According to a press release, the figures detailed in
Pew’s report, “The Trillion Dollar Gap,” include pension, health care,
and other non-pension benefits promised to both current and future retirees in
states’ and participating localities’ public sector retirement systems.
The announcement said Pew’s numbers likely underestimate the bill coming due because the most recent available data does not account for the second half of 2008, when states’ pension fund investments were particularly affected by the financial crisis. In addition, most states’ accounting methods spread the investment declines over a period of time, meaning states will be dealing with their losses for several years.
In fiscal year 2008, states’ pension plans had $2.8 trillion in long-term liabilities, with more than $2.3 trillion reserved to cover those costs. Overall, states’ pension systems were 84% funded, with an unfunded portion of $452 billion – down slightly from an 85% combined funding level in fiscal year 2006. Pension liabilities have grown by $323 billion since 2006, outpacing asset growth by almost $87 billion, Pew found.
For pension benefits, 16 states were deemed by Pew as solid performers, 15 were in need of improvement and 19 states were flagged for serious concerns. States like Florida, Idaho, New York, North Carolina, and Wisconsin all entered the current recession with fully funded pensions, and were rated top performers by Pew.
In 2000, just over half the states had fully funded pension systems. By 2006, that number had shrunk to six, and by 2008, only four states – Florida, New York, Washington, and Wisconsin – could make that claim.
In eight states – Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island, and West Virginia – more than one-third of the total pension liability was unfunded. Two states – Illinois and Kansas – had less than 60% of the necessary assets on hand.
Health Care and Other Retiree Benefits
The Pew Center on the States found that retiree health care and other non-pension benefits, such as life insurance, make a $587 billion total liability for state and local governments to pay for current and future benefits, with only $32 billion – or just over 5% of the cost – funded as of fiscal year 2008. Half of the states account for 95% of the liability, according to a press release.
Nine states were deemed solid performers by Pew, having enough assets to cover at least 7.1% - the 50-state average – of their non-pension liabilities. Only two states – Alaska and Arizona – had 50% or more of the assets needed.
Forty states were classified as needing improvement, having set aside less than 7.1% of the funds required for non-pension liabilities. Twenty of these have no assets on hand to cover their obligations. Nebraska does not provide estimates of its retiree health care or other benefit obligations and did not receive a grade, Pew noted.
Only four states contributed their entire actuarially required contribution for non-pension benefits in 2008: Alaska, Arizona, Maine, and North Dakota.
Pew's report, "The Trillion Dollar Gap," indicates that momentum for state retirement benefits policy reform is building nationwide. Fifteen states passed legislation to reform their state-run retirement systems in 2009 compared to 12 in 2008 and 11 in 2007.
Pew said reforms
largely fell into five categories: keeping up with funding requirements; reducing
benefits or increasing the retirement age; sharing the risk with employees; increasing
employee contributions; and improving governance and investment oversight.
With legal restrictions in most states on reducing pensions for current employees, the majority of changes to state retirement systems in the past two years affect new employees, Pew noted. Ten states increased the contributions that current and future employees make to their own benefit systems, while ten states lowered benefits for new employees or set in place higher retirement ages or longer service requirements.
The Pew report is here.