Price tag for state retiree benefits: $2.73 trillion

States have set aside about $2 trillion to cover the cost of pensions and health insurance promised teachers, police officers and other public-sector workers, but retiree benefits are still underfunded by about $731 billion, a new study released Tuesday (Dec. 18) shows.

Of that shortfall, nearly half ( billion) is needed for future retirees’ health care and other non-pension benefits, such as dental and life insurance, the Pew Center on the States said in “Promises with a Price,” a 50-state analysis of state retiree benefits.

Pew Center on the States is funded by The Pew Charitable Trusts, the same organization that funds Stateline.org. The full report and fact sheets for each state are available at www.pewtrusts.org.

States have always been required to publicly report their long-term pension liabilities, but starting in 2008, states also have to estimate the price tag of health care and other non-pension benefits. States will have to identify these costs in their fiscal 2008 financial reports under a new rule from the Governmental Accounting Standards Board.

Pew describes its report as “a first of its kind preview of these numbers.”

Only Arizona, North Dakota, Ohio, Oregon, Utah and Wisconsin were on track at the end of 2006 to fully fund retiree benefits other than pensions for the next 30 years, Pew said.

None of the big states – California, Texas, New York, Florida and Illinois – had put aside enough money for retiree health care and other non-pension benefits as of 2006. New York faces long-term liabilities of $50 billion, followed by California ( billion) and Connecticut and New Jersey ( billion each), according to the Pew study.

States that don’t sock away enough money risk getting a lower credit rating from Wall Street, making it much more expensive to borrow money.

On the pension front, Colorado, Illinois, Kansas, Michigan, New Jersey, Oklahoma and Washington have consistently fallen short in recent years of meeting their future pension obligations, Pew said.

Some states got themselves in a bind when they increased their benefits during the boom times of the 1990s but then couldn’t afford to continue paying for them when the national recession hit in 2001 and their finances went into a tailspin. “While funding levels may rise and fall with the economy, once given, a defined benefit is very difficult to take away,” the Pew report said.

The report describes the “pension envy” some workers in the private sector feel for their counterparts in state government. More and more workers in the private sector have to help pay for their own health care and retirement plans, and at the same time have to foot the bill for these same benefits for state workers. “The gap between public and private-sector benefits fuels the political debate, as taxpayers notice that they are contributing to government employee retirement benefits that are increasingly unavailable in the private sector,” the Pew report said.

The report comes at a time when states face rising health-care costs and more state employees are hitting retirement age.

To cut costs, an increasing number of states are setting aside money and restructuring benefits, Pew said. Michigan and Alaska, for example, have moved state employees from traditional pension programs – with guaranteed payouts – to 401(k)-style programs, where the state contributes a set amount each month to an employee’s investment fund.

Among other “promising approaches” the Pew report highlights:

• Adopting hybrid pension plans: Ohio, Washington and Oregon adopted plans that combine elements of traditional and 401(k) pension plans .

• Closing loopholes in pension systems: New Jersey no longer gives pension credit to elected and appointed officials who work part-time (earning $1,500 or less). Crediting part-time work had inflated the amount state employees could collect after retirement.

• Increasing medical premiums and requiring co-payments: Pennsylvania in 2005 started requiring new retirees to pay 1 percent of their annual base salary at the time of retirement for health-care costs. West Virginia now requires retirees to pay $10 co-pays for primary care, $20 for specialists and $50 for emergency room visits.

• Raising the number of years of employment needed to qualify for benefits: North Carolina in 2006 increased to 20 years, from five, the time that new employees need to work to qualify for full benefits.

• Setting up “irrevocable” trusts: At least 13 states have set up trusts to pay for future retirement benefits, ensuring that none of the funds can be diverted to other purposes.