In the state of Illinois, tensions are high. Democratic Gov. Pat Quinn has refused to pay lawmakers in the Illinois House and Senate until they pass legislation tackling reform of the state's pension system, which is currently underfunded by more than $100 billion. While the legislators have sued, arguing such a move is unconstitutional, public employees are prepared to file a lawsuit of their own, claiming that a number of proposals currently on the table to cut their benefits violate the Illinois Constitution as well.
Like Illinois, a number of states are also facing their own potential pension showdown. As part of his effort to bring state pension reform into the public discourse, former Utah state Sen. Dan Liljenquist, a Republican, joined with the American Legislative Exchange Council, an organization of state legislators, businesses and foundations that favors federalism and conservative public policy solutions, to release a report called “Keeping the Promise: State Solutions for Government Pension Reform.” The report lays out potential solutions that Liljenquist and ALEC believe will create more sustainability for states over the long term.
"In state government, there is not a more critical issue than pension reform," said Liljenquist, who writes a weekly Deseret News column. "The reality of the situation is starting to settle in that we are way, way, way behind [having] secure retirement for our public employees."
One of the main driving forces behind pension shortfalls is that while states are legally obligated to pay out pensions, they have no obligation to properly fund those pensions, and there has been a growing gap between states’ assets and their public sector obligations. In negotiations with public employees, politicians will often promise pension benefits in the future rather than raise employees' wages in the present, but then fail to set aside the funds to meet these obligations.
But decades of failing to properly fund these pension promises combined with investment losses in pension funds and lower tax revenue from citizens resulting from the 2008 financial crisis are coming to a head in a number of states.
“Underfunding public pensions is in substance, if not in form, an example of deficit spending in which current taxpayers enjoy the benefits of government services while pushing off some of the costs to future taxpayers," according to Jack Beermann, a law professor at Boston University School of Law, who has studied public pension shortfalls.
The state of pensions
While some states have done a good job in making sure their pension obligations will be funded, numerous states are looking down the barrel of a pension shortfall gun. According to a 2012 study from the Pew Center for the States, in fiscal year 2010, the gap between states’ assets and their obligations for public sector retirement benefits was $1.38 trillion. Of that figure, $757 billion was for pension obligations, with the rest reflecting a shortfall in public retiree health care benefits.
Using 2010 data, the Pew study found that only Wisconsin had fully funded its pension obligations, meaning it will be able to meet its pension obligations as they come due. According to Pew, experts say that pension obligations should be at least 80 percent funded, but 34 states fell below this threshold. Connecticut, Illinois, Kentucky and Rhode Island had the most dire situations, all under 55 percent funded. Only three other states besides Wisconsin — South Dakota, North Carolina and Washington — were more than 95 percent funded.
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