Reply #101: ALEC recommending 401(k)-style programs to replace state employee pensions [View All]

Few states have yet embraced the most drastic step— scrapping their traditional plans for a 401(k)-style program that would guarantee only a certain state contribution for employees, not a particular level of benefits when they retired. But it may only a matter of time until that change comes, says Barry Poulson, a retired University of Colorado economist who advises conservative think tanks like the American Legislative Exchange Council, which have been promoting the change.

"You're essentially at a point there where there's no way you can sustain that kind of plan," he said of states struggling with traditional defined benefit pensions. Most private employers have already made the switch because they "quite simply decided they couldn't afford them."

State Unfunded Liabilities in the Trillions: ALEC Provides the Solutions
Other Post Employee Benefit Plans: A Case for Shifting to the Defined Contribution Approach
(EMAILWIRE.COM, March 03, 2011 ) Washington DC -- State and local spending growth outpaced private sector growth by nearly 90 percent over the past decade and current budget deficits are estimated to exceed $100 billion for the upcoming fiscal year. However, state budget gaps are overshadowed in size and scope by unfunded liabilities in state pension and healthcare systems for public employees, which are trillions in the red.

These unsustainable cost drivers threaten the financial solvency of the states. State legislators can no longer ignore the unfunded liabilities in Other Post Employment Benefit Plans (OPEB). To help legislators navigate tough budget solutions, the American Legislative Exchange Council (ALEC) is pleased to announce the release of Other Post Employee Benefit Plans: A Case for Shifting to the Defined Contribution Approach.

“Clearly, state legislators need a new approach in order to fulfill their promises to government workers, while maintaining financial solvency,” said ALEC Tax and Fiscal Policy Task Force Chair Sen. Jim Buck (R-IN). “Most legislative fixes over the past few years for state budgets have merely postponed or obscured state budget problems, rather than solving them. By allowing public employees to contribute to their own welfare, they will have secure, portable assets for their retirement. ALEC is providing states the right solutions to address this crisis.”

According to the Bureau of Labor Statistics at the U.S. Department of Labor, as of December, 2010, state and local government employees received benefits that were 69 percent higher than those in the private sector. State and local government employees earn $13.85 per hour in benefits compared to the private sector workers who earn an average of $8.20 per hour. According to the new ALEC report, there are also great disparities in the magnitude of unfunded liabilities per capita of OPEB plans in the states. The outlier is Alaska, with more than $13,000 in unfunded liabilities per capita. In contrast, seven states have unfunded liabilities per capita less than $100.

ALEC’s comprehensive report discusses comparisons between public and private sector benefits, the causes of unfunded liabilities, and how state legislators can successfully address them. An in-depth discussion of Idaho and California’s experiences with unfunded liabilities also provides state legislators with best practices for reform. For example, Idaho recently enacted reforms that significantly reduced the cost of OPEB plans to the state. Idaho’s contributions to the plan now exceed the required contributions, and the state is on track to eliminate unfunded liabilities in the plan over the actuarial time period.

“If other states followed Idaho’s example and enacted the reforms in their retiree health plans, they could eliminate the $1 trillion in unfunded liabilities in OPEB plans over the actuarial time period,” said Dr. Barry Poulson, co-author of Other Post Employee Benefit Plans: A Case for Shifting to the Defined Contribution Approach.
To download a free copy of Other Post Employee Benefit Plans: A Case for Shifting to the Defined Contribution Approach, please visit www.alec.org/opeb .