States' Pension Gaps Widening, Pew Report Says

WASHINGTON — The gap between many states’ pension and health care benefit commitments and the money set aside to meet them is growing wider, representing a continuing and growing threat to their financial stability and creditworthiness, according to a new report from the Pew Center on the States.

The report updates the center’s April 2011 report using fiscal 2010 data, which is the most recent available. It shows that 34 states have pension obligations funded below the 80% level actuaries suggest as the minimum. Collectively, the data reveals a $757 billion gap between pension obligations and money set aside to meet them, a 75% funding level nationwide. That’s up from $660 billion in last year’s report.

North Carolina, Washington, South Dakota and Wisconsin all boasted pension obligations 95% funded or better. Illinois and Rhode Island both clocked in at under 50%.

David Draine, a senior researcher at the center, likened state behavior in the past decade to an irresponsible credit-card holder who continuously delays paying a balance, driving the long-term cost up.

“States have built up a substantial balance that requires bigger dollar amounts to pay off with each passing year,” he said.

This is displayed in the rapidly rising level of actuarially recommended contributions to state pension funds, which have grown by 175% since 2000.

Kil Huh, director of the States’ Fiscal Health Project at the Pew Center, said there was no direct link between states’ pension and health care obligations and municipal debt obligations, but Draine noted that muni market participants are “certainly aware” of the problem and “are not predicted to react strongly to this.”

There is a lag between the Pew numbers and steps taken since fiscal 2010, so some state efforts at reform may not be reflected in the data.

Draine pointed out that Rhode Island, in particular, has taken major steps to address the issue. Those have included reductions in cost-of-living adjustments, an increase in the retirement age and a new hybrid retirement plan with rolled-back benefits. Other states have sought to move from defined-benefit plans to 401(k)-style plans that move the risk away from the state and onto the worker, Draine said.

The continuing growth of unfunded liabilities bodes poorly for states’ ability to borrow at low rates, particularly when efforts at pension reform have not gone smoothly.

Earlier this month, Standard & Poor’s weighed in after Illinois Gov. Pat Quinn and state legislative leaders failed to move ahead on pension reform legislation, warning that the inactivity could harm the state’s credit.

Most reform efforts are aimed at altering benefits for future workers, but Draine said efforts at more sweeping reform will likely have to work their way through various state appeals and supreme courts.

Despite the real risks involved in allowing pension liabilities to continue to accumulate, he added, no state is in imminent risk of defaulting on its obligations. Even the states most underwater, including Illinois, have the ability to keep sending pension checks for another decade or beyond, Draine said.

That’s in contrast to localities, some of which, like Central Falls, R.I., did fail to keep pace with obligations.

“The worst cities are far worse than the worst states,” Draine said.

The report also showed that states are far behind in meeting their retiree health care benefit obligations. The data revealed that 17 states had no money set aside for those obligations at all, and that together only 5% of states’ retiree health care liabilities are funded. However, those liabilities are smaller than the $2.31 trillion pension liability, totaling $627 billion.

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