State governments have begun the slow process of addressing the unfunded obligations for their employee pensions, according to a new report from RBC Capital Markets LLC.
Public awareness of the issue increased substantially in 2010 with the release of a series of studies. They include a February report from the Pew Center on the States that identified a “trillion-dollar gap” when combining unfunded pension liabilities and unfunded retiree benefit liabilities.
“Throughout most of 2010, the mainstream U.S. media has been highlighting public pension liabilities in both straight news and op-ed form,” said the RBC survey on state pension funds.
The survey was prepared by Chris Mauro, head of U.S. municipals strategy for RBC. It maintains that media consumers may not be equally aware that governments are addressing the problem. And that rather than being passive, as has been implied in some reporting, states have been actively addressing their pension funding issues using the tools available to them under state law.
“Despite what may be floating around on the Internet from various sources, the sky is not falling,” Mauro said in a phone interview Thursday. “The states are dynamic entities that proactively manage their fiscal affairs.”
In the course of his research, Mauro said he detected a sea change that began in the middle of the past decade, when the trend shifted away from benefit enhancements and toward benefit limits.
“The switch was turned on in the second half of this decade,” he said. “You started to see more and more every year, leading up to this year, greater tightening of some of these benefits.”
The RBC survey found that the pace of change accelerated in 2010.
Most of the adjustments involve increases in employee contributions, changes to retirement eligibility and benefit formulas, or reductions in cost of living adjustments, or COLAs.
“According to the National Conference of State Legislatures, 18 states made changes to their public employee pension plans,” the report said. The changes were “principally for new employees, but, in some notable cases, for existing employees as well.”
Eleven states legislated changes in contribution rates in 2010, 13 changed eligibility requirements or benefit formulas for their defined benefit plans, and eight states made changes to COLAs, according to the RBC survey.
Legislatures in Colorado, Minnesota, and South Dakota lowered COLAs for people who have already retired. The report highlights the three COLA adjustments as important test cases. Lawsuits have been filed in each state claiming violation of contract, and the cases will be closely watched for clues to the future course of state pension fund reform, according to the RBC report.
“We expect to continue to see more changes to public pension plans as states manage through what will likely be a difficult budget environment over the next few years,” the report said. “Currently, eight states are expected to take up pension reform legislation in 2011.”
RBC also noted an increasing interest in shifting state employees away from defined benefit plans to either 401(k)-style defined contribution plans, or hybrids blending both defined benefit and defined contribution plans.