States' pension plans shaky, GAO says Underfunding termed a threat to future retirees

January 04, 1993|By Los Angeles Times

WASHINGTON -- Many state and local pension plans are dangerously underfunded, jeopardizing retirement checks for hundreds of thousands of teachers and other public employees, according to a study by Congress' General Accounting Office.

The crisis is most acute for teacher retirement plans in Maine, Oklahoma, West Virginia and the District of Columbia and for general state employee pension plans in Maine and Massachusetts, the GAO said.

Those governments are paying monthly retirement checks now but the pension funds are far short of the money needed to pay for the lifetime benefits promised to current retirees. And when the current work force retires, the funds could go broke trying to meet their obligations.

The six plans specifically identified by the GAO as having the worst troubles are merely the most acute cases of a disturbing national malady: the failure of hard-pressed governments to set aside enough money to make good on pension promises.

The ability to keep promises to retirees "may be particularly difficult in the face of competing future demands for the governments' moneys," according to the GAO report, which was obtained by the Los Angeles Times.

Some states beset by budget woes have taken drastic and threatening steps, sometimes skipping or sharply reducing the required contributions to the pension funds for several years.

The GAO's report included a review of 189 plans, showing that state and local governments contributed $15.3 billion of the $19 billion needed in 1991 to pay all the benefits promised to workers enrolled in the pension programs. The shortage of nearly $4 billion must be recovered, either through increased contributions or future earnings. Otherwise, the funds will go broke someday.

In Oklahoma, for example, the teachers retirement system is now VTC paying retirement benefits faster than it is collecting contributions. The fund's assets will be wiped out by the year 2015, and the state will have to spend $800 million a year to pay retirement benefits, according to testimony before the House Select Committee on Aging.

Rep. Edward R. Roybal, D-Calif., the committee's chairman until his retirement from Congress this week, requested the wide-ranging GAO investigation of the financial problems of state and local pension funds, which enroll nearly 16 million current workers and retirees.

State and local governments are tangled in a web of fiscal pressures endangering the pension funds. The recession has cut deeply into tax revenues, making it tempting to skip contributions needed for future pension checks and to use the money instead for immediate budget balancing.

The funds themselves are collecting reduced earnings on their investments because of lower interest rates and a comparatively sluggish stock market. And there is a rapidly aging work force in state and local governments that is nearing retirement age.

Most state government workers "are over the age of 41 and many of these are expected to retire before the age of 60," the GAO said.

"Further, the ratio of active workers to retirees is declining. Thus, the proportion of pension plan participants receiving benefits rather than contributing to the plan could increase quickly in the near future," according to the GAO report.

Governments could face a fiscal crisis "because the increase in the number of retirees could overtake the plans' ability to pay retirement benefits," the report said.

Then the governments would face the grim choices of raising taxes or cutting back the pension checks promised to people who worked 20 years or more in state and local agencies.

Under budget pressures, the governments are resorting to numbers games to skimp on their pension contributions, according to the report by the GAO, the investigative arm of Congress. As many as 40 percent of the public plans changed profit expectations on their investments in the past four years.

Whatever a fund's managers expect to earn on the investment is called the actuarial assumption. Raising the assumption by just one percentage point could reduce the government's required annual contribution by as much as 20 percent to 25 percent, according to the GAO.

If a state declares its pension fund will earn 9 percent for the next 20 years instead of 8 percent, it means millions of dollars won't have to go to the pension plan and can be used for other state spending programs.

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