State Budgets

Spooky, Scary Pension Fund Skeletons

From demons and hellhounds, to Jack the Ripper and Freddy – there are plenty of Halloween horrors for which to be ready. While most of these nightmares are only as real as costume and face-paint, America’s public pension liabilities are an acrid, looming reality. States now face almost $5.6 trillion in unfunded pension liabilities, according to a new report from the ALEC Center for State Fiscal Reform. Evaluating more than 280 public pension plans using state-level financial reports, the study finds that state pension funds, on average, assume an unrealistic 7.37 percent rate of return. Unfortunately, the economic reality today makes these assumptions quite scary. Assumed rates of return higher than what the market can provide are but a mask on the true size of the pension liability – and before you know it, the fund is a mere skeleton of its fully-funded self.

To determine the heinous extent of each plan’s true unfunded liabilities, the ALEC study utilized a risk-free rate of return of 2.344 percent, in conformity with the recommendations of the Society of Actuaries’ 2014 Blue Ribbon Panel. Collectively, the 50 states’ unfunded liabilities represent a burden of $17,427 for every man, woman, and child. Of course, the severity of the unfunded debt disease varies from state to state, but no state, by any measure, remains safe. Without commitment to meaningful pension reform, and soon, lawmakers are likely to face an even more apocalyptic scenario.

Total unfunded pension liabilities show just how gruesome the situation has gotten. While the most populous states with larger government workforces tend to have the largest unfunded liabilities, such as California with more than $956 billion, some smaller states struggle under high debt loads as well. Illinois, plagued by nauseatingly poor policy, is shrouded under nearly $366 billion in unfunded liabilities, and ranks second worst in the nation.

Another important vital sign for pension plans is their funded ratio, which is the total value of the plan assets weighed against accrued liabilities. As noted, the total unfunded liabilities may not show as clearly the true level of a state’s pension problems. Though California has the nation’s largest unfunded pension liability in absolute dollars, its funded ratio is 35.6, which ranks 21st. Connecticut, though, has a funded ratio of only 22.8 percent, ranking worse than every other state.

Some might feel America’s public pension crisis only threatens workers and retirees, but in reality the festering problem affects everyone. Taxpayers carry the legal obligation to cover the promised benefits of traditional, defined-benefit pension plans. Worse still, every dollar spent on filling gaps in public pensions is a dollar taken from core government functions. This forces legislators to make the difficult decision of leaving citizens with fewer services or enacting economically destructive tax increases.

Pension payments to retired state employees are guaranteed. If, at the end of the day, poor policy and inept management have turned every pension fund into a skeleton, with no lifeblood whatsoever to satisfy the debts when they come calling, taxpayers will be forced to pick up the bag. Assumed investment return rates must be realistic. If states want to keep their pension plans healthy, and avoid a virtual apocalypse of the pension undead, reform is indispensable. Pension reform is not a partisan issue: everyone’s financial security – of retirees, workers and taxpayers alike – now hangs in the balance.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

+ State Budgets In Depth