Report Indicates $1.26T Funding Gap for State Retiree Obligations

April 26, 2011 ( – A new report contends the gap between the promises states made for employees’ retirement benefits and the money they set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009 - a 26% increase in one year.

State pension plans represented slightly more than half of this shortfall, with $2.28 trillion stowed away to cover $2.94 trillion in long-term liabilities—leaving about a $660 billion gap, according to an analysis by the Pew Center on the States. Retiree health care and other benefits accounted for the remaining $604 billion, with assets totaling $31 billion to pay for $635 billion in liabilities.  

According to the Pew Center, pension funding shortfalls surpassed funding gaps for retiree health care and other benefits for the first time since states began reporting liabilities for the latter in fiscal year 2006.  

The report said precipitous revenue declines in fiscal year 2009 severely depleted state coffers and constrained their ability to pay their annual retirement bills. States’ own actuaries recommended that they contribute nearly $115 billion to build up enough assets to fully fund their promises over the long term, but they contributed only $73 billion—or 64% of the total annual bill. This 2009 payment represents a three percentage point decline from the previous fiscal year’s contribution, when they set aside just under $72 billion toward a $108 billion requirement. 

In all, state pension systems were slightly less than 78% funded, down from the 2008 level of 84, according to Pew data. New York led the way with a funding level of 101%—the only state to enjoy a surplus—while Illinois and West Virginia were at the back of the pack with just slightly more than half of their liabilities accounted for.  

In fiscal year 2009, 31 states were below Government Accountability Office recommendation to have at least an 80% funding level, compared to 22 states less than 80% funded in 2008.  

The Pew Center said fiscal year 2010 data is available for just 16 states, and it shows that collectively, the average funding level across the 16 states fell slightly, from 77% in fiscal year 2009 to 75% in fiscal year 2010.  

Alaska and Ohio accounted for nearly 62% of all the money set aside to fund retiree health care as of fiscal year 2009. Nineteen states had set aside nothing to pay for these promises. These states continue to fund these benefits on a pay-as-you-go basis, covering medical costs or premiums as they are incurred by current retirees.  

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