State Pension Unfunded Liabilities Nearly $6 Trillion

Average funded ratio a paltry 35% based on ‘realistic’ return assumptions.

The average US state pension plan is funded at a paltry 35%, as unfunded liabilities of state-administered pension plans total nearly $6 trillion—equal to $18,300 of unfunded pension liabilities for every US resident—according to a report from the American Legislative Exchange Council (ALEC).

The report surveyed more than 290 state-administered public pension plans, detailing assets and liabilities over a five-year period. Based on ALEC’s calculations, all but two state’s pension funds—Wisconsin and South Dakota—have a funded ratio below 50%, which it said is “especially troubling” because plans below an 80% funding ratio threshold are considered “at risk.”

In its calculations, ALEC used what it deems “a proper, risk-free discount rate,” and found that unfunded liabilities of state-administered pension plans now total over $5.96 trillion. It attributed much of the problem to state governments failing to make their annually required contributions (ARCs), which represent the appropriation needed to cover the cost of future pension obligations accrued in the present, along with amortization of prior unfunded liabilities.

“Unfunded liabilities in public pension plans continue to loom over state governments nationwide,” said the report. “If net pension assets are determined using more realistic investment return assumptions, pension funding gaps are significantly wider than even the large sums reported in state financial documents.”

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ALEC said its figures differ from the states’ numbers because its calculations use a risk-free rate to reflect the constitutional and legal protections extended to state employee retirement benefits.

“The accumulation of unfunded pension liabilities per capita is the most alarming facet of the pension crisis,” said the report. “This metric reveals the personal share of liability for every resident in each state, an indicator of potential future tax burdens to be borne by residents for pension promises made but not funded.”

Alaska had the highest pension liabilities per capita by far at $46,774, followed by Connecticut and California, with $32,805 and $29,137 respectively, based on ALEC’s calculations. Meanwhile Connecticut, had the lowest funded ratio among all 50 states at 20.28%, followed by Kentucky and Illinois, which had funded ratios of 24.81% and 25.19%, respectively.

Tennessee had the lowest unfunded liabilities per capita at $8,466, followed by Indiana and Nebraska, with $8,690 and $9,043, respectively. And Wisconsin had the highest funding ratio at 60.54%, followed by South Dakota and Idaho with 50.73% and 47.20%, respectively.

ALEC suggested that one reform most pension plans could immediately adopt to improve their standing is to lower their discount rate to the private sector average, or to a risk-free rate. It said this would shift the estimated liability from the average amount states would be liable for in the future, to an estimate which covers all potential futures.

“This change would ensure the constitutional and legal protections afforded to state pension benefits are being met,” said the report. “This will increase the ARCs, as the target asset will increase to match the risk-free liability.

The report said that if contributions are made in accordance to the ARC, the health of the funds would rapidly improve.

“Even a global financial crisis would not threaten the fund’s solvency,” said the report. “It would truly be a guaranteed, ‘defined benefit.’”

A second reform ALEC suggested is variable benefit or contribution rates based on the funding on the plan. For example, it said Wisconsin was the best-funded pension system because it has a variable benefit rate, which means the disbursement varies over time. It said that lowering the payments from the fund during economic shocks allows Wisconsin’s pension fund to recover, which has let it provide retirement security with few significant changes to the plan since 1975.

“Current state workers and retirees are not the only people affected by the pension liability crisis,” said the report. “Taxpayers ultimately provide the wages for public sector employees and the financial resources to cover promised benefits of traditional, defined-benefit pension plans.”

Related Stories:

Report: Only One US State Pension has Funded Level Above 50%

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Warren Buffett: Wrong-Headed Hypocrite on Foreign Stocks?

The investing legend has long advocated domestic shares. But are they always the best bet? And why did he buy Israel’s Teva, anyway?

You can credit Warren Buffett for a lot of things, and consistency is one of them. Through the years, he has almost unwaveringly stuck to his investing precepts, and he’s the third-richest person in the world.

Sure enough, on Thursday, he reiterated one of his tenets: Stay with US stocks, and by implication, don’t bother with international names. “You really want to bet on America,” Buffett said in a CNBC appearance, where he also noted that the US economy has slowed. “God has blessed America.”

While saying so may be heresy, perhaps the iconic Buffett is wrong about this. And maybe deep down he knows it, having made a hefty purchase of a foreign stock in 2018.

The stellar market record of his company, Berkshire Hathaway, would seem to support the wisdom of his US-only advice. Over the past 10 years, the S&P 500 (composed of only American stocks) has advanced 15.4% annually, versus the MSCI index covering all non-US stocks, 8.3%.

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But with half of the world’s stock valuation outside the US, does his prohibition on overseas equities make sense? Especially since emerging market countries, or at least some of them, have a lot more room to grow than does a developed nation like the US.

Domestic stocks trailed both Europe and Japan’s equities in the 1970s and 1980s, and from 2001 through early 2008, according to MSCI. True, during those times, the US economy mostly enjoyed healthy growth. An investor who shunned the rest of the world, though, lost out on an opportunity.

Still, Buffett has shown that he can change his mind. Once, he abhorred airlines, which he called a “death trap” for investors. The same was true for tech firms—he said he didn’t understand them. Well, as of  Berkshire’s most recent filing, it holds American and Delta, as well as Apple and Red Hat.

And last year, Berkshire bought a $60 million stake in Teva Pharmaceutical, which is an Israeli outfit. This is a real value play because the drug firm is stumbling under its large debt load. Berkshire did not return a request for comment. 

Who knows, despite his continued US-centric rhetoric, maybe Buffett will buy more overseas stocks. He always has counseled to invest against the grain—and that may include his own advice.

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