As Georgia’s lawmakers stare down the barrel of a $1 billion budget gap, they’re also looking at a $1.3 billion payment for 2011 to the state’s two largest pension plans.
That cost — about $135 for each Georgian — lately has been taking a bigger bite of tax revenues every year, chewing up resources that the state could use for schools or roads or other projects. Even so, the Teachers Retirement System and the Employees’ Retirement System were under water by at least $10 billion in 2009.
Pension managers and other officials say the plans are not in danger and, in fact, they look good compared with the fiscal train wrecks that some other state pension systems have become.
Still, Georgia’s plans are under strong pressure from two directions. First, they lost $11 billion during the stock market crash of 2008 and 2009 — a beating from which they haven’t fully recovered. Second, the ratio of active workers paying in to retirees taking out has declined sharply. In 2000, the teachers plan had 3.8 active employees for every retiree. That number has fallen to 2.9. Meanwhile, the Employees’ Retirement System ratio has dropped to 1.8 workers per retiree.
The sums involved are stratospheric. Senate Retirement Chairman Tim Golden, R-Valdosta, pointed out that the Teachers Retirement System is paying out about $3 billion a year in benefits, nearly twice as much as the state and other contributors are pumping into the pension fund.
“We are baby boomers. It is an aging population,” said Golden, whose parents both retired with state pensions. “Obviously, you have to be concerned.”
Concerned about how the future looked, the Employees’ Retirement System radically changed the game for new hires as of 2009: They will receive a much smaller pension — half of what their older co-workers will get — and be enrolled in a 401(k)-style retirement plan. The teachers plan, meanwhile, changed its rules so the state can cut its contribution to the fund when times are bad, as long as it catches up when the market recovers.
Could be worse
The good news, Golden and others say, is that Georgia’s pension plans are in better shape than most. The plans didn’t lose as much money as most state pensions during the crash, according to Pensions & Investments newspaper, and remain better funded than most.
Likewise, about 30 states have higher financial risk, based on such measures as each state’s total debt and pension liabilities compared with state revenue and statewide personal income, according to a recent report from Moody’s Investor Service.
Compared with other states’ plans, Georgia’s pensions “are not that much of a problem,” said Laura Quinby, a researcher with the Center for Retirement Research at Boston College.
In January, Illinois legislators increased the state income tax to 5 percent from 3 percent and approved a $3.7 billion bond issue to patch up its chronically underfunded pension plans.
Other states with huge budget and pension deficits, such as California and New Jersey, have cut services, hiked taxes or run into trouble selling bonds.
“Georgia’s better off than other states. In a lot of states, their pension systems are bankrupt,” said longtime Rep. Earl Ehrhart, R-Powder Springs. “They don’t know how they are going to meet their obligations. And they have stolen from them, completely raided them, and now the piper is coming to get paid. They have some significant legal exposure there. We don’t have that, yet.”
‘Every possible solution’
For state and local governments, pension payments are legal and contractual obligations. But former House Speaker Newt Gingrich is suggesting a change to federal law that would enable the states to declare bankruptcy, if necessary, to get out from under their pension obligations. Corporations already have this option.
Fulton County Taxpayers Foundation President John Sherman said the option needs to be available, although most governments should use less draconian methods to cut pension expenses, such as reducing benefits for new hires.
“This is the worst crisis since the Great Depression,” said Sherman, whose organization sued the city of Atlanta, claiming it improperly enhanced pension benefits. “It calls for every possible solution.”
Critics also say the costs of too-generous benefits are straining pensions. A Georgia employee who worked 35 years can collect a pension of up to 77 percent of his or her former pay from ERS; the typical pension covers about 60 percent of pay after 30 years.
Others, however, say richer public pensions were intended to compensate for pay that’s low compared with private-sector jobs.
“State employees do not make a lot of money,” said Bobbie Jean Bennett, a retired state department head, now president of the Georgia State Retirees Association.
Government pension officials and other experts blame the stock market crash for most pension funds’ shortfalls, rather than poor management or rich benefits. Most wounded plans are already on the mend, with the help of rising financial markets, greater cash injections and cost-cutting moves, they argue.
The heads of Georgia’s two largest pension plans say the funds are in sound financial shape.
“I agree there are some state pension plans that are in trouble,” but Georgia’s isn’t among them, said Pamela Pharris, executive director of the Employees’ Retirement System of Georgia, which covers 107,000 employees and retirees.
The pension plan will stay viable as long as the state keeps making its required contributions, she said. “We’re making our payments.”
Market rallies not enough
Stock markets have roughly doubled in value since early 2009, promising eventual relief to pension funds and their backers.
But even with the recent rebound, Georgia will have to significantly boost contributions to its pension plans for at least the next few years.
“Annual employer contributions to the Employees’ Retirement System of Georgia will probably continue to increase over the next five years to make up for earlier losses and other factors,” Pharris said in an e-mail.
“At June 30, 2009, we were 27 percent below where we should have been. It’s going to take us a while to make it back up,” she said.
Annual employer contributions, mostly by the state, may have to rise by roughly a third in coming years, from $281 million in 2009.
ERS paid out $1.1 billion to its 38,500 retirees in fiscal 2010, or an average of $29,354 per retiree.
The teachers plan
Annual employer contributions to the Teachers Retirement System — mostly paid by the state — have risen almost 50 percent since 2002, to $1 billion in 2010.
“Employer contribution” is another way of saying “taxpayers’ money.”
The fund paid out $2.8 billion to its 87,000 retirees in fiscal 2010, or an average of $35,604 per retiree.
But the state won’t have to pump much more than $1 billion into that pension fund this year, or a similar amount next year, because of a complicated change in how it calculates its so-called “annual required contributions.”
The new method, adopted last year, allows the state to chip in smaller amounts when its investments have fared poorly in recent years, but it has to catch up later when investment profits go up, Atlanta actuary Clark Weeks said.
Without the change, it appears the state would have had to pump hundreds of millions of additional dollars into the fund this year. Weeks said that by making lower payments now, “they were probably trying to keep some teachers on the payroll.”
The required contributions also are rising because employees are getting older and more are retiring.
Since 2000, annual benefits paid out by the teachers’ pension plan have grown by more than 150 percent, from $1 billion in 2000 to $2.8 billion in 2010.
Likewise, the number of retirees supported by the 67-year-old pension system grew at a faster pace than the number of active employees, who currently contribute 5.53 percent of their pay to the pension plan.
Fewer than 2.9 active employees were paying into the pension system for each retiree in 2008, compared to almost 3.8 employees in 2001.
At Georgia’s other major pension plan, ERS, the ratio has dropped to only 1.8 employees per retiree, said Pharris.
“That hits your plan pretty hard,” she said.
Disappointment all around
Faced with rising pension costs even before the recession, the state began looking for ways to retool retirement benefits at ERS in 2006.
In changes that took effect in 2009, the pension system switched to a combination of a 401(k)-style plan and a traditional pension that cut benefits in half for new hires.
The benefit cuts “did a huge disservice to the new workers,” said Bill Tomlinson, a retired state budget director who helped found the Georgia State Retirees Association.
The group, unhappy that ERS also shut down cost-of-living increases for retirees, said lower-paid state employees are unlikely to save enough in the new 401(k)-style plan to replace the pension benefits they lost.
Pharris said the recent pension changes were partly designed to appeal to younger employees wanting more portable retirement benefits.
They were expected to produce a slight savings initially.
Instead, ERS lost $2.7 billion during the recession. Lots of employees retired during the state government’s budget cutbacks, boosting the cash drain on the pension plan.
Temporarily, at least, projected pension savings “got blown out of the water,” said Pharris. “We didn’t save anything at all. If anything, we went backwards.”
Staff writer James Salzer contributed to this article.
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