States Should Cut Pension Costs, Not Default on Debt, Deutsche's DWS Says

States should cut pension costs through measures such as extending the retirement age rather than defaulting on debt, DWS Investments said in a report.

Pension funds are “unsustainable on their current trajectory,” and “represent a significant and growing threat to the long-term financial health of muni bond issuers,” according to the e-mailed report released today by the research unit of Deutsche Bank AG.

The average state’s pension is 76 percent funded, according to data compiled for the Bloomberg Cities and Debt Briefing in New York last month. Illinois’ is only 50 percent funded; Kentucky, New Hampshire and Louisiana are funded at 60 percent or lower. The average five-year return of pension assets is about 3 percent, below the 7 percent or 8 percent benchmarks many states use, according to consulting firm Wilshire Associates.

The severity of budget problems makes unions more willing to work with legislators to change laws and write new ones, the study said. Some states are prohibiting “spiking,” a practice that allows public workers to take overtime and opt out of vacation time in order to create an inflated benchmark for future benefits.

Other measures include changing from defined-benefit programs to defined-contribution programs and reducing the public workforce, said the report.

New Jersey Governor Chris Christie proposes legislation raising the retirement age and rescinding the pension increase granted in 2001. Minnesota is attempting to change its cost-of- living formula for retirees, the report said.

Defaulting on debt to free up capital would “handicap their access to the capital markets,” according to the report.

“After years of watching the unfunded obligation of municipalities, we are finally seeing an environment where reform is possible,” the report said.

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