States nationwide have badly underfunded pension plans.

States nationwide have badly underfunded pension plans. (Brian van der Brug / Los Angeles Times)

Underfunded state pensions are a vexing problem that even the brightest minds at the Milken Institute Global Conference can’t solve.

State governments nationwide have fallen behind in saving for employee retirements. The average public pension is 77% funded today, down from 96.8% in 2002, according to David Villa, chief investment officer of the Wisconsin Investment Board.

And as a panel of speakers at the conference pointed out, it’s easier for politicians to make promises to government workers (a.k.a. voters) than to squirrel away money that won’t be needed until the lawmakers have long since departed office.

Politicians often believe the problem can be solved if it’s far in the future.

“There is a tendency that if you have a long enough time horizon, you can always manage through this,” said Jeffrey Brown, a finance professor at the University of Illinois.

But underfunding is hitting staggering levels in many states, leaving politicians with three basic choices: Cut employee benefits, significantly improve investment returns, or boost government contributions, which may entail raising taxes.

“For [pension] plans to work, you’ve got to fund them,” Brown said, summing up the dilemma.

States are legally required to meet the obligations they have promised workers, so they’re going to have to come up with the money.

“Somebody has to be on the hook for retirement benefits for the American public,” Brian Pellegrino, chief investment officer at United Parcel Service.

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