Investing and Banking & Finance

Indiana pensions hit as economic doldrums continue

August 14, 2012

Indiana pension funds took a temporary hit last year and may not rebound as much as public workers would like, based on long-term economic trends outlined for lawmakers Tuesday.

The state's public pensions collected 1 percent interest on average last year, rather than the 7 percent the Indiana Public Retirement System originally expected. That immediate hit, plus a long-term decline in expectations, led pension leaders to tell members of the General Assembly's Pension Management Oversight Committee that pension plans may have to kick in more money next year.

Steve Russo, executive director of the Indiana Public Retirement System, said state investments underperformed last year as a result of continued economic troubles in Europe, partisan gridlock in Washington that nearly shut down the federal government and low interest rates set by the federal reserve. The poor performance caused Indiana's unfunded pension liability to increase from $3.5 billion to $4.9 billion.

"Contribution rates are going to be impacted this year because we haven't hit our number," Russo told state lawmakers.

But he said other states that currently appear in better shape than Indiana when it comes to pensions could end up being hit harder.

"There are some states out there who still have that 8 percent bogey out there that makes their funded status look good," Russo said. "But they're facing some pretty significant contribution rate increases because pension is a 'pay me now or pay me later' game. All the actuarial assumptions in the world don't change how much of it you have to pay out. That's defined by benefit policy."

It's not clear how much contributions would have to rise this year, but the increases could hit Indiana's counties, towns and cities, whose pension funds are managed by the state Public Retirement System. Local government plans account for close to two-thirds of the money invested by Indiana's Public Employee Retirement Fund.

David Bottorff, executive director of the Association of Indiana Counties, said he and his staff were briefed on the new pension numbers last week and plan to alert county leaders about the potential hit soon.

State pension obligations have garnered attention as conservative activists and tea partyers have shifted the national debate to focus on government debt and spending. Studies from various Washington think tanks have pegged the problem in the tens of billions of dollars for most states and estimated the aggregate problem at about $2.5 trillion.

For the most part, Indiana's pensions are on more solid footing than states such as California and New York. Indiana does not account for nearly as many public employees as some larger states, and it also does not pay the health care of retirees and other benefits like some other states.

However, the state has obligations in the form of commitments made to teachers hired before 1996. Unlike the other pensions managed by the Public Retirement System, the pre-1996 teacher plan is paid for annually out of the state budget.

The amount lawmakers spend on the teacher plan increases gradually each year. They spent $725 million last year and are expected to spend $747 million next year. The state is expected to spend upward of $1 billion annually from the budget in 2025 through about 2035, before costs start dropping as fewer retired teachers collect pensions.

Indiana's public pensions, excluding the pre-1996 teacher plan, are funded at 81 percent of what is owed workers. But if the teacher portion were added in, that amount funded would drop to 63 percent.

National think tanks have relied on that latter figure in lumping Indiana in with most other states having trouble keeping their promises to workers.

Gov. Mitch Daniels was asked last December about news reports that Indiana's pension liabilities were greater than his administration portrayed. He answered by arguing that the billions in unfunded teacher pensions should not count against the state's standing and accused one news outlet of "erroneous" reporting.

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