Governments Significantly Underpaid Pension Contributions

The State Budget Task Force said California, Illinois and New Jersey accounted for more than half of the contribution shortfall of U.S. state and local governments, which the group estimates to exceed $50 billion. Six states studied need to increase contributions to eliminate existing unfunded liabilities, the report said.

For example, contributions to the California State Teachers Retirement System (CalSTRS) would need to increase by more than $3 billion annually to amortize unfunded liabilities, assuming that the system earns 7.5% on its investments. If a 5% earnings assumption were used, CalSTRS would need to increase by a further $7 billion.

“If systems do not achieve currently assumed returns or contribution levels, the next generation may bear the cost, in the form of higher future contributions, of deferred compensation promised to workers whose services benefited this generation,” the report said. “Failure to achieve these returns or contribution levels also may be borne by workers and retirees, who could suffer cuts in the pensions that were promised to them.”

The National Conference on Public Employee Retirement Systems (NCPERS) mostly agreed with the report, saying in a statement: “The Report of the State Budget Crisis Task Force verdict on the role public pensions are playing in state and local government fiscal woes – which recommends stronger local funding policies and greater disclosure – is a balanced one. The Task Force members correctly identified state and local governments’ failure to keep up with required contributions in recent years as a primary cause of the current dilemma.” 

However, Hank Kim, Esq., the organization’s executive director and counsel, also noted the NCPERS’ 2012 Fund Membership Study demonstrates the vast majority of public pension plans are solidly funded and are experiencing a robust recovery from the Great Recession (see “Public Pensions Are Solidly Funded”). He went on to say that long-term investment returns, which is more indicative of a fund’s health than short-term fluctuations, are rising, and confidence among plan administrators is running high.

The task force’s full report is here, and a summarized report is here.