02/17/2010 - State’s handling of pension liability is best in the country, but health care obligations are unfunded
New York is a national leader in saving to cover the costs of its long-term pension liability for public sector workers, but has yet to put aside any funds to pay the bill coming due for retiree health care and other benefits, according to a new report released today by the Pew Center on the States. Pew’s analysis in “The Trillion Dollar Gap” rates New York a “solid performer” for its management of pension costs, but finds that its handling of retiree health care and other benefit liabilities “needs improvement.”
The state has successfully met its actuarially required pension contribution level at least as far back as 1997. As a result, New York had the best-funded pension system in the country at the end of fiscal year 2008, at 107 percent. The state had failed, however, to set aside any funds to cover its $56.3 billion bill for retiree health care and other non-pension benefits.
“New York should be applauded for its efforts to fund the long-term cost of pensions for public sector employees, but the state is coming up short in saving for retiree health care,” said Susan Urahn, managing director, Pew Center on the States. “With uncertain stock market performance and swelling numbers of ‘baby boomer’ retirees on the horizon, policy makers must consider whether their pay-as-you-go approach to this health care bill is sustainable.”
Pew assessed all 50 states on how well they are managing their public sector retirement benefit obligations. Nationally, there was a $1 trillion gap at the end of fiscal year 2008 between states’ assets on hand and the cost of their obligations to current and future retirees. This figure likely is conservative because the most recent available data do not fully account for the second half of 2008, when states’ pension fund investments were particularly affected by the financial crisis. State and local governments will have to make up these shortfalls over the next 30 years.
The annual bill for retirement benefits will increase unless states make their required annual payments consistently or contain the size of their liabilities. If the bill is ignored year after year, more taxpayer dollars will be consumed by these obligations at the price of either higher taxes or cuts in other critical services.
The figures detailed in Pew’s report 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 full report and fact sheets with in-depth data for each state, including New York, are available at: www.pewcenteronthestates.org/trilliondollargap.
Momentum for policy reform is building nationwide. In 2009, New York enacted policy reforms, raising the retirement age of many new government workers to 62 from 55 and increasing employee contribution levels. Across the country, 15 states passed legislation to reform their state-run retirement systems in 2009 compared to 12 in 2008 and 11 in 2007. Reforms largely fell into five categories: (1) keeping up with funding requirements; (2) reducing benefits or increasing the retirement age; (3) sharing the risk with employees; (4) increasing employee contributions; and (5) improving governance and investment oversight.
“A growing number of policy makers recognize that their states’ fiscal health depends on how well they manage the bill coming due for public sector retirement benefits,” said Urahn. “We are seeing more and more states explore policy reforms aimed at putting their systems on stronger fiscal footing.”
“The Trillion Dollar Gap” identified significant variations in how states are managing their employee retiree benefits:
• Sixteen states—including New York—were deemed 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 states. By 2008, only four–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 percent of the necessary assets on hand.
Health care and other non-pension benefits
• Nine states were deemed solid performers, having enough assets to cover at least 7.1 percent–the 50-state average–of their non-pension liabilities. Only two states–Alaska and Arizona– had 50 percent or more of the assets needed.
• Forty states—including New York—were classified as needing improvement, having set aside less than 7.1 percent of the funds required. 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.)
• Only four states contributed their entire actuarially required contribution for non-pension benefits in 2008: Alaska, Arizona, Maine and North Dakota.
About the Methodology
Pew’s analysis is based on data from states’ own Comprehensive Annual Financial Reports, pension plan system annual reports and actuarial valuations. Pew researchers analyzed the funding performance of 231 state-administered pension plans and 159 state-administered retiree health care and other non-pension benefit plans, which include some localities’ and teacher plans. States have flexibility in how they compute their obligations and present their data, so three main challenges arise in comparing their numbers: whether and how they smooth investment gains or losses; when they conduct actuarial valuations; and what assumptions they use for investment returns, retirement ages and other factors.
The Pew Center on the States is a division of The Pew Charitable Trusts that identifies and advances effective solutions to critical issues facing states. Pew is a nonprofit organization that applies a rigorous, analytical approach to improve public policy, inform the public and stimulate civic life.