The gap between the promises states have made for public employees' retirement benefits and the money they have set aside grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26 percent increase in one year, according to a report released today by the Pew Center on the States. The report's figures are likely conservative estimates because they reflect the states' own assumptions about the average investment returns they will achieve.
The most comprehensive analysis to date, The Widening Gap: The Great Recession's Impact on State Pension and Retiree Health Care Costs finds 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. Retiree health care and other non-pension benefits accounted for the remaining $607 billion. States have amassed $638 billion in non-pension liabilities but saved just $31 billion to pay for them—slightly less than 5 percent of the total cost.
Pension funding shortfalls surpassed funding gaps for retiree health care and other benefits for the first time since states began reporting these liabilities in fiscal year 2006. In all, state pension systems were just under 78 percent funded—declining 6 percentage points from the fiscal year 2008 level of 84 percent. New York had the highest funding level at 101 percent—the only state with a surplus—while Illinois and West Virginia trailed all states with slightly more than half of their liabilities accounted for. Experts such as those with the Government Accountability Office advise states to have at least an 80 percent funding level. Thirty-one states were below this threshold in fiscal year 2009, a dramatic one-year increase from fiscal year 2008, when 22 states were less than 80 percent funded.
“In many states, the bill for public sector retirement benefits already threatens strained budgets, and is competing for resources with other critical needs, including education, infrastructure and health care,” said Susan Urahn, managing director, Pew Center on the States. “The $1.26 trillion shortfall for pensions and retiree health care will drive up annual costs and make already tough budget decisions even tougher.”
The situation in retiree health care and other non-pension benefits has worsened since fiscal year 2008, when states had $587 billion in liabilities and $32 billion in assets. In fiscal year 2009, states made only 34 percent of the $49 billion in contributions required by their own actuaries for this long-term bill. Alaska, Arizona and North Dakota made full contributions.
The new study, which follows Pew's February 2010 report, The Trillion Dollar Gap, covers pension, health care and other benefits promised to both current and future retirees. Researchers examined the funding performance of 231 pension plans and 162 other post-employment benefit plans. The 2009 numbers for each state are available at: www.pewcenteronthestates.org/pension-report-update. Fiscal year 2009 data is the latest available information for all states; the report also includes fiscal year 2010 data for 16 states.
Pew's study applies the states' own actuarial assumptions. Most states use an 8 percent discount rate, which is the investment target that they expect to earn on average in future years. But there is significant debate among policy makers and experts about what rate is most appropriate to use when valuing pension liabilities. The stakes of this debate are high because when a state lowers its investment return assumptions, the projected value of its liabilities and the annual contributions required to meet them increase dramatically.
A November 2010 Pew report, Roads to Reform, found that many states took steps to address the rising cost of public sector retirement benefits between 2001 and 2010. At least 19 took action to manage their pension liabilities, either reducing benefits or increasing employee contributions in 2010.
“A significant number of states are trying to deal with the bill coming due for their employees' retirement benefits head on,” said Urahn. “Given the size of the problem and the challenges of reform, there are no quick fixes. But there is considerable momentum for change.”
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. For more information, please see page 9 of The Widening Gap and page 52 of Pew's February 2010 report, The Trillion Dollar Gap.