Some years ago, Herman Wouk wrote a book delightfully titled, "Don't Stop the Carnival." When it comes to the funding of state retirement systems, that carnival has been displaced to Illinois and many other states, and it shows no signs of stopping.
State politicians are continuing to underfund the retirement systems for their public employees, apparently learning nothing from the plight of underfunded corporate plans such as those of the airline industry.
The mix of generous pension increases when the funds appeared flush, reduced contributions, a bear market in stocks and declining interest rates has produced a looming pension crisis that many politicians appear unwilling to recognize.
That political "why-worry" shortsightedness in funding is leading to a weakening of support for public defined benefit plans.
Among the latest examples of political pension sabotage: In May the Illinois Legislature and Gov. Rod Blagojevich diverted $2.3 billion of state pension contributions for the next two years from already drastically underfunded state retirement systems to fund other government programs. The state took a "pension contribution holiday" — or a "half-holiday," as John Day, assistant to the executive director of the Illinois State Teachers' Retirement System, put it — because the state is cutting half its contributions.
"The money not paid now will have to be paid eventually with an interest cost we haven't calculated," said Mr. Day. At the Illinois State Universities Retirement System, Champaign, James Hacking, executive director, said the governor and Legislature "chose to raid the pension piggybank." "This is a catastrophe in the making," Mr. Hacking said of the cuts. "These costs are driven not because of future benefit costs, but because the state failed to pay for benefits as they have been approved in the past."
In Maine, Moody's Investors Service downgraded the state's general obligation bonds to Aa2 from Aa3, in part because of potential state pension funding problems.
In Vermont, Jeb Spaulding, state treasurer, noted on his website that the Legislature reduced contributions to the Vermont Teachers' Retirement System to 43% of the recommended actuarial contribution, down from 93% five years ago. "Continued underfunding of the teachers' pension fund not only increases the future cost to taxpayers for obligations already incurred, at the current scale it may well undermine benefits and lead to increased contributions for future teachers as well," he wrote.
Surging pension costs (including cost-of-living indexing) led voters in New York to reject a record number of school budgets this spring.
Some states are trying to opt out of defined benefit plans. Alaska will create a 401(a) plan for new employees, if, as expected, Gov. Frank H. Murkowski signs the legislation. "We're making the necessary changes to stop the bleeding in our overburdened pension system and bring more stability to the retirement system," Mr. Murkowski was quoted as saying.
Gov. Arnold Schwarzenegger still plans to move push ahead with a referendum to create a defined contribution plan for new public employees in California, though he postponed the ballot initiative.
In the future, state politicians must muster the courage to cut other spending so as to properly fund their pension promises, and then resist excessive benefit increases for public employees. One way to do so might be passing constitutional amendments mandating full funding of pension promises.
Or they can close their defined benefit plans to new employees and move to defined contribution plans, where the costs are more explicit and more predictable. Such a move may be inevitable because taxpayers are unlikely to long accept the burden of paying for public employee pensions that are far more generous than the average private sector employee receives.