For decades, public employees have had pension plans identical to those provided by most large American companies. These are defined benefit pension plans that pay workers a fixed amount of money each year after they have retired based on the amount of years they have worked and their salaries at the time of retirement. The trouble this causes for governments is that these funds often do not grow as quickly as the obligations they have to pay out, which creates a budgetary crisis.
It is not unusual for a plan to have an obligation to offer its members a guaranteed level of growth which allows retirees to be able to rely on future payments, no matter how the funds perform financially. During a period like the market collapse of 2008, the value of many large pension funds plunged. Pension fund obligations also crippled some large corporations such as General Motors so badly that they filed for Chapter 11 bankruptcy to escape their obligations.
The Pew Center for the States reported earlier this year: "$1 trillion. That's the gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion price tag of those promises." Pew says states wound up in this predicament for a number of reasons including:
- failing to make annual payments for pension systems at the levels recommended by their own actuaries;
- expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
- providing retiree health care without adequately funding it.
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Elected officials are pushing government employees into defined contribution plans, which are nearly identical to 401(k)s because of the funding issues associated with pensions. Just like in the private sector, employee contributions to these plans are sometimes matched by their employers. They fluctuate in value based on the securities in which they invest. Government employees can lose most of the value of their plan in a bad market, such as the one triggered by the Great Recession, potentially delaying their retirement plans for years.
24/7 Wall St.'s list of Sixteen States That Are Killing Their Pensions is below. These states are those in which governments have gained the upper hand in the war over what public workers will be paid and over what time.
To create our list above, we looked at the pension status of workers in all 50 states. We first chose those in which pension plans have already been converted from defined benefit plans to defined contributions plans. In some of the cases we examined, states have set up hybrid plans which are a blend of the two traditional types. Other states allow employees who have been in defined contribution plans to keep them, while newer workers are forced to accept 401(k) plans.
The fight over pensions is not unlike the one over collective bargaining or salary caps. States and cities have begun to run large deficits because the recession has robbed them of their expected tax receipts. Most local governments get the majority of their funds from property taxes. Florida and Arizona face 50% drops in the value of homes, and prices have fallen even further in some cities in these states.
The current battle between public unions and states is about financial power. Many governors and state legislators want almost unlimited control over how public workers are paid, what their bargaining rights are, and how their health and retirement levels are set. Naturally, workers want to keep their pension funds that guarantee pay-outs and leave the risk of funding those payouts to states and municipalities.