future.....

The municipal bond market, once a quiet corner of Wall Street, is slowly becoming a scene of scandal and regulatory inquest. The Securities and Exchange Commission recently accused New Jersey of giving fraudulent information about its finances to municipal bond investors. The SEC is investigating officials in Miami for similar problems.

The rate of municipal bond defaults -- roughly $3 billion per year -- is triple the usual pace, and analysts say many more bonds are on the brink thanks to the weak economy and low tax collections.

Should investors worry about their municipal bond portfolios? In most cases, no. The vast majority of municipal bonds pay off on time. Major disasters have been rare and confined.

That record of relative calm is a key reason munis have been spared the kind of regulatory attention given to their corporate bond cousins. In our view, that special treatment serves investors in municipal bonds poorly, leaving them under- informed about some of the risks they are taking. In the end, the biggest losers will be municipal bond issuers themselves, imperiling their ability to borrow at low rates in the future.....

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.....

Lawmakers and governors in many states, faced with huge shortfalls in employee pension funds, are turning to a strategy that a lot of private companies adopted years ago: moving workers away from guaranteed pension plans and toward 401(k)-type retirement savings plans.

The efforts come as the governors of Wisconsin and Ohio, citing dire budget problems, are engaged in bitter showdowns with public-employee unions over wages, pensions and collective bargaining rights.

The new plans allow states to set a firm, upfront limit on the amount they will contribute and leave it up to the employee and the financial markets to make the money grow. In a traditional pension system, the employer promises a certain benefit, then must find a way to pay for it.....

Billionaire philanthropist Bill Gates will step into the national debate over state budgets Thursday with a call for states to rethink their public-employee benefits systems, which he says stifle funding for the nation's public schools.

The July opening of a Target Corp. (TGT) store employing 200 may bring the last new jobs for a while to East Liberty, one of Pittsburgh’s lowest-income neighborhoods.

A $650 million shortfall in the city’s pension system is drying up funds for the sustained investments that remade Pittsburgh after the 1980s collapse of the steel industry. A decade of development brought 600 jobs to East Liberty at units of Google Inc. (GOOG), Home Depot Inc. (HD) and Whole Foods Market Inc. (WFMI)

Keeping up with expanding retirement obligations may consume 40 percent of Pittsburgh’s annual budget for the next three decades, according to Mayor Luke Ravenstahl, 31. This year he is facing a state takeover of the pension system, which might force him to raise taxes and cut services, jeopardizing the momentum of the city’s renaissance.

“Pittsburgh is probably the best model in the country for how to redevelop an urban area,” says Tom Murphy, Pittsburgh’s mayor from 1994 to 2006, who helped change laws to enable conversion of abandoned steel-mill sites. “And they are having the same problem as cities all over America.”

Ravenstahl is in the same bind as mayors from New York to Cincinnati to San Francisco. The gap between pension assets and amounts promised retirees by U.S. cities, counties and states may total a combined $3.6 trillion....

The U.S. public pension mess, with its $2 trillion to $3 trillion in unfunded liabilities, is such a volcano of gloom that it takes a potentially bigger problem to turn our eyes away from it.

Turn your attention instead to the size of the taxpayer- backed health-care obligations for public employees.

“Frankly, if you want to look at a truly scary set of unfunded liabilities, health care for retirees is a better choice than pensions,” said California Treasurer Bill Lockyer in an October speech meant to play down the pension crisis.
Not that Lockyer or his Democratic and union allies want to reduce any benefits that are at the heart of the problem. In their view, the real scourge is “pension envy” or perhaps “health-care envy” -- the failure of the private sector to keep up with government-benefit levels.

States and localities make their own decisions on how to finance these health-care policies. Far more government employees than private workers receive health and dental care -- and those plans cost more, require lower employee contributions and provide more comprehensive coverage.

Such generosity comes at a cost to taxpayers and municipal budgets, especially given the “promise now, pay later” approach of officials. As a recent Bloomberg News article noted, while most public pension plans are 75 percent funded, the figure for health-care plans is only 4 percent nationwide. So unlike pensions, governments are setting aside little money in advance to pay for their future obligations.....

SAN DIEGO (AP) — Voters in two major California cities overwhelmingly approved measures to cut retirement benefits for city workers Tuesday in contests being closely watched as states and local governments throughout the country struggle with mounting pension obligations.

In San Diego, 67 percent voted in favor of Proposition B while 33 percent were opposed. More than 65 percent of precincts reported.

The margin in San Jose was even wider, with 71 percent in favor of Measure B and 29 percent opposed. Nearly half of precincts reported.

San Jose Mayor Chuck Reed called the vote a victory for fiscal reform.
"The voters get it, they understand what needs to be done," he said in an interview.

Supporters had a straightforward pitch: Pensions for city workers are unaffordable and more generous than many private companies offer, forcing libraries to slash hours and potholes to go unfilled......