By PATRICK B. MCGUIGAN — In a new analysis from Professor Joshua Rauh of Northwestern University, Oklahoma and Louisiana are the first of 10 states that will run out of money to pay pensions beginning in five years. Rauh’s analysis was updated this week on the website of the Kellogg School of Management. In the study, including a model developed with Robert Novy-Marx, Rauh writes: “The pension plans sponsored by states and municipalities will place a substantial burden on state and local public finances in the near future.”
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He said they will have to pay billions of dollars in pension benefits from taxes instead of from investment trust funds beginning in 2017.
The other states are: Connecticut, Illinois and New Jersey, 2018; Arkansas and West Virginia, 2019, and Hawaii, Indiana and Kentucky in 2020.
Rauh wrote, “[T]he present value of already-promised state pension benefits is over $5 trillion when the benefit payments are discounted using Treasury yields, compared to a little over $2 trillion in pension fund assets. Most state constitutions offer special protections to pension benefits that state workers have already earned.
“This analysis raises the question of how soon such a situation might lead to an all-out state and municipal fiscal crisis. One important day of reckoning is the day that the state pension funds run out of money. At that point, pension payments to retirees will have to come out of general revenues. This day of reckoning is in fact not as far away as some might imagine.”
The Kellogg School of Management is part of Northwestern University, a highly respected institution based in Chicago, Ill. Rauh’s story is entitled, “The Day of Reckoning for State Pension Plans.”
In the chart (titled “When Might State Pension Plans Run Dry?”) included in his analysis, Rauh has “calculated the year at which each state will run out of pension fund money, under a number of stylized assumptions. I assumed, somewhat generously, that going forward states [would] contribute to their pension funds the present value of any newly accrued benefits. From the model of state pension fund payments …, I extracted our estimates of benefit payments that have already been promised to workers as of today.
“For simplicity, I pooled all the pension funds within each state. Finally, I conducted the analysis under a baseline assumption that states actually will earn 8% on their investments, as well as under alternative scenarios. … Under my projections, seven states run out of money before 2020. …”
