Across the nation, cities and states are watching Detroit’s largest-ever municipal bankruptcy filing with fear. Years of underfunded retirement promises to public sector workers, which helped lay Detroit low, could plunge them into a similar financial hole.
A CNBC.com analysis of more than 120 of the nation’s largest state and local pension plans finds they face a wide range of financial burdens as aging work forces near retirement.
Thanks to a patchwork of accounting practices and rosy investment assumptions, it’s not even clear just how big a financial hole many states and cities have dug for themselves. That may soon change, thanks to a new set of government accounting standards that could serve as a nasty wake-up call to states and cities relying on rosy scenarios and head-in-the-sand accounting.
Even less clear is who will pay to clean up the messes. Will it be the millions of retirees owed trillions of dollars in benefits, the bondholders who lent states and cities trillions more, or local taxpayers who may have to pay more to cover the shortfalls or see deeper cuts in public services?
Regardless, the painful process will likely play out for years.
“Moving pension plans is like steering a blimp: you turn the wheel and you go six miles before it starts to turn,” said John Tuohy, Arlington County, Va., deputy treasurer, who chairs the pension committee of the Government Finance Officers Association. “In the political process, that kind of patience is very difficult.”
Many state and local governments have set aside enough money to comfortably make good on promised retirement benefits. Seventeen states have funded more than 80 percent of their projected pension liability, a level that’s generally seen as financially sound. Most of the rest have been scrambling to make up investment losses inflicted by the 2008 market collapse and the shortfalls in sales, property and incomes taxes produced by the Great Recession.
But even as the economy and housing markets have recovered, most states are still falling behind in closing their pension funding gaps. In the last year, 34 states have seen their pension funds stretched further as they’ve failed to make the full contributions needed to meet the projected cost of retirement promises.
Much like a family that fails to save regularly to build a retirement nest egg, shortchanging those contributions increases the risk that the fund eventually will go broke.
Nine states – Hawaii, Alaska, Kansas, Rhode Island, New Hampshire, Louisiana, Connecticut, Kentucky and Illinois – have now set aside less than 60 percent of what they need. Illinois has saved just 43 cents to cover every dollar of what it needs to pay 350,000 retirees and 500,000 current plan participants who are counting on a pension check.
In Detroit, city officials argue that pension payments to retirees simply have to be cut because the money just isn’t there to pay them. But union officials there and in other cash-strapped cities say that’s the city’s problem.
“Our members were promised certain things,” said Tom Ryan, president of the firefighters’ union in Chicago, where years of underfunding have prompted proposals to cut workers’ retirement benefits. “They enter dangerous situations every day and the only thing they want to look forward to when they can no longer perform their duties is to be able to retire with some sort of security.”