Pew Center on the States: State-level unfunded pension liability nears $1.4 trillion

The Pew Center on the States, in a report released Monday evening (June 18) says the gap between promised retirement benefits for government employees and required funding for those benefits has risen to nearly $1.4 trillion.

Oklahoma fell among the weaker states in the analysis, covering data through Fiscal Year 2010, but the leading advocate of pension reform in the state House predicted the Sooner State’s showing will improve as newer data is incorporated. 

In a summary of the new report, the Pew researchers wrote, “States continue to lose ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care, according to a new analysis by the Pew Center on the States, due to continued investment losses from the financial crisis of 2008 and states’ inability to set aside enough each year to adequately fund their retirement promises.

“States have responded with an unprecedented number of reforms that, with strong investment gains, may improve the funding situation they face going forward, but continued fiscal discipline and additional reforms will be needed to put states back on a firm footing.”

The Fiscal Year 2010 gap between states’ assets and obligations for retirement benefits was a staggering $1.38 trillion. This is an increase of 9 percent over FY 2009. Over three fiscal years, a trillion dollar gap grew to $1.26 trillion and, in the most recent analysis, to $1.38 trillion.

Of the FY 2010 gap, Pew reports, “$757 billion was for pension promises, and $627 billion was for retiree health care.” In the case of Oklahoma, health care benefits for government retirees are reported in a manner than makes it difficult to provide clear analysis.

The new Pew study relies on seemingly dated information because FY 2010 is the latest year for which there are complete numbers for all 50 American states. Thus, it still provides one of the best available measures for pension system health, even if not in “real time.” 

State Rep. Randy McDaniel, an Oklahoma City Republican, cautioned that he anticipates a better showing for Oklahoma once FY 2011 and FY 2012 data are included. He told CapitolBeatOK, “The Pew Center’s analysis of states’ public sector retirement benefit funding used FY 2010 numbers.  The numbers do not reflect the reforms Oklahoma and other state legislatures enacted in 2011 and 2012 to shore up their pension funds.”

McDaniel, chairman of the House Pension Oversight Committee, continued,  “Oklahoma’s financial condition has improved significantly as a result of recent legislation.”
In limited respects, the Pew analysis is hopeful, noting that “nearly every state” has reduced pension benefits or increased employee contributions as the extent of unfunded liability grows clearer, and as accounting standards have evolved to more accurately reflect underlying government debt. The changes in some states, however, were characterized as “relatively minor.” 
However, taken as a whole, the report points to dire straits for state pension funds, based on the totality of the evidence.

Pension fund analysts generally agree that systems should be at least 80 percent funded. The Pew report notes, “In 2000, more than half of the states were 100 percent funded, but by 2010 only Wisconsin was fully funded, and 34 were below the 80 percent threshold — up from 31 in 2009 and just 22 in 2008.”

Oklahoma fell well below that 80 percent benchmark in the 2010 data, with only 56 percent of benefits funded and only a 70 percent payment toward annual “required contribution” that year. The state’s public sector pension liability was listed as $36,368,230 thousand (that is, $ 36 billion +). Oklahoma may have shifted as much as 10 percent toward the 80 percent benchmark due to the 2011 reforms. 

As distilled in an easy-to-comprehend one-page overview of Oklahoma’s status as of 2010, “Oklahoma failed to consistently pay its full annual pension contribution from 2005 to 2010.”
The report authors noted that Oklahoma policymakers “decided in 2008 that the health insurance available to its retirees did not qualify as a benefit. Oklahoma only acknowledges a minimal retiree health care obligation of about $3 million, none of which was funded, well below the 8 percent national average in 2010.”

On the plus side, “Oklahoma lawmakers in 2011 approved raising the retirement age for new employees from 62 to 65 and limiting annual cost-of-living increases for retirees.” That year saw a range of dramatic changes in Oklahoma government retirement systems, changes that could be viewed as the most significant changes in state fiscal policy in the first year of the (Mary) Fallin administration. This year, only a handful of comparatively moderate reforms were achieved. 
In sum, the latest Pew analysis, while carefully worded, can fairly be viewed as alarming.

The update released Monday noted the underlying issues raised in Pew’s study are long-term: “While it is currently difficult for states to make contributions toward their retirement systems, given the drop in revenues and fiscal stress from the recession, many of these states also failed to make the recommended contributions when times were good.”

Elsewhere, the report’s authors write, “While the Great Recession exacerbated the public sector retirement crisis, it did not create it. Before the downturn, many states drove up their pension liabilities by increasing employee benefits early in the decade, either without considering the price tag or assuming that market gains would cover the cost.

“In 2001, 11 states expanded retirement benefits; others followed suit in subsequent years. While the trend of increasing benefits without paying for them ended before the Great Recession, many of these states compounded the problem by failing to make recommended contributions in both good times and bad. In 2007, states faced a pension funding gap of $361 billion and a shortfall for retiree health benefits of $370 billion.”

While not among the worst states (Connecticut, Illinois, Kentucky and Rhode Island, all less than 55 percent funded), Oklahoma was far distant from the showing among the strongest states (North Carolina, South Dakota, Washington and Wisconsin, all over 95 percent adequacy of funding). Further muddying the picture for Oklahoma is the fact that the extent of retiree health care debt was not available to the analysts. 

Other states above the 80 percent threshold were Washington (95 percent), Oregon (87 percent), Utah (82 percent), Wyoming (85 percent), Nebraska (84 percent), Minnesota (80 percent), Iowa (80 percent), Tennessee (90 percent), New York (94 percent), Georgia (85 percent), Florida (82 percent) and Texas (83 percent).

The Lone Star State was the only state in Oklahoma’s immediate area at the 80 percent threshold.

Touching neighbors (clockwise) came in as follows: New Mexico (72 percent), Colorado (66 percent), Kansas (62 percent), Missouri (77 percent) and Arkansas (75 percent). Louisiana, also often considered in analyses with Oklahoma, was an identical 56 percent.  

Anticipating future studies, the Pew Center on the States pointed to a surge of reforms from 2009 to 2011. In all, 43 states enacted benefit cuts or increased employee contributions – or did both.

Further, “Since 2010, 10 states — Arizona, Colorado, Florida, Maine, Minnesota, New Jersey, Oklahoma, Rhode Island, South Dakota, and Washington — have frozen, eliminated, or trimmed their annual COLA increase for current retirees.”

Rhode Island has also adjusted (downward) the discount rate (assumed investment returns) from 8.25 percent to 7.5 percent. In 2010-11, Pew reports 18 plans in 14 states “lowered their return assumptions, according to an analysis by Gabriel, Roeder, Smith & Company, an actuarial consulting firm based in Michigan.”

Some states are beginning to study critically the ways in which benefits are offered and calculated. Here in Oklahoma, there has been frequent discussion – but thus far no action — of shifting from a defined benefit to a defined contribution system, at least for new state employee hires, to assure long-term viability of promised benefits.

The Pew Center on the State is described in its literature as “a division of The Pew Charitable Trusts that identifies and advances effective solutions to critical issues facing states. Pew is a nonprofit organization that applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life.” 

Pew’s project team for the new pension analysis included David Draine, Stephen Fehr, Kil Huh and Abigail Sylvester, reporting to managing director Susan K. Urahn.
The new report’s methodology is discussed in endnotes and in narrative, and was subjected to external review by Ronald Snell of the National Conference of State Legislatures and Keith Branard of the National Association of State Retirement Administrators.