CHARLESTON, W.Va. - As the debate grows over the future of Social Security, officials in most of the states are struggling with a $260 billion gap in another frayed retirement safety net: Public pension programs.
More than 5.1 million retired teachers, judges, law enforcement and other public employees now rely on public pensions, with another 15 million workers expecting benefits when they retire.
But a period of poor investment returns, rising benefits and states’ failures to properly fund their plans have created a gap between assets and benefits in 45 states, according to the National Association of State Retirement Administrators.
In 13 states, the unfunded liabilities exceed their annual general revenue budgets. For half the states, pension fund shortfalls top $3 billion, NASRA said.
The worst-funded plan: The older of West Virginia’s two retirement programs for its teachers. For every dollar it has on hand, it owes $3.50 in promised benefits.
Garry Lynn Shearer is among the 45,363 active and retired state teachers enrolled in that plan. Shearer taught English and social studies to several generations of ninthgraders before retiring in 1994. Though the cost of living has increased in the past decade, her pension check hasn’t because of the funding shortfall.
‘‘I sure do live hand to mouth,’’ the 66-year-old greatgrandmother said.
Public pension funds like West Virginia’s Teachers Retirement System will be strained even further as baby boomers begin to reach retirement age. That generation is expected to double the 65 and older segment of the nation’s population to more than 67 million by 2030. By that time, and for several decades afterward, one in five Americans will be of that age group.
The stock market’s rebound following its 2000-02 slump has helped somewhat. In its most recent annual report on state retirement systems, California-based Wilshire Associates found that the 64 plans it tracks closed their funding gaps by $75 million. These plans had only 77 cents on hand for every dollar in promised benefits in 2003; they now have 83 cents on hand.
But states need to protect their budgets, and so they’re reviewing different strategies to address pension funds:
• Rhode Island’s governor has proposed a minimum retirement age of 60 and would have state employees work two years longer, for a minimum of 30 years, before they could receive pensions. Plans there face $3.1 billion in shortfalls, and the proposal estimates savings of $256 million over the next five years.
• Although Illinois provided $7.5 billion from bond sales to its pension systems in 2003, Gov. Rod Blagojevich has proposed changes including a later retirement age for new hires and shrinking annual cost-of-living adjustments.
• New Mexico’s Legislature passed a measure requiring increases in employer and employee contributions to fund a $2.4 billion shortfall in its educational retirement system. The move is expected to raise at least $130 million in employer contributions over the next seven years.
• Oklahoma faces $6 billion in pension liabilities, and has earmarked a 5 percent portion, estimated at $3.1 million this year, of the state’s new lottery approved by voters in November. Oklahoma’s fund also could see a boost from a gradually rising share of general tax revenue recently carved out by lawmakers.
‘‘We appreciate every dollar, but it’s a drop in the bucket compared to the unfunded liability that we have,’’ said Norman Cooper, a lobbyist for the Oklahoma Retired Educators Association. ‘‘It won’t make a major change, at least not right now or not right away.’’
Though plans in 37 states automatically adjust for inflation, analysts say many programs struggle to provide adequate benefits.
‘‘The funding levels of many plans declined so suddenly, that pretty much brought to a halt the discussion of benefit enhancements,’’ said Keith Brainard, NASRA’s research director. ‘‘That doesn’t mean that it’s going to be gone forever, but for the time being, that seems to have gone off the table as systems focus more on restoring their funding levels.’’
Proposals advanced in Rhode Island would limit some cost-of-living raises. State General Treasurer Paul Tavares has introduced a pension plan that competes with Gov. Don Carcieri’s plan. Both want to tie cost-of-living increases to the rate of inflation, instead of the current fixed 3 percent increase.
Retirees in Rhode Island may be willing to go along with any changes as long as it affects only new employees and those in the system less than 10 years, said Bill Finelli, president of the National Education Association-Rhode Island Retired.
‘‘They have more time to adjust,’’ said Finelli, who also represents teachers on the state retirement board. ‘‘That’s different than taking something from someone with 30 or more years in the system and is about to retire.’’
But in West Virginia, some retirees say state lawmakers are not always sympathetic.
‘‘They’d just as soon slam the door in your face because of that unfunded liability,’’ said Roscoe Keeney Jr., president of the state’s retired school employees association. ‘‘They take it for granted that you can live and keep up your expenses and your health care.’’
West Virginia Gov. Joe Manchin took office in January and immediately called lawmakers into a special session to pass several measures including a proposal to sell $5.5 billion in bonds to fix the state’s teachers, state police and judicial pension programs. Voters must approve the bond sale in a special election scheduled for June. If approved, the state’s bonded debt ratio would increase from $859 in revenue-supported debt per state resident to $3,900.
In Maine, lawmakers passed a state budget that proposes to sell $450 million in bonds for state pension and social service programs. Kansas, Illinois and New Jersey also have sold bonds.
‘‘This is a very popular strategy,’’ said Sujit CanagaRetna, senior fiscal analyst for The Council of State Governments who recently completed a study of state retirement plans. ‘‘It’s a very favorable interest rate environment, so it’s a good time to borrow.’’
It’s also ‘‘a little bit like using a credit card to pay your mortgage,’’ NASRA’s Brainard said.
Another strategy is to change benefits from defined benefit plans to defined contribution, an idea that has grown in popularity at corporations thanks to the 401(k) plan.
Nine out of 10 state retirement plans provide a benefit defined upfront for the retiree, based on years of service and preretirement salary levels. But several states are exploring a switch to a defined contribution plan.
Defined contribution plans require workers and the state, as the employer, to each contribute a set amount. Workers invest these contributions, and walk away with whatever is in their account when they retire.
California was shaping up as a battleground for such a proposal, but Gov. Arnold Schwarzenegger recently backed off the plan after receiving pressure from organized labor groups. Schwarzenegger proposed to have employees hired after 2007 to join private, 401(k)- style individual investment accounts to cut state pension costs payments.
West Virginia adopted such a program for new teachers hired after 1991, but lawmakers voted this year to freeze the system, citing the stock market slump and less-thansavvy investing by enrollees.
The legislation, which has yet to be signed, would allow the 21,286 teachers now with personal accounts to vote in March 2006 on whether to merge their funds into the older defined-benefit plan.
All teachers hired after July 1 of this year would enroll into the older Teacher Retirement System.
‘‘This is probably the most significant piece of legislation affecting education professionals that will pass this session,’’ said Perry Bryant, a lobbyist for the 15,000-member West Virginia Education Association. ‘‘This doesn’t mean that definedcontribution programs are inherently bad.
But a lot of (defined contribution) members feel they were misled into joining that plan. They’ve lost millions of dollars.’’