Public Pension Plan Underfunding ... It's A Really Big Deal

Pension plan funding is usually ignored by most people. So are pension fund benefits until shortly before the person is scheduled to retire. Social Security is the same way. None of this seems important until it's time or close to time to retire.

That may be why we're in so much trouble today with meeting our obligations to provide already promised pension fund benefits to retirees.

The company for which I worked eliminated its pension fund in 1985. We replaced it with a 401(k) type company stock ownership plan and encouraged 100% employee participation with a generous company match. 

We may have been lucky, but the change was a total success. Employees liked it, shareholders liked it and all went well. The end of the story came in 1988 when GE bought all the stock of the company for a substantial premium. Of course, not all such stories have a happy ending, but this one certainly did.

Unfortunately, today we have big problems in public sector pension funding. And Social Security funding as well. It's time to pay attention to all this.

Is Your Pension Underfunded? details the various underfunding in specific public sector plans:

"By most accounts, pension plans are in trouble. How many plans and how much trouble depends, at least in part, on the accounting. And now that the Governmental Accounting Standards Board has adopted new rules for calculating pension liabilities today, the hole faced by many pension plans could look a lot deeper.

As we wrote in our story, States Face Pressure on Pension Shortfalls, the new rules will require state and local officials to use more conservative assumptions when calculating pension liabilities. As a result, some plans could see their liabilities double, according to an analysis by the Center for Retirement Research at Boston College of how the changes could affect 126 state and local pension plans.

The list of the plans analyzed by BC is below. Before you dive in, there are a few important caveats. First, the numbers come from 2010 when pension funds were smaller than they are today. With some plans, funding levels would have decreased if the GASB changes were implemented in 2010 because investments were doing poorly. Depending on how the stock market does, these plans may not reflect a shortfall when the rules take effect in 2013.

But for plans that already have large deficits, the hole is likely to look bigger, regardless of the market."

Summing Up

As a whole, the new standards reflect a funding level of 56.8%, down from 76.4% under the old standard.

In subsequent writings, we'll try to put this entire issue into better perspective for what it means to all Americans. 

For now, here's the overview.

Thanks. Bob.

Taken from the complete listing (all of which are available in the above referenced article), some specific examples are as follows:

Plan                                     Old      New

California PERF	83.4%	65.4%	-18.0
California Teachers	71.0%	41.2%	-29.8
Chicago Teachers	67.1%	31.0%	-36.1
City of Austin ERS	69.6%	55.7%	-13.9
Colorado Municipal *	73.0%	44.3%	-28.7
Colorado School *	64.8%	51.6%	-13.2
Colorado State *	62.8%	48.4%	-14.4
Connecticut SERS	44.4%	37.0%	-7.4
Connecticut Teachers	61.4%	52.3%	-9.1
Contra Costa County	80.3%	75.6%	-4.7
DC Police & Fire	100.7%	92.4%	-8.3
DC Teachers	118.3%	99.2%	-19.1
Delaware State Employees	96.0%	83.3%	-12.7
Denver Employees	85.0%	75.5%	-9.5
Denver Schools	88.9%	88.2%	-0.7
Duluth Teachers	81.7%	43.6%	-38.1
Fairfax County Schools	76.5%	67.4%	-9.1
Florida RS	86.6%	76.7%	-9.9
Georgia ERS	80.1%	78.0%	-2.1
Georgia Teachers	85.7%	72.2%	-13.5
Hawaii ERS	61.4%	42.3%	-19.1
Houston Firefighters	93.0%	81.5%	-11.5
Idaho PERS	78.9%	78.8%	-0.1
Illinois Municipal	83.3%	86.3%	3.0
Illinois SERS	46.1%	23.5%	-22.6
Illinois Teachers	48.4%	18.8%	-29.6
Illinois Universities	46.4%	40.2%	-6.2
Indiana PERF	85.2%	72.9%	-12.3