By Michael B. Sauter, Alexander E.M. Hess and Samuel Weigley, 24/7 Wall St.
Several years after from the financial crisis of 2008, state pension funds continue to languish. According to data released this week by Milliman, Inc. and by the Pew Center on the States, there was a $859 billion gap between the obligations of the country’s 100 largest public pension plans and the funding of these pensions. Most of these are state funds, and state legislatures have attempted to respond to this growing crisis by making numerous reforms to try to combat this growing deficit.
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In 2010, only Wisconsin’s pension funds were fully funded. Nine states, meanwhile, were 60 percent funded or less -- this would mean that at least 40 percent of the amount the state owes current and future retirees is not in the state’s coffers. In Illinois, just 45 percent of the state’s pension liabilities were funded. In some of these states, the gap between the outstanding liability and the amount funded was in the tens of billions of dollars. California alone had $113 billion in unfunded liability. Based on Pew’s report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with sinking pensions.
Each year, actuaries determine how much a state should contribute to its pensions to keep them funded. Many states, for various reasons, did not pay the full recommended contributions for 2010, while others have been paying the recommended amount for years. In an interview with 24/7 Wall St., Milliman Inc. principal and consulting actuary Becky Sielman explained that despite states making the recommended payments, many large individual public retirement funds are still underfunded.
Of the nine states with pensions that are underfunded by 40 percent or more, three paid more than 90 percent of the recommended contributions, and two, Rhode Island and New Hampshire, paid the full amount. Despite this, pension contributions were still generally higher in states that were better funded. Of the 16 states that were at least 80 percent funded -- a level experts consider to be fiscally responsible -- 11 contributed at least 97 percent of the recommended amount.
In an interview with 24/7 Wall St., Pew Center on the States senior researcher David Draine explained why, despite paying the full amount, several states continued to be severely underfunded. He pointed out that meeting contributions was important. He added that states that made full contributions in 2010 were 84 percent funded on average, compared to those that did not, which were only 72 percent funded.
To explain why several states that are making full contributions are still underfunded, Draine said much of it has to do with investment losses. “The 2000s have been a terrible period for pension investments that have fallen short of their expectations … that’s a big part of the growth in the funding gap.”
Unfunded liability can also grow due to overly optimistic assumptions about investment growth, pension payments that become deferred, and an increase in benefits or an increase in the number of beneficiaries without a corresponding increase in contributions, Draine explained.
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Based on the Pew Center for the States report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with public pensions that were 60 percent or less funded as of 2010. From the report, we considered the total outstanding liability, the total amount funded, and the proportion of the recommended contribution each state made in 2010. We also reviewed the level of funding for the 100 largest pension funds in each state, provided by Milliman’s Public Pension Fund Study, which covered a period from June 30, 2009, to January 1, 2011.
1. Illinois
- Percent liability funded: 45 percent
- Total liability: $138.8 billion (6th largest)
- Total funded: $62.5 billion (11th largest)
- S&P credit rating: A+
Illinois has not completely funded its full annual pension contribution in any year between 2005 and 2010. Just 45 percent of the state’s pension liabilities were funded in 2010. The underfunding, however, has not led to major overhauls. Over the past year, Illinois governor Pat Quinn has called for an increase in the retirement age from 65 to 67, a three-percentage-point increase in employee contributions, and reduced cost-of-living increases. But intense opposition from state labor unions has stalled the legislation. Standard & Poor’s cut the state’s credit rating in August from A+ to A, pointing to a “lack of action” in tackling the state pension system’s massive unfunded liability. Moody’s Investor Service downgraded the state earlier in the year and warned that further downgrades are possible if no action on pensions is taken.
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2. Rhode Island
- Percent liability funded: 49 percent
- Total liability: $13.4 billion (10th smallest)
- Total funded: $6.6 billion (4th smallest)
- S&P credit rating: AA
Although Rhode Island paid the entirety of its recommended contribution in 2010 and had consistently paid its full contributions for several years, the state’s public pension system was still just 49 percent funded. Facing a funding gap of nearly $7 billion, Rhode Island was forced to make difficult changes to its pension system. According to Pew, in 2011 Rhode Island transformed its plans into a hybrid pension and 401(k)-like plan. The state also raised the retirement age from 62 to 67 and limited cost-of-living increases. The total savings from these reforms were estimated to reach $3 billion. Although union lawsuits to block the plan are still ongoing, the state’s Treasurer, Gina Raimondo, told the Associated Press that "Rhode Island is leading the way. I expect others to follow, frankly because they have to."
3. Connecticut
- Percent liability funded: 53 percent
- Total liability: $44.8 billion (22nd largest)
- Total funded: $23.8 billion (24th smallest)
- S&P credit rating: AA
Connecticut has fallen short of paying its full annual pension payout three times between 2005 and 2010, and just over half of its liabilities were funded. In 2011, state unions agreed to concessions worth $1.6 billion, including changes to pensions, to avoid widespread layoffs. Some of the concession the unions agreed to, among others, were raising the retirement age by three years for those who retire after 2017 and increasing the penalty for employees who retire early. Despite the changes, Moody’s Investor Services downgraded the state’s credit rating from Aa3 to Aa2. The downgrade was partially due to unsustainably high retirement costs and “pension funded ratios that are among the lowest in the country.”
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