State and municipal pension systems are in financial trouble. According to a 2012 Pew Center on the States report, state pension plans estimate that they were collectively $757 billion short of the funding needed to meet the pension promises that had, as of that publication, been made to public employees. Moreover, that figure depends on a risky set of assumptions (e.g., expected rate of return and life expectancy) and may be considerably larger if reality does not match the predictions made by each system. Estimates produced using more conservative assumptions, similar to those used for private sector pensions, approximately double the shortfall.
Regardless of the exact size of projected deficits, rising annual pension costs have already spurred financial distress in many jurisdictions. For instance, Central Falls, Rhode Island, recently declared municipal bankruptcy because of unaffordable pension costs. In Chicago, Mayor Rahm Emanuel has pointed out that the city faces $20 billion in unfunded liabilities and will soon spend a staggering $1.2 billion per year solely on pension costs, or roughly 22 percent of Chicago's entire budget. As Mayor Emanuel stated, "Our taxpayers cannot afford to choose between pensions and police officers, or pensions and paved streets."
In light of looming deficits, states and municipalities across the country are taking steps to reform their pension systems. While some reforms are relatively modest, a few jurisdictions have enacted comprehensive reforms that aim to solve their pension problems permanently. Enacted reforms generally have addressed the following: cost-of-living adjustments, increases in retirement age and contribution rates, and establishment of defined contribution, cash balance and hybrid plans.