Retirement programs for public employees are under siege, with numerous state and local employers either undertaking or considering massive restructuring of their benefit plans. The constraint comes as state budgets constrict and asset values drop.

Financial services giant ING, which provides planning and service to 22 states and some 4,300 towns and municipalities, has unveiled a comprehensive research framework for public employers contemplating such a change, including a detailed checklist to help untangle what can be an intense political and emotional fight.

"The public pensions have been looked at for years, and it's been an ongoing debate and it becomes political," said Bill Jasien, ING's executive vice president for government markets. "Pension reform is clearly in the microscope because of the budget crisis."

According to the U.S. Census Bureau, the 2,500 state and local retirement plans in place throughout the country cover 20 million active workers and some 7 million retirees and plan beneficiaries.

In addition to the budget constrictions bedeviling public employers across the country, the spare returns the markets have been delivering have also hobbled many retirement programs.

ING reports that with the isolated exception of the years from 2001 to 2003, investment earnings comprised between 71% and 82% of the total funding of the plans from fiscal 1997 to 2007. And many plans had been structured around the presumption of returns in the range of 8% to 10%.

"The industry in general I don't think anticipated the market melting down the way it did and maintained for probably too long an inflated rate of return," Jasien said. "When you have a market meltdown and market volatility like we've had, you're obviously not enjoying 8% returns."

In many states, there is political momentum for replacing defined-benefit pension plans for public workers with employee-contribution plans, but ING warns that for some states, such a move could prove to be a short-sighted strategy.

"One reason may be that if a new plan fails to deliver sufficient retirement income, states -- unlike private employers -- might be pressed to fill the income gap," the authors of ING's white paper wrote. "In effect, they could be substituting one long-term liability for another."

Indeed, Jasien emphasized that there is no one-size-fits-all solution, that each employer needs to weigh the unique stresses on its retirement plan, and that ING's role -- or that of any other financial services firm -- is to help evaluate the programs on a case-by-case basis.

"Municipalities would have to really look at the full economics of their situation," he said. "We don't come out and say, 'Municipalities should absolutely follow this path.' That would be naïve of us to do that."

Instead, ING has developed a four-stage checklist, tasking employers with taking a hard look at an array of factors, such as whether the existing plan is meeting its non-financial goals and the demographics of the workforce. The latter point is key.

While the prevailing trend has seen states and municipalities shift more of the responsibility for funding retirement benefits onto their employees, such a move tends to elicit a different reaction depending on the makeup of the workforce, Jasien explained. Younger workers, as a general matter, are more receptive to higher rates of employee contributions, while older workers tend to be far less so.

Nevertheless, public employers are increasingly "putting the onus on the employee to help close the gap and cover the benefit that they'll ultimately receive," just as private employers have in the form of 401k plans, Jasien said.

Advocates of such a shift tend to represent the private sector as a model of efficiency and cost-effectiveness, one that public employers would do well to emulate. That certainly is where the trend lines are pointing, but how thorough will the transition be?

"I do think the public sector will look to the private sector for some sort of guidance," Jasien said. At the same time, at least in the near term, he isn't expecting public employers to completely abandon the defined-benefit model, as the private sector largely has.

"I think the public sector is very different,” he said. “I don't think the pendulum will swing as far."