Public pension time bomb ticking away

A headline in the Ithaca Journal placed a regional spotlight on a growing local, statewide and national problem: "Retirement costs bedevil Dryden schools."

The story noted that "a decrease in the value of retirement investment portfolios may force Dryden Central School District contributions to rise as much as 70 percent to make up the difference in payouts to former staff."

The huge losses that individual 401(k) retirement plan participants have experienced are also pressuring not only local school districts but also villages, towns, cities, counties and state lawmakers across the nation to spend more taxpayer money to stabilize their programs.

Sally Sherwood, the Dryden schools superintendent, tallied the bottom line. She said the district is anticipating a $803,882 increase in its pension bill for former teachers and $408,124 for other employees. This year's bill was around $1 million for teachers and $275,000 for other employees. "Those two alone are $1.2 million that we will have to make up next year," she was quoted as saying.

School districts all over the state face a similar dilemma, but they're not alone.

State pension funds have collectively lost at least $1 trillion as the financial markets have dropped over the past year. The Center for Retirement Research at Boston College states that pension funds will need $270 billion in additional contributions over the next four years and more than $100 billion annually for two decades hence to shore up their pension funds.

The Retirement Administrators Association reports that the market value of state and local pension fund assets has declined by a third, from a peak of about $3.3 trillion in the fall of 2007 to $2.4 trillion at the end December 2008.

New York State's public worker pension fund lost about 20 percent of its value last year from $154 billion to $122 billion. California's public pension fund invested heavily in residential real estate, a mistake that wiped out nearly one-third of the state employees' pension plan.

New York State Comptroller Thomas DiNapoli manages the New York pension funds mostly in stocks and bonds. When markets are up, the money accumulates, but when the market goes down, the state must cover those losses to make sure retirees continue to receive their pensions.

DiNapoli states that taxpayers who fund these government-worker benefits will soon have to make a bigger contribution. He intends to ask 3,000 local governments and school districts to increase their contributions to the retirement fund next year.

The pension funding problem is just one more economic challenge these days. Income and sales tax collections are dropping fast as unemployment rises. Jobless benefits funds are running dry. And because of substantial budget holes, states, municipalities and school districts are cutting back on a wide range of services and, in some cases, are laying off workers. Their options are limited. Property tax increases will be hard to pass in this economic slowdown.

Questions are being raised about the future of public employee pensions, and in a good number of states, legislation is being introduced to change funding and benefits. Here in New York, Gov. David Paterson has proposed increasing the minimum retirement age for new state government hires to 62, up from 55 and to contribute 3 percent toward their retirement for their entire career.

The state of Illinois is facing a nearly $50 billion deficit in its pension funds and is trying to sell the state lottery to raise $10 billion. The city of Chicago balanced its budget, but officials said they had to sell the Skyway toll road, the city's major parking garages and Midway airport. Kentucky is reporting a $30 billion gap in pension funding.

Billionaire investor Warren Buffett said: "Public pension promises are huge and, in many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed."

In his book, "While America Aged," financial journalist Roger Lowenstein wrote: "America's private companies and state and local governments share a financial challenge that makes today's economic downturn seem small by comparison. The problem is their pensions: They've made promises to their employees - in the form of retirement pensions and health benefits - that they simply can't afford to keep."