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Public Defined Benefit Plans: Is the Sky Really Falling?

Have public defined benefit plans run their course, or is Chicken Little back at it again?  The answer may not be clear cut. Public entities are under immense pressure to do more with less. 

Tax revenues are down and investment returns are still recovering from the 2008 recession. The funding status of public defined benefit plans has dipped over the past few years causing concerns regarding the sustainability of some plans.  According to the U.S. Census Bureau, assets of state and local government pension systems declined 23% in 2009 to $2.46 trillion, down from $3.2 trillion in 2008.  While many plans have made strong returns in 2011, there is still a lot of ground to make up. There is no question that these are tough times, but do tough times necessarily equate to a program becoming unsustainable?   

Ultimately it is not the defined benefit plan model itself that is the problem. It is how plans are administered. Estimates show that New Jersey’s pension fund is underfunded by approximately $46 billion (below 73% funded). Despite this, the State of New Jersey paid nothing to the fund in 2011 and has budgeted to only pay approximately $512 million into the fund next year. 

Now Governor Christie is saying the state may skip its pension payment again next year. Indiana on the other hand funded 100% of its actuarial required contributions for the 2010 fiscal year. As of June 30, 2010, the aggregate funded status of the prefunded plans administered by the Indiana Public Retirement System was 87.5%. Which according to accounting standards for public plans is well funded.  This is not to say that the Indiana Public Retirement System is not without its struggles, but it is not unsustainable by any stretch. Instead of getting wrapped up in the fear mongering that permeates the media today over public pensions, perhaps more focus should be on ways to improve the structure that currently exists. The downturn in the market hurt public plans, but what hurt them more were promises for better benefits without the contributions necessary to sustain those promises. So is Chicken Little right this time?  It probably depends on where he lives.

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