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Proponents of Maine Gov. Paul LePage's proposals to change the pension system gather in the State House in Augusta, Maine, on March 2, 2011. (Pat Wellenbach/The Associated Press)

Houston — Laura and John Arnold Foundation (LJAF) today released a policy solution paper, Creating a New Public Pension System, outlining effective alternatives to the current pension system that is putting enormous and increasing financial stress on state and local budgets across the nation.

Experts estimate the unfunded pension liabilities at $3 trillion for state-run plans. This figure does not include city-run plans, many of which are facing even more acute problems.

In the paper, LJAF’s Vice President for Public Accountability Initiatives, Dr. Josh McGee, highlights both the source of the problems as well as effective and sustainable solutions that transcend traditional policy perspectives.

“It is time for our political leaders to embrace their responsibility and address the acute underfunding of public employee benefits,” says Dr. McGee. “Failing to do so would lead to severe economic consequences for both public workers and taxpayers alike.”

The paper highlights three structural problems that must be addressed in order to create a sound, sustainable, and fair retirement savings system for public employees: unpredictable costs, incentive to underfund, and labor market distortions.

Dr. McGee also outlines key criteria for sound public pension reform: establishment of transparency with respect to the true cost of the benefits promised to public employees; a mandate that the state or municipality pay the full cost of accrued benefits each year; a mandate that the pension plan sponsor pay down the unfunded accrued liability over a reasonable time horizon; and an improvement of the generational equity, portability, and security of benefits for public employees.

LJAF actively seeks opportunities to invest in states and municipalities where leaders have a sincere interest in implementing fundamental reforms that fully address the cost, incentive, and labor market problems created by the current public pension system. LJAF welcomes the opportunity to be a resource to those leaders that share this goal.

The full paper can be found here.