States face serious pension woes: $1 trillion short

States' pension woes only have grown worse in the past year, a new study by the Pew Center for the States finds. This problem can't be laid at the door of the recession.

At the core of state budget problems in the US is something that goes beyond the recent recession: poorly managed pension systems for public employees.

That’s the conclusion of an in-depth analysis released Thursday by the Pew Center on the States in Washington. The unfunded liabilities exceed $1 trillion and could force difficult choices upon many states, the nonprofit research group said.

The problem is not a new one, but it has grown worse in the past year. And, on a day when President Obama called for a new commission to propose fixes to the federal budget, it’s a reminder that Congress doesn’t have a monopoly on the idea of making promises without figuring out how to pay for them.

“To a significant degree, the $1 trillion gap reflects states’ own policy choices and lack of discipline,” the Pew Center report concludes.

The problem behaviors by states include failing to make the recommended annual payments into state pension funds and expanding benefits without considering the long-term cost.

The severity of the funding gap varies widely among the states, but few are trouble-free:

• In 2000, more than half of states had fully funded pension systems. By 2008, the only four with fully funded plans were Florida, New York, Washington, and Wisconsin.

• As of 2008, there were 21 states with funding levels below 80 percent of what their actuaries recommend. The same number of states have made annual contributions that fall at least 10 percent short of what actuaries recommend.

• Almost all states are way behind in funding retiree healthcare. In all, the 50 states have set aside just $32 billion for a $587 billion liability on this front.

• Only three states – Arizona, Ohio, and Wisconsin – garnered a “solid performer” grade from the Pew Center for both their pension funds and their retiree healthcare programs.

The report comes as others also have been warning that states must improve their fiscal performance. But this is a very tough time to do it. The recession has boosted state costs for programs such as Medicaid, even as it has also caused tax revenues to plunge.

The recession also has amplified the pension gap. In fact, the Pew report notes that the current reality is probably far worse than its $1 trillion figure implies. A key reason: Its report drew on data from fiscal year 2008, which for many states ended just before a steep dive in stock prices hit their pension funds.

California has become a poster child for fiscal challenges. Its credit rating was recently downgraded. But Illinois and Kansas are among the states with the deepest pension troubles.

Still, the report ranks 16 states as solid performers on pensions, and nine as solid performers on healthcare or nonpension benefits. (The researchers examined the health of 231 pension plans and 159 other retiree benefit plans managed by the 50 states.)
What are the solutions, short of tax hikes?

Some states have already begun scaling back promises to future retirees or raising eligibility ages. Another approach is sharing the funding risk with workers, by reducing the traditional pension promise and adding a 401(k)-style account. Other states may ask workers themselves to pay more into state retirement funds.

Above all, the Pew Center report urges states to keep up with their own funding guidelines. A buoyant stock market would also help, but states would be wise not to count on double-digit investment returns.

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