Some states trying to fix pension liabilities -- but not going far enough, report says
More retirees than ever are drawing down on their plans, but state revenue has not increased.
Measures taken by states to cut pension liabilities aren’t enough to avoid a crisis, according to a report from Fitch Ratings.
Reuters reports that while Fitch says states including Colorado, Minnesota and Illinois were headed in the right direction financially by taking such actions as cutting public employee retirement benefits and increasing contributions, they didn’t go far enough to stabilize pension obligations and contributions long term.
The report cites Fitch saying, “Fitch believes funding improvement for many major pensions may not materialize any time soon. Pensions in general still face an uphill climb.”
According to Fitch, this is partly because funding discount rates for nearly all major plans remain higher than 6 percent, which is the level Fitch finds reasonable; in addition, more retirees than ever are drawing down on their plans and a recent economic expansion has not sufficiently increased state revenue.
While the states are limited in what they can do by past court precedents, the credit rating agency says in the report, Colorado cut cost-of-living adjustments for retiree payments to 1.5 percent from 2 percent, expanded the state’s defined contribution retirement plan and increased employee and employer pension fund contributions.
Minnesota not only cut cost-of-living annual increases and raised contributions, it also lowered the state retirement plans’ funding discount rate to 7.5 percent from as high as 8.5 percent.
Illinois’ actions weren’t as clear, Fitch says in the report, and has an unfunded pension liability that after years of skipped or inadequate annual state contributions, has risen to $129 billion and gotten the state the lowest rating in the country. This year it established a bond-financed buyout program for current and former public employees that it’s counting on to bring in savings of $423 million for the fiscal 2019 budget.
Fitch is quoted saying, “Notably, the timing of rollout will be lengthy and the precise fiscal impact will only be known upon conclusion of the program and could vary significantly from the initial estimates.”