States Faced Higher Than Expected Shortfall in 2008

(April 26, 2011) — Another report shows just how severely pension funds were pummeled by the recession.

According to a study released today by the Pew Center on the States, a nonprofit, public-policy think tank located in Washington, the gap between the amount states owed and the amount they set aside over the decades was actually larger than previously suspected in fiscal year 2009. Deficits grew to $1.26 trillion by the end of the 2009 budget year from $1 trillion a year earlier. The unfunded liability in state-run pension plans increased to $660 billion in 2009 from $452 billion in 2008, according to the Pew Center’s figures, which relied on the funds’ expected rates of return to calculate long-term liability.

The report — titled “The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs” — revealed that public plans collectively held $2.28 trillion in assets and $2.94 trillion in liabilities, with the median pension plan losing 19% in 2009. In total, state pension systems had 78% of funds necessary to pay for pension commitments, down from 84% in 2008.

One state that ranked high on Pew’s list of funding levels was Wisconsin. “There are several reasons why funds in the United States have such low funding levels — one reason is that a lot of funds were in trouble because they didn’t keep up with contributions, so states have promised benefits, but are not funding them,” State of Wisconsin Investment Board spokesperson Vicki Hearing told aiCIO. “The Wisconsin Retirement System funding level is strong and historically has been strong. We’ve met 100% of our contributions because it’s mandatory in the state. There’s never been a holiday here, while other states have had holidays for contributions,” she said, noting that the lack of mandatory contributions among pensions has created major attention in recent years.

Another factor that has driven Wisconsin’s superior funding level, Hearing noted, is the fact that the state’s contribution rate and the amount paid to participants are based on the fund’s investment returns. “Our participants sharing in investment performance is a unique part of our retirement system,” Hearing said. “We had a really difficult year in 2008, with low investment returns, so the amount paid out to retirees decreased over a five-year period,” she noted, adding that this year, retirees have a decrease of 1.2% in payments. “Systems are looking to address this issue and public pensions are making changes — that’s at the top of their radar.”

“The states dug themselves a big hole before the recession ever hit,” Susan Urahn, the managing director of the Pew Center in Washington, told Bloomberg. “We can see how the Great Recession and states’ severe budget problems made a serious problem even worse.”

Urahn stated in the report: “In many states, the bill for public sector retirement benefits already threatens strained budgets, and is competing for resources with other critical needs, including education, infrastructure and health care. The $1.26 trillion shortfall for pensions and retiree health care will drive up annual costs and make already tough budget decisions even tougher.”

While New York and Wisconsin achieved the best funding ratios of all 50 states in 2009, according to Pew, Illinois’ pension plans were at the bottom of the barrel at 51%. West Virginia held just 56% of what it needed to pay for promised benefits, according to the report. New Hampshire was 58% funded, while New Jersey and Ohio both had just two-thirds of what they needed.

A total of 31 states were less than 80% funded.

“Overall, these results suggest that while states benefited from better returns in fiscal year 2010, the legacy of the financial crisis—and the steady deterioration in the health of many public sector retirement benefit systems throughout much of the last decade—will remain an issue for years to come,” Pew’s latest report concluded.

The study follows a report the Center released last year entitled, “The Trillion Dollar Gap,” which revealed the shortfall reflects states’ policy choices and lack of discipline for:

• failing to make annual payments for pension systems at the levels recommended by their own actuaries
• expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
• providing retiree health care without adequately funding it.