Retiree Plans Hurt By Market Decline As Anxieties Rise

States Tally Short-Term Losses While Stressing Overall Safety

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Plunges in the stock market have taken a toll on the fortunes of the nation’s pension funds for retired teachers and other public employees, with retirement systems nationwide reporting losses in the billions of dollars in recent weeks.

The losses have worsened already-high unfunded obligations for plans that have promised more than $2 trillion in retirement benefits to public employees at a time of ballooning state and local government deficits.

Experts stress that public employee pension plans are structured to be safe, long-term investments.

“I think [teachers and others] should feel confident they should have what they have been promised,” said Ronald K. Snell, the director of the state-services division at the Denver-based National Conference of State Legislatures.

But the unsettled economy has many teachers on edge—a point illustrated by fierce opposition to a plan by Georgia Gov. Sonny Perdue that teachers warn could threaten future cost-of-living adjustments, or COLAs.

Under the Republican’s proposal, the board of the Teachers Retirement System of Georgia could decide how much of an adjustment—if any—its 75,000 retirees get each year. That would end a rule put in place in 1969 giving an automatic 1.5 percent increase twice a year.

The Georgia fund’s value decreased by $8.7 billion from June to September to $41.6 billion. But Bert Brantley, a spokesman for Gov. Perdue, said the proposed change is not directly related to the current financial crisis. Rather, he said, it is intended to give the pension managers greater control over the fund. The other pension boards in the state already approve cost-of-living benefits each year.

“At the end of the day, it really is about the board’s ability to manage. They have a fiduciary responsibility to manage their assets,” he said. “There’s [currently] no discretion. Our hope is our COLAs are approved each year with the same frequency and at the same rate as the last several years. If that happens, it means the fund is stable and healthy. This is not an effort to reduce them. This is an effort to maintain longer sustaining ability of the fund.”

Georgia educators, however, are highly suspicious of the governor’s motives, noting several attempts in the Republican-controlled legislature in recent years to move some pension dollars into riskier financial ventures, such as investing in junk bonds.

Tim Callahan, a spokesman for the 75,000-member Professional Association of Georgia Educators, an organization independent of the national teacher unions, said tens of thousands of Georgia teachers have sent state officials letters and e-mails to protest.

Plunging Value

While Georgia teachers fume, other educators have reacted with alarm to recent news about sharp drops in the value of public pension funds.

Specialist Dilip Patel, left, works at his post at the New York Stock Exchange on Oct. 29. Pension plans have been stung by falling stock values.
Specialist Dilip Patel, left, works at his post at the New York Stock Exchange on Oct. 29. Pension plans have been stung by falling stock values.
—Richard Drew/AP

The 795,000-member California State Teachers’ Retirement System, the nation’s second-largest public pension fund, had $162.2 billion in assets as of June 30. But by Sept. 30, that amount had shrunk to $147 billion, a decrease of 9.4 percent.

The day before, Wall Street investors lost $1.2 trillion when the Dow Jones Industrial Average dropped a record 778 points.

Others have been hit harder. The nation’s largest pension system, the 1.6 million-member California Public Employees’ Retirement System, lost 23 percent of its value in that same period, decreasing to $185 billion from $239 billion, it announced last week. The larger plan includes some retired teachers.

New York’s teacher-retirement fund, which covers most educators outside of New York City, dropped $7 billion in value from July to September, sitting at $88 billion as of Sept. 30. The larger statewide employee pension plan shrank by $20 billion between April and Sept. 30, state Comptroller Thomas P. DiNapoli announced last week.

And the New York City Pension Funds, which include two that cover school employees, dropped to $95.9 billion in the quarter ending Sept. 30 from $104.7 billion, a decline of 8.5 percent. Compounding that problem, Gov. David A. Paterson said last week, is a statewide budget deficit expected to hit $7 billion over the next 3½ years.

According to a 2007 Pew Center on the States report, states had $361 billion in unfunded liabilities in public pension plans, based on 2006 data. But that was before a slowing economy early in 2008 and before the global economic crisis this fall sharply decreased plan values.

“We can expect to see pretty much every state substantially increase in unfunded liabilities,” said the ncsl’s Mr. Snell. “On average, the funds are 60 percent invested in equities, where the big hits have come.”

Digging Out

States likely will tackle dwindling pension values in 2010, after a full accounting of those values is done at the close of the 2009 fiscal year. Changes most likely will come in the form of raising contributions made by states, local governments, and school districts to the plans.

Policy decisions on pensions and cost-of-living adjustments vary from state to state. While the Georgia plan’s adjustments are controlled by an administrative rule of a pension board, ad hoc legislative committees make the decisions in Texas, Oklahoma, and North Dakota.

It is unlikely, because of political considerations, that many states would look at a proposal like that in Georgia or actively seek to raise the contribution rate of future retirees, Mr. Snell said.

But there’s another option: holding off on dealing with the funding gap while states deal with other budget issues.

“Traditionally, legislatures hard-pressed otherwise will postpone pension contributions with expectations that improved market conditions will let them catch up in the future,” Mr. Snell said.

Meanwhile, states are seeking to ensure retirees that pension funds remain sound, with agencies in many states, such as Indiana and South Carolina, posting notices on their Web sites telling retirees there’s no need to panic.

The National Association of State Retirement Administrators and the National Council on Teacher Retirement issued a statement on Sept. 25 noting that pension funds have survived other market plunges, such as in 1987 and after the Sept. 11, 2001, terrorist attacks.

“History shows that because of the structure of the plans and their ability to be long-term, patient investors, they are able over time to come through these periods and not to have to make draconian changes in contributions from employers or employees,” said Leigh Snell, the federal government-affairs representative for the teacher-retirement council.

The Georgia teacher-pension plan ranks as one of the nation’s most actuarially sound and well-financed, boasting 94 cents for every dollar it is expected to pay. But the plan’s health hasn’t doused opposition to Gov. Perdue’s proposal on cost-of-living adjustments.

Educators also argue that they have paid 5 percent annually into the plan since 1995, and for most of its life, participants paid 6 percent—in both cases, more than what other state employees pay into their retirement plans.

“We’ve paid for our COLAs. So we don’t think it is fair to cut back on us when we’ve already paid for them. We are getting back the money we put in for, in my case, those 37 and a half years,” said William G. Sloan, the executive director of the 18,000-member Georgia Retired Educators Association.

“I was willing to put it in because I was under the impression I would be getting it back when I wasn’t working,” he said.

‘Hot Button’ Issue

One of the angry teachers is Michael C. Witt, who teaches 3rd grade in Alpharetta, in suburban Atlanta, part of the 88,000-student Fulton County school system. He said the proposed pension changes have become a “hot button” issue among educators.

“Our fund is managed by state employees, and they have done an amazing job. This thing ain’t broke. Don’t fix it,” he said.

But Mr. Brantley, the governor’s spokesman, said the state needs the flexibility. The retirement system’s “only option right now is to increase the amount teachers pay in and employers pay in. They are doing that next year.” The employees’ contribution will increase to 5.25 percent annually.

He added: “I’m disappointed people would take this as an affront to teachers. This is really about managing the state’s fiscal affairs in a way that will make them sustainable over the long term.”

Vol. 28, Issue 11, Pages 1, 14

Published in Print: November 5, 2008, as Retiree Plans Hurt By Market Decline As Anxieties Rise
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