State surpluses ease underfunding

Flush with cash for the first time in years, Montana, Connecticut, Washington and other states are considering setting aside a portion of their budget surpluses to shore up their underfunded pension plans.

In a report published in December, the National Association of State Budget Officers projected California had $7.6 billion left over at the end of fiscal 2005, the highest among all states, followed by Texas with $3.7 billion, Florida, with $2.9 billion and Massachusetts, $1.9 billion.

"The improved revenue environment is going to take some of the pressure off defined benefit plans and give them a chance to move toward full funding," said Keith Brainard, director of research at the National Association of State Retirement Administrators, Georgetown, Texas.

Already, Montana lawmakers have approved contributing $100 million of the state's estimated $300 million surplus in fiscal 2006 to the $2.5 billion Montana Public Teachers' Retirement System, and $25 million to the $3.2 billion Montana Public Employees' Retirement System. Both are in Helena.

With the contribution, the teachers' system will be about 76.6% funded vs. 73.4% before the contribution, said David Senn, executive director. The employees' system was 87% funded at the end of its 2005 fiscal year on June 30, said Roxanne Minnehan, interim executive director. Figures on the funding level after the new contribution haven't been calculated yet, she said.

When the Connecticut Legislature convenes Feb. 8, Speaker of the House Jim Amann intends to introduce a bill calling for the state to set aside $246.2 million, or nearly half its projected fiscal year 2006 $524.4 million surplus, for the underfunded Connecticut Teachers' Retirement System, said Larry Perosino, a spokesman for Mr. Amann. The state had budgeted for a $562.1 million contribution for the 2005-2007 biennial budget session, but that left a $246 million shortfall, which Mr. Amann proposes the state contribute now, instead of waiting, Mr. Perosino explained.

The $11.4 billion Connecticut Teachers' system, Hartford, with liabilities of $5.2 billion, is about 70% funded, and topping off the plan would meet the contribution schedule set by the state actuary to make the plan fully funded, said Bernard Kavaler, a spokesman for State Treasurer Denise L. Nappier.

"The state's pension obligations are not going away. By investing some of our surplus dollars now, taxpayers save big in the long term," Mr. Amann, said when he announced the proposal Jan. 6.

Ms. Nappier has said she supports the legislation.

And in Washington, Gov. Christine Gregoire introduced a supplemental budget midway through the state's two-year budget cycle to set aside $176 million in a new pension reserve fund to make up for contributions to two state funds that were suspended three years ago. Of that $176 million, $49 million will go toward the current fiscal year's pension obligations, and the balance will be earmarked for the 2007-2009 fiscal years' contributions, explained Hal Spencer, a spokesman for the Washington Office of Financial Management.

Washington has an anticipated $1.4 billion surplus for the period ending June 30, 2007, Mr. Spencer said.

The $176 million is being earmarked for the Washington Public Employees Retirement System 1, which had $12.5 billion in liabilities and $9.9 billion as of Sept. 30, 2004, the most recent actuarial valuation data available, said Marty McCaulay, senior pension actuary for the state. The Washington Teachers' Retirement System 1, had liabilities of $10.1 billion and assets of $8.7 billion, Mr. McCaulay said. Both plans are in Olympia.

Meanwhile, West Virginia lawmakers, while they have not yet announced any special plans for the pension plans, did act to shore up their state funds in fiscal 2005, and there are rumors of doing something similar this year, said H. Craig Slaughter, executive director of the West Virginia Investment Management Board, Charleston, which oversees $7.8 billion in pension and worker compensation money.

In fiscal 2005, state legislators appropriated $225 million of the budget surplus for the frozen West Virginia Public Safety, Death, Disability & Retirement System, which went to 74% funded from 25.6% funded, said Harry Mandel, state actuary. Legislators have already set aside $69 million of the surplus for fiscal 2006, in addition to the regular contribution of $10.5 million, in an attempt to bring the plan up to 90% funded, Mr. Mandel said.

The state also put in $23 million of the budget surplus into the West Virginia Teachers' Retirement System in fiscal 2005, in an effort to keep pace with salary increases given to teachers and prevent the system's funding level from worsening. As of July 1, 2004, the West Virginia Teachers' Retirement System had assets of $1.4 billion and liabilities of $6.4 billion.

But a few hundred million won't make a dent in the unfunded liability of the nation's public pension funds. According to Standard & Poor's, public pension plans had an estimated unfunded liability of $290 billion as of June 30, 2004, the most recent data available.

"Funding levels (of public pension funds) have fallen to about 84%" from about 100% in 2000, said Parry Young, director in the public finance department of Standard & Poor's, New York. The stock market's free fall in March 2000, combined with longer life expectancies and increases in benefits, caused the gap to widen.