New Report Provides Solutions to State Public Pension Dilemmas

Four states highlighted for strong public pension reforms; report provides short-term and long-term solutions for reforms 

States face an estimated $730 billion to $4.4 trillion in unfunded pension liabilities 

Washington, D.C. (August 13, 2013)—A  new report released today by the American Legislative Exchange Council highlights key states as models of effective pension reform and provides short- and long-term solutions for state pension liabilities, which are estimated to be as high as $4.4 trillion.

Nearly 90 percent of public sector employees participate in defined-benefit pension plans, which differ from their private-sector counterparts, whose pensions overwhelmingly consist of 401k-type plans. Due to the market crash of 2008, only 60 percent of public pension plans received their annual required contributions the following year, and even the best funded pension systems were threatened with massive liabilities.

“There has been a growing movement in the states to abandon defined-benefit pension plans, with their trillions of dollars in unfunded liabilities, and transition to 401k-style plans for new state workers,” said Jonathan Williams, director of the American Legislative Exchange Council’s Center for State Fiscal Reform. “Private sector employers shifted into defined-contribution plans years ago. Cities like Detroit and states like California will continue to reap the consequences if governments fail to fundamentally reform their pension systems.”

The report, Keeping the Promise: State Solutions for Government Pension Reform, highlights Utah, Michigan, Alaska and Rhode Island as examples of states that adopted effective pension reform. Additionally, the report analyzes defined-benefit, defined-contribution and cash-balance plans and presents a range of pension reform solutions and policies that can help state lawmakers balance their budgets while securing retirement funding for Americans.

“Lawmakers on both side of the aisle know we cannot grow out of this problem,” said report author Dan Liljenquist, a former Utah state senator. “State policymakers must first recognize the scope and size of the problems with funding states’ pension plans and understand to fulfill existing pension promises and avoid bankruptcy, essential changes must be made.”

The report includes a guide to model policies and a series of useful resources designed to help legislators—especially new legislators—navigate the intricate details of public pension policies. The report also contains a detailed section establishing principles for pension reform:

Principles for Pension Reform

  • Pension reform should remove the risk that states will go functionally bankrupt due to pension obligations
  • Pension reform should make sure that commitments and obligations to current workers are fulfilled
  • Pension plans should be predictable and defined
  • The public (taxpayers) should not bear all the risk of pension plans
  • No pension plan should be exempt from scrutiny
  • Retirement plans should not lock employees into the public sector

“States face serious consequences if they do not restructure public pensions,” said Sen. Liljenquist. “In California, cities such as Stockton and San Bernardino declared bankruptcy, and in Illinois, the state was charged by Securities and Exchange Commission for securities fraud. State lawmakers can use this information to reform policies to ensure that upon retirement, their current and future constituents will have the benefits they deserve.”

To view a copy of the report, please visit www.alec.org/keepingthepromise.

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The American Legislative Exchange Council is the largest nonpartisan, voluntary membership organization of state legislators in the United States. The Council is governed by state legislators who comprise the Board of Directors and is advised by the Private Enterprise Advisory Council, a group of private, foundation and think tank members. For more information about the American Legislative Exchange Council, please visit: www.alec.org. 

Contact: Molly Fuhs
mfuhs@alec.org