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Pension Report for November
- By Ray Sanderson
- Published 10/27/2010
- Pension Watch
The Pew Center on the States (www. pewcenteronthestates.org) who identifies and advances effective solutions to critical issues facing states has published a report titled "The trillion dollar Underfunded State Retirement Systems and the Roads to Reform". According to the report a $1 trillion gap is what exists between the $3.35 trillion in pension, health care and other retirement benefits states have promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them. In fact, this figure likely underestimates the bill coming due for states' public sector retirement benefit obligations: Because most states assess their retirement plans on June 30, the calculation does not fully reflect severe investment declines in pension funds in the second half of 2008 before the modest recovery in 2009.
While recent investment losses can account for a portion of the growing funding gap, many states fell behind on their payments to cover the cost of promised benefits even before the recession. Pew's analysis found that many states shortchanged their pension plans in both good times and bad, and only a handful have set aside any meaningful funding for retiree health care and other non-pension benefits.
In the midst of a severe budget crisis- with record-setting revenue declines, high unemployment, rising health care costs and fragile housing markets-state policy makers may be tempted to ignore this challenge. But they would do so at their peril. In many states, the bill for public sector retirement benefits already threatens strained budgets. It will continue to rise significantly if states do not bring down costs or set aside enough money to pay for them.
The good news? While the economic downturn has exposed serious vulnerabilities in states' retirement systems, it also appears to be spurring policy makers across the country to consider reforms. This report illustrates that a growing number of states are taking action to change how retirement benefits are set, how they are funded and how costs are managed.
Retirement benefits are an important part of how states can attract and retain a high-caliber workforce for the twenty-first century- and the bill coming due for these promises is an increasingly crucial issue affecting states' fiscal health and economic competitiveness. Pew's analysis for The Trillion Dollar Gap is based on data from states' own Comprehensive Annual Financial Reports, pension plan system annual reports and actuarial valuations. Pew researchers analyzed the funding performance of 231 state-administered pension plans and 159 state-administered retiree health care and other non-pension benefit plans, which include some localities' and teacher plans.
Among the key findings of Pew's analysis: In fiscal year 2008, which for most states ended on June 30, 2008, states' pension plans had $2.8 trillion in long-term liabilities, with more than $2.3 trillion socked away to cover those costs.
In aggregate, states' systems were 84 percent funded-a relatively positive outcome, because most experts advise at least an 80 percent funding level. Still, the unfunded portion- almost $452 billion-is substantial, and states' overall performance was down slightly from an 85 percent combined funding level, against a $2.3 trillion total liability, in fiscal year 2006. These pension bills come due over time, with the current liability representing benefits that will be paid out to both current and future retirees. Liabilities will continue to grow and, as more workers approach retirement, the consequences of delayed funding will become more pronounced.
Some states are doing a far better job than others of managing this bill coming due. States such as Florida, Idaho, New York, North Carolina and Wisconsin all entered the current recession with fully funded pensions. In 2000, slightly more than half the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four-Florida, New York, Washington and Wisconsin-could make that claim. Many states are struggling. While only
19 states had funding levels below the 80 percent mark in fiscal year 2006, 21 states were funded below that level in 2008. In eight states more than one-third of the total liability was unfunded.
Two states had less than 60 percent of the necessary assets on hand to meet their long-term pension obligations: Illinois and Kansas. Illinois was in the worst shape of any state, with a funding level of 54 percent and an unfunded liability of more than $54 billion. While states generally are more cautious about increasing benefits than they were in the early part of this decade, many have been lax in providing the annual funding that is necessary to pay for them. During the past five years, 21 states failed to make pension contributions that average out to at least 90 percent of their actuarially required contributions-the amount of money, determined by actuaries, that a state needs to pay in a current year for benefits to be fully funded in the long term.
So, according to the report, how does Washington State fair? Washington needs to improve how it manages its long-term liabilities for both pensions and retiree health care and other benefits. The state has failed to meet its actuarially required contributions since 2001. And while the level still exceeds the 80 percent benchmark that the U.S. Government Accountability Office says is preferred by experts, the percentage of its liabilities that is funded has declined from a high of 126 percent in 2000 to 100 percent in 2008.
Washington conducts its actuarial valuations on December 31, so the state's most recent data reflect more of the pension fund investment losses of the 2008 calendar year than states with valuations on June 30. In 2006,
Washington created a pension funding stabilization account with an initial appropriation of $350 million. That same year, the state increased employer contribution rates for various retirement plans. Meanwhile, as of 2007, Washington had failed to set aside any assets to cover its $7.9 billion long-term liability for retiree health care and other benefits.
Read a one page fact sheet on Washington State
For more details, read the full report
While recent investment losses can account for a portion of the growing funding gap, many states fell behind on their payments to cover the cost of promised benefits even before the recession. Pew's analysis found that many states shortchanged their pension plans in both good times and bad, and only a handful have set aside any meaningful funding for retiree health care and other non-pension benefits.
In the midst of a severe budget crisis- with record-setting revenue declines, high unemployment, rising health care costs and fragile housing markets-state policy makers may be tempted to ignore this challenge. But they would do so at their peril. In many states, the bill for public sector retirement benefits already threatens strained budgets. It will continue to rise significantly if states do not bring down costs or set aside enough money to pay for them.
The good news? While the economic downturn has exposed serious vulnerabilities in states' retirement systems, it also appears to be spurring policy makers across the country to consider reforms. This report illustrates that a growing number of states are taking action to change how retirement benefits are set, how they are funded and how costs are managed.
Retirement benefits are an important part of how states can attract and retain a high-caliber workforce for the twenty-first century- and the bill coming due for these promises is an increasingly crucial issue affecting states' fiscal health and economic competitiveness. Pew's analysis for The Trillion Dollar Gap is based on data from states' own Comprehensive Annual Financial Reports, pension plan system annual reports and actuarial valuations. Pew researchers analyzed the funding performance of 231 state-administered pension plans and 159 state-administered retiree health care and other non-pension benefit plans, which include some localities' and teacher plans.
Among the key findings of Pew's analysis: In fiscal year 2008, which for most states ended on June 30, 2008, states' pension plans had $2.8 trillion in long-term liabilities, with more than $2.3 trillion socked away to cover those costs.
In aggregate, states' systems were 84 percent funded-a relatively positive outcome, because most experts advise at least an 80 percent funding level. Still, the unfunded portion- almost $452 billion-is substantial, and states' overall performance was down slightly from an 85 percent combined funding level, against a $2.3 trillion total liability, in fiscal year 2006. These pension bills come due over time, with the current liability representing benefits that will be paid out to both current and future retirees. Liabilities will continue to grow and, as more workers approach retirement, the consequences of delayed funding will become more pronounced.
Some states are doing a far better job than others of managing this bill coming due. States such as Florida, Idaho, New York, North Carolina and Wisconsin all entered the current recession with fully funded pensions. In 2000, slightly more than half the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four-Florida, New York, Washington and Wisconsin-could make that claim. Many states are struggling. While only
19 states had funding levels below the 80 percent mark in fiscal year 2006, 21 states were funded below that level in 2008. In eight states more than one-third of the total liability was unfunded.
Two states had less than 60 percent of the necessary assets on hand to meet their long-term pension obligations: Illinois and Kansas. Illinois was in the worst shape of any state, with a funding level of 54 percent and an unfunded liability of more than $54 billion. While states generally are more cautious about increasing benefits than they were in the early part of this decade, many have been lax in providing the annual funding that is necessary to pay for them. During the past five years, 21 states failed to make pension contributions that average out to at least 90 percent of their actuarially required contributions-the amount of money, determined by actuaries, that a state needs to pay in a current year for benefits to be fully funded in the long term.
So, according to the report, how does Washington State fair? Washington needs to improve how it manages its long-term liabilities for both pensions and retiree health care and other benefits. The state has failed to meet its actuarially required contributions since 2001. And while the level still exceeds the 80 percent benchmark that the U.S. Government Accountability Office says is preferred by experts, the percentage of its liabilities that is funded has declined from a high of 126 percent in 2000 to 100 percent in 2008.
Washington conducts its actuarial valuations on December 31, so the state's most recent data reflect more of the pension fund investment losses of the 2008 calendar year than states with valuations on June 30. In 2006,
Washington created a pension funding stabilization account with an initial appropriation of $350 million. That same year, the state increased employer contribution rates for various retirement plans. Meanwhile, as of 2007, Washington had failed to set aside any assets to cover its $7.9 billion long-term liability for retiree health care and other benefits.
Read a one page fact sheet on Washington State
For more details, read the full report
