Unaccountable and Unaffordable 2016: Unfunded Public Pension Liabilities Near $5.6 Trillion

by Jonathan Williams, Ted Lafferty & Sarah Curry


State public pension plans are now underfunded by nearly $5.6 trillion – an increase of almost $900 billion from State Budget Solutions’ (SBS) last comprehensive report in 2014. When state pension funds are examined through the lens of a more realistic valuation, pension funding gaps are revealed to be much larger than reported in official state financial documents. This report totals state-administered plans’ assets and liabilities and finds nationwide total unfunded liabilities to be $5.59 trillion. The nationwide funding level is a mere 35 percent, which is one percentage point lower than two years ago. Combined across all states, the price tag for unfunded pension liabilities is now $17,427 for every man, woman and child in the United States.

The only way to solve this growing problem is for states to enact meaningful pension reform. While some might feel that America’s public pension crisis only threatens current workers and retirees, it is in fact a problem that affects everyone. Taxpayers are on the hook for the legal obligation to cover the promised benefits of traditional, defined-benefit pension plans. Additionally, every dollar that is spent filling the gap in public pensions is a dollar taken away from core government services. This forces legislators to make the difficult decision of leaving their citizens with fewer services or enacting economically damaging tax increases.

A Nationwide Pension Problem
This report considers three important metrics to gauge the severity of the pension problem across the 50 states: unfunded pension liability per capita, the funded ratio and total unfunded pension liability. Unfunded pension liability per capita reveals the personal share of liability for every resident in each state. The funded ratio represents how well a given state’s pension plans are funding their pension promises. Finally, the total unfunded pension liability reveals the fiscal strain on state budgets in raw dollar terms.

Unfunded pension liabilities per capita, which are given by state in the Appendix, are arguably the most alarming facet of pension funding. Since public pensions are the responsibility of all taxpayers, it is only fair to consider this metric when evaluating the states’ relative pension health. When unfunded pension liabilities are viewed as shared debt placed on each individual, Alaska, where each resident is on the hook for a staggering $42,950, tops the list. Ohio and Illinois follow for the highest per person unfunded pension liabilities.

Another useful gauge of financial health is the funded ratio, or the total value of a plan’s assets weighed against its accrued liabilities. This calculation is important since total unfunded liabilities alone do not tell the entire story of a state’s pension problems. California has the nation’s largest unfunded liability in absolute dollar terms, but its funded ratio of 35.6 percent is the 21st best. Connecticut has the nation’s worst funded ratio at 22.8 percent, meaning no state is failing to keep its promise to taxpayers and pensioners as badly as Connecticut. The state’s failure to address its pension liabilities is a significant contributor to Connecticut’s ongoing budget problems. While Wisconsin has the best funded ratio in the country, the state’s defined-benefit pension fund is only 63.4 percent funded when more prudent accounting assumptions are applied. Even in the best-case scenario, all states have significant funding gaps. The Appendix shows the funded ratios for every state.

While the most accurate indicators of state pension health relate to unfunded liabilities per capita and funded ratios, total unfunded pension liabilities show just how big a burden each state has accrued. The most populous states with the largest government workforces will also tend to have the largest unfunded liabilities, such as California (more than $956 billion). Smaller states, such as Vermont and North Dakota, which employ fewer workers, face smaller burdens. The Appendix shows the states with the largest and smallest total unfunded pension liabilities.

Click here to read the full report and see all the charts and maps.