WASHINGTON — Since the 2008 economic downturn, 35 states have reduced their pension benefits to cut costs and improve the long-term sustainability of their plans in the wake of investment losses and budget pressures, according to a report released by the Government Accountability Office on Friday.
Half the states have increased their member contributions, shifting a large share of pension costs to their employees, the GAO said in the 54-page report, “Economic Downturn Spurs Efforts to Address Costs and Sustainability.”
However, most large plans have assets sufficient to cover benefit payments to retirees for a decade or more, the GAO concluded.
At the same time, there are heightened concerns that growing budget pressures will challenge the long-term sustainability of plans as most of them have experienced a growing gap between actuarial assets and liabilities over the past decade, the report said. That means higher contributions from government sponsors are needed to maintain funds on an actuarially-based path toward sustainability.
During the past decade, funded ratios for large plans fell from over 100% in fiscal 2001 to 75.6% in fiscal 2010. Investment loss was one contributing factor to that growing gap, the GAO said. In fiscal 2008 and 2009, investments lost more than $672 billion, according to Census Bureau figures.
Despite budget pressures, most plans continue to receive pre-recession contribution levels. In addition, tax revenues are slowly recovering to pre-2008 levels, but long-term budget issues will continue to stress state and local governments and their ability to adequately fund pension programs, the report found.
While some states have reduced benefits or increased member contributions, others — Georgia, Michigan and Utah — have implemented hybrid approaches that incorporate a defined contribution plan component, shifting some investment risk to employees.
Some states have issued pension obligation bonds to help finance their contributions or to lower their costs by reducing the gap between plan assets and liabilities.
But issuing POBs is a funding strategy that can expose plan sponsors to additional market risk, the GAO said. Investment returns on the bond proceeds can be volatile and lower than the interest rate on the bonds. And in some cases, POBs can leave plan sponsors worse off, trying to juggle debt service payments on the bonds as well as their annual pension contributions.
POBs are taxable general obligation bonds that provide a one-time cash infusion into the pension system. They convert a current pension obligation into a long-term, fixed obligation of the government issuing the bond.
These bonds are generally used for one of two purposes — to provide temporary budget relief by financing a plan sponsor’s actuarially required contribution for a single year, or as part of a longer-term strategy for paying off a plan’s unfunded liability.
Relatively few states and localities use POBs, and there were only three issuances in 2011, according to the GAO. Aside from those, from Illinois, Connecticut, and the Chicago Transit Authority, most state and local governments have not issued sizable POBs over the last six years, the GAO said.
Illinois has been the largest single issuer in recent years, issuing over $7 billion in POBs since 2010.
The total amount of POBs issued in a single year has not exceeded more than 1% of total assets in state and local pension plans, according to the GAO.
There are 3,400 state and local pension systems in the United States, according to the Census Bureau.
