Sound Pension Reform Helps States Keep the Promise
Recently, ALEC published Unaccountable and Unaffordable, 7th Edition, the annual report analyzing unfunded pension liabilities for every state, as part of ALEC portfolio of 50 years of Trusted Policy Solutions. This year, those unfunded liabilities total $6.96 trillion nationwide – an average of nearly $21,000 per person.
The issue of unfunded liabilities flies under the radar for most Americans. We don’t get a bill in the mail stating how much we must pay into the public pension fund. Instead, these unfunded liabilities take up large amounts of our tax dollars, crowd out funding for essential public services, and take away opportunities for future tax cuts. States break their promise to taxpayers for affordable, quality public services.
When unfunded liabilities are allowed to grow rapidly, the promise of fully funded retirement benefits to public employees is broken as well. The best way to keep the promises made to taxpayers and public employees is sound pension reform.
All 50 states have unfunded liabilities. The five states with the largest unfunded liabilities per capita are:
- 46 Connecticut $34,717.89
- 47 California $35,786.97
- 48 Hawaii $36,508.16
- 49 Illinois $36,925.66
- 50 Alaska $46,080.40
What do those costs represent to taxpayers? Take Illinois, for example. At Illinois State University, the cost for an Illinois resident to live on-campus between tuition, fees, food, and housing for the 2023-2024 academic year is just over $27,000. Add books and supplies, transportation, and personal expenses, the total price of the academic year increases to $33,767. That means an Illinois resident could have paid for a full year at Illinois State University and still have over $3,100 leftover.
Per capita amounts, however, are not the full picture. Unaccountable and Unaffordable measures the health of public pension systems using six different measurements, including liability amounts, funding ratios, contributions, and legal protections for public pensions. No matter how you slice it, states are in dire need of sound pension reform.
Pensions are a valuable, non-wage benefit that a large majority of state and local governments offer to their employees as part of their compensation package. Pensions are funded through employee contributions, investment returns, and taxpayer dollars. When employee contributions and investment returns fail to meet funding targets, taxpayer dollars must fill the gaps.
A growing threat to pension plans and taxpayers is politically motivated investment schemes. Politically motivated investment strategies have been around for decades but have recently taken on a new level of prominence in the form of environmental, social, governance (ESG) investing.
ESG, like previous iterations of politically motivated investing, has been used by some states to divest funds away from politically “unfavorable” companies and industries toward ones that are more politically “favorable.” These strategies reduce investment returns over the long term, which leads to underfunding in state pension plans across the country and taxpayers ultimately footing the bill for the shortfalls.
California, the poster child of politically motivated investing schemes, has left over $3 billion on the table in foregone investment returns thanks to various politically motivated investment fads. However, just because you don’t live in California doesn’t mean your pension fund is safe from ESG.
Proxy advisory firms, which guide institutional investors on how they should vote at corporate shareholder meetings, have been hijacked by activists to push ESG. One infamous case occurred in 2021 over a proxy fight to replace four board members of ExxonMobil with ESG activists.
Institutional Shared Services (ISS) used its position as a proxy advisory firm to the Employees’ Retirement System of Texas (ERS) and Teachers’ Retirement System of Texas (TRS) to recommend the pension systems vote in favor of replacing the board members. The ERS and TRS both followed the recommendations of ISS and three of the four board members of ExxonMobil were replaced.
To ensure promises to workers and retirees are honored and hardworking taxpayers are protected, states lawmakers should examine the new ALEC model State Government Employee Retirement Protection Act. This model strengthens fiduciary rules to keep politics out of pensions, requiring plan managers and proxy advisors to make decisions solely in the interest of retirees. Nearly a dozen states have passed legislation based on this ALEC model, protecting retirees and taxpayers.
Several states are also leading the charge on sound pension reform. This year, North Dakota closed the existing pension plan and will enroll new hires in a defined contribution pension system, starting January 1, 2025. The Peace Garden State joins Alaska, Michigan, and Oklahoma by switching to a full defined contribution public retirement system.
In 2011, a series of reforms passed by the Wisconsin Legislature, and former Governor Scott Walker helped make Wisconsin the best funded public pension system in the country. These reforms included the requirement that public employees contribute half of the annual contribution instead of a fixed percentage of payroll. In 2016 under former Governor Paul LePage, Maine pursued a series of reforms which implemented variable contribution rates, a type of risk-sharing plan, for their state pension system, greatly improving pension funding.
These states show that sound pension reform is possible! Unfunded pension liabilities are too dire to ignore. If reforms are not made now, our children and grandchildren will be paying the price.