State-run retirement systems faced a $968 billion shortfall in fiscal 2013 - up $54 billion from the previous year, according to the latest report from Pew Charitable Trusts.
That amount -- the gap between the pension benefits state governments have promised to workers and the funding available to meet those obligations -- exceeds $1 trillion when combined with shortfalls in local pension systems. Pew expects pension debt to remain at historically high levels as a percentage of the U.S. gross domestic product, even as returns are fully realized under new accounting standards and the enactment in policy changes in many states since the financial crisis of 2008.
"State and local policymakers cannot count on investment returns over the long term to close this gap and instead need to put in place funding policies that put them on track to pay down pension debt," Pew senior researcher David Draine told reporters on Monday.
Washington-based think tank Pew has been reporting on state and local pension data since 2007. For this report Pew culled data from comprehensive annual financial reports produced by each state and pension plan, actuarial reports and valuations, and other state documents that disclose financial details about public employment retirement systems for 2013.
Thanks to missed contributions and the continued impact of investment losses, Pew expects pension debt to keep rising in many states despite efforts to overhaul systems.
South Dakota and Wisconsin boasted 100% funding levels, according to Pew. Illinois produced the lowest ratio, at 39%, followed by Kentucky and Connecticut at 44% and 48%, respectively.
Pew generally considers 80% a desirable threshold.
Draine cited Alabama, Arizona, Tennessee and West Virginia to illustrate the limitations of the actuarially required contribution, or ARC, and why stronger measures of contribution polices may be useful.
"ARC does not always signal true fiscal health," said Draine.
Those four states contributed on average 100% or more of their ARCs from 2003 to 2013. At the end of that span, Tennessee's plans remained well-funded at 94% and West Virginia improved from 40% to 67%, while Alabama dropped from 93% to 66%, while Arizona's had steadily declined to 72%.
States such as Tennessee and West Virginia, said Draine, succeeded by following debt payoff plans designed to close the funding gap.
"We see a lot of variance among the states," said Draine, who noted that 22 states' ratios had improved while 19 fell and nine remained about the same. "All this builds into differences in contribution policies, benefit changes, assumption changes and all these other factors."
Draine recommended the best-practices guidelines of the Society of Actuaries blue-ribbon panel, which included steady, level-interest payments rather than deferring larger payments; and using defined-payment schedules, called closed amortization periods, rather than refinancing annually.
In 2013, according to the report, state pension contributions totaled $74 billion, $18 billion short of what was needed to meet the ARC. In addition, only 24 states set aside at least 95% of the ARC they had determined for themselves.
Starting with the reporting of 2014 data, new standards required by the Government Accounting Standards Board will provide additional data policymakers can use to supplement the ARC and to evaluate the fiscal health of plans as well as the sufficiency of policies to reduce pension debt.
Although disclosure of ARC calculations is no longer mandatory, Draine expects many plans to continue to do so, or produce a similar metric under the new standards as the "actuarially determined contribution."
