June 5, 2012 / 10:02 PM / 5 years ago

States try to pop pension woes with COLA changes

June 5 (Reuters) - Many U.S. states, trying to chip away at large public pension shortfalls, are cutting the annual raises in benefits designed to cover growth in living costs.

According to a National Association of State Retirement Administrators report released on Tuesday, since 2009, 11 states have changed the cost-of-living adjustments, or “COLAs,” to benefits for current retirees. Five states have changed them for current employees’ future benefits and six have changed them for future hires.

“Just as high periods of inflation in the past placed pressure on states to add or adjust COLAs upward, the recent low rates of inflation, combined with sluggish state and local revenues and poor investment returns, have spurred action to reduce COLA levels,” the report found.

States are short $660 billion for future pension benefits, according to the Pew Center on the States.

Most of pension systems’ revenues come from earnings on investments, which plummeted during the financial crisis. States and local governments scrambled to make up for the shortfalls, hoping to find savings in the systems as their revenues collapsed in the 2007-09 recession.

Last week, Illinois lawmakers failed to pass a plan for shrinking the state’s $83 billion unfunded pension liability that hinged on COLAs. Current and retired workers would have had to choose between a cut in cost-of-living increases for their retirement payments and state-subsidized health insurance.

In some states, the raises are a set rate and go into effect automatically each year. In a few, the legislature decides the raises.

Most of the recent changes have revolved around lowering the automatic adjustments or tying the rates to the Consumer Price Index, a measure of U.S. inflation. For example, Colorado recently dropped its automatic adjustment to 2 percent from 3.5 percent. Under certain circumstances, it can choose to use an average monthly inflation rate instead. The change is being challenged in the state supreme court.

Legislation eliminating Florida’s 3 percent COLA is currently under appeal after a state district judge ruled the termination illegal. (Reporting By Lisa Lambert; Editing by Leslie Adler)

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