Administration January 4, 2007

NASRA: 45 States Have Underfunded Retirement Liabilities

April 25, 2005 (PLANSPONSOR.com) - The gap between assets and benefits in the defined benefit pension plans of 45 states now stands at a collective $260 billion with the unfunded liabilities exceeding annual general revenue budgets in 13 states, according to a new study.

Reported by

Kip McDaniel

According to the National Association of State Retirement Administrators (NASRA), the combined funding ratio for all the plans in the survey – 127 in total – is 88.8%. Average asset allocation follows the traditional set-up very closely, with the average equity allocation at 59.3%.

The median plan estimates a 8% rate of return on investments. However, with a 3.75% median rate of inflation choice, the median real rate of return on investments stands at 4.50%.

Although the funding problem is spread among many states – for half the states, pension fund shortfalls top $3 billion – the state with the largest gap is West Virginia. One of the state’s plans – the older of its two systems for teachers – owes $3.50 for every dollar it has.

The apparent problem may not be as bad as it seems on the surface, however. Although over 5.1 million retired teachers, judges, law enforcement and other public employees now rely on public pensions from states – and another 15 million workers expect benefits when they retire – the high number of underfunded plans may be due in part to the floundering markets of the early part of the decade. According to a report by Wilshire Associates that tracked 64 plans, where plans had only 77 cents on hand for every dollar in promised benefits in 2003, they now have 83 cents on hand.

According to the Associated Press, states are trying different solutions to solve the underfunding issue. For example, Rhode Island – where the total underfunded liability stands at $3.1 billion – is looking into a minimum retirement age of 60 and would have state employees work two years longer, for a minimum of 30 years, before they could receive pensions (See RI Treasurer Releases Pension Reform Proposal ). New Mexico has passed legislation that would require higher employer and employee contributions, while Oklahoma is trying to fund some of its pension shortfall by using state lottery funds, as well as a share of general tax revenue, to boost its pension system (See New Mexico House Offers New Pension Bailout ).