Pension Crisis at the U.S. State Level May be Worse than Retirees Think

California, Illinois, New York, Texas, Ohio and New Jersey Top the List for Highest Unfunded Liabilities 

More state leaders are devising methods to fund state and municipal-administered pension funds after Congress' $1.1 trillion spending bill allowed distressed multiemployer plans to cut benefits that the Pension Benefits Guaranty Corporation (PBCG) projected to become insolvent by 2020.

The PBCG’s prognosis left retirees across the nation wondering: if the federal program that backstops these plans is edging towards insolvency, how do state and municipal pension plans compare?

It depends on who you ask.

Across the nation state pension systems are reporting just over $1 trillion in combined unfunded liabilities.

However third-party accounting reveals that state pension plans are more likely underfunded by $4.7 trillion, up from $4.1 trillion in 2013, according to the 2014 Underfunded Pension Liabilities Report issued by State Budget Solutions (SBS), a non-profit, national public policy organization advocating for state budget reform. The report finds that if unfunded municipal pension liabilities were split evenly among all Americans, the average current cost would be $15,000 per person.

To determine the underfunded liabilities of pension plans, SBS uses fair market valuation and bases discount liabilities on the equivalent of a 15-year U.S. Treasury bond yield. This method accounts for a more realistic rate of return than state governments’ estimate of pension obligations.

While SBS’ donor base is not disclosed, it has frequently partnered with the Freedom Foundation, a conservative leaning group that supports limited accountable government.

State pension funds use high discount rates based on an assumed actuarial rate of return, which is often overly optimistic, to calculate underfunding. Coupled with numerous states and localities not making required annual contributions to pension funds, there’s no wonder why the deficit continues rising every year.

As determined by State Budget Solutions’ Data, here are the six states with the highest unfunded liabilities along with how state leaders are approaching the issue. Over half of all U.S. states’ combined unfunded liabilities belong to these states.

States with the Highest Unfunded Pension Liabilities

1.       California Unfunded Liability: $754 billion
California’s unfunded liability exceeds twice the amount of its runner-up, Illinois. In California’s proposed 2015-16 State Budget, Governor Edmund G. Brown Jr. calls for the state and more than 8,000 state employees to prefund retiree health benefits and pension plans. The investment returns under this plan could eliminate the Golden State’s $72 billion underfunded liability within 30 years or by 2044-45, according to the Budget Proposal.

“If we don’t rein things in, then down the road there will be drastic cuts just like there were over the last 10 years,” Brown said after releasing the budget proposal.

2.       Illinois Unfunded Liability: $331.6 billion

Illinois’ pension overhaul law was signed in 2013 to address the state’s pension deficit. The legislation attempted to cut state-run pension systems from five to four, reduce retirees’ benefits and trim benefits for existing workers. State public sector unions rapidly responded with a lawsuit that was ruled unconstitutional in a lower court. The litigation is now making its way to the highest federal court.

The Illinois Supreme Court recently granted its state government an expedited pension law hearing for March 2015. If the pension reform is struck down, lawmakers may be back to square one.

3.       New York State Unfunded Liability: $307.9 billion

In 2012, Governor Cuomo’s “Tier 6” pension plan was signed, which increased employee contribution rates, increased the retirement age from 62 to 63 and reduced pension benefits for public employees. The plan is expected to save the state more than $80 billion over the next 30 years.

Unions are now aggressively pushing for Cuomo to reopen the pension law. Teacher unions are giving the governor considerable heat for his lack of cooperation on pension adjustments. “Albany has been too concerned with protecting the pension rights of teachers and not concerned enough with the future of students,” said Cuomo.  In his 2015 State of the State speech, Cuomo appeared to circumvent the pension issue once more by focusing on educational reform and students’ futures.

4.       Texas Unfunded Liability: $296.1 billion

In 2013 the Texas Legislature made several pension reforms including raising the retirement age and incrementally increasing contribution rates. Like California Governor Brown’s proposal, the purpose of the pension modifications is to ensure long-term financial security by raising the necessary funds to pay for future benefits.

Most recently the Texas House unveiled its first draft of the 2016-2017 state budget that proposes increased contributions to state employee pension systems.

5.       Ohio Unfunded Liability: $289.6 billion

Ohio has the fifth highest unfunded liability and third highest when examining the total liability for every resident in the state, adding up to $25,080 per resident. That’s 67% higher than the national average of $15,000 per resident, according to SBS.

To address this the Ohio General Assembly unanimously signed a pension reform law that increased contributions for some public employees, established an early retirement incentive and created new guidelines for cost-of-living increases. Again, the legislation aims to improve long-term pension funding so major improvements are not yet validated.

6.       New JerseyUnfunded Liability: $200.2 billion
The Garden State’s governors have shortchanged the state pension fund for nearly two decades. Because of this New Jersey and many of its municipalities have been allowed to defer making necessary payments for pensioners, making it the state with the sixth largest unfunded liability.

In 2011, Governor Chris Christie signed legislation that increased state employees’ pension contributions. Three years later he reversed these contribution increases and slashed more than $2 billion from pension payments. New Jersey pension trustees responded with a lawsuit in December 2014 against the governor for not making the legally required annual pension contributions. The verdict could require Christie to reverse pension payment cuts to the Garden State’s required $2.25 billion payment.

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