Maryland shows even strongest states keep kicking pension can

(Bloomberg) -- Public pension promises are apparently made to be broken.

In Kansas, Michigan, New Jersey, New York and even top- rated Maryland, states and localities have shortchanged payments to retirement plans as rallying stocks ease the funding pressure while services such as schools and crumbling infrastructure scream for resources.

The insufficient contributions have led to $1.3 trillion of unfunded liabilities, leaving states and cities struggling to catch up with retirement pledges that in some cases were made decades ago. Skipping payments only raises the cost down the road.

“When you put off the payments you should be making, you’re just shoving it forward and making it difficult for future budgets,” said Tom Aaron, who tracks public pensions as an assistant vice president at Moody’s Investors Service in Chicago.

Also see: DB plan liabilities continue to outpace assets

States and localities are straining to catch up with a moving target. Their required contributions more than tripled to $93.7 billion in 2013 from $27.7 billion in 2001, according to National Association of State Retirement Administrators data encompassing 80 percent of U.S. public pension assets. The plans were 79 percent financed on average as of 2012, down from about 100 percent in 2001.

Resource Claim

Adequate funding is key for pensions to have enough money to write retirement checks. Illinois and Kentucky, which have shortchanged required contributions, have the worst-funded state pensions, data compiled by Bloomberg show.

“When you don’t have a budget stream going to pensions anymore, it’s hard to get it back,” said Keith Brainard, who directs research in Georgetown, Texas, for the retirement administrators group. “Those dollars are spoken for, so it’s hard for the legislature to direct it back to pension contributions.”

Also see: 9 hot trends in DC plans for 2015

New Jersey Governor Chris Christie, a Republican, in February proposed a budget for the year beginning in July that contributes a record $1.3 billion to the retirement system. Yet that’s less than the $3.1 billion the state was scheduled to pay as Christie seeks to cut costs and legislative analysts forecast a deficit of as much as $7.35 billion.

Kansas Hole

Kansas Governor Sam Brownback, also a Republican, has proposed shortchanging contributions by $58 million to fill a $280 million budget hole created by tax cuts he championed. He persuaded lawmakers to approve a $1 billion bond sale to make up for part of the underfunding.

The size of actuarially recommended contributions is determined by benefits promised, investment returns, the amount of assets and projections for members’ life expectancy.

New York has a system for rolling payments into future years, and in Michigan the governor has pushed to postpone contributions for teacher pensions.

Also see: Annuity industry expects robust year

“Public employees stand to lose their pensions and retirement security if they’re not funded,” said Bailey Childers, executive director of the Washington-based National Public Pension Coalition, which advocates for public pensions.

Maryland Promise

Officials in Maryland, with top credit grades from Standard & Poor’s and Moody’s, canceled part of promised payments designed to help the state catch up, partly because rising stocks boosted returns. The state had about two-thirds of assets to cover projected liabilities as of June 30.

In 2011, under former Governor Martin O’Malley, a Democrat, the state agreed to make an additional payment of $300 million a year starting in 2014 to make up for more than a decade of inadequate funding.

The state cut the extra payment to $150 million last year. Then, after Republican Governor Larry Hogan, who took office this year, proposed a 2016 budget with reductions to areas such as education, the legislature lowered the payment to $75 million, said Michael Golden, spokesman for the State Retirement and Pension System.

Lawmakers in the Democrat-controlled legislature say that investment gains have left the system strong enough to keep the extra contributions at a reduced level, so they can divert some of the pledged funds for other needs. They also want the state to return to making full pension contributions.

Because the plan wouldn’t fully fund pensions until 2039, it would add $2.5 billion of costs, according to Golden.

“Because we have had a few good years in the stock market, we’re backing away from the money we’ve promised,” said David Brinkley, Hogan’s secretary of budget and management. “They’re just taking the money.”