State and City Pensions Drenched in Red

The economic crisis has left 47 states in the red, with a combined deficit of $350 billion over the next two years. Pension benefits have been a highly visible target, pitting taxpayers against public workers in state and local governments.

These struggles will only intensify, as swooning stock prices have left nearly two-thirds of all state and local government pension funds at least 20 percent shy of what they need to cover retirees.

In California Governor Arnold Schwarzenegger wants a two-tier pension system. The move would do little to close next year’s $20 billion hole in the state’s budget, but the changes would have a far-reaching impact, lowering the rate at which workers accrue benefits and raising the retirement age for new hires.

The New York state pension system saw a 26 percent drop in assets last year, prompting the state comptroller to press for state and local governments to increase contributions by 60 percent. Meanwhile New York’s governor has wrestled support for a new tier—the fifth—in the state pension system from the two biggest state employees unions, in exchange for averting 8,000 layoffs.

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Illinois is slated to borrow $3.4 billion to cover contributions to several state pension plans, while Chicago’s mayor has approved raising property taxes—in part to fund pensions for Chicago teachers.

Even before the financial crisis, New Jersey pensions were famously underfunded, with state politicians shortchanging the pension system—even skipping contributions altogether—year after year. After a bruising battle with Governor Jon Corzine in 2007, unions beat back calls for a defined-contribution plan for new hires, and secured increased funds for the pension. They agreed to higher health care payments to get there.

Now conservative politicians are putting everything back on the table, as the pension fund remains 25 percent shy of full funding. Similar problems are plaguing small towns and rural areas as well: city and town workers in West Virginia face a $636 million gap.