"Generally, the change in age for retirement and length of service in retirement only affects people hired after the legislation passes. That can have an impact on long-term cost projections, but no immediate impact on the funding of the plan. Things like raising the employee contribution amount, especially if it is done for everybody, like in Florida, or cutting back on COLA, have an immediate effect on the bottom line," he said.

So what caused most states pensions to be underfunded? The downturn in the markets was a big part of it, Snell said. Not just the downturn in 2007/2008, but the downturn in 2000 also hit retirement funds hard. Pensions were making a pretty good recovery in the years after the 2000 downturn, but the second market drop created an overwhelming problem.

"The fact is, the obligations of pension funds keep growing in good times and bad times, depending on how long people worked and the pension credits they accrued," Snell said. "Speaking for 50 states in the group, it seems extremely unlikely that investment growth can fix the problem. The growth in liabilities is too far from the growth in assets."

It hasn't helped that the Baby Boomers are starting to retire and people are living longer. State governments have been experiencing difficult fiscal circumstances, Snell said. "They have not a dollar to spare so it is virtually impossible for them to increase employer contributions to these funds."

Stephen Fehr, a researcher with The Pew Center on the States, said that it is important to keep in mind that "no one is in danger of losing their pension now. It is a 20- or 30-year problem. We have to take action now to avoid a serious problem in the future."

He added that during the past three years, most states have at least looked at their pension systems. Many made changes and are now realizing that it may not be enough. Many are looking at what they can do to save money immediately by reducing benefits to current employees.

Most states have tried to minimize the impact to current retirees. In 2010, Colorado, Minnesota and South Dakota took pension reform one step farther. They either froze or reduced cost-of-living adjustments for current retirees.

The Public Employees' Retirement Association of Colorado, which covers state and school employees, began taking a hard look at the sustainability of its plan after the market crash in 2008. In looking at the system, PERA's board of trustees had several objectives, said Meredith Williams, PERA's executive director. "That was shared responsibility among members, employers, intergenerational equity, long-term sustainability, paying off our unfunded liabilities in a 30-year time frame and a defined benefit plan," he said.

The majority of individuals covered by PERA are not eligible for Social Security benefits, so the state had to find a workable solution that would reduce the fund's liabilities while ensuring future retirees their pension benefits.

Over 18 months, PERA looked at the numbers from every angle and commissioned a forecasting tool that would help it figure out the pros and cons of any decisions on the system currently, tomorrow and 30 years into the future, Williams said.

"We went to extraordinary lengths to solicit input from members, the public, legislators and the governor," he said. "The most critical thing we did was take that input from literally thousands of people and input those suggestions into the model to see what in fact did or did not work. Frankly, when we did that, we determined that the COLA provision we had was quite expensive."

There are regulations governing how states can impact the benefits earned to current members in the system. Because of that, PERA's board felt it needed to do something with the cost-of-living adjustments for retirees who already were receiving benefits.  "Unless we did something with the COLA for people already receiving benefits, we would run out of money before any changes to new hires would have an impact," Williams said.

"Basically, if you make a change to a pension plan that only impacts new hires, it is about 30 years or a generation before you start to realize those cost savings, when those people start retiring in significant numbers. I think there are a lot of people in a lot of places that ignore that reality," Williams said. "A lot of places made or are contemplating changes that are primarily on the shoulders of new hires. They are flat going to run out of money before they realize any savings from those changes. We were careful to not let that be the case in Colorado."

The public was angry when PERA suggested making changes to the cost-of-living-adjustment to current retirees, he said, but once "we had the ability to show them the projections going forward over the next 30 years, 84 percent of the people that sat through a presentation on the proposal ended up supporting the proposal."

Under PERA's plan, which was passed by the state as Senate Bill 1 on Feb. 23, 2010, the COLA would be cut back to 2 percent from 3.5 percent a year, and both new members and current retirees would experience a 1-year freeze of their cost-of-living adjustment.

"However, if we experience a negative investment year, where the return is a negative number, then the COLA for the next three years is the lower of 2 percent or the CPI-W, determined by the Department of Labor, between 0 and 2 percent," he said.

If the pension fund is more than 103 percent funded, the COLA will start crawling back up a quarter of a percent per year. If it falls below 90 percent, the COLA will start dropping a quarter percent a year.

Minnesota PERA followed Colorado's lead, as did South Dakota. All passed their bills and all were sued in district court. Both Colorado's and Minnesota's lawsuits were dismissed and the plaintiffs have filed appeals.

A few states have looked at closing their existing pension plans to new hires and shifting those people into 401(k)-type defined contribution plans. Some states, like Kansas, Kentucky and Nevada, backed off moving to defined contribution plans after they found out how much it would cost to close their old benefit plan and create a new one, Fehr said.

Rhode Island held meetings around the state. "They wanted people to buy into what they were doing. The discussion needed to go beyond just cutting benefits for workers. They had to ask broader questions like what is an adequate amount of retirement income for someone in Rhode Island and should a firefighter retire with 75 percent of their final salary," Fehr said. "Lots of states are going to shift to those sorts of discussions."

Under Rhode Island's pension reform proposal, Rhode Island's unfunded pension liability would be reduced by more than $3 billion and the pension plan's funding status would increase to over 60 percent, according to the state of Rhode Island website. The retirement age would increase to match their Social Security age and the COLA would be suspended until the system is "healthy and at actuarially acceptable funding levels." This would affect all state employees, teachers, judges, municipal employees and public safety employees.

Moving to a combined defined benefit and defined contribution plan spreads the market risk of the system across both taxpayers and employees. Going forward, employees and teachers would pay a smaller amount of their paychecks into the defined benefit system and also would contribute into their own retirement accounts. State employees and teachers would contribute 8.75 percent out of each paycheck toward their retirement. State employees and teachers would contribute 3.75 percent of pay toward a pension, for which vesting requirements have been reduced from 10 years to five years of contributing service. They also would contribute 5 percent of pay into their own retirement account and the state would contribute an additional 1 percent to this account.

This structure creates a portable benefit, which employees can take with them, regardless of where they work. Combining these two structures would ensure that employees could receive more than 70 percent of their final average pay in retirement—a similar benefit level to what they receive in the current system, according to the state.

States aren't the only ones having difficulties with their pension liabilities. Cities are experiencing the same problems, Fehr said. San Jose, California, and Omaha, Nebraska, are just two cities that have cut benefits to try and shore up the funding of their pensions, he said.