One of the largest budgetary issues that states across the country are dealing with is managing state pensions; namely ensuring the longtime viability of these plans and states' ability to meet all obligations.
It is such a pervasive issue that in the past decade, 48 states—including Connecticut—have passed some form of state pension reform, according to published reports.
The truth is these pension plans, as they were created decades ago, are largely unworkable today.
When they were created, such as here in Connecticut, it was simply easier on the state budget to make promises for later down the road than to reward employees at that time.
But now, of course, we've reached that point down the road, and once these liabilities are measured under requirements of the Government Accounting Standards Board, they are no longer affordable in their current form.
Those same published reports indicate that the majority of states that have engaged in some level of pension reform have modified their existing defined benefit pension plans, which provide recipients with steady monthly income for life.
In most of these cases, plans have been altered for new hires to include things such as higher retirement ages, increased employee contributions and cost of living adjustment reductions for retirees and existing workers.
These reports indicate that no states have yet shifted to a defined contribution plan—such as a 401(k)—since 2005, although several have adopted a hybrid type of retirement arrangement that combines reduced DB pension benefits with a mandatory DC plan.
This is progress, but more needs to be done. And the single biggest issue standing in the way of true pension reform involves working collaboratively with organized labor on an agreement.
Without the support of state employee unions, true pension reform is unlikely to work.
Of the 48 states that engaged in some level of pension reform, roughly half of them faced legal challenges from unions, and that fact alone speaks directly to the problem.
The success of the lawsuits have varied state to state—some were upheld, others rejected, and no steady pattern as to how to courts will handle them has emerged.
So rather than continue on the path of waiting for court-by-court decisions, a better approach could be to have a meaningful dialogue with union leaders to communicate that the current practice is unsustainable.
Actions must be taken to preserve future benefits and address the structural issues, and if they are taken collaboratively with labor involvement, the chances of success are all the better.
The issues that need to be addressed are:
- Increasing employee contributions;
- Creating a hybrid pension plan for new employees;
- Suspending/minimizing COLA adjustments; and,
- Raising vesting periods.
New Approach Needed
If done correctly, the benefits of such reform efforts could prove to be myriad.
Taxpayers could see significant savings, retirees will see their long-term benefits preserved, and both current and future employees will have peace of mind in knowing their pension benefits are protected.
State pensions were created with the best intentions, but it happened long enough ago to outlive intended effectiveness.
This is why a new approach is needed, in strict compliance with GASB, to ensure these problems don't linger for another generation.
And, to ensure people who banked on these benefits all those years ago can still count on them.
About the author: Vanessa Rossitto, CPA, is the government industry partner leader for blumshapiro, the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts, and Rhode Island.