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As the superintendent of the St. Mary Parish (La.) Schools since 2004, Don Aguillard faces many fiscal challenges in overseeing the rural district’s 1,500 employees and 10,000 students. But for the 2010-2011 school year, a new and significant financial burden will be added to his annual budget. In an effort to make up a large funding shortfall, Louisiana’s two largest teacher retirement systems will be raising their required employer contribution rates, one from 15.5 percent of salary to 20 percent, the other from 17.6 percent to 24.3 percent. Aguillard estimates the total increase will add between $2.3 million and $2.6 million to his district’s annual budget of $83 million. “ The rates are calculated by each retirement system, and we do not have any power to alter them,” Aguillard says, adding that the sudden rate increases “will have devastating impacts on our operating budget.”
A similar situation exists in nearly every state in the country. The financial state of the nation’s public pension funds—which provide the retirement incomes for all state employees but in most states are dominated by teachers, administrators and other school employees—has gone from bad to worse, and for most it is only projected to worsen in coming decades. A perfect storm of factors has combined in the past year. Long-term trends of insufficient state funding, ever-increasing payment obligations and retirees living longer than ever, coupled with the market crash at the end of 2008, have put most teacher retirement funds on a path to financial disaster.
Worsening a Crisis
Since public pension funds count on investment returns for asset growth—and because the market boom of the 1990s caused many fund managers to make riskier investments and states to reduce their contributions and rely even more heavily on returns—the 2008 stock market decline was catastrophic, pushing what were already declining values in many states off a cliff.
The Iowa state pension fund’s value dropped over $3 billion in the course of the year, putting the total deficit at nearly $5 billion. A recent report by the University of Kansas described that state’s pension fund as “bankrupt,” with a projected shortfall between assets and payout obligations of $8.3 billion in the next 25 years.
In Colorado, the state employee pension fund plummeted in value from $43.1 billion at the end of 2007 to $30.8 billion at the end of 2008, a drop of more than 25 percent, with the state retirement agency acknowledging in a recent report that the fund “cannot invest its way out of” the situation. The New York state retirement fund—which has also been rocked by a kickback scandal that resulted in October in the arrest and guilty pleas of officials in the state comptroller’s office—lost $23 billion over the year. And the largest funds of them all, the California Public Employee Retirement System (CALPERS) and the California State Teacher Retirement System (CALSTRS), together lost a total of $100 billion of their high of $260 billion in assets after the 2008 crash. While they have since regained about $40 billion of the loss as the stock market has rebounded in 2009, the funds are still tens of billions short of future obligations.
"If no changes are made, we will eventually be unable to pay benefits." -Michael Nehf, executive director, Ohio State Teachers Retirement System
Pension Politics
While the market crash accelerated the problem, many states’ retirement programs were in trouble well before 2008. A 2007 report by the Pew Charitable Trusts’ Center on the States found that the nation’s public pension funds were a total of $731 billion short of obligations—which it admitted was a “conservative figure”—the result of risky investments, chronic state underfunding, and increasing levels of benefit guarantees from legislators. The American Enterprise Institute calculated, based on numbers from the Center for Retirement Research at Boston College and market adjustments from Forbes, that in 2007 only Oregon had funded over 80 percent of its future pension obligations, leaving 49 states with less than 80 percent funding and over a dozen with less than 60 percent. “The tension at the heart of pension politics is the incentive to satisfy today’s claimants in the here and now at the expense of long-term concerns,” says Frederick Hess, AEI director of education policy studies. Legislators are pressured to increase benefits paid but rarely, if ever, to provide adequate future funding, especially not if it involves raising taxes. “Public pension promises are huge and, in many cases, funding is woefully inadequate,” Warren Buffett wrote in a 2008 letter about the subject to Berkshire Hathaway shareholders. “Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed.”
In addition, teacher pension systems encourage early retirement and have no limit to the number of years in which benefits are paid—and retirees are living longer. This combination is costly, as some retirees collect pensions for as many years as they worked, or in some cases, many more years. The Ohio School Employees Retirement System, for example, is one of five Ohio funds that has lost billions of dollars—one officially cites “infinity” for the length of time it would take to make up the shortfall—and currently has 55 retired school employees receiving benefits who are over 100 years of age. “If no changes are made, we will eventually be unable to pay benefits,” says Michael Nehf, executive director of the Ohio State Teachers Retirement Fund, which lost $24 billion in assets over the year.
