If you have a 401(k) account, you don't need to be reminded what has happened to it lately. For state and local governments, whose pension funds hold the equivalent of hundreds of thousands of 401(k) accounts, the losses are magnified astronomically.
But unlike individuals' accounts, government pensions are guaranteed. When stock market earnings fall and retirement funds dip below specified levels, state and local governments must make up the difference. So counties, cities, schools, special districts and the state are bracing for big increases in the contributions they are required to make to employee retirement funds.
The California Public Employees' Retirement System recently reported that its pension fund lost a staggering 20 percent of its value – $48 billion – between July 1 and Oct. 10. The CalPERS fund, which peaked at $260.4 billion at the end of October 2007 and was at $239 billion in July, was worth $192.7 billion last week.
CalPERS officials warned last week that the increased contributions that employers will be required to make to backfill investment losses could amount to 2 percent to 4percent of payroll.
The city of Sacramento is anticipating it will be charged an additional $8 million annually, a doubling of its current pension contributions. The pension bills won't come due for cities and counties until July 2011. For the state and school districts, pension increases will hit in July 2010.
It is impossible to reduce benefits already promised, but the state and local governments ought to take steps to reduce future costs. That will mean rolling back benefits or increasing retirement ages for new hires. The state and local governments should also consider calculating benefits based on workers' average wages over the last three years on the job rather their final year's pay.
It may seem unfair to establish a lower tier of benefits for new workers, but state and local governments may have no choice.
Even when the stock market was soaring, state and local governments were having difficulty paying pension costs. With the dramatic drop in investment earnings, the situation is approaching crisis proportions. The city of Vallejo has already filed for bankruptcy. Other local governments may follow suit if they don't do something to reduce the mounting costs of retirement.
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