Pension Crisis

Taxpayers On the Hook for Trillions in Unfunded State Pension Liabilities

Promises are cheap. Keeping them won't be.

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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.

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.

NEXT: Detroit Tries to Boost School Attendance

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  1. What would Poland do?

  2. This is what they make bankruptcy court for. It’s all good.

    1. This, sadly, and I say that as the son of a very recently retired schoolteacher. I’m somewhat relieved she’s getting out now, since it permits her some latitude in changing her profession (she’s not planning on staying retired).

    2. Or not. A state can’t go bankrupt, in the sense it’s normally used, because of soveriegn immunity. It just stops paying on whatever debts it doesn’t feel like paying anymore, and there’s really nothing the creditor can do.

      1. When MuniBonds take a shit after the first few do it, “bankruptcy” might not be so easy.

        1. That’s when the nationalization of greedy 401Ks and IRAs happen, and don’t get me started on that greedy 1% “railroad retirement fund”!

          1. That’s what I’m waiting for.

            I’ve things set so I can get by with 401k and IRAs.

            1. without 401k and IRAs

  3. The thing that articles like this never drive home is that even if the taxpayers ponied up the money to eliminate the shortfalls that just brings the pensions funding current to today, tomorrow it will become underfunded again and the amount by which it is underfunded will continue to grow every day thereafter.

    What you really need to do in a piece of this type is say…

    “the residents of xxx state would have to pay $yyyyy to cover the pension gap and then fork over an additional $zzzz per year in taxes to keep them fully funded going forward”

  4. Someone remind me – why do public sector unions exist? Those employees face zero forces that could cause the loss of their jobs besides their own ineptitude. Oh I forgot ERMAGERHD SERKWESTER

  5. Ban two things. Public sector unions and pensions (private and public) and the world immediately becomes a better place. Pensions will of course need a transition period of perhaps 5 years, but make it clear what you are getting paid NOW and stop the ponzi schemes.

  6. An equally interesting number would be:

    How big is the unfunded liability per state pension worker?

    For example, if 1 of 4 workers is a state employee, that would be around $52,000 unfunded per state employee.

    Eric, you got them numbers?

  7. I trust our elected officials are working on this problem meanwhile my unicorn needs to be fed.

  8. I’d say the true number is 3x that.

    Again, like Balko’s articles about militarized police, this should be posted at places like HuffPo and MotherJones etc. Most of the readers here know full well that the pension time bomb exists, and that the current federal debt is somewhere between the admitted $17 trillion and perhaps $200 trillion.

    These are literally insane numbers that no country in the history of humanity has ever racked up. And there is no way these debts will be settled in the usual way.

    Stop preaching to the converted – sell it to the hordes.

    1. No, I’ll up it to 10x the estimate to cover the class-action suits.

  9. 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.

    1. This seems like a perfectly economically viable model. It’s just because that darned capitalism doesn’t work!

  10. I’ll be the first to a) support the move to 401(k) plans (advantages of being mobile, diversified, employee controlled, etc.) and b) say that some states have been irresponsible in funding their pension plans, including using what should have been pension contributions as cash cows for annual spending.

    However, I find the assumption of 3.225% unreasonably low. To put this into context, let’s assume that 8.00% return on assets is the expected return on assets (actually it’s probably a bit higher assuming a 60% stock and 40% bond split and looking at years 1926 to 2012). Think about what the assumption would be if you assumed the best happened. Instead of subtracting 5%, add 5%. A 13% return on assets? Now, if 8.00% is an unreasonable return on assets, how unreasonable is 13%? That’s *also* how unreasonable a 3% return on assets is.

    The better approach is to use high, medium, and low estimates similar to what the social security administration does, where medium is what you expect, but high and low might also happen, depending on how the future plays out.

    Don’t get me wrong here. State pension funding is an issue which needs to be addressed with more concern, but we don’t need to be unresonable in our discussion of it.

  11. This doesn’t surprise me, nor should it surprise you.

    When they turned Social Security into the world’s largest legal Ponzi scheme, everyone should have seen it coming.

  12. Another example of total ignorance of the state apparatus regarding their fellow citizens. And its happening all around the world.

    Yeah this comes as a no surprise to me. I was completely disgusted when I read the last Royal Bank Canada’s report. So many people are not able to keep with paying their mortgages they have to retire and keep paying them. This is a modern concept of slavery for me.

  13. Every state in the union has this problem. Public sector employees abuse this in every way possible. If public sector employees are so talented, and skilled, why don’t they form their own companies and pay their employees the same bloated wages they demand from the tax payers ? Had enough of republicans and democrats yet ?

  14. Since the productive folks pay all costs for the gov workers, the $13k is really higher. Back the millions of gov workers out of the equation and re-compute.

  15. pension crisis look worse than

  16. Budget Solutions, a fiscally conservative think tank that

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