Press release:
Pew Study Finds States Face $1 Trillion Shortfall in Retiree
Benefits
Issued by: Pew Charitable Trusts
Date: Thursday, February 18, 2010
Washington, D.C. - 02/18/2010 - There was a $1 trillion gap at
the end of fiscal year 2008 between the $2.35 trillion states had
set aside to pay for employees' retirement benefits and the $3.35
trillion price tag of those promises, according to a new report
released by the Pew Center on the States. The shortfall,
which will have to be paid over the next 30 years by state and local
governments, amounts to more than $8,800 for every household in the
United States.
The figures detailed in Pew's report, gThe
Trillion Dollar Gap,h include pension, health care and other
non-pension benefits promised to both current and future retirees in
statesf and participating localitiesf public sector retirement
systems.
Pewfs numbers likely underestimate the bill coming due because
the most recent available data do not account for the second half of
2008, when statesf pension fund investments were particularly
affected by the financial crisis. Additionally, most
statesf accounting methods spread the investment declines over a
period of time–meaning states will be dealing with their losses for
several years.
gWhile the economic crisis and drop in investments helped create
it, the trillion dollar gap is primarily the result of statesf
inability to save for the future and manage the costs of their
public sector retirement benefits,h said Susan Urahn, managing
director, Pew Center on the States. gThe growing bill
coming due to states could have significant consequences for
taxpayers—higher taxes, less money for public services and lower
state bond ratings. States need to start exploring
reforms.h
To help policy makers and the public understand these challenges,
Pew assessed all 50 states on how well they are managing their
public sector retirement benefit obligations.
In fiscal year 2008, statesf pension plans had $2.8 trillion in
long-term liabilities, with more than $2.3 trillion reserved to
cover those costs. Overall, statesf pension systems were
84 percent funded—above the 80 percent funding level recommended by
experts. Still, the unfunded portion–$452 billion–is
substantial, and statesf performance is down slightly from an 85
percent combined funding level in fiscal year
2006. Pension liabilities have grown by $323 billion
since 2006, outpacing asset growth by almost $87 billion.
Retiree health care and other non-pension benefits, such as life
insurance, create another huge bill coming due: a $587 billion total
liability to pay for current and future benefits, with only $32
billion–or just over 5 percent of the cost–funded as of fiscal year
2008. Half of the states account for 95 percent of the
liability. Because of a 2004 Governmental Accounting
Standards Board rule, the full range of non-pension liabilities was
officially reported in fiscal year 2008 for the first time across
all 50 states.
In spite of the large and growing shortfall and the variation
among states, momentum for 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. 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.
With legal restrictions in most states on reducing pensions for
current employees, the majority of changes in the past two years
affect new employees. 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.
gA growing number of policy makers recognize that their statesf
fiscal health depends on how well they manage the bill coming due
for public sector retirement benefits,h said Urahn. gWe
are seeing more and more states explore policy reforms aimed at
putting their systems on stronger fiscal footing.h
gThe
Trillion Dollar Gaph identified significant variations in how
states are managing their employee retiree benefits:
Pension benefits
- Sixteen states 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 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
Pewfs analysis is based on data from statesf 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 localitiesf 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.