A new assessment of state pension obligations suggests the problem is even worse than it already appears.
How much worse?
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.
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 billion – Gov. Pat Quinn made an effort at reform this year.