10. State Employee Pension Plans
States continue to wrestle with solving what has become a perennial crisis—the rising costs of state employee pension plans and other post-employment benefits.
“It doesn’t go away,” said Sujit CanagaRetna, senior fiscal analyst for The Council of State Governments Southern office, who tracks state pensions. “It’s always here with us.”
As in 2010, several states enacted fairly substantial changes to their pension plans in 2011, most which involved trimming benefits.
While that has been a trend the past few years, one big change is cropping up: Current state employees are no longer off the table as policymakers consider ways to reform the pension benefits they offer. Thirty-nine states made fairly significant revisions to their pension plans in 2011, including 12 states that require current employees—and three states requiring future employees—to make higher contributions, 14 states that increased the age and service requirements for employee pensions, and nine states that revised provisions for automatic cost-of-living adjustments.
“It used to be the case where these revisions were targeted to new employees. Not anymore,” said CanagaRetna. “Now the fiscal situation is so dire that you have to have immediate results and this is how you get immediate results.”
Three states—Colorado, Minnesota and South Dakota—are entangled in legal battles because they’ve reduced benefits to current retirees. The controversial move could have a domino effect, depending on how the courts rule. CanagaRetna said more states could adopt similar policies affecting current retiree benefits if the actions in these three states stand.
Five states also made changes to the way they calculate retirement benefits. CanagaRetna said states previously calculated benefits based on the last 36 months; those states changed it to the average of the last 60 months.
“Basically, the average salary is now calculated on smaller numbers so the actual pension is going to be smaller too,” he said.
The trend in recent years for a push from defined benefit to defined contribution plans seems to have abated, CanagaRetna said.
“In the last decade, that was a very popular move,” he said. “Many states were advocating a move from defined benefit to defined contribution. Now, you get a pretty adverse reaction to it given what’s going on in the stock market. The turbulence has been pretty intense, so people are going to be less convinced that will be an appropriate strategy at this time.
“The allure of that has dissipated to a degree,” he said. “But it’s lurking in the shadows.”
He said policymakers may revisit the issue once a more stable equity market returns.
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