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State pension liabilities top $4 trillion

By   /   September 5, 2013  /   News  /   12 Comments

By Eric Boehm | Watchdog.org

A new assessment of state pension obligations suggests the problem is even worse than it already appears.

How much worse?

EMPTY COOKIE JAR: Pension liabilities are worse than many states' official figures indicate.

EMPTY COOKIE JAR: Pension liabilities are worse than many states’ official figures indicate.

Using a more conservative method of accounting for financial gains in the marketplace, there is a $4.1 trillion gap between assets and liabilities — known as the “unfunded liability” — of all state-level pension systems in the United States, according to State Budget Solutions, a fiscally conservative think tank that deals with tax and spending issues at the state level.

On a per-capita basis, each American would have to fork over about $13,100 to fill that gap and fulfill the promises made to current and retired state workers.

The new survey makes the pension crisis look worse than in other reports because of the way State Budget Solutions calculates the plans’ unfunded liabilities.

The group uses a measure called “market value liability,” which assumes that pension funds will earn about 3.22 percent annually — in line with what long-term U.S. treasury bonds pay.  That measure is more accurate than often bloated assumptions that underpin most state pension plans, Eucalitto said.

“They are able to make the unfunded liability seem lower and that means they have to put less money into the pension systems each year,” said Cory Eucalitto, who authored the State Budget Solutions report.

Many states use an assumed return of 7 percent or 8 percent, though some are beginning to adjust those expectations downward.  But every time the investments miss that mark, it widens the gap between the pension fund’s assets and liabilities.

PAT QUINN: The governor of Illinois tried to get pension reform passed this year, but lawmakers failed to act.

PAT QUINN: The governor of Illinois tried to get pension reform passed this year, but lawmakers failed to act.

For example, in Pennsylvania the official unfunded liability reported by the state’s two major pension systems is a combined $49 billion. That assumes pension funds will grow at a rate of 7.5 percent every year in perpetuity.

Using the lower, safer growth rate of 3.22 percent, the unfunded liability in Pennsylvania’s two pension plans grows to a combined $156 billion.

This different form of measuring liabilities produces some truly scary results. In five states, State Budget Solutions calculates pension liabilities represent more than 40 percent of the entire state economy. In two states — Ohio and Mississippi — the pension costs are equal to more than half the state’s gross production.

On a per-capita basis, it’s equally worrisome. There are five states where the unfunded pension liability would represent a per-capita cost of more than $20,000, with Alaska leading the way at more than $32,000 per person.

Even Tennessee, on the low end of spectrum, would have to ask each and every resident to pay $5,676 to cover the full cost of its state pension liabilities.

Many states are struggling to find the political will to deal with the tsunami of pension costs poised to wreck budgets for decades to come.

In Illinois, where the state is dealing with the nation’s highest official unfunded liability of $100 billion – State Budget Solutions says it’s really more like $287 billionGov. Pat Quinn made an effort at reform this year.

The plan landed with a thud in the state legislature.

A similar effort by Pennsylvania Gov. Tom Corbett went nowhere during the spring session. He wanted to move all new state workers into a 401(k)-style pension system, but lawmakers expressed little interest in the face of sure-fire union opposition.

Conservative groups and state finance experts point to Wisconsin as an example of where pension reform is paying dividends.  Changes to public employee benefits that were pushed by Gov. Scott Walker — resulting in massive union-led protests and an unsuccessful recall effort — have saved the state $110 million this year, according to one measure.

Kansas and Alaska have recently reformed their pension systems to include a 401(k)-style plan for new hires, helping to ease the burden of long-term pension costs.

Eucalitto said that should be the end goal, because it saves taxpayers’ money and makes the system more easy for states to manage without the risk of underfunding plans.

It’s also better for employees, he said, because they have individual accounts and if they are getting short-changed by the state it will be readily apparent to them.

“For public employees, they are given greater control over their own retirement and it makes it harder for states to break their promises to their retirees,” Eucalitto said.

Using a different method of accounting for unfunded state pension liabilities, a recent report from Pew Charitable Trusts estimated the gap between states’ assets and obligations at around $750 billion.

Add to that an additional $620 billion in unfunded liabilities for retiree health care coverage, which many states promise to provide to their retired workers in a separate system from traditional pensions.

“Though states have enough cash to cover retiree benefits in the short term, many of them — even with strong market returns — will not be able to keep up in the long term without some combination of higher contributions from taxpayers and employees, deep benefit cuts, and, in some cases, changes in how retirement plans are structured and benefits are distributed,” concluded researchers at Pew.

While both Pew and State Budget Solutions express concerns over higher taxes and cuts to workers’ benefits, states could have other unseen consequences from running up high levels of pension debt.

Earlier this year, Moody’s Investors Service, a bond rating agency, warned that high levels of pension debt could hurt states’ credit ratings and make it more expensive to borrow money via the bond market.

“Pension underfunding has been driven by weaker-than-expected investment results, previous benefit enhancements, and, in some states, failure to pay the annual required contribution to the pension fund,” said Moody’s analyst Ted Hampton.

Moody’s is now assessing states’ pension liabilities and their overall debt levels, he said.

Of the 50 states, those with the highest debt and pension funding needs include Connecticut, Hawaii, Massachusetts and Illinois.

Boehm can be reached at [email protected] and follow him at @EricBoehm87 on Twitter.


  • votingmatters

    State level liabilities don’t begin to address corresponding liabilities at the city, county and school district level. Those interested may wish to visit http://www.infornedmajority.com

  • oldpro

    “It’s also better for employees, he said, because they have individual accounts and if they are getting short-changed by the state it will be readily apparent to them.” What could be better for the employees than having the taxpayers paying 5 bucks to every one they put in..why would they want it to change. Are your serious? Why do you think the public unions fight it

  • Fred Chittenden

    The solution to this is simple, though not painless. Give the pensioners their pensions, after taxing 100% the unfunded portion of that pension. If the Union’s didn’t and Gubermint didn’t properly track and fund these pensions, plus if the high tax and regulations policies they tend to promote cut prosperity necessary to fully fund those pensions, they (the public pensioners), not hard working private sector taxpayers, ought to pay for their own short sighted incompetence.

  • Sagebrush6

    “On a per-capita basis, each American would have to fork over about $13,100 to fill that gap and fulfill the promises made to current and retired state workers.”
    Well, you can thnk the state UNIONS for this major problem. And the democrats would have to shell out their fair share and we all know it’s would be a cold day in hell before that happened.

  • jacklohman

    Incorrect website address … but YES. We need oversight by a trusted group, preferably a private non-profit. Government pensions should not exceed private pensions.

  • Duke

    Here in WI we are (so far) sitting on a pretty good pile of money. Our state pension plan is over 95% funded. The reason for this is twofold: 1. Our Supreme Court Justices are in the plan and, 2. We don’t allow ANY politician, Republican or Dimocrat, to put their sticky fingers on our pensions. By comparison I would point to the head-in-the-sand programs like Social Insecurity and the IL state pension plan – all raped by Dimocrat Chicago Thugs.

  • Duke

    Jack – as usual you’re full of crap.

  • jacklohman

    Yea, I know, Mr. Anonymous. What I suggested requires honesty.

  • Dave

    Pensions and other benefits have been considered bonds between employers and employees; a measure of mutual loyalty and good faith. Now many people seem all too eager to dissolve that bond and cut millions loose from health care and retirement security without considering the consequences. Do they cling to the ideal of a society where 3 generations live in the same household taking care of one another and the doctor makes house calls. It is an antiquated vision in a society that also encourages individuals to pull up roots and move wherever there is opportunity. America was built by people willing to do that. These are two of the great tensions in our history.

    Legislators in every state have dipped into state pension funds to give tax payers the illusion budgetary restraint. Few legislators have resisted tapping into the millions of dollars just “sitting” in these funds, especially when tax payers reward them with reelection fiscal conservatives. Unions did not push legislatures to make those decisions. In fact, they fought them, knowing full well what these short sighted raids on pension funds would lead to.

    How many individuals are going to be able to save and invest enough for their own retirement if the expectation is that retirement funds will only grow by 3.2% per year, what this fiscally conservative think tank believes is the standard that ought to be applied to public pensions.

  • Pete Collins

    Not true DUKE, the TRS pension fund has had all contributions and returns managed by the public unions.
    Us Illinois taxpayers have not skipped payments as Public Unions want us to believe. In fact, us taxpayers have paid 1.7 times more toward saving for pensions in TRS pension fund then teachers themselves.
    In 2012 teachers contributed $0.9 billion towards their pension and IL taxpayers contributed $2.5 billion.
    In 2011 teachers $0.9 billion taxpayers contributed $2.3 billion.
    In 2010 teachers $0.89 billion taxpayers contributed $2.2 billion.
    in 2009 teachers $0.87 billion taxpayers contributed $1.6 billion.
    in 2008 teachers $0.86 billion taxpayers contributed $1.17 billion.
    in 2007 teachers $0.82 billion taxpayers contributed $0.85 billion.
    In 2006 teachers $0.79 billion taxpayers contributed $0.65 billion.
    In 2005 teachers $0.76 billion taxpayers contributed $1.0 billion.
    In 2004 teachers $0.76 billion taxpayers contributed $5.4 billion..

    Remeber that in 2009 the TRS pension fund LOST $8.6 billion in their investments, and in 2012 the pension fund only made $0.2 billion. In 2012, benefits paid to retirees was $4.5 billion and that number will be growing as babyboomers with spiked pensions are retiring.

    Us ILLINOIS TAXPAYERSS are not to blame. Below is link to spreadsheet showing every year Illinois govenment (us taxpayers) have paid more money into teachers pension fund then the teachers and the school districts.

  • Pete Collins

    Could the public union negotiators, and spiked pension be responsibe for this pension crisis??

    The teachers are good. The taxpayer matched the teachers contributions, AND 1.7 time more.
    To illustrate the SPIKING practice I will provide the following examples from my (Mark Evenson) local school district, CCSD15. In 2004 82 educators retired with an average ending salary of $123,364, a 66% increase from their $74,116 average three years prior. In 2006, the last year before the cap took affect, 26 educators retired at an average of $130,753, a 71% increase from their $76,317 average four years prior. By 2010, with the caps in full effect, 41 retirees had an average ending salary of $104,276, only a 26% increase over their average of $83,055 four years prior

    The public union contract negotiators forced deals upon local school boards that us taxpayers could not afford. If the school did not agree, the union negotiators forced the good teachers to strike against the schools, holding our kids hostage.
    For example, earlier this year, the Dixon IL school board wanted to reduce the last 4 years of automatic, extra 6 percent raisies before a teacher retires. ( in addition to normal annual raises). But obvioulsy the teacher union negotiators said NO, and then the Dixon public teachers union went on strike ,

    How do we hold the public unions and thier negotiators responsible??? The teachers are not resposible and the taxpayers are not responsible.


  • Wendy Smith

    I agree wholeheartedly with the plan nstituting a 401(k)-style plan for pension plans. Can the current pension plans be back-planned (so to speak) as if there were a 401(k)-style plan from the time they were hired? That would be fair, equitable and more manageable.