Underfunding Perils Pensions in Many States

Many state and local pension plans are dangerously underfunded, jeopardizing retirement checks for hundreds of thousands of teachers and other public employees, according to a study by Congress’ General Accounting Office.

The crisis is most acute for teacher retirement plans in Maine, Oklahoma, West Virginia and the District of Columbia, and for general state employee pension plans in Maine and Massachusetts, the GAO said.

These governments are paying monthly retirement checks now, but the pension funds are far short of the money needed to pay for the lifetime benefits promised to current retirees. And when the present work force retires, the funds could go broke trying to meet their obligations.

The six plans specifically identified by the GAO as having the worst troubles are merely the most acute cases of a disturbing national malady: the failure of hard-pressed governments to set aside enough money to make good on pension promises.

The ability to keep promises to retirees “may be particularly difficult in the face of competing future demands for the governments’ moneys,” according to the GAO report, which was obtained by The Times.

California’s major pension programs are financially strong but their top managers worry about political pressures for the government to skimp on contributions because of the state’s fiscal problems.

In 1991, the state “grabbed $1.9 billion from a surplus account” at the California Public Employees Retirement System to help balance the budget, Dale M. Hanson, the system’s chief executive officer, said in an interview.

The California system is in strong financial health, Hanson emphasized, but he said that he fears future efforts to short-change the funds.

“Every governor back to (Edmund G.) Brown (Jr.), (George) Deukmejian and (Pete) Wilson has made efforts to raid the fund--it’s not restricted to a particular political party,” he said.

With $70 billion in assets, the fund “is a big pot of money and it’s tempting,” Hanson added.

The California state teacher retirement system also is fiscally sound but it depends on a $500-million annual appropriation from the Legislature to pay for old unfunded obligations.

“Every year we worry about it,” said chief executive officer James Mosman.

Other states beset by budget woes have taken much more drastic and threatening steps than California, sometimes skipping or sharply reducing the required contributions to the pension funds for several years.

The GAO’s report included a review of 189 plans, showing that state and local governments contributed $15.3 billion of the $19 billion needed in 1991 to pay all the benefits promised to workers enrolled in the pension programs. The shortage of nearly $4 billion must be recovered, either through increased contributions or future earnings. Otherwise, the funds will go broke someday.

In Oklahoma, for example, the teachers retirement system is now paying retirement benefits faster than it is collecting contributions. The fund’s assets will be wiped out by the year 2015, and the state will have to spend $800 million a year to pay retirement benefits, according to testimony before the House Select Committee on Aging.

Rep. Edward R. Roybal (D-Los Angeles), the committee’s chairman until his retirement from Congress this week, requested the wide-ranging GAO investigation of the financial problems of state and local pension funds, which enroll nearly 16 million current workers and retirees.

State and local governments are tangled in a web of fiscal pressures endangering the pension funds. The recession has cut deeply into tax revenues, making it tempting to skip contributions needed for future pension checks and to use the money instead for immediate budget balancing. The funds themselves are collecting reduced earnings on their investments because of lower interest rates and a comparatively sluggish stock market. And the work force in state and local governments is rapidly nearing retirement age.

Most state government workers “are over the age of 41 and many of these are expected to retire before the age of 60,” the GAO said. “Further, the ratio of active workers to retirees is declining. Thus, the proportion of pension plan participants receiving benefits rather than contributing to the plan could increase quickly in the near future,” according to the GAO report.

Governments could face a fiscal crisis “because the increase in the number of retirees could overtake the plans’ ability to pay retirement benefits,” the report said. Then the governments would face the grim choices of raising taxes or cutting back the pension checks promised to people who worked 20 years or more in state and local agencies.

Under budget pressures, the governments are resorting to numbers games to skimp on their pension contributions, according to the report by the GAO. As many as 40% of the public plans changed profit expectations on their investments in the past four years.

Whatever a fund’s managers expect to earn on the investment is called the actuarial assumption. Raising the assumption by just one percentage point could reduce the government’s required annual contribution by as much as 20% to 25%, according to the GAO. If a state declares its pension fund will earn 9% for the next 20 years instead of 8%, it means millions of dollars won’t have to go to the pension plan and can be used for other state spending programs.

California voters approved a ballot proposition in November to give the public employee pension fund more authority and independence, including the right to hire its own actuaries. Presumably, this would prevent pressures by the Legislature or governor to raise the earnings projection during the next budget crisis.