The Widening Gap Update

From Pew Foundation

States continue to lose ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care. In fiscal year 2010, states were $1.38 trillion short of having saved enough to pay their retirement bills, a nine percent increase from the year before.
Over the last three years, the majority of states put reforms in place to better manage their retirement bills, but there is more work to be done to get back on solid fiscal footing.

Pew rated 11 states as solid performers in managing their pension obligations in fiscal year 2010. These states were at least 90 percent funded. Seven states earned a 'needs improvement' rating and 32 states were cause for 'serious concerns.'

On retiree health care and other benefits, Pew rated 10 states as solid performers. 16 states earned a 'needs improvement' rating, and 22 states had cause for 'serious concern.'

Key Findings

Pensions

Pension plans represent more than half of the retiree benefit funding shortfall. Experts say that a healthy pension system should be at least 80 percent funded.

• In 2010, only Wisconsin had fully funded its pension plan and 34 states were below the 80 percent threshold.
• Connecticut, Illinois, Kentucky, and Rhode Island were the worst among the states, with pensions funded under 55 percent in 2010.
• North Carolina, South Dakota, Washington, and Wisconsin were the best among the states, with pensions funded at 95 percent or better in 2010.
• Keeping up with the annual required contribution is perhaps the most effective way that states can responsibly manage their long-term liabilities for public sector retirement benefits. Pew's research shows that states that consistently make their full payments have better funded retirement systems and smaller gaps.

Retiree Health Care

States only have 5 percent of the funds needed to pay for their retirees’ health care and other non-pension benefits—such as life insurance.

• 17 states did not set aside any money to fund their retiree health care liabilities.
• Only seven states had funded at least 25 percent of health care liabilities— Alaska, Arizona, North Dakota, Ohio, Oregon, Virginia, and Wisconsin.
• Alaska and Arizona are the best among states, with nearly 50 percent of their health care liabilities funded.

State Pension Reforms

States' public sector retirement funding gap for both pensions and retiree health benefits grew by $120 billion, from fiscal year 2009 to 2010. The largest part of that year-over-growth was the increase in pension liabilities. States are $757 billion short of funding their pension promises.

To meet these long-term pension obligations, nearly every state has moved to better manage its retirement bill in the last three years. Between 2009 and 2011, 43 states enacted benefit cuts, increased employee contributions, or both. The most common actions included:

• asking employees to contribute a larger amount toward their pension benefits
• increasing the age and years of service needed before retiring;
• limiting the annual cost of living increase; and
• changing the formula used to calculate benefits to provide a smaller pension check.

Rhode Island’s Pensions Overhaul

The majority of reforms enacted in the last three years largely affect future state workers. However, some states are attempting more comprehensive reform in order to gain immediate cost savings.

In 2011, Rhode Island lawmakers approved an unprecedented overhaul of the state’s traditional defined benefit pension plan. If the legislation survives a likely legal challenge, it will cut benefits for current as well as future employees and trim the state’s unfunded liability by an estimated $3 billion. Learn more about Rhode Island’s pension overhaul.

Hawaii

Although Hawaii paid its full annual pension contribution in all but one year from 2005 to 2010, the system was 61 percent funded in fiscal year 2010 and faced a $7 billion funding gap. Most experts agree that a fiscally sustainable system should be at least 80 percent funded.

The state also had a $14 billion bill for retiree health care costs, none of which was funded, well below the 8 percent national average in 2010.

Hawaii lawmakers approved pension benefit cuts for newly hired employees in 2011, increasing employee and taxpayer contributions and trimming cost-of-living increases for retirees.

Lawmakers also changed the retirement age for employees hired after July 1, 2012.

TOTAL BILL COMING DUE Hawaii’s retirement plans had a liability of $32.5 billion and the state has fallen $21 billion short in setting aside money to pay for it.

In 2010, Hawaii paid 102 percent of the recommended contribution to its pension plan and just 24 percent of what the state should have paid to fund retiree health benefits.

Hawaii’s management of its long-term liabilities for pensions and retiree health care was cause for serious concern.

PDF: Hawaii The Widening Gap Update

Full Report: The Widening Gap Update

AP: Isles among 34 states behind in funding pensions