Public employee pension crisis update: CalPERS $1 Trillion Short; Kentucky considers ending defined-benefit plan.

We’ve written previously about the challenges facing many of the nation’s public employee pension systems. There’s evidence, for example, pension costs are crowding out eduction funding. And analysts warn that many state pension plans continue to rely on unrealistic assumptions about investment returns. 

Still, this report from California contained staggering numbers.

“It’s the albatross around the necks of cities and counties,” Stanford Professor of Public Policy Joe Nation said about public employee pensions. “Unless we do something the system may not survive.”

The biggest system in the country is in California, the public employee retirement system known as CalPERS. The problem is the pension fund doesn’t have nearly enough money to cover the cost of current and future employee pensions. It’s short according to some estimates by a trillion dollars. “That’s equivalent to eight years of the entire state budget,” said Stanford Professor of Economics Jeremy Bulow.

And, yes, unrealistic assumptions come into play.

Critics say CalPERS has been hiding the enormity of the problem the same way a gambler hides their losses – by assuming that in the future, there will be huge and unlikely returns on their investment.

The consequences for other areas of public spending are substantial.

CalPERS estimates about a third of local and state budgets go to pay for public pensions. Experts at this recent pension workshop estimate it’s closer to 60 percent and growing. 

We wrote earlier of a Manhattan Institute scholar who links the Seattle income tax to the city’s pension “mess.”

In an article headlined “What Seattle’s Income Tax Fight Says about America’s Pension Mess,” [Steven] Malanga writes,

Although the case is being portrayed in the media as a legal face-off, one underlying but rarely mentioned factor in Seattle’s search for more revenues is the city’s huge pension bill. Seattle’s retirement system, like those of many local governments, is woefully underfunded, and the added cost of trying to fix the system will consume big chunks of the city’s tax revenues in coming years, squeezing the budget.

Washington’s state system remains relatively healthy, at least in comparison to other states. In April, Pew Charitable Trusts published a good — and sobering — national overview of the state pension funding gap.

In response to its pension crisis, Kentucky is considering ending its defined-benefit plan for state workers. 

Most of Kentucky’s future public employees would not get guaranteed pension payments under a deal announced Wednesday by the state’s Republican leaders who are trying to salvage one of the worst-funded public retirement systems in a country where many such plans are hopelessly underfunded.

The plan to move most new hires into a 401(k)-style system would still put pressure on state taxpayers, who would be legally required to make annual payments of nearly $2 billion to the system. That’s more than 20 percent of the state’s annual general fund spending.

A year ago, we wrote about the pension crisis in Oregon. Last month, according to the Oregonian, business interests filed an initiative to reduce the pension shortfall. 

The long-term unfunded liability in Oregon’s public pension fund is more than $24 billion. Initiative Petition 32 would limit spending by state and local governments as long as the pension shortfall is at least $1 billion. It would do so by tying budgets to population growth and inflation. School districts would be exempt from the limits.

An extraordinary proposal, certainly. The Tax Foundation reports on the more common actions taken across the country, which are similar to the path proposed for Kentucky.

States vary in the way they structure their pension systems, but some states are transitioning new employees into defined contribution or hybrid plans rather than more traditional, and more costly, defined benefit plans. Defined contribution plans give employees control of their own investment account, while defined benefit plans promise employees a lifetime annuity. This move toward defined contribution plans can be a step toward fiscally sound pension plans for states…

With an aging workforce, the challenges are likely to continue, as are the efforts for pension reform.