Pension Reform

Promises Made, Promises Broken 2014: Unfunded Liabilities Hit $4.7 Trillion

The Betrayal of Retirees and Taxpayers Continues as State Governments Fail to Change Their Faulty Pension Accounting

State Budget Solutions’ latest research reveals that state public pension plans are underfunded by $4.7 trillion, up from $4.1 trillion in 2013. Overall, the combined plans’ funded status has dipped three percentage points to 36%. Split among all Americans, the unfunded liability is over $15,000 per person.

This spells trouble for the millions of Baby Boomers who are quickly approaching retirement age and expect to collect the pensions promised to them by government officials. Furthermore, state taxpayers who are not government employees will also feel the pinch, which could result in reduced government services, as larger and larger portions of the states’ budgets must be allocated to cover the public pension shortfall. This report gives ample support for reform efforts that would protect pensions and vital public services.

How Bad Is It?

The overall picture for state pension unfunded liability is bleak. Many plans are still feeling the effects of the Great Recession, in terms of both lost investment returns and stagnant economic growth. As the economy struggles to get back on track, states’ fiscal health also suffers, making it more difficult for state officials to make up for the shortfalls with greater contributions.

As bond yields have suffered due to interest rates being held at historic lows, the fair market valuation of public pension liabilities also took a hit. Part of the reason for the increase in unfunded liabilities is that the comparable bond yields caused us to lower the fair market discount rate from 3.255% to 2.734%. Had we applied last year’s discount rate to this year’s numbers, it would have still resulted in an increase of nearly $110 billion in unfunded liabilities.

There are several ways to view the size of the issue at the state level. California carries the largest unfunded liability in total dollars at $754 billion, followed by Illinois at $331.6 billion and New York with $307.9 billion.

State Fair Market Valuation
Unfunded Liability
(in thousands)
 1. California  $754,049,342
 2. Illinois  $331,579,500
 3. New York  $307,932,488
 4. Texas  $296,099,832
 5. Ohio  $289,603,831
 6. New Jersey  $200,150,052
 7. Florida  $183,400,221
 8. Pennsylvania  $181,834,408
 9. Michigan  $136,352,801
10. Massachusetts  $104,045,210


This does not mean much, however, as the largest states with the largest government employee workforce will likely always lead the list, even if unfunded liabilities were not at their current crisis levels. The funded ratio, however, is a better indicator of the health of the pension plans. Illinois, with only 22% of its liabilities met, is the worst, followed by Connecticut at 23% and Kentucky at 24%.

State Funding Ratio
 1. Illinois 22%
 2. Connecticut 23%
 3. Kentucky 24%
 4. Alaska 25%
 5. Mississippi 27%
 6. Kansas 28%
 7. New Hampshire 28%
 8. Hawaii 29%
 9. Massachusetts 29%
10. North Dakota 29%


Perhaps the most jarring number comes from viewing the total liability for every resident of the state. When viewed on a per capita basis, Alaska tops the list, followed by Illinois and Ohio.

State Fair Market Valuation Unfunded Liability
Per Capita
 1. Alaska  $40,639
 2. Illinois  $25,740
 3. Ohio  $25,028
 4. Connecticut  $24,080
 5. New Jersey  $22,491
 6. New Mexico  $22,251
 7. Hawaii  $21,852
 8. Nevada  $21,472
 9. Wyoming  $19,698
10. California  $19,671


The “bright side” of the report is still rather gloomy. The most well-funded state is Wisconsin, which still only has a 67% funded ratio. (It is no coincidence that Wisconsin also has one of the lowest discount rates in the study-5.5%). In per capita terms, Tennessee citizens are in the best shape, though their liability still exceeds $6,500.

Click here or see the Appendix below for the complete figures.

2014 Promises Made, Promises Broken Report

How We Got Here

Each year, state public pension plans must disclose their funding progress, showing their assets and liabilities, and providing information as to how the plans intend to pay for the pensions of millions of government employees. One quick glance at any given plan shows that there are several problems with the current system.

First, state pension funds use a high discount rate. Discounting liabilities is a necessary part of fund management. Fund managers must assume that the current assets will be worth more in the future due to a number of factors, notably the return on investing those current assets. The problem arises because the discount rate is not based on the nature of the assets held by the pension plan, but is rather based on the assumed rate of return.

recent report from Moody’s Investor Services explains that even though the 25 largest state pension plans have been very close to meeting those lofty investment return goals in the last 10 years, their unfunded liabilities are nearly $2 trillion.

Second, state governments are often guilty of exacerbating the high discount rate problem by not making the necessary annual contributions to the pension funds. State Budget Solutions found that in recent years several states have reduced the annual required contribution to the pension funds, or just skipped the payment altogether. New Jersey is the latest state to pull off this budget gimmick, reducing this year’s payment by a whopping $2.4 billion as a way of “balancing” the state’s budget.

Though public pension plans have been vocal in their opposition to our analysis, their annual filings tell a different story. Even by the states’ own generous assumptions, the combined public pension plans stand at only 72.5% funded and just over $1 trillion in unfunded liabilities. This is short of the mythical 80% funding goal and even further back from the unstable scheme proposed by some New Jersey officials.

The State Budget Solutions Difference

State Budget Solutions uses fair market valuation to determine the unfunded liabilities of public pension plans. Outside of the small world of public pensions, there is near-universal agreement that discount rates based on the assumed rate of investment return are far too risky. The approach SBS uses is to discount liabilities based on the approximate equivalent of a 15-year U.S. Treasury bond yield. This year’s number is derived from the 2013 calendar year average of the 10 and 20 year bond yields.

Since pension payments to retired state employees are guaranteed, the discount rate should reflect that. The rate should reflect the type of liabilities, not the risk of the assets in play. This is why SBS uses fair market valuation. The most recent Moody’s report shows us that even if investment targets are met, high discount rates will cause the funds to come up short by trillions of dollars.

Using fair market valuation does not allow state officials to simply hope for the best and shortchange the pension funds. Because of the way that public pension plans currently discount liabilities, it distorts how much money is needed to fund the plans today to guarantee pension benefits in the future. Ultimately, this will result in broken promises to government employees.


This report includes data from over 250 state-level defined benefit pension plans holding nearly $2.6 trillion in assets. Figures were drawn from state Fiscal Year 2013 Comprehensive Annual Financial Reports, as well as the Comprehensive Annual Financial Reports and actuarial valuations published by individual plans. In each case, figures were from the most up-to-date valuation available at the time of research. Plans were compiled based on the United States Census Bureau’s Annual Survey of Public Pensions and state-level financial reports. Plan liabilities were discounted according to the 15-year Treasury bond yield averaged over calendar year 2013. That rate was 2.734%.

The formula for calculating the market value of a liability requires first finding the future value of the liability. That formula, in which “r” represents a plan’s assumed interest rate, is FV = AAL x (1+r)^15. The second step is to discount the future value to arrive at the present value of the market valued liability. That formula is PV = FV / (1+r)^15, in which “r” represents the risk free discount rate.

In Depth: Pension Reform

Modern, 401(k)-style plans are now commonplace in the private sector. For state workers, however, traditional pensions are still the norm. As former Utah State Senator Dan Liljenquist wrote in Keeping the Promise: State Solutions for Government Pension Reform, this is not a partisan issue, but a math problem. State Budget…

+ Pension Reform In Depth