By Patrick B. McGuigan
In a 2010 analysis from Professor Joshua Rauh of Northwestern University (Chicago), Oklahoma is listed as the first state to run out of pension cash flow.
Although dated March 22, 2010, interest in Rauh’s analysis on the website of the Kellogg School of Management was renewed this week by references in other news stories. In the study, including a model developed with Robert Novy-Marx, Rauh writes: “The pension plans sponsored by states and municipalities will place a substantial burden on state and local public finances in the near future.”
He asserts, “[T]he present value of already-promised state pension benefits is over $5 trillion when the benefit payments are discounted using Treasury yields, compared to a little over $2 trillion in pension fund assets. Most state constitutions offer special protections to pension benefits that state workers have already earned.
“This analysis raises the question of how soon such a situation might lead to an all-out state and municipal fiscal crisis. One important day of reckoning is the day that the state pension funds run out of money. At that point, pension payments to retirees will have to come out of general revenues. This day of reckoning is in fact not as far away as some might imagine.”
The Kellogg School of Management is part of Northwestern University, a highly respected institution based in Chicago, Illinois. Rauh’s story is entitled, “The Day of Reckoning for State Pension Plans.”
In the chart (titled “When Might State Pension Plans Run Dry?”) included in his analysis, Rauh has “calculated the year at which each state will run out pension fund money, under a number of stylized assumptions. I assumed, somewhat generously, that going forward states [would] contribute to their pension funds the present value of any newly accrued benefits. From the model of state pension fund payments …, I extracted our estimates of benefit payments that have already been promised to workers as of today.
“For simplicity, I pooled all the pension funds within each state. Finally, I conducted the analysis under a baseline assumption that states actually will earn 8% on their investments, as well as under alternative scenarios. … Under my projections, seven states run out of money before 2020. …”
Oklahoma is listed first (with cash flow crisis in 2017), followed by Louisiana (2017), Illinois (2018), New Jersey (2018), Connecticut (2018), Arkansas (2019), West Virginia (2019), Kentucky (2020), Hawaii (2020) and Indiana (2020).
Rauh’s narrative, which does not touch specifically on Oklahoma other than in the chart accompanying his post, continues, “The damage inflicted by this problem depends upon how large the benefits owed to workers actually are relative to the state’s revenues. In Illinois, obligations already promised to workers as of today will result in over $14.5 billion in pension payments in 2019, the year after the funds will run dry. Tax revenues for the state of Illinois were $31.9 billion in 2008, according to a recent U.S. Census Bureau table. Moving to a pay-as-you-go system would therefore be a catastrophic shock to the revenue needs of the state of Illinois, amounting to 46% of 2008 tax revenue.
“For Louisiana, the corresponding figure is a smaller but still worrisome 28%.”
“By 2018 Illinois will run out of plan assets which will require that the state begin contributing $11 billion annually from revenues between 2019 and 2023. Currently, the state contributes $3.5 billion annually, and has often bonded its contributions. Using less generous assumptions, this scenario is much worse. Indeed, as Dr. Rauh notes this will present a ‘catastrophic shock’ to Illinois’ current revenue needs.
“The situation is not much better in New Jersey. Dr. Rauh estimates New Jersey will require $10 billion annually out of its revenues to pay for pension benefits it has already made beginning in 2020, which represents one-third of the state’s current budget. Other plans have a longer time horizon but face even more difficult scenarios. In 2031, Ohio will require 55 percent of its projected revenues, or roughly $13.8 billion annually to pay for existing liabilities.”
“Once the pension plans run out of money, the payments will have to come out of general funds, meaning taxpayers’ pockets. That will happen very soon: The number of retirees is going up, the promises made have gotten more and more generous over time, and pension plans aren’t underfunded just because of the recession. States are already broke, so if they want to avert a pension crisis, they need to push through reforms as soon as possible.”
CapitolBeatOK has submitted questions to several state officials asking about the future of Oklahoma pensions based on varied economic assumptions, and will report all responses received.
Recently, Moody’s Investors Service began to include unfunded pension liabilities in its consideration of state bond ratings. The decision moved Oklahoma toward the top of states in terms of challenges facing pension and retirement plans, and associated public debt.
Yesterday, an estimated 800 firefighters from across the state were at the Capitol to talk with legislators about their pension plans. Activities included a rally on the Capitol steps.
State Rep. Randy McDaniel told Michael McNutt of The Oklahoman, “I wanted to see how things were going. We tried to come to an agreement with several of the public safety pension plans, and we just thought we would take a little bit more time to make sure we develop a very thoughtful, good plan.
“Since it didn’t materialize, we decided we’ll go ahead and put it in a task force. That way we can continue looking at it, evaluating what can actually make a difference and hopefully with a great solution next year.”